Q4 2019 Earnings Call
Welcome to the asked that fourth quarter 2019 earnings conference call. Your lines have been placed on listen only until the question answer session.
Be advised today's conference is being recorded I would now like to turn the call over to Mr., David Young Vice President of Aflac, Investor and rating Agency relations.
Thank you Nicole good morning, and welcome to our fourth quarter call. This morning, we will be hearing remarks from Dan Amos Chairman and CEO of Aflac incorporated about the quarter as well as our operations and Japan and the United States.
Then tried Crawford President and Chief operating officer of Aflac incorporated will follow with more details about our operations.
And Max brought in executive Vice President and CFO of Aflac incorporated will discuss our financial results.
In addition, joining us this morning during the Q and a portion are members of our executive management team in the United States.
Teresa White President of Aflac, U.S., Eric Kirsch, Global Chief Investment Officer, Rich Williams, Chief distribution officer, and hours, Gerry Global Chief risk Officer, and Chief Actuary.
We're also joined by members of our executive management team in Tokyo at Aflac Life Insurance, Japan, Charles like Chairman Representative director President of Aflac International.
Yes, It Toshi Couey day, President and representative director.
Todd Daniels director and CFO.
Koji Ariyoshi director and head of sales and marketing.
Before we start let me remind you that 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. The earnings release is available on the investors page of Aflac sweat site at investors Dot Aflac Dot com and includes reconciliations of certain non U.S. GAAP measures I'll now hand, the call over to.
Dan Dan.
Thank you and good morning, like Who's joining us let me start morning, all by saying that the fourth quarter rounded out another great year for Aflac in terms of earnings.
Capital and overall financial strength.
I'm, especially pleased with the Companys financial performance in 2019.
And actually Aflac is as strong as we've ever been and our 65 year history.
Our capital position by any measure is robust.
Our investments for high quality and diversified.
And we have among the highest return on capital and the lowest cost of capital and the industry.
Total pretax adjusted earnings increased 2.5% with tease him is even more meaningful when you consider that we have continued our extensive investment.
In our core technological platforms and initiatives to drive future earn premium growth and efficiencies.
Investing in growth and innovation will continue to be critical strategic focus for 2020.
Brandon that will provide more detail in a moment.
In 2019, Aflac, Japan generated strong overall financial results as we anticipated full year third sector and first sector protection sales were down in the mid teens predominantly reflecting reduced sales of our cancer insurance group.
Japan post following a strong launch of our revised cancer insurance in 2018.
Earned premium growth or third and first sector protection products was 1.3%, which was inline with our expectations.
As you May have seen last Friday, the new management of Japan Post group held the press conference in regard to the submission.
Its business improvement plan to the Japanese government.
This update includes additional measures that Japan post group management is undertaking to restore the public for us and address concerns raised by the sale of Japan post insurance products.
Understandably, the new management of Japan Post group has placed this plan as a top priority management issue.
And we would expect sales of Aflac Japans cancer insurance through Japan post distribution to be secondary, especially during the first half of the year.
[noise] based on comments from Japan, suppose and our review of monthly trends, we expect very little production in the first half with 2020.
The level of recovery in the second half of the year is uncertain.
We will provide an update as we learn more.
Importantly, we assumed the possibility of low production.
Slow recovery in our forecast therefore, our guidance for Aflac Japans earned premium and pretax earnings does not change materially from our 2020 outlook call.
We continue to expected decline in the range of <unk>, 0.7% and the third and first sector protection earned premium or 2020.
As we think about distribution, we look forward to working with Japan Post you leadership to continue deepening the strategic alliance relationship for the long term.
To that point Aflac Japans executives met in January with Japan Post new leadership as part of the establish strategic Alliance framework.
The discussions were positive.
And the Japan Post group Presidents express their desire to further enhance the strategic alliance to the benefit of both organizations over the long term.
In addition, bread and I will be meeting with the Ceos in Japan post grew in March.
As I said earlier, we look forward to working with Japan post new leadership to continue deepening our strategic alliance for the long term.
Aflac Japans medical insurance focused upon a rider strategy in 2019.
While various factors affected sales that Fred will address shortly the cost of medical insurance sales results reinforce my confidence in our position as Japan's number one provider of cancer in medical insurance, ensuring one out of every or household.
As we've discussed in the past.
The government or Japan is debating social security reform for all generations as part of its growth strategy plan for dealing with the shrinking and aging population under the concept of 100 year Life Society.
The government is debating key social security issues, including potentially increasing copays by elderly.
This debate continues the public will be even more focused on the need for supplemental insurance and the environment in Japan will continue to evolve.
Against this backdrop, we take a longer term perspective, when it comes through our business and we will continue to focus on maintaining our leadership by leveraging the experience.
Expertise and scale and efficiencies develop over the last 45 years in Japan to bring value and protection to our policyholders.
At the same time, we are continuing to fully engaged.
Our wide reaching distribution networks.
Our traditional agencies have bands and remain vital to our success as do our alliance partners.
Now turning to Aflac U.S., we are pleased with our strong financial performance, which was consistent with our expectations.
And reflected elevated expenses as results of the ongoing investments in our platforms distribution and customer experience.
While sales were slightly down for the year coming off record sales in the prior year earned premium growth was 1.8%.
Ultimately, we seek to grow earned premium growth.
It is evident that there are macro elements and play.
Strong salaried and boy Miss.
Means fewer people that are willing to take independent commissioned sales roll.
This dynamic continues to constrain boat sales agent recruiting and ultimately sales to an extent, but keep in mind workers continues to convey a significant need for aflac benefit solutions and the work life and we are well positioned to.
Capitalize on this opportunity.
Our brokers strategies are taking hold opening the door for more sales opportunities and larger accounts.
Additionally, we are full we're fortunate to have such a strong independent field force, which is truly distinctive within our industry.
