Q3 2021 Aflac Inc Earnings Call
With that in mind I continued to address our employees in a way that similar to how with mountain family.
Keeping them informed and updates from the medical community and encourage them to get the COVID-19 vaccine because I want people to avoid being sick or even worse being a casualty due to this pandemic.
As we entered the fourth quarter when the weather gets colder in indoor gatherings increase the recovery from the pandemic remains uncertain and we must remain diligent.
For the third quarter adjusted earnings per diluted share, excluding foreign currency impact increased 10, 1% for the quarter and 21% for the year.
These results are largely driven by lower than expected benefit ratios and higher net investment income primarily in Japan.
Looking at the operations in Japan in the third quarter Aflac, Japan generated solid overall financial results as reflected in the profit margin of 26, 3%, which was above the outlook range provided at our financial analyst briefing for 2008.
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As Max will explain in a few moments Aflac, Japan has reported very strong premium persistency of 94, 5%.
Aflac, Japan sales were essentially flat for the quarter sales for the first nine months of this year were approximately 66% of 2019 level, we continue to navigate evolving pandemic conditions in.
In Japan, which include widespread state of emergencies that extended to multiple pre factors and persisted through the third quarter.
These states of emergency in Japan are much less restrictive and more limited in scope than lockdowns in other countries, but they have impacted face to face sales opportunities as we entered the fourth quarter the ability to meet face to face with customers appears to be improving somewhat.
Gradually.
And the degree to which our ability to meet face to face continues to improve with a very key driver and the recovery of our sales.
We were encouraged by the September launch of our new nursing care insurance in Japan, which we view as another opportunity to meet the needs of certain consumers. However, it's still very early in the launch of this new product to.
To determine the potential of the nursing care insurance.
In addition, Aflac, Japan continues to work to strengthen the alliance with Japan post, which resumed proactive sales of cancer insurance on April one we expect continued collaboration to further position both companies for the long term growth and a gradual improvement.
<unk> of Japan post cancer insurance sales in the intermediate term.
Now turning to Aflac U S. We saw a strong profit margin of 22, 2%. This result was driven by lower incurred benefits and higher adjusted net investment income.
Particularly offset by the higher adjusted expenses.
Sure.
Aflac U S. Also continued to have strong premium persistency of nearly 80%.
Sales increased 35% for the quarter and are at approximately 78% of sales for the first nine months of 2019. These sales results reflect what we believe are improving pandemic conditions in the United States, allowing us more face to face meeting.
And enrollments than prior periods.
In the U S. Small businesses have gained some incremental ground up toward recovery, which we expect to continue gradually within the challenging small business and labor markets. We continue to make investments in development of traditional independent sales agents.
That make up about 53% of our sales as of the third quarter of 2021 at the same time larger businesses appear to be more resilient given their traditional reliance.
All right.
<unk>, an online self enrollment tools and we continue to invest in the group platform group.
Group business, which is being driven by broker performance is performing very well, excluding our acquired platforms group sales have generated a year to date sales increase of 14% over the same period for 2019.
As we enter historically higher enrollment periods in the United States, we remain focused on being able to sell and service customers whether in person or virtually.
With an eye toward responding to the needs of consumers businesses and our distribution. We continue to build out the U S portfolio with Aflac network, dental and vision Premier life and disability.
These new lines modestly impact the top line in the short term these new products in combination with our core products.
Better position Aflac U S for future long term success.
Pandemic conditions have served to fuel our long standing strategy of being where people want to purchase insurance in both the United States and in Japan, and while face to face sales remains the most effective way for us to convey the financial protection only aflac products provide the pan.
<unk> clearly demonstrated the need for virtual avenues to help us reach potential customers.
We have continued to invest in tools for our distribution in both countries and to integrate these investments into our operations.
As always we placed significant importance on continuing to achieve strong capital ratios in the U S and Japan on behalf of our policyholders and investors, we remain committed to prudent liquidity and capital management.
With the fourth quarter.
Coloration 2021 will mark the 39th 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 will continue to be tactical and our share repurchase and focus on integrate.
The growth investments, we've made in our platform.
We are well positioned as we work toward achieving long term growth while also ensuring we deliver on our promise to our policyholders by doing so we look to emerge from this period and continued position.
Of strength and leadership and look forward to sharing more about our strategic and financial priorities at the financial analyst briefing on November 16, 2021, now let me turn the program over to Fred for it.
Thank you Dan.
