Aflac Incorporated — 2024 Q1

This is Virgil from the U.S. First, let me start with a little bit more color on how sales performed in Q1. As you mentioned, they were a little bit softer for Q1. A couple of drivers for that. First, let me start with our plans, our life, absence and disability business. Normally, that is a business that takes place the latter part of the year. Well, last year, in 2023, we did have some business process in Q1, so therefore, we were down with that comparison. That is an anomaly. That normally doesn't happen. So again, I expect continued strong performance from that line of business for the remainder of the year. So that was a timing element.

Let me let Aflac Japan answer that, but I think the most important thing is we still expect to attain our objective for the full year. So Koide, would you mind taking that or 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.

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

[interpreted] This is Yoshizumi once again. Let me answer your questions. Regarding the medical insurance sales, we have been increasing our sales on year-on-year basis, especially to those customers under age 50 or 40 and below. And also, this -- our sales in large nonexclusive agency sales on a year-on-year basis, increasing significantly this year. And this large nonexclusive agency sales is a benchmark to see how well the medical insurance is doing.

[interpreted] This is Aflac Japan, Koide. I would like to be adding a few comments. In Japan right now, third sector sales is becoming more and more competitive year-on-year. And our strategy is to have solid sale by meeting these customers under the very competitive situation by launching new products in both medical and cancer insurance. And we'd like to do this in a timely manner by really taking in the needs of customers.

Yes. Okay. Let me make a couple of comments, and then anything else you want to ask, we'll be glad. First of all, our cancer insurance is doing very well, both through our existing distribution channel and Japan Post. The other thing I would say is that the medical products are more competitive, and we have to continue to watch that. That's really nothing new, but it hasn't slacked up. And then we don't sell the foreign currency products that some of our competitors sell. We just don't think we want to take on that exposure and pass it on to our customers. And so we haven't done that. So I think those are the real differences that are created. Any other question you had, Tom?

So Tom, let me take that. One of the main reasons is that we obviously have an aging block of in-force. So our new sales is lower than our lapsation. That means you have a natural aging of the overall block, yes. When you have that, then you're going to see some higher surrenders, lapses and also mortality associated with the overall block. So it's very natural when you have an aging block that you have higher lapses. That in combination with -- we've also now -- in the last 5, 6 years, we moved into a little bit of a shorter product cycles. When you have that and you refresh products, you tend to have a little bit higher structural lapse and reissue come through your block. So I would point those are the 2 main reasons why we are probably in an environment now where you have a slightly lower persistency now structurally than what we did see 5, 6 years ago.

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.

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.

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.

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.

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%.

So Josh, volatility can obviously impact the pricing of options. That will be -- that together with all the other sort of normal inputs into the pricing of an option would be the main impact from that. The level itself has less impact to the ultimate cost of those put options. So at this point, we see relatively limited impact to the pricing of options. Quite frankly, I think that the volatility in the yen -- even though it's been trending, the short-term volatility has been quite low recently.

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.

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.

Yes. So I would say it's definitely a tough environment we're recruiting for commission roles out there. Still, I would tell you, if you look back at Q1 of 2023, it was a strong Q1 quarter for us. So this year, we knew we had a tough comparison. And so therefore, I would tell you we expect it to be slightly down. So I'm not throwing off about the performance of Q1. I'm expecting us to rebound and continue to recruit, develop, convert, train and actually build up on average we can produce as going forward. Again, knowing the environment is tough, we just have to recruit differently. We're deploying different means to make sure we hit our expected numbers this year.

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

Yes. We will answer to that question.

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

[interpreted] This is Yoshizumi. I will be answering your questions. I'm sorry, this is translator speaking. I just needed to clarify what Yoshizumi said about the numbers that he mentioned. Here I go.

[interpreted] Let me start out. This is Koide from Aflac Japan speaking. So first of all, let me just clarify our agency structure, our agency purpose. Ever since our foundation in Aflac Japan, we have always had exclusive agency channel as our main channel plus the so-called nonexclusive agencies that sells mainly our product in cancer and medical insurance area. And these are the main agencies that we have been dealing with.

Suneet, let me try to summarize, because I think it's important here. Number one is, in the nonexclusive area, this isn't something new. If you go back and you look, and you've been around a long time, you'll remember that there was this major agency that was independent and other competitors were selling for them, we ended up selling for them. They had been in the cell phone business and transferred over to the insurance business.

[interpreted] Dan, thank you. And I would like to add a little bit more color to that. We are really truly working on the large nonexclusive agency channel right now. However, as Dan mentioned, we have Japan Post, we have exclusive agencies, we have nonexclusive agencies and as I mentioned, we have Japan Post channel as well as other business partners and bank channel. So we have this variety of channels that sell our third sector products. And so that is how we are going to be increasing and growing our sales.

[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.

Right, I think we've answered that question. If you need a follow-up, we'll be glad to do that. But David?

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

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.