Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Great. Okay. Hi, I'm Andrew Kligerman, the equity life insurance analyst at Crédit Suisse. And it's great to have Dan Amos here. He's just kind of looking at the bio. And Dan has been CEO for 30 years at the company with EPS over that time frame that are up well over 1,000%. And a lot of people look at Aflac and see some challenges in both Japan and the U.S. I look at a CEO who has met every challenge, and we're excited to hear about some of the initiatives in the U.S. and Japan and some of the really interesting things like the corporate partnerships, which involve insurtech and then a strategy of buying to build. And just excited to have Dan here. So all set to hear from you.

Thank you, Andrew, and good morning, everyone. It's a pleasure to be here. Today, I'd like to tell you about Aflac's strategy, operations, recent performance, and how we plan to grow while returning capital to the shareholders. Before we begin, let me remind you that some of the statements of this presentation are forward-looking within the meaning of the federal securities law. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Please look at the Form 10 and some of the risk factors that could cause actual results to differ materially from those we discussed today. Our fourth quarter 2019 earnings is available on the Investor page of aflac.com, and also includes reconciliations of certain non-GAAP measures. We also encourage you to look at the appendix at the end of the presentation, which will likewise be posted on the Investor page of aflac.com, so for more non-GAAP and forward-looking information. Now Aflac's operation is in 2 of the largest insurance markets in the world, the United States and in Japan. Our policies cover more than 50 million people. Aflac's strategy in Japan and in the United States has remained straightforward and consistent for many years. Aflac develops supplemental insurance products that consumers want and need to offset rising co-pays, deductibles and other out-of-pocket expenses that arise from medical events. We want to be where customers want to purchase their insurance. As a result, we sell products through multiple diverse distribution channels. Ultimately, this yields new customers. Over time, Aflac has developed a number of franchise strengths, which will continue to leverage to position Aflac better for the long term. One of the most recognizable strengths is Aflac's well known and powerful brand. Many people most commonly associate our brand with the Aflac Duck, who, by the way, is turning or celebrating 20 years in the business. While about 9 out of 10 people in both the United States and in Japan recognize the Aflac brand, it is also a name that people have come to trust over the decades. As such, individuals and businesses are more receptive to hearing how Aflac's innovative products can provide value to them. Along with Aflac's strong brand, we look to employ a diverse and productive distribution channels to generate future growth in Japan and in the United States. We have focused a great deal of our efforts on being where the customers want to make their insurance purchase decisions. We will continue to enhance the productivity of our current channels, while exploring further distribution expansion opportunities. In 2020, this will include digital direct-to-consumer initiatives, developing new partnerships and better leveraging existing affiliations. We will also continue to offer innovative products and high-quality customized service to provide our customers with affordable solutions to help protect their financial wellbeing. Aflac's products provide a layer of financial protection against loss of income and assets based on qualifying health event. Aflac's policies are unique and that they pay fixed cash benefits directly to the insured regardless of any other insurance they might have because the benefits are fixed rather than open-ended. They are not subject to inflation. In Japan, this means tailoring products to fit consumer's stage in his or her life. In the U.S., One Day Pay is a great example of innovative spirit and how we place the customer first. In addition, we have industry-leading financial strength ratings, which are supported by our strong capital and liquidity positions as well as the ability to consistently deliver stable earnings and strong cash flows to drive the value of the shareholders. For 2020, we continue to focus on delivering profitable growth and executing strategy as an enterprise. In fact, this is a critical time for executing strategy, and why I created the role of the Chief Operating Officer of Aflac Incorporated to work with the officers of Aflac Incorporated and the team to ensure that we successfully cross the finish line. I also believe we have the right leaders in place, who will continue to guide and propel the operations going forward. We look to continue to leverage our core strengths and build upon our leading position in both countries. Aflac has been operating in Japan since 1974 when we pioneered cancer insurance there and became a leader in the market. Following deregulation of Japan's insurance market, we launched a standalone medical policy in 2002. Our medical product rose to the top within 1 year's time. Today, we are the leading cancer and medical insurer in Japan. Aflac Japan accounts for nearly 69% of Aflac Incorporated's revenues and 83% of its assets while insuring 1 out of 4 Japanese households. The foundation of Aflac's product portfolio continues to be third sector products, primarily cancer and medical insurance. These products help our policyholders with out-of-pocket expenses that they are not covered by Japan's national health care system. Over the last 4 decades, Japan's consumers have been -- have seen health care cost continue to rise and increase amid the aging population and the declining birth rate. The increase in medical expense is projected to significantly outpace GDP growth in Japan. This has put an increasing strain on the national health care system and consumers have been