Aflac Incorporated (NYSE:AFL)
2009 Financial Analyst Briefing
May 19, 2009 8:00 pm ET
Ken Janke - Senior Vice President Investor Relations
Dan Amos – Chairman and CEO
My name is Ken Janke and I’m Senior Vice President of Investor Relations for Aflac. I’d like to be the first of a few to welcome you to our 2009 Financial Analyst Briefing.
Things are a little bit different this year so I’d like to brief you on the program. If you didn’t notice by looking at it, tomorrow we actually shortened our program from s full day to a half day. We’re still covering the same topics. We do have some presentations that will be delivered tomorrow. The others we still think are important to a very complete understanding of our business and we’ll continue to update those discussions and publish them in our analyst book that hopefully we’ll have out in the next couple weeks.
We think the streamline program gives us a good balance between maintaining the very robust disclosure you’ve come to expect from us, at the same time getting you back to your office a little more quickly.
We do have quite a few representatives from Aflac with us today and what I’d like to do is acknowledge those folks, have them stand so you can see who they are, where they are, we’ll give them a big round of applause at the end.
Let me begin with our speaking program for tomorrow. Starting with Japan, Tohru Tonoike, who is President, Chief Operating Officer for Aflac Japan; Takaaki Matsumoto who is First Senior Vice President, Director of Marketing and Sales for Aflac Japan; Koji Ariyoshi, Senior Vice President Retail Marketing Promotion for Aflac Japan; Paul Amos, President of Aflac, Chief Operating Officer for Aflac US; Jeffrey Charney, new to our company, Senior Vice President, Chief Marketing Officer for US; Ron Sanders, Senior Vice President, Director of US Sales; Jerry Jeffery, Senior Vice President of Investments and CIO; and Kriss Cloninger, President Aflac Incorporation and Chief Financial Officer.
We also have quite a few other folks from Aflac some of whom again have spoken in the past; they’ve prepared written comments that will be included in the book. I’d like to acknowledge them as well, alphabetically with Martin Durant, Executive Vice President and Deputy Chief Financial Officer; Audrey Tillman, Executive Vice President, Director of Corporate Services; Teresa White, Executive Vice President and Chief Administrative Officer; Sue Blanck, Senior Vice President, Corporate Actuary and also First Senior Vice President of Aflac Japan; Ralph Rogers, Senior Vice President and Chief Accounting Officer; Mary Ellen Keim, Vice President Fixed Income Investments; Eric [Lajay], Vice President Field Force Development; Robin Wilkey, Vice President Investor Relations.
We do have a couple joining us from Japan as well that are not on the program tomorrow beginning with Charles Lake, Chairman of Aflac Japan; and Hisayuki Shinkai who is First Senior Vice President of Financial Institutions, he is also responsible for public and investor relations in Japan.
Lastly, we have a couple directors with us tonight. First, Mr. Doug Johnson, Mr. Johnson is retired audit partner with Ernst & Young and he is the financial expert on our audit committee. He’s been with us on the Board of Directors since 2003. We’re also joined by Mr. Marvin Schuster, Mr. Schuster is Chairman of Schuster Enterprises which owns and operates Burger King Restaurants throughout the Southeast. He chairs the corporate governance committee and he is also a member of the audit committee. Mr. Schuster joined the Board in 2000.
I’d like to thank our Board members and certainly all of our officers and please give them a big round of applause.
We do not have a formal Q&A tonight but they are fair game if you’d like to ask questions after dinner.
Before we begin the program I’d like to remind you that some statements you’ll hear tonight are forward looking within the meaning of Federal Securities Laws. Although we believe these statements are accurate, we can give no assurance that they will be, because they are perspective in nature. As you know, our actual results in the future could differ materially from those we discuss tonight so please consult our 10-Q which we filed a couple weeks ago to look at the risk factors that could influence future results.
Also, just as a gentle reminder, tonight’s program is being webcast. If you have a Blackberry phone if you can put it on silent mode that would be great.
Now I’d like to introduce our featured speaker for this evening. Dan Amos graduated from the University of Georgia with a degree in Insurance and Risk Management. He’s been with the company on a full time basis since 1973. He began in sales, quickly became one of our most successful state sales coordinators. In 1983 he was convinced to join headquarters as the President of Aflac. In 1990 he became CEO of Aflac and Aflac Incorporated. In 2001 he was named Chairman.
