David Young:

Good morning, and welcome. Thank you for joining us for Aflac Incorporated Second quarter earnings call. While I have your attention I also want you to mark your calendars to join us for our Financial Analyst Briefing at the New York Stock Exchange on December 3rd. Now this morning, Dan Amos, Chairman, CEO and President of Aflac Incorporated will provide an overview of our results and operations in Japan and the United States. Then, Max Broden, Executive Vice-President and CFO of Aflac Incorporated will provide an update on our financial results and current capital and liquidity. These topics are also addressed in the materials we posted with our earnings release and financial supplement on investors.aflac.com, including Max's quarterly video updates which also includes information about the outlook for 2024. We also posted under Financials, on the same site, updated slides of investment details related to our commercial real-estate and middle-market loans. For Q&A today, we are also joined by Virgil Miller, President of Aflac US.; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments. Before we begin, 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 discuss 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. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non-US GAAP measures. I'll now hand the call over to Dan.

Max Broden:

Thank you, Dan and thank you for joining me as I’ll provide a financial update on Aflac Incorporated’s results for the second quarter of 2024. For the quarter, adjusted earnings per diluted share increased 15.8% year-over-year to the $1.83 with a $0.07 negative impact from FX in the quarter. In this quarter, reinvestment gains on reserves totaled $51 million and variable investment income ran $1 million above our long-term return expectations. We also received a make whole payment adding approximately $20 million or $0.03 per share to our adjusted earnings. Adjusted book value per share, including foreign currency translation and the gains and losses increased 9.4% and the adjusted ROE was 14.3%, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment, net earned premiums for the quarter declined 5.7%. This decline reflects a 7.4 billion yen negative impact from internal reinsurance transaction executed in the fourth quarter of 2023 and 4.8 billion yen negative impact from paid up policies. In addition, there is a 1.2 billion yen positive impact from deferred profit liability. Lapses were somewhat elevated but within our expectations. At the same time, policies in force declined 2.4%. Japan's total benefit ratio came in at 66.9% for the quarter up 120 basis points year-over-year and the third sector benefit ratio was 57.8%, up the approximately 160 basis points year-over-year. We estimate the impact from reinvestment gains to be 140 basis points favorable to the benefit ratio in Q2 2024. Long-term experience trends as it relates to treatment of cancer and hospitalization continue to be in place leading to the continued favorable underwriting experience. Persistency remains solid with a rate of 93.3%, which was down 50 basis points year-over-year. This change in persistency is in line with our expectations. Our expense ratio in Japan was 17.8%, down 170 basis points year-over-year, driven primarily by the expense allowance from reinsurance transactions and continued discipline expense management. Adjusted net investment income in Yen terms was up 28.4%, mainly by favorably impact from FX on US dollar investments in yen terms, lower hedge costs, higher return on our alternatives portfolio compared to second quarter of 2023 and call income. The pre-tax more than for Japan in the quarter was 35.3%, up $490 basis points year-over-year, a very good result. Turning to US results, net earned premium was up 2.1%, persistency increased 50 basis points year-over-year to 78.7%. We are encouraged by early signs from our persistency efforts and we will remain focused on driving profitable growth. Our total benefit ratio came in at 46.7%, 140 basis points higher than Q2 2023 driven by product mix and lower reinvestment gains than a year ago. We estimate that reinvestment gains impacted the benefit ratio by 170 basis points in the quarter. Claims utilization has rebounded from depressed levels during the pandemic and are now more in line with our long-term expectations. Our expense ratio in the US was 36.9%, down to 210 basis points year-over-year, primarily driven by platforms improving scale and strong expense management. We tend to benefit from seasonality in the first half and would expect higher expenses in the second half. Our growth initiatives, Group Life and Disability, network, dental and vision and the direct-to-consumer increased our total expense ratio by 230 basis points. This is in line with our expectation and we would expect this impact to decrease going forward as these businesses grow to scale and improve their profitability. In just that net investment income, in the US was up 7.4%, mainly driven by higher yields on both our alternatives and fixed rate portfolios. Profitability in the US segment was solid with a pre-tax margin of 22.7%, also a very good result. Our total commercial real estate loan watch list stands at approximately $1 billion, with less than $300 million in process of foreclosures currently. As a result of these current low valuation marks, we increased our seasonal reserves associated with these loans by $14 million in this quarter net of charge-offs. We had six loan foreclosures and moved nine properties into real estate owned. We continue to believe that they currently distressed market does not reflect the true intrinsic economic value of our portfolio, which is why we are confident in our ability to take ownership of these assets, manage them through this cycle and maximize our recoveries. Our portfolio of first lean senior, secured middle market loans continue to perform well with losses below our expectations for this point in the cycle. In our Corporate segment, we recorded a pre-tax gain of $23 million. Adjusted net investment income was $39 million higher than last year due to lower volume of tax credit Investments at Aflac Inc. and higher volume of investable assets at Aflac REIT. These tax credit investments impacted the corporate net investment income line for US GAAP purposes negatively by $30 million with an associated credit to the tax line. The net impact to our bottom-line was a positive $4 million in the quarter. To-date, these Investments are performing well and in line with expectations. We're continuing to build up our reinsurance platform and I'm pleased with the outcome and performance. Our capital position remains strong and we ended the quarter with an SMR above 1100 % in Japan, now combined RBC, while not finalized we estimate to be greater than 650%. Unencumbered holding company liquidity stood at $4.1 billion, $2.3 billion above our minimum balance. These are strong capital ratios, which we actively monitor stress and managed to withstand credit cycles, as well as external shocks. US statutory impairments were released of $7 million and Japan FSA impairments were 10.4 billion yen or roughly $67 million in the quarter. This is well within our expectations and with limited impact to both earnings and capital. Adjusted leverage is 19.5% and below our leverage corridor of 20% to 25%. As we hold approximately 60% of our debt denominated in the yen, our leverage will fluctuate with movements in the yen dollar rate. This is intentional and part of our enterprise hedging program protecting the economic value of Aflac Japan in US dollar terms. We repurchased $800 million of our own stock and paid dividends of $283 million in Q2, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. Thank you. I will now turn the call over to David.

Operator:

[Operator Instructions] The first question today comes from Joel Hurwitz with Dowling & Partners. Please go ahead.

Dan Amos :

Max might just take that for chat.

Joel Hurwitz :

Okay and the cross-sell opportunity there with the third sector products?

Dan Amos :

Yeah, I think Aflac team nicely explains that. It's important that I say it, is remember it with the Tsumitasu product we are hiding a younger group less disposable income than does an older set of potential policyholders. And so whereas, with the older, we might offer the Tsumitasu product or another product and our supplemental for third sector product. With this group, we'd start by putting in one product, which would be the Tsumitasu product and then in a year or so later follow-up and add more. So it's different as we're building that policyholder base, which of course is one of the things we promised you we would work toward doing and Aflac Japan we believe is doing the right thing here for us.

Jimmy Bhullar:

Okay. First question just on the expense ratio in both the Japan and the US businesses, I think is the best it’s been in the past several years. So wondering how much of that is sustainable and driven by expense savings or other actions versus maybe just being timing - driven by the timing of discretionary and that spending in advertising?

Jimmy Bhullar:

Okay. And then, just maybe for Dan or the Japanese team, you talked a lot about competition in Japan on the last call. And it seems like as rates gone up in Japan some of the companies have cut prices to adjust for that. But what are you seeing in the competitive environment? And is it any different than what you've seen in the last few months or over the past few years?

Koichiro Yoshizumi:

[Foreign Language] Thank you for the question. Good morning everyone. I'm Yoshizumi. I am in charge of sales in Japan. So as you have mentioned our competitors have entered third sector market. And so the environment is totally different compared with maybe five years ago or 10 years ago. [Foreign language] And there are competitors that are launching a very reasonable or low price products. [Foreign language] However, in Aflac, our concept is to launch and sell products that have values to our customers and not just lower product buy for the sake of lowering product - lowering prices, excuse me. [Foreign language] And as we enter into our 50th anniversary this year in Aflac Japan. And this is based on the history and trust that we have from our customers in providing the appropriate insurance policies at all points by thoroughly thinking about what is needed in each environment or at times because the illnesses change and treatment methods change. [Foreign language] Now according to the data that’s been publicized between April 2022 and March 2023, [Foreign language] And Aflac is record the number one most sold policy company in Japan in third sector products. [Foreign language] What we will aim for is to continue to provide customers that most appropriate product for our customers, so that we can maintain our number one position. That’s all for me.

John Barnidge :

Good morning. Thank you for the opportunity. My first question is on distribution of the new first sector product in Japan. The closest customers and existing customer and one that doesn’t have that products, I know the product was introduced in early June. Have you identified how much of the existing customer base is the target for this new product? Thank you.

Koichiro Yoshizumi:

Hey, this is Yoshizumi once again. Let me continue to answer your question. [Foreign language] We have a large number of existing customers as you know. [Foreign language] And our target customers are young and middle-aged customers. [Foreign language] And the reason why I say our target is young and middle-aged customers is as follows

Koichiro Yoshizumi:

Hey, this is again Yoshizumi. [Foreign language] And as I just mentioned, it’s not just about Tsumitasu, but since we are a company that mainly sell third sector product. [Foreign language] Then for example as for the 50th anniversary, we will be selling pushing for cancer insurance sales and in order to increase our touch points with our customers, we will be having campaigns to offer gifts to our customers. [Foreign language] We also have a conservative service that no other competitor has. [Foreign language] And so so what we were trying to do is to appeal this conservative service in line with our 50th anniversary through the website, TV commercials, and video services. [Foreign language] We have a large number of sales agents and agencies that only sell Aflac and have walked together with Aflac for the past 50 years. [Foreign language] And these agents and agencies are extremely pleased and happy about celebrating 50th anniversary. [Foreign language] And there's a very big momentum for these sales agents and agencies to sell a large proportion of third sector products. [Foreign language] We, as a sales team would like to support these sales agencies at our maximum. [Foreign language] That’s all for me.

Tom Gallagher:

Good morning. A couple of follow-up questions on the Tsumitasu product in Japan. In response to John's question, I just want to be clear I'm assuming you're not selling this product. The Tsumitasu product to existing customers that already have third sector Aflac products. This would be all brand new Aflac customers. Is that is that correct?

Tom Gallagher:

And Dan, do you have a - are you keeping track of that to make sure this doesn't become a situation where the sales force kind of monetizes the in-force customer base and does a lot of selling there because then obviously that would limit the cross-sell opportunity?

Max Broden :

Tom, we track that closely. So we know what those numbers are. We will not necessarily publish those publicly, but it's an important factor that we keep track of.

Nick Annitto:

Hey, thanks. Good morning. Just wanted to touch on the US a bit. I know, sales came in a little late in the quarter relative to the full year guidance. I just wanted to get your overall thoughts there on the confidence of hitting something in the guidance for the year?

Dan Amos :

And I just want to make a comment. I think that we've seen one of the best years and certainly one of the best quarters in the U.S. in terms of we've got a lot of balls in the air. And to realize that they brought up the loss ratio. They brought down the expense ratio. They had switched business and our business is more complicated as we go into other products. They're training their people better. I just have a kudos to Virgil and the team for the hard work they're doing. And I think long term, our US operation is going to be a much stronger company because we're doing all the right things I think we need to do to prepare us for the future. So, I'm extremely - the sales yet I want more than 2%. But I promise you that the 2% that we had is much bigger than a normal 2%, because it's cleaner business is more profitable and it should compound as we move forward.

Virgil Miller :

Yeah, in the first quarter you know we came up with negative on recruiting came in with the second quarter though very strong with - I think we were over a 10% increase. I see us continue on that trend going forward to the second half. But when I mentioned if you kind of go back and look pre-pandemic and you look at where we are today we're going for quality recruiting. We're going for a better conversion rate. And then, that’s leading to the higher productivity. You continue to see better productivity from what we're seeing with our agents. And that is really the bigger factor for us. Last year, we were recruited over 10,000. I would expect the same this year. We've got some national recruiting efforts going on right now across the country. What we really do is we leverage support from headquarters to drive our message and then we leverage - when we call a nomination process is to local agents, local brokers going out telling people about the Aflac career path and bringing people and listen to that story. And then we actually turn them into and to recruit in the ultimately trying to get them to be average weaker producers. I am very pleased with what we did in the second quarter. Some of those efforts will definitely continue in third or fourth quarters also.

Tom Gallagher :

Hey, thanks for taking my follow-up. Just a Tsumitasu product follow-up question. Can you talk a little bit about how you think this rollout is going to go? Clearly, the June rollout seems to have been a big success. Would you expect this to become a much larger percentage of sales as you think about the rollout over the next couple of quarters here? How do you think third sector sales are going to hang in there? Because I think it's being sold through the same distribution as your third sector. So I'm just wondering while this gets rolled out, are we going to see a slowdown in third sector? How do you see that all playing out I guess over the near term next couple of quarters? Thanks.

Koichiro Yoshizumi:

[Foreign Language] Thank you. This is your Yoshizumi. I would like to answer your question. [Foreign Language] First of all this product was launched on June 2nd. We have able to record a very successful big sales. [Foreign Language] And the reason why we have been able to record such big sales at the beginning of its launch is because, we, we meaning our distribution channel has been fully prepared to really wear to sell this product where they should be selling. How we should be selling and that's what we'd be working on since the beginning of the second quarter. [Foreign Language] And the reason why this kind of preparation was needed was because. [Foreign Language] And our agents. [Foreign Language] Talk to about Tsumitasu new customers, our agents really need to practice how to sell this product. [Foreign Language] As a result, our agents did visit those customers that are easy for them to be talking to and as a result it made a big hit in the sales. [Foreign Language] And as a result of this through preparation for the June launch we are not expecting the same level of sales from July and on. [Foreign Language] But at the product to earn certain level of volume. [Foreign Language] And we are quite sure that this product will serve that kind of a role. [Foreign Language] And the big role that this product will play is to cross-sell third sector products. [Foreign Language] And it would be easier for our sales agents to talk about third sector products through their customers once they start talking about Tsumitasu. [Foreign Language] And that is the difference between other first sector products because Tsumitasu has its own feature that can make that sales agents easily talk about third sector products. [Foreign Language] So what we are expecting is to have Tsumitasu sell to certain volume on its own, but on top of that sell third sector products is to certain level, as well. [Foreign Language] That's all for me.

Max Broden :

Tom, I want to address a question that you did not ask, but I think you wanted to ask and that is, how is this different from the waste sales that we had in the years 2012 through 2014? And I would characterize is there are three main differences. The first one is that we will do much more frequent repricing of new business for this product. And that's very important because this is a more interest rate sensitive product than our core third sector business. The other one is that we will have a much more diligent management of the distribution channels and the third piece is that we are not utilizing reinsurance to make sure that we can relieve some of that new business train and get the IRRS higher. And if you take all of that to get or that is what makes this different from the waste sales that we had of that were very very significant back in that timeframe of 2012 through 2014. Thanks Max. You stole my follow-up. That was great. Appreciate it.

Operator:

The next question comes from Joel Hurwitz with the Dowling & Partners. Please go ahead.

Brad Dyslin :

Yeah, hi, Joel, this is Brad Dyslin. Thank you. Thank you for the question. We did have a very solid second quarter as you pointed out and there were several things that drove that that we do think are sustainable into the back half of the year. Besides the adjustments that you that you’ve highlighted short rates remain very attractive even with the Fed likely to cut sometime this fall, short rates remain very, very attractive compared to historical levels. And that benefits us in a few ways including our significant floating rate portfolio. We also took some actions early in the year, some tactical things we did with the portfolio. We moved a few bonds around in our public portfolio to capture some yield opportunities. It was a pretty sizable switch trade. We also took advantage of some attractive spreads and accelerated deployment in our structured private credit portfolio. So we think the things that have carried us in the second quarter these tailwinds are going to continue through the second half of the year. Now there are risks of course, but we think we're pretty well positioned and should have a good second half.

Max Broden :

I'm not going to put an exact number on that, but I would say that anything if you get even something like a hundred basis points is meaningful when the overtime translates that into the economic impact that would have from additional net earned premium. So, it's something that we will continue to drive over time. The other thing I want you to be aware of is that that persistency will jump around somewhat driven by mix of business. So our in-force in the US, it is gradually changing. So you are going to see more Group Life and Disability business as a proportion of our in-force, which clearly has a much, much higher persistence rate than our average. And then also the same thing applies to over time our Dental and Vision businesses as well should have an improved persistency. So we're driving all the underlying businesses and the way they improve persistency then the mix impact will be an important component as well. So, over time, what we are driving is both that business-by-business improved persistency and then obviously the mix impact, as well. So we will over time sort o. call that out and give you some more colors on that, as well.