required to pay more out-of-pocket expenses on their health care. Because of the rapidly aging population and the higher co-pays for medical expenses, the market for third sector products has been steadily growing and the trend is expected to continue. Within this context, the Japanese government is debating key social security issues, including potentially increasing co-pays by the elderly. As this debate continues, the public will likely be even more focused on the need for supplemental insurance. We will continue to refine our existing product portfolio to meet the evolving needs of our policyholders as we've done in the past and sell our policies where consumers want to purchase them. Our 2020 product launch plan includes the introduction of a fresh approach to cancer riders. This approach certainly simplifies the product design by bundling riders together, meeting consumers' needs as medical technology and treatments advance in Japan. This enhancement is also available at Japan Post system and is tailor-made for their unique distribution model, once returning to their full strength. We have also decided to accelerate our medical product refresh from 2020 -- 2021 launch to the fourth quarter of 2020. While this will have a modest impact on 2020 sales, it will position us well to head into 2021. The refresh product expands coverage and fills the gap that nonexclusive agencies that offer higher premiums and more expensive benefit structures to their clientele. In addition, while we don't lead with first sector product protection like term or whole life, they complement our third sector line of products very well and have similar profitability. As a result, we tend to be agnostic when it comes to selling cancer, medical or first sector protection insurance. Over time, we have enhanced and expanded Aflac Japan's distribution network to provide more opportunities to be where the customer wants to purchase insurance products. Our traditional channel, which includes more than 9,000 agencies, have been and will continue to be a key to our success. As discussed during the outlook call, we have also set aside funding to strengthen the traditional channels of our agencies and the largest sales contributors. Banks also allow Aflac Japan additional avenues to reach consumers and offer products in the places consumers want to buy them. At the end of 2019, Aflac Japan was represented by 367 banks, which is nearly 90% of all the banks in Japan. Additionally, we have forged strategic alliances to sell Aflac's cancer insurance with partners such as Japan Post, Japan Post Insurance, Dai-ichi Life and Daido Life. These alliances ultimately improve Aflac Japan's market access and increase touch points we have with Aflac Japan's existing and potential customers. As you know, our reinforced strategic alliance with Japan Post Holdings has been a topic of interest through 2019 and leading into 2020. Recently, on the fourth quarter earnings call, I noted that the new management of Japan Post Group is understandably focused on its plan to restore the public's trust and address concerns raised by the sale of Japan Post Insurance products. We expect sales of Aflac Japan's cancer insurance through Japan Post distributions to be secondary, especially during the first half of 2020. Based on the comments from Japan Post and our review of the monthly trends, we expect very little production in the first half of 2020, and the level of recovery in the second half of the year is uncertain at this point. As I mentioned on our earnings call, Aflac Japan's executives and Japan Post new leadership met in January as part of the established strategic alliance framework. The discussions were positive and the Japan Post Group Presidents expressed their desire to further enhance the strategic alliance to the benefit of both organizations over the long term. Most recently, Japan Post Holdings announced through the Tokyo Stock Exchange timely disclosure that they had acquired their targeted 52.3 million shares of Aflac Incorporated as of February 13, 2020. We look forward to working with Japan Post new leadership to continue deepening our strategic alliance for the long term. Now let me update you on Aflac Japan's performance and outlook. In 2019, Aflac once again emerged as the leading company in Japan's growing third sector. As we anticipated, full year third sector and first sector protection sales were down in the mid-teens. This result followed a very strong sales result in 2018 with the launch of our revised cancer insurance product and primarily reflected the reduced sales of our cancer insurance through Japan Post. As expected, Aflac Japan saw a 1.1% decline in total earned premium in 2019, mainly due to the limited paid policies reaching paid-up status, which has minimal effect on profitability. However, earned premium for third and first sector protection products grew at 1.3%, which was in line with our expectations. Pretax adjusted earnings were up slightly from the year ago. The lower benefit ratio continued to reflect the continued shift to business mix to the third sector, the expense ratios reflecting our investment in technology as well as the sale and marketing spend in the fourth quarter. Pretax profit margins was at the high end of the forecasted range and improved by 20 basis points. As communicated on the fourth quarter conference call, we continue to expect a decline in the range of 0.7% in the third sector and first sector protection earned premium for the year. In an environment of low interest rates and reflected pressure on premium growth, we continue to work on our long-term expense structure. We are building out an agile team focused on customer experience enhancements, administrative efficiencies and go-to-market productivity improvements. We believe the most accurate way to track our ratios is when adjusting for paid-up policies. We anticipate that adjusted expense ratios will trend downward gradually beginning in 2022. While we are early in the year, Aflac Japan's accelerated technology investments and marketing spend are not