Aflac Incorporated (AFL) on Q1 2023 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Aflac Incorporated First Quarter 2023 Earnings Conference Call. All participants will be in listen0only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Young, Vice President of Investor and Ratings Agency Relations and ESG. Please go ahead. David Young: Thank you, Andrea. Good morning and welcome. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated; Fred Crawford, President and COO of Aflac Incorporated is joining us from Japan and will touch briefly on conditions in the quarter and discuss key initiatives; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments will discuss the investment portfolio and its positioning given recent market events and volatility. Yesterday after the close, we posted our earnings release and financial supplement to investors.aflac.com. Under financials and the menu of that site, we also posted several slides of investment details related to our bank, commercial real estate and middle market loan exposure. In addition, Max Broden, Executive Vice President and CFO of Aflac Incorporated, provided his quarterly video update addressing our financial results and current capital and liquidity. Max will be joining us for the Q&A segment of this call along with the following members of our Executive Management in the U.S. The following Virgil Miller, President of Aflac U.S.; Al Roziere, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US. We are also joined by members of our Executive Management team at Aflac Life Insurance Japan: Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. Before we begin, some statements in this 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 are prospective in nature. Actual results could differ materially from those we discussed today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan. Dan? Dan Amos: Thank you, David, and good morning. And we're glad you joined us. Reflecting on the first quarter of 2023, our management team, employees and sales distribution, have continued to be devoted stewards of our business. Being there for the policyholders when they need us most just as we promised. The first quarter marked a good start to the year. Aflac delivered another quarter of solid earnings results, especially considering our material weakening of the yen. Looking at our operations in Japan and as noted last quarter, we are actively focused on numerous initiatives in Japan involving new and refreshed products and distribution that continues to cover from the -- as we recover from the pandemic. In addition, we are encouraged by the planned May reclassification of COVID-19 to the same level as influenza as Japan continues to emerge from the pandemic. I am pleased with the continued sales improvements, which reflect the ongoing rollout of our cancer insurance policy initially through associates and Daido Life followed by Dai-ichi Life and the financial institutions. First quarter sales also reflected the refreshed first sector ways in child endowment products, which we're using as a way of reaching new customers to whom we can also sell third sector products, including cancer and medical products. I'm also encouraged by the fact that Japan Post Group began selling our new cancer insurance product earlier this month. We expect this close collaboration to produce continued gradual improvement of Aflac's cancer insurance sales over the immediate term and to further position the companies for the long-term. In addition to product, another important element of our growth strategy is our intense focus on being where the customer wants to buy insurance. Our broad network of distribution channels, including agencies, alliance, partners and banks continually optimize opportunities to help provide financial protection to Japanese consumers. And we are working hard to support each channel. Turning to the U.S. while the first quarter tends to generate the lowest sales of the year, I'm encouraged by the continued improvement in the productivity of our agent and brokers, as well as the contribution from the build out of our network, dental and vision and group life and disability. We are seeing success in our efforts to reengage veteran associates and at the same time we are seeing strong growth through brokers. I'm very excited that we're in the process of refreshing our cancer protection assurance policy with increased benefits at no additional cost. We believe this will increase persistency, which will benefit our policyholders and lower our expenses. I believe that the need for the products we offer is stronger or stronger than it has ever been before in both Japan and the United States. At the same time, we know consumer habits, buying preferences have been evolving. We also know that our products are sold not bought. As we communicate the value of our products, we know that a strong brand alone is not enough. We must paint a better picture of how our products help address the gap that people face when they get medical treatment. We continue to reinforce our leading position and build on that momentum. As always, we continue to prudent liquidity and capital management. We continue to generate strong investment results, while remaining in a defensive position as we monitor evolving economic conditions. In addition, we've taken proactive steps in recent years to defend cash flows and deployable capital against the weakening yen. We treasure our track record of dividend growth, highlighted by 2022 marking the 40th consecutive year of dividend increases. We remain committed to extending this track record, supported by the strength of a capital and cash flows. At the same time, we remain in the market repurchasing shares with tactical approach focused on integrating the growth investments we've made in the platform to improve our strength and leadership