Q4 2020 Aflac Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Aflac fourth quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your first speaker today, David Jones, Vice President Investor and rating Agency relations. Please.
Please go ahead Mr. Mr Young.
Thank you Carol and good morning, and welcome to Aflac incorporated fourth quarter earnings call as always we have posted our earnings release and financial supplement to investors thought Aflac Dot com.
This morning, we will be hearing remarks about the quarter and the year related to our operations in Japan, and the United States amid the ongoing COVID-19 pandemic.
Dan Amos Chairman and CEO of Aflac incorporated will begin with an overview of our operations in Japan and the U S.
Fred Crawford, President and CEO of Aflac incorporated will then touch briefly on conditions in the fourth quarter and discuss key initiatives, including how we are navigating the pandemic.
Max Broden Executive Vice President and CFO of Aflac incorporated will.
I'll conclude our prepared remarks, with a summary of fourth quarter financial results and current capital and liquidity.
Members of our U S Executive management team joining us for the Q&A segment of the call are Teresa White President of Aflac U S.
Virtual Miller president of individual benefits.
Rich Williams President of group benefits.
Eric Kirsch Global Chief investment Officer, and President of Aflac Global investments.
Our average here.
Global Chief risk officer, and Chief Actuary.
June Howard Chief Accounting Officer, and Steve Fever, CFO of Aflac U S.
We are also joined by members of our executive management team in Tokyo at <unk>.
Life insurance, Japan.
Charles Lake Chairman and representative director President of Aflac International.
<unk> career day, President and representative director.
Todd Daniels director and CFO.
And Koji <unk> director and head of sales and marketing.
Before we began 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 day, Aflac Dot com and includes reconciliations of certain non U S GAAP measures.
I'll now hand, the call over to Dan Dan.
Thank you good morning, and thank you for joining us.
At this time last year, it would've been very difficult to foresee the gravity of what was soon to unfold for society and for the company due to COVID-19.
I'm proud of our employees, our sales distribution and board of directors for their decisive people first initiatives. We spearheaded early on in both the United States and Japan to protect our workforce and to be here for our policyholders throughout this trying time.
We were able to reinforce our financial strength and operations as well as our distribution franchise with digital and virtual investment.
To the position of our company for the future growth.
Adjusted earnings per diluted share, excluding the impact of foreign exchange increased 10, 8% in 2021.
While benefiting from a lower <unk>.
<unk> tax rate, we were pleased with the results when you consider the pandemic pressure on revenues accelerated investment in our core technological platforms and the initiatives to drive future earned premium growth and efficiency.
Investing in growth and innovation will continue to be critical strategic focus this year.
There is one central message of that been emphasizing with our management team. It is imperative that we control. The factors we have the ability to control and what we don't have control over we must monitor continually to be ready to adapt.
Despite the fact that sales in both U S and Japan had been suppressed considerably due to the constraints of face to face opportunities.
We did not sit still we maintained forward motion as we absorbed the accelerated investment in our platform, while continuing strong earning performance.
In 2020, Aflac, Japan generated solid overall financial results with a stable profit margin of 21, 2% and extremely strong premium persistency of 95, 1%.
The relaunch of our new cancer rider drove a sequential improvement in both cancer insurance and total sales in the fourth quarter. As a result total sales were down 22, 2% for the quarter and 36, 2% for the year.
In Japan, we introduced our new medical product in January and even up against difficult comparisons of last January.
Or pre Covid sales it is a positive launch exceeding our expectations.
We are encouraged by the reception of both the consumers and our sales force.
While these sales results represent sequential improvement relative to last quarter, the effective reduce face to face activity are evident and we continue to promote virtual sales.
Our goal in Japan is to be the leading company for living in your own way.
This is a declaration of how we tailor our products to fit the needs of customers during the different stages of their lives and reach them, where they want to buy through agencies strategic alliance and banks.
Now turning to Aflac U S. We saw a stable profit margin of 19, 3% amid a year of intense investments in the future of our business and the global pandemic conditions. However, this backdrop continues to noticeably impact our sales results in this segment.
As well largely due to reduced face to face activity.
As expected we saw modest sequential sales improvement in the quarter with a decrease of 27, 2% per the quarter and 33 for the year.
Sure.
In the U S. We continue to feel the impact of limited access at the work site, especially among our career agents who have historically relied upon.
Face meetings to engage small business owners and their employees.
However, we remain cautiously optimistic for continued modest sequential sales improvement.
Tien tsin upon the pace of the economic recovery.
And as a result expect to see a brighter second half of 2021.