We will continue to work with our agents to equip them with the tools that they need to be productive and to have a successful career with aflac.
We have also been encouraged Bobby advancement in our direct to consumer platform and associates partnerships, which are still in the initial stages.
Taking all factors into account, we continue to expect Aflac us to generate earned premium growth in the range of 1% and maintain stable persistency in 2020.
We will continue to invest in product development and efforts to facilitate producer growth and productivity.
Including the measured roll out all the Aflac dental and vision that was initiated in January.
Aflac has historically been known for its organic growth.
However, we recognize that prudent investment is critical to our growth strategy and the driving efficiencies that will impact the bottom line for the long term.
With this in my.
We will look for other opportunities to accelerate growth.
Through measured bought to build transactions.
We balanced reinvestment in the core business with a focus on increasing the dividend and repurchasing shares.
I am pleased with the board's decision to increase the first quarter 2020 cash dividend by one cents per share, which is 3.7% increase over the fourth quarter 2019.
This increase is coming off the 37 consecutive year of dividend increases in 2019.
Where we increased the dividend one cents each quarter generating a 3.8% dividend increase for the year.
These increases recognize the stability of our earnings.
Capital generation and demonstrates our commitment to rewarding our shareholders.
[noise], we expect share repurchase will be in the range of $1.3 billion to $1.7 billion in 2020.
With the range, allowing us to be more tactical in our deployment strategy.
As always this assumes stable capital conditions and the absence of any compelling alternatives.
We remain committed to maintaining strong capital ratios and maintaining a strong risk based capital ratio in the U.S. and solvency margin ratio in Japan on behalf of our bond holders, our policyholders and our shareholders.
Through Aflac incorporated subsidiaries in Japan, and the United States, we add privilege of helping.
Provide protection to more than 50 million people.
In both countries, we have earned our position as the leading supplemental injure about paying cash fast when policyholders get sick or injured.
Looking ahead, we believe our strong earnings growth will reflect the underlying earnings power of I insurance operations in Japan in the United States.
It will also reflect our prudent approach to deploying excess capital in a way that balances the interest of all stakeholders.
As always we are working to achieve.
Our earnings per share objectives, while also ensuring we deliver on our promise to our policyholders.
Now I'll turn the program over Brad who will cover more on the operations and then Max to cover our financial results in more detail for it.
Thank you Dan I'll focus my comments on market color in key areas of execution in Japan, the U.S. and global investments and connecting to our 2019 results and outlook for 2020.
Let me first start with Aflac, Japan, well the focus has been understandably on Japan post in cancer sales there had been additional market developments during 2019 that have shaped our product and distribution strategy for 2020.
Dan noted we were pleased to end 2019 with an increase in medical sales.
This is noteworthy as the medical product marketplace base natural headwinds specifically a change in corporate tax law late in the year that impacted products sold as part of a company benefit program and a measurable increase and competitive pressure as the traditional life players continue to pivot to.
Words medical products after being hit hard by the low rate environment.
The same dynamics continue in 2020 and as a result, we have adjusted our product and marketing strategy Accordingly.
Our 2020 product launch plans include the introduction of a fresh approach to cancer writers that greatly simplifies the product design by bundling coverage writers for ease of sale and meeting customer needs.
This enhancement is also available in the Japan post system and as tailor made for their unique distribution model once returning to full strength.
We've decided to accelerate our medical product refresh from 2021 launch into 2020 launching in the fourth quarter.
While this will have a modest impact on 2020 sales it positions us better as we head into 2021.
The refreshed product expands coverage and fills a gap with nonexclusive agencies that offer higher premium and more expansive benefit structures to their clientele. This move accelerates approximately 3 billion yen of product launch spend into 2020.
As discussed during our outlook call. We have also set aside funding to strengthen the associate channel our largest sales contributor.
Investment includes technology and marketing spend in order to leverage our 22 million policies in force and 30000 corporate groups to upsell and cross sell more effectively.
Finally in an environment of low interest rates and related pressure on premium growth. We continue to work on our long term expense structure.
We are building out agile teams focused on customer experience enhancements administrative efficiency and go to market productivity improvements for example, the work of our agile teams has successfully reduced Japan's product launch cycle by over three months.
Separately, we have a medium term plan to go paperless in our main operating centers and ongoing digital initiatives that required continued investment over the next few years.
We believe the most accurate way to track our expense ratio is when adjusting for paid up policies.
We anticipate our adjusted expense ratio will trend down gradually beginning in 2022 time frame.
Well, we're early in the year Japan's accelerated investment is not expected to change our guidance range for the segments 2020 pre tax margins.
Turning to the U.S. as medical and group benefit carriers pursue voluntary business and attempt to go down market. We believe it's important to build out a presence on the first page of the employee benefit marketplace.
Initial step in that direction is our entry into network dental and vision.
Along with entering a growth market. We believe this portfolio expansion will increase producer productivity and assist with recruiting and retaining agents and expand broker access.
We are taking a methodical approach beginning in 2020 with introduction in select states following by a national launch in 2021.
We expect to generate 300 to 500 million an incremental revenue over the next five to seven years.
Argus, our recently acquired dental and vision TPH platform ended the year with annual revenue of $84 million and normalized pretax margin of approximately 5%.
We expect this to be a growth area for the company as Argus has a strong reputation for servicing Medicare and Medicaid dental and vision members. In fact last week, we issued a press release under the Argus brand announcing the awarding of four new partnerships administering dental and vision benefits to new Medicare.
Vantage members like any TCPA model. This is a scalable business was strong return potential but has naturally reset our reported expense ratio by approximately 60 to 80 basis points.
We are actively investing in a consumer markets platform for the digital sale of insurance direct to consumer along with partnerships that leverage lead generation for agent assisted sales.
We are up and running with sales of 45 million in 2019, we're making important investments in a fully digital experience from acquisition to administration to policyholder experience, including a digital claims capability.