Operator:

This concludes our question and answer session. I would like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

David Young:

Good morning, and welcome. Thank you for being here a bit earlier than our usual start time. This morning, Dan Amos, Chairman, CEO and President of Aflac Incorporated, will provide an overview of our results and operations in Japan and the United States. Then Max Broden, Executive Vice President and CFO of Aflac Incorporated, will provide an update on our financial results and current capital and liquidity.

Daniel Amos:

Thank you, David, and good morning, and we're glad you joined us at this earlier hour. The first quarter marked a good start for the year in terms of earnings, but proved to be challenging for sales. Aflac Incorporated delivered another solid earnings result. Net earnings per diluted share for the quarter were $3.25. On an adjusted basis, earnings per diluted share were up 7.1% to $1.66.

David Young:

Thank you, Max. Before we begin, I just want to remind everyone, please mark your calendars for our financial analyst briefing on December 3 at the New York Stock Exchange. We'll have more information coming out. [Operator Instructions].

Elyse Greenspan:

My first question, starting with U.S. sales, which you guys said were weaker than expected in the quarter, but you did reaffirm the longer-term guidance for sales in that business. So can you just give us a sense of how you expect sales in the U.S. to trend from here?

Elyse Greenspan:

And then my follow-up, shifting to sales in Japan. The third sector sales went negative this quarter. You guys did highlight some initiatives you have to improve sales in Japan. But just hoping you could provide more color specifically on how you expect the third sector sales to trend over the course of 2024.

Koichiro Yoshizumi:

[interpreted] Thank you for the question. This is Yoshizumi, I will be answering your question. Starting from 2024, what we are expecting is that we expect to exceed 2023 results. Due to the following reasons, we are expecting our sales will recover. Number one, we are planning to enhance our associates' channel sales agents, I mean increase the number of sales associates. And in 2023, we approximately hired 600 new sales agents -- recruited and have enhanced their training. We are expecting that these 600 will become more productive in the second quarter and be successful.

Operator:

The next question comes from Tom Gallagher with Evercore.

Daniel Amos:

Let's let our Japanese cover that, and I don't -- I'll pick up on it a little bit more, too.

Thomas Gallagher:

Dan, anything you would add? Or should I ask a follow-up?

Thomas Gallagher:

Yes. And just for a follow-up, the weaker persistency in Japan. Can you talk a little bit about what you're seeing there from a product standpoint? Is that cancer and medical that you're seeing it on? And do -- is it just lapsing of coverage? Or is it switching to other companies, do you suspect?

Operator:

The next question comes from Jimmy Bhullar with JPMorgan.

Virgil Miller:

Yes. Let me add to that. Again, this is Virgil. I just want to say that what you're seeing is the evolution of our block of business. Our group voluntary benefit business has continued to grow over the past several years. And really, when we talk about that underwriting discipline, that is where you're most are going to see that. If there's strong competition out there, fierce competition in the group business, and what we're doing is making sure though that we are able not only to compete, but we want to look at the business that yields profits.

Daniel Amos:

And if you think about it a minute, it will make plenty of sense is that -- you take an account that has high lapsation, then you have a low benefit ratio and you have a high expense ratio and basically no profit. So you actually improve every aspect of the business -- the overall business when you just don't write it. And that's what we've been looking at and seeing and then that allows us by doing that for our -- as we've increased benefits and other policies to move it up and give a better value. So it's a good balance that we think ultimately creates value not only for the policyholder, but ultimately for the shareholders as well.

Max Broden:

So our ESR in Japan continues to track well. We are running a little bit north of 250% on our ESR based on our internal model. We would expect relatively soon in the second quarter for the FSA to come up with a final calibration. I would not anticipate that, that would have a material impact on our -- i.e., the difference between the FSA calibration and our current internal model. So I wouldn't expect to have that number move materially.

Operator:

The next question comes from Joel Hurwitz with Dowling and Partners.

Max Broden:

So Joe, the main driver continues to be the hospitalization trends that have been favorable for a long, long period of time, and they quite frankly have continued to improve. The way we do -- when we do our reserving, we are looking to true up to current experience, but we don't necessarily anticipate that it will be a continued future improvement in that experience. And that's why you see these -- if the hospitalization trends continue to improve from current levels, then you could see in the future but that will lead to future remeasurement gains as well. But if they stabilize at current levels, then you wouldn't necessarily see that.

Max Broden:

Yes. There's a significant element of both seasonality and timing in this number. And for the full year, we are tracking towards our expense ratio outlook of 19% to 21%.

Joshua Shanker:

There's a lot of news out there right now about the Japanese government doing some major intervention to support the yen. What does that mean for the cost of your hedging program?

Max Broden:

So the overall return on capital to shareholders is really, quite frankly, driven by, number one, satisfy the capital ratios in the subsidiaries, and that means all of the subsidiaries. Then we look at the pool of capital that we have at the holding company, which currently sits at $3.7 billion on an unencumbered basis, which is roughly $2 billion north of our minimum liquidity level. We then think about what is the capital generation going forward. And that helps us then think about how we can deploy capital, both short term, i.e. in the next couple of quarters, but also long term, i.e., thinking about what it's going to look like over the next 2, 3, 5 years as well.

Operator:

The next question comes from Wes Carmichael with Autonomous Research.

Bradley Dyslin:

Sure. Wes, this is Brad Dyslin. In the quarter, we saw our overall commercial real estate, which is predominantly the transitional real estate, as you've called out, the watchlist has been relatively stable. Our overall foreclosure watchlist is about $1.2 billion. Of that, about half is in active workout proceedings where we are fully prepared to foreclose on the property. We did have one, as you mentioned, that we foreclosed in the quarter. We were actually able to book a small gain on that. The accounting rules are such that if the appraised value exceeds our loan value, we're able to book it at the higher value. It's a pretty small number, but it does highlight the value of disciplined underwriting and maintaining a good, solid loan-to-value on the underlying assets.

Wesley Carmichael:

Thanks, Brad. And just turning to the U.S., could you maybe just talk about agent recruiting. What's the environment like given the strong employment in the U.S.? And are you kind of expecting that to change any in your outlook there?

Operator:

The next question comes from Suneet Kamath with Jefferies.

Daniel Amos:

Hold on there. Let me -- guys, can you hear. Did you all hear the question, Koide?

Daniel Amos:

Hold on, just 1 second, they'll translate.

Suneet Kamath:

The bigger question is, are you behind the curve here, right? It seems like the industry is moving towards these nonexclusive agencies. That's my sense. And if it's only 5% in terms of these large nonexclusive agencies, is that just going to be an ongoing headwind in terms of your sales growth? Or do you have strategies to gain share in that channel?

Koichiro Yoshizumi:

[interpreted] So this is Yoshizumi once again. Let me just add a little bit more information to your question. The large nonexclusive agencies, the main product that they sell to a customer is the first sector product. And Aflac, our main products are cancer and medical insurance products and the total number of policies of cancer and medical added altogether combined, we are #1 in overall Japan. So we truly believe that we will be able to increase the number of sales through other channels as well. And I do think that our driver will be our exclusive agencies.

David Young:

Betsy, I think that's our last call, correct?

David Young:

Yes. Thank you all very much for joining us this morning. And in the coming months, you'll get more information about our financial analyst briefing at the New York Stock Exchange on December 3. And if you have any questions that you want to follow up, please reach out to Investor and Rating Agency Relations. We will talk to you again. Have a great day.

David Young:

Good morning and welcome. This morning, we will be hearing remarks about earnings for 2023 as well as our outlook for 2024. First, Dan Amos, Chairman, CEO, and President of Aflac Incorporated will provide an overview of our results and operations in Japan and the United States. Then Max Broden, Executive Vice-President and CFO of Aflac Incorporated, will provide an update on our financial results and current capital and liquidity, as well as our outlook for 2024. These topics are also addressed in the materials we posted with our earnings release and financial supplement on investors.aflac.com. In addition, Max provided his quarterly video update, which also includes information about the outlook for 2024. We also posted, under Financials, on the same site, updated slides of investment details related to our commercial real-estate and middle-market loans. For Q&A, we are also joined by Virgil Miller, President of Aflac U.S.; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments. Before we begin, 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 discuss 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. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non- U.S. GAAP measures. I'll now turn the call over to Dan. Dan?

Max Broden:

Thank you, Dan. This morning, I'm going to address our 2023 results before providing an outlook for certain drivers for 2024 that were included in the slides with our earnings materials filed yesterday with our 8-K. Aflac Incorporated delivered very strong earnings for the year as adjusted earnings per diluted share rose 9.9% to $6.23, the highest amount in our company's history. This result included a $0.19 negative impact from foreign currency and variable investment income was $0.14 per share below our long-term return expectations. In addition, our annual results included remeasurement gains of $0.51 per share, a $0.20 per share non-economic loss in the fourth quarter under U.S. GAAP related to the innovation of our reinsurance treaty with a third-party ceded back to the company, and a $0.04 per share write-off of certain capitalized software development costs in the third quarter. Our liquidity remained strong with unencumbered holding company liquidity being $1 billion above our minimum balance. Likewise, our capital position remained strong and we ended the year with an SMR above 1,100% in Japan. At the end of 2023, we estimated our internally modeled ESR to be above 250% and we expect the FSA to provide final guidance on the ESR later in 2024. We also estimated our combined RBC in the U.S. to be greater than 650% at the end of 2023. These are strong capital ratios which we actively monitor, stress, and manage to withstand credit cycles as well as external shocks. In addition, impairments have remained within our expectations and with limited impact to both earnings and capital. Our Adjusted leverage remains below our leverage corridor of 20% to 25% at 19.7%. And this will fluctuate with the yen-dollar rate, since we hold approximately two-thirds of our debt denominated in yen as part of our enterprise hedging program to protect the economic value of Aflac Japan in U.S. dollar terms. In 2023, we repurchased $2.8 billion of our own stock and paid dividends of $245 million in Q4, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. Adjusted book value per share increased 10.1% and the adjusted ROE was 13.8%, an acceptable spread to our cost of capital. I'm also pleased with our continued development of our Bermuda reinsurance platform, which resulted in three transactions during 2023. We will continue to utilize this platform to better manage risk and improve capital efficiency across the enterprise, and we expect these transactions to be part of a series that will improve our run-rate adjusted ROE by 100 to 200 basis points over time, all things being equal. Overall, we're very pleased with these results, especially when normalizing for one-time items. Turning to Aflac Japan. Its total benefit ratio for the year was 66%, down 140 basis points from the prior year. Throughout the year, we continue to experience favorable actual to expected on our well-priced large and mature in-force block. We estimate the impact from remeasurement gains to be 130 basis points favorable to the benefit ratio in 2023. Long-term experience trends, as it relates to the treatment of cancer and hospitalization, have continued to lead to favorable underwriting experience. Persistency remained solid with a rate of 93.4%, and was down 70 basis points year-over-year, reflecting elevated lapse as customers updated their cancer and medical coverage with our latest cancer and medical products. Our expense ratio in Japan was 19.8%, down 50 basis points year-over-year, driven primarily by good expense control and to some extent, by expense allowance from reinsurance transactions. For the full year, total adjusted revenues in yen were down 3.6% to ¥1.5 trillion. Net earned premiums declined 5.9% to ¥1.1 trillion, reflecting the impacts of reinsurance transactions, paid-up policies, and deferred profit liability. When excluding these three factors, net earned premiums declined an estimated 1.7%. On this same basis, we would expect net earned premiums in 2024 to decline 2.5% to 1.5% when taking into consideration the impact of reinsurance, paid-up policies, and the deferred profit liability reclassification. Adjusted net investment income increased by 4% to ¥365.6 billion as we experienced higher yields on our U.S. dollar-denominated investments and related favorable FX. This was partially offset by a transfer of assets due to reinsurance. Pretax earnings were ¥456.9 billion or 6% higher than a year ago. For 2024, we would expect our well-priced in-force to show greater stability in terms of the benefit ratio excluding unlockings and to be in the range of 66% to 68%. This is a function of both favorable morbidity experience and improved mix of business. With the current trend in revenues, we are actively reducing our expenses. We are taking both tactical efforts as well as more long-term transformational initiatives and we would expect our expense ratio to be in the range of 19% to 21% going forward. The pre-tax profit margin for Japan for 2023 was 30.5%, up 280 basis points year-over-year. A very good result. With approximately 30% of the Japan portfolio in U.S. dollar assets, the strength of the U.S. dollar versus the yen has increased the proportion of net investment income as a component of our pretax profit. With a greater contribution to profitability from net investment income in yen terms, our pre-tax margin is naturally pushed up. In addition, having transitioned to option-based currency hedging, we expect quarterly hedge costs to remain roughly in line with what we experienced in the fourth quarter of 2023. In combination with a lower expected benefit ratio, we expect a pretax profit margin of 29% to 31% in 2024. Turning to Aflac U.S. Our 2023 total benefit ratio came in well below expectations at 42.8%. We estimate that the remeasurement gains impacted the benefit ratio by 500 basis points in 2023. Claims utilization has stabilized, but as we incorporate more recent experience into our reserve models, we unlocked assumptions and released reserves during the year. Persistency increased 130 basis points year-over-year to 78.6%. This is a function of poor persistency quarters falling out of the metric and stabilization across numerous product categories. Our expense ratio in the U.S. was 40.6%, up 90 basis points year-over-year, primarily driven by our growth initiatives and higher DAC amortization. We would expect the U.S. expense ratio to decrease over time as these businesses grow to scale and improve their profitability. For the full year, total adjusted revenues were up 2.1% to $6.6 billion. Net earned premiums increased 1.9% to $5.7 billion in 2023. Adjusted net investment income increased 8.6% to $820 million, mainly driven by higher yields on both our fixed and floating-rate portfolios. Pretax earnings were $1.5 billion or 10.4% higher than a year ago, driven primarily by the lower benefit ratio which was largely impacted by the third quarter unlock and only partially offset by the higher expense ratio. For 2024, we would expect net earned premium growth to be in the range of 3% to 5%. Profitability for the U.S. segment was solid with a pretax margin of 22.7%, driven primarily by the remeasurement gains from unlocking. Looking forward at 2024, as we grow products with a higher benefit ratio and lower expense ratio, like group life and disability, and network dental and vision, you should start to see those changes reflected in our ratios over time. In 2024, we would expect to operate with a benefit ratio in the range of 45% to 47% and an expense ratio of 38% to 40%. This translates into an expected profit margin of 19% to 21%. In our corporate segment, we recorded a pre-tax loss of $425 million, compared to a loss of $218 million a year ago, primarily due to higher investment tax credits and the impact of the innovation of our reinsurance treaty with a third party. Adjusted net investment income was $54 million lower than last year due to an increased volume of tax credit investments. Higher rates began to earn in and amortized hedge income increased. These tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $343 million with an associated credit to the tax line. The net impact to our bottom line was a positive $39 million. To date, these investments are performing well and in line with expectations. The impact from the reinsurance innovation was a one-time negative of $151 million. Overall, we're very pleased with our 2023 results and our outlook for 2024. I'll now turn the call back to David, so we can begin Q&A. David?

Operator:

[Operator Instructions] The first question today comes from Tom Gallagher with Evercore ISI. Please go ahead.

Max Broden:

Thank you, Tom. I'll kick it off and then hand over to Brad and then to Dan for the strategy question. As it relates to our investment portfolio and net investment income, you're correct in noticing that our net investment income has increased over the last couple of years. A portion of that is driven by our increased allocation to U.S. dollar assets. And I do want to remind you that, that is primarily driven by the view that we have of hedging our economic exposure to the yen as it relates to the overall exposure that we have as a company to the yen throughout like Japan. We have now reached what we view to be more of a steady state as it relates to our total U.S. dollar allocation. So from that level, I would expect a stabilization in terms of our total allocation between yen and dollars within the investment portfolio. But as it relates to more of an outlook into 2024 for our NII, I'll turn to Brad, and he can give you some more color.

DanAmos:

And Tom, in regards to strategy, that's been an issue we've had for several years. We feel like that one of the things we are addressing is cancer or medical product suite is by starting them off on an inexpensive savings plan that gets them to participate with us. We also continue to look for new product. We have still not found that third product or third leg that we want to find and we're continuing to try things. But I don't know of anyone right now that I would trade places with in Japan in terms of distribution and product that we have and believe we can continue to grow our business moving forward. Saying that, we have to be realistic that it is an aging population, and it also is a position where it's not the population is declining, but all in all, I still believe it's the best market in the country or in the world because of the persistency and our ability to continue to grow it. And so, I think you're going to see growth for the next several years. We did lower that number to -- from 80 billion just to be cautious, but we're encouraged. Our Japan Post growth and what's gone there continues to do very well, and we've enjoyed our relationship there. It's our existing distribution system that was really hurt, both in the U.S. and Japan, by COVID, but more so in Japan because if you look back at COVID, it really lasted an additional year in Japan. And because our agents are commission-driven, our newer agents, when COVID hit, all of a sudden did not have an opportunity to go out and sell one-on-one. And as we've always said, our products are sold, they're not bought. And so, we go out and make those presentations, and we couldn't do it. And so people that were normally working for us on a commission basis tried to find other jobs that were salary in nature, and that's what we've been fighting, but it is coming back both in the U.S. and Japan, and I'm encouraged by what I'm seeing there.

