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Metlife Inc (MET), Prudential Financial Inc (PRU), AFLAC Incorporated (AFL): This Duck’s Japanese Moat May Spread to the States

After digesting the government data concerning jobs, which was seen as a positive with June non-farm payrolls reported at 195,000 versus the consensus estimate of only 165,000, stocks rallied significantly. The Federal Reserve’s plan to taper may be coming sooner than later– especially if an increase in added jobs becomes a reoccurring and frequent thing. This will likely keep rates on the upward trend.


Insurers make a good bet going forward…

One industry that may benefit from higher rates is insurance. Higher rates means higher profits for the insurers, who can invest client premiums in assets such as bonds to support future payouts. The nation’s largest life insurer is Metlife Inc (NYSE:MET), followed by Prudential Financial Inc (NYSE:PRU), AFLAC Incorporated (NYSE:AFL) is the largest provider of supplemental insurance in the United States.

Here’s how these three companies stack up against each other:

P/E Forward P/E Price/Book Dividend (Yield)
AFL 9.03 8.78 1.70 1.40 (2.40%)
MET 22.11 8.29 0.79 1.10 (2.40%)
PRU 52.54 8.51 0.86 1.60 (2.20%)

Data provided by Yahoo! Finance

The above insurance stocks trade at about par when considering their price relative to forward earnings and their dividend yields. All three company’s share price suffered quite a bit as a result of the financial crisis as well.

The financial crisis, however, clearly separates one of these three companies apart from the pack — at least as far as earnings quality and overall business strength goes.

Unlike Metlife Inc (NYSE:MET) and Prudential Financial Inc (NYSE:PRU), if only earnings were considered, an investor in AFLAC would have barely even noticed that a financial crisis ever happened. AFLAC Incorporated (NYSE:AFL) maintained profitability and its earnings are still on an uptrend in today’s market.

It’s dividends tell a similar story:

AFLAC Incorporated (NYSE:AFL), unlike its fellow insurers, managed to not only continue to pay its dividend, but also managed to increase it — just like they have been for over 30 years.

Is supplemental insurance where it’s at?

With the Affordable Care Act (ACA), or “Obamacare”, inevitably coming onto the scene sometime in the future, AFLAC may be insulated better than most. The companies policies, according to CEO Dan Amos in a letter to shareholders and customers, are not major medical insurance, and are therefore not negatively impacted by healthcare reform. Amos also points out the company’s great success in Japan, a country which has had a national healthcare system for years.

According to the company, AFLAC Incorporated (NYSE:AFL)’s policies provide insurance for “everyday living and out-of-pocket expenses associated with illness and injury” and the company is currently king of supplemental coverage in the U.S. and even more so in Japan. This lucrative market is becoming more and more attractive to other players such as Metlife Inc (NYSE:MET) and Prudential Financial Inc (NYSE:PRU) as well.

Both Prudential Financial Inc (NYSE:PRU) and Metlife Inc (NYSE:MET) are looking to compete with AFLAC by adding supplemental health policies to their array of services. This may be a way to avoid some of the negatives resulting from Obamacare, because apparently the new law limits profits from traditional medical insurance.

The changing landscape…

AFLAC Incorporated (NYSE:AFL)‘s CEO commented on the upcoming changes as a result of the ACA, stating that:

“The cost of major medical continues to go up at such a rapid rate…Employers are eventually going to say, ‘Enough is enough.’ “

Before further elaborating on the subject by saying that:

“…employers may cut back the scope of coverage they offer and increase deductibles and copays. The Aflac plans help cover gaps in less-costly plans or as deductibles and copays rise.”

AFLAC Incorporated (NYSE:AFL) has enjoyed incredible success in Japan, and they have the expertise to dominate in a similar fashion in a newly created U.S. national healthcare system.

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