<unk>, we have our analyst and Investor briefing scheduled in the next few weeks I'll keep my comments brief before handing off to Max on the quarter's financial results.
Beginning with Aflac, Japan as Dan noted it was an unusual quarter with the states of emergency declarations across most of the country.
<unk> are triggered in Japan by among other things a combination of rates of infection and hospital utilization by Prefecture. The precise impact is difficult to calculate but the practical implications include reduced face to face consultations limited access to onsite workers and payroll solicit.
<unk> reduced foot traffic to the roughly 400 owned and affiliated retail shops that we sell through.
And restricted travel between prefectures, which further constrains sales professionals.
When looking at claims experience through the third quarter and since inception of the virus.
<unk> Japan's Covid impact has totaled approximately 31000 claimants with incurred claims of $5 6 billion yen.
We expect conditions to improve and remain focused on what we can control, including product development and advancing our business model.
Our medical product ever Prime continues to do well with medical sales up roughly 14% in the quarter and 36% year to date over the same period in 2020.
Our market share has improved but we're still at roughly 85% of the medical sales enjoyed in 2019, which was also our medical product refresh year. So pandemic conditions in the quarter are having an impact.
Regarding our nursing care product since our late September launch, we have sold nearly 10000 policies.
This is a strong start but within our expectations given the marketing support put behind the product.
From a risk perspective. This is a supplemental product aligned with coverage provided by the Japanese government and targeting the mass market.
Benefits are therefore, less rich and capped both in amount and duration. The product is designed for protection versus savings with modest interest rate sensitivity.
In summary, the product has a similar risk profile to our existing third sector products.
We continue the development of non insurance services that wrap our cancer and now nursing care product offerings. This has become more common among the large domestic insurers and we see these services as important for both defending and building our market share.
Turning to the U S pandemic conditions remain at elevated levels with the spread of the delta strain of the virus.
As of the end of the third quarter Aflac U S. Covid claimants since inception of the virus has totaled approximately 79000 with incurred claims of $135 million.
Dan covered overall U S sales conditions I'll focus my comments, specifically on our buy to build growth platforms.
Our 2021 dental and vision strategy can be summed up as a year of launch.
<unk> and adjust this quarter, we processed over 600 cases up 30% over the second quarter as we roll out training and development to agents and launch in additional states.
We are focused on small and medium sized businesses was sold cases, averaging around 95 employees.
Looking forward into 2022, we continue building out our dental network and readying the platform for increased volumes as we move upmarket and introduce a direct to consumer individual product.
Our premier life and disability team successfully renewed 100% of their current accounts a testimony to their high quality service model, we are preparing to launch with Connecticut administering benefits for their statewide paid family and medical leave program in 2022.
This is an administrative only contract leveraging our acquired leave management platform.
With respect to our E Commerce initiative Aflac direct we currently offer our products in 46 states.
We are actively building out our licensed call Center and currently have 14 licensed agents. The call Center platform is in the early days of building and augments, our digital only conversion rates as well as reduces operational dependency on call center vendors.
In the third quarter. These three platforms accounted for roughly 13% of sales and are expected to build as a percentage of sales and earned premium in the coming years.
Before handing off the Max a few comments on operations in Japan, We continue to drive volume through our online sales solution.
Year to date, we have processed over 38000 online applications with September being our largest month since launching the capability.
We are pushing forward on technology and digital modernization and are sizing the investment required to streamline our policyholder services platform.
This is the largest operating platform in Japan, and a key to driving down our long term expense ratio.
In the U S. Our premier life and disability platform completed a successful transition this month from Zurich on time on budget and without client or customer disruption.
We are focused on migrating our voluntary business to a new group administration platform and building out critical critical data connections with leading benefit administration and HR systems.
The goal is to ensure ease of doing business smooth, onboarding and renewals and quality service and analytics.
When looking at our Japan and U S expense ratios going forward, we continue with critical platform development. Despite a period of weaker revenue, we expect to stay within previously guided ranges for expense ratios recognizing prolonged pandemic conditions require recalibrating the precise.
<unk> and timeline for reaching our ultimate targets.
Finally at Aflac Global investments performance remains strong we continue to advance our sustainable investing platform and recently refreshed our strategic asset allocation work.
Our team will dive deeper into operations and strategic execution at next month's analyst and Investor briefing.
I'll now turn things over to Max to cover our financial performance Max. Thank you Fred for the third quarter adjusted earnings per share increased 10, 1% to $1 53, with a <unk> <unk> negative impact from foreign exchange in the quarter.