position. We also believe in the underlying strength of our business, and our potential for continued growth in the United States and Japan, two of the largest life insurance markets in the world. We are well positioned as we work toward achieving long-term growth, while also ensuring we deliver on a promise to the policyholders. I'm proud of what we've accomplished in terms of both our social purpose and financial results, which have ultimately translated into strong long-term shareholder return. Now, I'll turn the program over to Fred in Japan. Fred? Fred Crawford: Thank you, Dan. Let me first begin with brief comments on our Japan and U.S. operations. As Dan noted, we're off to a promising start. The revised cancer product is doing well and now supported by our Yorisou Cancer Consultation Platform. This providing Concierge’s care to cancer policyholders and connecting them with non-insurance services. As we look ahead this year, we are focused on the following here in Japan. Continued recovery with our longstanding alliance partners fueled by a refreshed cancer product and joint marketing and training support. Based on our preliminary read of activity levels within Japan Post, the Wings product appears to be off to a promising start and gaining traction. We are preparing to launch a new medical product in the fourth quarter. We are operating in a highly competitive environment with medical product representing 70% of the third sector marketplace. We are focused on simplifying the product and appealing to both younger policyholders with basic needs and older or existing policyholders, who desire upgrading to a more comprehensive coverage. The sale of WAYS is delivering on our strategy of attracting younger policyholders and cross sell activity. We are primarily selling in our associates channel and are being cautious with respect to selling in the bank channel with limited volume expected. We understand that over the long-term, leveraging the bank channel will require marrying a competitive medical and cancer product with a formal asset formation strategy to drive shelf space. Finally, our short-term insurance subsidiary SUDACHI launched a line of affordable term medical and cancer products in April. We anticipate a modest level of sales as measured in annualized premium. The focus is on introducing young first time buyers to the importance of medical and cancer insurance to then upgrade to more comprehensive coverage in the future. From an operations perspective, we are pleased with our expense ratio coming in below 20% in the phase of continued revenue pressure. This is in part a cumulative result of addressing expenses over the past few years. Turning to the U.S., we have discussed our balanced attack and this remains the case with individual, dental and vision, group life and disability and consumer markets all contributing to sales growth in the quarter. The underlying signs of momentum remain encouraging in our agent driven small business franchise recruiting the number of average weekly producers and agent productivity are all up in the quarter. Dental and vision sales increased 40% in the quarter with continued strength in cross sell of core voluntary products. While this is traditionally a slower quarter in the life and disability markets, our platform is off to a strong start for the year. Finally, we are encouraged by consumer markets sales up 29% in the quarter and with new products gaining traction and alliances coming online. With expanded business lines and new distribution channels, product development is a key focus in the U.S. We have launched a refreshed approach to cancer as Dan mentioned, we've advanced coverage for mental health conditions and are adding non-insurance services to our group disability products. We are proactively driving benefit utilization through wellness campaigns and benefit endorsements to in-force policies. We know that utilization drives persistency. In terms of operations, our expense ratio remains elevated, but as Max commented on in his recorded remarks, roughly 300 basis points are due to the pace of investment in emerging growth businesses all performing in line with our expectations. So what bends the expense curve in the U.S.? Traditional managing of expenses along with investment in process automation in our mature individual and career driven small business franchise, a multi-year technology modernization path, including a new group administrative platform driving process improvement and cost reduction. Finally, delivering on revenue build in our inquired and Greenfield properties that requires investment upfront to secure and retain quality business. Now I'd like to hand over to Brad Dyslin to discuss our investment portfolio and positioning with respect to recent market events and volatility. Brad? Brad Dyslin: Thank you, Fred. Given recent events with the global banking system and the uncertain macro outlook as the Fed continues to raise rates to fight inflation, I would like to provide a brief update on those segments of our portfolio that are most directly impacted by the current environment. Let me start with our bank exposure. As at the end of the quarter, our total global bank portfolio is $5.6 billion with an average credit rating of single A minus. Our holdings are concentrated in large, systemically important banks located in stable countries. As of today, our U.S. bank exposure is limited to the largest banks. We have virtually no exposure to smaller U.S. regional banks. We do not have holdings or other direct exposure to any of the three U.S. banks that failed in early March. While the swift and decisive action of regulators has helped the calm markets, we are watching very closely for signs of further instability in the global banking system and feel good about our holdings. Like the rest of the industry, we are seeing pressure