Brad is responsible for acquisitions and he will cover that shortly but while these acquisitions may not have an immediate effect on the top line they better position aflac for future long term sales in the United States.
Yeah.
As part of the vision 2025 in the U S. We seek to further develop a world where people are better prepared for unexpected health expenses.
The need for the products, we offer is as strong or stronger than ever has been.
At the same time, we know consumer habits, and buying preferences have been evolving and we are looking to reach them in ways other than the traditional media and the outside the work site. This is part of the strategy to increase access penetration and retention.
Even while working remotely for the greater part of the year, we remain true to our culture and identity as a socially responsible company.
We stepped up our engagement with our employees through virtual town meetings and weekly touch base letters.
Additionally, diversity continues to play an important role at Aflac as it has for decades.
I have always believed that in order to accomplish our goals and serve the community where we have a presence we must surround ourselves with a group of people who bring different perspective to the table. We have done that for years at the end of 2020, nearly 50% of Aflac U S.
Employees will minorities, 66% were women.
23% of our U S senior officers, where minorities and 30% were women.
And then when you think of Aflac Board of directors, 36% were minorities and 36% were women.
Diversity has always played an important role within ESG.
And on cash spread with executive oversight of our ESG efforts he will provide greater detail on our 2021 key objectives.
I've always said that the true test of strength is how one handles adversity.
<unk> pandemic conditions are ongoing I am pleased that 2020 confirmed what we knew all along and that is that Aflac is strong adaptable and resilient, we strive to be where people want to purchase insurance that applies to both Japan and the United States.
In the past this is Matt meeting face to face with individuals to understand their situation proposal solution and close the sale. However, the pandemic clearly demonstrates the need for virtual means in other words non face to face sales to reach potential customers.
And provide them with the protection that they need and therefore, we have accelerated investments to enhance the tools available for our distribution in both countries.
Related to capital deployment, we placed significant importance on continuing to achieve strong capital ratios and the United States and Japan on behalf of our policyholders and shareholders.
When it comes to capital deployment, we pursue value creation through a balance of actions including.
Excuse me growth investment.
Stable dividend growth and disciplined tactical stock repurchase it goes without saying that we treasure our record of dividend growth.
The fourth quarter's declaration, Mark the 38 consecutive year of dividend increases.
Additionally, the board approved a first quarter dividend increase of 17, 9%.
Our dividend track record is supported by the strength of our capital and cash flows at the same time, we remain tactical in our approach to share repurchase buying back $1 5 billion of our shares in 2020.
We are also focused on integrating the growth investments we have made in our platform.
As always we are working to achieve our earnings per share objectives while.
I'll also ensuring we deliver on our promise to our policyholders.
By doing so we look to emerge from this period in a continued position of strength and leadership.
I don't think its coincidental that we have achieved our success, while focusing on doing the right things.
For our policyholders.
Shareholders employees distribution channel business partners and communities in fact, I believe they go hand in hand.
I am proud of what we have accomplished in terms of both our social purpose and financial results, which have ultimately translated into strong long term shareholder return now let me turn the program over to Fred Fred Thank you Dan.
I'm going to touch briefly on conditions in the fourth quarter with respect to the pandemic. I'll then provide an update on key initiatives in Japan and the U S. G.
Japan has experienced approximately 400000 COVID-19 cases in 6000 confirmed deaths since inception of the virus.
While quite low as compared to other developed countries and the U S. These statistics have more than doubled since the end of the third quarter.
Earlier this week the government of Japan extended their state of emergency for Tokyo, and nine other prefectures through March 7th.
This action includes the suspension of domestic tourism campaign.
And entry of foreigners into Japan.
We have responded with again moving more of our workforce to working from home. Unlike the state of emergency declared last year in the initial stages of the virus government restrictions are more balanced with economic recovery considerations, and we have not prohibited face to face consultations and or closed our sales.
Meanwhile.
While Prime Minister Tsuga has announced a goal of beginning vaccinations mid February.
Through the fourth quarter Aflac, Japan, COVID-19 impact totaled approximately 3400 unique claimants with incurred claims totaling 1 billion yen.
We continue to experience a significant reduction in paid claims for medical conditions other than COVID-19, as Japan manages hospital capacity and discourages more routine visits.
Despite the recent rise in infection rates in Japan, we continue to track well below our stress assumptions as Dan outlined sales have clearly been impacted but when looking at policies in force the impact of reduced sales on earned premium has largely been offset by improved persistency with the reduction in reported.
<unk> revenue driven primarily by paid up policies.
Finally pandemic related expenses in the quarter totaled $1 8 billion yen.