Suneet Kamath:

Thanks. Just a couple on Japan. And the first one, Dan, just gets back to something you're just talking about in terms of the ¥67 billion to ¥73 billion sort of target down from the ¥80 billion. Are you viewing that as sort of just a delay? And that, that ¥80 billion is ultimately achievable, maybe a year beyond your original target? Just -- I wanted to think about it a little bit longer term.

Masatoshi Koide:

This is Koide Aflac Japan. So let me answer the question. And the reason why we've changed our target from ¥80 billion to ¥67 billion to ¥73 billion was because we knew that it would take a longer time. So we do think that we are able to achieve ¥80 billion if we look beyond 2026 or after.

Max Broden:

I'll kick it off and I'll let anybody add some commentary to that as well. As we sell to younger customers, that should actually improve the persistency. Because of the age-based pricing that we have in Japan, there's a very strong incentive to hold on to the product for a long time and maybe even for life. So as you sell into a younger population, that tends to reduce your lapse rates and improve your persistency. Suneet, you are correct to -- when you look at the corporate agencies that you are referring to from the past that, that was -- had very strong persistency overall in that channel. And as that has become a smaller piece of our overall inforce, that have structurally reduced our persistency. The other thing I would mention as well is that we have seen an aging of the block. And when you have an aging of the block, that naturally leads to higher lapsation and lower persistency as well. So you hear us talk about that we are trying to reach younger customers, that is partially to sort of fight these sort of long-term trends that we have going on in our in-force block to not only provide coverage and new coverages to the younger population but also to improve the overall persistency of the block. All of this is marginal from year to year, and it's very slow-moving, but it's certainly something that we're watching closely.

Koichiro Yoshizumi:

Thank you. This is Yoshizumi. And regarding the persistency that was just asked and answered by Max, and as Max answered, by us focusing on young and middle-aged customers, our persistency is going to be higher, and that is our strategy. And that is actually represented by the medical insurance that was just launched on September 19. And this product is very popular among the young and middle-aged customers whose ages are under 49 -- or 49 and under. In terms of the number of policy count that we sold to these young and middle-aged customers, we actually saw a 46% increase year-on-year from the time that we launched in September to the end of the year last year. And these customers are for our middle and long-term growth of Aflac Japan. And these are the customers who will be our asset and our treasure going forward. And the actual premiums that are being paid by young and middle-aged customers are lower. And we truly believe that by focusing on these younger customers and increasing these young customers would contribute to stable growth of our company. And at the same time, as I mentioned, the persistency rate will be higher, and this is our strategy.

DanAmos:

I just want to remind you all that the persistency rate is really high. And we can move it up a little bit, move down a little bit, but it is more than we ever dreamed when we first started doing business over there. So we're very pleased with it. So -- but at the same time, we will improve because when you're writing younger people, of course, they'll live longer, and therefore, they'll be more persistent.

Jimmy Bhullar:

Good morning. So first, a question on Japan. And if you think really long term, is it even realistic to assume that the business can grow given that the population shrinking, the population is aging as well? And then versus 10, 20 years ago, there are a lot more companies in the product lines that you're in? So if you could just comment on that, like -- and maybe on your -- the reduction in guidance on sales, how much of that has to do with just Japan taking longer to recover from COVID versus some of these demographic headwinds?

Masatoshi Koide:

Yes. This is Koide, Aflac Japan. And it is true that Japan is being projected as having declining population. But at the same time, with the advancement of longevity in the 100-year life era, the need to prepare for longevity risk is expected to increase steadily. And it's also expected that the aging population could increase the medical cost because as you live long, the probability of suffering from cancer and other diseases will increase. And in Japan, the sustainability of the overall social security system is being discussed. And this would also include medical and nursing care. And this is being questioned and the discussions are underway within the Japanese government to review how the benefits and burden should be balanced. And given these circumstances, there is a way of thinking about helping themselves or self-help and preparing for the future as people become more aware of the situation. And as a result, although the population may decline, we do think that the third sector market will steadily grow going forward as well.

Virgil Miller:

Hi. This is Virgil, from the U.S. We have been working with the tri-agency sales to talk about any potential impact we could see to those selling supplemental into the consumers out there. And we're waiting on a ruling. Thus far, they set a date to be on April 2024, you know and I know that a date may move. However, we remain encouraged that our policies and coverages are relevant regardless if that rule does come through. We looked at our indemnity sales from last year. We really didn't see any decline. We remain flat there. And again, regardless, even if there is a rule of not a rule, our coverage is relevant, and we're not predicting any major impact going forward.

Operator:

The next question comes from Wilma Burdis with Raymond James. Please go ahead.

Max Broden:

Thank you, Wilma. If you think about the total capital generation that we've had recently and also going into 2024, I don't see any significant change to our overall capital generation on an organic basis. That remains in the $2.6 billion to $3 billion range. On top of that, we know that we have opportunities that we can, over time, unlock more capital through utilizing our reinsurance platform, and we intend to do so. We can't necessarily predict exactly when that will happen or what amounts that will be, but you've seen us in the recent past be quite active on that front. So I would expect us to do more. But on a pure sort of run rate organic basis, I would have pegged our underlying capital generation at $2.6 billion to $3 billion annually.

Virgil Miller:

Sure. I think there's one primary thing related to our watch list relative to our portfolio that makes us different than peers, and that's the fact that the bulk of our exposure is in transitional real estate. Remember, that's a much shorter asset class. It's a much shorter maturity, generally a three-year term with some options to extend out a fourth and fifth year. So because of that, when you have a market downturn and you've got these maturities coming due and the liquidity is as poor as we're seeing in the market today, it naturally creates an elevated watch list and creates an elevated amount of potential foreclosures. Now, we work very closely with our borrowers to address those maturities. We do our best to avoid foreclosure. But if they are not willing to work with us, if they're not willing to reset the loan to reflect current valuations and give us other protections, we are fortunate that we're in a position, we can and will foreclose if we think that's the best route to maximize our recoveries. We are blessed with a strong capital and liquidity position, which prevents us from being a forced seller here. So I think it's a combination of the nature of our portfolio, having shorter maturities relative to our total exposure. And then the fact that we are much more willing to foreclose and able to foreclose, if we think that's the best route.

Operator:

The next question comes from Elyse Greenspan with Wells Fargo. Please go ahead.

DanAmos:

Japan? Okay. Well, we, at this particular time, are just evaluating what we think might happen for the next two years. And frankly, we've just tried to be conservative and give us some latitude on what would happen. But we have some very positive things coming out in 2024 that we think will drive sales and are encouraged about it and even some things as we're looking to 2025 that will be coming. Let me make sure that Koide or -- they don't want to make any comments in that regard. Koide?

DanAmos:

Okay, Yoshizumi.

Max Broden:

Elyse, I would think about the sales trajectory as being relatively linear, i.e., not back-end loaded.

Max Broden:

So we're obviously operating with a very significant capital levels in all of our subsidiaries at the moment. Over time, I would expect us to operate at slightly lower capital levels in terms of the ratios and where we are today. I would reflect that in Japan, we are now going through a transition from SMR to ESR. So I wouldn't necessarily make any dramatic changes ahead of that. In the U.S., we are looking to, over time, target in an RBC of closer to 400%, and we have active plans towards drawing that down. At the same time, we have strong capital and liquidity at the holding companies. We always think about where is capital serving us the best at that very point in time, at the same time making sure that we have capital available for deployment into dividends, buybacks, et cetera. So overall, I would say that our capital plans remain solid. We've got plenty of capital around, and we try to place it where it makes the best use.

Operator:

Your next question comes from John B. Barnidge from Piper Sandler. Please go ahead.

Dan Amos:

No, it did not.

Max Broden:

Pet insurance, we think, has a significant opportunity in the U.S. market because of the very low penetration of the product itself. For Aflac, we act as a distributor where these premiums, claims, et cetera, do not hit our income statement. So it's an opportunity to - for our distribution to earn additional commissions, so in that sense, it's very positive to Aflac. We do, obviously, have an alliance and a partnership with Trupanion that is strong through the equity ownership that we have in the company, and we capture significant economics over time through that equity ownership.

Operator:

Your next question comes from Joel Hurwitz with Dowling & Partners. Please go ahead.

Max Broden:

So you are starting to see a drop in 2024, and I would expect that to continue. There are two forces at play here, both expenses and our revenues. Expenses, we have active plans to improve our expense efficiency and reduce expenses both from a tactical and transformational standpoint. But also do not disregard the impact from revenues here. So as we have a number of businesses that are not at scale today, they will grow to scale. And when they do that, their expense ratios will drop significantly, and that will improve overall our expense ratio, i.e., push that down. The last piece to all of this is also where is our future growth coming from. It is generally coming from low expense ratio businesses. Predominantly, the group life and disability business that operates at a significantly lower structural expense ratio than the voluntary benefits business. So if you take all of that together, we should have a trajectory that is going lower, and we would expect to operate in the 35% to 37% over time.

Max Broden:

So overall, we're very pleased with the economics. In terms of the impact on future run rate results, they're relatively small, but they're obviously favorable. So there's a favorable run rate going forward. In terms of the other blocks out there, I do deem that this is - was the one that we really had out there. I wish we had more than we could do, but this was really the one that we had outstanding.

Operator:

The next question comes from Ryan Krueger with KBW. Please go ahead.

Max Broden:

So I think that we have been in a structurally low benefit ratio period, which means that over time, I would expect our benefit ratios to increase. And you're right, Ryan, to acknowledge that the mix impact will also push our benefit ratios higher. So we're always going to see that mix impact impacting both expense ratio and benefit ratios going forward. And that will have a slightly negative impact to the pretax margin going forward because of mix. But I'll kick it over to Virgil Miller to give his comments as well.

Ryan Krueger:

Thank you. And then on Japan internal reinsurance, you've done a transaction two years in a row. Is there any practical limitation on doing something like that kind of pretty regularly? Or is there anything that would omit your ability to do that?

Ryan Krueger:

Okay. Great. Thanks a lot.

Operator:

The next question comes from Josh Shanker with Bank of America. Please go ahead.

Max Broden:

So obviously, the pricing of options will move, and that impacts, to some extent, the cost of hedging. And so obviously, every input that you would have to the pricing of options would impact that. In terms of the level of the yen, the answer is no. We want to structurally protect the economic exposure we have to the yen. And we do that through the dollar allocation that we have in the general account. We do that through the debt that we issue in yen, and we do that through the forwards that we hold at the holding company, where we are long dollars, short yen. So overall, we do this in order to reduce risk, not necessarily to express an opinion on the yen. Now, how we hedge and protect ourselves, we have all these different levers that we can pull, and the cost and return on capital associated with those can vary over time because of the capital markets. So that's why we will then dial up and dial down some of those associated with that. But it's not necessarily associated with the level of the yen-dollar rate. We are not FX traders. We're looking to protect ourselves long term.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

David Young:

Good morning and welcome. This morning, we will be hearing remarks about the third quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated, and Fred Crawford, President and COO of Aflac Incorporated. Max Broden, Executive Vice President and CFO of Aflac Incorporated will provide an update on our financial results in current capital and liquidity, which can also be found with the materials that we posted along with our earnings release and financial supplement on investors.aflac.com. We also posted under financials on the same site updated slides of investment details related to our commercial real estate and middle market loans. In addition, Max provided his quarterly video update, which you will find there also. Other members of our executive management team who are joining us for Q&A include Virgil Miller, President of Aflac US; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan; Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments. Before we begin, 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. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non-US GAAP measures. I'll now hand the call over to Dan. Dan?

Fred Crawford:

Thank you, Dan. As announced last night, I plan to retire in September of next year to spend more time with my family and pursue other interests. It's a personal decision, but also a recognition of the very capable leadership team surrounding Dan and the company being in a very strong position. While I believe this is the best for me and my family, I also believe it is in the best interest of Aflac. I've enjoyed 25 years as an executive in the insurance industry and feel blessed to have worked with talented professionals and leaders throughout. However, the highlight has clearly been my time here working for Dan and for Aflac. Over the next year, I will be focused on transition and helping on select initiatives where I can add value. I'll now hand the call back over to Max. Max?

David Young:

Thank you, Max. Before we begin our Q&A we ask that you please limit yourself to one initial question and a related a follow-up. Then, you are welcome to rejoin the queue to ask an additional question. We will now take the first question.

Tom Gallagher:

Good morning. Dan, wanted to start with your comment about succession planning and having several strong candidates. Should we take that to mean you won't be looking to do an outside search to replace Fred? And are you looking to replace Fred in the COO role? A little bit of color on what you're thinking overall there. Thanks.

Tom Gallagher:

Got you. Thanks for that, Dan. And just an operational question for my follow-up. Max, can you comment on what's behind the bigger reserve release in the US and if there's a go-forward earnings impact associated with that? I would have thought there might have been a bigger benefit coming from Japan, just given how strong and this efficiency of margins there are. So any -- maybe any color comparing and contrasting how the actuarial review stacked up US versus Japan? Thanks.

Tom Gallagher:

Okay. Thanks.

Jimmy Bhullar:

Hi, good morning. So Fred, I'm sure we'll be dealing with you a little bit more over the next year, but good luck in the future. I had, first, a question on just any updates you have on the potential tri-agency rules. And in sort of the worst-case scenario, what are the products that are in scope and what could be the impact on your business, assuming that the industry does not get any concessions from the rule as it's initially written?

Dan Amos:

Let me make one other comment. I was in Washington for three days about three weeks ago and met with probably 18 senators and congressmen to just see their positions on it. I want to go back to the pretax situation that Virgil was talking about because it was an anomaly. What actually happened was it ended up being passed. And we, as a company, back 20-something years ago, we didn't sell pretax for the first two years because the Congress said it was a mistake and it was never really meant to happen. And so once it was in the bill, then when they tried to take it, thought about taking it out, there would -- it looked like it was a [free tax] (ph). If they took it out, it became a tax on the average American. And you take, for example, a school teacher that has come down with cancer to, all of a sudden, say you're going to tax their benefits will not sit well with the contingency of people that they deal with. And so we were able to talk to a lot of people about it, and we had no feedback that thought that it should be the opposite. Now saying that, we know that this has been submitted by the branch outside Congress through the executive branch, and we've got to handle it and we plan on talking to them. But it is -- it will absolutely be a direct tax. But we sold in that environment. I'm one of the ones -- one thing about me being around a long time is I remember a lot of things. And we saw -- I was around when we sold in a pretax environment. In fact, I was in the sales force for 10 years and saw it. And so it's a matter of adjustment no matter what happens. And what I've always said is with change comes opportunity. And so no matter what happens, we're going to find a way to do well in that environment.

Brad Dyslin:

Yeah. Good morning, Jimmy, this is Brad Dyslin. I'll take that. There's a couple of things behind the relatively modest reserving that you've seen so far compared to that $1 billion watch list. One is the average LTV of the portfolio and the price declines we've seen. What happens when we go through the foreclosure process is we have to mark that asset to the lower of the principal balance of the loan or the value of the asset. So when you're starting at a 60% LTV, you've got a fair amount of cushion before you start to realize losses on that mark. The second dynamic at play here is we are still in process on about half of that $1 billion of watch list, which means we are in workout negotiations with the borrower. Those can be very long-lasting, very intense and they can ebb and flow a lot of different directions. Once we get certainty that we expect to foreclose, we have to order a third-party appraisal. Those take time to come in. And as they come in, that's when we end up re-marking our assets. So it's a combination of our relatively conservative LTVs and the fact that we've still got about half that portfolio subject to appraisal.

Operator:

Our next question will come from Ryan Krueger with KBW. You may now go ahead.

Max Broden:

Yeah. Thank you, Ryan. Yes, I think what you saw in terms of hedge cost for the third quarter, it's a blend of us rolling into our new structure, so it's a mix between the old structure and the new structure. In terms of run rate hedge costs going forward, I do think that the third quarter hedge cost that you saw, it's certainly not going to be higher. We’re probably going to, on a run rate basis going forward, be at this level or slightly lower going forward in terms of actual hedge cost. That is obviously subject to capital markets inputs and everything that impacts the cost of a put option and also, to some extent, if we decide to increase our forward exposure in the future as well. So things like the FX volatility, interest rates, et cetera, will come into play here. But in the near future, I would expect our hedge cost to be similar to the third quarter level or slightly lower.

Max Broden:

Sorry, Ryan, I didn't quite catch that. Can you repeat?

