Aflac: The Profits Nobody Wanted (AFL, PGR)

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Includes: AFL, PGR
by: Eddy Elfenbein

Eddy Elfenbein submits: In 1970, John Amos visited the World’s Fair in Osaka, Japan. When he got there, he was astounded by the number of people who walked around the crowded cities wearing surgical masks. Amos instantly recognized a golden business opportunity. Amos, along with his two brothers, ran a small insurance company based in Columbus, George called the American Family Life Assurance Co. He figured that if people in surgical masks won’t buy insurance, no one will.

For many years, American Family had been a pioneer in the insurance industry. They were the first company to offer cancer insurance. The company also decided to focus on insurance in the workplace. Almost all of its policies came from payroll deductions.

In 1974, the Japanese government awarded American Family a monopoly on Japanese cancer insurance, which is very rare for a gaijin. The only reason they got it was become no Japanese firms were interested. Today, 95% of all the listed companies in Japan offer American Family’s products.

I’m going to let you in on a little secret Wall Street doesn’t want you to know about. Although it may appear to be boring, insurance is insanely profitable. Most investors have no idea of the goldmines they ignore just because insurance is dull as dirt. Warren Buffett built his investment empire on insurance. Just look at the long-term charts of stocks like Progressive (ticker: PGR).

American Family is no exception. For the past few decades, the stock has been a huge winner. Over the last 25 years, the stock is up 250-fold (not including dividends). Not bad for a boring business, but the company still had a major problem. Despite all their success, no one had heard of them. The company’s name recognition was at 2%. How do you get the public interested is something as dull as supplemental life insurance? The company’s advertising firm noticed that American Family’s nickname sounded almost like a...duck. Six years later, Aflac’s (ticker: AFL) name recognition is over 90%. (Here's more on how the duck was born, er, hatched.)

Last month, the company celebrated its 50th anniversary. The current CEO is Dan Amos, John Amos’ nephew. How’s this for an earnings guidance? He recently said that operating earnings will be up 15% this year, 15% next year and 13% to 16% in 2007. This is the kind of company you can set your watch to. Here are the sales and earnings for the past few years (figures for 2005 and 2006 are projections):

Year..........Sales...........EPS
1996........$7,100........$0.69
1997........$7,251........$1.04
1998........$7,104........$0.88
1999........$8,640........$1.04
2000........$9,720........$1.26
2001........$9,598........$1.28
2002........$10,257......$1.55
2003........$11,447......$1.52
2004........$13,281......$2.52
2005........$14,210......$2.59
2006........$14,880......$2.92

In October, Aflac said that earnings for the third quarter surged by 55%. The insurance industry prefers to focus on operating earnings. Aflac's operating profits came in at 66 cents a share, two cents more than Wall Street was expecting.

Ask most investors which stock has done better over the last quarter century, Aflac or Intel? They may not believe you when you tell them, but here's the proof:

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