This strong performance for the quarter was largely driven by lower claims utilization you depend emmett conditions, especially in Japan.
Variable investment income ran 11 above our long term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses grew 10, 1%.
And the adjusted ROE, excluding the foreign current foreign currency impact was a strong 16, 2% a significant spread to our cost of capital.
Starting with our Japan segment total earned premium for the quarter declined 4%.
Reflecting first sector policies paid up impacts.
Premium for our third sector products was down two 6% due to recent low sales volumes.
Policy Count in force, which we view as a better measure of our overall business growth declined one 8%.
Japan's total benefit ratio came in at 66, 1% for the quarter down at 520 basis points year over year.
Third sector benefit ratio was 55% down 670 basis points year over year.
We experienced a greater than normal <unk> release in our third sector block as experience continues to come in favorable relative to initial reserving.
Utilization continues to be constrained by pandemic conditions, and we now have more than a year's worth of pandemic data and with that our model output is more refined leading to increased releases.
Adjusting for greater than normal IV in our releases and in period experience, we estimate that our normalized benefit ratio for the third quarter to be 68, 7%.
Persistency remained strong with a rate of 94, 5% down 50 basis points year over year.
Consistent with past refreshed product launches, we have experienced a slight uptick in lapse rates on our medical product as policyholders look to update that their coverage.
Our expense ratio in Japan was 21, 4% down 30 basis points year over year.
Constrained business activity lowered our expenses in Q3, which we view to be a temporary phenomenon with.
We generally expect increased spending on key initiatives to continue and especially in Q4 as we tend to see some seasonality in spending and booking all projects.
Adjusted net investment income increased 19, 7% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by lower reinvestment yields on our fixed rate portfolio.
The pre tax margin for Japan in the quarter was 26, 3% up 690 basis points year over year, a very good result for the quarter.
This quarter's strong financial results lead us to expect the full year benefit ratio for Japan to be below the three year guidance range of 68, 5% to 71% given that the fab and.
And the pre tax margin to be above the 25% to 22, 5% range given at the full year 2021.
Turning to U S results net earned premium was down 1% as lower sales results. During the pandemic continue to have an impact on our earned premium.
Assistance, they improved 110 basis points to 79, 9%.
70 basis points of which are from lower sales as first year lapse rates are roughly twice the level of enforced lapse rates. In addition, there's still remains about 40 basis points of positive impact from emergency orders.
Our total benefit ratio in the U S came in lower than expected at 45, 1% or 320 basis points lower than Q3, 2020, which itself was heavily impacted by the initial pandemic.
Lowering and deferred claims utilization impacts our IV in our held for incurred claims within a year and as we get more data our long term models increased reliance on raw data leading to IV in our releases.
This quarter they amounted to a three five percentage points impact on the benefit ratio.
Which leads to an underlying benefit ratio, excluding ibm's <unk> releases of 48, 6%.
We expect the benefit ratio to increase gradually throughout the remainder of the year with the resumption of normal activity in our communities and by our policyholders.
Full year, we now expect our benefit ratio to be in the range of 43% to 46% versus original guidance of 48% to 51%.
Our expense ratio in the U S was 38, 9%.
170 basis points year over year, but with a lot of moving parts.
Weaker sales performance negatively impacted revenue however, the impact of our expense ratio is largely offset by lower <unk> expense.
Higher advertising spend to increase the expense ratio by 40 basis points.
Our continued build out of growth initiatives group life, and disability network dental and vision and direct to consumer contributed to a 260 basis points increase total ratio when isolating these investments.
These important strategic growth investments are somewhat offset by our efforts to lower our core operating expenses as we strive towards being the low cost producer in the voluntary benefit space.
Net net despite a lot of moving parts Q3 expenses are tracking according to plan.
In the quarter, we also incurred $7 $8 million of integration expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the U S was up nine 1%, mainly driven by favorable variable investment income in the quarter.
Profitability in the U S segment remained strong with a pretax margin of 22, 2%.
With a low benefit ratio as the core driver.
With nine months now in the books, we are increasing our pre tax expectation for the full year.
Initial expectations were for us to be towards the lower end of 16% to 19%.
We now expect to end up above the range indicated at fab 2020.
In our corporate segment, we recorded a pre tax loss of $41 million as adjusted net investment income was down $12 million versus last year due to lower interest rates at the short end of the yield curve and change in value of certain tax credit investments.
