Q3 2020 Aflac Inc Earnings Call
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Good day, everyone and welcome to our flat third quarter 2020 and call Oh.
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The speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply quite spar Oh by the number one on your telephone keypad. If you would like to withdraw your question press. The pound schemes. Thank you I would now like to turn the call over to your host David Young Vice President.
Aflac incorporated investors relations. Please go ahead Sir.
Thank you Andrea.
Good morning, and welcome to Aflac incorporated third quarter earnings call as always we have posted our earnings release and financial supplement to investors that Aflac Dot com.
This morning, we will be hearing remarks about the quarter as well as our operations in Japan, and the United States amid the COVID-19 pandemic.
Dan Amos Chairman and CEO of Aflac incorporated who will begin with an overview of our operations in Japan and the U.S.
Fred Crawford, President and COO of Aflac incorporated will then touch like touch briefly on conduct conditions in the third quarter and discuss how we are navigating the pandemic, including some key initiatives.
Mike Burton Executive Vice President and CFO of Aflac incorporated well, then conclude our prepared remarks with a summary of third quarter financial results and current capital and liquidity.
Joining us this morning during the Q and a portion are members of our executive management team and the U.S.
Teresa White president of Aflac us.
Eric Kirsch, Global Chief investment Officer, and President of Aflac level investments.
Rich Williams Chief distribution officer.
Average Gary.
Global Chief risk officer, and Chief Actuary.
June Howard Chief Accounting Officer, and Steve Fever, CFO of Aflac us.
We're also joined by members of our executive management team and Tokyo at Aflac Licensure, Japan.
Charles like Chairman and representative director President of Aflac International.
Masatoshi, Kuwait day, President and representative director.
Todd Daniels director and CFO.
Thank Koji Ariyoshi director and head of sales and marketing.
Before we begin some statements in this teleconference are forward looking within the meaning of federal securities laws although.
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 thought Aflac dotcom and includes reconciliations of certain non us GAAP measures.
I'll now hand, the call over to Dan Dan.
Thank you David and good morning, Thank you for joining us.
As we all know the COVID-19 pandemic has ushered in some of the most difficult times for so many people around the globe.
And we continue to pray for all those affected.
I'd like to share my appreciation for our employees and Salesforce in Japan, and the United States for their tireless work in helping our policyholders and community was impacted by the pandemic.
During this difficult time, it's important to note that we remain focused on doing what we do best that is providing protection products to help consumers when they need it most.
This morning, I'll provide an overview of the quarter and how we performed by operating segments.
Financially aflac continues to be impacted by the pandemic, but remained strong in terms of capital and liquidity.
In addition, our investments are high quality diversified and they are among the highest return on capital and lowest cost of capital in the industry.
Amid the challenges of Cove at night team. This quarter was also significantly impacted by the release of favorable us tax regulations related to the utilization of foreign tax credits you will recall that our Japanese subsidiary.
Is taxed as the us domestic company for us tax purposes in the quarter, we recognize the cumulative year to date benefit from these regulations of $202 million or 28 cents per share compared to our previous run rate Max will provide additional details.
Turning to our operations, starting with Aflac, Japan the effects of COVID-19 continues noticeably impacted our results as seen in the third quarter with sales decreasing 32%.
We continue to have around 50% of the workforce working from home in Japan and in September traffic coming into the shops remained at 70% of pre pandemic levels.
While these sales results represent sequential improvements.
Relative to the last quarter the effects of the reduced based based activities are evident and we continued to bring both virtual sales.
2020 has also ushered in a change on the Japanese political front Prime Minister RV was Japan's long asserting prime minister and a source of political stability with nearly eight years and office. Mr. Service was a core member of obvious administration leadership.
Thing serving as the Chief Cabinet Secretary.
We believe Mr. So goes the administration will carry on skilled leader scale.
This will continue to promote a good business environment in Japan and emphasize policies.
In terms of the response to the Cove at 19 and economic policies.
Hi, Minister. So good is accelerating efforts to move toward to move forward with regulatory reforms for a post pandemic world promoting digital transformation in that respect I am pleased with Aflac Japans paperless initiatives is well underway and Fred will show.
We are more.
Turning to Aflac us the effects of Cove at 19 continued to noticeably impact our results in this segment as well largely due to reduced face to face to activity third quarter sales were down 35.7%.
In the U.S., we continue to feel the impact of temporary business closures and lack of access to the worksite, especially among our career agents, who have historically relied upon face to face meetings to engage our small business owners and their employees.
At the same time, the fourth quarter typically when we see strong results and the broker driven group market, which has generally been more resilient to face bay to non face to face conditions.
