AFLAC's CEO Discusses Q1 2012 Results - Earnings Call Transcript

AFLAC (AFL)

Q1 2012 Earnings Call

April 25, 2012 9:00 am ET

Executives

Robin Y. Wilkey - Senior Vice President of Investor & Rating Agency Relations

Daniel P. Amos - Chairman, Chief Executive Officer, Chairman of AFLAC and Chief Executive Officer of AFLAC

Eric M. Kirsch - Global Chief Investment Officer and First Senior Vice President

Kriss Cloninger - President, Chief Financial Officer, Treasurer, Director, Chief Financial Officer of American Family Life Assurance Company and Executive Vice President of American Family Life Assurance Company

Paul S. Amos - Chief Operating Officer of Aflac, Chief Operating Officer of Aflac U S Operations, President of American Family Life Assurance Company of Columbus, President of Aflec and Director

Analysts

Randy Binner - FBR Capital Markets & Co., Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Edward A. Spehar - BofA Merrill Lynch, Research Division

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Nigel P. Dally - Morgan Stanley, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Joanne A. Smith - Scotiabank Global Banking and Market, Research Division

Presentation

Operator

Welcome to the Aflac First Quarter Earnings Conference Call. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to turn the call over to Ms. Robin Wilkey, Senior Vice President of Aflac Investor and Rating Agency Relations.

Robin Y. Wilkey

Good morning, and welcome to our first quarter conference call. Joining me this morning here in Columbus is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Ken Janke, Executive Vice President and Deputy CFO, Eric Kirsch, First Senior Vice President, Chief Global Investment Officer; and joining us remotely this morning is Paul Amos, President of Aflac and COO of U.S. Operations; and Toru Tonoike, a President and COO of Aflac Japan, who's joining us from Tokyo.

Before we start, let me remind you that some statements in this teleconference are forward-looking within the meaning of federal securities laws. 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. Actual results could differ materially from those we discuss today. We encourage you to look at our quarterly report for some of the various risk factors that could materially impact our results. Now, I'll turn the program over to Dan, who will begin this morning with some comments about the quarter and our operations in Japan and the U.S. I'll follow up with a few highlights for the first quarter and then we'll be glad to take your questions. Dan?

Daniel P. Amos

Good morning, and thank you for joining us today. I'm very pleased that we met and, in many cases, significantly exceeded our financial and operational targets for the first quarter. Let me begin with an update on Aflac Japan, our largest earnings contributor. Following an impressive 2011, we again, are pleased with Aflac Japan's financial performance with their tremendous sales momentum in the first quarter. New annualized premium sales rose 53.8% to JPY 52.4 billion for the quarter, which surpassed our expectations and set a production record for the third straight quarter. Revenues grew 7.8% and pretax earnings were up 3.2% for the quarter. Bank channel sales has been a huge factor in the tremendous sales growth over the last couple of years. We told you at the end of the year that we expected new annualized premium sales through the bank channels in the first quarter to be up more than 150%, and they were actually up 208% over the first quarter of 2011. As you will recall, our unique hybrid whole life product, WAYS, has been a significant contributor to the bank channels' growth. There are 3 principal reasons why selling WAYS has benefited our business. First, due to its much higher premium, it's a strong contributor to the top line growth. Although our margins are lower than our healthcare products, WAYS contributes to the bottom line. It's important to note that the profit margin on WAYS sold using the discounted advance premium method is 8% to 12%, and more than 90% of the consumers purchasing WAYS through bank select this payment method. But I point out that if we use the new money yields for WAYS' cash flows, are just 25 basis points higher, the profit margin range would be 13% to 17%. At our analyst meeting next month, we will give you some additional color on the margins and the returns on the WAYS product.

The second reason we sell WAYS is because this products gives us access to new customers. I'll point out that 80% of the customers at the banks are new to Aflac. Also, the average age on WAYS purchasers is 43, which is appealing to us because that age is in the segment of the market which is 25 to 49, where we are under penetrated.

The third reason we're selling WAYS is because this product helps us solidify the relationships we worked hard to establish with banks. Aflac has agreements with 372 of the 403 banks in Japan. We believe this number is significantly greater than any of our competitors. Our bank channel has significantly reached into Japan with more than 20,000 branches. Japanese consumers rely on banks not only to provide traditional bank services but also to provide insurance solutions among other services. As such, our partnership with the banks provide us with a very different demographic of potential customers than we otherwise, had been unable [ph] to reach. And it also allowed the banks to expand their products and offerings to consumers.

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