These tax credit investments run through the corporate net investment income line for U S. GAAP purposes, with an associated credit to the tax line.
The net impact to our bottom line was a positive $5 million in the quarter.
To date these investments are performing well and in line with expectations.
In the fourth quarter, we do expect a significant tax credit investments to fund.
Which will bring some volatility to the corporate NII line as well as an offsetting credit to the tax line.
Our capital position remains strong and we ended the quarter with an SME in Japan of north of 900% and an RBC north of 600% in Aflac Columbus.
Unencumbered holding company liquidity stood at $4 2 billion.
One 8 billion above our minimum balance.
Leverage which includes the sustainability bond issued earlier this year remains at a comfortable 22, 6% in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $525 million of our own stock and paid dividends of $220 million offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk adjusted return on equity with a meaningful spread to our cost of capital.
Finally, I would like to mention that we will begin to expand our disclosures around the adoption of <unk> in our Form 10-Q and at fab.
At a high level, we do not see this accounting adoption as an economic event with no impact to our regulatory financials or capital base that.
There will be no change to how we manage the company.
Cash flows or capital.
With that I'll hand, it over to David to begin Q&A.
Thank you Max.
We are now ready to take your questions, but first let me ask you to please limit yourself to one initial question and a related follow up to allow all participants an opportunity to ask a question.
And we will now take the first question.
And to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star two.
At this time, our first question comes from Nigel Dally of Morgan Stanley. Please proceed.
Alright. Thanks, Good morning, I wanted to touch on Japan sales, hoping to get some color on a number of points first progression of sales throughout the quarter in particular, whether you saw a sharp dip during the Olympics.
Second is the emergency orders were lifted have you seen sales rebound if it's possible to comment on that and third an update on the ramp up in cancer cells within Japan post.
Well, let me just.
Get Aflac, Japan to start with that and then I'll, maybe make a comment afterwards, but I think that'd be best So co EDA you have or do you want to handle this placed.
Yes.
We will answer to this question.
Alright.
Oh, yes, she doesn't mean it was only months.
Yes, you did.
Was that Japan.
It was floating out there.
Thank you for the question.
Local DSO quarter.
Yeah, let me start from our situation in the third quarter.
I hope you a buildup of annuity couples how're you doing constant.
Constant cyclical.
Okay.
Can you came in the third quarter since we had the largest spread of COVID-19 due to Delta stream can you give us your dosing into the Hudson is peak.
Peak EBITDA dilution.
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And as a result of that the state of emergency Declaration, which only cover 20 fixtures in the second quarter increased to 33 three sectors in the third quarter.
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In other words, the state of emergency Declaration area covered 90% of population in Japan.
Ultimate payment gain so yeah.
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So, let's talk a little bit on logistics <unk> and so there were impact to our sales performance and results due to decrease in face to face solicitation and meetings with customers.
And also delaying some of the work site, so station as well as the number of traffic customer traffic coming to our Waukesha and on top of that there were some restrictions in traveling across prefectural borders, which prevented us from visiting customers.
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Violent we have been able to arrive at a point.
At the same level of sales adds for the third quarter last year that caused the online solicitation that we have conducted and also the new product that we launched at the end of September which is the newest nursing care product. So as a result, we have been able to reach the same level of sales in the third quarter last year.
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Now in the fourth quarter. There is no area in Japan that is covered under the state of emergency Declaration.
What's a little more comfortable.
Steve.
Are there any covenants on that facility and the economic activities are becoming much more active in Japan, although it's gradual.
So sourcing.
Okay.
To suddenly this quarter.
Cool.
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Growth in the fourth quarter.
Focusing on the field nursing care product.
So for me for now.
Thanks Martha.
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No.
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I was hoping you hosted a according to this that you don't use any money.
Excuse me some kind of technical means.
And that's what that's going to take Acorn can you. Please.
This is a message doshi of Covid from Aflac, Japan.
We will address the overall strategic alliance, but before doing so if there's anything.
Could you please talk about our sales performance.
Through the Japan post channel right.
Jonathan the deals as we did with nine months. Okay. Once again this is actually Danny does Samsung <unk>.
If you look at Yulia.
Themis new policy sales increased over the second quarter. However, the pace of recovery has been moderate <unk>.
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June we got something that other people to put the level of colonial US well. This was driven by several factors, including that it has been approximately two years since Japan posed to refrain from conducting proactive sales.
Rates of emergency limited the ability of sales representatives in many areas to meet customers and preparations are underway for the upcoming transfer of sales I'm pleased from Japan Post company to Japan Post insurance.
