Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Okay. Good morning, everyone. My name is Greg Peters, and I'm the analyst at Raymond James following the insurance brokerage and technology space. And I'm honored really to host in my career, my first ever ESG strategy fireside chat. And as part of the process, I have Leslie Vandegrift, who I'll turn over the floor to in a second, to help stem the chat and lead some of the questions. And I'm honored that we have Aflac and Fred Crawford, who serves as President and COO, on the panel to walk us through their approach to the ESG-related issues. So just for the audience that's listening in on the presentation today, the schedule -- this presentation is supposed to go until 10:20 Eastern Time this morning. And if you have any questions, I'd encourage you just to e-mail me directly at [email protected], and we'll certainly try and include those questions into the discussion as it proceeds over the next 40 minutes. So with that said, I'd like to turn the mic over to Leslie to give a brief introduction.

Perfect. Thank you, Greg, and good morning. And thank you, Fred, for joining us as well. As Greg mentioned, my name is Leslie Vandegrift. I cover ESG strategy here at Raymond James. That is a newer product on the research side. We launched coverage officially in February 2020, here at Ray Jay on that. And so we've been developing the topics that we cover and all the different events we do, including panels such as this over the last 2 years, and we're very excited to have Aflac on here with us to talk about their ESG journey. I know for everyone out there in the audience. whether an investor or another corporate client, we've all had our own stories and the way that we're working through them over the last year. So having these conversations is always enjoyable and also greatly informational. And so before we get started, as Greg mentioned, you can email him with questions. And also if you have any ESG questions you'd like to reach out to me about after this panel, feel free to email me. You should see my name on the screen, [email protected]. So to get us started, I'm going to hand it over to Fred so he can give us introduction and tell us how Aflac has gone about through ESG journey.

So first, Greg, and Leslie, thank you very much for the invite this morning, and welcome to everybody. I hope everybody is safe and sound. So first, a little bit about Aflac, only because it will tie into some of my comments. Many of you, perhaps all of you, are familiar with Aflac as a company in terms of our brand and our presence. But structurally as a company, we are really the leading voluntary benefit provider in the work site in the United States, effectively built that business some 70 years ago. And essentially what our products are, our gap products or supplemental products, basically filling the gap between what your major medical insurance covers in the way of health insurance and what your out-of-pocket expenses are related to a health event. In Japan, we started about roughly coming on 50 years ago, not quite, and we are also the leading supplemental health insurance company in Japan. In Japan, that business is called the third sector business in its medical and cancer and disability and now elderly care products that essentially fill the gap between what the government provides in the way of a national health care and support system and what out-of-pocket costs are for individual. So in other words, we have a very similar strategy, both in the U.S. and Japan, but just formed around the health care system that is unique to the U.S. and unique to Japan. And those are the 2 largest insurance markets in the world, and we're the largest at what we do in those geographies. Part of the reason I mentioned that is because when we think about ESG, our efforts are always primarily on a U.S.-based perspective and platform and then very importantly, on a Japan-based perspective and platform. And so you'll hear me reference that from time to time. In terms of our ESG journey, the way I would describe it to you is that certainly, as part of our culture, the primary components of ESG, government, environmental climate and particularly diversity and inclusion and cultural social investments have been part of the fabric of the company dating back to the 3 brothers that founded the company nearly 70 years ago. But in terms of the more formality or formal structure built around ESG, that really kicked in around 2008. So actually quite a few years ago, we were a company that formed what we at the time called our Green Committee of the Board of Directors. And it was put together, it was the brainchild of one of our Board members, Betty Hudson, who is a longtime Board member of Aflac and was an executive at National Geographic in her later years as an executive and so had a very strong and acute window into driving ESG initiatives, particularly around climate, diversity, social gaps and issues. So she encouraged the Board to form this Green Committee, it later became called the Sustainability Committee. And today, it's called the Corporate Social Responsibility and Sustainability Committee of the Board. And it is a committee of the Board that wraps all of our ESG efforts together in a bow and drives it forward. I think most of you will know from a governance perspective, you'll have elements of your governance committee that handles ESG issues, you'll often have your investment committee, in our case, that is handling and tackling ESG issues. And we have a special Board that wraps it all together -- committee of the Board. In terms of some key milestones in our journey, I would say a few things. One is over 20 -- coming on 25 years ago, we formed the Aflac Cancer Center and Blood Disorder platform in Atlanta. We've donated over $150 million to this organization that carries our name and a tax childhood cancer, but also very importantly, blood disorder. In particular, it's one of the leading sickle cell platforms in the country. As many of you know, sickle cell is something that affects particularly the African-American community. And so it is both a cause and very close to our culture as well as a diversity-based platform in our eyes and something that we're very proud of. In Japan, we formed something called the Parents House, which think of the Ronald McDonald House in the U.S., this would be similar, only focused on families with children that are fighting cancer in Japan. This is predominantly locations in Tokyo and Osaka. They have, over the past 20 years now, it was formed in 2001, have served over 140,000 individuals through those Parents' homes in Japan. And so culturally and for my point being, for several years, that's been part of the fabric of the company, long before ESG became the terminology that's used today. And so now today, we're advancing the ball in ways that are, I think, familiar to all of you, most notably around sizing and measuring our Scope 1, 2 and 3 emissions; emphasis on Scope 3, which is the more complex part of the measuring dynamic. And as you may know, we've pledged to be carbon neutral by 2040 and net zero by 2050, and that is on a full 1, 2 and 3 scope basis. We also have been advancing our disclosures across the board, most notably around TCFD-type disclosures on climate, but other disclosure platforms that have become the standard of the industry. We issued our first sustainability bond this past year for $400 million. As many of you know, you can't issue a sustainability bond unless you have the appropriate audited tracking and governance processes inside your company to ensure that the proceeds are used in a qualified way once you issue the bonds. So what I always tell people is it's not about the capital markets side of it, it's about what all has to be in place in order to even qualify for issuing a sustainability bond. And so we're quite proud of that and happy with that. And so those are some of the key areas that we've been advancing in most recent years. But again, very proud of our path to this point.

