Q1 2022 Aflac Inc Earnings Call
2018.
Adjusted earnings per diluted share were solid at $1 42 in the first quarter supported in part by the continuation of the low benefit ratio associated with the pandemic conditions.
Also contributing were better than expected returns from alternative investments. Despite the weakening of the yen we remain cautiously optimistic as we continue to navigate the pandemic.
Looking at the operations in Japan in the first quarter Aflac, Japan generated strong overall financial results with a profit margin of 25, 3%.
This was above the outlook range that we provided at the November 2021 financial analyst briefing.
Persistency remained strong however sales were constrained as a quasi states of emergency remained in place through mid March this impacted our ability to meet face to face with customers also contributing to the decline in the quarter were.
<unk> of the first quarter of 2021, when our new medical product was launched.
<unk>, Japan has continued to offer support to Japan Post group as it gears up for the start of the new fiscal year of April of 2022.
This included the transfer of approximately 10000, Japan post company's sales employees to Japan post insurance the sales employees will focus solely on selling Japan post insurance products and Aflac Japan's cancer insurance product.
Since it may take some time for these employees to ramp up sales activities under the new framework, we anticipate sales momentum picking up in the second half of the year on that note as part of the ongoing collaboration and governance framework of the strategic Alliance.
Excited to be traveling to Japan towards the end of June to me with Mr. Masuda, Japan Post holdings CEO , along with the President of Japan Post postal.
And insurance companies.
Given this we expect stronger overall sales in the second half of the year, assuming that the pandemic conditions do not escalate that we execute on our product introductions and refreshment plants.
And the sales productivity continues to improve at Japan Post group.
Turning to Aflac U S. We saw solid profit margin of 19, 8%. This result was also above the outlook range that we provided at the financial analyst briefing I am pleased that our U S. Sales momentum has continued from the fourth quarter with a 19%.
<unk> annual sales increase in the first quarter. This reflects continued improvements in the pandemic conditions growth in our core products and investment in the build out of growth initiatives, while aflac dental and vision and group Premier lie.
Absent management and disability solutions, which we call plants are relatively small part of our sales. We are very pleased with how they're contributing to our growth.
Our growth initiatives modestly impacted the top line in the short term, but also tend to comp.
Excuse me I tend to be accompanied by the sale of our core supplemental health products as Fred will explain in a moment in combination with our core products. They also better position Aflac U S for future long term success.
The need for the products, we offer is as strong or stronger than ever before.
At the same time, we know that consumers habits and buying preferences.
Then evolving.
We remain focused on being able to sell and service customers whether in person or virtually this as part of our ongoing strategy to increase access penetration and retention.
Turning 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 <unk>.
<unk>, including growth investments stable dividend growth, a disciplined and tactical stock repurchase.
It goes without saying that we treasure our record of dividend growth.
Fourth quarter's declaration marked our 30 <unk> consecutive year of dividend increases. This is a record we seek to extend demonstrated by our 21, 2% increase in the first quarter cash dividend.
2020 will remain in the market purchasing shares with a tactical approach in the first quarter Aflac incorporated deployed $500 million in capital to repurchase $8 million of its common shares with this approach we look to emerge from this period in a continued position.
<unk> of strength and leadership.
Keep in mind. In addition, we have among the highest return on capital and lowest cost of capital in the industry.
We are also focused on integrating the growth investments we've made.
I don't think it's a coincidence that we've achieved success, while focusing on doing the right things for our policyholders shareholders employees sales distribution business partners and communities I'm proud of what we've accomplished in terms of both our social purpose and financial results.
Which have ultimately translated into strong long term shareholder return.
We also believe in the underlying strength of our business and our potential for continued growth in the U S and Japan. The two of the largest life insurance markets in the world.
Thank you for joining us this morning, and now I'll turn the program over to Fred for it.
Thank you Dan.
Going to focus my comments today on efforts to drive growth I'll also provide some perspective on market and economic conditions in Japan and in the U S.
Beginning with Japan, Covid related critical illness daily deaths and hospitalizations remains at very low levels.
While weekly new cases were elevated for much of the quarter. They have come down in the last month and the government's intensive infection prevention measures were lifted as of March 21.
However for much of the quarter, we felt the ongoing COVID-19 impact and as evidence a further 17% decline in traffic through our retail insurance shops as compared to 2021.
We have seen COVID-19 incurred claims increase despite the lower rate of hospitalization.
This is driven by the rise in cases, along with COVID-19 s designation as an infectious disease or deemed hospitalization, which allows for payment of claims for care outside of the hospital.
To give you a perspective, we estimate over 80% of our Covid related claims in the quarter were considered deemed hospitalization.
In the meantime, and despite the increase in Covid claims third sector benefit ratios remain very low.
Sales in the quarter were weaker than we had hoped for provided Covid dynamics continued to trend positive. We remain confident we will hit our internal expectations for the year.
While COVID-19 conditions, partially explain the weakness we are taking additional action to strengthen the associate channel to include renewed investment in our exclusive agency platform and efforts designed to build market share with nonexclusive agencies, where we have low market share.
With this in mind, we are accelerating our cancer insurance refreshment timing and plan to launch in the second half of 2022.
With respect to Japan post we have experienced sequential growth in sales with increased proposal activity as we continue to rollout a successful pilot program launched late last year.
As Dan mentioned the April transfer 10000 sales employees to Japan post insurance was completed without disruption.