JP agenda.
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Some of the local political and Bemis hopefully along those lines.
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But then because of Google and Amazon.
We have been conducting a range of activities to help promote sales, particularly the Japan post channel for example in the third quarter, we conducted training aimed at improving Japan post agent mindset and skill.
Did you mean activities to inform policyholders about the latest coverage and engaged in proposal activity for those not yet covered by insurance.
Ginza Yoga and Leslie will talk some of them are below its Linda.
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Okay humble youll see some steam.
We are currently promoting cancer insurance sales by managing the sales process, which includes our protein customers no.
There need inform them of the latest coverage, making proposals based on the proposal form and closing the deal.
Emphasizing with Japan post to increasing the number of proposals.
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As the Japan Post group announced in September approximately 10000 sales employees to be transferred from postal network to Japan Post insurance will offer only Japan post insurance and Aflac cancer insurance product suite.
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And the dealers.
We believe that preparations for the transfer and transition of these employees also affected our third quarter sales activities.
The motion.
The global Hawk picking up that if you.
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And against that backdrop, SaaS will continue to strengthen that we expect that a full recovery will take time, but that's kind of a it's millions yodle 90 months.
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In the June agreement to further expand the strategic alliance, we confirmed that ASUR accounting issue sales are an important part of Japan Post group co creation platform vision, which is a central theme of its medium term management plan.
Also confirmed that Japan post group will continue to promote cancer insurance sales is an important product and its sales strategy.
When you deal with some of the senior management of this young can you.
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And Japan Post group senior executives held our quarterly quarterly strategic Alliance Committee meeting.
At that meeting the Japan Post group President Charles Lake.
Others net.
Had a very constructive discussion about the current situation, including the pace of sales recovery and discussed specific measures to improve cancer insurance sales.
So it's not just against that many end up taking account to consider commit.
Commit them into that so let me talk with any patent months Oxy method.
The hike in the motto sticking your viewpoint, you think hadoop, we noticed that who came home buyer, so consistently kind of stick with those spaces.
We love to lay pleased by the strong commitment expressed to strengthen the alliance to achieve growth.
Against that backdrop, we expect that cancer insurance sales through the Japan post channel will steadily recover over the medium term.
And thats okay.
Alright.
You heard a lot because.
There's been a lot going on because we consider this to be one of the most important issues that we are looking at let me just sum it up by saying that the third quarter definitely hurt our production everywhere because of people being required to stay at home.
Under those emergency orders to some degree not like Europe, but strong enough that it hurt based space sales.
Has the attitude of the management team at Japan post changed in any way from what it was earlier in the year. The answer is no we are.
Our aligned they are large shareholders. They know that so goes their production.
<unk> will play a big impact on the company.
Aflac is specifically and what will take place.
Is it slower than we thought it's slower than I thought I was hoping it would pick back up but with the emergency it did slow it down.
Do I think they will recapture where they were I absolutely do do I know the time on it I do not.
I think that top management is pushing it yes, I do think theyre pushing it to I think the lower management levels are on board yet.
Theyre very tentative because not about our products, but any products because they've been pushed by the FSA not to make any mistakes debate that so it's just a little bit slower getting them comfortable back to normal where they can begin to go. So I still think we have a winner with Japan post.
I think.
It's nice that not only are they.
Selling for us, but they are a large shareholder because that tab. So closely together. So I know you've heard a lot about this so I'll stop there. Thanks. Nigel you also asked a very specific question about the quarter. Let me just give you. Some color July was about $4 4 billion in sales August $3 7 billion.
In September rebounded back to $4 5 billion that may suggest on the surface some impact related to the Olympics, but it's extremely difficult to calculate that type of precise impact I think the broader issue of states of emergency picking up throughout the quarter as we discussed earlier I would also note that September had.
300, a little over $300 million of sales of the new care product, which we launched in the last seven days of the month. So that will give you an idea of some of the trend dynamics.
That's great very comprehensive answer I appreciate all the color I'll leave it there.
And our next question comes from Humphrey Lee of Dowling and partners. Please go ahead.
Good morning, and thank you for taking my question. My first question is on the IBM reserve releases.
About the reserving practice I feel like with trying to get to that.
Understanding for a while now but you have continued to see these favorable reserves recent releases for a number of quarters.
I appreciate the guidance for the full year basis. That's helpful at least for kind of looking at the fourth quarter, but just can you walk us through.