Perfect. So with that, some questions in today. And I'd say that we've got it broken out into 2 conversations today. We're going to first talk about Aflac's ESG footprint, which is the nomenclature we use to talk about ESG risks and disclosures. And then in our second conversation, if you will, will be on your ESG handprint. So how Aflac is pushing for sustainability, as you mentioned in your prepared comments there. So I'd say that the first question here is about transparency and comparability of disclosures. That's the big name of the game now is what the SEC is pushing for governments, non-regulatory bodies as well. So with transparency and comparability of disclosures being so specific and so called for these days, how does Aflac approach disclosing and tracking ESG metrics and targets that you have out there? And do you focus -- you mentioned TCFD, do you focus on any other particular framework? Are there ones that you've released your data in those 4 months before?

Yes. There are -- so first of all -- and this is actually also ties in a bit to the sustainability bond. And as I mentioned, sort of things that must be in place from a reporting and auditing perspective, compliance perspective to do it. We base a lot of our disclosures and internal measurements on, for example, UN-based platforms. This would include the global reporting standards or so-called GRI standards for reporting and then more recently, the SDG's sustainability development goals. These are the 17 or so published goals coming out of the UN, of which you've been pattern your measuring -- internal measuring and disclosures around those standards. So we do pay careful attention to the types of best practices that grow out of the UN in terms of global standard setting for reporting. I mentioned -- SASB, of course, I think most companies you would talk to that have advanced ESG platforms, want to be able to, and so does Aflac comply properly with SASB initiatives around a standard of reporting. The reason I mentioned TCFD, more particularly, is we now are on our second full TCFD report as a company. We had our first official report last year. This is our second annual report. The reason I particularly emphasize that is because it's a very holistic report. It has a lot of both quantitative and qualitative discussion around all holistic facets of reporting on particularly sustainability, including risk reporting and how we think about risk. The other reason I mentioned it, though, is that many in the industry, in the insurance industry, and I would say more broadly, are encouraging, for example, the regulatory community, the rating agency community, to try to coalesce around a set of standards that, frankly, don't drive companies crazy. Right now, there are so many different requests for information, questionnaires that are coming into companies to feed information that we're trying to really, as an industry, push for a more common set of measuring dynamics to make life easier on us reporting and for comparability and measurability and all the things that I think an investor and other governance gurus would want to see. So the TCFD report in our view, is the best report for accomplishing that. And we're finding many of the regulators in our industry, which is a state-by-state dynamic as well as then the NAIC are, in fact, coalescing around TCFD reporting. And so we, obviously, publish and we'll make available those reports, but I emphasize that one because I think it does the best job of somewhat of a common basis of reporting among companies absent a true global standard or agreed upon regulatory standards.