We expect production through this platform to double in the next three years.
Our U.S. outlook has assumed roughly 40 to 50 basis points of expense ratio drag in 2020, as we build out network dental and vision and consumer markets platforms.
We continue to invest in or operating platform in the U.S. with two critical deliveries anticipated in 2020.
The first is an upgrade to our enrollment platform used by our agents in focused on the small business market.
Upgrades are expected to provide more intuitive functionality and speed.
The second is the successful migration onto a modernized platform for Aflac group, which is our fastest growing segment.
Modernization includes scalability and automated backend processing and billing functions. We just recently began placing new groups on her modernize platform. These projects along with other key initiatives are also supported by an agile work environment.
Overall, we anticipate expense ratios will remain elevated in 2020 and 21, then trending down beginning in the 2022 timeframe as the topline response to our key initiatives and we begin delivering on expense efficiencies.
Turning to Aflac global investments as Eric noted that last year's analyst briefing, where it makes sense, we will explore team lift outs joint ventures in equity Stakes in asset managers that will then manage a portion of our assets.
In January we closed on a minority investment in Varagon capital partners, a leading direct lender to middle market companies. Our equity stake includes a mandate for up to 3 billion invested in middle market loans over the next three years. The mandate is consistent with our overall general account investment strategy.
Our minority equity investment will be held within our U.S. investments subsidiary with any associated returns running through the corporate segment.
At this early stage, we do not expect a measurable impact on our 2020 outlook for investment income or earnings [noise] I'll now hand off the Max to cover our financial results Max.
Thank you Fred.
We finished the year with a solid Q4 reporting adjusted EPS of $1 three up 1% year over year.
Underlying earnings continue to come through strong with no significant items to call out in this quarter.
As previously guided expense ratio ticked up in both operating segments.
Due to seasonality and as Fred detailed in his comments our continued strategic platform bills.
For the full year adjusted earnings per share increased 6.7% to $4.44.
The strengthening yen benefiting earnings for both at quarter end of year by two cents.
As a result adjusted earnings per share on a currency neutral basis rose, 6.3% to $4.42 per share, which was at the upper end of our upwardly revised guidance of $4.35 to $4 imported five cents at the end of Q3.
Adjusted book value per share, including foreign currency translation gains and losses grew 10.6% in both Q4 and for the full year.
The adjusted or are we excluding foreign currency impact was a strong 15.1% put a full year 2019.
Turning to our Japan segment total earned premium for the quarter declined 1.6%.
Selecting first sector policies paid up impacts and to pay medical policies sold in 2017.
Reaching paid up status as well.
However, we continue to focus on driving the quality and value of new business.
As a result are earned premium put a perspective protection and third sector products increased Daryl 0.6%.
Japan's total benefit ratio came in at 70% for the quarter with third sector benefit ratio coming in at 60.1%.
Both of these ratios are up on a year over year basis as these ratios will naturally bounce around a bit on.
On a quarterly basis and the comparable benefit ratios last year, we're very low.
Looking at the full year numbers, we're reporting a stable third sector benefit ratio and a decline in our total benefit ratio supported by mix shift.
Overall claims trends are still tracking favorably, but were less of a tailwind this quarter.
Digging into the details a lower lapse rate on our cancer insurance block led to an increase from future policy benefit reserve and we also experienced a slight uptick in incurred claims.
We do not ceded as a trend, but broader quarterly noise.
Our expense ratio in Japan was 21.7% 90 basis points higher than in Q4 last year.
Due to technology investments as well as sales and marketing spend.
The race was also impacted by lower reported earned premium.
Net investment income declined 1.4% in young terms. Unlike the previous few quarters. There was no significant coal income or alternative investment returns in this quarter to call out [noise].
The pretax margin for Japan in the quarter was 19.8%.
For the full year, we recorded a very strong. So you guys called the margin of 21.3% toward a high and of our forecasted range.
Turning to U.S. results earned premium was up 1.1% despite weaker sales results and 100 basis points decrease in persistency, which we view as temporary result of a large case volatility and replacement of an administrative partner.
Our total benefit ratio came in at 49.1% in line with reason claims trends and mix of business shift toward all accident product.
Our expense ratio into us was 39.9%.
The fourth quarter is a seasonally higher period for expenses. The increase of expenses in Q4 is due to lower unit cost capitalization higher DAC amortization and the inclusion of August which carries a structurally higher expense ratio in its benefits management business.
Net investment income in the U.S. declined by 1.6% due to onetime benefits sorry, due to onetime benefits from coal income last year that did not recur this year.
Maintaining consistent net investment income it's a very good result on the back of sending excess capital after the holding company as the final step in our planned RBC drawdown.
Profitability in the U.S. segment was impacted by the previously discussed elevated expense ratio was pushed down the pre tax profit margins is 16.8% in Q4.
For the full year, the pretax profit margin held up well and came into at 19.4%.
In our corporate segment. The main driver of improved results, it's higher levels of amortized hedged income.
Given by our enterprise call that hedging program.
Amortized hedged income contributed 27 million on a pre tax bases that this quarter's earnings with an ending notional position of $4.9 billion.
As a reminder, this program reduces the exposure to the yen lowers the absolute level of hedge costs and reduces our exposure to volatility in hedge costs.
Ultimately improving the risk adjusted return on capital put a group.
For 2020, we would expect this segment pre tax profit for the full year to be a loss of $55 million to $65 million.
This is $5 million higher than communicated on outlook call due to an updated and refined internal allocation of expenses.
With no impact on our total earnings.
[noise] in December we successfully executed a 38 billion of global yen issuance with a weighted average coupon of 80 basis points.
The proceeds will be used to redeem $350 million above 4% senior notes maturing in 2022.
Reducing our run rate interest costs by $11.2 million on a pre tax basis.