As a result, we remain cautiously optimistic for modest sequential sales improvement for Aflac us in the fourth quarter compared to the second and third quarter contingent upon the pace of economic recovery.
We're also on track to close our acquisition of Zurich Group business benefits soon which allows us to extend our distribution reach and appeal to brokers and large employers, while having little effect on the fourth quarter the acquisition positions us for expanded capacity.
As we look forward to 2021.
The place Aflac in a position of spring, we know that we must balance investing in growth with an eye toward reducing expenses in the long run.
As such we took an opportunity to offer a very generous voluntary separation package to eligible employees, who expressed an interest as a results we have achieved and approximately 9% reduction in our U.S. and corporate workforce with expected one time.
<unk> expenses of $45 million in the fourth quarter.
This allowed us to thank employees for their years of favorable service and dedication as they pursue a new path or open up the next chapter.
You will recall that the U.S. benefit ratio was significantly affected by policyholders limited visits to the Doctor.
With this in mind, we lost the U.S. niches. It early in the third quarter to remind policy holders of the value of their wellness benefits attached to their products.
The wellness benefits pays on certain routine dr., Dennis and hospitalization visits.
In addition, we make sure that it pays a benefit for COVID-19 testing.
The wellness initiative has been a success we're glad we emphasize this important aspect of our policies as it reinforces how we are there for the policyholder when they need us most.
This wellness campaign and the voluntary separation programs or a couple of near term headwinds to the profit margin. However, we expect that they will serve us well as we enter 2021.
To conclude our operational discussion as I've said before we want to be where.
The people want to purchase insurance that applies to both Japan and the us into.
In the past this has meant meeting face to face with individuals to understand their situation.
Suppose a solution and close the sale.
However, the pandemic clearly demonstrates the need for virtual meetings.
In other words non face to face sales to reach potential customers and provide them with the protection that they need therefore, we have accelerated investments to enhance the tools available.
To our distribution in both countries.
As always we are committed to prudent liquidity and capital management. This includes maintaining strong capital ratios on behalf of the policyholders and both the U.S. in Japan, and a tactical approach to capital allocation.
It goes without saying that we treasure our record of dividend growth.
With the fourth quarter Declaration 2020 will mark the 30 eightth consecutive year of dividend increases.
Our dividend track record is supported by the strength of our capital and cash flows at the same time, we have remained tactical in our approach to share repurchase buying back $400 million of our shares in the third quarter.
We have also focused on integrating the growth investments that we've made in our platform by doing so we look to emerge from this period of continued position of strength and leadership.
As always we are working to achieve our earnings per share objective. While also ensuring we deliver on our promise to our policyholders, we look forward to going into greater detail on our strategic growth plans and efforts to drive efficiency at the financial analyst briefing conference call in a few weeks.
So now I'd like to turn the program over to Fred Fred Thank.
Thank you Dan I'm going to touch briefly on conditions in the third quarter and how we're navigating the pandemic I'll also provide an update on key initiatives in Japan and the US to include our approach to managing expenses.
There are currently approximately 97000 COVID-19 cases.
And 1730 deaths in all of Japan.
Through the third quarter Aflac, Japan, COVID-19 impact totaled 1750 unique claimants with incurred claims totaling approximately 550 million yen in the quarter.
And 760 million yen year to date.
In short we are tracking well below our stress assumptions with no measurable impact from Cove in 19 claims.
However, reduced sales and delaying the promotion of the new cancer writer and refreshed medical products are contributing to revenue pressure. This pressure is offset somewhat by favorable persistency.
Coated related expenses in the quarter totaled 1.7 billion yen, which.
Which included the rollout of virtual distribution tools employee teleworking equipment and distribution support.
In the us the dynamics are understandably more complex.
It was 19 case levels in the us now exceed $8.5 million with dust nearing 230000.
Through the end of the third quarter COVID-19 claimants in the U.S. totaled 12800 with incurred claims of approximately $23 million in the quarter and year to date approximately $57 million.
We are closely monitoring the recent surge in infections, but continue to see the rate of hospitalization length of stay in the hospital and transition to IC you traveling below our expectations.
We believe this is attributed to advancements in treatment and the nature of the work site, which is generally younger and healthier population of policyholders.
As Dan noted in his comments, we launched an initiative early in the third quarter to remind policy holders of their wellness benefits, which drove increased utilization.
This effort involved connecting with 2.7 million accident in hospital policyholders through a combination of email and direct mail in the month of August.
This impacted our benefit ratio in the period, but is designed to reinforce the value proposition of our products.
We have thus far seen limited impact to persistency. However, we believe this is partially attributed to state executive orders requiring premium grace periods.