Perfect. Thank you. So you can't talk about ESG these days without touching on the changes that occurred in 2020. And after last year, it seems that the fourth tier of ESG is an R for resilience. How did Aflac work with employees as well as customers and the communities in which you were? To face COVID continued business during the lockdown, provide necessary resources, information, premium delays or cuts for customers, what was the Aflac approach to that?

Yes. I would tell you this, I think, very true to form all of your cultural commitments, your verbal commitments, saying the right thing, all of that gets tested in a very real way when you're faced with a crisis of some kind. Sometimes the crisis is a company crisis, sometimes the crisis is more along the lines of the pandemic, which is more of a global crisis in nature. And so I think in many respects, it tested out elements of your commitment around various aspects of ESG, particularly around the more social, cultural community aspects of ESG. In our particular case, we were pretty early in making moves as a company. There's a couple of reasons for that. One is our Japan presence. You have to really remember back to the early days of the pandemic but it started to hit the news and really become an issue with the Diamond Princess cruise ship, if you remember that off the coast of Japan. And it was that started the process of understanding what was going on in that ship. What was the nature of this virus Japan was struggling with weather to let people onshore or not and how to contain that. Japan is no stranger to fighting off things like the Asian flu and other dynamics. So because of our presence in Japan, we had a very close and insightful understanding of what was developed. So we were very early to move as a company. The other issue, and this goes to ESG, is we moved very quickly in our hometown of Columbus, Georgia, and we moved quickly to move people remotely upwards of 98% of our employees in Columbus, Georgia. We have 5,300 employees in the United States and 3,500 of them are in Columbus, Georgia. Columbus, Georgia is a community of 200,000 people. If we get it wrong at Aflac, we could overwhelm the hospital system and hospital beds and critical care system. So we moved very quickly and very early, long before any other company was even assessing the notion of moving remotely. We moved all of our employees remote because we were very concerned about the hospital system in Columbus, Georgia. And so we did that, did that smoothly, and that ended up really managing the local environment in a better way. The other thing we did is, of course, we answered the call with our pocketbook. So we donated about $10 million to first responders, both in the U.S. and in Japan, to go at the virus. We immediately expanded some of the definitions in our coverage, and this is very important. As you all know, one of the things that we provide is hospital coverage where we reimburse individuals for a day in the hospital. We reimburse them if they move into the ICU, and we immediately expanded the definition because the definition of hospital all of a sudden change. In Japan, hospital was in hotel rooms that were converted to hospitals. In the U.S., as many of you know, in some cases, they were converting parking garages next to hospitals to take on patients. And so we immediately expanded that definition. Basically, if you are being treated, you're good for coverage. It doesn't literally have to be brought into a hospital, if you will. And so those are examples of the things we did. We obviously, with our employees, immediately did things like raised any sort of co-pays for anybody that was needing medical attention. We expanded our definition of leave and qualified leave because we want people to feel very comfortable. They had to take care of their families, in many cases, kids out of school, parents, elderly parents, they had to care for. This is both in Japan and the U.S. And so we greatly expanded our definition of what accounts for paid leave because we knew these were unusual circumstances. So those are a few of the things we did as part of our adjustment in the community. But obviously, it was a big deal for us and something we want to move quickly.