Our alliance now is best characterized as distribution through 20000 post offices 10000 sales employees selling from 223 locations within the Japan Post insurance network and 88, Japan post insurance branches focused on corporate sales.
Importantly cancer sales targets have been communicated to the regional offices of both the postal system and within Japan Post insurance for the first time in three years.
With respect to our elderly care product sales were softer in the first quarter after initial promotional period.
This market is still relatively small roughly 110th the size of the medical product industry. The market is further divided into two distinct and equally sized classes of product protection and savings. We are focused on the protection segment of the market, where we have quickly captured market share in the high teens.
We are well positioned with competitive product should the government of Japan contemplates shifting more of the burden to individuals.
Turning to the U S. The markets for voluntary and other worksite benefits of effectively recovered to pre pandemic conditions.
However, we are navigating inflation in a challenging labor market.
When we reflect on the U S economic environment, we are especially focused on two areas of impact to our U S model recruiting and persistency.
Tight labor markets create difficulty in recruiting to a full time commission based profession.
Therefore focused on improving conversion rates of new recruits to producing agents and re engaging veteran agents who are less productive during the pandemic.
Our strategy has been successful driving a 7% increase in average weekly producers year over year in.
In addition veteran agents are better equipped to leverage our recent product expansion and strategy strategy to grow within the small business brokers.
In terms of persistency, it's important to note our account persistency was stable in the quarter. However, policyholder persistency was weak and broad based which leads us to believe it's partially attributable to the extreme movement in the labor markets. We track the labor department's quit rate, which had been declining.
Climbing during the pandemic than jumped in the first quarter to levels not seen in recent history.
While higher turnover in the small business sector is common the so called great resignation, along with Covid and returned to office dynamics is driving higher turnover on.
Unfortunately, when employees leave their place of work they often leave their policies behind.
With this backdrop what is most impressive about the sales results Dan covered is the balance.
Split by product type group voluntary was up 23% individual benefits up 17%.
Split by channel agent sales were up 15% and broker up 25%.
Our buy to build platforms were all up year over year with the combination of network dental and vision Premier life, and disability and consumer markets up 65%, albeit off a small but building base.
We track the Halo impact of dental and vision sales and for every dollar of dental and vision sales, we were able to cross sell 57 cents of other voluntary product.
Finally, we launched Aflac pet insurance powered by Japan, and targeting the larger case market and are busy responding to requests for proposals.
It's the balance in our results that give us added confidence that performance should continue throughout the year.
Turning to our investment operations, we do not have any direct exposure in Russia or Ukraine.
Of course, our large global credit portfolio does include multinational companies with business interests and the impacted region, but nothing significant enough to cause us concern among what are generally large high quality credits we.
We are closely watching secondary risk, namely the impact to the European energy sector, the conflicts impact to existing supply chain and inflation risk and a risk of recession in Europe .
While increasing yields erode some of our unrealized gain in the bond portfolio. We also have benefits from rising interest rate environment rising.
Rising rates, obviously provide a tailwind for new money investments.
There are sizable floating rate portfolio will benefit directly from aggressive fed rate hikes as their interest rate resets are based off short term rates.
Given the significant move in the forward rate curve, we expect we elected to lock in a portion of the expected rate increases by increasing the notional of our interest rate swap strategy such that now approximately 70% of our income is protected from changes in short term interest rates over.
The next five years.
In addition, the holding company hold short term investments that will benefit with rising short term yields.
Our alternative portfolio continues to deliver strong results. We understand these portfolios could very well give back some of the gains as the year goes on but we're off to a strong start in generating the favorable returns expected from these portfolios.
Finally, Max provided helpful perspective on our exposure to the weakening yen and as recorded comments in short while there are GAAP reported impacts.
Are well protected from an economic perspective, and do not see the weakness in the yen is altering our investment strategy hedging strategy or overall capital deployment activities.
There are certainly no implications to our business model, which reinforces our strategic focus on currency neutral outcomes I'll now hand, the call back to David to take us to Q&A David Thank.
Thank you Brett.
Before we take questions I just wanted to ask everyone to please limit yourself to one initial question and a related follow up and then you can get back into the queue to allow other participants an opportunity to ask a question Andrea will now take the first question.
Our first question comes from Nigel Daily All of Morgan Stanley . Please go ahead.
Great. Thanks, Good morning, So I wanted to start in the U S. I know, there's some potential seasonality and the like but perhaps has remained high considering some potential strategies to improve persistency and if so what are some of the options that you have a balance sheet.
We have an outlet Teresa Virgil comment on this but we have had for a while a number of strategies underway to help over the long run persistency.
Not the least of which has been our expanding product portfolio. As you know, we believe dental and vision for example.
We will over time contribute to better persistency just by the very nature of the product and how that works.
However.
We think that much of the persistency issue that we're seeing right now is a combination of number one the falloff. The final fall off of state regulations that were requiring policies to Bahrain remain in place, but on a larger scale. We think this labor force and motion is contributing to a lot of the lapse rates and we would expect or.
Dissipate that to eventually come down.
In the meantime, we remain focused on activities that drive better persistency, but we think right now there is there are certain market conditions influencing it.
Virgil <unk>. So if you have any comments.
I'll just mention.
You mailed it as it relates to some of the high level things that we're doing but.
