Q3 2022 Aflac Inc Earnings Call
Adults and current capital and liquidity.
Max will be joining us for the Q&A segment of the call along with other members of our executive management, including Teresa White President of Aflac U S. Virtual Miller Deputy President of Aflac U S.
Eric Kirsch Global Chief investment Officer, and President of Aflac Global investments.
Brad discipline, Deputy Global Chief Investment Officer.
<unk> Global Chief Risk Officer, and Chief Actuary June Howard Chief Accounting Officer, Steve Beeper, CFO of Aflac U S.
Charles Lake Chairman and representative director President of Aflac International Masatoshi, <unk>, President and representative director.
Daniels director and CFO of Aflac life insurance, Japan.
<unk> Yoshi, Zoomy executive Vice President and director of sales and marketing and alliance strategy.
Before we begin some statements in this teleconference are forward looking within the meaning of federal Securities laws.
Although we believe these statements are reasonable we give no assurance that they will prove to be accurate because they are prospective in nature.
Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results.
As I mentioned earlier the earnings release is available on investors Dot Aflac Dot com and includes reconciliations of certain non U S. GAAP measures I'll.
I'll now hand, the call over to Dan Dan.
Good morning, and thank you for joining US let me begin by saying that the third quarter of 2022 concluded a solid first nine months for the company Aflac incorporated reported net earnings per diluted share for the third quarter of $2 53.
$6 25.
Year to date adjusted earnings per diluted share were $1 15 in the third quarter and $4 three for the first nine months. These results are solid despite the impact of significantly elevated COVID-19 claims in Japan during the third quarter due to the.
Industry practice of deemed hospitalization.
Overall, I am pleased with where we stand at the beginning of the fourth quarter. We remain on track for another good year of financial results and we expect continued sales momentum in both markets.
As we have communicated in the second quarter, we anticipated a sharp third quarter inquiries and Covid claims in Japan, and we experienced that increase we are now seeing more normalized COVID-19 claims during the fourth quarter.
Reflecting on the third quarter, our management team employees and sales force have continued to be resilient, while being there for the policyholders when they need us most just as we promise looks.
Looking at our operations in Japan in the quarter Aflac, Japan generated solid overall financial results with a profit margin of 21, 6% one of the key contributors to Aflac Japans strong financial results is its persistency.
Which has remained consistently strong at 94, 3% for the past four quarters.
New annualized premium sales continued to improve in the quarter with the launch of our new cancer insurance product through agencies in late August which drove a 32, 6% increase in cancer insurance sales in the quarter.
This contributed to an overall sales increase of 10, 2%.
I just recently returned from my trip to Japan. This year as Youll recall, our travel to Japan in June and had a successful meeting with the management of Japan Post holding Japan Post company and Japan Post insurance. This most recent trip in mid October .
It was geared toward connecting with our agencies, where I went to five different cities across Japan and it was equally successful.
As you know, we strive to be where consumers want to buy insurance and this is accomplished through all the distribution channels agencies Alliance partners and banks.
We continue to closely track our pandemic conditions are evolving, particularly because of its correlation.
With the opportunities for face to face sales, which is key to the recovery in sales.
I arrived home from Japan excited by the energy at the agencies, with whom I met and feel very good about our ability to sell new policies as we emerge from the pandemic.
As I mentioned, we have seen our benefit ratio normalize so far in the fourth quarter, given the narrow scoped a deemed hospitalizations introduced towards the end of the third quarter.
We continue to expect stronger sales momentum in the fourth quarter, assuming that productivity continues to improve at Japan Post group and that we execute on our product introduction and refreshment plants.
We will start selling our new cancer insurance product through Japan Post group in the second quarter of 2023.
Turning to Aflac U S. We saw a solid profit margin of 19, 3%.
Im pleased that we again generated sales growth with a 11, 8% sales increase in the third quarter and a 15, 2% increase year to date.
I am encouraged by the continued improvement in the productivity of our sales associates and brokers with the strength of both channels are approaching pre pandemic levels.
As we enter what tenant what trends excuse me to be our strongest quarter of the year.
We are seeing success in our efforts to Reengage veteran and sales associates.
And at the same time, we are seeing strong growth through brokers.
These results reflect continued adaptation.
The pandemic conditions.
Growth in our core products and investments and build out of our growth initiatives.
While aflac dental and vision and group Premier life.
Absent management, and disability solutions, which we now call plants.
Relatively small part of our sales we are pleased with how they are contributing to our growth and opening opportunities to sell our core supplemental health products. We continue to work toward reinforcing our leading position and generating stronger sales for the fourth quarter.
I believe that the need for the products that we offer is strong or stronger than ever before in both Japan and the United States.
At the same time, we know consumer habits and buying preferences have been evolving.
We remain focused on being able to sell and service customers whether in person or.
Yeah.
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.
Half of our policyholders and shareholders, we continue to generate strong investment results, while remaining in a different defensive position as we monitor evolving economic conditions.
In addition, we have taken proactive steps in recent years to defend cash flows 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 discipline and tactical stock repurchase.