in the commercial real estate markets. Office properties are the current area of focus given the difficult market for office leasing. Office represents approximately 30% of our total $8.1 billion commercial mortgage loan portfolio with most of our exposure in our transitional real estate book. We currently expect approximately $500 million of loans to enter into some form of foreclosure, approximately 6% of our total mortgage holdings. When going into foreclosure, we revalue the property to current market levels. In those cases where we do not yet have an independent third-party appraisal as an interim step, we establish an updated value based on our current -- based on our external manager's current assumptions of the local market and updated cap rates. This process resulted in a small $10 million of additional asset reserves this quarter. To offer perspective of our potential loss exposure, we have approximately $900 million of TRE loans currently on our watchlist. At the time of origination, these loans were 65% loan to value. If you apply a simple stress scenario, that assumes we foreclose on the entire amount and each property declines 50% in value, a drop which would exceed what we saw during the financial crisis by about 15 percentage points. We would have to establish approximately $200 million of reserves. To be clear, this is not our base case, but it highlights that our exposure under such a severe downturn in the office segment is manageable. Although accounting rules may require additional reserves, our strong capital and liquidity position will allow us to hold these properties to maximize our recovery. Turning to our middle market loan portfolio, despite the headwinds from rates and inflation, this portfolio continues to perform quite well. Our borrowers average leverage is stable. They have largely been successful passing through higher costs, and sponsors have generally been supportive whenever required. This quarter, we did take reserves of $20 million related to two names that were struggling with issues unique to them and not reflective of broader systemic issues in the asset class. As the primary outlet for our below investment grade exposure, we very deliberately built this portfolio with a strong focus on managing through the inevitable downturns in the credit cycle. Our average loan size is a very modest $16 million, we only invest in senior secured first lien positions. We utilize strict limits on position size, diversification and other characteristics. Should conditions worsen, we believe this approach will serve us well. We expect market volatility to remain elevated as the global economy absorbs the impact of higher interest rates. We will, of course, experience the impact of this volatility across our portfolio namely in our alternatives holdings. Relative to many in the industry, our exposure is rather modest, but we expect our $2.4 billion portfolio to experience volatile marks in the near-term. We remain committed to our disciplined systemic approach to building this portfolio and fully expect to enjoy the benefits of enhanced returns over time. Let me turn it back to Fred. Fred Crawford: Thanks, Brad. Let me just give some additional perspective before we go to Q&A and that is connecting Brad's comments to capital. Our low asset leverage, which we define as the ratio of assets to statutory capital, particularly when you consider our natural concentration in JGBs, places us in a strong position to absorb weak economic conditions. We watch SMR in Japan carefully, as historically, it is more volatile during periods of economic stress. However, our SMR as you can see remains very strong. We are also comforted by a stable ESR ratio that like our U.S. statutory RBC is robust and more resilient to market volatility. The punch line is we do not see the events of the last quarter and/or mild to medium recession causing disruption to our capital deployment plans. So with that, let me hand back to David, who will take us to Q&A. David? David Young: Thank you, Fred. Now we are ready to take your question. But first, let me ask you to please limit yourself to one initial question and a related follow-up to allow other participants an opportunity to ask their question. Andrea will now take the first question and if you want to let people know how to get back in the queue, that would be great. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Wes Carmichael of Wells Fargo. Please go ahead. Operator: The next question comes from Suneet Kamath of Jefferies. Please go ahead. Operator: The next question comes from Jimmy Bhullar of JPMorgan Securities. Please go ahead. Operator: The next question comes from Alex Scott of Goldman Sachs. Please go ahead. Operator: The next question comes from John Barnidge of Piper Sandler. Please go ahead. Operator: The next question comes from Erik Bass of Autonomous Research. Please go ahead. Operator: The next question comes from Tom Gallagher of Evercore ISI. Please go ahead. Operator: Next question comes from Wilma Burdis of Raymond James. Please go ahead. Operator: The next question comes from Ryan Krueger of KBW. Please go ahead. Operator: The next question comes from Michael Ward of Citi. Please go ahead. Operator: The next question is a follow-up from Wes Carmichael of Wells Fargo. Please go ahead. Operator: The next question is a follow-up from Tom Gallagher of Evercore ISI. Please go ahead. Operator: The next question is a follow-up from Jimmy Bhullar of JPMorgan Securities. Please go ahead. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks. Operator: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Aflac Incorporated (NYSE:AFL) Stock Analysis: Insights and Expectations
- Aflac Incorporated (NYSE:AFL) maintains short-term price target stability at $101.5, despite a cautious outlook from Morgan Stanley with a lower target of $78.