We also in addition to the stickiness of the product, which <unk> talked about with the product mix were also from an operational perspective, making sure that we stabilize on talent.
Retention.
Count persistency, because when we do that we know that our premium persistency is generally stable as well.
As you say it what we're seeing today.
Lot of.
What we think might be.
Labor market or Labor force.
Based on what's going on and so we're thinking that that's what's going on with our premium persistency at this point and so more to come on that.
Great then as a follow up just on Japan sales or sales decline I think that's a little worse than some of us were expecting medical appear particularly weak. So perhaps you can discuss why that was the case and with the expectation that sales will recover in the back half should we expect that mostly to being canceled.
Given your product refresh or do you also expect to rebound in medical as well.
I think we'll let <unk> answer that question, but you have in fact identified some of the issues number one realize the first quarter last year medical was during a fresh launch period and we normally see medical sales come down really sales of all products come down after that initial launch peer.
<unk>.
However, there is no question that COVID-19 conditions are really impacting across the board results cancer held up better for the simple reason that we are seeing some increased momentum slowly within the Japan post system and that offset things, but generally speaking you have it right and then I'll, let <unk> talk about the types of things we're looking at in the second.
Half of the year to improve our sales results. In addition to our cancer launch.
Thank you for that.
You'll see them.
Bank customer for this is yesterday, thank you Frank and let me answer the question.
Perhaps thinking about our confidence in the park with annual good isn't it tight Scott how are you.
If you look at most of the demand in Japan in the first quarter.
This infection increase.
That very much what our homeowner comfortable.
No.
All right.
But I'll tell you Bob Wilson.
I'm just going to ease up.
Often plant.
Thank you.
And that goes to both the salespeople who visit the customers as well as those customers who visit.
Our agency shops for example February the number of people the customer alright.
Alright insurance shop decreased by 22%.
You don't know for sure.
Joe.
At the booth interested on this law.
Homo couple hundred thousand dollar puts a lot of it.
You Wanna Jojo.
We are gathering information from various associates to analyze what actually had occurred.
And as.
Finally here it seems like the appointment that means that our agencies are trying to make for a visit to customers has been declined by about 30%.
Carsten.
Okay.
I believe your question was related to medical costs.
<unk>.
Got a CEO who can stop.
Cards to the medical insurance, we did launch a new product last year.
Yeah.
It isn't that kind of Jewish shuttle contract settlement.
It's been a year since you've launched the product I think we have gone through a cycle of customers and multiple but you don't have kind.
Nice quarter.
No.
Okay.
But all other things.
We did have a plan that our medical insurance in the first quarter sales will decrease.
Almost the only mall all let me correct that.
Isn't it.
So stop vehicle deliveries and the fact is that backs or let's even lower than we.
We had expected because of the impact of Omicron Hello, Linda.
Sure.
Sure.
Let's start with capital efficiency.
And that's where the future theft measures, we would like to further promote our ISR activities that your online sale hydro organic user Wolfgang.
From essential coming off it.
So also.
This is 30 months.
We would also like to be proposing more comprehensively our coverage and benefits to our customers using the new products, such as nursing care product and our work with product.
Yes.
On that facility.
No.
We will constantly lump.
And the rest are basically what I had.
What Fred has said and then now regarding Japan Post group working.
The ankle is a must.
Organizational change that viewpoint being cut off.
<unk>.
<unk>.
Awesome.
Yes.
And what that means is that the sales consultants from the parent company. This is a post office company.
<unk> has been transferred it to Japan post insurance company.
Good luck Jim.
Yeah.
Okay got it.
So you got the new Brazilian Comstock.
On the 1 billion Mark and the preparation to move this many people over to Japan Post insurance took place in the first quarter and they are fully prepared and they have gotten a very good start in April .
Since I assume 90 months.
The only incremental locomotive.
Got it.
It cannot youll Pepsico psychosis equal.
The Japan Post group arena within their sales under the new organization now that we have a good infrastructure in place for sale.
First off from that.
Let me let me make one comment this is Dan and.
What what I think you're seeing evolve here with sales in the U S and in Japan is that we've got one more quarter to the second quarter of.
Thanks, suggesting but I see things moving back to a new normal what that normal is I am not exactly sure, but I don't think its going to be that different from the way we've been enrolling in the past and I think youll see that in the second half of the year and.
I have not been to Japan.
In quite a while and I can't wait to get back, but I have been talking all of us have with Japan constantly and I don't think you can underestimate the impact of those cost moves that they had in terms of restrictions and but they are over right.
Now and assuming that we don't see it come back in any great degree I think youre going to see the second half and the second quarter start to improve but the second half really be.
More like.
The past in terms of our selling ability because as I mentioned people coming into the office was down 22%. Some other things and those are just reflections and they affect everything they affect recruiting.
<unk> new sales they affect every aspect.
That's great I appreciate the color.
The next question comes from Sumit Kumar of Jefferies. Please go ahead.
Thanks, I wanted to start with Japan again.
Just as we think about these new product refreshes and launches it seems to us that the shelf life.
Post these launches has been shortening overtime, maybe years ago, you had a couple of years of runway now it feels like it's a couple of quarters if that so I'm wondering one if you think that's a fair observation and two is some of what we're seeing in Japan due to increased competition in other words do you have any.
Data on your market share in medical and how that's changed over time.
Yes, I think.