Your reserving process during the pandemic and should we see more releases in the coming quarters as long as Covid is still around.
On a rolling basis, the IBM that you set up 12 months ago will have to be released if claims incidence remained low.
So humphrey.
So first of all we have not changed our reserving practices. They continue the way they have always been.
And Paul has the same methodology when it comes through so future risk.
Reserve releases Thats very difficult to predict but in general terms I would say that.
We continue to be in pandemic conditions with low claims.
Claims utilization you are likely and therefore, you are likely to continue to see some reserve releases come through our results simply because we continue to reserve the way we have before we have not adjusted our new claims reserving too.
The.
More recent claims utilization experience, but we continue to reserve to a more normalized.
Claims expectation.
Okay got it.
My second question is related to the U S sales.
Actually those food the broker channel, which has continued to show good recovery.
Given the channel as has the largest production fourth corner.
Have you seen any early signs of what the fourth quarter it looked like through that channel.
Okay.
Yes. This is teresa.
Ill make a couple of comments and then I'll ask vertical too.
Response, specifically to the question but.
As far as the broker sales so first of all we benefited from.
Really.
Stellar broker sales in the third quarter.
Also benefited from that.
Trend sales.
Sales as well.
Existing and new accounts.
From a broker standpoint.
Know that during the quarter, we have the delta area, so with that we saw pressure.
Pressure with career agency sales and so.
One of the ways that we mitigate that.
Is it.
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Drive broker contracting.
So that we could set up the third and fourth quarter.
For sales through that channel, so I'll, let virtual respond with additional color.
Yes, Thanks, Teresa just to add up a few things you said Theresa.
Within what we saw in the third quarter returnable veterans.
Veterans, we talk about really being five years, plus we saw a 10% increase over last year and return to those veterans that gives us a good start going into Q4 specific to the broker channel third quarter, we saw.
<unk>, 2% increase year over year, and also that was 112% performance compare to 2019 pre COVID-19.
I am optimistic we will see the same thing go into fourth quarter, our pipelines are strong and so therefore, we stick with our expectations going through the rest of the year.
Thank you for that.
And our next question comes from Jimmy <unk> of Jpmorgan Securities LLC. Please go ahead.
Hi, Good morning, So I just had a question on Japan sales and you gave a very detailed response to the earlier question, but I think everyone was sort of surprised that sales declined on a sequential basis.
And to the extent this is driven by more widespread emergency orders and the Olympics I just wanted to see if you could comment on how you feel sales activity will pick up now that the orders have been lifted and have you seen that already now that you've gone through the first month.
The fourth quarter.
Okay.
Yes, Jimmy one thing I would say.
Our Japanese colleagues can weigh in if they'd like but.
Few things one.
I think.
It's very difficult to give a precise percentage if you will as to what the impact of the rolling States of emergency and the Olympics are in the third quarter and so that mix judging the fourth quarter more difficult, but we clearly expect conditions to be better in the fourth quarter.
We also.
As you remember, we only had seven days for my earlier comments, we only had seven days of the new care product sales in September.
And we continue to see momentum through the first 20 plus days in October in that product.
And then Meanwhile, we continue to work with Japan post and so we have a positive view of the trend lines heading into the fourth quarter for all of those things, but it's very difficult to put.
Put sort of percentage or a more precise guidance around that and we wouldn't we wouldn't venture to do that but certainly conditions I suggest that we will see some recovery.
Okay.
And then just on the U S business can you sort of compare and contrast, what's going on in the agency channel versus.
The broker channel it seems like the broker business is obviously doing better and then also similarly smaller versus larger employers there. It seems like the larger employer markets coming back a lot faster than smaller employers.
I'll ask Virgil to respond yes, thanks curious as though.
First of all start to large case market and the lowest case market.
Like I said before we've seen good performance with our overall broker channel, they're performing about 112% of 2019 predominantly sell into group product group product is dominated now and large case space. We've seen really 146% of 2019 sales when it comes to the group. So I agree with you that we've seen strong.
Recovery large case studies really that relates to the.
Laura Street space is already really.
Used to more virtual and online sales.
Little bit more.
Literally hit wins in smaller cases small case, though we continue to dominate went on career channel again.
Earlier that we saw a return of all veterans, we are veterans comeback to reduce.
Third quarter that had not produced all year, so we're looking well.
The two together really one of the things we've been doing though is ensure that we go to market as a unified <unk>.
<unk> distribution channel distribution continues to be a core competency of Aflac has always been and you will see that broker driven sales and lowest case plays out.
