Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Welcome, everybody, to the second day of the Annual Bank of America U.S. Financials Conference. We're broadcasting live from the Bank of America Tower at One Bryant Park here in New York City, and we hope that yesterday was a rewarding day. You've learned a lot of stuff. We have a slate of very interesting executives from insurance companies today once again. [Operator Instructions] I know Dan, who's waiting to talk to you all, has a presentation. So we may not get time for this presentation, but we'll see what we can do. And if not, I'll relay the questions to Dan and David Young who are standing by. We can surely get all your questions answered, without a doubt. So for -- to consider the first section of the morning is going to be Aflac. And at 9:00, we'll have Selective on deck, if you want to prepare to ask a question about Selective. With regards to Aflac, we have Dan Amos, the CEO of Aflac, here right now, who's going to speak with us. I saw a stat that Dan is the second longest-serving CEO in the Fortune 200, and I didn't know who the first one was. I was thinking maybe Mr. Buffett. I wasn't sure where that stat came from. Maybe Dan can give us some framework for that one, but he's going to do a presentation. I mean I know a lot of you know Aflac. It's always evolving and always interesting. And if we have time at the end, we're going to ask some questions. So this is going to be the Dan Amos show, and I'm going to stay quiet. So let me introduce him to you. You probably all know him, and we'll go from there. Thank you, Dan, for joining us today.

Thank you, Josh. And you are correct. It is Warren Buffett that has more tenure. So tough guy to follow but trying our best. But good morning to all of you today, and it's a pleasure to be here. Today, I will review our performance in 2020. However, I'll also cover more about how we've navigated the pandemic and positioned our company for growth as we emerge from the pandemic while simultaneously returning capital to the shareholders. Before we begin, let me remind you that some of the statements in this presentation are forward-looking within the meanings of the federal security laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they're prospective in nature. Please look at the annual report on Form 10-K for some of the risk factors that could cause actual results to differ materially from those we discuss today. Our fourth quarter 2020 earnings release is available on the Investor page of aflac.com and also includes reconciliations of certain non-GAAP financial measures. We also encourage you to look at the appendix of the end of the presentation, which will, likewise, be posted on Investors page at aflac.com. So for more of our non-GAAP and looking-forward information, you can go there. Now at this time last year, it would have been very difficult to foresee the gravity of what soon would unfold with COVID-19. Early on, we acted swiftly, putting the safety and well-being of our workforce, policyholders and communities in Japan and the United States first. In both countries, we implemented travel restrictions, shifted to working remotely and adjusted our approach to employee benefits to accommodate the need for such things as extended pay leave and to account for school closings. We also provided financial support to our agents and agencies with interest-free loans to help manage through the difficult period. The policyholders, we granted grace periods for premium payments to give them relief without fear that their coverage would be canceled. We contributed more than a combined $10 million to support the frontline efforts to combat the virus in both countries. In addition, we accelerated investments that we were making and the digital tools to accommodate both our customers and distribution in this virtual environment. While 2020 represented a certain challenge, our long-term strategy remained intact. Our policy covers more than 50 million people worldwide. Aflac's strategy in Japan and 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. Aflac's core supplemental policies are not structured to build wealth. They're to provide a layer of financial protection against loss of income and asset based on qualifying health events. Our supplemental policies pay benefits cash directly to the insured, regardless of any other insurance they may have. Because the benefits are fixed rather than open-ended, they're not subject to inflation. Of course, we also want to be where the customer wants to purchase insurance. The lack of face-to-face opportunities created by the pandemic clearly limited our opportunities for new sales and pressured earned premium and revenues. As I mentioned earlier, they prompted us to pivot virtual and sales methods to go digital and accelerate relative digital investments. We don't see face-to-face sales going away. We just see the ability to make them better going forward. However, we believe that these virtual tools and digital sales methods will allow our agents and brokers to be more efficient and productive as we emerge from the pandemic. Ultimately, our strategy is to provide protection that our customers value through multiple channels that will continue to yield new customers. Aflac has been operating in Japan since 1974 when we pioneered cancer insurance there and became the leader in the market. Following deregulation of Japan's insurance market, we launched a standalone medical product in 2002. Our