Let's have Japan, maybe comment on it but what I would tell you is the need is in general your comments I think hold up a bit and I think it is in fact, largely due to the competitive environment. One of the things that I would tell you just as an observation is in 2016, when the bank of Japan went to their negative interest rate environment, we saw a.
Low and steady migration of shift towards third sector in out of first sector not surprisingly, but for a period of time you had firms that were moving into currency product and then all of a sudden rate movements and other reserving dynamics rendered currency product to be less attractive and so that started to back off and now you have companies <unk>.
Leading domestic companies that have subsidiaries that often specialized in third sector business, even by the way property casualty insurance companies that have life and health related subsidiaries are getting into the action as a way to drive more business.
Competition and intense competition is not new thats been around and we've navigated that for years and years, but theres. No question that has become more intensified which means your product cycle product refreshment.
And the nimble nature of how you go out product has to speed up and be quicker. So yes. The life expectancy of a new product is shorter, but that's simply means that you have to be quicker to revise and refresh products than maybe the old two year cycles for medical and four year cycles for cancer.
That's my perspective based on talking with our Japan colleagues, but I'll, let <unk> comment.
And of those.
Thank you again this is actually Jamie.
Hemophilia.
Okay.
He is already competitive in our market.
And that's what I just mentioned the market is becoming very very competitive and hopefully New York market.
The NOI margin.
As you can get policy.
And especially the medical insurance and market is really evolving or changing almost every day, but why don't I am not sure Mckee and we're going to lose a couple of things.
And what we are saying is that the good.
The data until it is good.
It shouldn't become shorter and shorter.
How about you probably want to keep some of them most of them off on the other handsets. We do have very good sales and solicitation platform on abortion of chemo.
And we think that base base.
Automotive globally.
Domestic utility killed almost a month and we do believe that we can still grow in this area, but envelope 30 months ago.
With our overwhelming brand very strong brand.
<unk> and we also have very good advertisement capability Mcdonald.
Got it.
Hi, Don.
Market.
That's it.
Come on.
But even with very severe competition I think we can work towards expanding the market and really make efforts and perform gahagan constant on this now.
Now let me go into accounts insurance.
Essentially.
So that will come out of bundle data.
Good day, taking overdue amongst our going out and my thinking regarding new product for cancer insurance, we are thinking about that because it is before the approval of the authority. We cannot say tell you about the details.
So on.
Gunn becomes a kind of tough.
A couple of them to be on efficacy, probably still coming off.
So it will go to Joe was a total harvest.
So we can more unlikely.
Thinking of a product that would differentiate.
Take ourselves from our competitors are having very competitive benefits as well as the various services that would support the cancer patient from the time of when they start developing cancer until these patients recover to society all work.
That's all for me.
Got it Okay, Alright, and then I just wanted to pivot Fred you'd made a comment.
Prepared remarks about the floating rate portfolio and.
Having the income on that locked in for five years or 70% of it locked in for five years can you just go into a little bit more detail on that I'm, just trying to think through.
If the fed is really aggressive does that mean that you've limited some of the upside or just how do we think about that.
Yes.
Eric and Brad disciplined here that can provide color, but just a couple of points to be to be very clear on remember what we're doing effectively is locking in the forward curve not current rates in other words, we're locking in the expectation in the marketplace for aggressive fed action and so thats the very nature of the swaps. So we're not.
Losing out if you will on that aggressive forward what were doing is were protecting against the risk of that reversing we're coming down are not meeting the expectations that are embedded in the forward curve also note that we've got about 10 billion of floating rate floaters. If you will in our general account and another $2 billion at the holding company and so we still remain <unk>.
<unk> exposed if you want to define it that way.
Taking advantage of the rate environment that exceeds the forward curve expectations. So we haven't taken it all off the table.
But I'll let <unk>.
Eric or or a Brad comment, yes, thanks Fred.
That's an excellent start.
I would just dive a little deeper to to have you understand when we do our planning if you will.
Which is of course, the current year, plus we look out over five years for the floating rate book, we typically use forward curves. The last set of financial plans. We did were back in November which Max end users as part of the overall franchises EPS if you will.
But the forward curves as you know because of the fed change in policy has substantially increased so if you just look at projecting based on the forward curves where the floating rate income will be over the next five years significantly higher than what our plan was having.
Having said that we all know forward curves I never realized so we have an opportunity to basically say, we don't really know what's going to happen in years 234, and five but what we do know is that the <unk>.
Forward curves became true there is a significant amount of pickup in income what we've chosen to do is take about 70% of that Buck and do a fixed for floating rate swaps such that we've locked in a good portion of that upside if the forward curves and upcoming down. An example of that would be many people are talking about recession and the.
U S next year those forward curves will likely never be realized in years, three four and five because the federal then change policy.
If rates continue to go up because the fed has even more aggressive Fortunately we've got a good portion of the book about a third.
Not covered by the swap so we will still enjoy some some upside as well and then of course over the next few years, we continue to invest potentially and more floating rate assets. So we've got good exposure to to rising rates as well.
Would you be willing to size the pickup just from November to March on that.
That you've locked in.
Yes, I think.
We would have to kind of give some thought to that.
The pickup this year.
As relatively modest it's not insignificant.
But remember all we're really doing is locking in the pickup that's there anyway. If you're if you will we're trying to so I think yes.
It does give some thought to that.
I don't have the numbers right in front of me.
Because we've looked at it more on a present value over the life of the swap what it has done but it's.
