How AFLAC Laid a Golden Egg in Japan

Can the insurer keep racking up huge profits?

It's a case of the tail wagging the dog, or, in this case, the duck. AFLAC Inc. (AFL ), a Columbus (Ga.) supplemental health insurer, raised its brand recognition enormously in the U.S. with TV commercials featuring a duck that incessantly quacks "Aaaa-flaaaak." AFLAC isn't using the duck right now in its Japanese ads, but no matter: The company's business in Japan dwarfs its home market, accounting for 70% of AFLAC's operating earnings and 80% of its $38 billion in assets.

Indeed, American Family Life Assurance Co., or AFLAC, is the largest foreign insurer in Japan and second-most-profitable gaijin company, after IBM. Merrill Lynch expects pretax Japanese profits to reach $940 million this year, up 14% from last year. Japanese revenues are expected to rise 5%, to $7.6 billion. "Japan is our driving force," says AFLAC Chief Executive Daniel P. Amos.

How did AFLAC, founded by the Amos family in 1955, ever manage to crack Japan's notoriously cordoned-off financial-services industry? Back in 1970, Amos' uncle, John, then the CEO, made his first trip to Japan and marveled at how Japanese wore cotton surgical masks to ward off colds and other bugs in crowded trains and urban areas. Clearly, Japan was the kind of big, health-obsessed consumer market where AFLAC could thrive. Moreover, AFLAC's best-selling product, which reimburses out-of-pocket expenses for cancer treatments, is well suited to Japan, whose state-run health system doesn't cover such treatments generously. In 1974, the Ministry of Finance handed AFLAC one of the rare licenses awarded to foreign firms, in part because Japanese insurance giants didn't see much of a market in such a niche business.

Big mistake. Today, AFLAC covers one in four Japanese with its policies; some 95% of all listed Japanese companies offer its products through payroll-deduction plans. Factor in Japan's rapidly aging population, and the expected increase in premiums and decrease in coverage under the national health plan, and AFLAC's prospects in Japan seem boundless, even with the currency-exchange worries that come with doing so much business in a foreign country.

Haven't other foreign insurers figured that out, too? Sure, but only those with well-known, trusted names have been successful, says HSBC Securities (Japan) Ltd. analyst Rie Ota. In fact, 10 foreign insurers and several local firms have closed up shop since 1991, including U.S.-based Allstate Insurance Co. (ALL ) "New entrants have found it difficult to establish a brand name," says Ota. AFLAC, on the other hand, has a well-established brand, enhanced last year when dubbed versions of its duck commercials ran on TV. Now, Amos is developing a new ad blitz for 2004 that will feature the duck with Japanese actors.

AFLAC needs to keep up the brand-building because local competitors now have the company in their sights. Last year, the Japanese government allowed big property and life insurers such as Tokyo Marine & Fire Insurance Co. and Nippon Life Insurance Co. to move into specialty-insurance markets.

Investors, fearing the company would get crushed, pushed down AFLAC's stock price. So Amos went on the offensive, clinching a big distribution deal with Dai-ichi Mutual Life Insurance Co. to distribute its cancer policies. AFLAC has also begun offering standard medical benefits, and last year it rolled out Japan's first accident-insurance policy. Now, the stock is just off its late-2000 all-time high.

In any case, AFLAC's competitors are hard-pressed to match its efficiencies. AFLAC doesn't rely on a legion of expensive sales agents, and it processes claims online. So its cost to acquire and process a new policy is about $72, vs. $120 for Japanese rivals. Amos and his crew have also done a far better job investing the roughly $30 billion in assets AFLAC controls in Japan--by avoiding local stocks and real estate. AFLAC earns annual returns of 4%, two percentage points better than the average Japanese insurer. This is one company with plenty to quack about.

By Brian Bremner in Tokyo

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