Which includes the rollout of virtual distribution tools employee teller, working equipment and distribution support.
Turning to the U S. There are nearly $27 million COVID-19 cases, and over 450000 deaths as reported by the CDC.
For Aflac U S. In 2020, COVID-19 claimants totaled 23000 with incurred claims of approximately $71 million in the quarter and $128 million for all of 2020.
We are now in a better position to back test the correlation of U S rates of infection to paid claims in order to build an estimate for incurred claim reserves. It's fair to say this is still very difficult to estimate as IV and are often works from years of reliable data to establish trends.
While our reserves assume elevated claims we continue to see the length of stay in hospital and transitioned to ICU traveling below our expectations.
We have seen limited impact to our reported persistency numbers. However, we believe this is in part attributed to the combination of reduced sales where lapse rates tend to be much higher in the first year and the state of the state executive orders requiring premium Grace periods.
Executive orders are still in place in 11 states as of the end of the quarter with five states. Having open ended expiration dates we have reduced pressure on lapse rates through proactive work with our policyholders, including converting from payroll deduction to direct bill and encouraging our review of wellness benefits.
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Turning to key operating initiatives 2020 was an important year in setting the stage for growth once we move clear of pandemic conditions.
Beginning with Japan, after launching and promoting a simplified cancer writer in the fourth quarter, we successfully launched our refreshed medical product called ever Prime in January as Dan noted in his comments, it's early and our associate channel is having to navigate pandemic conditions, but January medical sales are promising.
Introduced in October of 2020, we have technology in place to allow agents to pivot from face to face to virtual sales and an entirely digital customer experience.
Through virtual sales in Japan is relatively limited. In addition, the majority of applications are still filed in paper form although digital applications have been adopted in face to face consultations.
Excluding traditional non face to face means of distributing products like Worksite direct mail and call Center sales, we estimate only 2% to 3% of our sales are currently digital end to end.
However, we understand some of our agencies has significantly adopted virtual tools to supplement face to face consultations.
We have discussed our paperless initiative across all operations in Japan.
This is a 10 billion yen investment with approximately $2 8 billion yen spent in the fourth quarter and $4 8 billion spent in 2020.
We are projecting another $4 3 billion yen and spend planned for 2021.
This investment has a three year payback and will reduce the production and circulation of over 80 million pieces of paper per year.
In summary, we expect the combination of product development improved pandemic conditions and the return of Japan post to distributing Aflac cancer insurance will drive growth as we look towards the second half of 2021.
Turning to the U S. We focused our efforts in 2020 on setting the table for 2021, including a national launch of network dental and vision, completing our group benefit acquisition and standing up our new direct to consumer digital platform.
On the operations side, we rolled out a new and upgraded enrollment platform called ever well too low in September which requires time for full adoption and stabilizing the platform.
2020 was an important year to introduce digital tools increase adoption rates and take on any corrective action before 2021.
In addition, under Teresa whites leadership, we have reorganized the us forming a group benefits and individual division.
Rich Williams will now lead our group benefits Division, which includes Aflac voluntary group Aflac network dental and vision Argus, our dental Tpa and our new Aflac Premier life absence management and disability business.
Virtual Miller will lead our individual benefits division, which includes aflac individually issued and small business focused worksite products and our new consumer markets business targeting workers not at the traditional worksite.
Both divisions pull from shared service U S. Operating platforms. This new alignment provides focus for each division within the U S business segment and allows aflac to offer tailored products and services for our career agency teams and broker partners based on the unique markets. They serve.
Like Japan, we have all the tools in place for agents to conduct business without a face to face meeting.
However, most sales are being driven on a continuum of face to face and digital interaction we estimate about 15% of our traditional individual sales are completed without some form of face to face interaction. This excludes digital direct to consumer which is naturally non face to face.
Turning to more specifics on our key growth initiatives.
On January 12, we announced the national rollout of Aflac dental and vision.
Our dental and vision products are now available in 40 states with more coming online throughout the year.
This is a broad launch that is available to large and small companies and distributed through agents and brokers and.
In November we closed on our Zurich group benefits acquisition, the new platform managed to contribute to sales in the quarter with $5 million in production.
This is more of a turnkey launch meeting products are filed and we are open for business in 2021 under the Aflac brand.
Finally, we officially launched our new digital direct to consumer platform in the first week of January we offer critical illness accident and cancer and are approved to sell all three products and approximately 30 states with more states and products coming online throughout the year.
As highlighted during our Investor Conference, we are addressing expenses over two horizons in 2020, we took actions to realize approximately $100 million of annualized run rate expense savings.