These executive orders are still in place in 13 states as of the end of the quarter.
In those states, where the executive orders have expired, we have reduced pressure on lapse rates through proactive outreach to policyholders and employers actively converting policyholders from payroll deduction to direct bill and notifying policyholders of their wellness benefits.
Turning to key operating initiatives in both Japan, and the US we are balancing investments in growth, while addressing our expense structure.
Material driver of elevated expense ratios in Japan, and the US is weakness in revenue thus the need for a balanced approach.
Beginning with Japan, we are set to promote a simplified cancer writer in the fourth quarter and launching our refresh medical product in the first quarter of 2021.
We rolled out in late October we have the technology in place to pivot from face to face to virtual sales and an entirely digital customer experience.
We continue with direct mail campaigns aided by data analytics that serve to enhance the close rate.
We expect the combination of product development, a recovery and pandemic conditions, and our alliance with Japan post to be important growth drivers as we make our way through 2021.
We view the pandemic as a call to action on accelerating investments in our digital roadmap and related process improvement.
On our second quarter call I noted, our paperless initiative across all operations in Japan.
This is a three year in roughly 10 billion yen investment with approximately 2 billion yen spent in the third quarter along with another 3.6 billion yen estimated spend in the fourth quarter.
While elevating our 2020 expenses this effort will reduce the production and circulation of 80 million pieces of paper per year with run rate savings in the range of 3 billion yen annually.
As we move to the fourth quarter, we have budgeted an increase in general administration expenses over our third quarter of approximately 6 billion yen. This.
This includes 50% of our 2020 annual advertising spend concentrated in the quarter to raise new product awareness as well as a stepped up level of investment in the paperless initiative.
We are effectively accelerating investments in our digital platform into 2020 and 2021.
Turning to the us the build out of network dental and vision remains on track.
We have successfully filed our new network products in 48 states with approvals received in 37 States, we are up and running with sales in 10 states and expect to ramp this up as we move into 2021.
Our consumer markets platform remains on track with hospital accident and cancer product filings expected to be completed in early 2021.
We also plan to include life insurance in 2021, recognizing that as a natural product to sell digitally empowered by the Aflac Brandt.
Finally, we will soon close on our Zurich benefits acquisition, having successfully completed the required regulatory approvals.
Along with efforts to improve overall persistency. These are the three largest incremental drivers to earned premium growth in the coming years.
Anticipating further pressure on near term earned premium and as we move into 2021, we are addressing expenses in the us with a sense of urgency.
We are addressing expenses across two horizons.
Horizon, one is near term focused and includes a series of actions in 2020 designed to take out approximately 100 million of annualized run rate expenses as we enter 2021.
This includes both the us platform and corporate expenses.
Early in the fourth quarter, we completed a voluntary separation plan for eligible employees, which will result in a 9% reduction to our U.S workforce.
We expect to record a onetime separation expense of approximately $45 million in the fourth quarter and will realize annualized run rate savings in the $45 million to $50 million range.
Horizon to expense initiatives elevate near term expenses until such time the investment is complete.
Legacy platforms, our decommissioned and business processes our adjusted.
The most significant investment is in our group business in migration off an old administrative platform onto a new platform.
In addition, we are completing a broader did.
Digital roadmap, which includes approximately $25 million of accelerated investment in 2020 much of that investment coming in the fourth quarter.
As I noted we need to balance these expense initiatives with investment in growth, we have adopted a buy to build acquisition strategy, while a tactical and prudent use of excess capital. This is not an inexpensive effort in the early years.
These build efforts include dental and vision direct to consumer and group benefits and taken together impacted our expense ratio in the third quarter by 110 basis points and are expected to impact the fourth quarter by approximately 160 basis points.
I'll conclude my comments with investment conditions, our global investment team remains focused on asset quality monitoring economic conditions and sourcing new investment opportunities in a low interest rate environment.
Our firm view is that we will experience a checkmark shaped recovery, meaning a slow road to recovery with pockets of volatility along the way.
Our actions prior to the pandemic to tactically improve the risk profile of our portfolio combined with some additional de risking earlier. This year has served us well with only modest losses on the sale of securities impairments and loss reserve increases.
These actions have also positioned the portfolio defensively should we see a second surge in the virus impact economic conditions.
We continue to watch closely our middle market loan and transitional real estate portfolios. While we have seen credit rating downgrades are middle market loan portfolio is more resilient consisting of first lien loans to high quality borrowers backed by strong equity sponsors.
In the case of transitional real estate. Our portfolio is also consisting of only first lien positions and is diversified with strong loans to value.
We continue to explore ways to optimize currency hedging.
Overall, no material change, but we are further refining our approach to managing the unhedged dollars in Japan. These.