Our agents participate in many cases as fulfillment. So that's a key aspect is there is overlap where the two work together also.
Thank you.
One of the things that we're seeing Jimmy in the U S. As you've read a lot about the labor markets and when you think about the $3 99 space, which is where our agents. So.
That's that's a particular part of the economy that obviously was hit harder than it is taking longer to recover from the pandemic, they're now facing a different kind of issue and that is can they get the help to actually keep the business is open and running properly. So labor market conditions are very difficult to navigate right now for many small businesses.
That same dynamic goes to our recruiting so recruiting dynamics are more challenging in this type of a labor market.
There is a lot of speculation about those conditions also starting to improve.
More so as we get out of the fourth quarter.
Early part of next year, but I just want to remind folks that you tend to think about the pandemic and that's of course affected small businesses, but labor market dynamics are also uniquely impactful to that franchise.
Thanks.
Our next question comes from Tom Gallagher of Evercore ISI. Please go ahead.
Good morning.
Any Max just.
A follow up on on some of the underlying claims trends youre, referring to the.
I heard what you said about U S is returning closer to normal.
<unk> remains below below normal how much lower is Japan in terms of the underlying claims trends are we talking about 1% to 2% below normal is it closer to 5% can you comment on what the level is.
And then also relatedly.
How does that split between medical and cancer is it below normal for bolt is one kind of driving that.
So Tom.
Specifically for Japan, it bounces around.
From month to month.
But I would say that it's a single digits below normal run rate is what we have experienced.
For an extended period of time.
In the U S. It's been a little bit more volatile, where we've seen anything between zero and 20% below normal and sort of.
Claims run rates.
And more recently, we have approached more more than sort of normal.
Run rates, especially one way to look at.
For example, the first two weeks of the fourth quarter and we have.
Come back to more certainly more normal levels.
Got you and then the.
Between medical and cancer in Japan, where does it is it across both or is it one or the other.
It's really both where we have seen it.
It's for inbound again, it's different for different.
Different benefits within those products, but generally speaking when we sort of average it out and look at both product lines.
We see similar impacts on both medical and cancer.
And when you say single digit is it mid single digit or high or low.
Single digits.
Okay. Thanks.
Our next question comes from John Barnidge of Piper Sandler. Please go ahead.
Sticking with the U S benefit ratio, a little bit I get it seems reasonable assume claims utilization coming in that next quarter, but given the IBM nature, how do we think about like the time decay.
This is it weeks.
Forward I think you were cut off you might want to ask the question one more time, because we only heard part of it.
Thank you.
I get it seems reasonable that claims utilization will normalize next quarter, but given the IBM nature, how should we think about that time decay of that tailwind maybe leaking into subsequent years.
I'll kick off and then I'll ask al <unk>, our chief Actuary to maybe give some comments as well, but generally speaking you tend to see a quicker reaction to more recent claims trends in our U S business than what you see in Japan, but please al.
I would like to add some color. Please.
Sure.
As Mac said was.
A little bit more it fluctuates more so you'd see a little bit more fluctuation around that but we go through approximately 12 months.
<unk>.
Two to really get zeroed in on on the claims levels. So take data and time to mature the information coming in looking at it for IV in our judgment during a period I'd expect it to.
To have a little a bit of a tail going out the back end.
Through the remainder of Covid.
As the claims rebound youll begin to see more normalization back into normal levels sort of benefit ratio trends.
Okay.
Okay great.
I don't have a follow up.
Our next question comes from Erik Bass with Autonomous Research. Please go ahead.
Thank you Maxime just talk about how much capital generation is running ahead of your initial expectations. This year given the strong results and how does that play into your outlook for capital deployment.
Yep.
It clearly runs above what we initially expected.
You can essentially break it down as the.
The upside is primarily driven by the lowered unexpected benefit ratios.
Pretty much immediately flow through into higher statutory earnings and also higher FSA earnings as well, which then drives our.
Our capital formation and generation and ultimately dividends up to the holding company. So you can use the difference between our reported benefit ratios and our normalized benefits ratios at the guidance.
For.
What that sort of increased capital generation this year would be.
Now when we then think about capital deployment.
We have significant capital around the company and all the operating subsidiaries and we operate with very strong capital ratios and also at the holding company, we hold a very high level. Therefore.
If our capital generation in a single year or a single period deviates from our initial expectations, it's not necessarily driving or changing our tactical view of how we deploy capital.