- The company is expected to face a 6.6% decline in EPS and a 13.7% drop in revenue for the upcoming quarter, indicating potential financial challenges ahead.
- Investors are advised to watch for Aflac's upcoming earnings report and any strategic company announcements that could impact future analyst expectations and stock performance.
Aflac Incorporated (NYSE:AFL) is a leading provider of supplemental health and life insurance products, with operations primarily in Japan and the United States. Founded in 1955 and headquartered in Columbus, Georgia, Aflac offers a variety of insurance products, including cancer, medical, and life insurance. The company competes with other insurers like Lemonade, Heritage Insurance Holdings, and Assurant.
The current consensus price target for Aflac's stock is not explicitly provided, but historical data shows stability in the short term. Last month's and last quarter's average price targets were both $101.5, indicating that analysts' expectations for Aflac have not changed significantly in the short term. However, Morgan Stanley has set a lower price target of $78, suggesting a more cautious outlook.
Over the past year, Aflac's average price target has decreased from $104.5 to $101.5, reflecting a slight decline in analysts' expectations. This decline may be influenced by anticipated financial challenges, as Aflac is expected to report a 6.6% decline in earnings per share (EPS) and a 13.7% drop in revenue for the upcoming second-quarter earnings report. These pressures are present in both the U.S. and Japan markets.
The stability in short-term price targets suggests that analysts have a consistent view of Aflac's near-term performance. However, the anticipated decline in earnings and revenue, as highlighted by Morgan Stanley, may impact analysts' future outlook. Investors should monitor upcoming earnings reports and market conditions in the insurance industry to better understand potential movements in Aflac's stock price.
Investors should also be aware of any company announcements, strategic initiatives, or changes in leadership that could influence analysts' price targets. As Aflac prepares for its second-quarter earnings report, stakeholders are keenly observing these developments to gauge the company's financial health and future prospects.
Aflac Incorporated (NYSE:AFL) Earnings Preview: A Closer Look at the Insurance Giant's Financial Health
- Aflac Incorporated's NYSE:AFL earnings per share (EPS) is expected to be $1.71, marking a 6.6% decline year-over-year.
- Revenue is projected at around $4.43 billion, a 13.7% decrease from the previous year, with challenges in both the U.S. and Japan markets.
- The company's financial metrics, including a price-to-earnings (P/E) ratio of approximately 14.87 and a debt-to-equity ratio of about 0.29, highlight its market position and investor valuation.
Aflac Incorporated (NYSE:AFL) is a prominent player in the insurance industry, known for its supplemental insurance products. As the company gears up to release its quarterly earnings on August 5, 2025, analysts have set their sights on an earnings per share (EPS) of $1.71. This figure represents a 6.6% decline from the previous year, reflecting challenges in both the U.S. and Japan markets.
The company's revenue is projected to be around $4.43 billion, marking a 13.7% year-over-year decrease. This decline is attributed to pressures on earnings and weaker investment income. Despite these challenges, Aflac's Corporate and other segments may offer some relief by improving pre-tax adjusted earnings. However, the anticipated premium growth might be offset by the difficulties faced in Japan.
Over the past month, the consensus EPS estimate has been revised upward by 0.6%, suggesting a slight increase in analyst expectations. This revision trend is often linked to potential investor actions, as changes in earnings estimates can influence short-term stock price performance. Aflac's stock price could be significantly impacted by the upcoming earnings report, especially if the actual earnings differ from expectations.