I think it’s fair to say that during Dan’s many years now at the helm, Aflac has had many awards and accolades that I think largely reflect his leadership. If I named them all we’d be here forever. I do want to touch on a couple that I think are very important. Last month, for instance, Ethisphere Magazine named Aflac as the world’s most ethical companies for the third consecutive year. The Reputation Institute just named Aflac as the most reputable company in the global insurance industry, that’s the second year in a row we’ve received that honor.
Also in April, Dan was named the top CEO in the Life Insurance Industry by Institutional Investor Magazine, that’s the fourth time that he’s earned that designation. Knowing Dan as long as I have, I believe one of the reasons he received that honor is that he listens to his shareholders. If I could give you one good example that I think best exemplifies that, it would be the leadership Dan took along with our Board of Directors in becoming the first public company to adopt a voluntary say on pay vote on executive compensation for our shareholders.
I think that the votes that we’ve had in the last two years speak volumes. Last year 93% of the vote was cast in favor of our pay for performance approach to compensation. This year, although the stock price was down, 97% voted in favor of our compensation approach, and the turnout was actually higher this year then it was last year. That’s just one example of his approach to leadership. I think its important we all understand that he did it because he was convinced it was simply the right thing for Aflac to do and nothing more, it was not a statement of global corporate governance.
I could go on for a bit longer but I’m not going to. Instead I’d like to introduce you to who we would agree is the top CEO in the Life Insurance Industry, Dan Amos.
I would imagine that most of you would consider that you have never seen anything like we have seen in this current market environment in your lifetime, I know I haven’t. The financial markets volatility has been incredible and it’s been difficult to watch at times. Back a few months ago, I guess it was in late February, I was at the grocery store and one of the people in the grocery store, because Columbus is not that big a city, the lady said to me, she said, “Can you tell me, how have you been sleeping lately?” I said, “I’ve been sleeping like a baby.” She looked kind of shocked. I said, “I’ve been waking up every two hours and crying.” Although I’m still not sleeping as well as I’d like to I certainly feel a little better now.
I will tell you that tonight I want to discuss the balance sheet and our capital position. First let me begin with some comments on our operations and our earnings outlook for next year and beyond. Perhaps the best starting point is our business model. Although Aflac is by no means immune to economic downturns, particularly as pronounced as the current recession, I believe our operations are on solid footing. Our business is growing and generally meeting our expectations.
Not only are we not laying off workers, we are continuing to grow our business and hiring necessary administrative staff both in the United States and in Japan to serve our customers. Of course, we are continually hiring new sales associates which are growing at great numbers in both markets.
I continue to believe the resiliency of our model is directly related to the underlying need for our products in both markets. In Japan, the need for our products is directly related to the aging population, and the financial stress on the national healthcare system caused by the aging demographics.
As we’ve discussed for many years, Japan’s consumers face significant financial risk from serious health events. Over time, consumers recognize that potential risk and insurance preferences may migrate from traditional death benefit coverage to products that offer living benefits. Aflac is the leader in providing living benefits because of our dominant position in the cancer and the medical market.
However, at the same time, we have identified and developed a niche market in Japan for not so traditional life insurance coverage that is growing. Tomorrow you will hear more details about the unique life insurance market or the first sector products we recently introduced. We believe the new products will be appealing to consumers and furthermore they will help build on Aflac’s reputation of being product innovators. Most importantly, we believe that it will increase our policy holder base and serve as the door opener for adding supplemental health products which remains our primary focus.
Our product specialty continues to concentrate on protecting wealth, not building wealth. As the market leader, we want to make sure we continue to meet the varied and changing needs of consumers, by continuing to enhance our product line. Product development remains one of the cornerstones of our model and a key element for our strategy for growth.
The other element of our business model is focus on building distribution. Although there is a strong need for insurance we provide, our products are generally sold, they are not bought. That has become even truer as the competition in Japan’s insurance market has increased over the last several years. As a result, it has become important for our distribution system to evolve to a better position in the marketplace.
In the 90’s we began to greatly expand our capabilities to make face to face sales by increasing the number of individual sales associates. Since the insurance market was liberalized in 2001 we further diversified our distribution system to gain even greater access in the marketplace. In addition to our long established tradition, affiliated corporate agencies and independent agencies, we continue to add new agencies and individual agencies. In 2008 and into this year we’ve had strong recruiting numbers and believe that the new associate trading program is more effective then ever.