With fourth quarter's declaration.
22 will mark the 48th consecutive year of dividend increases.
We treasure our track record of dividend growth and remain committed to extending it supported by the strength of our capital and cash flows.
We have remained in the market repurchasing shares with a tactical approach year to date Aflac incorporated deployed $1 $8 billion in capital to repurchase $33 million of our shares combined.
Combined with dividend that means that we delivered $2 $6 billion back to the shareholders for the first nine months.
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 we have made.
We are well positioned as we work toward achieving long term growth, while also ensuring we deliver on our promise to the policyholders I.
I am proud of what we've accomplished in terms of both social purpose and financial results, which have ultimately translated into strong long term shareholder return.
We also believe in underlying strengths of the business and our potential for continued growth in Japan, and the U S. The two largest life insurance markets in the world.
Throughout the uncertainty of the last few years I think we've done a good job in maintaining our focus on controlling the things that we have the power to control.
We can and will control our efforts to build our business and take care of those who depend upon us our policyholders our shareholders our customers our employees, our distribution and the communities in which we operate.
In closing you've heard me say many times that.
Before of how I believe that one of my key roles as CEO in conjunction with the board is to develop our leaders to lay a groundwork for strong succession planning.
This approach enables continuity and expertise and strategic execution.
You saw that succession planning inaction recently with the two deputy positions moving to the next level. The announcement last week of Brad discipline will assume the role of Chief investment Officer in January of 2023, as well as on August announcement of Virgil Mill.
Assuming the role of President of Aflac U S.
I want to thank Eric for his vision and expertise in building a world class investment organization that has performed at a high level I also want to thank Brad for his new leadership role Brad has proven himself as a distinguished later collaborating with Eric and the team to deliver.
<unk> results in enhancing the reputation of Aflac global investments I'll also I'm grateful for to races, 24 years of outstanding leadership and contribution to Aflac. Most recently as president of Aflac U S for the last eight years.
As virtual assumes his role I know he is well suited to lead Aflac U S with a seamless transition as Aflac continues to build on its path toward delivering efficiencies innovation and growth.
These are great examples of how we place a high priority on ensuring that we have the right people in the right place at the right time in doing so we have continued our focus on building a strong deep bench of leaders preparing to take on more responsibility.
Thank you all for joining us this morning, and I'll turn the program over to Fred Fred.
Thank you Dan last quarter I commented on how we are positioned as a company when considering current U S and global economic conditions.
The impact of inflation does apply upward pressure to expenses. However, this is mitigated by rising rates and additional investment income.
In terms of the risk of recession, our morbidity based insurance model is generally defensive in nature with relative stability in sales and earned premium through the economic cycles, low asset leverage and exposure to risk assets.
Finally, while certainly not immune to volatility in foreign exchange, we have put in place defensive measures to combat the economic impact of a weakening yen.
Overall, we like how we're positioned and see no material adjustments to our operating or capital plans.
Turning to Japan, we witnessed Covid cases surging in what is now referred to as Japan's seventh wave of infections.
Daily New cases in the quarter reached a peak of 260000 in August with the wave concentrated in the July through September timeframe effectively running its course in the third quarter.
Daily cases have now slowed to a seven day average of roughly 40000.
As we signaled last quarter, we experienced elevated COVID-19 incurred claims driven by its designation as an infectious disease and the industry practice of deemed hospitalization, which allows for payment of claims for care outside of the hospital.
To give you an idea of the magnitude before the seventh wave our weekly Covid claims were in the 7000 to 13000 range.
During the recent wave we peaked at a price of approximately 47000 weekly Covid claims.
Hospitalization remains low and this lack of severity has resulted in the government of Japan changing the definition of deemed hospitalization.
Effective September 26th the scope has been narrowed to the elderly.
Requiring hospitalization and individuals more vulnerable to severe symptoms.
This change in policy together with lower overall rates of infection will greatly reduce the volume of new claims submissions.
While more volatile than usual, we have established reserves for claims incurred in the period, but not yet reported therefore, we expect pressure on Japan benefit ratio to subside in the fourth quarter.
Dan mentioned his trip to Japan, I also traveled to Japan in the last few weeks the.
The general population remains very cautious with respect to the potential for Covid infection. For example, if you walk the busy streets of Tokyo, you'll stand out if youre not wearing a mask outside.
While difficult to measure we believe this remains a headwind for proposal volume in sales. However, our view is conditions are improving.
Despite these conditions, we remain focused on the following <unk>.
Distribution recovery and productivity across all channels.
Core product refreshment and product line expansion.
Cancer and elderly care ecosystem development through hatch healthcare.
And digitizing paper and manual processes for greater operating efficiency.
We will develop these themes in more detail at our financial analyst briefing later this month.
Before I jump to the U S. Let me also extend my gratitude to Teresa White. She has been a trusted advisor to me and helped me acclimated into this new role of mine and getting educated on the U S platform and I also look forward to working with virtual as we're off to a great start in 2022.