On a go forward basis.
Actions included restricting hiring rationalizing distribution expenses and a voluntary separation plan that resulted in a 9% reduction to our U S workforce.
Longer term expense initiatives centered on our group division and the migration onto a new administrative platform as well as integration of the Zurich group benefits business.
As you are all aware, we have adopted a conservative buy to build acquisition strategy. The build efforts taken together impacted our expense ratio in the fourth quarter by 160 basis points and is expected to impact the 2021 ratio by approximately 180 basis points.
Our global investments team remains focused on asset quality monitoring economic conditions, and sourcing new investment opportunities portfolio actions prior to and in the early days of the pandemic lowered our exposure to prolonged economic weakness and we ended 2020 with a modest amount of asset losses.
Yes.
We continue to watch closely our middle market loan in traditional real estate transitional real estate portfolios.
While we have seen ratings downgrades, our portfolios are resilient consisting of diversified first lien loans conservatively underwritten to high quality borrowers.
We have further refined our approach to managing the unhedged dollars in Japan, both lowering our hedge ratio and maintaining our out of the money protection for extreme moves in foreign exchange. These unhedged dollars provide diversification and income benefits as well as lowering our enterprise exposure to the yen.
As has been our practice for 2021, we have locked in lower hedge costs with floating rate loan yields benefiting from LIBOR floors.
Finally, we are pleased with the performance of our strategic investment in alliance with <unk> capital partners during 2020 contributing to corporate investment income.
We are working to establish similar strategic alliances that leverage the capabilities of our asset management subsidiary and further the performance of our insurance segments.
As comment on commented on by Dan We have refocused our efforts in key areas to drive tangible ESG initiatives. In 2021, we are focused on the following.
Building off our published ESG investment policy Aflac global investments is advancing a responsible investing framework that includes the establishment of a core ESG team and formal governance process.
We initiated work with third party experts to measure draft and eventually disclose a formal plan to be carbon neutral on or before 2040 and carbon net zero emissions on or before 2015.
We pledge to continue hitting key milestones on our important women in leadership initiative as part of a diversity and inclusion in Japan, and targeting 30% of leadership positions in Japan filled by women by 2025.
In the U S. We seek to advance our already strong diversity statistics by broadening our influence through identifying and providing capital to organizations that advanced diversity and inclusion as well as social justice and economic mobility.
Finally, we pledge to advanced reporting and disclosure framework in compliance with SaaS, B and Tcf day reporting standards.
We will provide further disclosures on ESG initiatives, and our proxy materials and on our ESG hub ESG Dot Aflac dot com.
Wrapping up my comments, we believe the investments made in the past two years and accelerated during the pandemic position us for future growth and efficiency in the face of what we believe to be temporary weakness in sales and earned premium I'll now pass on to Max to discuss financial performance in more detail Max.
Thank you Fred will.
We finished the year with stable fourth quarter earnings in a year marked by significant mortality and morbidity events as well as continued low interest rates.
For the quarter adjusted earnings per share increased three 9% to $1 seven.
And our full year EPS was a record $4 96.
Up 11, 7% year over year.
Adjusted book value per share, including foreign currency translation translation gains and losses grew 19, 1%.
Growth for the quarter and full year.
The adjusted ROE, excluding the foreign currency impact was 12, 1% in the fourth quarter and a respectable 15, 1% for the full year.
Our material spread to our cost of capital.
This quarter benefited from favorable marks on our alternate alternative investment portfolio to the amount of $47 million pre tax above our long term return expectations.
A very good outcome on our building alternatives portfolio.
We also book the severance charge associated with our previously announced voluntary separation program or VSP in our U S and corporate segments totaling pre tax $43 million included in adjusted earnings.
Turning to our Japan segment.
Total earned premium for the quarter declined three 5%.
Reflecting mainly first sector policies paid up impacts.
While earned premium for our first sector products was down one 9%.
For the full year total debt premium was down two 8%.
Totally policies in force declined by a lesser rate at one 2%.
As policies in force are not impacted by the paid up status. It tends to serve as a better indicator of the growth of the underlying business.
Persistency has been on a positive trajectory in stopped slightly sequentially to 95, 1% up 70 basis points year over year.
Japan's total benefit ratio came in at 68, 9% for the quarter down 110 basis points year over year.
And that third sector benefit ratio was 58, 6% down 150 basis points year over year.
The main driver for the lower benefit ratio was a higher than normal <unk> release.
Due to a sustained lower paid claims environment in 2020.
