Aflac chief: U.S. sales model is broken

Aflac Chairman and Chief Executive Officer Dan Amos
Aflac Chairman and Chief Executive Officer Dan Amos Ledger-Enquirer file photo

Aflac Chairman and Chief Executive Officer Dan Amos had been keenly watching insurance premium sales in the U.S. sputter through the recession and into the nation’s economic recovery. But the performance simply wasn’t getting any better in recent quarters.

“He said to the sales hierarchy management team: If I don’t see a turnaround soon, there’s going to be strategic measures taken that you haven’t seen around here before,” said Robin Wilkey, Aflac’s senior vice president of Investor and Rating Agency Relations.

The CEO’s patience finally began to wear thin and earlier this year — with competitors’ business rebounding — he determined that Aflac’s U.S. sales model wasn’t working. In fact, it was broken.

“Disappointing” is how Amos — as he had in previous quarters — described the sales results in the U.S. An 8-percent percent drop in new annualized premium sales over the April-June period, and 6.4 percent through the first half of 2014, has the firm projecting full-year U.S. premium sales will drop at least 4 percent and as much as 8 percent.

Business 101 math is fairly simple. If sales drop, then very likely overall revenue and profits will as well. Wilkey said that was unacceptable for Amos, who has been with the company four decades and cut his teeth on sales.

That climate of frustration led to the decision by the company to dramatically overhaul its U.S. operation. The move was announced during Aflac’s second-quarter earnings release Tuesday, a report that showed the Columbus-based firm racking up a seemingly healthy profit of $810 million. The problem: That was down 8.8 percent from $889 million in the same period a year ago.

“Dan’s been doing this for 40 years and I’m sure it wasn’t an easy thing for him to come to grips with or make that decision lightly,” Wilkey said of the move to dump the firm’s system of commissioned-based state sales coordinators.

The coordinators are being replaced by company-paid employees called market directors, who will be eligible for bonuses. The current 76 state coordinators can apply for one of the 66 market director positions. Some states have multiple regions.

District sales coordinators and front-line sales associates will continue to be paid on commission as independent contractors. But Wilkey said Aflac will have more control over sales efforts by making the top management — the market directors — company employees and, thus, more accountable and responsive than their counterparts in the past.

“We will be taking on their budgets for their office management staff, for their office leases, and that type of thing,” she said. “So they’re going to have to budget the same way that I have to budget and everyone else has to budget around here.”

The company also will have much more control over recruiting, the lifeblood of any sales organization, she said. That’s been a sore point in the past, with Aflac counting about 70,000 licensed agents selling its products across the U.S. But, in reality, a much smaller number have been actually producing solid sales.

At the end of the second quarter, there were 9,353 individuals classified as “average weekly producers,” she said, meaning they contribute strong levels of sales to the Aflac pipeline. That number is down from 10,197 in December and 10,400 a couple of years ago.

“It’s sort of stagnated there for the last four years,” said Wilkey, acknowledging a priority when the new changes take effect Oct. 1 will be generating more sales reps in the field and, like their district and company-level management, making sure their compensation is among the best in the industry so they don’t jump to rival insurance firms.

Wilkey said she expects other Aflac employees, including the roughly 4,500 earning a paycheck in Columbus, to embrace the efforts to turn U.S. sales around and put them on a growth path. Some aspect of all employees’ pay, be it a bonus or other compensation, is tied to the success of the company, she said.

“So we have to do better here to support them,” she said of Aflac’s headquarters and Columbus support staff in relation to the sales operation. “We’ll be making some changes here also at the home office to better support them. That could mean adding additional staff or it could mean moving people from one area to a different area.”

Wilkey, whose job it is to talk frequently with Wall Street analysts who follow the firm, as well as those who own Aflac stock, said no one at the company should be taking this U.S. sales move lightly.

Asked if this is one of the biggest changes in sales in the firm’s nearly 60-year history, she said it is “THE” biggest she can remember.

“It certainly, in my 23 years with the company, is the largest change,” she said. “I think Dan would agree with that. And he has been right in the middle of all of this, because he understands the sensitivity of making a change of this magnitude.”

For the record, Aflac did amass $5.8 billion in total revenue during the second quarter, down slightly from the year before. And it will pay a healthy quarterly third-quarter dividend of 37 cents per share later this year.

But with its business in Japan in a transition from selling policies through banks to being sold primarily via Japan Post, that country’s postal service, there is added pressure to improve results in the U.S. About 80 percent of Aflac’s supplemental health and life insurance business is done in the Asian nation.

Analyst reaction Wednesday to the changes in the U.S. sales model varied.

John Nadel, in a note from Sterne Agee, kept a “buy” rating and $78 per share price target on Aflac’s stock. But, he said, the “very poor U.S. sales” could lead to “likely investor concerns that weakness in U.S. sales could result in lower earnings outlook for the U.S. segment in 2015.”

Steven Schwartz, in a note from Raymond James, said “Aflac’s domestic sales were, quite honestly, terrible” and that the company is “making the biggest changes to the U.S. sales force since the end of the Duck Bubble.” He continues to rate the firm’s stock “outperform,” meaning it should fare better than the S&P 500 over the next 12 to 18 months.

With investors digesting Aflac’s major news, its shares took a hit in trading Wednesday on the New York Stock Exchange. Out of the gate, they quickly dropped $2.61 per share, or about 4 percent, from Tuesday’s close of $63.14 per share. But by the end of the day, the stock had recovered somewhat, finishing at $61.38 per share, down $1.76, or about 2.8 percent.