That's great. Thank you for all that detail there. Also on the side of, as an insurer, Aflac has a large scope of personal identifying information. And given that a large issue risk for many companies, whether it be in financial services or in tech, et cetera, is data security and customer information security, how do you, as a company approach security around those issues? And how does that evolve with the constantly fluctuating cybersecurity landscape today?

Well, it starts by understanding something very fundamental, and that is unfortunately, health care or health information, personal health information on individuals is -- has become one of the more valuable pieces of information in the black market among cyber criminals. And so you tend to think naturally about things like your credit card information, your bank statement information, things that are very financially oriented. You don't realize how valuable all of the personal identifiable information around medical records are in the black market, unfortunately. And as a result, if you are in the health insurance industry, whether it be supplemental or major medical. While supplemental health insurance carries less data, if you will, on the personal health information of individuals, we still have it, and we have to be particularly careful about it. And so as you can imagine, we have very robust compliance standards that we maintain. They're driven by regulatory dynamics, but also best practices in the industry and obviously, the local and national laws and regulations. And in our case, international law and regulation as pertains to Japan. We have very robust data security policies in place, and we actively monitor the threat landscape on a regular basis. I think most importantly, for the purposes of this conversation is governance over cybersecurity. We actually happen to be this week in our Board meetings. And one of the standing agenda items that we have at our Audit and Risk Committee is a full report on where we stand on the cybersecurity and privacy landscape, where are we on the maturity spectrum of where we want to fall relative to peers in the industry and best practices globally. That report then does something very, we think, important, and that is we report out of that committee to the full Board. So every Board meeting, the Audit and Risk Committee has given a download, detailed download, and then the full Board has given a similar report out as part of our Board meeting. And by doing that, by having that type of visibility at the top of the house, it pushes the rest of the organization to be very refined and very acutely aware of where we stand, where we see any gaps, how we're closing them, what threats are out there and how we're dealing with that. So I would tell you the most important thing is starting from the governance of it and then the rest flows through naturally because no executive, including myself, wants to go in front of the Audit and Risk Committee of the Board or the full board and talk about where we have gaps and weaknesses or threats. One more comment I would make, this is something that I think is obvious, but I'll just make it. The most valuable asset that our company has, both in the U.S. and Japan as our brand. 9 out of 10 individuals in the U.S. know the Aflac brand. Similarly, 9 out of 10 individuals, consumers in Japan, know the Aflac brand. We have a policy in 1 in 4 households in Japan, and our brand is something we defend. So when we think about privacy of information and protecting information, we are also focused on protecting the most valuable asset of the company, and that's the brand. And so there's no shortage of attention or investment to do that because we can't risk a black eye in that regard when that's our #1 asset.

That's understandably thorough answer. It seems like with cyber issues, it's not a question of preventing them, it's just a question of minimizing them when they do pop up, seems to affect a lot of different industries.

It is. It's a bit like Homeland Security. You can't guarantee that something won't get through and cause a problem, but you can sure do everything you possibly can within reason to make it difficult and lower that risk profile as much as you can.

Precisely. Well, I'm going to kick off a conversation, too, and this is around how Aflac is working to push forward sustainability issues through its business model and through community involvement. I'll kick off with one question and then a follow-up, and then turn it back to Leslie to bring home the rest of the conversation in the remaining 15 minutes. So the first area I wanted to focus on is just the social issues and the framework of all of the -- if you think about 2020 and early 2021, there was a lot of social movements in the U.S. and globally. Some of it was COVID-related, some of it, there were protests of other sorts that manifested itself across the country and, frankly, across the globe. So Fred, from your perspective, when you think about Aflac, can you give us -- from where you sit, how does Aflac track its diversity within the company? And how do you think you measure up not only against the broader company's comparisons? But I think within the insurance industry, there's been some challenges in this area as well. So that would be my first area to focus on.