Max Broden:

The way to think about this in terms of the P&L, this will drop to the bottom line. When you think about the P&L here, what we have done when we move gradually from using forwards to put options, what happens is that we are now increasing the volatility for small moves in the yen-dollar as it relates to our capital ratios in Japan, i.e., the SMR and ESR. So for a strengthening yen or a weakening yen, you're going to see slightly higher volatility in that ratio for small moves. But what the put options give us is that we have dramatically reduced the tails. So any dramatic moves or shock moves in the yen-dollar, we have reduced our risk exposure to those kind of events. And we feel that this is a very good risk reward for us.

Max Broden:

We will deploy the capital appropriately in the respective business units, and if we have good opportunities to deploy the capital there, we will do so. If we feel that we have significant surplus capital, it will be moved up to holding company. And the holding company will deploy it in the different sort of capital distributions that the holding company generally does, i.e., dividends, buybacks, et cetera.

Operator:

Our next question will come from Suneet Kamath with Jefferies. You may now go ahead.

Max Broden:

Let me kick off on that question, and I would ask Al Riggieri to fill in any blanks and add his color as well. But the fact of the matter is that we have seen lower levels, generally speaking, in terms of hospitalizations come through. And we've also seen changes in the way treatments are being done, i.e. more outpatient treatments as well. So we believe that we have seen a shift in both the way hospitals are operating and also the way individuals are going for their treatments. And we have factored that in to some extent.

Suneet Kamath:

And I think, Max, you said you factored some of that into your reserve. Is it -- does that mean that if things sort of persist the way they are, that there would be the potential for some more reserve releases down the road?

Suneet Kamath:

Yeah. No, that makes sense. My other one is on Japan and the earned premium drop of 1.7% sort of adjusted. I would have thought at some point, the impact of the paid-up policies would sort of have run its course. And I know some of those policies were very long-dated, but I believe that they were sold quite a bit ago. So are we getting closer to the point where that impact is expected to fall off?

Suneet Kamath:

Okay. Thanks.

Marly Reese:

Good morning. It's Marly on for Alex. I was hoping you could provide a little more color on the Japan Post sales and partnership. It looks like it's been progressing, so I was hoping to hear a little more on this versus the longer-term sales guidance.

Dan Amos:

Yeah. I want to make one other comment. We've been waiting for Japan Post to come back for several years now. And we had assurances that they would do that and I'm happy to see it take place. They are our largest shareholder. And so what is good for us is good for them and vice versa. So I believe this is a strong alliance and will continue to be strong as we move forward.

Max Broden:

So obviously, the capital ratios in our subsidiaries, they are strong, and that's obviously priority number one to make sure that we have adequate and strong capital in our operating subsidiaries. And then obviously, we want to move operating cash flow up to the holding company and then deploy it from there. You did see that in the quarter, we bought back $700 million of our own stock. I view that as quite a strong capital deployment. And we also increased the dividend by 19% starting in the first quarter of next year. So overall, the company is generating significant cash flow, and we are deploying significant cash flow as well.

Operator:

Our next question will come from John Barnidge with Piper Sandler. You may now go ahead.

Fred Crawford:

Why don't I just make a couple of comments on that, and then Koide-san can comment. But what we are focused on in Japan from an efficiency perspective is digitizing the platform. That's the major thrust of what we're looking at, which is a long-term plan of investment followed by returns. And that is a plan to digitize or increase the usage of digital applications away from paper applications, the use of digital self-service where policyholders go online and serve themselves through technology as opposed to inundating our call center and then claims payments or digital claims. We've been making steady progress on both the digital application front and on the customer self-service, but we are engaged currently in updating those tools. Think of it as no different than your iPhone 1 to iPhone 11. We are updating those tools to modernize them and improve the customer experience. We have been in a proof of concept over the last year and, in fact, have moved those digital adoption rates up. And so with that will come natural efficiencies over time but it will take time. So it's a long-term progress of moving customer and agent experience to digital and away from paper, but that will yield benefits. The claims side of it is more stubborn. And the reason for that has nothing to do with Aflac. It's because the Japanese healthcare system is a paper-based healthcare system that requires the exchange of paper forms when one goes to the doctor. That's really requiring a modernization of the healthcare system in Japan. And interestingly, they actually do have an effort underway to attempt to modernize or digitize the healthcare system. But until that takes place, our ability to process claims digitally will be somewhat contained. But over time, we expect to improve. So what you should expect as investors is that over the long time, we will be increasing that digital adoption. It will yield a lower per-policy expense outcome from an administrative standpoint, but it will be over multiple years of slow and steady progress because this is about adoption, it's not about installing software, okay?

Brad Dyslin:

Sure, thank you. The two properties that we took back, the current occupancy levels are in the low to mid-50s, which has been pretty stable since we first got involved and did the loan. The occupancy across the portfolio, it does range a fair amount. We've got a few that are below 50%, given the nature of the asset class, the nature of transitional real estate. But for the most part, our averages are right around the 55% to 65%.

Operator:

Our next question will come from Wilma Burdis with Raymond James. You may now go ahead. Pardon me, Wilma, your line is open for question.

Virgil Miller:

This is Virgil from the US. We absolutely are taking precautions to make sure that we prepare just in case the proposal does go through, and we are confident that we can do that. We've been continuing to enhance our benefits while current policies are out there. I think Dan stated earlier, we were clear that we've sold before in an environment without some of the pretax benefits that currently exist, and we're confident we'll be able to do that again. We have a random process here that we are always looking to innovate and reinvent our products and enhance our benefits. We demonstrated that this past year with our cancer enhancements we did that really had no additional cost to our policyholders. So you can expect more of the same related to that.

Max Broden:

Yeah. Obviously, our priorities with all the capital that we have is always to deploy it into writing new business and use it in our operating entities. That is where we get generally the best IRR on that capital. If we cannot deploy it in our operating entities, then it will flow up to the holding company.

Max Broden:

Yeah, that is our estimate, yes.

Operator:

Our next question will come from Josh Shanker with Bank of America. You may now go ahead.

Brad Dyslin:

Sure. Thank you, Josh. The loans that we're dealing with now that are on the watch list are those that were made a couple of years ago. The transitional real estate book is our biggest focus area, and that differs from a more traditional CML book in that the maturities are much shorter. They tend to be three-year fixed maturities with options to extend up to five, in some cases, up to seven years based on certain thresholds and the operating metrics being met. So what we're dealing with now are those maturities predominantly in 2023 and a few in 2024 as obviously, the maturity is coming up and when those loans need to be addressed, either being repaid or if that is not an option, then we get into the workout discussions. We have really substantially reduced our deployment into the asset class this year. Part of that is the market -- well, not part of it, it is frankly driven by the market. Very much a lack of activity. We're seeing a large bid ask between buyers and sellers. The increase in rates has really put valuations upside down. Buyers are trying to get -- take advantage of the current levels. Sellers are trying to get yesterday's prices, and we're just not seeing a lot of good, solid transactions, and there's a lack of liquidity in the market. So that's really limited our opportunities. And of course, we always adjust our underwriting standards to the current experience, to the current market. So we're being a little bit more difficult in our terms and conditions as well.

Max Broden:

Yeah. So when they move from being a CML to real estate owned, there is a significant uptick in terms of the capital charge associated with that. For us, it's still very small. So if you think about RBC points, it's very -- I would estimate it to be low single-digits. And as it relates to SMR, the same applies. When you then think about the -- you generally should think about the distribution on what balance sheet or capital base if they go into as follow it the same way the size of the investment portfolio is between the two segments, i.e., roughly 85% falls into Japan and 15% falls into the US.

Operator:

Our next question will come from Wes Carmichael with Wells Fargo. You may now go ahead.

Max Broden:

Yeah. We -- if you think about what our track record, you have seen what we have done historically. Aflac has not been an acquisitive company. This is a company that is built selling one policy at a time. We've done a number of, I would call it, tuck-in acquisitions in the United States to broaden our product portfolio. And we do feel that we are in a good spot in terms of the products that we have to offer in our go-to-market strategy. So at this point, I don't see that we have any holes that need to be filled using M&A.

Brad Dyslin:

Yeah. Thank you. So far, we have been extremely pleased with the performance of the middle market loan portfolio. It is, frankly, performing better than we expected, given where we are at this point in the cycle. There are several reasons for that. And then ultimately, it boils down to fundamentals, underwriting and then how we've chosen to build the portfolio. We have a very small average loan size. We have maintained a discipline around only first-lien secured structures. We've kept leverage at a very modest level. We have maintained our use of strong covenants. And then ultimately, it's about good businesses, good companies with sound business plans that are seeing good top line growth and have the margins and cash flow, avoiding cyclical companies, and that's really played out. We have built this as our primary below-investment grade portfolio. So we do expect to incur some losses. But relative to the outsized yields we've received, they are really quite modest. And as I said, it is doing better than we expected at this point in the cycle. Going forward, we're going to have to wait and see just how the macro environment does. It does look like we've got the possibility of a soft or at least a soft-ish landing. And then how quickly rates turn around is something that we're going to watch very closely.

Operator:

Our next question will come from Joel Hurwitz with Dowling & Partners. You may now go ahead.

Max Broden:

So obviously in the US, we are seeing some growth, and we're seeing some growth in lines of business that are driving a little bit more new business strain. And that's why we have, in the pandemic, we wanted to run with a little bit more capital and then coming out of the pandemic, we see a little bit higher strain associated with that growth that we are starting to see and expect to see come through. That has led us to run with a little bit higher RBC than what -- than the 400%. But we are at a point in time now where I would expect us over the next couple of years to really get down to that 400% level long term.

Max Broden:

The preferred option would be to drive it by growth because that's where we're getting the best returns on our capital by just writing more policies. At the same time, our -- even though we have some lines of business that are consuming a little bit more capital, overall, we're a relatively capital-light business. So given that we're operating at a 650% RBC right now, I don't see that growth alone will necessarily drive us all the way down to 400%. In order to do so, we probably would, over time, need to address our capital base through special dividends, et cetera.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

David Young:

Thank you, Jeff. Good morning and welcome. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated; Fred Crawford, President and COO of Aflac Incorporated will touch briefly on conditions in the quarter and discuss key initiatives; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments, will provide an update on the investments. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com. We also posted under Financials on the same site, updated slides of investment details related to our commercial real estate and middle market loans. In addition, Max Broden, Executive Vice President and CFO of Aflac Incorporated, provided his quarterly video update addressing our financial results and current capital and liquidity. Max will be joining us for the Q&A segment of this call along with the following members of our executive management in the US

Frederick Crawford :

Thank you, Dan. Let me begin by briefly commenting on conditions in Japan. As Dan commented on our revised cancer product, which we refer to as WINGS, is doing well, now introduced in the Japan Post group. Having rolled out WINGS in Japan Post, we are now at full strength with this refreshed product in all channels. Our entire cancer platform, including in-force policyholders, is now supported by our Yorisou Cancer Consultation services. This platform provides conscientious care to cancer policyholders connecting them with non-insurance services. In dialogue with key alliances and distribution partners, we continued to receive feedback that this platform is a differentiator in the marketplace. From a data perspective, our market research has shown a positive and meaningful impact to our net promoter scores. The sales of WAYS and Child Endowment continues to deliver on our strategy of attracting younger and new policyholders, along with cross sell performance. Since the launch of our refreshed WAYS product, approximately 80% of sales are to younger customers below the age of 50. This cohort of younger buyers has driven a concurrent third sector sales rate of approximately 50%. Looking forward, we anticipate launching our new medical product mid-September. As mentioned last quarter, this product design has been simplified to appeal to both younger policyholders with basic needs, and older or existing policyholders who desire upgrading coverage. As we move through the natural product renewal cycles, we believe simplifying our products is key to driving sales productivity, attracting new and younger policyholders, and lowering our operating costs. Turning to operations, we are pleased with our expense ratio traveling below 20% in the first half of the year and in the face of continued revenue pressure. We are actively working to increase digital adoption focused on new business applications, customer self-service and claims. As we look forward, we anticipate increased levels of investment to drive digital adoption, with the goal of remaining competitive by lowering our long term operating expenses on a per policy basis. Turning to the US, our second quarter results followed a similar pattern as the first quarter with individual, dental and vision, group life and disability and consumer markets, all contributing to sales growth. Group voluntary sales has been down modestly from a strong 2022. However, we remain encouraged by the level of quoting activity that we believe positions us for a stronger second half of the year. Our growth platforms of dental and vision, group life and disability, and consumer markets are beginning to have a more material impact on performance. In aggregate. sales produced by these platforms are up over 50%, albeit off a smaller and building base. With the build largely behind us, we are focused on driving scale, stabilizing new platforms and leveraging our ability to bundle core voluntary products as we work with brokers on larger groups. We are absorbing a pace of investment in growth platforms that pressures our expense ratio, but naturally precedes revenue development. This is particularly the case in our group life and disability business, which is more capital intensive. As we settle into operating these platforms, we're also refining our approach to drive expense efficiencies and a long term path to profitability, in some cases making decisions around business we choose to exit and opportunities we aggressively pursue. Last quarter, we commented on our renewed focus on product development in the US. Our refreshed cancer product is up roughly 23% and still in the early stages of rollout. Of all the critical illnesses, cancer remains the most frequent and devastating to families and their financial security, and we have high expectations for this product. Last week, we announced a new group voluntary term life product, which is part of an important effort to increase our overall worksite and life sales. We have lagged in terms of life sales and see this product line as an area where we have market share opportunity. Like cancer insurance, this is a product that should contribute to improved persistency. We are pleased to see a return to earn premium growth in the US and modest recovery in persistency. We continue to drive utilization through wellness campaigns and benefit endorsements to in-force policies, with the objective of improved sales, persistency and driving core revenue growth. Now, let me pause and I'm going to turn the call over to Brad Dyslin to bring you current on the health of our investment portfolio with a focus on the loan book. Brad?

Frederick Crawford :

Thank you, Brad. As Brad noted, we follow the disciplined approach that began with building out our external manager program that matured into taking a minority interest in select managers. These investments have produced strong returns and we intend to expand upon this strategy as opportunities present themselves. Market conditions remain volatile as both the US and Japan economies go through a period of transition. Last week featured moves by both the Fed and the BOJ. The US is looking to calm down inflation and avoid recession, while Japan continues to maintain its ultra loose monetary policy as economic and inflationary uncertainty remain high. As Max noted in his recorded comments, through investment strategy, hedging, and capital engineering, we have greatly reduced our enterprise economic exposure to movements in the yen. In addition, our low asset leverage places us in a naturally strong position to absorb weak or volatile economic conditions and maintain capital deployment plans. I'll now turn it back to David to take us to Q&A. David?

Operator:

Our first question will come from Tom Gallagher with Evercore ISI.

Frederick Crawford:

Let me let me start by making just a couple of comments. And then I'll hand off to some of the folks around the table to contribute. Tom, this is Fred. First on sales results and Japan Post in the quarter, as you may know or may remember, based on our alliance, we don't comment on some of the specific results coming out of those channels. But what we certainly can say is that the launch of the cancer product in the quarter was the majority contributor to the increase in cancer sales that you saw in our results. For example, in the first quarter without being launched in Japan Post, our sales were up in cancer around 25% or so. And as Dan mentioned in his comments, in the second quarter, we were up around 60%. And you can safely assume the majority contributor of that was from Japan Post. Your question then is what about continuation. And our view is that there is still much more runway in Japan Post over the long term, predominantly as they build efficiency in their distribution channel and more and more agents take on the cancer product and begin producing. So, we do think that there's a continuation of upside in Japan Post. However, it is also the case that, commonly, right when you launch the product, you'll have an immediate jump in sales in the early months followed by a calming down. But let me just turn to Yoshizumi-san and/or Koide-san if they'd like to comment or add any color beyond what I just said.

Frederick Crawford:

Tom, your second question was related to revenue in Japan and how to think about it. obviously, having to take into account both our reinsurance agreement and paid up policy, so I'll ask Todd to address that.

Max Broden:

Tom, I would just add as well, if you look at it long term, for us, to sort of get to a level where we are replacing the business that is falling off, i.e. get to an earned premium growth of zero, we need to essentially get back for all distribution channels to pre-pandemic levels in terms of production and also have the Japan Post channel get back to a restored production level.

Alex Scott:

First one I had for you is on some of the comments that were made in the remarks video that you all post. It was mentioned that the [indiscernible] are continuing to run favorable in what you're seeing in the claims activity and the benefit ratios. I was just interested what the updated view is on whether that's temporary, associated with utilization levels, potentially being temporarily depressed versus maybe something that you guys have just seen longer term and that you potentially need to adjust in your long term assumptions?

Virgil Miller:

Yes, utilization continues to be our focus in the US. We have launched a series of wellness campaigns really driving our policyholders to leverage the coverage. I think Fred or Dan mentioned that we've seen over a 22% increase in wellness utilization during that time period, which started about the first quarter of the year. And we're going to continue to do that. Our main thing is to drive and demonstrate value. We know that the average American has less than $1,000 in savings out there. So there's a benefit to them that make sure they're prepared for any unexpected medical event. And also, getting regular checkups will help anyone that gets diagnosed with some catastrophic disease like cancer. It helps them, of course, be able to get the right treatment and save their lives. So we're going to continue to push on that. And I expect us to see continued improvement going forward.

