Q2 2022 Aflac Inc Earnings Call
Okay.
We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results.
As I mentioned earlier the earnings release is available on investors thought Aflac dot com and include reconciliations of certain non U S. GAAP measures I'll now hand, the call over to Dan Dan Good morning.
Thank you for joining us as I reflect on the second quarter of 2020 to our management team employees and sales force continued to adapt to more tirelessly to be their policyholders when they need us most just as we promise.
Black incorporating reported solid results for the second quarter with net earnings per diluted share of $2 16, <unk> and.
And $3 73 year to date adjusted.
<unk> earnings per diluted share were solid at $1 46 in the second quarter and $2 88 for the first six months.
Supported in part by the continuation of the low benefit ratio associated with the pandemic conditions.
Also contributing was a better than expected investment income, including returns from alternative investments.
We remain cautiously optimistic as our efforts focus on growth and efficiency initiatives.
This evolving pandemic backdrop.
Looking at our operation in Japan in the second quarter Aflac, Japan generated strong overall financial results with a profit margin of 27, 4%.
This was again above the outlook range, we provided at the November 2021 financial analyst briefing.
Persistency remained strong however, sales continued to be somewhat constrained as the pandemic conditions to impact our ability to meet face to face with customers.
Also contributed to the quarterly results was the 2021 comparison following the launch of our new medical product rigs.
Regarding Japan post strategic alliance as part of our ongoing collaboration and governance framework I traveled to Japan towards the end of June to meet with Japan Post holding CEO , Mr. Masuda, along with the presence of Japan post postal and insurance companies.
We had an understanding and productive visit discussing our plans. This indeed excuse me. This included a renewed commitment from executive management to drive sales with a focus on distribution growth and marketing of <unk>.
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Year began in April of 2022, and following Japan post sales structure transformation.
The support includes further aligning of our sales offices with Japan, Post's regional offices to strengthen support and to share best practices.
As you may recall under the new structure sales employees focused solely on selling Japan post insurance products.
And Aflac Japan's cancer insurance product we.
We've made gradual progress toward providing cancer insurance protection to more consumers demonstrated by the increased proposal activity and sequential monthly sales growth during the second quarter.
There is more progress to be made and we continue to work to strengthen the strategic alliance to create a sustained cycle of growth for both companies. We believe that sales through Japan Post group will improve in the second half of the year.
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Sales employees gained more experience and momentum.
As we look forward to 2023, we will introduce our new cancer insurance product through Japan post likely in the second quarter. This will allow both entities to invest in a more complex coordinated required Bob.
The distribution system of this size, we plan to launch our revised cancer product and agencies in the second half of 2022, and we continue to expect stronger overall sales in the second quarter of the year.
This assumes that pandemic conditions do not escalate and the sales productivity continues to improve at Japan Post group and that we execute on our product introductions and refreshment plants.
Turning to the U S. We saw a solid profit margin of 21, 4%.
Pleased with the U S sales momentum has continued with a 15, 6% sales increase in the second quarter.
This reflects continued adaptation to the pandemic conditions growth in the core products.
Our investment and build out our growth initiatives.
While Aflac network, dental and vision and group Premier life absence management, and disability solutions, which we call play adds a relatively small part of our sales. We are pleased with how they are contributing to our growth our growth initiatives.
Modestly impacted the top line in the short term, but also tend to be accompanied by the sale of our core supplemental health products in combination with our core products. They also better positioned in Aflac U S where future long term success.
The need for our products, we offer is as strong or stronger than ever before at the same time, we know consumers habits and buying preferences have been evolving we remained focus on being able to sell and service customers whether in person or virtually.
This is part of the ongoing strategy to increase access penetration and retention.
Turning to capital deployment, we placed significant importance on continuing to achieve strong capital ratios in the U S and Japan on behalf of our policyholders and shareholders.
We continued to generate strong investment results, while remaining in a defensive position as we monitor evolving economic conditions. In addition, we've taken proactive steps in recent years to defend cash flow and deployable capital against a weakening yen.
When it comes to capital deployment, we pursue value creation through a balance of actions, including growth investments stable dividend growth and disciplined and tactical stock repurchase it.
Goes without saying that we treasure, our 39 year track record of dividend growth and we remain committed to extending it supported by the strength of the capital and cash flows.
In 2022, we remained in the market repurchasing shares with a tactical approach in the second quarter Aflac incorporated deployed $650 million in capital to repurchase $11 2 million of its common shares bringing the six month total to one point.
One 5 billion in purchase.
And $19 2 million of the shares with this approach we look to emerge from this period in a continued position of strength and leadership.
