AFLAC Management Discusses Q2 2012 Results - Earnings Call Transcript


Q2 2012 Earnings Call

July 25, 2012 9:00 am ET


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

Kenneth S. Janke - Deputy Chief Financial Officer, Executive Vice President and Chairman of Disclosure Committee

Toru Tonoike - President of Aflac Japan and Chief Operating Officer of Aflac Japan


Nigel P. Dally - Morgan Stanley, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

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

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

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

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

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

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Edward A. Spehar - BofA Merrill Lynch, Research Division



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

Robin Y. Wilkey

Thank you, and good morning, everyone, and welcome to our second quarter conference call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, President of Aflac and COO of U.S. Operations; 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 Toru Tonoike, President and COO of Aflac Japan, who joins us from Tokyo.

Before we start this morning, let me remind you that some of the statements in the teleconference are forward-looking within the meaning of 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. Actual results could differ materially from those we discussed today. We encourage you to look at our quarterly reports for some of the various risk factors that could materially impact our results.

Now I'll turn to program over this morning to Dan who will begin with some comments about the quarter and our operations in Japan and the United States. I'll then follow up with a few financial highlights for the second quarter, and then we'll be glad to take your questions. Dan?

Daniel P. Amos

Thank you, Robin. Good morning, and thank you for joining us today.

Let me begin this morning with a review of Aflac Japan, our largest earnings contributor. We were again pleased with Aflac Japan's strong financial performance and sales momentum that continued in the second quarter. Following 2 tremendous years and an impressive first quarter, new annualized premium sales rose 47.4% to JPY 53.2 billion in the second quarter. These results, again, greatly surpassed our expectations and set a production record for the fourth straight quarter. For the first half of the year, Aflac Japan's totally new annualized premiums in yen rose 50.5%. Aflac Japan's revenues grew by 9.2% for the quarter and 8.5% for the first 6 months. Pretax earnings for the quarter were JPY 77 billion, up 2.4%; and for the 6 months, pretax earnings were JPY 160 billion, up 2.8%. Premium income increased 9.7% for the quarter and 8.8% for the 6 months, benefiting from the stronger sales of our WAYS product. I would also note that persistency remained strong. The bank channel generated JPY 24.7 billion in sales, which represents an increase of 224% over the second quarter of 2011. The bank channel accounted for 46.5% of Aflac Japan's total sales and the traditional accounted for 51.9%.

From a product perspective, WAYS, our unique hybrid whole-life product, continued as the top seller in the second quarter, generating an increase of 259% over 2011 and accounting for 45% of the total second quarter sales. Our cancer and medical insurance accounted for 13.4% and 16.9% of total sales in the quarter, respectively.

I would point out that we expect our new nonstandard medical product introduced this week to benefit medical sales in the second half of the year. You may recall that we started selling the 5-pay version of WAYS product through the banks in June of 2011. As we've previously discussed, we have taken action to limit the production of the 5-pay version of WAYS to address the possibility of disintermediation risk in the event of interest rates increase significantly. Now, virtually all banks have reached their sales cap by 5-pay WAYS for the year. Our traditional sales channels will stop sales of all 5-pay WAYS on August 1. Except for a little spillover business, we don't expect the contribution of 5-pay WAYS to impact third quarter sales.

Banks have a very strong distribution outlook for Aflac Japan. Compared with the U.S. banks, Japanese banks interact with the customers and consumers through more touch points offering a broader scope of transaction. As such, consumers in Japan tend to have more face-to-face interaction with the banks, often developing strong loyalties. This is true from the smallest villages to the largest cities. The bank channel networks of about 20,000 branches gives us a far-reaching access to consumers we've never had the chance to do business with otherwise. The bank channel helps expand our customer base. Today about 80% of the bank channel sales are new customers.

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