In the past one year, the shares of Aflac Inc. (AFL Quick QuoteAFL - Free Report) have underperformed the Zacks categorized Insurance - Accident and Health Insurance industry. Shares of the company gained 13.7% compared with 21.3% increase logged by the industry. We believe that weakness in the company’s U.S. and Japan segments was primarily responsible for the underperformance.

Aflac Japan, which contributes more than 70% of the company’s total earnings, continues to be affected by the weakness in the Japanese economy and a low interest rate. The company incurred fourth-quarter reserve adjustment, which impacted the segment’s overall profitability. Low interest rates are anticipated to remain one of the biggest issues for the Japanese life insurance industry in 2017.
    
Meanwhile, the U.S. business has been facing stiff competition in the middle market, which in turn, has been denting its sales. In 2016, the company recorded disappointing U.S. sales figures. Despite writing almost $1.5 billion in new premiums, the company did not achieve its 2016 sales growth target of 3–5%. Also, its career agent channel underperformed for the majority of the year. Sales to groups with less than 100 employees, which is the focus of the company’s career agents, were relatively flat.

Though the company experienced an increase in its broker business, the sales were lesser than expected. Sales in the middle market of groups of 100–999 employees were negative.

The company’s bottom line is expected to be affected due to approximately $250 million or more of hedging costs related to Japan’s dollar investment program. The company will also incur up to $130 million as restructuring costs for branch conversion. Investors should note that the branch conversion will result in an accounting-related reduction of Aflac Japan's solvency margin ratio (SMR) of approximately 100 points.

Though the company has undertaken a number of turnaround initiatives, such as emphasis on sale of third-sector products (that are less sensitive toward interest rates), pull back on sale of first-sector products (that are highly sensitive to interest rates), improving the productivity of recruits as well as their retention, introduction of new products like cancer insurance, we remain watchful of the company’s performance.

Zacks Rank and Stocks to Consider

Aflac carries a Zacks Rank #4 (Sell).

Some better-ranked stocks from the insurance industry include American Financial Group, Inc. (AFG Quick QuoteAFG - Free Report) , Argo Group International Holdings, Ltd. and The Progressive Corporation (PGR Quick QuotePGR - Free Report) . Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Financial offers Property and Casualty (P&C) insurance products in the U.S. The company delivered positive surprises in three of the last four quarters with an average beat of 6.45%.

Argo Group International Holdings underwrites specialty insurance and reinsurance products in the P&C market worldwide. The company delivered positive surprises in all of the last four quarters with an average beat of 36.54%.

The Progressive Corporation offers personal and commercial P&C insurance, and other specialty P&C insurance and related services primarily in the U.S. The company delivered a positive surprise in two of the last four quarters with an average beat of 1.32%.

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