Aflac CEO Dan Amos (right) with researcher Dr. William Woods. Image: Aflac.
Many investors misunderstand insurance company AFLAC (AFL 0.04%), incorrectly assuming that most of its business comes from its domestic operations. Yet Aflac's Japanese business is larger than its U.S. counterpart, and that introduces complexity to its operations and its financial results. After its quarterly report in late October, Aflac executives talked about some essential aspects of its recent performance. Let's take a closer look at the things that Aflac's management said in order to get more clarity on the insurance company's future.
"While it's been a year of building, I'm not satisfied with these results. In fact, I won't be satisfied until we see our sales growth more in the range of the mid-single digits, which I believe is reasonable and achievable." -CEO Daniel Amos
Aflac third-quarter results continued a troubling trend for the insurance company, with dollar-denominated revenue and earnings falling by double-digit percentages year-over-year. Aflac has emphasized that 2015 would be a rebuilding year, with operational changes in its internal structure designed to bolster long-term growth. Nevertheless, CEO Dan Amos pointed to strong sales of products in the Japanese insurance market that were hidden by weakness in the Japanese yen as evidence of Aflac's long-run potential, and he thinks the U.S. market has plenty of room to grow as well as the company builds its brand reputation.
"Between dividends and repurchases, we returned just over $400 million to our shareholders in the quarter and expect to fulfill our guidance of $1.3 billion in repurchases for the year. Our dividend increase is in line with our expectation for full-year 2015 operating earnings-per-share growth, excluding the impact of currency." -CFO Frederick Crawford
In its quarterly release, Aflac boosted its dividend by 5%, making it the 33rd consecutive year that the company has made an increase in its payout. Yet in addition to those reliable dividends, Aflac has also remained committed to returning capital to shareholders in other ways, and the ongoing efforts to do so through a large stock buyback program have helped support the stock even through a tough market environment. Many investors rely on Aflac for its income, so good news on this front is important in order for the insurer to keep its credibility among dividend investors.
"We also continue to work closely with Japan Post to enhance our partnership, as demonstrated by the recently announced initiative to foster enhanced communications with the growing elderly population in Japan." -Amos
Japan Post is a major state-owned financial institution that holds extensive bank deposits, and the company started offering cancer policies from Aflac in 2008. In 2013, the two companies broadened their relationship to sell a wider range of insurance products, using Japan Post's extensive network of thousands of post-office locations to solicit sales. With Japan Post going public in November, Aflac is keen to emphasize that it intends to keep making the most of its partnership to get broader exposure to the Japanese market, especially among the elderly who are most likely to use Japan Post's savings products. The pact has helped contribute to strong sales in Japan for Aflac, and the company is confident it can keep benefiting even after the Japan Post IPO.
"We've really made moves to focus the type of product that we're selling to deemphasize lump-sum premium. ... What we're emphasizing is the longer-pay products, which give us more possibility of putting money to work at attractive levels." -Crawford
Low interest rates have hurt insurance companies like Aflac, and they cause especially big problems when Aflac sells a product that brings in a lump sum of cash in a single transaction. To remedy this, Aflac is aiming to sell more products that involve paying small premiums over time, in the hope that by the time it receives some of its future premium payments, rates will have risen, and it'll be easier for Aflac to invest the premium income prudently. To the extent that Aflac can push customers toward longer-pay products without actually losing business, that strategy could pay off in greater long-term investment income for the insurer.
"We have continued to receive phenomenal feedback from our distribution channels, our policyholders, and accounts on One Day Pay, our industry-leading claims initiative." -Amos
On the customer side, paying claims in timely fashion is crucial, and Aflac's One Day Pay strategy has worked extremely well. Amos believes that being able to treat customers well will open more doors for the insurer in the long run, and it also demonstrates Aflac's commitment to policyholders in ways that improves customer satisfaction and word-of-mouth referrals.
Aflac has a strong core of growth opportunities that has largely gotten hidden by currency impacts. Once the yen stops sliding, the value of having Japan in Aflac's corner should really have a positive benefit to the insurer's future growth.