These unhedged dollars provide diversification and income benefits as well as lowering our enterprise exposure to the yen.
As we look towards 2021, we will reset 2020 hedges on our floating rate portfolio and currency hedges at materially lower rates.
While we do not see this impacting net investment income to any great degree you will see line item impacts to Japans net investment income hedge costs and corporate investment income.
Wrapping up my comments, we are not backing off critical investments to drive long term growth and efficiency in the face of what we believe to be temporary weakness in sales results in earned premium.
We will provide further further detail around this when we meet.
For our annual financial Investor Conference in the coming weeks, and we will talk about the details of investments and when we expect them to turn the corner to having a positive impact on growth and profits.
I'll now pass on to Max to discuss financial performance in more detail Max Thank you Fred.
Let me begin my comments with a review of our third quarter performance with a focus on how our core capital and earnings drivers have developed.
For the third quarter adjusted earnings per share increased 19.8% to $1.39.
With no significant impact from FX in the quarter.
Adjusted book value per share, including foreign currency translation gains and losses grew 17.4% and be adjusted R&D, excluding the foreign currency impact.
With a strong 16.8% and material spread to our cost of capital.
This quarter was significantly impacted by the release of favorable us tax regulations related to the utilization of foreign tax credits.
As a reminder, our Japanese subsidiary is taxed as a us domestic company for us tax purposes.
In the quarter, we recognized cumulative year to date benefit from these regulations, which lowered our tax rate on adjusted earnings for the quarter to 4.1%.
A benefit of 28 cents versus our previous run rate.
Our tax rate for the quarter further benefited from tax credits in our solar and historically rehabilitation investments.
Which lowered our tax expense by approximately 20 million more than in a normal quarter.
In addition, variable investment income coming in $6 million above our long term return expectations and together. These two items boosted calm quarter EPS by about three cents.
On a go forward basis nominated the current US corporate tax regime, we would expect our go forward tax rate on adjusted earnings to be approximately 20%.
Turning to our Japan segment total earned premium for the quarter declined 3.3% roughly.
Reflecting mainly first sector policies paid up impact.
Earned premium put a third sector products was down 1.7%.
Japan's revenue trends should be considered in that life of impact of paid up policies.
For example year over year.
Earned premium was down 3.3% during the quarter while policies in force was down we're down a little less than 1%.
This disconnect masks, the strength of persistency, which has been rising during the pandemic in short.
Expenses related to managing our enforce tend to hold steady despite the drop in reported earned premium putting pressure on our expense ratio.
Japan's total benefit ratio came in at 71.3% for the quarter up 130 basis points year over year and.
And the third secular benefit ratio was 61.7% up 170 basis points year over year.
The main driver for the increase was lower lapses associated with policyholders upgrading the coverage.
Given the current lower new business activity. This naturally pushes up our benefit ratio due to lower reserve releases decreases DAC amortization and improves reported persistency.
We did experience all of this into third quarter manifested by our persistency, improving by 80 basis points year over year.
The IB NR was also less favorable this quarter, we've seen a drop in paid claims during the pandemic more so in our medical coverages.
Our IP in our estimate has only partially reflected this drop.
Given there is not much data to base an adjustment on.
We continue to monitor experience and will adjust our paid data as it gets more complete.
In addition for our cancer claims that are more than three years old we extended a completion on claims which led to a smaller release in hybean arm compared to 2019.
Our expense ratio in Japan was 21.7% up 110 basis points year over year.
Our paper less initiative kicked in at a higher gear as with digitize, our operations and drive efficiencies throughout the value chain to a future state with significantly reduced paper usage.
Overall, when considering covert related spend promotional spend and digital and paperless initiatives.
We anticipate expense ratios in Japan to remain elevated in the 22% range for the remainder of 2020.
Net investment income declined 0.2% in yen terms, despite the higher variable investment income as our yen denominated portfolio generated lower yields due to lower coal income in this quarter.
The pre tax margin for Japan in the quarter was 19.4% impacted by both the higher benefit ratio as well as a higher expense ratio in the quarter.
Turning to US results earned premium was down 2.6% due to weaker sales results.
Premium persistency improved 80 basis points to 78.8% as our efforts to retain accounts in key premium enforce show early positive results.
As Fred mentioned their steel 13 states with premium Grace periods in place at the end of Q3. So we are monitoring these developments closely.
Our total benefit ratio came in at 48.3%, which was 80 basis points lower in Q3 2019.
We have seen a normalization of claims and claims activity across our portfolio compared to the second quarter.
In order to improve customer experience and persistency, we conducted an extensive policyholder communication campaign, highlighting the embedded wellness benefit in our accident product.