Keep in mind. In addition, we have among the highest return on capital and the lowest cost of capital in the industry.
We are also focused on integrating the growth investments that we've made we are well positioned as we work toward achieving long term growth. While also ensuring we deliver on our promise to the policyholders.
Don't think it's a coincidence that we have achieved success, while focusing on doing the right thing for the policyholders shareholders employees sales distribution business partners and communities I am proud of what we've accomplished in terms of both our social purpose and financial results, which are.
Ultimately translated into strong long term shareholder return.
We also believe that the underlying strength of our business and our potential for continued growth in Japan, and the United States. The two of the largest life insurance markets in the world.
You again for joining us this morning now.
Bret Thank you Dan before commenting on our results, let me start with some perspective on how we're positioned when considering current U S economic conditions.
We have not witnessed this level of inflation in the U S. In many years and we are closely monitoring conditions.
Wage inflation and full employment is generally supportive of growth in worksite benefits. However, when considering voluntary product. There is a question as to how much of any increased income is available for supplemental products as real wages are likely neutral to down.
Our benefits are defined at time of purchase and do not adjust for health care inflation.
Therefore, we do not expect any measurable impact on claims in.
In terms of recruiting and retaining agents it can be more of a challenge as agents are commission only need to keep pace with any increase in costs.
When looking at enterprise margins the impact of inflation does does apply upward pressure on expenses. However, this is mitigated by rising rates and additional investment income having built a significant floating rate loan portfolio.
In terms of the risk of economic slowdown and recession. Our business model is generally defensive in nature with low asset leverage and exposure to risk assets.
<unk> and cash flow are driven largely by morbidity margins that tend to remain stable during periods of economic volatility.
While employment levels May decrease, we often benefit and the recruiting side during an economic slowdown versus today's tight labor markets.
Max spoke in his recorded comments to the work we have done to defend our cash flow from weakness in the yen. We have built a sizable unhedged U S dollar portfolio in Japan shifted most of our senior debt to yearn for both hedging and cost of capital purposes, and maintain a flexible hedging position at the holding company.
It's important to understand what makes all this possible significant economic value strong capital ratios and predictable cash flow out of Japan.
Overall in recognizing the balance we have in operating in the U S and Japan, we like how we're positioned to defend our performance under today's U S inflationary conditions and the potential for economic slowdown.
We see no interruption in our core margins and return of capital to shareholders, including dividend pattern and share repurchase.
Turning back to our businesses and beginning with Japan, Covid cases have surged again with daily New cases, reaching 200000 up significantly from already elevated levels earlier in July and considerably higher than levels experienced in the second quarter. However.
However, hospitalization and deaths remained low.
Based on commentary from the Japanese government, there does not appear to be plans to introduce a nationwide state of emergency which are typically triggered by both increasing cases and declining hospital capacity.
We continue to experience elevated COVID-19 incurred claims driven by its designation as an infectious disease and deemed hospitalization, which allows for payment of claims for care outside the hospital.
We would expect the recent surge in Covid cases to apply pressure to near term benefit ratios, while not guaranteed this may be partially offset by other drivers of hospitalization and care, which have remained low during periods of higher Covid. Our data suggests this is driven by increased and less.
Expensive outpatient treatments as policyholders and their doctors seek to avoid going to the hospital with Covid cases on the rise.
With respect to Covid classification under the infectious disease law.
Just first a special committee of the Ministry of Health Labor and welfare started reviewing COVID-19s classification under the law.
Revision of the classification requires amending the law, which is expected to be discussed at the extraordinary diet session. Beginning in September at the earliest.
Having just spent a few weeks in Japan. The general population remains cautious with respect to the potential for Covid infection.
With Reits with widespread infection. This is not simply a matter of customer behavior and face to face interaction, but also agents who are sidelined temporarily with COVID-19.
As a result, we typically experienced reduced proposal volumes during periods of elevated cases, an early indication of potential sales weakness.
While COVID-19 conditions remain outside our control our work continues to position Japan for sales recovery in the second half of the year and as we move into 2023. These actions include items that Dan referenced in his comments such as accelerating the launch of our new cancer product direct marketing campaigns.
More closely tied to targeted TV advertising and adjusting our distribution model for better alignment with our third party partners.
We continue to review our broader product portfolio, both first and third sector for enhancements designed to increase the value proposition for our policyholders offer a broad product lineup for our core distribution partners and secure our competitive position in the market, we have been making investments in technology and in.
Working with our distribution partners to reduce launch costs associated with product refreshment and development it.
It's becoming clear that both the competitive environment and our broader product line creates a product refreshment cycle that is more continuous in nature.
