Aflac Incorporated (AFL)

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AFLAC (AFL)

Q1 2011 Earnings Call

April 28, 2011 9:00 am ET

Executives

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

Kenneth 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

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

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

Robin Wilkey - Senior Vice President of Investor Relations

Analysts

Joanne Smith - Scotia Capital Inc.

Darin Arita - Deutsche Bank AG

John Nadel - Sterne Agee & Leach Inc.

Randy Binner - FBR Capital Markets & Co.

Nigel Dally - Morgan Stanley

Edward Spehar - BofA Merrill Lynch

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 Relations. Thank you. You may begin.

Robin Wilkey

Thank you, Diane, and good morning, everyone, and welcome to our first quarter conference call. Joining me this morning is Dan Amos, our 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 Chief Financial Officer; Jerry Jeffery, Senior Vice President and Chief Investment Officer; and Toru Tonoike, President and Chief Operating Officer of Aflac Japan, who's joining us remotely from Tokyo.

Before we start, let me remind you that some statements in this teleconference are forward looking within the meaning of federal securities guidelines. 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. 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 our program over to Dan, this morning, who's going to begin with some comments about the quarter and our operations in both Japan and the U.S. I'll follow up with a few financial highlights for the first quarter, and then we'll be glad to take your questions. Dan?

Daniel Amos

Thank you, Robin. Good morning, and thank you for joining us today. I hope you've had a chance to review our first quarter press release. I'll comment on our operations in Japan and the United States. But first, I'd like to discuss what's been going on in Japan over the last 6 weeks. Clearly, the earthquake and tsunami on March 11 and the subsequent nuclear situation presented Japan with one of the biggest crises it's ever faced. The whole world watched helplessly through television and social media as devastating pictures and news coverage of the disastrous situation unfolded. We've been operating in Japan for more than 35 years. If there's one thing we've found in developing such close ties in Japan, it's that the Japanese people are resilient. And when I visited Japan the week after the earthquake, I saw this resilience. Our employees are safe, our business operations are running, and we do not expect any material impact on claims or earnings this year. Life is moving forward for most Japanese citizens and so is our resolve to be there for our policyholders during their time of need by paying claims just as we promised.

Aflac Japan generated strong results in the first quarter, and we're again pleased with the financial performance of our largest earnings contributor. Revenue growth showed continued improvement rising 3.7% for the quarter. In addition, our pretax margin continued to expand, resulting in solid earnings growth for the quarter. We were particularly pleased with the continued sales momentum in the quarter. In fact, Aflac Japan generated the largest first quarter production in its 36-year history.

New annualized premium sales exceeded our expectations and rose 12.6% to JPY 34.1 billion. With the expanding bank channel in mind, Aflac Japan has developed innovative products that align well with the product needs of banks. Bank sales in the first quarter posted another record with sales of JPY 7.9 billion, which represents an increase of 12.6% over the fourth quarter of 2010 and a 154% increase over the first quarter of 2010. I mentioned how we believe more banks, and mega banks in particular, would step up their efforts in selling Aflac's products, and that's exactly what we've been seeing.

At the end of March, Aflac Japan was represented by 364 banks and more than 90% of the total number of banks in Japan. While many banks have agreed to sell our products, turning that agreement from ink on paper into sales does not happen overnight, especially with more than 20,000 branches representing the 364 banks. It will take some time to facilitate training at all these locations but we're seeing sales steadily improving at many of these banks as training takes place and the banks expand their offering of Aflac products. In many of the banks, sales representatives had gained experience at selling our products, and their confidence level and their sales ability have grown. WAYS and child endowment products, which are both especially popular with banks, were key drivers to growth again in the first quarter. You'll recall that WAYS is a unique hybrid whole life product that's being converted to fixed annuity, medical coverage or nursing care benefit when the policyholder reaches a predetermined age. The real story can be seen in WAYS' phenomenal sales growth rate, which was an increase of 221%, compared to the first quarter of 2010. Consumers find WAYS attractive because of the guaranteed principal and the future flexibility of the benefit options. Banks like to sell this product because of its high premium and attractive commission, and Aflac's product margin on WAYS is significantly enhanced when policy holders elect to pay all the premium upfront through the discounted advanced premium. Importantly, 90% of the customers at the banks choose this payment option. As our banking channel becomes a greater contributor to our top line growth, we expect sales of this innovative and flexible product to grow significantly in 2011.

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