We also have developed several avenues to reach consumers. The strategic marketing alliance that we created with Dai-ichi Mutual Life in 2001 remains productive and strong. We continue to enhance our telemarketing capabilities through our non-traditional agencies. In addition, we now offer our products through nearly 270 different banks in Japan, which far exceeds any other insurer in Japan.
We have begun our initial sales efforts through Japan’s vast postal network. Although we’re only in the first quarter under our belt, I am pleased with Aflac Japan’s start this year. First quarter sales, while roughly flat with the year ago, they’re still better then what our original expectations were. Additionally, sales through the bank channels appear to have turned the corner after a weak fourth quarter.
Since the end of the first quarter I remained encouraged. In the past I have frequently commented at this meeting on how sales were looking in the second quarter. In that regard, I am pleased with April sales. Although the year is young, I still believe Aflac Japan’s goal of flat sales to up 5% for the year is very attainable.
When facing past recessions in Japan, our message to our agents and our consumers has been pretty consistent. Consumers incomes may be down, investment returns may be lower, and the possibility of job loss may increase, but the financial risk that arrives due to a serious health event will not change in a recession. In fact, one could argue that the need for our products is actually greater in the times of economic weakness because the illness or accidents simply don’t go away.
To help consumers mitigate possible financial calamity, Aflac helps provide financial security when serious illnesses or accidents occur. We provide the piece of mind for the premium that is usually no more then $50 per month. I believe strongly in that message and I believe that applies to our US business as well. So far that message seems to have resonated better in Japan. We remain absolutely convinced that the United States is still a vast attractive market for our products. Yet there is no doubt the recession is taking it toll on consumers in the United States.
As I’ve said before, we believe the coverage is affordable to the average American family, but we realize that in these hard times families have to make difficult choices. We have seen some stability in the environment and we believe that we will see stronger demand for our products because the need has not changed.
However, I want to make one important point very clear. We are not simply standing around waiting for the economy to recovery. While many companies may be pulling back due to expense pressures, we continue to invest heavily and efficiently in the business and in our brand. Although the recession has made it more challenging to sell our products in the United States, the current labor market has provided a good opportunity to expand our commission sales force because salary jobs are harder to come by.
Our new agent recruitment was strong in the first quarter and we continue to believe we will attract new qualified people to our sales organization as we move forward. Like Japan, we believe the training programs are more effective then ever before. That effectiveness is evidenced by the strong increases in our new payroll accounts and the sales by our associates who have been with us less than one year.
Some of you may have read our press release or new articles about Aflac’s new marketing initiative. In the morning you’ll hear about what we refer to as Aflac’s Wings brand, and the new tag line “We’ve Got You Under Our Wing”. I don’t want to take away from tomorrow’s market discussion but I do want to let you know that I’m excited about how we can build our brand using the iconic Aflac duck.
I think you’re going to find our approach is fresher and upbeat and fund. Importantly I believe Aflac’s wing span will make our products more relevant to the employers and to consumers alike. As this new approach takes hold we expect our sales results to be positively impacted as well. We remain convinced that we have a strong business model in the United States. We are equally confident that there are tremendous opportunities to grow our business while at the same time helping people when they need us most.
As a market leader, we believe we are the best positioned to capitalize on those opportunities. In short, we expect our US sales and the persistency will continue to be influenced by the weak economic conditions. However, I want to point out that our persistency did stabilize in April. As we told you last quarter, sales in the second quarter will be our toughest comparison.
The downward trend we saw in the first quarter has continued. We do expect the second half of this year to improve due to the marketing initiatives that we just started. However, we’re striving to achieve flat to up 5% growth for the year as it is part of or incentive bonus.
We still believe the long term potential is enormous in the United States from an earnings perspective. Tonight we’ll again affirm our objective of a 13% to 15% increase in operating earnings per diluted share in 2009 excluding the impact of the Yen.
As I mentioned on our first quarter conference call, it is unlikely we will repurchase shares in 2009. That means we expect to have earnings growth will be at the low end of the range this year. I realize that you’ve heard me say for the last few years that my personal goal was to increase operating earnings per share at least 15% excluding currency for my first 20 years as CEO. Well, this happens to be my 20th year.
I have to admit I’m disappointed I won’t likely reach that goal but my intent in establishing my personal goal was always to enhance shareholder value. Clearly in this current economic market earnings are not as important as statutory capital. Therefore my primary focus has shifted to maintaining a strong RBC ratio, and then grow our earnings per share. I also commented that beyond this year we did not expect to see earnings growth to fall off sharply.