medical product rose to be the #1 product in medical that year and has remained the leader since then. Today, we are the leading cancer and medical insurer in Japan. Aflac Japan accounts for nearly 74% of Aflac Incorporated's pretax adjusted earnings while ensuring 1 out of 4 households. While we don't lead with first-sector protection products, like term or whole life insurance, they complement our core third sector line of products very well and have similar profitability. Aflac Japan is also developing its life cycle product approach, namely continued refined to existing income products designed for younger working populations and then existing elderly care products. Increasing uncertainty in aging populations have heightened concern about income stability and nursing care. Therefore, Aflac Japan will look to enhance its products to address these concerns. However, the foundation of Aflac's Japan's products portfolio continues to be our third-sector products, primarily cancer and medical insurance. These products help our policyholders with out-of-pocket expenses that are not covered by Japan's national health care system. Over the last 4 decades, Japanese consumers have seen health care costs increase amid an aging population and a declining birth rate. The increase in medical expense is projected to significantly outpace the GDP growth in Japan. This has put an increased strain on the national health care system, and consumers have been required to pay more out-of-pocket expenses for health care. The market for the third-sector products has been steadily growing due to these conditions, and we expect that trend to continue. While focused on resolving the pandemics, the Japanese government has debated key social security issues, including potentially increasing the co-pays for 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. In the fourth quarter of 2020, Aflac Japan relaunched its new all-in cancer riders. This approach greatly simplifies the product design by bundling coverages or riders together, meeting consumers' needs as medical technology and treatments advance. This enhancement is also available in Japan Post system and is tailor-made for their unique distribution model once returning to full strength. Toward the end of last month, we introduced our newest medical product, Prime EVER -- or excuse me, EVER Prime. This new product has provided extensive protection, including enhanced coverage for hospitalization and the 3 dreadly diseases: cancer, heart attack and stroke. With EVER Prime, we seek to capture a greater share of the highly competitive medical market. We believe that EVER Prime's competitive enhanced coverage will appeal to many, including nonexclusive agencies. Even up against difficult comparisons of last January pre-COVID sales, its positive launch exceeded our expectations. We are encouraged by the reception by both consumers and our sales force. Ultimately, Aflac Japan aims to leverage Aflac's strong reputation in cancer and medical to drive life cycle solutions that can mature into third major category of sales and growth for Aflac Japan. In 2021, Aflac Japan will also utilize small amount short-term insurance in the areas that are difficult to cover with our existing products and services. One such example includes medical insurance designs, those not eligible for nonstandard medical insurance. We believe that such a product will enable us to capture new customers and making our profit margins at the same time. We provide innovative products that follow a policyholder through life stages. 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. A key element of our channel strategy will be leveraging digital technology and artificial intelligence toward implementation of digital transformation. This will apply to our core traditional channels and strategic partner channels as well. In October of 2020, we introduced technology that allows agents to conduct virtual sales and provide an entirely digital customer experience. True virtual sales in Japan is relatively limited. In addition, the majority of the applications are still filed in paper form, although digital applications have been adopted in face-to-face consultations. We estimate that only 2% to 3% of our sales are currently digital end to end. However, we understand some of the agencies have significantly adopted virtual tools to supplement face-to-face consultations. At the same time, Aflac Japan will seek to provide competitive, protection-type products like EVER Prime through nonexclusive agencies in line with their prospective strategies. Our traditional channels, which include nearly 9,000 agencies, have been and will continue to be the key to our success. 