It's not.
Immaterial to net investment income.
Further there is a pickup in income from our floating rate book this year.
When we talk about the forward curves as an example, LIBOR started the year at 10% or 17 basis points, one and three month LIBOR.
Currently three month LIBOR is like 120.
So we get a pickup this year now the forward curves and we went out if you look at the forward curves for years three four and five LIBOR is projected to be two 5% plus that's if the fed goes through with all of these aggressive rate hikes. So there is a positive tailwind to our income from the floating rate book.
This year, but we'd have to come back to size it.
Alright, thank you.
The next question comes from John Barnidge of Piper Sandler. Please go ahead.
Thank you.
What percent of sales in the first quarter with consumer markets in buy to build products.
With 10% last year.
The growth this year. Thanks.
So.
Go ahead Jason.
To respond to that okay. Thank you so <unk>.
6% to 7% and between six and 7% for Q1 remember there is seasonality in our numbers. So when you talk about 10% our.
Numbers grow, especially during the fourth quarter would you give us a higher annual average so we're anticipating this year that when you combine all of the by the bills will end up between 10 and 50% again this year again first quarter those solid growth with a 6% to seven.
We had anticipated so we're starting to gain traction on the market with those products now.
Great and then my follow up how much of the decline.
In the U S.
Fab, where do they end up coming in higher than anticipated.
Thanks.
Could you ask that question again.
Sure how much of the higher lapse nation rates in the U S.
Were captured into the guidance reflected at the fab in November where did lapse rates in the coming in higher than anticipated.
We did see a higher lapse station that we planned for.
Tapper off last year so.
There is obviously an impact going on here running through our financials.
Across the benefit ratio expense ratio and also the bottom line.
Yes.
Through lower earned premium as well, but the net impact on all of those three combined is a favorable favorable $5 million in the quarter yes.
The way I would think about it overall.
Obviously, it lowers future net earned premiums and because we are sitting with slightly lower policies enforced them, what we otherwise would've expected.
So.
From an embedded value standpoint.
It's clearly a negative that being said.
Sales were off to a strong start this year and that builds embedded value for us for the future as well. So there's a number of puts and takes but in the quarter.
The bottom line $5 million positive impact from higher than expected lapses.
Hey, let's let's come back to the swap because we pulled up some of the numbers and so we can answer that question more directly so Eric why don't you kind of give us a little bit of an idea on our current projection for the year and this assumes the forward curve. So this year materialize is about an extra $39 million of ink.
Come from our floating rate book versus our plan.
The next question comes from Erik Bass of Autonomous Research. Please go ahead.
Hi, Thank you I was hoping maybe you could talk about kind of the other moving piece.
NII would be that hedge costs. So could you talk about the outlook for hedge costs.
Yes, Black Japan business and as these move higher or are you still able to generate the same level of spread on in the U S. Dollar assets or are you, making any changes to your investment approach.
Yes. Thank you very much for the question.
First talking about this year as you will recollect for a number of years now our strategy has been at the beginning of the year to lock in our hedge cost for the majority of the Buck there are moving parts.
So that was very good for us this year, because our hedge costs are locked in on the forward that about 89 basis points and on the FX options, we do at around 44 basis points.
And altogether I think about $110 million, so estimated hedge cost for this year, obviously hedge costs are higher with short term rates going up significantly. So just to give you a flavor of the differential.
And this really wouldn't impact us until 2023.
Forward cost today for.
For 12 month forward is around 256 basis points versus what we're paying this year of 89, so a significant increase and we expect that from from what's happening with interest rates and similarly options would probably cost us around two times more than what we paid given increased FX volatility in overall levels.
If the yen so when we get to next year.
If rates stay where they are hedge costs would be significantly up probably by about 125% or so on the book now having said that our book does change over time. So I can assure you the balances in all of our asset classes or even when we revisit our hedge ratio that may change as well, but thats just looking at it.
As a.
As a static book the other thing to remind you of though as well on our forward book, which is much reduced them whether it was those forwards are applied against our floating rate assets.
So those floating rate assets as we just discussed with the needs question. Their income is going up substantially so the income while not 100% correlation will go up pretty close to the amount of the hedge costs going up so the net should stay pretty even with the with the one variable being the level of spreads on the asset.
And those spreads have generally been going up so on a net basis at least on the forward bucket should be pretty neutral, but the actual line item of hedge costs, we would definitely go up.
I want to make a comment as I.
I've always said unlike evolution not revolution and for you that have been following our stock for 10 years or more.
Just wanted to tell you what a sophisticated model we have today and how it's evolved not only from Eric and Brad and the team and what they've done, but also our board and our specifically Tom.
As chairman of what they have done from an investment standpoint. It is it is very gratifying to hear as we get into such volatility and change in the last year or so even in the last three months with the yen and yet we are prepared for and to hear these answers.
Just want all of you to know.
What hard work and dedication they've done through bread and Max and what's gone on so Max I think you were going to make a comment yeah I wanted to add one more comment so Eric when you think about these four words in Aflac, Japan, So thats about $4 $5 billion of notional at the end of the quarter.
<unk> at the holding company. We also have $5 billion of notional going the other way so even in that scenario, where you would have.
Dislocation in the marketplace that could significantly.
Increase the hedge costs and for Aflac, Japan, you would have an associated increased hedge income at the holding company. So from an enterprise standpoint, we're somewhat reduce the exposure to volatility in hedge costs as well.