We estimate that this lower day benefit ratio by roughly 130 basis points compared to what we would deem a normal IBM released to be.
For the full year the reported total benefit ratio was 69, 9% up 40 basis points year over year.
Our third sector benefit ratio was 59, 7% also up 40 basis points year over year low.
Largely due to improved persistency.
The expense ratio in Japan was 23%.
130 basis points year over year.
The main driver was our paperless initiative, which kicked in at a higher gear as we digitize their operations and drive efficiencies throughout the value chain to future state with significantly reduced paper usage.
This investment increased our quarterly expense ratio by 85 basis points.
For the quarter adjusted net investment income increased 11, 9% in young terms.
Led by strong returns in our alternatives portfolio, but also strong results from the loan book by transitional real estate and middle market loans.
For the full year adjusted net investment income rose four four per ton.
The pretax margin in the quarter was 29% up 110 basis points year over year as the combined effect from the lower benefit ratio and higher expense ratio was still positive.
For the full year, the pre tax margin was a respectable 21, 2%.
Turning to U S results earned premium was down two 3% for the quarter due.
Due to weaker sales results.
Persistency improved 160 basis points to 79, 3%.
This was driven by emergency orders in various states and by lower sales in 2020, as new policies lapse at a higher rate than.
And then in force policies older than one year.
We're moving these factors would result in a stable year over year persistency rate and we view that as a good outcome to date, given the pandemic environments impact on our policyholders and reflecting our efforts to retain accounts and keep premium in force.
For the full year earned premium was down 0.9%.
Our total benefit ratio came in at 51, 6%.
Which was 250 basis points higher than Q4 2019.
Pandemic conditions continued to be very relevant when analyzing our benefit ratio.
Due to the recent increase in infection rates.
Estimate incurred claims impact of $72 million of which $58 million was an increase to IBM.
Resulting in an impact to the benefit ratio of five one percentage points from Covid related claims.
This is somewhat offset by favorable non COVID-19 related claims activity generating an underlying benefit ratio of 46, 5%.
Covid and non Covid related claims tend to have a negative correlation which clearly can be seen in our quarterly results throughout 2020.
We would expect this pattern to continue in early 2021.
Going forward, we still expect the guided range of fab of 48% to 51%.
To be a reasonable future benefits ratio.
Our expense ratio in the U S was 43, 5% up 360 basis points year over year.
The severance charge for our BSP explains 220 basis points on the rise while the residual is primarily driven by digital investments and the reduction in revenues.
The full year expense ratio landed at 38, 6%.
Adjusted net investment income in the U S was up one 1% due to strong alternative investment income while the portfolio book yield contracted 22 basis points year over year.
Full year adjusted net investment income declined two 1%.
As both the benefit and expense ratio gross profitability did come under pressure.
With a pretax margin of 11, 6% in the quarter.
For the full year, we still reported a solid pre tax margin of 19, 3% in line with recent historical average.
In our corporate segment, the pre tax loss widened to $47 million in the quarter compared to $9 million from a year ago.
Lower net investment income on our short duration hold hold co cash position.
Increase retirement expenses.
An $8 million of BSP severance expense were the main components of the Delta.
For the full year, the corporate segment pre tax loss was $115 million.
Our capital position remains strong and stable with.
We ended the quarter with an <unk> of north of 900% in Japan and.
In an RBC of approximately 525% in Aflac Columbus.
Holding company liquidity stood at $4 billion.
2 billion above our minimum balance.
With a leverage of 23% we continue to travel in the middle of our stated leverage range of 20% to 25% offering ample debt capacity.
The continued spread of COVID-19 leads us to remain cautious in how we manage our capital base make investments.
And deploy capital to the benefit of the shareholder.
In the quarter, we repurchased $500 million of our own stock and paid dividends of $196 million offering good relative IRR on these capital deployments.
For the full year, we paid $798 million of dividends and returned an additional $1 $5 billion to shareholders in the form of share repurchases.
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 meaningful spread to our cost of capital.
A recent example is the board's decision to increase the quarterly dividend by 17, 9% to 33 per share.
Before going into Q&A.
I would characterize our 2020 financial performance is solid.
Despite significant external challenges.
As we look forward into 2021, we do not see any fundamental drivers, causing us to change the outlook provided at our financial analyst briefing in November.
In order to achieve these objectives.
We remain laser focused on executing on our growth initiatives.
Expense efficiency.
And continue to drive ROE at a significant spread to our cost of capital.
With that let me turn it over to David to begin Q&A.
Thank you Max.