Instead we believed our growth rates would grade down over time. We also said we thought it was possible to generate double digit earnings growth for another 10 years. I still think that is a reasonable expectation. However, implicit in my past remarks was the assumption that we would continue to deploy capital through share repurchase to enhance per share results and produce consistent double digit growth over a long period of time.
I still believe that prudent and methodical share repurchase are effective at enhancing shareholder value. When we return to normalcy I expect to deploy capital in a similar fashion to again enhance our per share earnings growth. Understand that before we resume repurchase of shares we need solid evidence that the credit market has stabilized and the economy is recovering. As such, we remain cautious on the deployment of excess capital for shareholder purposes. In fact, right now it’s impossible for me associate the word excess with the word capital.
I know Kriss will agree with me on that particular thing. We believe that it’s important to keep our powder dry, very dry at this particular time. We have spent a lot of time analyzing and assessing our opportunities for earnings growth in 2010. Assuming no change in the economic environment, we’ve established a range of 9% to 12% growth in the currency neutral basis for 2010.
At the end of tomorrow’s program, Kriss will review the assumptions that we’ve used to model our earnings objectives. Within the 9% to 10% range we have focused on achieving a 10% increase in earnings per share next year. In the foreseeable future, my primary interest will continue to be maintaining a strong capital position to protect the company in very uncertain environment.
As I discussed a couple of weeks ago, we have focused our entire officer group on maintaining a risk based capital position as measured by risk based capital ratios. Every officer’s incentive compensation for 2009 has a component linked to maintaining a target RBC ratio of 375%. I don’t want them to lose sight on running our business so we’re still using other important bonus criteria such as traditional premium, earnings, sales, and expense growth.
Additionally, we used the RBC ratio as the only measure for our all performance based restricted stock awards that are granted to Section 16 insiders this year. To earn these equity awards, when they’re vested in three years, we have to maintain targeted RBC levels. Ultimately our objective is to maintain a high risk based capital ratio that supports our financial strength rating and provides adequate cushion for possible investment losses.
At the end of 2008 our RBC ratio was 476.5%. At the end of the first quarter we estimate that the RBC ratio will be 479%. We expect our capital generation to be strong in 2009 and our RBC to remain high. Importantly our entire officer team is motivated to keep it that way. We also expect our solvency margin in Japan to remain strong.
Let me continue with the balance sheet and comment a bit on our investments. As I said repeatedly, I remain pleased with the overall quality of our assets. Despite global credit downgrades over the last several months, the credit profile of our holdings is still quite high. At the end of March, 95% of our fixed maturities in perpetual securities were investment grade. Our global investment approach is time tested and I continue to believe that it’s the best course of action for Aflac.
The reason is straightforward; we purchase securities that best match the characteristics of our policy liabilities. That is especially true with Aflac Japan’s operation. For more than 15 years our greatest challenges has been investing huge cash flows in appropriate securities. We need to purchase long dated, Yen denominated, investment grad securities, to fund our long duration, Yen denominated policy liabilities. It’s just that simple.
Because Japan does not have a developed corporate bond market, we turn to securities issued by many non-Japanese entities in Yen, including the perpetuals we first purchased more than 16 years ago. Perpetual securities provide us with the returns and the long durations we need to support our policy liabilities. That hasn’t changed.
Obviously subordinated perpetual securities have been the primary area of investors focus within our portfolio over the last several months. When we first began purchasing perpetual securities in the early 90’s they were never considered risky. Although we have not purchased any securities since 2005 they have served their purpose very well over the years. Except for the Icelandic banks that we wrote off in the fourth quarter, every one of the perpetual securities that we own were current on interest at the end of the first quarter. In addition, we have not experienced any extension of principal at this point.
In the fourth quarter of 2008 we had three separate perpetual securities redeemed. On April 22nd of this year KBC bank redeemed the upper tier two securities that we own, and today HSBC redeemed our upper tier two holdings. Because of our long term view of these investments we have both the ability and the intent to hold these securities until they mature. Our current credit analyses suggest it’s probable that we will receive both interest and principals on a timely basis. As such, it makes sense for us to retain them in the portfolio.