Separately, our incubated businesses continued to develop we are seeing favorable results piloting hach healthcare are provider of non insurance support to develop the ecosystem for both cancer and nursing care policyholders and expect to expand availability in early 2023.
Our short term insurance subsidiaries <unk> was launched in early 2021.
And currently offers two products.
Sub standard medical product and a disability product aimed at the contingent or freelance workforce in Japan.
So daiichi <unk>, two strategic purposes to grow and develop these specialized markets and second as a proof of concept platform for product innovation that may become more broadly popular in the future.
We can't control Covid conditions, but we are not standing still we will develop these themes in more detail at our financial analyst briefing in November .
Turning to the U S and as you are aware COVID-19 conditions are also elevated this is not currently causing any issue in terms of either our operations or distribution in the U S.
We saw persistency recover to more normal levels when isolating results in the quarter and accounting for seasonality account.
Account persistency has remained stable through the year.
So we believe this is driven by an increase in employee turnover with tight labor markets.
There are moving parts when looking year over year, including the retirement of state mandates that served to reduce <unk>.
As Dan noted in his comments, we continue to deliver a balanced performance, we see recovery in the small business market with growth in veteran average weekly producers, while also continuing to strengthen relationships with our broker partners. For example split by product type group voluntary was up 16%.
Individual benefits up 11%.
Split by channel agent sales were up 11% and broker up 22%.
The combination of network dental and vision and Premier life and disability were ahead of our plan as we continue to see strong performance with our buy to build properties, we were up 175%, albeit off a smaller but building base.
Direct to consumer is down 7% and largely the result of the increase in costs associated with organically generating purchasing and converting leads and meeting our return expectations.
In terms of the U S expense ratio, it's important to identify the impact of our build investments. We have three important business initiatives underway that are essential to the future growth of the company. These.
These investments include group life disability, and absence management network, dental and vision and having a digital direct to consumer platform to reach consumers that are outside the traditional workforce.
In the quarter investment in these efforts impacted our expense ratio by 280 basis points and we would expect this pace of investment to continue for the rest of 2022 and into 2023.
Our 2021 outlook for a 3% to 5% compound annual growth rate in revenue through 2026 is largely driven by these three growth platforms and related Halo impact of cross sell and retention of core voluntary products.
In the next three years, we expect our natural swing in the in these platforms from from contributing to an elevated expense ratio to being the principal driver of returning to more normalized levels.
In the interim we are navigating investment in the future growth advancements in our digital platform, while maintaining strong profitability.
Turning to global investments with the rise in short term interest rates driven by federal reserve as they combat inflation together with deployment activity net investment income generated from our $12 billion floating rate portfolio is currently estimated to increase approximately 160 million.
For the year as compared to our original plan.
As mentioned last quarter, we have locked in the favorable LIBOR curve on a large portion of our portfolio and expect continued tailwind to floating rate income going into 2023.
Along with being an attractive asset class and strategic to our US dollar program in Japan, our floating rate book acts as a logical hedge against inflationary cost pressure.
We maintain a book of foreign exchange hedge instruments on our U S dollar portfolio in Japan that is also impacted by inflation.
As the cost of these forward contracts are generally aligned with short term rates in the US However, we have locked in those costs for 2022 and have offsetting hedge instruments at the holding company that served to neutralize the impact to the enterprise.
Our alternatives portfolio continues to deliver strong results, we fully expect lower valuations of these portfolios in the second half of the year as private equity marks track public equity valuations likely resulting in giving back much of their 2022 gains.
There is a well understood lag in reporting numbers on private equity and this is a natural expectation given private equities correlation to the public equity returns.
Naturally we are closely monitoring economic conditions and the chance of a recession, we maintain a defensive position to risk assets in terms of private and real estate equity our investment thesis and risk appetite remains the same we are willing to accept some equity market volatility to earn 10 plus percent.
Over the long term, adding to NII or net investment income on a risk adjusted basis.
We maintain a conservative allocation of under 3% of our invested assets with marginal growth expected over the next five years.
We closely monitor our middle market and traditional transitional real estate portfolios were recessionary impacts could be felt sooner.
We expect these portfolios to perform well given their senior secured first lien structure protective covenants reasonable leverage and private equity sponsorship for middle market loans as well as a high degree of diversification.
The portfolio has performed well during the stressful period of Covid and we expect they will continue to I will now hand, the call back to David to take us to Q&A David.
Thank you Fred.
Now we are ready to take your questions, but first let me ask that you. Please limit yourself to one initial question and a related follow up to allow other participants an opportunity to ask a question Andrea will now take the first question.