Alex Scott:

A follow-up I had is just on Japanese interest rates. I was interested in just how it affects your strategy in terms of – if you all are thinking through different products that you may emphasize more in higher rate environment, as well as on the investment side, choices you're making between USD investing and yen investing?

Bradley Dyslin:

In terms of investment activity, the rise in yen rates is certainly welcome news. It's been a long time since we've had these kinds of levels. But one of the biggest issues we face in Japan is finding attractive spread products. And that remains our biggest challenge. We continue to take advantage of those opportunities when we can find them. We have been relatively successful in finding yen credit where we can get an acceptable level of pickup over JGB yields for what we think is a pretty acceptable level of risk. And although the rising race is definitely welcome, it still pales in comparison to what we're able to get in some of the dollar assets. So we'll continue to always be active there, but you shouldn't expect to see a big wholesale change in strategy, at least not yet.

Suneet Kamath:

I want to go back to some of the comments that you're making on utilization, both in Japan and the US. It seems like things are moving in the right direction. My question is how quickly did these benefits get reflected in your financial statements under this kind of remeasurement concept in LDTI? My thought was historically these impacts would take a while to kind of feather in. But I'm wondering, if under LDTI, does this get reflected in your financials much faster?

Suneet Kamath:

I guess where are we with that now? Should we expect some of these benefits that you saw here in 2Q to persist going forward? Or is it more – you've baked in these lower utilization trends and so, going forward, we need to see them decline even more to get incremental benefits?

Suneet Kamath:

My follow-up is just on persistency in Japan. I just noticed that it fell below 94%, which is something we haven't seen in a while. Just wondering if you can unpack that a little bit. Is this lapse/reissue related to the new cancer product? Or is there something else going on?

Todd Daniels:

I think that we saw a lower lapse and reissue rate during the quarter than we did first quarter. And that's typical. As we launch a new product, we expect that to wane over time. With the product being launched in the Japan Post channel, we did have some lapse and reissue activity during the quarter. But it's within our expectation, and it's still running somewhere around 50%.

Frederick Crawford:

One thing that I'd really like to add when we have this conversation, particularly spending some time in Japan and with the team is, we proactively promote the notion of an existing policyholder with an older cancer policy replacing their policy if it's in their best interest, if it serves them economically and from a benefit and overall quality of coverage perspective. And we do that because it's good for the customer. But we also do it because it brings that customer into our shops and allows for face to face interaction between our distribution partners and their clients. And that often leads to cross sell – cross sell activity with the individual, but also cross sell activity with their family members, as the agents have a chance to engage. And so, please realize that we don't actually look to avoid or curtail lapse and reissue activity. It's actually part of the strategy. And it's particularly important on the cancer side, as you can imagine.

Masatoshi Koide:

[Foreign Language] As our sales results show, the cancer insurance product that we launched newly in August last year called WINGS, it's going extremely well. [Foreign Language] We now sell in cancer, WINGS, through all channels because we had somewhat a progressive launch of this product starting August last year with our associates and then in January this year, Dai-ichi Life and [indiscernible] has introduced it, and then in April of this year did the Japan Post has launched its product. [Foreign Language] Well, all distribution channel sales has been active of surrounding this new cancer product. Because of the new product launch, it is obviously the case that things will become very active. But at the same time, the Japanese society's economic activities have recovered during the same time. So with these two factors, I think the product has been extremely well. [Foreign Language] And our cancer new product competitiveness has increased as well. As Fred mentioned earlier, we now have this support service called Yorisou Cancer Consultation service, which is somewhat of a concierge service for our customers. And by having this integrated with our cancer product, it is also pushing the sales as well. [Foreign Language] And we're also preparing to launch a new medical product with very good competitiveness in September. [Foreign Language] So as a result of all these things that are going well, all our employees in Aflac Japan as well as our sales people in our distribution channel, all channels are extremely motivated to do more sales.

Wes Carmichael:

I'm hoping you could just talk a little bit about the lapse in persistency trends in Aflac U.S. It looks like it's improving a bit, but maybe you can help us with your expectation for how that should trend from here and maybe any impact on the expense ratios. I think that's been a little bit elevated by lapses.

Steven Beaver:

I'll just add that, remember, the activity around driving persistency takes time to emerge in a 12-month rolling metric. But we do expect, like Max said in his video, it will help us bend that curve and lower the expense ratio going forward.

Wes Carmichael:

I just wanted to kind of clarify, maybe a follow-up to Tom's question, but on net earned premium growth in Japan, I think it was impacted by 260 basis points related to the reinsurance transaction and some lapses. I just want to clarify, for the rest of 2023, do you think that roughly 6-ish-percent decline is reasonable for the full year and then it kind of moves back into that 1.5% to 2.5% decline in 2024? Just wondering your thoughts on that.

Operator:

Our next question will come from Jimmy Bhullar with J.P. Morgan.

Frederick Crawford:

Why don't we have our team here in Japan comment on that. So, Yoshizumi-san, the question is, is there a natural pullback in medical when there's anticipation of a new medical product to come later in the year?

Daniel Amos:

[Technical Difficulty] any time that we come out with a new product, it always has some impact. So we're taking that as being a standard, no matter what. If it's a new cancer, it affects medical. If it's a new medical, it's cancer. Because everyone goes to the easiest thing to sell. And so, something new and sparkly always looks better. So that's going to always happen. But the variation can be such. But, all in all, that's part of the system. That's why we're constantly having to upgrade is because we have to show that competitors come out with new things. We have to come out with new things. But because it isn't actual expenses, but fixed cost, we have to do this.

Daniel Amos:

Well, I don't think you ever say never. And you also remember that they're our largest shareholder. Those are positive things that we'll look at going forward. Fred, you've got any comment?

Operator:

And our next question will come from Josh Shanker with Bank of America.

Max Broden:

Essentially, all of it, both senior management and employees, have incentive compensation based on earned premium.

Max Broden:

You mean in terms of specific levels?

Max Broden:

In the short term, it's outlined in our proxy and you can see our MIP targets there.

Max Broden:

That is correct.

Frederick Crawford:

You'll see very clearly in each segment, US and Japan, there's both sales and earned premium targets. And then as you can imagine, we cascade that down and get more particular by line of business when we get down to executives or officers that are in charge more directly to a particular line of business. So the concept of earned premium is an essential piece of how we compensate.

Joshua Shanker:

I'm aware of that.

Mark Hughes:

This is actually Maxwell Fritscher. I'm calling on behalf of Mark Hughes. So looking at the total recruited agent count, it looks like it reduced to 4% year-over-year. On a tough comp, though, and up 6% sequentially. I was just wondering if you could give me an outlook or what the environment looks like for recruiting and the labor market right now.

Daniel Amos:

Let me make a comment about recruiting for the past. And we have to remember we're in a post pandemic period. But our track record for the past has been that, with high unemployment, people tend to come selling for us because they can't get a job on the south. So they're working on commission. That's not limited to Aflac. Anybody that's in that business – most people prefer a salary with a bonus versus all commission. So that's the first point. But on the other hand, when you have high unemployment, recruiting becomes more difficult. But at the workplace, there are more people to enroll. So the people that are selling are seeing more people at the worksite. It will be interesting, what happens here is we see more people working from home. We're seeing that there – I was in a restaurant the other day that it was closed for lunch because they couldn't get enough people to work there. So, these things are happening, and we're having to do that. But I would say, considering that it's hard to find employees, certainly at the lower levels, it tells you that we're doing a pretty good job. And I give kudos to Virgil and their team for what they're doing because it is a little bit uncharted waters because the tradition of the way we've been doing it, I've just got to see how it falls out. So I want to make that comment.

Frederick Crawford:

If we could for a minute before we go to the next question, Jimmy had asked a question earlier about our expansion opportunities in Japan Post. And as Dan mentioned, our president, Koide-san, is here with us today this morning in Columbus and he would like to add just a few comments about the Japan Post alliance. Koide-san.

Operator:

This concludes our question-and-answer session. I'd like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference is now concluded Thank you very much for attending today's presentation. You may now disconnect your lines.

David Young:

Thank you, Andrea. Good morning and welcome. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated; Fred Crawford, President and COO of Aflac Incorporated is joining us from Japan and will touch briefly on conditions in the quarter and discuss key initiatives; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments will discuss the investment portfolio and its positioning given recent market events and volatility. Yesterday after the close, we posted our earnings release and financial supplement to investors.aflac.com. Under financials and the menu of that site, we also posted several slides of investment details related to our bank, commercial real estate and middle market loan exposure. In addition, Max Broden, Executive Vice President and CFO of Aflac Incorporated, provided his quarterly video update addressing our financial results and current capital and liquidity. Max will be joining us for the Q&A segment of this call along with the following members of our Executive Management in the U.S. The following Virgil Miller, President of Aflac U.S.; Al Roziere, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US. We are also joined by members of our Executive Management team at Aflac Life Insurance Japan

Fred Crawford:

Thank you, Dan. Let me first begin with brief comments on our Japan and U.S. operations. As Dan noted, we're off to a promising start. The revised cancer product is doing well and now supported by our Yorisou Cancer Consultation Platform. This providing Concierge’s care to cancer policyholders and connecting them with non-insurance services. As we look ahead this year, we are focused on the following here in Japan. Continued recovery with our longstanding alliance partners fueled by a refreshed cancer product and joint marketing and training support. Based on our preliminary read of activity levels within Japan Post, the Wings product appears to be off to a promising start and gaining traction. We are preparing to launch a new medical product in the fourth quarter. We are operating in a highly competitive environment with medical product representing 70% of the third sector marketplace. We are focused on simplifying the product and appealing to both younger policyholders with basic needs and older or existing policyholders, who desire upgrading to a more comprehensive coverage. The sale of WAYS is delivering on our strategy of attracting younger policyholders and cross sell activity. We are primarily selling in our associates channel and are being cautious with respect to selling in the bank channel with limited volume expected. We understand that over the long-term, leveraging the bank channel will require marrying a competitive medical and cancer product with a formal asset formation strategy to drive shelf space. Finally, our short-term insurance subsidiary SUDACHI launched a line of affordable term medical and cancer products in April. We anticipate a modest level of sales as measured in annualized premium. The focus is on introducing young first time buyers to the importance of medical and cancer insurance to then upgrade to more comprehensive coverage in the future. From an operations perspective, we are pleased with our expense ratio coming in below 20% in the phase of continued revenue pressure. This is in part a cumulative result of addressing expenses over the past few years. Turning to the U.S., we have discussed our balanced attack and this remains the case with individual, dental and vision, group life and disability and consumer markets all contributing to sales growth in the quarter. The underlying signs of momentum remain encouraging in our agent driven small business franchise recruiting the number of average weekly producers and agent productivity are all up in the quarter. Dental and vision sales increased 40% in the quarter with continued strength in cross sell of core voluntary products. While this is traditionally a slower quarter in the life and disability markets, our platform is off to a strong start for the year. Finally, we are encouraged by consumer markets sales up 29% in the quarter and with new products gaining traction and alliances coming online. With expanded business lines and new distribution channels, product development is a key focus in the U.S. We have launched a refreshed approach to cancer as Dan mentioned, we've advanced coverage for mental health conditions and are adding non-insurance services to our group disability products. We are proactively driving benefit utilization through wellness campaigns and benefit endorsements to in-force policies. We know that utilization drives persistency. In terms of operations, our expense ratio remains elevated, but as Max commented on in his recorded remarks, roughly 300 basis points are due to the pace of investment in emerging growth businesses all performing in line with our expectations. So what bends the expense curve in the U.S.? Traditional managing of expenses along with investment in process automation in our mature individual and career driven small business franchise, a multi-year technology modernization path, including a new group administrative platform driving process improvement and cost reduction. Finally, delivering on revenue build in our inquired and Greenfield properties that requires investment upfront to secure and retain quality business. Now I'd like to hand over to Brad Dyslin to discuss our investment portfolio and positioning with respect to recent market events and volatility. Brad?

Fred Crawford:

Thanks, Brad. Let me just give some additional perspective before we go to Q&A and that is connecting Brad's comments to capital. Our low asset leverage, which we define as the ratio of assets to statutory capital, particularly when you consider our natural concentration in JGBs, places us in a strong position to absorb weak economic conditions. We watch SMR in Japan carefully, as historically, it is more volatile during periods of economic stress. However, our SMR as you can see remains very strong. We are also comforted by a stable ESR ratio that like our U.S. statutory RBC is robust and more resilient to market volatility. The punch line is we do not see the events of the last quarter and/or mild to medium recession causing disruption to our capital deployment plans. So with that, let me hand back to David, who will take us to Q&A. David?

Operator:

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Wes Carmichael of Wells Fargo. Please go ahead.

Fred Crawford:

Sure. Let me -- this is Fred. Let me do this, let’s go to Koide-san to comment on Japan Post and Yoshizumi-san can follow-up with any color from his perspective. Koide?

Koichiro Yoshizumi:

[Foreign Language] Thank you. This is Yoshizumi of Aflac Japan. [Foreign Language] To launch this product in April, we have been thoroughly preparing for the launch. [Foreign Language] We are seeing the start of the sale, this new product is very good, and it is gradually growing and it is meeting our expectation. However, having said that, because this product has just been launched, it would probably be a bit too early to say whether this is truly successful or not. But this is the product that we have launched this year as a continued new product. [Foreign Language] And I do believe that we have been able to get started with a very good new product process, because we have been training since January, and we have also introduced just so means. So we do believe that this product can be successful and at the same time this can be a trigger to even know more success. [Foreign Language] So let me just repeat this again, our start of the sale of this product has been very successful and that can be proved by the number of calls that we are receiving at the call center and also the number of illustration and estimates that we are providing to customers. [Foreign Language] And that's all for me. Thank you very much.

Wes Carmichael:

No, that's helpful. Thank you. And on capital, the capital ratios are pretty strong with RBC north of 600 and SMR 850 plus and Holdco capital strong at $3.3 billion. But how do we think about the outlook for dividends or distributions out of the insurance companies this year? And I think you had proceeds from the reinsurance transaction, but it seems like there may be a lot of capital coming. So is there any help you can give us there?

Operator:

The next question comes from Suneet Kamath of Jefferies. Please go ahead.

Fred Crawford:

We're going to go to Koide-san and Yoshizumi-san to help you out with that Suneet.

Fred Crawford:

One of the things I would also add is that I have mentioned in my comments our Yorisou cancer care consulting practice, which is really wrapping non-insurance services around our cancer policies for our policyholders and that's gotten off to a good start and is building. And I mentioned that only because one of the things we do have to do, Suneet is continue to differentiate and protect our leadership position. And we differentiate the overall value proposition of a cancer product, not just from the enhanced coverage, advanced treatments, advanced types of care, but we also wrap that policy with non-insurance services and that really differentiates it from a traditional and often basic medical product sold to individuals.

Brad Dyslin:

Yes, thank you. This is Brad. It's a very good question. A couple of things I'd say in response to that. On the transitional real estate book, most of those loans contain rate caps. So the sponsors are protected from the large increase in rates. In fact, our average rate cap is about 200 basis points below where SOFR is today. Now that benefits the borrower, we still get the benefit of the higher rate. They just get the offset through the rate cap and the hedging that they've put in place. On the middle market loan portfolio, there's a couple of things at play here. First, these are largely service-oriented companies, which means they generate a fair amount of free cash flow. Now that's less free cash when you have a higher cost structure. But these companies have also been part of a growth strategy for the underlying sponsors who own these. So they've continued to perform well. They're continuing to grow. Margins have been relatively stable. And while cash flow may be reduced, they are taking actions to mitigate that. And the overall thesis for most of these companies remains intact.

Suneet Kamath:

Okay. Thanks, Dan.

Jimmy Bhullar:

Hey, good morning. So first, just a question for Brad. On the real estate portfolio, commercial real estate, you mentioned a loan-to-value at origination of 60%. What would you guess that is now given that rates are higher since you've originated most of these loans? And then obviously, demand for office space has dropped over the past couple of years because the COVID is gone and work from home.

Jimmy Bhullar:

Okay. And then fair to assume that the numbers are smaller, but there's a similar decline across the rest of the portfolio in terms of value as well?

Operator:

The next question comes from Alex Scott of Goldman Sachs. Please go ahead.

Fred Crawford:

This is Fred. From a business perspective, and I'll let Max comment on capital sensitivity, and I would invite in either Koide or Yoshizumi-san to comment on. But as you start to see rates recover, then you start to bring in some of the first sector savings products, particularly the yen-based products as potentially being able to price to offer up a more valuable value proposition, a better value proposition to the consumer. So you can see some of that, but it takes quite a while, because the way that reserve discounting works in Japan, you have to go for quite a while of rate recovery before you are able to price more appealing and make the product more appealing broadly. So you need to have consecutive years, if you will, of recovery. But it does add some added tailwind to those products. I don't think you see much of any impact to the other aspects of our business that are far less rate sensitive and are really more of a morbidity play, as you can imagine. Max, I'll let you comment on the SMR dynamics, ESR dynamics.

