Aflac, the supplemental insurance giant, just released their Q1 2024 earnings, and while the headline numbers look solid, there's a deeper story playing out, particularly in Japan. The company openly acknowledged challenges with sales, but what caught my eye was an almost casual mention of "stronger underwriting discipline" in the US.

Now, for most insurance companies, that phrase wouldn't raise an eyebrow. But Aflac? Their supplemental products, historically, have been cash cows, boasting high margins and seemingly impervious to the usual pricing pressures. So, what's changed? Why is Aflac, suddenly, acting like every other insurance company in a competitive market?

The transcript offers clues, hinting at a deliberate shift in strategy. While Japan struggles to revive sales amidst an aging population and new distribution challenges, the US is quietly undergoing a transformation. Aflac is choosing to walk away from certain accounts, specifically "less profitable larger accounts" plagued by high employee turnover.

This seems counterintuitive at first. Why forgo top-line growth in a business known for its profitability? The answer lies in the pursuit of sustained, long-term value, a strategy that prioritizes earned premium growth and persistency over chasing every fleeting sales opportunity.

Here's the hypothesis: Aflac has identified a hidden drain on their profitability – high lapsation accounts. Accounts with high turnover generate a deceptive short-term benefit ratio. Since employees constantly churn, fewer claims are paid out. However, this masks a far larger expense burden. Acquisition costs for constantly replacing departing policyholders eat away at the bottom line, leaving little, if any, actual profit.

By refusing to underwrite these accounts, Aflac is, essentially, surgically removing a tumor. This may create a temporary dip in sales, but it strengthens the core of the business, freeing up resources to enhance existing policies and invest in products with a naturally lower expense ratio, such as group life and disability.

The numbers paint a compelling picture. US persistency jumped by a substantial 80 basis points year-over-year, reaching 78.7%. This indicates customers are holding onto their policies, a direct result of perceived value and improved underwriting. Furthermore, net earned premium grew by a healthy 3.3%, exceeding overall sales growth and demonstrating the power of focusing on the right customers.

US Persistency and Net Earned Premium Growth

This chart, derived from Aflac's Q1 2024 earnings, illustrates the positive impact of their strategic shift in the US.

Let's not forget the ripple effect. By purging their books of unprofitable accounts, Aflac gains leverage in negotiations with other clients. They can confidently pursue premium increases or product enhancements, secure in the knowledge they're no longer chasing volume at the expense of value.

This subtle shift in US strategy may hold the key to unlocking Japan's potential. By learning from their American counterparts, Aflac Japan could apply the same principles, prioritizing high-quality, persistent accounts over short-lived, low-value sales. This aligns with their stated focus on attracting younger customers, a demographic statistically more prone to changing jobs and therefore, a prime target for this new approach.

While analysts focus on the headline sales numbers, they may be missing the forest for the trees. Aflac is playing a long game, building a fortress of sustained profitability. This "secret weapon" of disciplined underwriting, quietly deployed in the US, might be the key to conquering both the demographic challenges in Japan and the intensifying competitive landscape in both countries.

"Fun Fact: Did you know that the first commercial pet insurance policy was issued in 1890 in Sweden? Aflac's got a long history, but not *that* long! And who knows? Maybe Aflac will even start selling pet insurance in the US, building on their new partnership with Trupanion in Japan!"