Our ability to hold securities to maturity is doing great part to the fact that we do not fact any liquidity issues. As we have discussed, some of the products in Japan have a small cash surrender value particularly with our old block of cancer insurance. However, we do not have a similar benefit in our US healthcare products. That means that our reserves exist for the benefit of a persisting policyholders.
As a rule, our customers do not have a claim on those assets if they last. As a result, we do not base the risk of liquidating invested assets to pay surrender values. As you are aware, our only short term liquidity need in 2009 was the repayment of the senior notes in April. It was always our preference to refinance our recently mature senior notes in the debt market, preferably the Samurai market in Japan.
However, when the financial crisis emerged in late 2008 the Samurai market basically shut down for financial names especially without government guarantees. At that time we are sensitive to interest rate costs and we were not willing to issue debt with excessive coupons. This prompted us to secure a loan from our principal life insurance company, American Family Life Insurance Company of Columbus, the parent of Aflac Incorporated.
I’ll remind you that the loan is an admitted asset on our insurance subsidiary books under statutory accounting principals. As a result, it did not negatively impact our RBC ratio. Despite its three year term, we view short term financing until the credit markets improved. Fortunately there has been substantial improvement in the debt markets.
Over the last few weeks spreads have tightened significantly and there has been a sharp increase in the issuance. Just yesterday we were able to execute a debt transaction in the US debt market. We issued $850 million of senior notes with a 10 year maturity and the coupon on the debt was 8.5%. As we announced yesterday, the primary intent to the use of this proceeds is for the issuance to repay the intra-company loan that we originated in April and will repay the maturing debt.
With the debt in place we can maintain our conservative capital structure and we are pleased to have the financing in place. This also positions us to take care of the obligations that mature in 2010 as well.
I realize that many of you have given thought to our shareholder dividend recently. Last October our Board of Directors raised the quarterly cash dividend by 16.7% effective with the first quarter of 2009 which amounts to $0.28 per quarter. The Board’s actions marked the 27th consecutive year in which we’ve increased the dividend.
Historically we have generally increased our dividend in line with earnings growth excluding the currency. We are proud of our lengthy track record of dividend increases. We realize that for roughly 30% of our shares that are owned by individual investors dividends are very important. We also understand the argument for reducing or eliminating the dividend, which has been expressed not only to Aflac, but many other publicly owned companies as well.
Our decision to pay a dividend and if so, at what amount, will ultimately come down to the strength of our RBC ratio. As I mentioned, our priority is to maintain a capital position that supports our financial strength rating and provides and adequate cushion for possible investment losses. While we do not expect any change to this year’s quarterly dividend of $0.28, if we experience significant deterioration in the investment portfolio that produces stress on our capital position, we will consider a modified dividend as a means of conserving capital.
In like share we’ve purchased, we are not prepared to commit to an increase in the dividend in 2010 until we have more clarity in both the economy and the credit markets. I wanted to point out that the stock price and the investment consideration may have changed but what hasn’t changed is our business model. Despite wildly volatile financial markets we have maintained our focus on controlling the things that we have the power to control.
We can and we will control our efforts to build our business and take care of our customers, our employees and our sales associates. By doing this we will continue to enhance shareholder value. I am confident that we will get through these difficult times that we’re facing here and around the globe and I believe that Aflac will emerge as a strong company you followed or owned for many years.
Let me conclude by saying as I’ve said many time before and will say many more times, I wouldn’t trade places with any other CEO.
That does conclude our formal presentation for this evening. We’ll be around a little longer if you’d like to talk with our management and I hope you will. Just a couple more housekeeping things. We would like your name tag back so we can give it to you again tomorrow morning. We’ll begin outside of the hall here at 7:30am with a continental breakfast if you’d like to join us for that. Otherwise, the business meeting will start promptly at 8:00am in the ballroom right next door.
I would like to also acknowledge a very hard working investor relations staff both here and abroad who every year put in a tremendous effort to pull this meeting together and pull all the materials together including Delia Moore, Manager of Investor Relations, Barbara Barfield, [Mike Pina], [Kathy Shan], [Malco Tramel]; in Japan [Ken Keyo] who some of your know, is general manager of our IR office there and also [Malco Sako] who has come from Japan. Heidi Carlisle from the meetings area is instrumental and also [Aikiko Tatchi], a translator who has helped us quite a bit. They’ve put in a great effort and again thank you for what you do.
If you need anything at all from us, please see anyone in IR, we’ll help you in any way we can. Otherwise meeting adjourned. We’ll see you in the morning.
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