Our first question will come from Brian Daley Morgan Stanley . Please go ahead.
Great. Thanks, and good morning, So I wanted to touch on U S losses last quarter. It was a little troubling this quarter. It seemed to return to more normal levels can you talk a little bit more about what was driving that was it purely just the macro conditions.
You are looking at various initiatives to help improve it was that a play as well and then also looking forward do you expect higher inflation to have an impact on that activity as well.
Nigel It's Fred let me comment on on lapse rates.
When we talk about as you know we report our lapse rates on a trailing 12 month basis and as a result, you'll see pressure in our reported lapse ratios year over year and so what we have done is looked at our quarterly lapse rates seasonally adjusted when we make our comments about a recovery in lapsed.
Rates and let me give you an idea our lapse rate in the quarter or said differently, our persistency in the quarter for the second quarter only was around 79% and that is approximately <unk>.
Equal to the pre COVID-19 levels of lapse rates that we tend to enjoy our persistency that we tend to enjoy in the second quarter to give you an idea before COVID-19, we would travel again around that 79% rate it rose up into the 81% territory over the last couple of years and we.
Believe that's largely related to the state mandates that require keeping policies in place as those started to expire and have now largely expired we've traveled back into normal persistency.
In the first quarter, what spooked us is that our persistency in that quarter was around 74, 5% and that seasonally adjusted was about 200 basis points lower than we expect we always expect the first quarter persistency to be lower because it has implications or it's timed related to annual enrollment process.
And year end process. So it's normally a lower persistent quarter, but in this case a traveled about 200 basis points lower than we would have expected and that's what gave rise to our comments last quarter. So we're very pleased to see it recover back to normal seasonal adjustments in the second quarter.
And that would be my comment there.
We'll have to obviously monitor it as we go forward to my comments on inflation I would tell you that we don't see necessarily the implications of inflation impacting lap.
Lapse rates per se.
Right now we haven't seen any evidence of that but it's a very unusual inflationary period and quite honestly, we don't have a lot of history of inflation at these levels and watching how our business behaves and Thats why I have some of the cautionary language. Thus.
Thus far I would tell you we don't see any acute implications from inflation, but we simply want to note. The fact that we're going to monitor that again, we see offsetting dynamics related to inflation. So we don't see this as having an impact to overall U S financial performance.
That's very helpful. Thanks, Brian .
Yes.
Yeah.
Okay.
The next question comes from Jimmy <unk> of Jpmorgan Securities. Please go ahead.
Hi, Good morning, So I had a question on sales than in the U S and in Japan, and if you could talk about how sales trended through the quarter and specifically on Japan. It seems like your comments are pretty positive on unexpected improvement in sales are you seeing that or are you just hopeful that.
That things will get better and then just relatedly any impact that youre seeing on your.
Production activities in Japan, because of the recent increase in Covid cases.
Let me.
Let me answer that.
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The second quarter of 2022 cell downturn, continuing from first quarter as sales of our new medical insurance product had run its course after its release in January last year. Additionally, COVID-19 continues to have a negative impact on sales activity as the number of new cases increased eight point.
Two times compared to the same period last year, although intensity infection prevention measures have been lifted.
Significantly higher E Colby.
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So COVID-19 infections have been rapidly increasing since the start of July and Japan is experiencing a seventh weight and uncertainty Ramon we're having said that from the third quarter. We are hopeful that sales will exceed last year's result.
Building on the new accounting insurance product launch and the gradual recovery of Japan Post group sales.
That's all for me.
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Thank you.
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<unk> been shared earlier, we did see a 15, 6% increase in sales.
We're pleased with the second quarter performance I think Fritz said it well, though is the combination of what we're seeing from our distribution channels.
Think about the small market, which was disrupted quite heavily at the beginning from October we've seen a solid recovery is really driven by our veterans returning to producing we saw another increase.
Veteran in average weekly producers and we saw an increase in productivity from our veterans.
When you look at the large case space. It was less disrupted by Covid, we continue to see great performance from our broker partners in that space.
24% quarter over quarter increase in production from our brokers. So when you look at it how we're going to the market in large brokers large screen space with our brokers and continue to see recovery in the small market with our veterans overall, we're pleased with our quarter.
Okay.
Thank you.
The next question comes from Alex Scott of Goldman Sachs. Please go ahead.
Good morning, first one I had is on the Japan benefit ratios I guess when I think about the I think it was 190 basis points you called out of unfavorable Covid claims and.
But then the normalized benefit ratio thats materially higher.
Could you help us think through I think it was over 400 basis point Delta associated with these IV in our releases when you sort of go through that and.