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 2020, and Aflac Japan was represented by 361 banks. But more importantly, it was approximately 90% of all the banks in Japan. Additionally, we afford strategic alliances to sell Aflac's cancer insurance with partners, such as Japan Post and Japan Post Insurance, Dai-ichi Life and Daido Life. These alliances ultimately improve Aflac Japan's market access and increase the 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. As we noted on our recent fourth quarter earnings call, we expect a combination of product development, improved pandemic conditions and the return of Japan Post to distributing Aflac's cancer insurance. We will drive growth as we look forward to the second half of 2021. Now let me update you on Japan's performance and outlook. In 2020, Aflac Japan generated solid overall financial results with a stable profit margin of 21.2% and an extremely strong premium persistency rate of 95.1%. The relaunch of our new cancer rider drove sequential improvement in both cancer insurance and total sales in the fourth quarter. As a result, total sales were down 22.2% for the quarter and 36.2% for the year. For the full year, total earned premium was down 2.8%, while total policies in force declined by a lesser rate of 1.2%. As policies in force are not impacted by the paid-up status, it tends to serve as a better indicator of the growth of the underlying business. For the full year, the reported total benefit ratio was 69.9%, up 40 basis points year-over-year. Our third-sector benefit ratio was 59.7%, also up 40 basis points year-over-year, largely due to the improved persistency. The expense ratio in Japan was 21.2%, up 50 basis points year-over-year. The main driver was our paperless initiatives. These initiatives kicked in at a higher gear as we digitalize operations and drove efficiencies throughout the value chain to a future state with significantly reduced paper usage. Now let me turn to Aflac U.S., where we began in 1955, today stands as the #1 provider of supplemental insurance at the worksite in the United States. The vision for Aflac U.S. is to create a world where people are better prepared for unexpected health expenses. Aflac is targeting a new sales of more than $1.8 billion by 2025. However, one of the biggest impacts that we can make on growth is to retain the existing policyholders. Our normal persistency rate is in the range of 78%. We believe this is an opportunity we have to address. In 2021, we are responding with an expanded product portfolio. It includes network dental and vision and group benefits designed to reach new accounts, penetrate current accounts further and drive increased premium persistency. We'll also continue to introduce tools and capacities that reduce costs and also improve service experience and perceived value. We plan to increase our attractiveness in the large-case market by accelerating an integrated platform and go-to-market strategy for a full suite of group benefits. We'll also strengthen our position in the small business market. COVID-19 has certainly shifted to selling and the enrollment landscape in small-case businesses. As a result, we have shifted to meet the demands with new digital tools and processes that provide our field agent channel with tools they need to engage consumers virtually or face-to-face. In short, we are repositioning them in this new digital environment. Like Japan, Aflac U.S. has all the tools in place for the agents to conduct business without a face-to-face meeting. We estimate that about 15% of our traditional individual salesmen (sic) [ sales ] are completed without some form of face-to-face interaction. This excludes digital direct -- excuse me, direct-to-consumer, which is naturally non face-to-face. Finally, we're executing on the strategy to reach consumers that we don't reach in the traditional workforce: the consumers market. The overall cost of health care coverage continues to rise as premiums, co-pays and deductibles are steadily increasing for both individual and families alike. This is causing people to worry about their wallet and their health. These challenging trends continue to limit the spending power of many American workers and leave many workers financially unequipped to handle unexpected illnesses or accidents. Given the landscape, it's no surprise that the supplemental benefit market, as a whole, is projected to grow. Amid the backdrop, we believe Aflac U.S. is well positioned with product solutions that help with expenses health care doesn't cover. After a year like 2020, people now better understand that getting sick can be expensive. Many also have experienced that not even the best major medical plans are designed to pay 100% of the expenses associated with a sickness or accident. Our products provide fast access to cash when the policyholders need it most. In 2020, we focused on 3 growth initiatives to position our success in reaching sales of more than $1.8 billion by the end of 2025. In January -- excuse me, in 2025. First, we launched Aflac Dental and Vision in 10 select states to enter the dental network and vision market. But in January of 2021, we initiated a national rollout, and we went from 40 states -- 20 states to 40 states with more coming online during the year. We expect network dental and vision to assist Aflac with increased access in growth areas of the market. Additionally, we believe these products will foster increased producer productivity and deeper account penetration, not only with these 2 new products, but also with Aflac's core supplemental products. We target generating $300 million to $500 million in annual revenue over 5 to 7 years with Aflac Dental and Vision. Later in 2020, we also expanded group life and disability solutions through a buy-to-build acquisition. Similar to the dental and vision market entry, we will utilize a phased and methodical approach to integrate and grow this business. We expect measured approach will allow us to generate $500 million to $800 million in annual revenues over the next 5 to 7 years. Finally, the build-out of the consumer market business will allow Aflac to sell products with a completely digital experience and platform. Aflac will be able to access consumers outside the worksite when, where