And we encourage policyholders to utilize this benefit.
We estimate this initiative drove incremental claims of approximately $14 million and impact to our benefit ratio in the range of 100 basis points over what we would normally expect but.
But we believe our efforts will add value for the customer and improve their experience along with improved long term persistency.
Our expense ratio in the US was 37.2% up 130 basis points year over year.
The inclusion of Argus added 80 basis points in the quarter and a decline in revenues roughly explains the residual year over year impact.
The impact from declining revenues has become more pronounced on our ratios in this quarter relative to prior quarters.
We anticipate expense ratios in the us to remain elevated in the 39% range for the full year 2020.
Driven by near term weakness in revenue.
Uptake in seasonal business activity.
And expected inclusion of the Zurich group benefits acquisition.
Net investment income in the US was down 4.4% due to a 14 basis points contraction in portfolio yield year over year.
Profitability in the US segment remains healthy at 20.5% with a low benefit ratio as the core driver.
In our corporate segment amortized hedge income contributed $22 million on a pre tax basis to the quarters earnings with an ending notional position of $5 billion.
Our capital position remains strong and we ended the quarter with an Esa more north of 900% in Japan.
In an RBC of approximately 700% NAFL at Columbus.
Our RBC is temporarily boosted by delaying statutory subsidiary dividends to Q4.
We still expect to end the year with an RBC in a range of 550% to 600%.
Holding company liquidity stood at $3.8 billion.
$1.8 billion above our minimum balance.
This is down compared to earlier in the year, but reflects our decisions to delay regular Q3 subsidiary dividends to Q4.
On an annual basis, we expect omni interrupted dividend flows to continue from our subsidiaries.
Leverage improved to a comfortable 22.9% due to the increase in shareholders equity driven by the release of the tax valuation allowance of $1.4 billion.
While we remain cautious in terms of monitoring that endemic we.
We have comfort in the strength of our capital ratios access capital stack.
Statutory earnings and dividend capacity and our ability to navigate any current and future stress brought on by the pandemic or associated economic conditions.
In the quarter, we repurchased $400 million of our own stock and paid dividends of $192 million.
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 return on equity with a meaningful spread to our cost of capital.
Let me now turn it over to David to begin Tonight.
Thank you Max.
We're now ready to take your questions, but first let me ask you to please limit yourself to one initial question followed by related.
A follow up question to allow other participants on an opportunity to ask the question.
Adrian we will now take that first question.
Your first question comes from the line of Nigel Dally with Morgan Stanley.
Great. Thanks, and good morning, everyone. My question is on expenses you now see us expense reduction initiative.
Because of its type listeners should in Japan, but you will see talking about ramping hiring basements and other digital and growth initiatives. Appreciate the color floor for the fourth quarter, but how should we be thinking about expense ratios in 2021, I should we see some of the benefit of those initiatives flow through to the bottom line are still elevated expense ratio as it unfolds.
I would Nigel this is Fred I would say in general both in 2000, both in the case of the us as well as Japan. In 2021, you should anticipate a continuation of elevated expenses as these investments will continue add.
At their current pace.
And in fact in the US we will particularly be building more proactively on the dental and vision.
The consumer markets and then now adding the group benefits business. So you will see the pace of investment to improve when it comes to business as usual expenses or what we call. Our general operating expenses, that's where you'll see improvement, particularly in the us as we take.
Action around staffing models head count and other related cost savings efforts. So it's a balancing act we will give more color on our expense ratios, both in Japan, and the us at the financial analyst briefing as we traditionally do so I don't want to get out in front of that but I can certainly answer to your question that the pace.
Of investment will continue to go forward, but its really directed towards growth.
As well as efficiency right.
Remembering there's two components of the expense ratio in one of the things weighing on our expense ratios right now in Japan, and the US is weakness in revenue. So we've got to drive these expenses through to generate revenue improvement over time that will be the path to victory on expense ratios ultimately.
Very helpful. Thank you.
Your next question comes from the line of Genie line with JP Morgan Securities LLC.
Hi, Good morning, So I had a question just on the US business, obviously sales have been pretty weak recently and I am assuming that for Fourq, you will be a little bit better and just given that a majority of the sales are duecker sales in that channel doesn't seem to be as impacted by sort of social distancing and stuff.
But we'll see.
So the bad to do an improvement in sales beyond that if.
Because I'm assuming.
Even though businesses are starting to open up most of them are going to be reluctant to have sales people come in and pitch products.
People. So whats you make just a few comments on what you feel is going to drive a recovery in your sales in the us.
Beyond just sort of a vaccine or just normalization of the social and business growth.