Now we are ready to take your questions, but first let me ask that you. Please limit yourself to one initial question and then one related follow up to allow other participants an opportunity to ask a question Carol we will now take the first question. Please.
Thank you. Your first question comes from Nigel Dally from Morgan Stanley. Please go ahead.
Great Thanks, and good morning.
To ask about Japan sales you mentioned, the new medical product has exceeded initial expectations can you elaborate somewhat on that and how sustainable should that improved demand base that will just a first quarter phenomenon or should we expect debt improved momentum to continue into the second quarter and perhaps the growth.
This is Dan I'm going to let Japan, but let me let me just say that.
It track to me more of what other products and past introductions have done.
It's really too early to tell it's really only been out two weeks. So to go ahead forecast on two weeks is a little too early to tell.
Dale but.
I am certainly optimistic.
The field force or our agents are excited about it and the consumers seem to be excited about it which means it's a good product at a good time to be introducing.
Of course, we will know much more details net.
Next quarter, but I would expect it to have the same pattern that we've seen with past introductions.
Uh huh.
Koji.
Okay.
No.
No.
Yeah.
Thank you David.
Sure.
Awesome.
And the medical product.
Greg Mckinney from bank of <unk>.
The low coverage.
I'm sorry.
So now moving on.
To conclude from this.
Hi, Shlomo.
Thanks, Ken.
And the product also.
So can you share the normal scope of the agent can be competitive in that market as well.
So David.
What are your items.
Thank you.
Thank you.
So we are expecting.
It's product.
Non exclusive market.
Paul format product strategy with low.
Our competitive advantage with this product.
No.
Doug are you choosing to see what are you still comfortable.
Got it moving.
Sure.
<unk>.
David.
Okay.
So we do believe that this price.
Last from a long term and this product will be very popular among younger generations as well.
This income is going to the low cost.
Welcome Steve.
Thank you.
Okay.
So low.
Students.
And although we only have two.
Two weeks since the launch of the product the actual number Paul.
Our increasing net income.
Right.
Per policy is also on the increase.
Yes.
Moving on.
Thank you Susan.
Good day.
So they are removed.
Go ahead Robin.
Thank you.
I think we'll have to get a much better start this time.
Environment compared with the medical product that we've launched in 2019 and the writer.
Go ahead.
Dan.
Yeah.
Yes.
So I don't think from quarter.
Okay.
Thank you Daniel.
Seamless.
And we are expecting.
Improvement reported much more.
Much more much more and we have seen some improvement.
The fourth quarter last year.
We're planning to have more improved.
Proof of this quarter.
Go ahead Jonathan.
And that's all from me.
That's great. That's very helpful. The second question is just on <unk> understand brokerage group in sales are holding in better than the agency sales is it possible to get some quantification behind how much better I think with brokerage and group, becoming much larger part of the strategy.
That's helpful to understand houses how sales are trending along distribution margin.
I think it's probably best for Teresa enrich to handle that but you're the premise of your question is correct broker group driven sales will hold up better under this environment, an agent driven small business sales for sure so Teresa and rich.
I'll, let rich answer, but I'll just make the comment that.
Yes.
Broker sales.
Traditionally a lot more.
Automate it.
We have a lot more digital presence in the broker environment.
From the beginning but.
I'll, let rich response, thank you Teresa.
As Dan alluded to in his comments, we've seen reduce face to face activity, which certainly impacts agency sales and then from a broker sales perspective.
Given that they tend to work with larger accounts they are less dependent on face to face activity.
As a result in particular with our group business our group business.
Solid results in the.
In the single digit decline, whereas our traditional businesses saw it at a larger decline, but all those comments.
Teresa Fred myself, I think kind of speak to the question.
That's great. Thanks, a lot.
Okay.
Our next question comes from John <unk>.
From Piper Sandler. Please go ahead.
Yeah.
Yes, thank you very much.
Headline the other day day.
Japan had been.
Dan champion and required masks and their preparation declined host the 2021 Olympics, assuming that were to go through I know previously you talked about joint marketing and product campaigns with Japan post is there the possibility of some increased marketing expenses in the mid year.
Okay.
Yes.
Yes, we will have koji or accretive sign address that I would tell you that if what your question is is do you expect to build some form of marketing campaigns surrounding the Olympics.
That is not in the plans and not normally what we would do what we are doing however is building marketing campaigns around the launch of our new products.
And particularly taking advantage of a heightened awareness for supplemental health products.
Covid environment. So Koji <unk> you can you can address it with more detail.
Hi, good morning.
What do you think you'd be able to <unk>.
Non-GAAP between accounts.
David I think about that.