and how they want to be met with a more holistic and attractive value proposition. We expect this business to contribute $150 million to $250 million in annual revenues by 2025. We believe Aflac U.S. has the opportunity to emerge better positioned from an ever-evolving health care environment. When you consider that a little over 7 million individuals have Aflac's coverage, out of nearly 49 million who have access to buy it through their work or their employer, this represents a big opportunity for Aflac. By expanding our value proposition in the U.S. and focusing on our distribution, our strategy for the next 5 years will be to focus on these 3 key areas. First, we look to increase our attractiveness in large-case market with a full suite of group products, paired with a premier service model to support the various needs of larger employers. Of the more than 60 million employees and large employers, Aflac's current penetration is only 1.3 million, which is way too low. This large case is primarily driven over the broker market, which, as you know, was not our concentration until the last few years. However, it is now our fastest-growing area. Second, while we have steadily increased our penetration of the larger-account markets over the last several years, there's an opportunity to accelerate growth as we continue to expand the value proposition. Front page group benefits are top products sold in the larger accounts, and we have made strategic investments in businesses to position Aflac more favorably during the enrollment process. Our traditional focus has been on payroll accounts with fewer than 100 employees. We will continue to strengthen our position in the small business segment with new digital tools, new products and solutions that meet the demands of the market. The heart of the company has been individual sales through our career agency force. Our individual sales agents are best positioned to serve this segment. We have provided our career agents with tools they need to enhance consumers virtually and face-to-face. In short, we are repositioning them for the new digital environment. Finally, as I mentioned earlier, we are executing on the strategy to reach 125-plus million consumers that we don't reach in a traditional worksite through our consumer marketing platform. These consumers may not necessarily want to purchase insurance through the traditional means. They trend, which was certainly accelerated, consumers' purchasing preference to more digital methods. In short, we are committed through our strategic objective to increase access to markets, increase participation in Aflac's products and increase policyholder and account penetration. As for the performance of Aflac U.S., we still reported a solid profit margin of 19.3%. The combination of the lower revenues and elevated expenses tied to investing in the growth of our business led to higher expense ratios. While the benefit ratio finished lower than the prior year, we saw the benefit ratio increase significantly in the fourth quarter driven by the increase in reserves as the national infection rates increased significantly. While earned premium was down 0.9%, persistency remained high due to emergency orders in certain states and lower sales of new policies. These newer policies tend to lapse at a higher rate being first year. The pandemic conditions continue to impact our sales results in this section -- or segment, largely due to reduced face-to-face activity. As expected, we saw modest sequential sales improvement in the fourth quarter with a decrease of 27.2% for the quarter and 30.3% for the year. However, we remain cautiously optimistic for continued modest sequential sales improvement contingent upon the pace of the economic recovery. And as a result, we expect to see brighter second half of 2021. I'll now spend the last portion of my discussion 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 best and most meaningful way to assess our financial performance, whether the yen has helped us or the yen has hurt us. For the full year, the average yen/dollar exchange rate was JPY 106.86 versus JPY 109.07 a year earlier, which increased Aflac Japan's growth rate in dollars and our adjusted earnings per diluted share by 90 basis points. We believe an analysis of adjusted earnings, a non-U.S. GAAP financial measure, is key to understanding Aflac's underlying profitability drivers. For 2020, adjusted earnings per share on a currency-neutral basis increased 10.8% to $4.92. In 2020, we continue to maintain a strong capital profile, which is reflected in our capital ratios. Our capital ratio demonstrated our commitment to maintaining financial strength and flexibility on behalf of our policyholders, shareholders and bondholders. In terms of capital, we ended the year in a strong position. As of year-end 2020, Aflac Japan solvency margin was greater than 900%. And Aflac's company's level of U.S. risk-based capital ratio was 525%. We also ended the year with approximately $4 billion of liquidity at the holding company. This was $2 billion above our minimum balance that we have set aside as capital buffer and contingent liquidity. Capital deployment and financial soundness has always been important to our investors. As we've communicated, we have been and will continue to be very disciplined in evaluating capital deployment within the sound risk framework. We view our primary capital deployment options as dividends, share repurchase and opportunities to use the cash