And extending our debt maturity profile.
Turning to capital.
Japan's estimated solvency margin ratio remains above 1000% and our estimated U.S. risk based capital ratio at quarter end was north of 500%.
With the announcement of our Japan branch conversion to a subsidiary we pledged to remove excess capital out of the U.S. antibody targeting 500% RBC, but end of 29 team.
The fourth quarter model the successful completion of our RBC drawdown plan, where we moved $1.75 billion on capital from Aflac Columbus to Aflac incorporated supporting our capital deployment and risk management activities.
As we've noted previously we have room for additional capital optimization as the risk profile, a U.S. business suggests an RBC closer to 400% is more appropriate.
We ended the quarter with approximately 3.4 billion of capital and liquidity at the holding company net all pre funded debt.
This is slightly lower than previously guided for.
The deviation is primarily driven by a voluntary pension fund the contribution to maintain strong funding levels on the face of lower discount rates.
And our decision to tactically buyback some additional shares.
In the quarter, we repurchased 8.9 million shares for approximately $470 million.
There's no change to our debt to our guidance for repurchase a 1.32 1.7 billion in 2020.
Finally, let me comment briefly on guidance with our full year 2019 results into books.
There are no material changes from our 2020 outlook call. This past December.
Well there on national movements in our plan, we affirm all materials segment margin contributors, including ranges for benefit ratios expense ratios net investment income and pre tax profit margins.
Innovation, we affirm our range for share repurchase and EPS guidance, recognizing we have adjusted the currency neutral range for a final average exchange rate of one on 907 yen to dollar.
As you May recall, our outlook coal guidance was set at assuming 110 yen to dollar. Thus we have adjusted our guidance accordingly to $4.32 to $4 in 52 cents per share.
Now, let me turn the call over to David for Tonight, David Thank you Max.
We're now ready to take to take your questions, but first let me ask that you. Please limit yourself to one initial question and a related follow up to allow all participants an opportunity to ask a question.
We will now take the first question Nicole.
Thank you first question is from the line of Nigel Dally of Morgan Stanley. Your line is now open.
Great. Thanks, and good morning, with medical Fred you highlighted the competitive nature of the medical market you from what I understand medical is being competitive full with some time for years, but from your comments. It appears conditions of heated up some more just wanted to make sure I got that right and if so is it just more crowded more participants, although I will say things from companies actually get more aggressively.
Pricing as well.
Yes, it's a thinking Nigel it's it's not more competitors are really more specifically, what we've seen if some of the large and respected domestic life insurance players.
Have moved towards refreshing their medical products as well as enhancing.
Compensation or basically incentives if you will around the sale of medical product. We think this is understandable given given that the interest rate environment has made it very difficult to sell a young based life insurance products.
And so that's really what we're starting to see take place.
Yeah, we have distribution unique distribution through exclusive agency arrangements and so most of what we see in the way of competitive dynamics is in the nonexclusive agencies that we sell through.
And perhaps to a lesser degree some of the banking channel, which is very small for US right now and so that's why the new product refreshment is meant to be more competitive, but also particularly make us more competitive and non exclusive agencies interestingly, it's not really a pricing war, it's really more enhancing and enriching benefits going after.
For a marketplace, that's able to pay more premium for enhanced in broader coverage capability and so that's the gap, we're looking to fill and that's where we see the competition.
That's great. Thanks.
Thank you next question is from the line as Andrew Leaguer Ma'am. Your line is now open.
Hey, good morning.
Just going back to capital.
Women, so what would be the timing.
Just for Max commentary of getting the RBC down to 400% now being in excess of 500% what would be the timing.
Getting that figure down and.
I guess your guidance implies about 71%, 70% capital return this year.
Why not picking up a little bit more.
So yeah, Andrew first of all let's step back and realize that we just finished the endeavor that draw down all of them.
Yeah, the capital that was generated through the yeah branch conversion.
And we are now in a position to for the first time have a clean blue book that we have print thing and that we them Tim take to regulators to rating agencies etcetera. So we will then have clean financials on a statutory basis and that we can discuss with these constituents.
Yeah. So we will have these discussions it add throughout the year and Dan we don't feel that we have a rush to bring it down 2% to 400% range.
Yeah right now, we've given where we are in this cycle and we feel that holding strong capital levels is a benefit to us. So I would expect the to travel downwards towards 400% overtime, and we will not initially and pull capital out and broader.
I would like to see that the growth out of business and will consume that capital and take us down to 400%.
I see some growth of business not so much.
[noise] extracting the capital.
Correct.
Okay, and I think Fred you were alluding earlier too.
Business.
Could you talk about some of the initiatives there and the potential to impact premium in the United States.
[noise] so the referenced that I made in my comments was what we have been seeing for a while now not surprisingly in particularly if you listen to other.
True group carriers calls.
We're seeing competitors in that space or look to move into the voluntary space and look to move down market is sometimes with success sometimes without.
That also leads to a level of bundling at times square Trueblue players and even helped players will bundle voluntary product with their core offering.
And so what we have been doing is looking at making sure that we have an answer to that type of competitive dynamic first and foremost our voluntary benefit programs on a group basis tend to be very competitive and desired by employees and HR professionals and so we tend to be very well in that space is the fastest growing.
Part of the company.
But in order to combat bundling type dynamics, we need to have a a broader solution that includes dental and vision and also true group life and disability.
Right now we have a partnership Entre group life, and disability, where we offer the product and partner with the or a mess on the administrative side and really we need to involve that plans evolve that platform. So that it's more competitive and able to fight off that type of dynamic. So again, we are competing very well in that space, but we think we have more opportunity to grow if.
We build out those programs.
Fred do you think that at that at some point in the next two three years you could see a very material impact on the top line from a.
Product like group life.
Realty.