I struggle with it because.
You guys have had favorable RBR overtime, I mean, do you have any way of sort of <unk>.
Breaking that apart a little for us in helping us think through.
What portion of it is more.
The outpatient treatments associated with Covid specifically.
Any help with how to sort of figure out.
Where things should be on a run rate basis.
Thank you Alex.
If you start with obviously you make the walk from the reported benefit ratio of 6% to seven 4% to adjusting for all the sort of special factors in the quarter, you'll get to a 69, 8%.
What I think is reasonable to sort of add back is sort of run rate.
More permanent or somewhat permanent reserve releases that we have experienced pompe favorable hospitalization trends et cetera.
<unk> added up in the quarter to about 170 basis points and Thats, what we have seen historically run through our results. So if I were to adjust for that to sort of get too.
Yes sort of adding back what we normally see.
Ongoing reserve release released in each quarter, you get back to a 68, 1% in sort of an a.
Adjusted adjusted underlying.
Benefit ratio for the quarter.
Going forward over time.
These reserve releases have been running at relatively high recently.
And we would expect those to continue maybe not at the level of 170 basis points, but we certainly expect an element of that going forward.
Got it that was really helpful. Thank you.
Next one I had is just on inflation and the expenses I heard some of the comments that that could put upward pressure on expenses.
I mean is that material enough for us to think about.
Maybe a different.
Range for expense ratios I know things are a little more focus on the back half for expenses as well. So I was just wondering if there's any update to sort of the expense ratio guide that you guys have out there.
I think.
Essentially where we face inflation is in just a couple of areas one predominantly is simply wage inflation.
So your overall head count.
And what we're all experiencing and seeing in the market with with with wage inflation and salary inflation.
And we've got to do that we've got a fall in line to retain and keep our talent and we will do so.
Having said that for a company our size our employment levels are quite manageable.
Or a very large U S and Japan company, but we have 5300 <unk>.
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<unk> 7000 in Japan and.
So we don't have the type of business model that is overly concentrated from that perspective, and so therefore, the wage inflation numbers, while they do apply pressure there more manageable. There's also certain contracts that we have and quite frankly, the industry has that will have inflation riders and so certain it and servicing contracts often have inflationary.
<unk> provisions that kick into place when inflation gets out of control.
That can also come back down as inflation gets back into control.
Overall, what I would tell you is inflation in of itself is not causing us to rethink our guidance on expense ratios the bigger moves on expense ratios as what I noted and the fact that we're heavily investing in growth platforms. We're very pleased to see that the growth is coming through in those platforms as I mentioned in my comments.
But it's going to that's really going to weigh on expense ratios in the U S more than inflationary pressure issues.
And just to add one reminder, obviously expense ratio, it's a ratio.
You have net investment income coming into play here as well and it helps boost the top line and therefore it gives you some relief on.
On the expense ratio when you think about the inflationary pressures and the last piece is that yes, we do obviously acknowledge that it is putting upward pressure on expenses in dollar terms as well and we are taking active actions in order to combat that as well.
And I'll also remind you that a year and a half ago.
We had a voluntary program for retirement in the U S and about 10% of our workforce retired so.
This is not something that has not been top of mind.
Operator.
Hey, Bob.
The next question comes from Erik Bass of Autonomous Research. Please go ahead.
Hi, Thank you I was hoping you can provide a little bit more detail on the NII outlook I think Fred mentioned $160 million of higher expected NII in 2022 than the original plan.
Wanted to confirm is this gross or net of hedge costs and then how should we think about the impact moving into 2023, when I guess floating rate NII should continue to build but hedge costs will also reset and probably move higher.
And would you like me to take that yes. It plays there yes sure.
The numbers that Fred quoted.
Our gross currency hedge costs.
Our net interest rate hedging because we've done some interest rate hedging with respect to the floating rate bucket I just wanted to bifurcate those two buckets.
And as a reminder, for this year, our FX hedge costs are primarily locked in like 90, 598% of those hedge costs are pretty locked in.
Clearly going into next year.
Cost of hedging is substantially higher and we still carry about $4 $1 billion or so forwards on the Japan dollar program. So the hedge costs next year, we will certainly go up but as a reminder, we have what we call the back to back program are sort of countering.
Words at Inc. So for the enterprise the FX hedge costs from a forward perspective should should stay relatively stable on a net basis we.
We do have some FX options on the book as well that helped us with tail protection for the unhedged portion of the dollar program in Japan and those are based on options pricing, we do expect those to go up.
Which won't necessarily have an offset but we do often look at our hedge ratios and how much we want hedged so the amount of that to be a variable, but we would expect the option cost to go up as.