Alex Scott:

Got it. That's helpful. And then for a follow-up, I wanted to ask about the additional benefits you were talking about for the U.S., some of the things you're doing to improve persistency. I mean, could you help us think through what some of those things may be. And I mean when I hear higher benefits and no additional costs, I would think maybe that would put pressure on the benefit ratio itself. But maybe I'm not thinking about that right.

Operator:

The next question comes from John Barnidge of Piper Sandler. Please go ahead.

Fred Crawford:

John, I want to make sure I heard that last part of your -- you're on the track of expense ratio quarter-to-quarter related to product launches. But what's your last part of your question?

Fred Crawford:

Understood. Why don't we do this? Let's go to Yoshizumi to talk about the training and rollout of training for Japan Post agents. And then Todd Daniels is with us and can comment on any implications for expense ratio. So why don't you go ahead, Yoshizumi-san?

Masatoshi Koide:

[Foreign Language] Now this is Aflac Japan Koide once again. Regarding expenses, normally, when we launch a new cancer product, we will be doing training or renewing our solicitation materials, et cetera. And this is sort of like a normal course of action that we normally take when launching a new product. So that's what we did for this new cancer product as well.

Todd Daniels:

Yes. I agree, Fred. I think the first quarter is traditionally lower with expense ratio, and you see a higher expense ratio later in the year with IP and marketing spend. But we have been paying for the training and the marketing of the product all throughout the quarter, so a lot of that is cost. And now you have the sales of the product and most of the acquisition expenses will be amortized into DAC. So you should see a slightly higher expense ratio as expected in the second quarter, but not really materially a result of Japan Post.

John Barnidge:

Thank you so much for the answers.

Erik Bass:

Hi, thank you. I had a couple of questions for Brad on the CRE portfolio. And I was hoping you could talk more about the common factors among the loans that are entering foreclosure. And then also maybe talk about what's driving the $900 million of CRE loans you have in your watch list currently. Maybe how that watch list has changed in the past few months and what's the risk of that growing over time.

Erik Bass:

Got it. And then just to clarify, when you talked about the $200 million of reserves that could be needed in your stress scenario, is that the full capital impact? Or could there be any additional pressure from capital charge changes when you bring a property on to your balance sheet?

Operator:

The next question comes from Tom Gallagher of Evercore ISI. Please go ahead.

Brad Dyslin:

Yes. We did -- that is where the $10 million of additional reserves came from. It was on that $500 million in process of foreclosure. And the reason it wasn't larger is because looking at the decline in the asset, both the physical property, as well as land or any other peripheral value, the declines were not severe enough to dip into our 65% loan to value.

Brad Dyslin:

Sorry, Tom. Yes, it's a really good question. It's one we spend a lot of time on. These properties, by and large, are generating some income. There is an NOI coming off of them. It is going to be lower than the yield we're getting on the underlying loan, and that is baked into all of our projections and planning.

Brad Dyslin:

Yes. Well, right now, it's currently nine properties. We think that is -- that reflects our current best estimate of the number. There are different levels of discussions going on in the workout process with the sponsors. We may have a couple of those break positively where they end up coming out of this bucket. But at this point, we think that's unlikely and we believe it was prudent to assume that this full $500 million are going to be foreclosed and become real estate-owned.

Wilma Burdis:

Hey, good morning. Could you give an update on any plans to refresh the Japan medical product? I think it's about 18 months old, and you tend to refresh the product every two years or so.

Koichiro Yoshizumi:

[Foreign Language] Okay, this is Yoshizumi once again. Thank you for the question. Well, regarding the Japanese medical market, what I can say is that it is very competitive. [Foreign Language] And especially the competition is in trying to acquire young to middle-aged customers, and that's where all the companies are aiming for. [Foreign Language] As a result, what is being asked by the market is to come up with something with reasonable premiums and simple benefit structure. [Foreign Language] And we are hoping to launch a new product that are focused on those points and will have competitive advantage. [Foreign Language] And especially by using this new product, the channel that where the competition is the most severe is a large, enormous collusive agencies channel, and that's where we would like to regain our share. [Foreign Language] Right now, we are collaborating between Japan and the U.S. to come up with a good product and we are in a full preparation mode. [Foreign Language] And that's all for me. Thank you very much.

Fred Crawford:

Yes, I'll make just a couple of comments, and then I'll ask Koide-san and Yoshizumi-san to comment. But first, remember back when we were selling WAYS a number of years ago, 10 years ago, much of the volume of that sale -- those sales were through banks and particularly what we would call mega banks or the large banks and regional banks. And much of it is sold with discount advanced premium features. So products structured more for deposit like mining, meaning single premium-type short pay products, which can be much more attractive particularly in the banking channel. During our investor conference, we talked a bit about the approach we're taking here which is more of a level pay process product. And that level pay product is less appealing in the bank channel which is why we have rather muted expectations for volume. But it is -- it can be a useful tool and sell in our associate channel and more of a financial planning environment and attracts a younger policyholder in the process. And so that's where we came back in. From an engineering perspective, I'd also add that in the last 10-years, we've quite advanced our investment strategies and structures quite a bit under the leadership of Aflac Global Investments. And that is a nice weapon to have when looking at first sector savings products and dialing in investment strategy to back product and product pricing. And then as Max Broden has covered with you, we now have a reinsurance unit, and reinsurance is actively used to help manage capital returns over time of that product. So we have some engineering benefits that make it more attractive to come in at this time. Koide-san or Yoshizumi, maybe on the [Multiple Speakers]

Fred Crawford:

Yes, I think that -- I think we've covered it here. I would say we're -- I believe roughly half of our sales are to individuals younger than -- even more than that, younger than 50-years old, that may be even north of that. And then I think we're achieving upwards of 40% cross-sell results to new and younger policyholders to Dan's point. So those are critical metrics, we want to see it attracting young and we want to see the cross-sell activity, because that's fundamental to the strategy of coming back in the market.

Koichiro Yoshizumi:

[Foreign Language] So let me just add a word as well, this is Yoshizumi speaking. [Foreign Language] So what I would like to say is that those customers that have actually purchased WAYS and Child Endowment are basically 40s and below. So those customers in their 30s and 40s account for 83% of all customers. [Foreign Language] And on top of that, as was mentioned, we are planning to sell third sector product using WAYS and Child Endowment by using this level premium product. That was our strategy. And right now, our sell rate is 47%. [Foreign Language] And so what I'd like to do going forward is to really expand and really sell more in third sector products by using Child Endowment and WAYS as a trigger and catalyst. That's it from me. Thank you

Ryan Krueger:

Hey, thanks. Good morning. Get back to this transitional real estate. A couple of questions. One is, can you -- what is the total people reserve specifically against the transitional real estate that you're holding at this point? And then I also just wanted to confirm that the $900 million on the watch list, is that in addition to the $500 million potentially foreclosed or is the $500 million the subset of the $900 million?

Max Broden:

And Ryan, our total CECL reserve was $250 million.

Max Broden:

Yes. So we obviously operate with strong levels of capital, and you know our sensitivities to different, kind of, macro factors. We're also in this now transition over time from SMR into the new ESR world. As we do that transition, we obviously are going to find our way to, over time, optimize our capital base somewhat. But also every time you go through a transition, you actually want to do that with some additional level of capital in order to make sure that you have the flexibility to then down the road optimize your capital structure. So right now, we feel comfortable where we operate, both from a standpoint of it gives us flexibility to be opportunistic where we can, but also then obviously absorb any kind of losses that may come our way. And also it gives opportunities for us to also deploy capital organically into opportunities that we might see as well.

Michael Ward:

Thank you, guys. And thank you for all the color on the loan books. Extremely helpful. So Brad, on the commercial mortgage loans, I think you mentioned the process of making office buildings more attractive for tenants and leases. I guess my understanding on office is that they, sort of, have to be super new and exciting to attract new leases. We've heard that the cost of that can be super expensive at times. So just curious if you have any thoughts on that and if the $10 million reserve math incorporates that.

Michael Ward:

Awesome. Thank you. And then on the rate caps. I was wondering if you can help us understand maybe the percentage of rate caps on the portfolio that have reset with the jump in rates over the last 12-months?

Operator:

The next question is a follow-up from Wes Carmichael of Wells Fargo. Please go ahead.

Dan Amos:

Well, I'm not going to be that good a retiree and I'm not in that big a hurry. I just had a physical at Emory and got a good report. So I plan on staying around a few more years. But I still think my number one responsibility is to make sure I have it prepared. We never know what can happen in life, and we've got to have a company ready to go and go uninterrupted. And so that's one of the things that I'm doing. I will say, for example, with Virgil and the changeover to Teresa, that's been smooth. I will say that Eric's changeover to Brad has been smooth. You go back to Koide, we've gone on interrupted on the -- as things take place. And to me, that's one of the things I have to make sure happens. And I promise you, I'm working toward that with the Board of Directors, who ultimately make the call. But we have very structured and very intense meetings about what goes on in regard to personnel and human resources at our August meeting. And so I'll be constantly updating on what's going on there. But I would say I'll be around a few more years. So unless the Board gets tired of me, look for me to be here.

Operator:

The next question is a follow-up from Tom Gallagher of Evercore ISI. Please go ahead.

Brad Dyslin:

Yes. Thanks, Tom. The $900 million on the watch list is predominantly near-term maturities. I will have to double check, but I don't believe we have anything out into 2024 on that watch list. But it is predominantly near-term maturities that we have to address. No, I'm sorry, what was your second question?

Brad Dyslin:

Sorry. Yes, these are very short-term loans. The -- at origination, they're generally three years in term with options for one-year extensions based on certain thresholds being met. So these do turn over pretty quick. We do have -- it's less than one-third of the total portfolio rolling over this year. But a big portion of those are what's on this watch list.

Brad Dyslin:

It's really way too early to try to give any insight on second quarter. I think you're familiar with the lag we have in our marks. For first quarter, we're really reflecting broad market activity from third and fourth quarter just given the lag in the reporting to our managers and then the reporting to us and it gets extended a little bit longer in fourth quarter. So second quarter should correlate more closely with the general market activity we saw in fourth quarter and a little bit of first quarter, but it's just way too early to give you any direction on that.

Jimmy Bhullar:

Hey, just a question for Fred on the implications of the May reclassification of COVID equivalent to influenza. What do you think the financial implications are? Because your margins in Japan have already been pretty good actually.

Jimmy Bhullar:

Yes. So obviously, more of an implication for potential sales activity than…

Jimmy Bhullar:

And then for Max, the stress that you're seeing in your investment portfolio, specifically in CRE, is that causing you to reevaluate your capital plans, because you did buy back a decent amount of stock, and your overall capital levels, both in Japan and the U.S. are pretty healthy.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

David Young:

Thank you, Andrea. Good morning, and welcome to Aflac Incorporated's fourth quarter earnings call. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated. Fred Crawford, President and COO of Aflac Incorporated, who is joining us from Japan, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com, along with a video for Max Broden, Executive Vice President and CFO of Aflac Incorporated, who provided an update on our quarterly financial results and current capital and liquidity. Max will be joining us for the Q&A segment of the call, along with other members of our executive management; Virgil Miller, President of Aflac U.S,; Brad Dyslin, Global Chief Investment Officer and President of Aflac Global Investments; Al Roziere, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac U.S. We are also joined by members of our executive management team at Aflac Life Insurance Japan; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. Before we begin, 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 assurances that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. And 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. As I mentioned earlier, the earnings release is available on investors.aflac.com, and includes reconciliations of certain non-GAAP U.S. measures. Please also note that after we file our 10-K, we plan to post, on our investor site, a recast quarterly financial supplement, showing the effects of the new long-duration targeted improvement accounting standard had it been applied to the 2022 and 2021 fiscal years. I'll now hand the call over to Dan. Dan?

Fred Crawford:

Thank you, Dan. I'm joined here in Tokyo by our Aflac Japan leadership team led by Masatoshi Koide, President of Aflac Japan. Let me begin by saying 2022 was an important year of operational and strategic progress across the organization. Our U.S. growth platforms, dental and vision, group life and disability and consumer markets have moved from integration to full production, with comprehensive product portfolios that are broadly filed and marketed across the U.S. under the Aflac brand. These businesses have modernized operating platforms built to support the scale we anticipate in the future and are now fully contributing to sales and earned premium growth. In Japan, our refreshed cancer product is now further enhanced with the launch of our new [Yuriso] consulting support model after nearly a year of successful testing. We launched a revised and tactical approach to the sale of our WAYS and child endowment products, leveraging the strengthened product appeal to promote third sector cross-sell. While navigating difficult COVID conditions, we were proactive in addressing our expense structure, defending strong margins in the face of revenue pressure. From a corporate perspective, we remain focused on risk management and capital efficiency. Two areas of focus included our approach to hedging the U. S. dollar portfolio in Japan and efforts to improve enterprise return on equity and Japan product competitiveness with the launch of Aflac Re, our Bermuda-based reinsurer. Finally, across the organization, we launched a coordinated effort to address the balancing act of investing in and delivering on growth, reducing expenses simplifying our business model and improving overall customer experience. This includes comprehensive project governance, a network of agile teams and regular reporting up to the Board level. The financial goal is simple

Operator:

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jimmy Bhullar of JP Morgan Securities. Please go ahead.

Fred Crawford:

I think really -- so first of all, over the long run that is beyond 2025 and '26 we obviously would expect to continue some level of growth pattern. We simply stopped the timing around that time frame as a reasonable forecasting period. But there's no doubt, in the short run, meaning the next three to four years, that one of the shortfall compared to pre-pandemic levels was strength in the Japan Post distribution platform, including some very strong years of introducing new cancer in that platform. And it's clear to us at this point in time that while that platform is recovering, it's going to recover in a more linear fashion over time as opposed to a step function with dramatic increases. And that's because Japan Post is under a very diligent program of improving and investing in their platform, retraining their sales force and recovering from effectively halting and being out of the market for a period of time, as you know. So I think it's more of that gradual approach to the build that we expect that is playing on the slower growth rate. Now having said that, we're doing a lot of different things, as you know, we're refreshing our cancer product. We're adding to that cancer product competitiveness with our [Yuriso] consulting practice. We're also adding lump sum critical illness benefits, and we continue to focus on our other product development, including refreshing our medical product, particularly with an eye towards competing better in non-exclusive channels that are very competitive on the medical product, and we need to compete better there and build share. And then we're excited actually about the developments with WAYS and child endowment, particularly with WAYS. While it is not as high a return product as our other third sector, we're very pleased with the cross-sell activity, and it's also serving to build a little bit of momentum back in our core associate channel who needs more product to generate more commission and have more opportunity to recruit and build the sales force. So, so far, it's very early in that program. We're only a few months into reviving the WAYS product, but so far, the data is very supportive of the halo effect, if you will, particularly cross-sell. So we're doing a lot of different things here in Japan. But ultimately, the reason you see muted recovery is when we look at the throughput of these new products and capabilities, meaning the throughput through agents at Japan Post, agents at Dai-Ichi, agents and agencies in our associate channel, they're busy recovering from COVID, getting back out into the marketplace with face-to-face meetings. And of course, Japan Post is going through their own dynamics of recovery. So it's really the recovery in those third-party platforms that's causing us to be more cautious.

Fred Crawford:

I think from a claims perspective, you're seeing the recovery already, and that is we're expecting it to recover back to previous traditional levels of claims activity. I think I mentioned to you last quarter, a normal week in Japan for us is processing something in the neighborhood of 30,000 claims in our operating center. That rose to north of 90, 000 claims a week during the deemed hospitalization period and seventh wave of COVID. So we've seen that dramatically come back down to normal levels with the exception of working the backlog that I mentioned in my comments. So I think the idea is to return back down to normal levels of benefit ratios, and that's the answer there. In terms of new sales, we have Yoshizumi-san here and Koide-san and they can add their commentary. I think the trickier thing is, when you're talking about thousands of agents, some of whom were forced into quarantine conditions during COVID, the issue becomes not only are more agents out there able to produce and share numbers undisrupted by COVID, but will there be a recovery in face-to-face activity, which is more effective. This is still an extremely cautious society here. As we sit here today, we are all wearing masks on the way into work, on the way home from work, while at work and while walking the streets of Tokyo. So there's still some time to take place to recover the full normal activity. Yoshizumi-san, I don't know if you feel differently or have anything to add about COVID conditions.

Operator:

The next question comes from John Barnidge of Piper Sandler. Please go ahead.