Too early to tell on that topic I think right now our focus primarily as driving earned premium growth in the dental and vision space. Because obviously, we've made a transaction in that space built out the platform are starting to on a starting to build out that.
State by state platform to generate $3 million to $500 million a premium over the next five to seven years and so that's that's right now the focus I would say to a lesser degree we would expect to pickup or in premium over the next three to five years on the direct to consumer and lead generation platform. Those are incremental adds remember.
Our core business, we still intend to grow earned premium there through the blocking and tackling of building out our platforms in a in group voluntary as well as the individual a voluntary business, but incrementally it's focused right now in dental and vision and ER and on consumer markets true group will evolve over time, but where it's too.
Early to pinpoint earned premium on that at this point.
Thanks, a lot.
Thank you next question from the line Jimmy Bhullar of JP Morgan. Your line is now open.
Hi, Good morning. So another question on Japan sales and obviously, you had mentioned and everybody expected cancer sales to be fairly weak given the pool situation.
I thought medical fields were a little weaker than expected as well and you mentioned the tax change.
That might have heard demand what's your view on how that thought it's performing and then also given that you're.
Updating the product later this year should we assume that as the year goes on historical moderate because people made or agents might lead to the new product do start pushing it again.
I think of Aflac, Japan can take that question. So, let's see over there who like to Koji Youre going today I would tell like to do this.
No it doesn't open a clinicals most.
Courage and honor.
No one can cause the skus is as good as wonderful. So let me explain a little bit <unk> medical insurance physical goods in your scale can also assessing couple stuff happening for new stuff I don't know took that you're going to keep those must not our exclusive agencies. The new rider that we've implemented last year as it worked very well Twitter coverage for.
Hey, listen policyholder experience, but also nothing much stuff and so different words positive rate than what do you guys I.
Well so how you will cover guidance document personally don't even know goals and you will do I think you'll get the months however, non exclusive agencies.
Actors have expanded their contracts and that has really been hitting us hard there's going to bleed over 1 million barrels a day or again is on your.
No no, but also you mentioned something else. So that's the reason right at the positive order increase there have been medical has slowed down [laughter] weaker sales that's going to goes now doesn't have goals.
I didn't alumina do since it was asking why doesn't like 11 condensate.
Clinical Dakota, and because the fair at the current situation, where nonexclusive does your fee for expanding and got negative impact could offer it to impact our exclusive agency no don't go down sort of Dominion Uli, who do this is Doug can you sort of not doble too when you say hi, gentlemen.
Thank you.
We will do is to make improvements.
Our new medical insurance, if it by having more in rich.
Hi, rich to really gave Richard could be competitor when all was will not only constella modern eco mine on the Glasgow analytical target nothing today.
And in terms are they actually recoveries that we currently offer [laughter] before that hiring to their family we are not able to disclose the details Hello.
Turning to sort of level profitability. Despite the weak on that them. However, when I can see in fact, we would like to increase their competitor [laughter] competitiveness to the top level [noise].
[noise] Georges that's all from.
And thread anything on just a likely weakness as you go through the year people the agent that agents sort of holding back from pushing the product in anticipation of the new offering.
I don't think we expect any material dynamic in that respect either holding back or what have you I think right now our cancer product, particularly with the right I'm sorry medical product with the writer strategy remains very competitive and are in our core a associate platform I think I've.
I would remind everybody that since we moved to a writer strategy.
The reported sales naturally declines because you're selling a writer and we only count the writer premium as a sale as opposed to the full policy. So please keep in mind that we continue to add economic value throughout the year by maintaining policies, having better persistency and then adding writers to our core policies. So economically we continue to.
Push forward on medical even though the sales look a bit dampened due to the writer strategy that hasn't changed that will still remain popular. We just think this particular gap in our product is a good one to fill so we've accelerated into 2020.
Thank you.
Thank you next question is from the line of Humphrey Lee Dowling and partners Your line open.
Good morning, and thanks for taking my questions are I've a question related to U.S. So so in your prepared remarks, you talked about so being a little bit soft and I understand is the dynamics of some of the the agency and broker relationship care management as you've done a through 29 team, but I was just wondering have you seen any kind of changes in.
The company and competitions as well and kind of how we should think about it. It's you kind of going into 2020.
I'll ask a rich Williams to take that for us. It's okay. Thank you Humphrey for your question. So first of all the as we've discussed at SAB and September or results finished the year as expected.
And we had shared the drivers in 2019 be exiting partnerships large case volatility and some headwinds with average weekly producer on a positive note our broker sales growth as well as our consumer markets contribution or two areas that we're very pleased with.
And also as we finished the second half of the year as we focus on producer growth. We're encouraged to see career recruiting a growing both those quarters from a competitive dynamic.
As spread alluded to a with medical and group benefits carriers getting into the space.
This is another opportunity for us.
To to be at the table and we're excited about our progress with dental and vision and the ability to also offer a life and disability. So what I would say, we're speaking balance both on our core supplemental products and also being able to provide benefits solutions on the front page benefits.
Understand and then in terms of the elevated expenses in the coming couple of years like should we think about it kind of in terms of elevations more like towards the upper hand off to your guidance range for 2020, and 2021 before Oh normalizing 2020 students at the way that we should think about it all.
The elevation be above and beyond what youre kind of guidance range or upper end.
I would say, we certainly don't see it above and beyond the upper end of our range. It will naturally fluctuate within the range.
But usually when we set those ranges, it's plus or minus around our actual financial plan target.
Those plans can evolve and of course performance can evolve, but I would not have fixed rate instant at some spot within the range or what I can say with confidence as we wouldn't expect to be above it.
And again these investments are all I think where you're going to see eventual benefit in the spec expense ratio is really driving driving the topline most of the investments that we're making both operationally as well as a course and the incremental.
Projects that we have around dental and vision and a direct to consumer are meant to drive the top end, where the revenue side of it and that's where I think we'll start to achieve a turnaround in the expense ratio.