As well and then.
More broadly speaking when you look at next year's forecast from the perspective of where do we think our floating rate income is growing.
As Fred said, we still expect tailwind the forward curve for LIBOR is still upward sloping we're all watching the fed.
And assuming it stays where it is we would expect further tail winds in floating rate income for next year, but again the fed is.
Moving with inflation in the markets. The latest fed meeting was a little bit more dovish than hawkish for the future. So it's so that's good it's going to be a moving target. If you will however, having said that.
We reported on this before R&R floating rate book, we have put on interest rate hedges and we did that because at the beginning of the year with the aggressive fed hikes and increase in LIBOR.
When we do our financial planning over a three and five year period. We saw that there was a substantial increase based on the forward curves and that floating rate income over the over that time period, but we also know that there is no guarantee we will get that it all depends on where LIBOR is at that time. So the purpose of the interest rate hedge was to say.
Given that potential large increase in income why not locked in a good portion of it.
And put better surety around that.
Which we did so it gives us great protection now in case in the future those recession and the fed starts to lower rate but.
We didn't hedge all of that so we still have some upside as well if rates continue to go up so that's a picture if you will of the future and some specifics on the hedge cost.
Thank you that's helpful.
Confirm then given the back to back program should we really think of most of the kind of NII uplift from the higher floating rate yields dropping to the bottom line at an enterprise level. Realizing it may not you may see less of an impact in the Japan segment and more of it and incorporate.
Yes, Thats correct basically you would see.
The locked in hedge costs roll off and we go into a new level of hedge costs in Japan, you would see those hedge costs increase.
But then that same increase would be offset by increased hedge income at the corporate level. So that there would be no.
<unk> impact to the enterprise.
And then also keep in mind, what Eric said that of the $12 billion in floating rate portfolio.
Our hedge instruments are around 4 billion notional.
So we still have an ability to enjoy outside net investment income despite the rise in hedge costs.
Got it thank you.
The next question comes from Sumit Kumar of Jefferies. Please go ahead.
Thanks, just a follow up on Eric's question.
So if we're getting $160 million of higher NII from the floaters does that influence your thinking around expense initiatives, maybe an opportunity to accelerate that.
In order to generate maybe faster growth going forward.
Okay.
Well there are two different topics.
I would tell you is if what youre, saying is would you accelerate your initiatives and actually increase the pace of investment with added net investment income.
We're not really adjusting our plans around NII up or down the plans we have around investing in our platform are really related to core growth in earned premium and policies in force sales.
And overall efficiency measures so it really would not.
Render any.
Any impact on those plans.
And I do want to highlight as Dan mentioned in his comments.
We are very much at work in terms of addressing the long term expense structure, both in Japan and in the U S.
We have several initiatives underway to drive productivity improvements and efficiency improvements.
Do require near term investment.
But we have plans in place.
To help our expense dynamics and certainly combat any inflationary pressure as we go forward, but none of that need is really impacted by watching NII move up and down.
Okay got it and then just shifting to Japan, I was hoping to get a little bit more color on this.
Colgate is in infectious disease.
Policy that the government has.
Maybe what are your expectations for the I guess early September .
Conversation around this that the government will have an and I believe that your products have certain caps in terms of number of days.
We're benefits can be drawn is there any risk to the potentially that changing.
In the future. Thanks.
I think perhaps quita sun can address that we can add our color here in the U S. But create assigned maybe address your views of the.
That conversation in September .
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Thanks, Steve.
So as Fred mentioned earlier, the discussion and deliberation related to COVID-19.
He thought discussion is really gaining momentum.
And I will say if at all.
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And in light of the situation experts from the government for committee on countermeasures against infectious diseases, Coronaviruses and the National Governors Association have proposed and review of the classification.
And I will take a look at that.
That's kind of close out what goes on in San Juan because demo context auto not wondering Amin also estimate that Ken talk Ics.
And also as Fred mentioned earlier, starting from August 1st a special Committee of the Ministry of Health Labor and welfare started reviewing our COVID-19 classification under the law I'm wondering I mean, asking yes or.
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Political folks valuable steakhouses and revision of the classification under the infectious disease law requires amending the law, which is expected to be discussed at <unk> Dot question beginning in September at the earliest.
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Hi, Daniel.
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So we cannot predict the outcome of the discussion.
I'd highlight that it is not focused on the insurance industry, rather it is focused on how the law.
Pressure that the overall health care system. However, we feel it is it is a positive development.
That dialogue is taking place on the issue.
Got it that's all for me.
So I would also just note is something that I think is.