Yes. I've been with Aflac for about 6.5 years now. And what's interesting is it's given me an opportunity to really understand and study and get familiar with the depth of the culture of the company, which is a very strong culture here at Aflac. And you got to remember that Aflac was built from the very single first policy we sold, both in the U.S. and Japan. We have not grown through acquisition, for example, we merged and so forth. And as a result, that creates a very thick and very formidable culture. One aspect of that culture is diversity. And I think it -- this is my personal observation, but I think it's confirmed, and that is we became a major company in Columbus, Georgia, 90 miles south of Atlanta on the border of Georgia and Alabama. And the founders of the company, including particularly our principal founder, John Amos, really took it upon themselves to drive diversity and fairness and equitable treatment, really equity in the community, starting with the community around us and then spreading beyond that. Interestingly, John Amos was very good friends with John Lewis and again, being in proximity here on the border of Alabama and Georgia, there was a lot of understanding and focus about the things that John Lewis was driving. He became a friend of the company and somebody that we worked with in driving those types of initiatives. And so it's been part of the fabric of the company for many years. Today, 65% of our board are minority and women, and 2 members of our 5-member executive team are minority women, African-American women running both Aflac U.S. and our General Counsel of the company. And so this has just been ingrained in the company to drive diversity throughout. Interestingly, I would tell you that it also travels over to Japan. Japan is a different matter. Japan diversity is really about driving women in executive leadership roles and officer roles. And so back in 2014, we established women in leadership in Japan to drive towards a goal of 30% of our officer ranks in Japan being female by 2025. That's a significant initiative in Japan that's broader than Aflac. It's also part of the government's initiative to drive better GDP growth by having women in the workplace and most importantly, moving up the ladder into leadership positions. And so we currently have around -- we're approaching 23% of our managerial leadership structure in Japan being female. And we're quite proud of that. That makes us a leading company in Japan in that regard. We have more room to go, of course, but we're on the right path. Where we are today though is taking it from what we do internally and our statistics internally to how we drive it externally, and that is through initiatives involving particularly the way in which we invest in our assets. And so we have incrementally invested in $600 million worth of diversity and inclusion-qualified investments that we've committed to. This is opportunity zones and really what we would call standing in the gap where we stand in the gap between economic prosperity and some of the communities that are underserved, underdeveloped and have been left behind in many cases and closing that gap with the rest of the community on particularly economic, education, housing and so forth, health basis. And that's where we're focusing much of our investments. So I would say, Greg, where we've matured is from, hey, our house is very well in order when it comes to diversity statistics on any measure where you can base it on it, okay? The issue isn't that any longer. The issue is now what can we do as a company externally to drive more of that into the community around us. And not surprisingly, where do all the roads lead? It leads to your $135 billion investment account, right? Because it's all about economics at the end of the day. We can be out there as a leader, we can be an influencer, and we are, but at the end of the day, it's the power of that economics of our asset and how we invest it, that's going to be the biggest driver. And so we're concentrating on that.

As part of your answer, you talked about education. Can you just provide a brief view on what kind of programs you have internally, education programs you have for your existing employees, help them go out into the marketplace, either recruiting new talent to come on board at Aflac or customers that are more diverse and qualify under the -- a better footprint going forward?

Yes. It's -- I'll describe it in this way. So first, I would tell you that at Aflac, we have many of the same types of programs, I think, that have become conventional in mature corporations that are dedicated to these initiatives. So we have significant diversity and inclusion councils within the company that provide education. We have a Chief Diversity and Inclusion Officer in the U.S. We have a similar officer role in Japan, although more oriented around women in the workplace. And these organizations penetrate and provide education. We also build a lot of internal education around all employees through use of various communication vehicles inside the company. And very importantly, though, I would tell you, one of the things that we made a decision to do is incorporate ESG metrics, including diversity inclusion standards into our compensation programs and into our annual incentive compensation. I hate to make this all about compensation, but the reality is, is that at the end of the day, you want accountability, not just communication. And if you want everybody harnessing around the same mission, embracing and educating themselves and needing to remain educated, then tying it into incentives is very helpful to rally the troops around. And so we've also embedded that into our system. And by communicating on where we stand on the metrics and that it matters to your compensation that resonates with every employee pretty quickly, as you can imagine. It becomes less of a nice thing to do or the right thing to do and more embedded in the fabric of what the company is trying to achieve in the way of real milestones. So I consider that part of communication. One of the things we're also doing on the branding side is what we call care on purpose. And so we're trying to move from being that brand that everybody loves the Duck and finds our commercial humorous and noteworthy We're trying to move that to more of where can we advance the ball on caring and carrying on purpose because that drives a thicker attachment point between you and the consumer and you and the intermediaries such as agents and brokers and driving your business. One of the partnerships we have recently is with historically black colleges, HBCUs. We have been developing partnerships with them, which help with recruiting individuals and talent into distribution, into executive roles. You might have noticed Deion Sanders has now joined Nick Saban on our commercials. For those of you who are college football fans, that's not an accident. It's not just about Deion Sanders, it's also about him being a head football coach at a historically black college, and that we have tied into other forms of joint venture work with him and those universities to drive recruitment and education. So we also, again, try to connect it to our brand where possible. I view this as important a branding dynamic as the Duck and how well that's received.