Got it thank you.
Thank you next question is from the line of Erik bass.
Research Your line is now open.
Hi, Thank you first just one follow up I think on Humphreys question. Fred You mentioned no change to 2020, Japan margins, despite bringing in some additional product launch spend related to accelerating the medical product timing is there something offsetting this or does it just push you a little bit towards the lower end if the range.
We do have a little bit of an offset a in the sense of a little better revenue dynamic as persistency was a bit better coming off of 2000.
19, but also have locked in a little bit better net investment income coming through Japan.
And that has helped us to accelerate some of that spend or without impacting the the bottom line that much but again most of the commentary is really important around the range, meaning we don't see really any change in the ranges, but again will naturally fluctuate within the range.
Got it. Thank you and then can you comment a bit more broadly on your aspirations for investment management do you want to potentially explore commercializing you're offering at some point in looking to manage assets.
Third parties or other insurance companies or do you see the investments and properties like Varagon more as a way to source assets and just participate in their growth.
You know I I'll I'll I'll make a couple of comments, but then ask Eric to expand on it I think we we have not made a fundamental decision to commercialize our institutional asset management capabilities, but we are absolutely looking to leverage what Eric and the team built over the better part of eight plus years now.
In New York and in Tokyo, and really what you should think of these strategies as a is a natural extension of our external manager program.
If you think about it we moved assets that we have less of an expertise into external managers and it's quite naturally that we will from time to time run across teams and managers that we find attractive enough to where we want to hold in equity interest along with mandating them on investments. So that's really more of the strategy is a natural extension of what we have in a way of or.
Cities, but Eric I don't have that covers it or if you have anything else you want to add from your perspective, I think bread coveted perfectly.
No aspirations in the traditional sense, Eric as you stated it commercially for our teams to be a third party asset manager that's a very tough business. There's a lot players, but where we can differentiate ourselves is in the selection of asset managers for our balance sheet.
And how we earn income for Aflac, Japan, Aflac U.S., but if we're able to lever that into examples like NXT varagon and potentially others in the future, which we see those opportunities will not only improve the income up the balance sheet for the two insurance operations.
But will create a revenue streams from owning those equity stakes and eventually potentially some some upside as well. So so in that way, we kind of have exposure to the third party asset management business indirectly through those joint ventures or equity ownership.
Got it thank you.
Thank you next question is from the nine Suneet Kamath of Citi. Your line is now open.
Thanks, just a question about Japan, historically, you guys have done a lot a market research on brand and trust and a lot of those dynamics and so my question is given everything that's been going on with Japan post.
Has your research pointed out any impact on Japan, Japan post brand in Japan, and if there is do you worry about some kinda spillover effect on the Aflac brands.
Oh this is saying, yes, let me just say and then I'll have then follow up or.
That Oh of course, we worry a little bit, but all indications from everything we've seen it pad.
Note that on.
Our brand because as you've seen in the media Oh, we were excluded from any of the issues concerning that.
I feel good about that I think the longer it goes on.
The more potential there is for issues, but I do believe that.
The Japan post is on these issues resolving.
Any issues with the consumers and ER I think the change in the management team and there.
Focus right now it's been viewed very positive Bob public and so I think it will all take care of itself in the next.
Six months or so but oh.
So he day or are they might want to speak on this.
Hi, I'm not going up on quoted to you. This is for either from Africa, Japan.
[laughter] semesters she doesn't need these tiny Brandon so I'm doing it goes on so system. So we're not thematic let me just at a little bit in January we have conducted a consumer survey on our brand. So Glenn Kinda accomplished looking you considered as of Monday, I know who needs to stay too.
Someone I thought it.
Among the people who recognize the media coverage on Japan Burke insurance issue since last year, that's not going a bit and when you guys did and let it go mostly still I know they look unethical you still Uh huh, Okay. That's it got.
They were very few people, who had a negative read about aflac brand based on GAAP media coverage on tape yet because I think you know I know you bought simple.
Specifically, there are only 2% responsibility for negative impact on our frac spreads because I think look I know.
Okay. So coupled with you know and one day, they often asked a little bit Antoni ties and those that do not take the last night.
Total company steam so in other words, we have confirmed that there has been no impact on African bring on [laughter] based on Japan personal insurance product. The issue is or what is that so for me.
Okay. My follow up questions just on the Copayment increase that you talked about in your prepared remarks, I guess for the elderly population in Japan.
We've heard about this at different.
Different periods in the past in terms of the government wanting to do that.
Does it feel like it's got a little bit more legs. This time in terms of actually happening or any color around that would be helpful.
Yes, Oh, well, what I would say is that there seems to be more activity.
In that regard predominantly about people living to be 100 or add as you probably remember from the past they kind of send up probably wants to see what's the reaction is publicly sometimes.
And it's too early for us to tell but my gut says that.
That there's more of an interest now than there has been in quite a while we'll have to wait and see but they do have issues with budgets are and their deficit that they've created and how they're going to control that so certainly I think there they're trying to find out where.
And how they will attack those issues and this is certainly one way to do that by increasing the copays and deductibles, but don't walk away from this call thinking that this is a done deal and it's going to happen. We don't know anymore than then you know from what we read in the newspapers, but in talking with <unk>.
Our people I think it's a reasonable thing.
Thing for them to be considering and one I think that has a much higher profitability then in the fat past few years when it was a much lower chance of it happens.
Hi, Thanks.
Okay.
But I picked up on the boy. This is once again this is created from Africa, Japan.
Don't do it shows equal there can you comment on Chicago Silicon, although they still can you go to nor do they did as I said ocular Curtis equal to hike any [laughter] backdrop in Japan rig that is government friend funding at the current the in financial [laughter] financial issue from increasing medical.
<unk> cost in the first will ever since John.