Perhaps obvious but just to be clear this is really not uniquely in aflac issue.
The major insurance companies in Japan are all facing substantial increased claims activity on medical policies. In fact, we're not even among the top few in terms of the volume of claims we have relative to other peers in the industry domestic insurers with large platforms. So this is really.
Broadly based.
We can't confirm some of the statistics, but there has been recent news articles, suggesting that the amount of claims paid in the month of June for example, under medical policies was up nearly 12 fold over the same time period last year. This time.
It is absolutely pressuring the system and we think that the.
Legislative community in Japan is taking us under consideration and realizing they've got to contemplate a change in the law.
But saying that we're still very comfortable with our projections for 2022.
So I want to make sure you grasped that.
Okay. Thanks.
The next question comes from Ryan Krueger of GW. Please go ahead.
Hi, Thanks, Good morning, I guess first could you.
Just give us some sense of how much.
Uplift in the current quarter did you realize from higher short term rates on the floating portfolio.
Okay.
Yes.
Please go ahead Sir.
Go ahead.
It's Eric it was about $38 million for the quarter.
But that's in total for the portfolio, but just from rates alone is around $2 million to $4 million.
And that's pretty logical because if you think about the ascent of <unk>.
<unk> really didn't start increasing till February March April and these are one month or quarterly reset so the impact from just rates alone on the floaters was rather small, but we did have other portfolio activity around deployment, the new money yield on deployment was better than planned.
We were able to purchase.
Some floating rate assets ahead of plan from a particular provider. So a number of portfolio activities really added to most of that increase but as the year goes by the impact from rates alone just continues to get higher because of the substantial rise in LIBOR.
Thanks, I guess just to clarify is the $38 million part of the 160 years.
So we think about the $2 million to $3 million.
Yes.
<unk> is part of the 160 that is just for the second quarter and the 160 is for the full year forecast.
Okay understood and then yes.
Yes in the U S did you see any normalization in the.
Benefits.
Went through the quarter.
Hey, Ralph.
Okay.
I think it's relatively.
Well spread out over the quarter there was no specific movements between the different reporting months in the quarter.
Got it thank you.
One thing back on Japan to just make sure that you're capturing is.
Again when it comes to these Covid cases were talking about just want to make sure you take to heart Max's comments.
And Dan's comments in my script comments and that is the very same dynamic that is giving rise to these higher infectious disease. Covid claims. We believe are absolutely impacting the rate of hospitalization on other claims activities not the least of which is.
As cancer insurance related claims and remember again as you. All know we are a dominant cancer insurance provider and so when the world of Japan health care moves to more outpatient treatment that has material implications for your cancer claims and how they trend over time.
So this is why despite all of the comments around Covid claims and increases in medical claims you still see a low benefit ratio in Japan, even by historical standards. There is no guarantee of that direct correlation, but its certainly what we have seen.
And the data thus far.
The next question will come from Tom Gallagher of Evercore ISI. Please go ahead.
Good morning.
First question back on the floating rate portfolio.
So the $12 billion floating rate portfolio and the transitional real estate.
Eric how do you feel about the quality of those portfolios, if we do enter into a recession.
Would you expect the higher yield you're getting on them.
To keep the higher yield on a net basis.
Spect.
Some portion of that is going to be given back through <unk>.
Chairman.
And are you looking to grow that portfolio or are you keeping it steady.
Sure thing and Tom actually since we have Brian discipline on the call who is my deputy but also in charge of credits I'm going to shift that question over to Brad.
Thank you Eric Good morning, and thank you for the question Tom.
Definitely paying very close attention to both of these portfolios.
I think Fred mentioned in his opening comments, we think this is ware.
As the economy slows down we could see the first sign of any issues.
We're really focused as you would expect on their ability, especially on our middle market loan portfolio their ability to pass along these cost increases and absorb higher financing costs.
Worked very closely with our managers, we stress the portfolio for some very severe outcomes and we think any potential loss is going to be very manageable.
When you look across the space, we feel we have a relatively high quality portfolio.
Cross middle market lending.
All first lien, we have modest leverage and very well diversified portfolio.
We think there is some inherent characteristics that allowed us to perform well during COVID-19.
The Covid shock and we think it will continue to support the portfolio.
Downturn no of course.
We don't expect to come through entirely unscathed, we would be surprised if we didn't have a few losses, if we get the kind of downturn that it is possible.
Don't expect it to be overly material.
In the real estate portfolio again, it all boils down to the quality of assets you underwrite the leverage you have in there.
In the case of transitional real estate, how well re underwrite the actual transition of the asset.