Not to have rich answer.
Sure.
Okay. Thank you Jimmy.
As Dan noted in his comments.
We expect modest sequential improvement in the fourth quarter compared to the second and the third quarter and as you recall the fourth quarter for US is more heavily weighted to broker sales roughly about 50% of our quarter and Thats where.
Less face to face enrollment as utilized as well as larger cases. So I think those are sort of some four points the dean's comments around modest sequential improvement.
I think secondly.
We will reserve comments around 2021.
For our outlook call and financial analyst briefing.
And we'll look forward to that discussion and Teresa do you want to add anything.
No I think rich covered it thank you.
Maybe just another one on the us on your persistency.
Can you talk about what you've seen in terms of persistency in the regions where premium grace periods.
Have expired are you seeing an uptick in less severe or not.
So overall we.
Thanks, Dan overall, we've not seen a notable increase in all three lapses given the stability in our persistency rate.
But we continue to monitor it.
Lastly, with the small business side, it's important to note that.
Small businesses a large.
Part of our in force however.
The premium is more balanced across small and large cases, so really we're not seeing.
We thought we'd see.
But we are continuing to monitor that and then we'll get more insight at the Investor conference as well.
And I have thank you.
In this benefit and our ability to pay claims for it although it ticked up our benefit ratio, which we wanted to happen. We believe it will also have a positive impact on persistency as people realize they need the product.
Okay. Thanks.
The next question comes from the line of meat.
CD.
Thanks, Good morning.
I think you had said.
You expect some new products in Japan in the first quarter.
So just curious normally when when you launch a new product, we see an almost immediate pickup in sales.
Just given the pandemic and how the sales dynamic has changed.
Should we expect the same sort of trend that we've seen historically and will you be selling this new.
Medical product in the Japan post side against product niche and post channel.
Go ahead.
Okay.
Because the real answer that question okay.
No.
No other than.
Does this mean no sudden.
Okay, and then 100 Lumpiness because a moon grew due to what's going on.
Hi, Scott.
Men done no.
Our news release system for you know when you stainless is good in Europe.
Yeah.
Hmm comes into the schools.
Youre going to get it.
Cedents.
Let me just the medical insurance as we have already started we'd have cancer insurance you have implemented wed assume solicitation as bad application.
Instruments application system.
Tumor and this will allow reduction.
19 risk like having potential distance.
So look and it comes through loan deals.
Susan can you see it will continually has the tools to do the notice. It was you who uses readiness and what are you doing.
On the emptiness.
And on top of that the medical insurance policy that we plan to launch its a competitive product. So we will be able to bring in the competition and that you should be able to increase our share in the medical market.
Yeah.
We will know your Duncan tells US who will review the specific user.
He will give you some guys.
Okay, just one room everything's been sort of I guess too.
Let's now move you like you soon for you.
Cool and they can do what we do to speed up marginally using liquitime.
Our new seasons.
Our new product has a broad range of coverage to really be able to respond to various types of customers.
Well cost and a lot of the customers have concerns about the threat drill three dreaded diseases.
We will cover further in this new product as well as short term rates in the medical insurance and at the same time those customers, who really do not want to just keep on paying premium and doing nothing we do have some.
No clue bonus right here that can be added to this writer so we should be able to respond to various needs of customers.
Split.
And on the most.
Houston.
It was mentioned in Houston.
And then you can do to in online games would at this time.
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Yes, let the use of medical insurance product as soon as the end to start our sales in 2021 and group web virtual sales.
We should be able to minimize the negative impact of the risk of COVID-19. So.
Yes, hi, harness our sales.
Okay. Thanks, and then I guess for Max on the tax rate change.
Was any of this related to the Trump tax cuts from and accordingly is there any risk that under a different administration. This tax ruling that you got to be reversed.
No it's not related to the comp tax cuts.
As his roof related to add new regulation issued by the U.S Treasury and IRS that came out on September 29.
Okay.
The next question comes from the line of John Bonn, each with Piper Stan.
How should we be thinking about the permanence of some of the decline in utilization in the U.S. from maybe change behavior from Tobey, principally maybe telemedicine driving down the benefits ratio.
Well I think.
It's still in limbo in terms of what we're absolutely sure will happen.
Certainly.
We have seen.
When.
Let's say April May June.
People or stay in inside more they were not going to the doctor we saw it drop off and the claims.
The idea of the wellness benefit is to get them back to a doctor twofold, one to add utilization of the policy and therefore improved persistency raise the loss ratio sub but also prevent.
People from I mean, I have a friend who is why.
Was diagnosed with a stage three cancer and if they had.
Gone to the Doctor as they should have a good because of Cove it.