Aflac's financial metrics provide insight into its current market position. The company has a price-to-earnings (P/E) ratio of approximately 14.87, indicating how much investors are willing to pay for each dollar of earnings. Its price-to-sales ratio is about 3.10, while the enterprise value to sales ratio stands at 3.25. These figures help investors assess the company's valuation relative to its sales and earnings.
The company's debt-to-equity ratio is approximately 0.29, suggesting a relatively low level of debt compared to its equity. This can be a positive sign for investors, as it indicates a lower risk of financial distress. Additionally, Aflac's earnings yield is about 6.72%, providing a measure of the return on investment for shareholders. As the earnings release approaches, these financial metrics will be closely watched by investors and analysts alike.
Aflac Incorporated Downgraded by Evercore ISI but Continues Strong Financial Performance
- Evercore ISI downgraded Aflac Incorporated (NYSE:AFL) to "Underperform" despite a strong financial strategy and a history of dividend growth.
- Aflac announced a 16% increase in its first-quarter 2025 dividend, marking the 42nd consecutive year of dividend growth.
- The company's stock price experienced a slight decrease, but Aflac's commitment to shareholder value and strategic capital deployment highlights its focus on long-term growth.
On December 3, 2024, Evercore ISI downgraded Aflac Incorporated (NYSE:AFL) to "Underperform" with a "hold" action, when the stock was priced at $114.6. Aflac, a leading provider of supplemental insurance in the U.S. and Japan, competes with companies like MetLife and Prudential Financial. Despite the downgrade, Aflac's financial strategies remain strong.
Aflac recently announced a 16% increase in its first-quarter 2025 dividend, raising it to $0.58 per share. This marks the 42nd consecutive year of dividend growth, showcasing Aflac's commitment to enhancing shareholder value. The increased dividend will be paid on March 3, 2025, to shareholders recorded by February 19, 2025, as highlighted by StreetInsider.
The dividend increase reflects Aflac's strong financial position. In the first nine months of 2024, Aflac distributed $820 million in dividends, demonstrating its reliability as a dividend-paying company. The new dividend offers a yield of 1.8% based on the closing stock price of $111.40 on December 2, 2024.
Aflac's stock price currently stands at $106.76, a decrease of 4.17% from the previous day. The stock has traded between $106.74 and $112.24 today, with a market capitalization of approximately $59.31 billion. Despite the recent downgrade, Aflac's strategic capital deployment, including share buybacks, indicates a focus on long-term growth.
Aflac Incorporated Downgraded by Evercore ISI but Continues Strong Financial Performance
- Evercore ISI downgraded Aflac Incorporated (NYSE:AFL) to "Underperform" despite a strong financial strategy and a history of dividend growth.
- Aflac announced a 16% increase in its first-quarter 2025 dividend, marking the 42nd consecutive year of dividend growth.
- The company's stock price experienced a slight decrease, but Aflac's commitment to shareholder value and strategic capital deployment highlights its focus on long-term growth.
On December 3, 2024, Evercore ISI downgraded Aflac Incorporated (NYSE:AFL) to "Underperform" with a "hold" action, when the stock was priced at $114.6. Aflac, a leading provider of supplemental insurance in the U.S. and Japan, competes with companies like MetLife and Prudential Financial. Despite the downgrade, Aflac's financial strategies remain strong.
Aflac recently announced a 16% increase in its first-quarter 2025 dividend, raising it to $0.58 per share. This marks the 42nd consecutive year of dividend growth, showcasing Aflac's commitment to enhancing shareholder value. The increased dividend will be paid on March 3, 2025, to shareholders recorded by February 19, 2025, as highlighted by StreetInsider.
The dividend increase reflects Aflac's strong financial position. In the first nine months of 2024, Aflac distributed $820 million in dividends, demonstrating its reliability as a dividend-paying company. The new dividend offers a yield of 1.8% based on the closing stock price of $111.40 on December 2, 2024.
Aflac's stock price currently stands at $106.76, a decrease of 4.17% from the previous day. The stock has traded between $106.74 and $112.24 today, with a market capitalization of approximately $59.31 billion. Despite the recent downgrade, Aflac's strategic capital deployment, including share buybacks, indicates a focus on long-term growth.