expected to change our 21% to 22% guidance range in the segment of the 2020 pretax profit margins. Now let me turn to Aflac U.S., where we began 1955 and today stands as the #1 provider of supplemental insurance at the worksite in the United States. Our vision for Aflac U.S. is to be the #1 distributor of benefit solutions, supporting the U.S. workforce at traditional worksite and beyond. With consumers increasingly turning to technology and the avenues to research, buy and communicate, Aflac is utilizing innovative ways to leverage our distribution brand and benefit solution as a key differentiator. As the overall cost of health care coverage continues to rise and premium copayments and deductibles are steadily increasing for both individuals and families alike. This is causing people to worry more about their wallets than their health. These challenging trends continue to limit the spending power of many American workers and lead many workers financially unequipped to handle unexpected illness or accident. In fact, 46% are not prepared for $500 of out-of-pocket expenses associated with unexpected illness or accident, and 65%, 2/3, have less than $1,000 for such expenses. Given this landscape, it's no surprise that supplemental benefits markets, as a whole, are projected to grow. Amid this backdrop, we believe Aflac U.S. is well positioned with product solutions that help with expenses health insurance doesn't cover. Keep in mind, major medical health insurance plans, not even the best, are designed to cover all the out-of-pocket expenses that are associated. Our products provide fast access to cash when policyholders need it most. In the U.S., Aflac has mainly utilized agents and brokers to reach the American workforce. In 2019, agents accounted for 57% of Aflac sales, whereas brokers accounted for 40%. That nearly 3% remaining comes from our efforts to expand our reach through direct and partnerships. We are pleased that the growth of our broker sales and the way in which agents have collaborated with local and regional brokers to win new business. We look to 2020, our distribution strategy is focused on meeting the customers where and when they want to purchase the policy. Distribution expansion through partnerships and digital means continues to be an area of opportunity for us to reach potential policyholders who are not in the worksite. We look forward to seeing programs in our distribution expansion efforts. Turning to the U.S. operations, our enhanced results for the year were consistent with our expectations. They reflected elevated expenses as a result of ongoing investments in our platform, distribution and customer experience. Following record sales in 2018, sales were flat for 2019 but earned premium grew at 1.8%. We communicated on our 2020 outlook call that we expect Aflac U.S. to generate earned premium growth in the range of 1%, maintain stable persistency and deliver pretax profit margins in the range of 17% to 19%. The benefit ratio continues to trend lower due to continued favorable claims trends and the shift in the mix of earned premium from the older cancer policies to accident products. As we anticipated, our expense ratio was elevated, especially in the fourth quarter, reflecting our investment back into the business, including the August benefit administration business. Therefore, pretax margins declined 50 basis points from the prior year to 19.4%. When you consider that a little over 7 million individuals have Aflac coverage out of the nearly 49 million who have access to it through their work or employer, this represents a big opportunity for us going forward. We believe that Aflac U.S. has the opportunity to emerge better positioned from ever-evolving health care landscape. Our traditional focus has been on payroll deduction accounts with fewer than 100 employees, and our individual sales agents are best positioned to serve that segment. We also believe our strategy for working with local, regional and national brokers will better position Aflac in businesses of 100 and more employees. We will continue to invest in our existing platform, including product development and our efforts to facilitate producer growth and productivity, especially as the medical and group benefit carriers pursue voluntary business and attempt to go down market. That is why we believe it's important to build out our presence on the first page of the employee benefit marketplace. An initial step in that direction is our entry into the network, dental and vision. Through a measured rollout of Aflac Dental and Vision that was initiated in January of 2020, this rollout will be followed by a national launch in the first quarter of 2021. We believe this is important to the future growth and defending our leading voluntary supplemental product franchise. Along with entering a growth market, we believe this product portfolio expansion will increase producer productivity and assist with recruiting and retaining agents and expand the broker access. We expect Aflac Dental and Vision to generate $300 million to $500 million in revenues over the next 5 to 7 years, recognizing that there will be a little impact on revenues in 2020 as we build. At the same time, we are actively investing in consumer market platforms to reach one of the fastest-growing segments with more than 126 million employees who don't have access to Aflac's products and solutions. We will also continue to strengthen the agency's distribution, incentives and investing in training and retention programs to stabilize the decline in the average weekly producers. Now I'll spend the last portion of my discussions updating you on the consolidated financial performance and our capital management activities. We believe that viewing our results, excluding the impact of foreign currency, is the most meaningful way to assess the financial performance whether the yen has helped us or hurt us. We also believe that an analysis of adjusted earn per diluted share of non-U.S. financial GAAP measure is important to an understanding of Aflac's underlying profitability