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Tickers in this Article: AFL, NKE, MCD, PEP
Due to the success of its memorable talking duck ads, multi-line insurer AFLAC's (AFL) brand awareness in the U.S. now ranks up there with the likes of Nike (NKE), McDonald's (MCD) and Pepsi (PEP). Scoring a runaway advertising success like this is one reason why the company's U.S. have been strong over the last couple of years.

Unfortunately, it looks something might have gotten lost in translation when the talking duck ads where launched in Japan, where AFLAC is a top insurance provider and earns 75% of its profits.

As successful as they were in the United States, these clever spots have so far failed to reverse an ongoing decelerating trend in Japanese sales, which are off about 12% so far this year.

So why is the duck not having any luck in turning Japanese sales around?

AFLAC is an established player in the Japanese insurance market, having first stepped in back in the 1970s, primarily selling life policies. More recently, the company has followed the rest of the industry into the "third sector" which covers living as opposed to death benefits.

These products help fill gaps in consumers' primary insurance coverage and include cancer expense insurance, care plans, supplemental general medical expense plans, and living benefit plans.

Growth in these living benefit policies has been huge. They now account for 47% of industry policies sold, compared to only 14% a decade ago. The key underlying trend generating this demand has been the dramatic aging of the Japanese population. Unable to fully fund the rising health care costs for this older generation, the Japanese government has begun pushing more of the burden to individuals though higher co-payment requirements in the state-operated health system. In such a situation, private health coverage has become a necessity.

The Japanese insurance industry's reaction to all of this has been a feeding frenzy of massive proportions. Over forty companies now provide living benefit policies in a market that is now crowded, overly competitive and offering an excessively broad and confusing range of choices to the consumer.

Further dampening consumer demand has been recent negative headlines regarding the non-payment of claims by certain AFLAC competitors. Government regulators are now demanding that all non-life, medical and life insurance companies submit five years of claims payment and medical policy history to the FSA (Japan's financial regulator.) Non-life companies must submit reports by the end of October, while medical and life companies must submit their reports by March 2007.

So is there any reason to believe that the company can buck the industry trend and reverse the decline in its sales? The short answer is no. However that turns out not to be such a big deal, as premium income from new sales accounts for less than 10% of AFLAC's Japanese revenues. The company adds new business at a faster rate than it experiences run-off from lapsed policies, and the new business it adds generally has higher margins that the business that lapses.


The company also benefits from running one of the tightest operations in the business, with the lowest maintenance costs per policy in force in the industry. All this suggests that the company should be able to weather the downturn in relatively better shape than its competitors and maybe pick up some market share as the ongoing regulatory scrutiny shakes up the industry.

The stock has been a major under-performer so far this year, and has failed to show any sign of a reversal of sentiment despite a recent increase in the dividend and a 20% boost in next year's share repurchase target. If the stock isn't fully washed out at this point, it's probably close to it.

While I don't expect any dramatic near-term price recovery at this juncture, the company's long-term fundamentals are supported by this huge ongoing demographic shift taking place in Japan – and that makes for a fairly compelling reason to be a long-term buyer at these levels.

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