And this is from Japan.
Probably won't have a particular campaign around the Olympics.
John I don't know if thats correct.
Yes.
Adjusted Thank you very much.
And then the follow up the wellness program you started in <unk> 'twenty.
Is that still at Le because I think last time, you said it would carry over a little bit and how should we be thinking about cost of debt.
Yes. It is still in play in the sense that there is sort of a I'll call. It a tail to it if you will in other words, we did the mailings. We saw as you recall from last quarter's spike in.
Some of the wellness claims, which we want to anticipate because we believe the payoff of that is not only persistency, but also being able to come back into companies.
Explain that for our sector.
A lot of what our agents will do with their business clients as they will phone them up and say based on our analysis, you've got a certain number of employees that have wellness benefits and we can help with understanding whether they are fully utilizing those wellness benefits to get money back in their pockets as you can imagine, particularly as a small employer.
That's an attractive proposition these days to get money in the pockets of your employees and so that ends up lead are leading us into the account to talk about future enrollments in cross selling and Upselling et cetera, and so that has been fairly successful. So it's a very important piece of our product features and one that we would continue if what's your.
We're asking is.
What are we looking at in terms of ongoing perhaps elevated claims related to wellness.
That's factored into some of our IP and our estimates for example, where we will set up those types of reserves in anticipation of a trend line of wellness claims and so at the moment I'll ask Max to give color, but I don't anticipate that being a mover for our benefit ratio.
Thats right, Fred and that John as you remember we did a we had a companion in the third quarter.
And obviously we.
The impact on the on our benefit ratio in the U S. In the third quarter both.
From paid claims but also.
We established an IV and are associated with that wellness campaign.
And look at the impact on the fourth quarter, you did not really see any impact follow through into the fourth quarter because of the IP and our debt we established in the third quarter going forward.
We would expect these to be more normal activity for us out there may be instances with any significant campaigns that could trigger.
Trigger and include an increase in net claims temporarily but generally it would be relatively small, but if you refer specifically to day campaign debate campaign, we had in the third quarter.
That hit the benefit ratio in the third quarter, and we didn't really have much about flow through into the fourth quarter.
Great. Thank you very much.
Our next question comes from the fleet from Citi. Please go ahead.
Thanks, Good morning, I wanted to go to the Japan benefit ratio.
I think you had said that some of the improvement or the.
Lower than expected result.
Other than expected result was due to reserve releases.
How are you guys planning for no.
Benefit ratio as you think about a world where the economy opens up again and maybe we see more people in Japan going to hospitals versus what we're seeing right now, which I understand is a sort of subdued level of activity.
Let me kick it off at a high level and I'll ask Paul to fill in the blanks.
Well specifically.
Specifically for the fourth quarter.
We had a reserve release of about $7 billion that is higher than we would normally.
Incur in a quarter.
We estimate at that lower day benefit ratio by about 130 basis points in the quarter and this is because of the paid claims pattern net we're seeing primarily to the non COVID-19 related claims activity as debt.
<unk> referred to in his prepared remarks.
Going forward.
You could obviously see an impact on the benefit ratio will temporarily from an.
Element of sort of pent up demand for.
Hospitality stations like elective surgery, physicals et cetera.
That's much more of the case in the U S and in Japan, where the Japan Hospital system have been running at a more normal level than what we've seen here in the U S.
So you could see a little bit of a higher benefit ratio from that but this has been taken into consideration. When we gave you the benefit ratio range at fab 68, 5% to 71% in our outlook.
So I'll leave it at that and talk please feel free to give some additional comments.
No Max I think Youre right expense.
We if you think about our hospitalizations as it relates to accident hospitalizations. They won't come back accidents that have happened and you recovered. However, there could be a level of sickness hospitalizations that would increase in the future.
One other aspect of our benefit ratio that al mentioned, if we get our sales back to a more normal level and we start with introducing product when people refresh product that has a slight impact on the benefit ratio as well in the form of reserve releases on old policies. So.
Last year as you saw in our results persistency increased.
Led to a slightly higher net.
Reserve with those policyholders hanging on to those policies.
Okay. Thanks, and then just my follow up is on U S sales. Dan you had commented that you're optimistic about a recovery in the second half.
How much of that is just due to sort of recovery in face to face sales versus some of the things that youre doing to try to improve that.
Penetration of.
Direct to consumer or the digital <unk>.
Virtual sales.
Well I think it's a combination of both.
And of course, youre going against much easier numbers, especially in the second quarter and so debt within itself makes it easier, but all in all we have been working on trying to find ways to do less face to face.