Right with the sponsor and the strength business plan again, we've stressed this portfolio with our managers.
But we feel really good about how we're positioned and don't currently expect we will.
Harvey losses.
But of course.
Keeping a very close eye.
I would also just add to brad's remarks.
Just as a reminder, for our Trs and middle market loans. These are first lien senior secured assets, we take a more conservative approach to those asset classes, we definitely earn higher yields and spreads, but that's to offset the rest of that we're taking.
The other reminder, is just from a financial standpoint, we do take a seasonal reserve for these asset classes.
And those are generally speaking based on long term historical default rates based on Brad's comments and our actual expected performance, while certainly we won't come out of this unscathed. My suspicion is we will outperform those seasonal reserves and in essence, while there could be some losses in the future depends.
On how deep a recession is how long it'll be it'll be much better performance than the expected seasonal reserves that we've taken already.
Okay, Thanks, Brad and Eric just one.
One quick follow up.
The U S earned premium is still modestly declining despite the sales recovery and some improved persistency and I know, there's a bit of a lag here in terms of how that earns in but based on what Youre seeing now would you expect earned premium to be begin to grow again in the second half.
And then maybe pick up in 2023.
Okay.
We would expect.
An improvement throughout the year, and then that it really picks up in 2023 as lapses coming down and we continue to see sales growth.
Okay. Thanks Max.
The next question comes from John Barnidge of Piper Sandler. Please go ahead.
Thank you very much can you maybe talk about foot traffic and shops in Japan and <unk>.
Versus <unk>.
Because I know that's a metric you discussed previously.
Are you talking about.
Our walk in shops and shop traffic.
Good question Greg.
I think I would ask you.
She is Aimee song in Japan to answer that question I don't have that data right in front of me excuse me Miss on <unk>.
Have any data on the level of traffic through our retail shops.
Yes.
Thank you Brent.
Jonathan Ho.
Okay. Let me answer the question this is actually Jamie.
<unk>.
Isn't there.
Stempel accordingly.
<unk> grew up in both regions.
The Mustangs.
Or the number of customers in store, where the shop in the second quarter was at the same level as the previous year.
No you heard lineup.
Hum.
Hi.
Nonetheless.
And which indicates a recovery from the first quarter, while we had a negative nine 3% and discuss another cylinder.
<unk> got a third for the minor food in your model.
Sure.
Yes Seth.
<unk> has not yet returned to pre COVID-19 level and we will continue monitoring the trend in the number of visiting customers.
Sure.
That's all for me.
Yeah.
The next question comes from Mike <unk> of Citi. Please go ahead.
Hey, guys. Thanks for the question.
I just wanted to expand on the concept of delayed cancer screenings, I think Dan was actually talking about this on CNBC. This morning, but just wondering if you could maybe give an update on what youre seeing in terms of cancer severity and the impact potential impact from delayed screening in the U S and Japan.
Well I mentioned it on CNBC, when I was talking to Joe.
And we have not seen.
An enormous jump in.
Any candid was not actuarially copy data so we're falling within our ranges, saying that it's now getting from the original it's getting out to be.
Two five years, it's been so I think the chances are less and less as we move forward, but at the same time is just to show you.
How you don't know what you have ahead of you and but all of our tracking says that.
We should have seen more if it was going to really spike by now and I've got.
Guy that knows all the actuarial computations shaky to say that's correct. So that's what that's the answer.
One thing I would add to that answer is that we have seen first occurrence coming back to more normal levels, and obviously that tends to be should be a leading indicator for our overall total cancer claims. So overall, we're still running a little bit low.
Where we would expect to be in the low creep and then pandemic levels, but then component I'll first diagnosis and first occurrence is generally back both in the U S and in Japan.
Yes to more normal levels.
We've said before and we still expect that there is sort of a level of cancer out there to be detected within our policyholder base that we think will come our way at some point, we just haven't seen the full impact of that yet.
And all of that is incorporated in our guidance for benefit ratios going forward.
Most people that we're going to the doctor and whatever they were having checkups are now back to normal and it's been going on probably for a year or so so.
We feel pretty good about those numbers and that's one reason we said overall, we feel good about.
Even the issue in Japan regarding.
The governments move here and how we can and all those claims we feel well positioned.
Thanks, very much guys I appreciate it.
Alright.
Thank you Mike and thank you Andrea I believe that was our last question and we're past the top of the hour and want to thank you all for joining US Hope you Mark your calendars for Tuesday November 15th for our financial analyst briefing.
And we look forward to seeing and talking to you. Then until then please reach out to Investor and rating agency relations with any questions that you may have and we look forward to talking to you soon take care.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
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