Fred Crawford:

Well, I think the primary benefit, there is certainly an ease -- customer ease element to moving to digital. But the primary motivation of moving to digital is increased agent productivity, yes, ease of doing business with the customer and the agent. There is, in fact, speed of processing claims that would pick up. For example, imagine paper-based claims processing when your claims went from 30,000 to over 90,000 a week during the last seventh wave of COVID. Had we been -- frankly, as an industry, this is not an Aflac thing. Had the industry been far more digitized in the level of claims they process digitally, you would have had much greater speed of claims adjudication. Normally, we'll pay a claim on average in around three days or so in Japan, sometimes four days. It had gone up to around 12 days during that peak level. It's now come down to around five days, so we've recovered quite a bit. But if you are in a digital environment, there's no doubt, John that you could speed that up and also protect against elevated claims periods to keep the speed and turnaround time faster. But I will tell you, a big motivation on our part to move to paperless is taking cost out of our structure. So when you're dealing with paper applications and paper claims processing and a heavy call volume related to customer service activities, all of that adds to cost structure. And in order for us to get that cost structure down, we've got to move it to digital, and that's what we're on a path to doing.

Fred Crawford:

Not materially. I'm looking at Todd Daniel's here, our CFO, and no, we wouldn't expect that. It's not unusual, however, when we launch a new cancer product in general and then launch in a major system that there is, in fact, a level of marketing expense that comes into play and launch expense. But quite candidly, while you may see it have modest implications to your expenses and expense ratio, it's not material and it's nothing I would characterize as a onetime thing that would pop out on our financials. It's just sort of normal way of doing business and normal business activity. So I wouldn't anticipate that, John.

Alex Scott:

I just wanted to get an updated view on just capital management and capital management priorities. Just looking at even just in the U.S., I mean, how strong the RBC ratio is, I mean I think there's companies that run with around half of your RBC level. There's seemingly a lot of excess capital around the organization. So, I was just interested in your views on that and how that's evolving?

Alex Scott:

Got it. And then the second question I had, I think it was mentioned earlier that Fred was going to be in Japan for some time. And I'd just be interested in sort of what the focus is for you, Fred, as you're over there? It sounded like maybe a year or something. What is your focus? What are your key objectives as you spent some time over there?

Dan Amos:

This is Dan. I want to make a comment is that actually, I wanted Fred to go in 2020. And of all things, as you know, that was the year he got promoted to Chief Operating Officer and then COVID. So the year really is behind because I just thought -- it was actually his idea to stay there. My idea was to go there and live three months. And so that just shows how committed he is to the Company and doing well, and at the same time, working with the U.S. So I'm very pleased with Fred being over there. And that knowledge you cannot buy. It takes being over there, either the way I've been going for 40 -- over 40 years of the Fred's doing in the last seven. So thank you, Fred, and... David?

Suneet Kamath:

On the Japan sales, can you give a sense of how much of those sales represent to the lapse and reissue -- and when we think about the sales metric that you show in your supplement, is that a sort of a gross number? Or is that a net number when we think about policies that may be lapsing?

Max Broden:

And just to add, Suneet, to how this impacts our P&L, it obviously impacts our benefit ratio and expense ratio as well. The benefit ratio was lower by about 90 basis points in the quarter from increased lapse and reissue activity, and our expense ratio was roughly 50 basis points higher because of higher DAC monetization that Fred referenced.

Todd Daniels:

Yes, Suneet, this is Todd. It's still running around that rate. We saw it a little higher in the third quarter when we launched. And naturally, that rate starts to come down. So I think as a whole, over the first six months or so, we anticipate being around 50%.

Ryan Krueger:

Could you talk a little bit more about what you saw in terms of the elevated U. S. lab activity in the fourth quarter? And then, also if you can provide any commentary on if that's continued into January or is settled down?

Dan Amos:

Yes, Fred, Steve's got some numbers here on that, I think. Steve?

Max Broden:

Yes. We certainly expect the continued decent velocity of the labor force and so that will continue to be there. But at the same time, we do expect the recovery overall in our persistency going into 2023 relative to 2022.

Ryan Krueger:

And then just one question on the critical illness rider that you're going to be operating in Japan. Can you help frame how big of an opportunity that is? And it seems like trying -- I know that Japan Post is in a gradual recovery mode, but it seems like that would be a fairly meaningful opportunity given that you can add it to the existing policies.

Koichiro Yoshizumi:

This is Yishizumi. I will cover your question. We are currently planning to launch this lump-sum serious disease rider in April in Atria. But then that assumes that this product will be approved by the SSA, This product responds to customers' needs of having to want to prepare against, not only cancer, but also for cerebral vascular diseases as well as heart diseases. And the Japan Post Group as well as with Aflac, we are trying to fully prepare to launch this product. And as you know, the Japan Post sales is gradually recovering. And what we are expecting is that this new rider will also help accelerate sales and recovery of the Japan Post.

Operator:

The next question comes from...

Operator:

The next question comes from Wilma Burdis of Raymond James. Please go ahead.

Fred Crawford:

I think it may be good for Brad island to talk about that. It's largely an investment question.

Max Broden:

And Rima, just a reminder in terms of the impact on our capital ratios, our SMR sensitivity to 100 basis points shift in the yen yield curve is 35-point -- negative 35 points on our SMR. Our ESR, more importantly, goes the other way. And obviously, higher yen rates are positive to our ESR. So a 100-basis-point shift in the gain yield curve would increase our ESR by 34 points.

Dan Amos:

Virgil?

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

David Young:

Thank you, and good morning. Welcome to Aflac Incorporated's third quarter earnings call. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated; Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com, along with a video from Max Broden, Executive Vice President and CFO of Aflac Incorporated, who provided an update on our quarterly financial results and current capital and liquidity. Max will be joining us for the Q&A segment of the call, along with other members of our executive management, including Teresa White, President of Aflac U.S.; Virgil Miller, Deputy President of Aflac U.S.; Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments; Brad Dyslin, Deputy Global Chief Investment Officer; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; Steve Beaver, CFO of Aflac U.S.; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO of Aflac Life Insurance Japan; Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we give no assurance that they will prove to be accurate, because they are prospective in nature. Actual results could differ materially from those we discuss 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. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan. Dan?

Fred Crawford:

Thank you, Dan. Last quarter, I commented on how we are positioned as a company when considering current U.S. and global economic conditions. The impact of inflation does apply upward pressure to expenses. However, this is mitigated by rising rates and additional investment income. In terms of the risk of recession, our morbidity-based insurance model is generally defensive in nature with relative stability in sales and earned premium through the economic cycles, low asset leverage, and exposure to risk assets. Finally, while certainly not immune to volatility in foreign exchange, we have put in place defensive measures to combat the economic impact of a weakening yen. Overall, we like how we are positioned and see no material adjustments to our operating or capital plans. Turning to Japan. We witnessed COVID cases surging in what is now referred to as Japan's seventh wave of infections. Daily new cases in the quarter reached a peak of 260,000 in August with the wave concentrated in the July through September time frame, effectively running its course in the third quarter. Daily cases have now slowed to a seven-day average of roughly 40,000. As we signaled last quarter, we experienced elevated COVID incurred claims, driven by its designation as an infectious disease and the industry practice of deemed hospitalization, which allows for payment of claims for care outside of the hospital. To give you an idea of the magnitude, before the seventh wave, our weekly COVID claims were in the 7,000 to 13,000 range. During the recent wave, we peaked at approximately 47,000 weekly COVID claims. Hospitalization remains low, and this lack of severity has resulted in the government of Japan changing the definition of deemed hospitalization. Effective September 26, the scope has been narrowed to the elderly, those requiring hospitalization and individuals more vulnerable to severe symptoms. This change in policy, together with lower overall rates of infection will greatly reduce the volume of new claim submissions. While more volatile than usual, we have established reserves for claims incurred in the period, but not yet reported. Therefore, we expect pressure on Japan's benefit ratio to subside in the fourth quarter. Dan mentioned his trip to Japan. I also traveled to Japan in the last few weeks. The general population remains very cautious with respect to the potential for COVID infection. For example, if you walk the busy streets of Tokyo, you'll stand out if you're not wearing a mask outside. While difficult to measure, we believe this remains a headwind for proposal volume and sales; however, our view is conditions are improving. Despite these conditions, we remain focused on the following

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Barnidge from Piper Sandler. Please go ahead.

Fred Crawford:

So the -- what we announced was the launching of Dental and Vision and Hearing on our direct-to-consumer platform. And so this is really what we mean by outside the work site is our direct-to-consumer platform is designed specifically to go after potential customers outside the normal work site pay or W-2 employee environment, meaning the gig economy, individuals who are -- work outside traditional W-2 environment, self-employed, for example, and then also to some degree, the senior markets who are naturally concentrated outside the work site. So, this is really a strategy to enhance our product lineup the direct-to-consumer platform. We think the Dental and Vision piece of it is important really for two reasons. One is, of course, the ability to generate sales through that channel, but the other is Dental and Vision and Hearing is a heavier searched item by individuals. And by putting product on our platform that caters to more search activity, it offers up an opportunity to cross-sell some of our traditional supplemental health products, which are less searched for. So that's effectively the strategy, John. Did I answer your question? Or do you have a second question there?

Fred Crawford:

So, on the topic of pet insurance, we have, in fact, rolled out the pet insurance alliance. This is the Aflac Pet insurance powered by Trupanion. We have focused on the larger broker-driven case size for that product. We characterize that as our premier broker relationships, which tend to travel in the 1,000 employee and up case size. It is really just getting off the floor. I think we have been awarded four accounts so far and are in the process of building that out. I would characterize this year as still somewhat of a proof-of-concept year in terms of getting out there with the product, successfully landing accounts, integrating those accounts between the two parties, our partnership with Trupanion and then making any tweaks or adjustments that we think are necessary to better compete as we roll towards 2023. But we are up running and launched. We're filed in all the states. The product is ready to go but concentrated in the large case market. So we will have, obviously, a fairly small level of sales this year. Also be mindful of this is really earned premium and economics for Trupanion. Our play from a pet insurance perspective is to fill out our portfolio, as you suggest, to where we're able to offer a broader array of benefits to brokerage clients, who desire that plus also their end clients. Other than that, I would say our product upgrades have been relatively routine in nature, meaning natural upgrades, covering things like mental health and other dynamics that have become more important to the broker and the consumer this year, and we continue to do that as a normal part of our business activities.

Operator:

The next question comes from Nigel Dally from Morgan Stanley.

Koichiro Yoshizumi:

Thank you for the question. This is Yoshizumi. Let me answer your question. Well, in terms of the cancer insurance, we have launched our new product in -- on August 22. The channel that we have launched the new product is in the general agencies channel and live channel. And the sales through these channels between August and September this year have been quite successful. The actual sales was up 50%, 5-0% year-on-year. And we are seeing a great momentum still in the fourth quarter as well regarding this cancer insurance. And we are seeing about 47% increase year-on-year at the moment. And also from January 2023, we will start offering more comprehensive support related to cancer called Cancer consolidation service. This is a new service that would comprehensively support the patients or the policyholders from the time they develop cancer and up to the point they recover to their work. And this is the first of its kind in the industry. And this service will be able to respond to all the struggles and all the things that the patient as well as the family members have difficulties with. This is a great differentiator against other cancer insurance. And regarding the sales to start in the Japan Post Group, we are hoping to have it launched in the second quarter next year. We are thinking of working closely together with the Japan Post Group to increase the actual sales channel or sales route as well as training. And in terms of the other channels such as financial institutions and Dai-ichi Life, we are planning to launch the cancer product in January next year. And we will be actively and aggressively selling cancer insurance in the fourth quarter this year as well as the first quarter next year, and that's all for me.

Max Broden:

Thank you, Nigel. It's Max. So $650 million in the quarter, and as always, we look at our capital levels, the capital generation, current and future that we expect from our subsidiaries in the overall enterprise, as well as the opportunity set that we see in terms of deploying capital, that being through dividends, buybacks, opportunistic deployment, et cetera. And that's really what sort of drives how much of buybacks we are doing at any point in time. And generally speaking, we want to deploy capital where we see good IRRs, and the buybacks that you saw in the quarter was a reflection of that. In terms of looking forward, we feel good about our overall capital position and liquidity as well despite the very significant movement that we've seen in the yen.

Jimmy Bhullar:

Teresa and Eric, good luck in the future. So first on a question just on policy usage in the U.S. The benefits ratio has been lower than normal through the pandemic, and it was fairly low in 3Q as well. Do you feel that you're still benefiting from low usage in the U.S.? Or is the benefits ratio reflective of what you expect it to be going forward?

Teresa White:

Yes. I'll just add to that. You're absolutely spot on with your comments. We are seeing lower hospital benefits as well coming out of the pandemic and more outpatient-focused therapies wherever possible. So, we're seeing first occurrence benefits to rebound to 2019 levels, but hospitalization has lagged. That's really all I wanted to add to that.

Fred Crawford:

Yes, I think there's a couple of things going on. One is, yes, there is a general headwind to face-to-face communication unless necessary. And so that persists in Japan, although as I mentioned, it is improving. And in fact, the actual government of Japan is now coming out and encouraging people to open up a little bit and get back to traditional business. So, it's not at pre-COVID levels of activity. And that's what I mean by remains a headwind, but it certainly is improving. I think the other dynamic that we mentioned last quarter that remained the case during the third quarter is when you have a high level of cases and a high level of infection rates of COVID, you naturally are going to have actual agents that are infected and impacted and are pulled out of the field, so to speak, unable to meet with clients or meet effectively with clients. And so that has played into it. You're talking about our distribution model through third parties has several thousand agents that we sell through. And so when you have something as widespread as the third quarter level of COVID cases, you naturally will see less feet on the street, so to speak selling. Again, we think this will naturally improve for the same reasons we see our benefit ratio and claims activity improving in the fourth quarter.

Operator:

The next question comes from Suneet Kamath from Jefferies. Please go ahead.

Todd Daniels:

Suneet, this is Todd. I think I'll take that. It takes time for us to look back and know exactly how to identify the lapse and reissue. We don't see it until the lapse actually is processed. So right now, we're seeing slightly higher lapse and reissue rates over 50%. And we believe that this could go higher as we look backwards, but this is within our expectation.

Fred Crawford:

I don't know if you'll see Yoshizumi-san or Koide-san have any color they can provide on the overlap.

Masatoshi Koide:

Okay, this is Koide. Let me just add a little bit. And of course, in each channel, there are some overlaps of customers. And although I did mention that there are some overlaps of customers between channels, at the same time, each channel has its own specific customer base. Therefore, for example, in Japan Post Group, the other channels may start selling the product before the Japan Post Group, because the Japan Post will not start its sales until the second quarter. However, because Japan Post Group has a very solid customer base on its own, there should be a great sales from there as well.

Wilma Burdis:

My understanding of the 940 basis points of higher Japan benefits ratio from the hospitalizations, about half of that was reported, and the other half as IBNR. This feels a little bit conservative. I don't know if you agree. Is it possible that some of this could be reversed in 4Q? Or is that -- just help us think about the benefit ratio in 4Q between releases and what's going on there?

Al Riggieri:

Yes. It's Al Riggieri. I'll give you a quick comment. I think it's much around the common sense on the IBNR. If you think about that peak in claims happening around August when you think about how long it takes for it to actually come through our peak infections during August coming through our financials. Approximately 60 days later, it's going to start really washing its way through. So the 50-50 split in the third quarter is pretty reasonable in the sense that half of the claims that you saw in the quarter are actually cash and the other half is sitting there and will be cleared during the fourth quarter, sort of a rough estimate of how that 50-50 will play out during the fourth quarter.

Wilma Burdis:

Thank you. Another question. Could you talk about the potential impact of a recession on the group disability business and maybe talk about why this is or isn't a good time to get into that business?

Operator:

The next question comes from Alex Scott from Goldman Sachs. Please go ahead.