drivers. You will find the detailed definition of adjusted earnings and adjusted earnings per share in the appendix of the presentation. For the full year, the average yen-dollar exchange rate was JPY 109.07 versus JPY 110.39 from a year ago, which increased Aflac's growth rate in dollar terms and our adjusted earnings per diluted share by 40 basis points. We believe an analysis of the adjusted earnings and non-GAAP financial measures is a key to understanding Aflac's underlying profitability drivers. Adjusted earnings exclude realized investment gains and losses as well as other nonrecurring items. For 2019, adjusted earnings per share on a currency-neutral basis increased 6.3% to $4.42 per share, which was at the upper end of our upwardly revised guidance range of $4.35 to $4.45 a share. We continue to maintain a strong capital profile, which is reflected in our capital ratios. Our capital ratios demonstrate our commitment to maintaining financial strength and flexibility on behalf of the policyholders, the shareholders and the bondholders. In terms of capital, we ended the year in a strong position. As of year-end 2019, Aflac Japan solvency margin ratio was 1,043%, and Aflac's company's level of U.S. risk-based capital ratio was 539%. Over time, we believe we can run our company RBC down towards the 400% range, given the risk profile of our U.S. businesses. We also ended the year with approximately $3.4 billion in capital and liquidity at the holding company's net prefunded debt, recognizing this balance mutually fluctuates. We have settled aside $1 billion as capital buffer and an additional $1 billion for contingent liquidity. The contingent liquidity supports our holding company's derivative positions that serve to lower our enterprise exposure to currency movement. Capital deployment and financial soundness has always been important to the investors. We have communicated that we have been and will continue to be very disciplined in evaluating capital deployment within a sound risk framework. We view our primary capital deployment options as dividends, share repurchase and opportunistic uses to enhance organic growth. Including dividends and share repurchase, we returned more than $2.4 billion to the shareholders in 2019. I am pleased with the Board's decision to increase the dividend, coming off the 37th consecutive dividend increase and a recognition of the stability of our earnings and capital position. This has placed us among a very elite category of companies, including the S&P 500 Dividend Aristocrats and demonstrates our commitment to rewarding shareholders. Additionally, Aflac's Board of Directors increased the dividend by 3.7% in the first quarter of 2020. The Board continues to take a balanced approach within the desire to sustain long-term track record of dividend increases. That also reflects the strength of the company's capital position, an outlook for stable growth in earnings and deployable capital generation. We will continue to seek the right balance of investing in our business, repurchasing stock and continuing our long range of dividend growth. We expect $1.3 billion to $1.7 billion of share repurchase within the range, allowing us to be more tactical in our deployment strategy. For 2020, we expect adjusted earnings per diluted share to be $4.32 to $4.52, assuming the yen-dollar exchange rate of JPY 109.07. This slide shows how the 2020 adjusted EPS might look at variance -- currency levels. We estimate that every JPY 1 move in the average annual exchange rate will have an impact of approximately $0.015 per share. In summary, our objective is to maintain our strong capital position while producing stable earnings and strong cash flows. We believe that we will achieve our objectives by leveraging in both Japan and the United States our strong leading market position, our powerful brand, our strong distribution, innovative products and high-quality service. As we look towards our objectives and goals, we have confidence in our business model, the fundamental need for our products and most importantly, the future of Aflac. With that, I'll be glad to take your questions. Andrew?

Yes. One interesting item that you touched on was regulation and social security with regard to co-pay, that could be a massive impact. When might they rule on that? And what do you think the potential impact on the revenues could be?

Well, when I originally started with Japan now almost 30 years ago, there were no co-pays or deductibles. It then went to 10%, it then went to 20%, then went to 30%. The past has been -- they generally do a trial balloon to see how the public reacts to that possibly happening. I would say that it seems to me like there is a trial balloon going on right now, where they are bringing up the fact that this could happen to see if all of a sudden, there was a rebellion going on with our people saying, oh, no, this can never happen. There hasn't seemed to be one at this particular point, but not being Japanese, I have to ask our people over there what they see happening. And although they are not committed that it will happen, I think they feel there is more of a chance that it will than it won't. But they will create something predominantly with the older, which normally you think is the opposite in the U.S., but they seem to have more out-of-pocket -- have the ability to cover more out-of-pocket expenses, and they've had less cost affected by their health care system. And so that's probably the way it will go if they do it. It could happen any time. It could be a year, could be longer. I remember when they went from 20% to 30%, I was stunned how quickly they did it. I thought it would been delayed more so, and they went right with it. It took a long time to go to 10%. It took a long time to go to 20%. But then 20% to 30%, they topped it. And then it's been dormant for years now, 2003, so 17 years. So I think they can get away with one, but we'll have to see what they do.

Are we out of time or -- they are shaking their heads. Certainly, great speech. Thank you very much.

Thank you for having me.