Wouldn't necessarily immediately lead it into that on a short term basis, obviously long term, it's more capital that we.
We have available to us to deploy.
Into our different deployment strategies.
Yeah.
Got it thank you.
And then.
Follow up Fred you mentioned some of the ancillary products and services that you could offer kind of around the cancer and.
Senior care product just wanted to get a sense of what those might be and how you would.
Bring those to market.
Yes.
It's becoming a very developed approach by.
Not many but a few of the leading insurance companies.
In Japan, and it's largely developed around care products, historically and that is offering certain concierge services for the elderly that are attached to elderly care.
<unk> policy support everything from nursing care support to in home.
Modernization to reduce the risk of injury et cetera.
Some of that of course go on in the U S and it's going on in Japan too.
Our approach has been to a make sure that we're building out those types of services around the care product, but also we think there's an opportunity for particularly aflac to do that in the cancer space and the way to think about it we have formed an entity in Japan called Hatch health care and that entity.
He has been building out these non insurance services surrounding cancer and now care insurance.
And effectively the way. It works is you as a policyholder have an ability to call into effectively a concierge desk that then helps direct you to either internal or third party contractual agreements to support both diagnosis.
Early screening type services on cancer as well as post cancer diagnosis care everything from nutrition.
Two.
Mental health two other dynamics and so this is in the early stages of being built we've been working on it for about two years now.
It's now starting to become in a spot to be put into action, but we think this is really the next horizon. If you will of securing our market share and building our capabilities on the cancer side.
And then also it's really unnecessary entity in support and care insurance and competing with the other big care providers in the country.
Got it is it fee for service or part of your covered under your premium.
Essentially it's covered under the premium.
And then.
Once you.
Funnel through a concierge desk it depends on what services you request and then there are charges that are applied through third party contractual arrangements predominantly that is the vision at the moment.
So it's.
It's more around customer service persistency sales opportunity and market share I should note that these types of services would also be offered on cancer policies sold through Japan post. So it's really both a defensive and offensive play, but ultimately this hatch health care entity would drive its own independent <unk>.
Revenue through contractual relationships and margins.
With third party providers.
Got it thank you.
Okay.
By the way. These are the types of things, we would develop more at the financial analyst briefing.
It's probably better down there, but just to provide you some color.
Yeah.
Our next question comes from Ryan Krueger of <unk>. Please go ahead.
Hey, Thanks, good morning.
Max could you talk a little bit about your the potential uses of excess capital at both the holding company and and in the U S subsidiary over the next few years and if you'd look to work that down.
Yes, so let's start with the U S.
Clearly, we are carrying excess capital right now and but we also have a number of growing in businesses that are building.
And we would expect over time that that will drive thru through growth that will drive quite some new business strain and if we are successful and really executing on our plans.
That will gradually drive down the capital level towards a long term RBC ratio of 400%.
When we move up to the holding company and we clearly have significant.
Yes readily deployable capital.
At $1 8 billion dollar SaaS of today.
And this will continue to support the deployment strategies that we have and through dividends will increase the dividend earlier this year by 17, 9%.
We have a very long standing track record as Dan mentioned in terms of continuing to increase the dividend.
And we have done a number of.
Smaller acquisitions as well.
Where we have allocated capital to.
And we've been very active.
<unk> of our own stock as well.
Would expect that all of these to continue and I see the same headlines as all of you in terms of.
Tax surcharge on buybacks and obviously, we will study the details very very closely and.
And that May mean that we will.
Yeah.
<unk> changed our strategy somewhat but long term I don't see that as SaaS.
Significant change too.
How we generally and our funnel of capital back to shareholders.
Thanks, and then just one follow up since you mentioned you were going to start providing more LD Ti disclosure have you had conversations with the rating agencies on.
I guess debt to capital levels, given the potential impact to equity and.
Kind of confirmed with them that your debt is still appropriate.
We've had a number of conversations with rating agencies and I quite frankly for quite some time.
We began already in 2019 too.
Close discussions with them and they have a continued throughout the <unk> project.
Great. Thank you.
Alright, I just wanted to thank everyone for joining us and remind you that as mentioned today, we will be hosting our virtual 2021 financial analyst briefing on November 16th beginning at eight am Eastern registration opens today, so keep an eye out for that and reach out to investor in <unk>.
And agency relations, if you need more details or have questions and we look forward to having you join US then on the 16th and wish you. All continued good health until then that concludes our call for today.
The call is now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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