This is Dave this is I guess as well, so Craig food and animal did.
Totally open another great quarter isn't look we will consider go to those any it's I've also said I don't know quoted as I did not to put his Lps that before they quoted is I know you dorky equal stand the scaglione 30 from Oklahoma.
Well I didn't mean street I bet administration is trying to do is under the name.
Healthcare reform, if all the generation, where he led the imitation is trying to do Easter Moody's page [laughter] I'm wondering elderly population increase to willing to work and secure employment and those people haven't been supports their social welfare system instead of being the recipient.
And that is the reason right at the same time.
I'd administration is trying to increase.
The company medical feet on the elderly elderly population.
So it does little to come on in order to open a suicide, you're not going on I will say Phil.
Looking is causing you touched on it they must still exists and this is something that is being covered in the meeting right now as a result, maybe of the consumers are becoming interested in this type of on media coverage.
And then as it will say doing recorded I know you booked on the no no. It was like that so.
So did you not FEMA.
So the focus.
The discussion right now is.
There there will be any or could be increase for the population is 75 or about <unk>.
What do I know what is on equals done on the adult opened at American State Bank because it isn't all day because this is a very difficult reform attributes will require [laughter]. They increased elderly, whom then we'll get on I know Theres a couple minuses. So my assumption is that this discussion we will continue for some time so.
Is it safe, though still on vehicle that to assist it really is done kind with it I got unless it goes I used to and you know you had submitted you say needed and you know nemanja, you'll need it's only been decided to finalize statements are done the government's intention is to weren't to.
Addressed the issue by the time, the baby Boomers I read a different age group from 2022.
That's all for me.
[laughter].
Thank you next question is from the line of John Barnidge Viper Sandler Your line is now open.
Thank you a productivity as listed on page 19 of the supplement.
Surely increase I guess theres, a seasonal nature to this but it was definitely higher than the last couple of years no with the strong economy recruitment engage in may be harder given the commission nature. So I was just curious any commentary you had on that.
Teresa you Wanna, Yeah, I'll start and then I'll I'll hand, it to to rich one of the things that we've been working on that we've talked about in the fab and then other calls is our our enrollment tool and Oh, we have invested a tremendous amount and those tools to drive pro.
Activity for our agency fourth we're also investing in third party tool.
For enrollment so that we can increased the productivity of those enrollments as well so that has been a focus for our administrative side too.
Support what rich and his team that's doing from a growth perspective, you have any other comments the only other comment that I would say Teresa and John is that in the fourth quarter, we see productivity spike so.
Activity in 2018 in the fourth quarter over 17 was up 5.1% and in 2019 in the fourth quarter. It was up 4.8%. So the productivity, we see is pretty consistent where most of our field force is working as that's the larger part of our sales for the year I.
I think it's important for you tell them about the changing compensation at the management level to try to push productivity.
For new associates, absolutely good good point, Dan So first and foremost we communicated to our field a in the fourth quarter of 2019 that we were aligning all compensation from associates through their management hierarchies, all the way up to our highest levels towards producer growth that is something.
That had been missing for several years.
And you would seem to in sort of our inconsistent recruiting and producer growth results. It's not a quick fix but it's one that we believe it's going to have positive effects and were series. It seems the near term you know positive indication and that will drive that average weekly produced growth, Yes picture.
Uh huh.
Great. Thank you.
Thank you next question is from the line as Alex Scott Goldman Sachs. Your line is now open.
Hi, Thanks for taking my question Dan here [noise].
First one I had was just from the third sector benefit ratio in Japan, Yeah. I was just interested in light of the comments, you're making about the competitive environment some of the domestics.
Pushing a little harder on on the medical in particular.
I I mean, what's being price in the new product in terms of like hospital days stayed on the cancer side I mean.
It's a medical relative to the trends you're seeing I mean can can you keep that benefit ratio stable or will the are you know well there have to be natural kinda upward pressure on that overtime.
You know quite quite honestly, we have been pricing for quite awhile now to mirror the improvements in morbidity that we've been seeing in Japan, but are we continue to see actual to expected.
Results run favorable ER, which implies a continued level of improvement in benefit ratios.
But we've been saying now for a while that particularly around medical that we would expect some level of stabilization of benefit ratios in other words, there's a there's a point at which you would expect.
That to normalize to some degree a in so there's been a slowing down gradually movement in the third sector only benefit ratio that is improvement in the benefit ratio. When we think that's illustrative of both pricing actions as well as a natural slowing down of the pace of.
Shrinking hospitalization stays et cetera.
Having said that these are still products that are priced at very attractive returns relative to our extremely low cost to capital in Japan, and as a company and so the economic value being added by every policy. We put on our books is quite significant given our scale.
On the and the performance so.
That that that gap, if you will between cost of capital return on capital remains healthy and allows us to be aggressive where we need to be but as I mentioned earlier, we do see pricing pressure, but frankly at the moment right now it's really product design type pressure, which is something we can react too quickly and why we accelerated the medical product refresh.
Cash into 2020.
Got it and then maybe just a quick follow up on these potential susser, a social security changes I mean is your view still the cancer and sort of medical policies with maybe a nursing care writer takes takes care of of the nursing care piece of this and the best way or you know where you're exploring.
In other types of products, maybe standalone nursing or something like that that that would potentially garner more demand from that kind of a change.
I'll, let my Japan colleagues answer, but from my perspective, I would tell you that right now our answer is just as you say its attaching care or nursing care writers to the medical product that allows the buyer to age with the lies the policy to age with the buyer.
Everything from the younger side of the cohort, which is interested in income or disability type protection to core medical to then as the policyholder ages naturally attaching writers related to nursing care, we think thats the best on a risk adjusted basis, because as you can imagine that type of risk as well.
Dementia type risk is one that we want to stay away from and as a result, the supplemental nature of our policies. The limited benefit structures of our policies. The fact that is attached to a high return medical base policy all of that strikes us as the best way to address it.