Perfect. And we're getting towards the end of panel, but I think we've got a still time for 1 or 2 more questions. And I actually wanted to do a quick follow-up to part of your answer before as well. You mentioned the power of the pocket book, right? How you can take the money that Aflac has to invest from premium and really make your biggest impact there with that portfolio. And I noticed in your report -- your sustainability report from last year that you all have an internal ESG scoring system that you use to determine those investments. So I guess the question would be, how do you focus those investments? Are there particular ESG issues? Or do you just have a wide variety of ESG scoring that you then lay on top of your traditional investment tools?

yes. So we have developed a proprietary ESG scoring mechanism. It is -- it plays off of some of the best practices you see around responsible investing standards globally. So it's not wholly and invented process of scoring by Aflac. It is proprietary but it does play off the standards that we know to be best of practices, and it draws in information, both third-party information on potential investments as well as questionnaire-type due diligence dialogue with issuers when we're looking to invest. We currently apply this to all of what we call our internally-managed money. And what do we mean by that definition? What that excludes is we have a very large sovereign exposure, our sovereign level of investments, most notably, of course, JGBs. So like every Japanese insurance company, you're going to have a meaningful portion, upwards of 40% of your general account invested in JGBs. And in that regard, we simply pay careful attention as you could expect, with what the Japanese government is doing, for example, in the efforts towards net zero emissions and various ESG initiatives in Japan. But absent that, it's a sovereign, and it's a different type of equation. We don't apply scores, if you will, the sovereigns. We simply track and try to understand what those developments are because JGB is our reality if you're an insurance company in Japan. Beyond that, we also have externally managed money where we go to outside asset managers to manage money in more specialized asset classes. And in there, we've actually focused on what the standards are of the actual managers themselves. And so part of the RFP process or the proposal process to qualify an external manager is a questionnaire and feedback on how they approach ESG with their investments. When you remove those 2 asset classes, JGBs or sovereigns and externally managed money, the remainder of that money, over 90% of those issuers and securities, are qualified under our scoring system for ESG proprietary scores. And that's how we approach it. We don't have a bright line litmus test, but we know enough about where we need to go in terms of Scope 3, for example, emission standards, to know what types of investments are going to dig a deeper hole for us in getting there and what kind of investments are going to advance us closer to meeting our obligations come 2040 and '50. So those scores are ESG broad scores, but also particularly around climate. We know the types of investments we're going to push to the top of the stack that also advance us on the overall Scope 3 dynamic, which starts to include your assets under management.

Perfect. That's great. And I know that we are running up against the time here now, so that will have to be our last question. You'll have to give us another opportunity in the future because I'm sure I could ask you about another 2 hours sorts the questions myself. So we look forward to that in the future. But I wanted to say thank you again for joining us, and thank everyone in the audience. Again, if you have questions, feel free to e-mail Greg or myself here at Raymond James, and we'd be happy to follow up with you. And I hope everyone has a delightful day at the insurance conference.

Thank you very much for having me.

Thank you, Fred. And David's on. Thank you, David.

Thank you, Greg. Thank you, Leslie.

All right.