Got it thank you and I guess, maybe putting it all together.
So you're talking about the benefits to NII this year.
The floating rates being higher at Sao.
Like the hedge costs are locked in so.
Maybe.
Is that a net benefit you'd expect this year and then the comment on 2023 based on what you've locked in for the floating rate expectation of our hedging costs and then what happens in corporate kind of putting it all together, it's sort of a neutral impact.
Oh, I think putting it altogether, it's a positive impact yet okay. That's what I was looking at.
Realized realize we've got a $30 billion $30 $31 billion U S dollar portfolio and I think we have $6 billion of it hedged so.
You've got $10 billion of floaters, we have locked in 70% of it I mean, it's a positive catalysts theres no question.
Got it thank you.
The next question comes from Jimmy <unk> of Jpmorgan Securities. Please go ahead.
Hi, Good morning, I had a question following up on.
I think then your comment on the environment sort of returning to normal as you think about sort of the long sales process in the U S. How close to normal as it.
In terms or are there still ongoing headwinds, whether it's people working from home or business is less interested in letting agents come in and pitching to their employees are scheduled meetings. So how do you think about like a return to normal sleep endemic versus ongoing headwinds that might <unk> sales from getting too.
Pre pandemic levels over the next year or so well I'm going to let virtual but let me just say just take our company for example.
Today, we really have our first officer meeting.
After for lunch today, and we've got about.
150 people coming in.
That is normally that includes our directors and.
That's about a little lower than what we normally have that.
Pre pandemic, maybe we would have had up to 200. So it gives you an idea of how things are getting back to normal they are not quite there, but as I've said I'll look forward to happen in the second half outlook for everything to kind of move back, but it will be a new normal I mean, there will be a certain.
Amount of people that will work for them all but things are moving back. So let me, let virtual because I'm real pleased of what Teresa and Virgil have done in terms of having an impact on sales.
And.
I've been very pleased with persistently until this issue that just came up in the first quarter and I know they will address it and fix that problem. As we go forward. So go ahead virtually you can start and then if teresa wants to make comments.
You can do whatever you want she has the ball.
Yes, So let me give you anecdotal comments almost support with some numbers. So one of our key focuses was to return to normal by driving our culture. So as Dan mentioned, we got back last year to allow the normal things. We do that includes like having sales meetings, we gather our top producing sales agents on veterans out there.
To make sure that they were born to loan strategies.
Minimum doing that we're very very pleased to bring everybody back together as well as our brokers working with our broker sales professional team, which is when a company is not in the market and bringing those broker partners. We still have all of our events, where we sat around and talked to them make sure we're delivering their feedback and make sure. We've got the right model.
To support the service levels, they would be going forward.
Having said that you also mentioned, though about how things have changed about face to face and being able to support virtually so I'll tell you. This that we're able to provide the level of service. However, whether it's face to face was virtual where there's still some movement I'll share a couple of numbers with you to support that.
Going back looking at pre Covid 2019, 95% of our sales were face to face.
As you saw the height of the pandemic.
In 2020.
Face to face sales were 80% the rest of them were doing either doing virtual enrollment a hybrid type model or self service and now if I look at Q1, 85% of our sales.
<unk> been in face to face so to sum that up of course, we were more face to face pre pandemic, we saw a tremendous drop in that and we were able to companies still getting all the products zone.
Through other means and now you can see that number of face to face going back up.
I hope that helps but overall I can tell you theres a lot of momentum on the sales force right now.
More of the same the hit when we spoke about earlier.
<unk> was around recruiting again recruiting is important but we did adjust our model to reengage. Our veterans average weekly producers are up our productivity is up across all lines.
Conversions.
So 11% increase in converting veterans who've been here more than five years.
Q1, so as you can see the confidence in my voice here.
Feeling very good about where we're going to see the remainder of the year.
Yes, I'll just mentioned, we're just well positioned to address many of the headwinds that we're seeing in the environment, specifically due to our financial strength, our distribution model and our digital solutions and so you hear the energy and Virgil.
Comment and that's because.
There is a tremendous amount of momentum in our sales force today and so we're.
On the right momentum and will continue to.
Dressed any issues that we see come up in the market.
And then just in terms of progression of sales through the year.
The last couple of years, obviously had been off because of.
But prior to that typically your second quarter used to be higher in sales then.
The first quarter, and obviously fourth quarter, you've got the amount of broker sales should we assume a similar pattern this year as well or is there something.
Alex that would affect the results.
Yes.
First quarter is certainly higher than we anticipated more higher than most anticipated for us. So we're very pleased with that we certainly will see the same seasonality definitely in the third and fourth quarters, where you'll see the majority of our production.
Again, we're looking to maintain this consistency in the second quarter, but I would tell you that the momentum.
A lot of it has to do with two contributing factors, we mentioned earlier that would come from out by the bills.
With our Premier life announcements product this'll.
Disability.
Those products really is the selling season right now early new year and those sales will come through in Q4, so the growth and the seasonality of the highest point Youll see is definitely going to be in Q4, we will look to maintain this consistent momentum from Q1 going into Q2, but again ive spent more on the third and fourth quarters.
Thank you.
The next question comes from Alex Scott of Goldman Sachs. Please go ahead.
Hi, good morning.
First one I had is on capital deployment.