But we have to continue to explore what opportunities we have with an aging population.
And we'll continue to do that but it's going to be done in a risk adjusted way.
Got it.
Thank you. The next question is from the line of Marcos Landau Freeman James Your line is now open.
Hi, good morning, Thanks for fitting me in it in the recall.
I just want to drill down on U.S. fills in Oh, I Hope you guys. Good to give us some more color on sales results for distribution channel and if there is it was any one channel that exceeded expectations when the sugar.
Yes. Thanks for the question so as we alluded to earlier the areas, where we saw productivity was broker sales and consumer market sales a broker sales were strong for the quarter as were consumer markets and then obviously with our associates.
Agency distribution channel it was lower than anticipated and then I'd you know because we've alluded to also our mix of business is moving gradually more towards brokerage.
And that's been doing that over the last 10 years in 2019 was consistent with prior movements.
Got it and my follow up I think you mentioned the Argus platform generated about 84 million revenue last year and as I'm looking at your 2020, I'll look I guess your guys or should we were basically flat revenue growth.
I was hoping maybe you could bridge to grab between that and your long term target of 300 or 500 million.
Is that just a function of a slow ramp up is there anything else would you notice we give a sir.
Yeah. The it I'm actually glad you asked that question because it allows me to to be very clear on this don't confuse Argus is TCPA or administrative platform with the growth expectations of our dental and vision business in other words, what we bought when we purchased Argus was a administrative.
But what we believed to be a top notch administrative platform that simply administers Medicare Medicaid dental and vision products on behalf of other large typically health organizations and that is a traditional TCPA administrative only business.
And not a not a conventional risk taking business that business, we would expect to steadily grow overtime and in fact, even the purchase prices is designed in a way to incent growth rates separate and apart from that though is the dental and vision business, which is the actual insurance business.
That is really aflac strategy, leveraging that platform to build out and sell and grow premium on aflac dental and vision and that's the three to 500 million were pointing to and keep in mind at the PPA revenues that is running not running through the premium line. So one Fred talks about and premium growth.
That does not include a TCPA revenue, it's coming through thieves into other income line.
Got it thank you.
Thank you next question is from the lightest Tom Gallagher of Evercore. Your line is now open.
Good morning, I'm, just looking at their distribution a disclosure on channels for Japan in the supplement it's a little hard to know how important the independent agency channel is afraid where you reciting the increased competition in medical.
I can you can you give us a sense for what percentage.
Of Japan sales sales through through the independent channel, where the competition is has escalated how large.
And how important that is for Aflac and <unk> and just related Lee.
Do you would you also expect similar competition with the new rider or cancer product launch, where do you think there it's going to be less competitive there.
I can I can answer the second part of your question I'm Gonna toss to Japan to answer the the breakout of exclusive agencies versus independent agencies, but you know we intend to be competitive in every channel period, even on the exclusive front because we think that's that's important but obviously when you get to the nonexclusive channel.
Channels here, there's more of a spreadsheet environment.
You have to be constantly conscious of the fact that we are facing competition in those channels is nothing new that that is been going on for several years now it's really just more of that we need to react and react more quickly to product development moves as we see the competition turned their attention to more proactively going after medical product.
That's where for example closing down early or a shrinking the this product launch cycle by three months really helps because we're going to need to be more nimble as we move forward and that's in this is an example of being nimble. The cancer rider. We think is actually a very interesting dynamic on the cancer product and will be interesting to track how we see sales.
Going there that rider is meant to simplify a series of writers that address different types of tenant cancer in cancer treatment to really simplify the offering a and we think that could help both in the sales process as well as in ease of the buying public understanding or the the.
Oh risk benefit if you will or the benefit of what they're paying for so we think that could be a very good writer. It's also a writer that adjusts with the amount of a risk you have as you age. So as you know as you age in Japan, a greater proportion of your medical costs are covered under the national medical system and that's probably.
We'll adjust accordingly, which makes it more affordable and more practical as you age in Japan to buy the cancer writer.
So again, it's it's an example of both putting out of a very marketable product, but also adjusting to the aging population with our products.
Coweda son, or Koji, if you want to comment on the relative proportion of independent versus exclusive agencies. If you have that data handy.
Newport.
No moved on what they think they must Bulls eye you do again.
And as I only know some unbelievable.
I'm doing jono disillusioned with them.
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Good if it wasn't on that.
Humbling Justin this is currently.
Looking at their fourth quarter performance and get some gains in individual Asian food accounted for more than half for the medical trend there.
When you drill so lucky visiting all up and.
No no nuclear just wondering on I didn't know the identical oneml, you'll get the Buenavista, but then the booster fierce competition is of course.
Non exclusive independent because you were agencies [noise].
No no no one can you constantly.
I'm not going sort of I don't feel good that when it does not so you've chosen sounds that at the digital can do and I've. Given you guys are however, as you may now we are very strong in occurs insurance market fair, we are not facing a fierce competition in terms insurance Marcus hook on an elegant ideological use.
Yes I.
No you don't it takes on many others don't them all.
She Moshe nimble, we ask US is done many notice improve customer seasonal he says.
In terms the truth insurance revision gets turned this product group you very easy to found and that would expand or segments, because even use their agents will be able to asparagus [laughter] simplified product that's going to kill when it comes from Morgan. Please go ahead.
Okay.
So the meaning the launch of this product if not typically run over competitors rather.
And our sales are not provisioning in the markets.
For me.
I think I hope that answers your question.
I wanted just thank everyone for joining us for this extended call today. If you have any additional questions. Please feel free to reach out to Investor Relations, we'll do what we can't do respond and look forward to speaking to you said, thank you very much.
[noise]. Thank you that concludes today's conference. Thank you for participating you may now disconnect.
[noise].