Aflac Incorporated (AFL)

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AFLAC (AFL)

Q3 2012 Earnings Call

October 24, 2012 9:00 am ET

Executives

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

Daniel P. Amos - Chairman and Chief Executive Officer

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

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

Eric M. Kirsch - Global Chief Investment Officer and Executive Vice President of Global Investments

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

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

Nigel P. Dally - Morgan Stanley, Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

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

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

Suneet L. Kamath - UBS Investment Bank, Research Division

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

Ryan Krueger - Dowling & Partners Securities, LLC

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

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Presentation

Operator

Welcome to the Aflac Third 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 third 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; Ken Janke, Executive Vice President and Deputy CFO; Eric Kirsch, Executive Vice President, Chief Global and Investment Officer; and Toru Tonoike, President and COO of Aflac Japan, is joining us today from Tokyo.

Before we begin, let me remind you that some statements in the teleconference are forward-looking within the meaning of the 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 release for some of the various risk factors that can materially impact our results.

Now, I'll turn to program over to Dan, who will begin this morning with some comments about the quarter in our operations in Japan and the United States. I will then follow up with a few financial highlights for the quarter in the first 9 months, and then we will be glad to take your questions. Dan?

Daniel P. Amos

Thank you, Robin. And good morning, everyone. Let me begin with a review of AFLAC Japan, our largest earnings contributor. We were again pleased with AFLAC Japan's strong financial performance and phenomenal sales momentum that continued into the third quarter. Following 2 years of tremendous sales growth, new annualized premiums, sales rose 31.7% to JPY 55.7 billion in the third quarter. These results significantly surpassed our expectations again, and marked the fifth straight quarter of record sales production. For the first 9 months of the year, AFLAC Japan's total annualized premium sales in yen rose 43.4%.

Record sales growth, combined with continued strong persistency, contributed to AFLAC Japan's double-digit increase in premium income for the third quarter. Premium income increased 10.7% to JPY 346 billion. Revenue growth was also strong in the quarter, rising 10% to JPY 404 billion. Pretax earnings were JPY 78 billion, down 1.4%; and for the 9 months, pretax earnings were JPY 238 billion, up 1.4%.

The bank channel generated JPY 26.9 billion in sales, which represented an increase of 85.3% over the third quarter of 2011. The bank channel accounted for 48.6% of AFLAC Japan's total new sales in the quarter.

From a product perspective, WAYS, our unique hybrid whole-life product, continued as our top seller in the third quarter, generating an increase of 108% over 2011, and accounted for 50% of the total third quarter sales. Our sales management team has done an excellent job ensuring the transition from 5-pay WAYS to 10-pay WAYS has gone smoothly through all distribution channels. Additionally, sales of 10-pay WAYS in the quarter was much stronger than we originally anticipated.

Sales for the medical category was also strong, rising 11.7% in the third quarter and benefiting from July's introduction of the revised nonstandard medical product.

Given the current low interest rate environment, we continue to employ strategies to enhance the profitability of our child endowments and WAYS products. In the third quarter, all distribution channels stopped selling 5-pay WAYS. Beginning this week, we lowered the interest rate credit from 0.5% -- from 1% to 0.5% for discounted advance premium or DAP. This credit essentially increases the total premium paid. The profitability of WAYS and child endowment will be enhanced in April of 2013 when we lower the assumed interest rate for new product pricing.

Considering AFLAC Japan's very strong sales results for the 9 months, we think sales could be challenged for the remainder of the year. We anticipate the additional sales growth hurdles in the fourth quarter will come from consumers' response to the lower credit given for the DAP. And as a result, we expect sales to be in the range of flat to up 15% for the quarter. Taking all that into account, we now expect 2012 Aflac Japan sales to rise 30% to 35% year-over-year.

But let me say that even before the fourth quarter began, my mind had already shifted to 2013, and the challenges we faced following 5 straight quarters of record-breaking sales results. I want to point out that the bank channel represents a larger portion of our business, so projecting future sales results becomes more challenging. Also, we won't gain insight into 2013 bank sales strategies until closer to the start of AFLAC -- of Japan's fiscal year, which starts April 1.

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