Max Broden:

So Alex, you're right in your thinking that, generally speaking, given the significant dollar assets that we hold in Japan, that works relatively well as a capital hedge. And in fact, to your point, it strengthens the SMR ratio and the ESR ratio in a weakening yen scenario that we now have been in. That means that over time, the dividend capacity of Aflac Japan, all things being equal, is slightly higher than before. And you should then expect that over time more capital to find its way up to the holding company. Now that is not immediate, and it's coming through over time. So over time, you would then see a liquidity and capital at the holding company build unless we were to deploy that. And obviously, if you want to have sort of a restored EPS trajectory, you would need to deploy that capital either through dividends, buybacks or an opportunistic deployment. And obviously, we try to deploy that as best as we can to obviously generate an IRR that is north of our cost of capital and preferably with a cushion significantly above our cost of capital. Also, when you think about the capital hedge that is sitting at the holding company, the two components there, which is the first one, the yen debt that that we have, that is currently, we hold about $3.8 billion of equivalent debt denominated in yen. Right now, our leverage then obviously has declined and it's below our leverage corridor of 20% to 25%. But I also know that the yen could strengthen and it could strengthen sharply and then all of a sudden, our leverage will move up sharply as well. So, we need to be quite thoughtful and sensitive to what our underlying and really look through debt capacity, yes. And I wanted to give you one number that I actually kind of look at and I find interesting. So if you take our leverage right now and you -- what sort of yen move would take us to the middle of the range, i.e., 22.5%. And that's roughly an immediate move of the yen dollar to $102. So that gives you a little bit of a sense for how we sort of think about what our debt capacity potentially could be. And then the -- the last piece as well is the forwards that we have at the holding company. They are spread out in terms of maturities. And obviously, they are in a net gain position, so they will settle into cash, but that will occur over the next 24 months, and it's fairly spread out. So, the increased cash flow to the holding company from a weakening Yen is not immediate. On a mark-to-market basis, they are, but I don't count that until they have fully settled and we have received all that cash. That's when we move the cash to become unencumbered in terms of definition. So if I take all of this and sort of wrap it up, I would say that there is a lag in terms of the cash flow to find its way to the hold the Company from all these capital hedges. And that means that you have a little bit of a lag in terms of capital deployment that would then ultimately lead to your sort of restored EPS capacity on a run rate basis. And we are currently in that sort of lag period, i.e., our reported EPS has dipped because of the gain. But then we will -- if the Yen stays at these levels, the capital hedges will start to kick in. And then over time, as we deploy that capital, that should restore our earnings power on an EPS basis going forward. That was a long answer, but I hope that was helpful.

Dan Amos:

How about Eric and Brad take that?

Operator:

The next question comes from Ryan Krueger from KBW. Please go ahead.

Dan Amos:

Sure thing, it's approximately 70%. That number can fluctuate based on market values and the movement in interest rates, but it's approximately 70%. In terms of the sensitivity, we still have upside, but I think when we get to fab, we'll be able to illustrate that better for you in terms of some sensitivities.

Ryan Krueger:

And my follow-up is also related to this. Can you update us on where the yen hedge costs are running at this point? And then how to think about the offset to that from the forward of the holding company?

Max Broden:

Yes. Just adding to Eric's very good memory in terms of hedge costs. Just in terms of notional, the forwards in Japan that we are rolling into this higher hedge cost environment is $4.1 billion of notional. And then at the holding company, we have $5 billion of notional that obviously benefits from the higher hedge costs and that runs through as positive net investment income at the Corporate & Other segment. That will not be immediate as those are spread out and some of that have already started to earn in, but the real impact also at the Corporate & Other segment will sort of occur in the in the 2023 time frame. But overall, this is also designed to make sure that we are not as an enterprise too exposed to any significant movements in hedge costs up or down, quite frankly. So net-net, we are actually $0.9 billion positively exposed in terms of the notional balance to the higher interest rate differential between the yen and the dollar.

Erik Bass:

Can you provide some more color on the group voluntary benefits case lapse as you alluded to about this quarter and year-to-date. Is there any common trend that you're seeing? And should we expect any more case movement during 4Q enrollment?

Erik Bass:

And then maybe a follow-up on Alex' question a little bit. But based on the SMR sensitivities that you provided at last year's fab, it seems like the most challenging scenario would be higher interest rates globally, wider credit spreads in a strengthening yen. And year-to-date, we haven't really seen that because of the DOJ's actions, but how do you think about the potential scenario where the BOJ eases its commitment to yield curve control and JGB yields rise and the currency appreciates. Is that a risk? Or are there other mitigating offsets?

Fred Crawford:

Something that on the topic of capital in Japan, something that will no doubt touch on at our investor conference, but you're starting to find the industry, not just Aflac slowly migrate and turn their attention more significantly to ESR and away from SMR. SMR will not fade to black or become insignificant for the industry anytime soon, but as we creep towards 2025 and the adoption of ESR, we're starting to pay more and more attention to that economic ratio, and that ratio is far less sensitive to these mark-to-market rate spread dynamics and will help with stabilizing capital position. As you know, we maintain a very strong ESR.

Tom Gallagher:

Just a question on Japan sales. If you're tracking up 47% quarter-to-date is what I believe I heard in an earlier response. And that was, I think, just for general agency and Daido Life. Can you just comment on what proportion of sales are those channels? And sort of taking that all together, would you expect a big increase in Q4 Japan sales overall? Any perspective there is appreciated.

Fred Crawford:

In other words, the contribution from cancer.

Tom Gallagher:

And just a follow up on that. Any perspective on what this means for 4Q sales? And I'm not asking for a specific forecast, but are we looking at a pretty big sequential inflection in sales, because the launch of the new product was August, as you said. So, I just want to make sure I'm understanding the numbers here correctly, if we're looking at kind of a big outlook for sales or is it not broad enough yet to move the needle overall?

Operator:

The next question comes from Mike Ward from Citi. Please go ahead.

Dan Amos:

Virgil, why don't you take that?

Mike Ward:

Okay. Do you think we're back sort of at pre-COVID levels going forward?

David Young:

All right, Jason. I think that's our last question in the line, and I appreciate everybody joining us today. I want to remind you that we will have our financial analyst briefing in New York on November 15 at the NYSE. There will also be a webcast for those who can't join in person, and registration is still open. In the interim, please reach out to Investor and Rating Agency Relations. If you have any questions, we'll be happy to help and look forward to talking to you soon. Take care.

David Young:

Thank you, Andrea. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated. Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com along with a video with Max Broden, Executive Vice President and CFO of Aflac Incorporated, providing an update on our quarterly financial results and current capital and liquidity. Max will also be joining us for the Q&A segment of the call along with other members of our U.S. executive management

Frederick Crawford:

Thank you, Dan. Before commenting on our results, let me start with some perspective on how we're positioned when considering current U.S. economic conditions. We have not witnessed this level of inflation in the U.S. in many years, and we are closely monitoring conditions. Wage inflation and full employment is generally supportive of growth in worksite benefits. However, when considering voluntary product, there is a question as to how much of any increased income is available for supplemental products as real wages are likely neutral to down. Our benefits are defined at time of purchase and do not adjust for health care inflation. Therefore, we do not expect any measurable impact on claims. In terms of recruiting and retaining agents, it can be more of a challenge as agents are commission-only and need to keep pace with any increase in costs. When looking at enterprise margins, the impact of inflation does apply upward pressure on expenses. However, this is mitigated by rising rates and additional investment income, having built a significant floating rate loan portfolio. In terms of the risk of economic slowdown and recession, our business model is generally defensive in nature with low asset leverage and exposure to risk assets. Profits and cash flow are driven largely by morbidity margins that tend to remain stable during periods of economic volatility. While employment levels may decrease, we often benefit in the recruiting side during an economic slowdown versus today's tight labor markets. Max spoke in his recorded comments to the work we have done to defend our cash flow from weakness in the yen, we have built a sizable unhedged US-dollar portfolio in Japan, shifted most of our senior debt to yen for both hedging and cost of capital purposes and maintain a flexible hedging position at the holding company. It's important to understand what makes all this possible

Operator:

[Operator Instructions]. Our first question will come from Nigel Dally of Morgan Stanley.

Frederick Crawford:

Nigel, it's Fred. Let me comment on lapse rates. When we talk about -- as you know, we report our lapse rates on a trailing 12-month basis. And as a result, you'll see pressure in our reported lapse ratios year-over-year. And so what we have done is looked at our quarterly lapse rates seasonally adjusted when we make our comments about a recovery in lapse rates. And let me give you an idea. Our lapse rate in the quarter, or said differently, our persistency in the quarter -- for the second quarter only was around 79%. And that is approximately equal to the pre-COVID levels of lapse rates that we tend to enjoy or persistency that we tend to enjoy in the second quarter. To give you an idea, before COVID, we would travel again around that 79% rate. It rose up into the 81% territory over the last couple of years, and we believe that's largely related to the state mandates that require keeping policies in place. As those started to expire and have now largely expired, we've traveled back into normal persistency. In the first quarter, what spooked us is that our persistency in that quarter was around 74.5%, and that seasonally adjusted was about 200 basis points lower than we expect. We always expect the first quarter persistency to be lower because it has implications. It's timed related to annual enrollment process and year-end process, so it's normally a lower persisting quarter. But in this case, it traveled about 200 basis points lower than we would have expected, and that's what gave rise to our comments last quarter. So we're very pleased to see it recover back to normal seasonal adjustments in the second quarter, and that would be my comment there. We'll have to obviously monitor it as we go forward. To my comments on inflation, I would tell you that we don't see necessarily the implications of inflation impacting lapse rates, per se. Right now, we haven't seen any evidence of that. But it's a very unusual inflationary period, and quite honestly, we don't have a lot of history of inflation at these levels and watching how our business behaves. And that's why I have some of the cautionary language. Thus far, I would tell you, we don't see any acute implications from inflation, but we simply want to note the fact that we're going to monitor that. Again, we see offsetting dynamics related to inflation, so we don't see this as having an impact to overall U.S. financial performance.

Jamminder Bhullar:

So I had a question on sales trends in the U.S. and in Japan, and if you could talk about how sales trended through the quarter. And specifically on Japan, it seems like your comments are pretty positive on an expected improvement in sales. Are you seeing that? Or are you just hopeful that things will get better? And then just relatedly, any impact that you're seeing on your production activities in Japan because of the recent increase in COVID cases?

Koichiro Yoshizumi:

This is Yoshizumi. Let me answer your question. For the second quarter of 2022, so a downturn continuing from first quarter, as sales of the new medical insurance product had run its course after its release in January last year. Additionally, COVID-19 continue to have a negative impact on sales activities as the number of new cases increased 8.2x compared to the same period last year, although intensive infection prevention measures have been lifted. While COVID-19 infections have been rapidly increasing since the start of July, Japan is experiencing its seventh wave and uncertainty remains. While having said that, from the third quarter, we are hopeful that sales will exceed last year's results, building on the new cancer insurance product launch and the gradual recovery of Japan Post Group sales. That's all for me.

Virgil Miller:

Thank you, Teresa. As Fred and Dan shared earlier, we did see a 15.6% increase in sales. Very pleased with the second quarter performance. I think Fred said it well, though. It's a combination of what we're seeing from our distribution channels. If you think about the small market, which was disrupted quite heavily at the beginning from COVID, we've seen a solid recovery. It's really driven by our veterans returning to producing. We saw another increase in our veteran average week of producers, and we saw an increase in productivity from our veterans. And then when you look at the large case space, it was less disrupted by COVID. We continue to see great performance from our broker partners in that space. We saw a 24% quarter-over-quarter increase in production from our brokers. So when you look at it, how we're going to the market in large with our brokers, large case space with our brokers and continue to see recovery in the small market with our veterans, overall, we're pleased with that quarter.

Alexander Scott:

First one I had is on the Japan benefit ratios. I guess when I think about the, I think it was 190 basis points you caught out of unfavorable COVID claims and -- but then the normalized benefit ratio that's materially higher, could you help us think through, I think it was over a 400 basis point delta associated with these IBNR releases, when you sort of go through that. And I struggle with it because I know you guys have had favorable IBNR over time. I mean, do you have any way of sort of breaking that apart a little for us and helping us think through like what portion of it is more the outpatient treatments associated with COVID specifically? I mean, any help with how to sort of figure out where things should be on a run rate basis.

Alexander Scott:

Got it. That was really helpful. Next one I had is just on inflation and the expenses. I heard some of the comments that, that could put upward pressure on expenses. I mean, is that material enough for us to think about maybe a different range for expense ratios? I know things are a little more focused on the back half or expenses as well. So I was just wondering if there's any update to sort of the expense ratio guide that you guys have out there.

Max Broden:

And just to add one reminder. Obviously, expense ratio, it's a ratio. And you have net investment income coming into play here as well, and it helps boost the top line, and therefore, gives you some relief on the expense ratio when you think about the inflationary pressures. And the last piece is that, yes, we do obviously acknowledge that it is putting upward pressure on expenses in dollar terms as well, and we are taking active actions in order to combat that as well.

Max Broden:

Operator?

Erik Bass:

I was hoping you can provide a little bit more detail on the NII outlook. I think Fred mentioned $160 million of higher expected NII in 2022 than the original plan. Just wanted to confirm, is this gross or net of hedge costs? And then how should we think about the impact moving into 2023 when, I guess, floating rate NII should continue to build but hedge costs will also reset and probably move higher?

Frederick Crawford:

Yes, please, Eric.

Erik Bass:

That's helpful. And just to confirm then, given the back-to-back program, should we really think of most of the kind of NII uplift from the higher floating rate yields dropping to the bottom line at an enterprise level, realizing it may not -- you may see less of an impact in the Japan segment and more of it in corporate?

Operator:

The next question comes from Suneet Kamath of Jefferies.

Frederick Crawford:

Well, they are two different topics. What I would tell you -- if what you're saying is would you accelerate your initiatives and actually increase the pace of investment with added net investment income, we're not really adjusting our plans around NII up or down. The plans we have around investing in our platform are really related to core growth in earned premium, policies in force, sales and overall efficiency measures. So it really would not render any impact on those plans. And I do want to highlight, as Dan mentioned in his comments, we are very much at work in terms of addressing the long-term expense structure, both in Japan and in the U.S., and have several initiatives underway to drive productivity improvements and efficiency improvements. Those do require near-term investment, but we have plans in place to help our expense dynamics and certainly combat any inflationary pressure as we go forward. But none of that, Suneet, is really impacted by watching NII move up and down.

Frederick Crawford:

I think perhaps Koide-san can address that. We can add our color here in the U.S., But Koide-san, maybe address your views of the Diet conversation in September.

Frederick Crawford:

So I would also just note something that I think is perhaps obvious, but just to be clear. This is really not uniquely an Aflac issue. The major insurance companies in Japan are all facing substantial increased claims activity on medical policies. In fact, we're not even among the top few in terms of the volume of claims we have relative to other peers in the industry, domestic insurers with large platforms. So this is really broadly based. We can't confirm some of these statistics, but there's been recent news articles suggesting that the amount of claims paid in the month of June, for example, under medical policies was up nearly twelvefold over the same time period last year this time. So it is absolutely pressuring the system. And we think that the legislative community in Japan is taking this under consideration and realizing they've got to contemplate a change in the law.

Operator:

The next question comes from Ryan Krueger of KBW.

Frederick Crawford:

Go ahead, Eric.

Ryan Krueger:

I guess just to clarify, is the $38 million part of the $160 million? Or should we think about the $2 million to $3 million as...

Ryan Krueger:

Okay. Understood. And then I guess, in the U.S. did you see any normalization in the benefit ratio as we went through the quarter or it was pretty spread throughout?

Frederick Crawford:

One thing back on Japan to just make sure that you're capturing is, again, when it comes to these COVID cases we're talking about, just want to make sure you take to heart Max's comments and Dan's comments and my script comments, and that is the very same dynamic that is giving rise to these higher infectious disease COVID claims, we believe are absolutely impacting the rate of hospitalization on other claims activities, not the least of which is cancer insurance related claims. And remember, again, as you all know, we are a dominant cancer insurance provider. And so when the world of Japan health care moves to more outpatient treatment, that has material implications for your cancer claims and how they trend over time. So this is why, despite all of the comments around COVID claims and increases in medical claims, you still see a low benefit ratio in Japan even by historical standards. There's no guarantee of that direct correlation, but it's certainly what we have seen in the data thus far.

Thomas Gallagher:

First question, back on the floating rate portfolio. The -- so the $12 billion floating rate portfolio in the transitional real estate, Eric, how do you feel about the quality of those portfolios if we do enter into a recession? Would you expect the higher yield you're getting on to keep the higher yield on a net basis? Or would you expect some portion of that is going to be given back through impairments? And are you looking to grow that portfolio or you're keeping it steady?

Bradley Dyslin:

Thank you, Eric. And thank you for the question, Tom. We're definitely paying very close attention to both of these portfolios. As I think Fred mentioned in his opening comments, we think this is where as the economy slows down, we could see the first sign of any issues. We're really focused, as you would expect, on their ability -- especially in our middle-market loan portfolio, their ability to pass along these cost increases and absorb higher financing costs. We've worked very closely with our managers. We stressed the portfolio for some very severe outcomes, and we think any potential loss is going to be very manageable. When you look across the space, we feel we have a relatively high-quality portfolio across middle-market lending. It's all first lien. We have modest leverage. It's a very well-diversified portfolio. We think there's some inherent characteristics that allowed us to perform well during COVID, and we -- the COVID shock, and we think it will continue to support the portfolio with a downturn. Now of course, we don't expect to come through entirely unscathed. We would be surprised that we didn't have a few losses if we get the kind of downturn that is possible. But we don't expect it to be overly material. In the real estate portfolio, again, it all boils down to the quality of assets you underwrite, the leverage you have, and in the case of transitional real estate, how well we underwrite the actual transition of the asset, the strength of the sponsor and the strength of the business plan. Again, we stressed this portfolio with our managers and we feel really good about how we're positioned and don't currently expect we'll have any losses in real estate. But of course, we're keeping a very close eye on it.