Aflac Incorporated (AFL)

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AFLAC (AFL)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

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

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

W. Jeremy Jeffery - Chief Investment Officer and Senior Vice President

Robin Wilkey - Senior Vice President of Investor Relations

Analysts

Thomas Gallagher - Crédit Suisse AG

Andrew Kligerman - UBS Investment Bank

Darin Arita - Deutsche Bank AG

John Nadel - Sterne Agee & Leach Inc.

Jeffrey Schuman - Keefe, Bruyette, & Woods, Inc.

Steven Schwartz - Raymond James & Associates, Inc.

Edward Spehar - BofA Merrill Lynch

Unknown Analyst -

Presentation

Operator

Welcome to the Aflac second 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 your host, Ms. Robin Wilkey, Senior Vice President of Aflac investor Relations.

Robin Wilkey

Thank you, and good morning, everyone, and welcome to our second quarter 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; Jerry Jeffery, Senior VP and Chief Investment Officer; and from Japan, we have Toru Tonoike, President and COO of Aflac Japan.

Before we start this morning, let me remind you that some statements in the 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're perspective 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 can 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. Afterwards, I'll follow-up with a few financial highlights for the quarter and the first half of the year, and then we'll be glad to take your questions. Dan?

Daniel Amos

Thank you, Robin. Good morning, and thank you for joining us. I'm pleased with Aflac's overall financial and operational performance in the second quarter. I believe we've established a solid foundation toward achieving our annual operating earnings growth and capital strength objectives.

With half the year behind us, we believe we have substantially completed our proactive investment de-risking program from a realized investment loss perspective. I'll give you more details later, but first, I'll begin with a review of our operations in Japan and the United States.

Aflac Japan generated strong financial results for both the second quarter and the first 6 months of the year. Revenue growth rose 3.7% for both the quarter and the first 6 months. In addition, our pretax margin continued to expand, resulting in solid earnings growth for the quarter and for the 6 months. We are particularly pleased with the continued sales momentum in the quarter. New annualized premium sales in yen exceeded our expectations and rose 6.6% to JPY 36.1 billion for the quarter, which was a record for the second quarter production.

For the first half of the year, total new sales rose 9.4%. These results are even more remarkable when you consider that Aflac Japan overcame challenges resulting from the most destructive and devastating natural disaster in Japan's history. With the expanding bank channel in mind, Aflac Japan has developed innovative products that align well with the product needs and banks. Bank sales continued a strong growth trend with sales of JPY 7.6 billion, which represents an increase of 95.6% over the second quarter of 2010. Sales through banks accounted for more than 21% of the total sales for the second quarter. I'll mention how we believe more banks, mega banks, in particular would step up their efforts in selling Aflac products, and that's exactly what we've been seeing.

At the end of June, Aflac Japan was represented by 367 banks or 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 367 banks. It will take some time to facilitate training in all these locations. But we're continuing to see sales steadily improving at many of these bank branches as training continues and the banks expand their offering of Aflac's products. In many of these banks, sales representatives have gained experience at selling our products, and their confidence level in sales ability has also grown.

WAYS, which is especially popular with banks, was again a key driver to the growth in the second quarter. You will recall that WAYS in our unique hybrid whole life product that can be converted to a fixed annuity, medical coverage or nursing care benefits when the policy holder reaches a predetermined age. WAYS has been a phenomenal sales growth story, and in the second quarter generated an increase of 190.7% compared with the second quarter of 2010. Consumers find WAYS attractive because of its guaranteed principle and future flexibility of its benefit options. Banks like to sell this product because of the high premium and attractive commissions. And Aflac's profit margin on WAYS is more than double the profit margin for child endowment. On top of that, the profit margin is significantly enhanced even further when the policy holders elect to pay all their premiums upfront through the discounted advanced premium option. Importantly, 90% of the company's customers at the banks choose this type of payment. As our banking channel becomes a greater contributor to our top line growth, we expect sales of the innovative and flexible products to grow significantly in 2011.

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