They could have called it much earlier, so while the things that we're watching is is to see whether or not there is a tail on this and that's why we're trying to encourage people to go ahead now and go back to the Doctor use these wellness benefits get the exams, you should get and hopefully that that bridge.
Things down the tail of the business.
So we're up we know that it's already picking back up in terms of people going back to the doctor, but it's not back to the normal amount that it was running up for E coat.
Okay, and then a follow up it does very helpful. The wellness initiative that trimmed a 100 basis points in the benefits ratio has that completely played out or could there be still more to come.
The news release.
Now more on the Com alright, great well again.
But the answer is we believe that there could still be more to come there.
Thank you.
The next question comes from the line of Eric.
Yes.
Three cents.
Hi, Thank you do you intend to let all of the tax benefit drop to the bottom line or do you see opportunity to either accelerate investment or adjust product pricing to boost growth.
Yeah. We we obviously you have multiple initiatives in place in order to drive growth as Fred outlined and that is pushing up our expense ratio and a half.
Yeah Thats been in play for the last couple of years, and we see that ongoing and so generally I would characterize this.
Benefit as dropping to the bottom line.
One thing I would add though in this this goes to this goes to the previous question too about how to think about future corporate tax rate changes is that we do have to be mindful that this effectively just creates an even playing field for the way in which we report our effective tax rate and cash tax payments in other words we.
Effectively paying a 21% corporate tax rate us being a us taxpayer.
At Aflac and so to the degree there is a change in tax law going forward will be impacted much like any other corporate taxpayer in the us and so we do have to be mindful of that and we'll be watching that carefully having said that though there is a very real benefit.
To us both cash wise and effective tax rate for a period of time, including going back in grabbing some cash flows that we had previously paid out in the way of tax payments. So it's a real benefit.
The one that you want to be careful about taking into the future. If you believe there could be changes in the corporate tax rate going forward.
Thank you and then can you talk a little bit about the recruiting and licensing backdrop from new agents.
That pretty much.
Absolutely. So first of all recruiting continues to be a very important part of our element.
Strategy going forward.
We saw him.
The third quarter compared to the second quarter.
And we are at the beginning of 2020 and we implemented.
Infigen alignment from a compensation program.
To drive producer growth and to drive recruiting and so the anticipation on recruiting for the fourth quarter as we expect to see moderate improvement compared to the second and third quarter and then as we.
Look to 2021, well clearly talk about that more at the Investor conference, but it will be a key part of our strategy.
Got it thank you.
The next question comes from the line of Humphrey Lee.
All right.
Good morning, and thanks for taking my questions.
First question is related to the expenses in Japan, I heard that you talked about the $1.7 billion in 42 related expenses in the quarter and in those with EUR 2 billion yen related to the paperless initiatives, but just looking at the sequential increase in expenses as Stuart.
Those two pieces on the EPS explains most of the increase so I was just wondering what's the other driver for the much higher expenses in the quarter.
In India. The main driver continues to be in terms of the expense ratio is the decline in revenues and so you have to increase spending but also to functional lower revenues is impacting the the the expense ratio.
Just referring to the notion in.
General expenses loans of 72 billion yen.
Keith I think.
I think that much of that has to do with just the seasonal dynamics related to direct mail spend as well as other promotional initiatives in the quarter related to let you know as compared to last year. So I think some of it is just natural fluctuation. The two main drivers and maybe I would add a third are not only covert related.
Senses and the Paperless initiative, but we also continue to accelerate certain digital investment.
In the quarter.
And those are the those are the primary drivers of just an incremental increase in general admin General operating expenses.
Okay.
And then in terms of the sewerage. In addition in the fourth quarter, how should we think about the size of the premium at the end and also by extension DCD the expense impact.
And platform and also in terms of whats your expectation on a full year premium basis.
Four.
That business.
That business has been running.
At or around I believe in the 75 to 100 million in annual.
Annualized premium range.
As you can expect that is a lumpy business because it's largely a startup as zurich and it tends to focus in our large accounts, but.
But it's also a very persistent business, so theres high persistency with that business. So I would expect on an annualized basis. It's in that range. So it will have a modest impact to annual earned premium.
In terms of the overall PNM will impact on it as we mentioned when we announced the transaction we would expect there to be roughly five cents dilution on an annualized basis.
Related to that transaction.
And that's largely because as they are still ramping up the business.
Their revenue is not enough to offset their cost structure, because it's in a growth mode.
So and we expect obviously and intend to continue that growth mode going forward. So that's that's essentially the nature of the business its modest modestly dilutive.
To earnings in modestly accretive to earned premium.
Got it thank you.
The next question comes from the line of.
Andrew.