And more virtual and.
We've been preparing for that and it just got accelerated.
I will say the new norm.
Today is much improved over six months ago in terms of ability to get around as the vaccines are getting out. So we are seeing some stability from that standpoint.
Teresa would you like to make any comments, specifically, yes, I'll make a couple of comments.
Agree its a combination of both.
The virtual environment and as our agent and.
Or I can get better with adopting some of the virtual tools I think we'll continue to see improvement, but the other thing that I think debt.
We are excited about is the idea of having new product that's been introduced dental vision.
But typically in some of the broker and the small case market as well as in the larger case market having.
Some of the life and disability products.
Available as well so we have a great opportunity in the second half to really.
Start selling some of the newer product that we have out there and so I think thats what gets us.
That's what makes us excited about the second half of the year.
Fourth vaccines et cetera.
Okay. Thanks.
Our next question comes from Greg Peters from Raymond James. Please go ahead.
Good morning, Thanks for squeezing me in.
Just big picture.
You talked about risk adjusted return on equities and you looked at your slide deck.
Then you have.
Great track record of borrower.
We've seen a number of other large insurance companies sort of get away from earnings per share guidance and focus on sort of setting Roe target. So.
Given all the changes and challenges you've dealt with last year.
With the growth being uncertain at least from the near term.
Should we be thinking about sort of the ROE objectives for your company for 'twenty, one 'twenty two.
So Greg I think we will be operating in a fairly stable environment.
We obviously are running at fairly high capital levels and that is putting some pressure on our ROE as we go forward.
So it makes it somewhat challenging too.
Continue to sort of operating in the strong ROE levels that we have been in the mid teens like for example, this year, we came in slightly above 15% for the full year.
That being said I do think that long term, one way to sort of think about our business as.
It's a fairly capital light.
Products that we sell both in Japan and in the U S.
And overtime I would expect debt.
We should sort of run into sort of 600 basis points above our cost of capital.
<unk> is a reasonable way to sort of think about where our ROE should be over time.
We don't have a whole lot of interest rate sensitivity, but it does play a factor in terms of what's out what's sort of driving the ROE as well.
One thing Greg too I would add is.
Yes, youre seeing a bit of a migration from EPS to Roe.
But also from GAAP earnings to cash flow valuation and the cash flow dynamics of the company remains extremely strong even further advanced in that I think particularly soon when it comes to Aflac youre going to want to focus in on economic value and what I mean by that is if you think about our goal with.
New business as we brought on which is network dental and vision absentee management disability and life true group if you will.
Then the direct to consumer these are businesses that we expect to combine contribute upwards of $1 billion of earned premium over the next five to seven years.
And that earned premium will have a different GAAP profit dynamic associated with it because it's in building mode and as you know direct to consumer you don't back expenses and so by definition you have a lower reported profit yet at the same time that business. If actuarially appraised absolutely has value and somewhat argue great value.
As you can imagine so I think as we communicate going forward, it's not just communicating on EPS and Roe.
But it's also communicating on our cash flow and the economic value that we're driving in the company for the long run.
Got it the second question is more in the weeds, but I know in your prepared comments you talked about now that Covid, you've got a year of COVID-19 under the belt.
Looking at reserves in using the data sort of set the reserve levels and I'm just curious both in Japan and in the U S. How you're reconciling one year's results with the fact that there is a rollout of a vaccine.
And that may cause the data shift entirely in a different direction over the course of the next 12 months.
It's it's.
I commented a bit on this in my script and Max comment on it.
Look it's a very interesting science right now for valuation actuaries, establishing reserves, particularly incurred but not reported reserves.
These are practices that these models and so-called completion factors. If you want to use the technical language are built off of years and years and quarters and quarters of information that gives particularly for a stable business like ours very high confidence in the level of IBM <unk> to set up on a per product basis here you have pandemic conditions, but you.
Also have not a linear dynamic, but a convex dynamic of infections and as you said you've got these new wrinkles as in vaccination the amount of explanation that rolls out the acceptance and absorption of the vaccination among the public et cetera.
So it is a tricky environment, but these are incurred but not yet reported claims meaning it's our best estimate right now of what we believe to be claims coming in and in hand.
It is still however, an estimate and it's an estimate under a convex environment and so we will have to continue to back test to monitor and adjust our completion factors accordingly.
Got it thanks for the answers.
This concludes the Q&A portion of our call and I'll turn it back for any closing remarks.
Thank you Carol and thank you all for joining our call. This morning, we look forward to speaking with you. Soon if you have any additional follow ups and wish you. All continued good health. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.