Aflac Headquarters building in Columbus, Ga. Aflac’s headquarters, in Columbus, Georgia. (Photo: John Disney/ALM)

Aflac did almost as well in the second quarter as in the comparable quarter in 2019, and it’s worried about a 12% drop in spending on claims and benefits.

But executives at the company say that, in some ways, the COVID-19 outbreak in the United States is starting to look like the company’s pandemic stress test scenario.

Fred Crawford, Aflac’s chief operating officer, today told securities analysts that, when Aflac has conducted pandemic stress tests, it has pictured the United States facing 6.5 million confirmed cases of a serious disease, with 1.5 million hospitalizations and close to150,000 deaths.

Statistics from the U.S. Centers for Disease Control and Prevention and Johns Hopkins suggest that COVID-19 has already caused about 4.3 million cases and about 150,000 deaths, Crawford said.

“In short, we are unfortunately tracking to our U.S. macro stress test assumptions,” Crawford said.

Resources

So far, however, the level of actual Aflac COVID-19-related claims seems to be only about 40% of what the company would have expected, given the total size of the pandemic, Crawford said.

In the second quarter, Aflac recorded receiving about 5,000 COVID-19-related claims, with a total value of $31 million, or about $6,000 per claim, Crawford said.

About 80% of the claims were short-term disability insurance claims, and Aflac has not yet noticed any surge in COVID-19-related hospitalization or wellness claims.

The relatively low level of claims might be partly due to customers’ claim filing delays, but it might also be due to the relatively young age of typical Aflac insureds, Crawford said.

Crawford spoke at a conference call Aflac organized to go over the company’s earnings with securities analysts. The company has posted a recording of the call on its website.

Earnings

Aflac is reporting $805 million in net income for the second quarter on $5.4 billion in revenue, compared with $817 million in net income on $5.5 billion in revenue for the second quarter of 2019.

Revenue at the Columbus, Georgia-based insurer was down partly because investments produced a $170 million net loss, compared with a $66 million net loss in the year-earlier quarter.

The Aflac U.S. unit is reporting $426 million in pretax adjusted earnings for the latest quarter on $1.7 billion in revenue, up from $338 million in pretax adjusted earnings on $1.6 billion in revenue for the year-earlier quarter.

U.S. earnings increased partly because spending on benefits and claims fell 12%, to $646 million, due to COVID-19-related reductions in people’s use of health care.

Dan Amos, Aflac’s chief executive officer, said Aflac is trying to increase workers’ use of Aflac coverage by sending them explanations of how their coverage works, and reminders that they should file claims for qualified events.

Aflac is particularly eager to encourage the insureds to use their wellness benefits. Wellness benefits provisions typically reimburse the insureds for up to $60 for a covered routine doctor or dentist visit.

“The key time to do this is in fact typically in the third quarter, not just because of COVID dynamics, but because that’s also about the time when people are reviewing with their employer, their benefits and considering whether to sign up again,” Amos said.

The U.S. Economy

Aflac executives repeatedly talked about their uncertainty about how COVID-19 will affect the economy.

But Crawford did talk about the general shape of what U.S. economic strength line charts might look like.

“Our firm view is that we will experience a checkmark-shaped recovery, meaning a slow road to recovery, with pockets of volatility along the way,” Crawford said. “We have moved away from the notion of a V-shaped or even U-shaped recovery.”

Aflac’s Workers

About 50% of Aflac workers in Japan have already returned to working in Aflac offices.

In the United States, where case counts and hospitalization levels are increasing significantly in many areas, Aflac is being slower to return workers to their offices.

The company now is thinking about phasing in returns to offices in 2021, Amos said.

U.S Product Sales

New annualized premiums from sales of U.S. products fell 5.2%, to $323 million.

Here’s what happened to new annualized premiums for U.S. sales of some types of products in the second quarter, when compared with the year-earlier quarter.

  • Short-term disability insurance: $38 million (down from $86 million)
  • Life insurance: $14 million (down from $23 million)
  • Accident insurance: $41 million (down from $104 million)
  • Critical care insurance: $33 million (down from $72 million)
  • Hospital indemnity insurance: $28 million (down from $58 million)
  • Dental and vision insurance: $7 million (down from $19 million)

Crawford said dental and vision sales should increase

The company is preparing to offer dental plans and vision plans that offer contracted provider networks, and the company has already filed applications for those plans in 40 states.

Aflac ramp up sales of the network-based plans to small and medium-sized business as 2021 nears, Crawford said.

Customer Retention

Crawford noted that second-quarter insurer customer retention rates might look artificially good partly because of the federal Paycheck Protection Action benefits, which are set to expire Aug. 8, and partly because 23 states still have premium grace period rules in effect.

“We see the third quarter as a critical period,” Crawford said.

Agents

Overall spending on commissions increased to $332 million, from $329 million, but the average number of weekly producer equivalents fell to 4,252, from 8,121.

The average production per producer fell to $37,814, from $44,613.

Crawford said the agent count is down mainly because of the difficulties with getting new agents trained and licensed.

“Recruiting normally strengthens during weak employment periods,” Crawford said. “That’s been our history through say normal economic cycles, and it’s no different here. We can see a tick-up in eligible recruits and recruiting activity during weakness in the economy.”

But many states have stopped granting new licenses, or are processing applications slowly, Crawford said.

“So, because we recruit so many people across the country that come to us without previous insurance experience, that licensing becomes critical,” Crawford said. “It’s very different if you had a model that was recruiting previously licensed agents away from other insurance carriers, but that’s not our model.”

Money

U.S. regulators use the risk-based capital (RBC) ratio system to get an idea of how well-capitalized an insurer is.

Many of Aflac’s competitors have RBC ratios of about 400% to 450%.

Max Broden, Aflac’s chief financial officer, said the company’s U.S. operations have an RBC ratio of about 600%.

The top-level holding company has access to $4.7 billion in cash, which is $2.7 billion over what the company sees as its minimum liquidity level.

Amos’s Assessment

Amos made the following comment on the company’s results:

As a result of the global COVID-19 pandemic, many people are facing the most challenging times of their lives now for various reasons, and our thoughts and prayers are with everyone affected. This includes individuals who are among the confirmed cases, people who are on the front lines fighting the spread of COVID-19, those who are providing essential services, including our own employees — and everyone who is facing difficulties in one way or another. I never cease to be inspired by our management, employees and sales agents’ passion and sense of purpose when it comes to delivering on our promise and compassionately helping our policyholders when they need it most. The safety and health of everyone with whom we do business is our greatest priority. We will get through this together.

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