With credit Suisse.
Hey, good morning.
Snow.
This question is around the benefits ratio and I'm wondering.
As we were.
In the us.
At a 48.3 down from 49.1 year over year, and then of course 44.3 quarter over quarter have we reached kind of receivables now how would you expect them to trend over the course of the next several quarters.
Well I mean in general we would expected to trend up but really up to previous reported numbers prior to the pandemic and thats simply because of what Dan outlined in his comments that there will be naturally a gradual increase in utilization, but really back to normal levels and still overall favorable.
Relative to going back in history.
So you will see a trend up.
Wellness related impacts will subside, we certainly hope, but frankly, we're monitoring as you can imagine given the news cobot related.
Cases.
But overall, we would expect utilization to find it's more normal levels overtime.
We are bringing on businesses that tend to have a higher benefit ratios and the lower expense ratios.
That work dental and vision for example that of course group benefits. So over time, you will eventually have a bit of a mix play in our benefit ratio to be aware of.
But thats unlikely to be material over the certainly over the next several quarters and in 2021, but you'll see that play out over time and it will of course be able to report that out and let you know what's influencing the benefit ratio and expense ratio.
Right and and in earlier in the year, you provided a credit stress scenarios about.
680 million of credit losses has that changed improve worsened.
It's kind of the out there and what are you seeing in to 2021.
Eric why don't you take that.
Sure thing. Thank thank you Andrew.
Naturally we continue to analyze our portfolio stress scenarios.
Inclusive of how our our portfolio actually performed over these past six months and looking forward, including assumptions about a second wave and economic and market impact.
In fact, our portfolio has performed very well through.
Through the first part of that pandemic and better than expected relative to our stress test.
In addition.
You may recollect in the second quarter, we did some marginal de risking and risk reduction and there were particular names in the stress test that in essence were impacted or went away having said that we're completing our newest stress tests and intend on presenting data at this upcoming fab.
So you'd be patient for about another month, you will see some of the new results.
Got it thank you.
The following question comes from the line of Tom Gallagher with Evercore ISI.
Good morning first question Max can you can you give a sense for how the cash tax benefits will compare to the reduction in the GAAP tax rate and how that how we should think about that playing out over time.
So cash.
Cash taxes will always be volatile and there will be.
Hi, timing differences between our GAAP and our cash taxes, but.
But overtime I would expect them to.
Have about the same impact from from this change in tax regulation.
Well, Dave would you expect there to be a meaningful difference in the first couple of years and converge overtime were or is it going to be would you say.
Directionally similar.
With some volatility around it if you know what I mean, yes, the they will be the latter.
It will not be any material seeking.
Significant difference there and certainly not over as long period as as a number of years, it's more the latter where we might in a short term have some timing differences, but add.
Generally speaking, we would expect our cash taxes to come down as well.
Got you and then my follow up is.
Can you talk.
Just given the increase in the benefit ratio in Japan this quarter.
The 150 basis points to 200 basis points.
Can you talk about and I know you had referenced that was somewhat related to the slowdown in sales and the impact of Latin re issue.
Can you talk a bit given that sales are likely to remain at least somewhat lower rental.
Relative to historical levels.
Can you talk about whether you would still expect to see the broader trend.
Benefit ratio improving here over the next couple of years are we likely to see that maybe go the other way.
Why don't you take a crack at that.
Okay. Thanks Max.
Really when we look forward for our persistency in as Max alluded to it's it's totally related to sales activity and.
About 80 basis points in the benefit ratio for the quarter is attributed to.
Lack of what I will call action reissue activity. So as we introduce product in the first quarter I would expect that tick up somewhat from the medical block.
So I would I would really anticipate as we go through next year that you see more of a.
Normalized termination rate, which will lead to a more normal looking benefit ratio, especially as it pertains to the policy reserve aspect of it.
Got you and Tom would you still expect a broader trend over multiple years of improvement in the benefit ratio.
I think as we see.
Claims come in and our trends that we have in or cancer and medical box you know.
That will be reflected in the benefit ratio going forward.
Okay. Thanks.
Come on we will address some of the underlying drivers in terms of the.
Hospitalizations and and.
And duration of the hospital space et cetera at Fab. So, we'll give you a little bit more insight into that.
Thank you.
And.
That leads us to the top of the hour before concluding I just want to remind you that we have combined our financial analyst briefing and our 2021 outlook call schedule webcast event on the morning of November 19th.
Eight am eastern time for more details please reach out to Investor Relations here and we thank you all for joining us today and look forward to speaking with you soon and wish you. All continued good health. Thank you.
This concludes today's call everyone me down disconnect.
Yeah.
Yeah.