I think about what youre seeing on the economic hedge and how it's not just the GAAP EPS impact we got to think about here. It's also this economic hedge.
My understanding of that hedges with the yen weakening it would actually make your capital in Japan stronger.
And just in general I think the capital of the overall business stronger and if Thats. The case I think it will give you.
Maybe GAAP EPS.
Short term hurt, but then you have like more capital deployment opportunities as a result of that.
Am I understanding that correct.
If I am.
What is what are your priorities for deploying that capital if the yen remains weaker than you have that flexibility.
Yes.
I think that the way you sort of described it as a reasonable description of how our long term hedging model actually works.
Capital in Japan, obviously is stronger with a weakening yen and you know our <unk> sensitivities you can go back to our fab disclosures and we'd give those those sensitivities. There. So we can sort of calculate what the impact is on.
On the capital position in Japan.
And also if you travel over to the holding company.
In this quarter alone because we issue debt.
Denominated in yen you saw our leverage dropped 60 basis points simply because of the FX move into first quarter.
So that ultimately leads to somewhat higher debt capacity.
Over time.
And then you should also expect that over time as the $5 billion of forwards as they settle they convert into cash.
At the end of the first quarter, we had $3 6 billion of unencumbered cash.
At the holding company and I use the term unencumbered and that's actually quite important in this context, because it excludes any collateral received that we have.
And obviously that will add to the pile.
Cash if if the FX rate continues to be.
At this at this current level.
We have four words that.
The settlements will spread out there there is no specific sort of tower at the generally settle we got some cohorts that elaborate month, so overtime. This hedging program.
We will then convert into cash so short term youre going to see our EPS, obviously to get hit by it from the translation impact but over time.
It leads to.
Deployment opportunities by lower leverage.
Epic towards converted into cash and then also long term you have.
Our higher capital position in Japan.
Associated with the dollar portfolio that we have in Japan that strengthens.
<unk> in a scenario weakening yen all these sort of balances out to some extent over the long term.
As it relates to deployment of additional capital. It follows the same criteria that we have for all deployments of capital.
We deploy where we see a good risk return based on an IRR basis.
Got it.
And then maybe a little more of a housekeeping question.
Corporate.
How should we expect that to trend from here I guess, there's just a lot of moving parts. Because you have those offsetting derivatives that are sort of housed in corporate I believe so.
Could you help us think through where the run rate of earnings for that segment would be or even add maybe if you can't do that and just how to think about net investment income in corporate.
Yes, so first of all the derivatives house apps at the corporate level, the Mark to marketing pack does not run through the GAAP EPS number about the amortized hedge income to us and that's a fairly stable number.
If you look at the results for corporate this quarter, we're running a little bit high on expenses in the quarter and a little bit low on NII in the quarter. The NII was somewhat depressed by our tax credit investments and that Ron as a negative through the NII line, but then obviously you have <unk>.
Favorable offsetting impact on the tax credit line.
Yes.
As discussed earlier, we do have.
Most of the assets at the holding company all floating rate in nature. So obviously that means that as the short end of the yield curve now has increased and come up youre going to see a little bit of a pickup in NII over time. So if you look at the results of this quarter. There were some puts and takes on a lot of moving parts, but generally I think it is.
Decent run rate for the current vein.
Got it thank you.
The next question comes from Tom Gallagher of Evercore ISI. Please go ahead.
Good morning first question.
Just to come back to you.
The underlying benefit ratio in Japan the <unk>.
69, 1% I think excluding the extraordinary IV in our releases.
That's a little bit above the range that you've guided to I think you explained why it happened just elevated medical coding claims is it fair to expect that this is going to drop back down to within the range for the balance of the year as Covid cases go down.
Yes.
Let me actually give you some perspective, if you don't mind just over the last few quarters on incurred claims related to COVID-19 , because it will really illustrate what's going on with the most recent omicron. If you go back to the first quarter of last year.
Our incurred claims were around 800 million yen in the second quarter. It picked up to about $1 3 billion yen, obviously very small numbers in the third quarter. It picked up to $2 3 billion yen and that was actually the Delta peak that was right when that Delta peak took place and we had claims coming in then they dropped down in.
The fourth quarter to about 100 million yen, so almost nonexistent and then in the first quarter eight 3 billion yen.
And so what I think if you if you are living and working in the U S and if you're following largely U S companies in economy I think many don't realize just what a peak of omicron, we saw here in Japan Youre talking about.
Case levels that we're running at around 100000 a week.
Two three times at least the level of peak that what you saw during the Delta now Fortunately, it's a very mild version of OMA Kron and Fortunately vaccination rates, particularly among the elderly in Japan are very high and so as a result, you haven't really seen hospitalization nor.
Have you seen deaths pickup in Japan, but don't think for a moment that thats because things calm down it's quite the opposite this is the most severe peak of infection rates, particularly in that February time period that Japan has seen throughout the entirety of the Covid environment. As a result, that's why you're seeing some of the face to face dynamics and what Dan mentioned about.
On again off again states of emergency.
Going on now the reason I pointed out the nature of our claims was that this deemed hospitalization issue essentially the life insurance industry of Japan got together and agreed with the government the Fi.
The COVID-19, inversions variance of COVID-19, as an infectious disease and when you do that Youre allowed to cover if you will youre allowed as a doctor to diagnose and allow for at home treatment and cover the claims related at home. The reason for that is Japan does not one infectious.