to enhance our organic growth. Including dividends and share we purchased, we returned $2.3 billion to our shareholders in 2020. I am pleased that with the Board's decision to increase the dividend coming off the 38th consecutive year of dividend increases and a recognition of the stability of earnings and capital generations. This has placed us among the very elite category of companies, including the S&P 500 Dividend Aristocrats, and demonstrates our commitment to rewarding our shareholders. Additionally, Aflac's Board of Directors increased the dividend by 17.9% in the first quarter of 2020. The Board continues to take a balanced approach with the desire to sustain long-term track record of dividend increases. We will also continue to seek the right balance of investing in our business, repurchasing our stock and continuing our long-term record of dividend growth. As a result, we will remain tactical in our approach to share repurchase, expecting to buy $1.5 billion of shares in 2021. Over time, Aflac has developed a number of franchise strengths, including the leading market share and scale which continue to leverage our position at 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 is, in 2020, celebrating its 20th year of spreading the word of the best value in insurance. By leveraging the popularity of the Aflac Duck, about 9 out of 10 people in Japan recognize the Aflac brand. It's also the name that people have become to trust over the decades. In the U.S., the established brand has also served as an effective door opener and catalyst for many consumers and payroll accounts. 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 our diverse and productive distribution channels to generate future growth in Japan and the United States. We will continue to explore opportunities to expand our distribution, including leveraging technology to increase production, like digital direct-to-consumer initiatives and developing new partnerships and better leverage existing affiliations. We will also continue to offer innovative products and high-quality customized services to provide our customers with affordable solutions to help protect their financial well-being. In addition, our ability to consistently deliver stable earnings and strong cash flows drives value for our shareholders. We will also maintain strong capital and liquidity, which contribute to our leading financial strength ratings. For 2020, we will continue to focus on our long-term profitable growth. This is a critical time for executing strategy. It's also why I created the role of Chief Operating Officer of Aflac Incorporated to work with the senior team to ensure that we successfully cross the finish line. I also believe that we have the right leaders in place who will continue to guide and propel the operations moving forward. 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 our key strengths in both Japan and the United States, which will include market-leading positions, powerful brands, strong distribution, innovative products, high-quality service and financial strength. As we look toward our objective and goals, we have confidence in our business model and our fundamental need for our products, and most importantly, the future success of Aflac. Thank you. And now I'll be glad to take a question.

Thank you, Dan. So you talked about it a little bit, but I was interested in hearing of the changes you made during the pandemic, some of those things will carry on. If you think about back to pre-pandemic eras, if you add some of these skills that you've developed prior to the pandemic, it would have been stimulative to sales prior to this. As we go into the next post-pandemic phase or the new normal, what can we expect in terms of learnings and growth from behaviors that you adapted during the pandemic in a less severe sort of market environment that will continue?

Well, I think we, as a company, we're already working toward digital transformation. If there was any good that came out of the pandemic is it probably pushed everyone forward 2 or 3 years because it forced our agents to evolve, and it forced consumers to learn about Zoom or whatever you might be getting the information from and how it's changing. So I think it, for the long term, will help us, provided things get back to normal, which we expect them to do. So I see our agents continuing with our brokers to be the backbone of the company. But they can now, through technology, be able to see people. For example, if there's account that has 10 locations and instead of going and seeing the 1 or 2 people, they can now hook them up through Zoom or some form and talk to them and make the presentation versus prior to that, they had to show up at those locations and drive everywhere. So I think the efficiency will be much better as we move forward, and I'm excited about that, and I'm ready to move on to see things go back more to normal, which may be toward the end of next -- this year.

All right. Well, of course, we're out of time. There are a few questions from the audience, but I'm going to direct them to David, and he'll give them to you. And maybe if you want me to connect you with that shareholder, I'm happy to do so. But we really appreciate your time. Be safe and get you and your employees vaccinated as soon as possible, and we'll move on to the next stage of things.

Well, we certainly want to answer those questions, and we'll be happy to do so. And thank you all for attending.

Thank you. Take care.