These two cause hospital capacity issues and so they allow more degrees of freedom as to where that care takes place. So we're seeing claims go up not because of the severity, but because of the sheer volume or frequency of cases and at home treatment.
We would expect that to come down over time, because we've seen cases calmed down, but there's a lagging effect.
Right now in April and May for example, we're seeing claims coming in that are likely related to two or three months ago related peak levels. So we think that's probably going to continue I would say into the second quarter. Its early we don't really know at the end of the day, what it may mean for the benefit ratio in the second quarter, but we should see Covid claims continue.
But then calmed down as the year goes on and again remember while this is all going on and you have lower activity levels lower face to face Youre seeing other types of medical claims not come in.
So you don't necessarily see your benefit ratio moving in the wrong direction. It's just the mix of claims have shifted during this period of time, so it's quite interesting and we've been busting down this data and looking at it very carefully.
But you should expect claims and Covid to continue I would say into the second quarter, given the lagging effect, but not necessarily be dramatic upward pressure on benefit ratio I would not anticipate that.
Tom just to give you some more color on it if you take the b incurred impact from Covid in the quarter on our normalized.
Benefit ratio.
Was a little bit north of the 100 basis points. So if you take that.
Isolate that component that would take your normalized benefit ratio in the first quarter smack in the middle of our range of 67% to 69%.
Gotcha. That's helpful guys. Thanks for that color.
My follow up is with.
With the recruiting numbers down so much in the U S. On both career agents brokers and knowing there's a lag in terms of recruits converting into sales.
But then taking that together with your comment about improvement in productivity gains based on some of those initiatives.
What do you think that all if you add all that up does to sales. If you look out I don't know two or three quarters from now do you think you can maintain the strong momentum youre seeing in the U S.
It sounded like from what virtual said he thought so but I'm just curious if you think.
Just given the severity of the drop in recruiting whether you think that's going to start to impact your yourselves.
If they don't they wont make bonuses so.
Certainly going to impact them, but virtual you want to comment.
Yes, Thank you Dan.
The numbers, we were still recruited over 10000 career agents last year.
Over 5000 close to 6000 of those small brokers that we do business with.
When I talked about the focus whether its focus was converting on them. So think about it coming out of Q4.
Last year, which is the busiest time of the year.
A lot of focus on getting those convert it and I'll tell you.
70%, we had a 70% increase in broker conversions in Q1, so that strategy is working now.
That's not to say that recruiting is important you know it is.
There's a formula you can add it up we can look at the productivity you can look at conversion rates to tell you how many people we need to hit our numbers right now were solid because we are seeing again when those veterans to Meg.
And Reengage the veterans produced at a higher rate.
<unk>.
So.
Randy's numbers over and over we are optimistic about how we're going to look not to say that we're not going to see a recruit.
So I can tell you right now we've got some additional efforts going on in <unk>.
I look at it on a weekly basis.
Week over week back in March seeing progress in the final few weeks of March and that progress is translating over into April .
One thing I would add and virtual can add color to it but one column that you may be looking at in the recruiting is the recruited agents through brokers and remember to some of our comments at year end and this past quarter, we're focusing on driving sales now through small.
Business brokers as well, which has not been historically a focused effort of our company.
And as a result, you saw the recruiting level of broker agents go up dramatically in 2021, averaging over upwards of 12.
<unk> hundred to <unk> hundred now what does that mean, when you recruit a small business broker what it means as you've pointed them and they are appointed us to be eligible to sell product through that broker. It doesn't mean, you're selling product through that broker and so one of the things that virtual is talking about when he uses the term conversion.
We're now working on those.
Large amount of brokers that were signed up and appointed last year, we're now focusing on converting them into actually generating sales through their brokerage platform.
So that's that's a big piece and there's a lot of runway yet to go on that.
The next question comes from Ryan Krueger of <unk>. Please go ahead.
Thanks. Good morning, I was just curious if you could give it I know you can't give exact quantification, but if you could give any.
Qualitative commentary on how much you think Japan post.
<unk>.
As we begin more actively selling cancer products again.
Maybe maybe one metric.
Help us think about it I think I believe.
Japan post was about a third of your cancer production.
Fire too.
To the mis selling issue.
Any thoughts on what percentage of your kitchen cabinet sales do you think they could build back up to.
Well we can't.
Go into any detail regarding Japan post they've always been you know since inception of Japan post they have asked us to never go into detail.
<unk>.
Basically they stopped last year and they have regained a position, but it's still very low and all I can tell you is they have committed to us that they are dedicated to seeing a return to.
Stronger production.
And I am expecting that that as you. All know there are large shareholders I feel like that's important and the message that I've been saying is those two together with them and so we'll have to wait and see.
<unk>.
But.
I am encouraged about the production, but I can't give you any more detail other than to say.
We have a wonderful relationship they know what we want they want our help us it's just the timing and how to do it but.
There is there is no.
<unk> that I can tell you.
Other than just getting it started again theres absolutely nothing they're happy with US, we're happy with them and but we wanted to say that production that.
Okay understood I appreciate the comments.
This concludes our question and answer session I would like to turn the conference back over to David Young for any closing remarks.
Andrea and I want to thank all of you for joining our call. This morning. If you have any follow up questions I'd be happy to take them. Please contact me via email or.
Phone and look forward to speaking to you all soon until then take care.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
[music].
Okay.