Turning to the U S. As Dan noted in his comments, we continue to deliver a balanced attack to the marketplace.
Split by product class group benefits were up nearly 28% individual benefits up 4% split by channel agent sales were up 6% and broker up 20%.
With respect to our expansion businesses network, dental and vision and Premier life, and disability were up 120% and 39% respectively for the quarter.
Consumer markets continues to struggle down, 13% and somewhat expected given the cost of lead generation and timing related to the rollout of new product.
We remain bullish on this building business, having recently launched our direct to consumer dental and vision products as well as new alliances introducing senior and core Aflac products on third party platforms.
Persistency is recovered in our individual business as labor markets appear to have stabilized. However group persistency has been weak throughout 2020 to.
Our group business represents about 15% of our U S earned premium and has traditionally lower persistency compared to individual.
There are no systemic drivers, but this segment can be more volatile and we have experienced the loss of a few larger accounts this year.
Our focus in the U S remains the following recovery in our agent driven small business model post COVID-19.
Maintaining momentum in our group voluntary business.
Building out our expansion businesses and realizing the halo effect and associated voluntary sales.
And bending the expense ratio curve transitioning from investment to benefit realization.
Again, we will develop these themes at our briefing later this month.
Turning to global investments, let me first add my sincere gratitude to Eric for his years of leadership and trusted counsel and managing not only our investments, but contributing to many of the key financial strategies that have positioned us well today congrats.
Congratulations to Brad I can't think of a better prepared executive to ensure continuity and carry forward our record of strong investment performance.
In terms of investment conditions with the rise in short term interest rates. We are actively managing the interplay of net investment income and the cost of currency hedging.
Given the material increase in LIBOR forward curves, we elected to lock in a large portion of our floating rate portfolio to protect against future rate declines.
A portion remains floating and will benefit if rates continue higher.
We believe this balanced approach to managing interest rate risk in our floating rate book positions us well for future rate volatility.
We maintain our traditional approach to rolling foreign currency hedges on a portion of our U S dollar portfolio and Aflac Japan.
We also continue to hold options against our unhedged dollar assets a strategy that protects our aflac, Japan capital position against the large weakening of the dollar.
While hedge costs are on the rise and will impact Japan segment earnings the combination of floating rate investment income and offsetting hedge instruments at the holding company serve to largely neutralize the impact to enterprise earnings.
Our alternative investment portfolio pressured results in the quarter recording a $40 million loss from our third quarter valuation marks.
This was anticipated given the natural correlation to the public equity markets and the lag in private equity reported <unk>.
Despite losses in the quarter year to date, the alternative portfolio has generated $125 million in income following a very strong year in 2021.
We expect continued pressure on alternatives in the fourth quarter as the markets remain volatile, but fully intend to invest through the cycle and capture the long term return benefits of this strategy.
Offsetting our variable investment income results was a negative negotiated prepayment of a private security and large amount of associated make whole income. This we called this out in our results as the event contributed a one time boost of $84 million pre tax to <unk>.
<unk> income.
Our middle market and transitional real estate loan portfolios continue to perform well we have reserves set up for these loans, which have increased modestly reflecting potential softening of economic conditions.
We are closely monitoring the risk of recession, we maintain a defensive position to risk assets and feel good about how we're positioned we continue to seek attractive opportunities recognizing the near term risks of a global slowdown.
And do not have any acute derisking activity planned at this time.
I will now hand back to David to take us to Q&A David.
Thank you Brad we're ready to take your questions.
Please.
Let me get yourself to one question and one related follow up to allow others an opportunity to ask a question.
You may get back in queue as well, Jason we will now take the first question. Please.
Thank you.
We will now begin the question and answer session and to ask a question you May Press Star then one on your Touchstone phone for using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question comes from John Barnidge from Piper Sandler. Please go ahead.
Thanks My question.
It's an October dental vision and hearing plans available to individuals outside of the traditional work sites can you talk about how youre going to meet the customer how sizeable and opportunity is and how you think about acquisition costs. There. Please.
So the what we announced was the launching of dental and vision and hearing on our direct to consumer platform.
And so this is really what we mean by outside the Worksite as our direct to consumer platform is designed specifically to go after potential customers outside the normal work site pain.
Or W. Two employee environment, meaning the gig economy.
Individuals who are work outside traditional <unk>.
W. Two environment self employed for example, and then also to some degree the senior markets who are naturally.
Concentrated outside of the work site. So this is really a strategy to enhance our product lineup.
The direct to consumer platform.
We think the dental and vision piece of it is important really for two reasons. One is of course, the ability to generate sales through that channel, but the other is dental and vision and hearing is.
Heavier searched item by individuals.
And by putting product on our platform that caters to more search activity. It offers up an opportunity to cross sell some of our traditional supplemental health products, which are less searched for.
So that's effectively the strategy.
John did I answer your question or do you have.
Question there.
Yes, Fred that was fantastic briefly and thank you for that the related follow up can you talk about the initial tech rollout of the group benefits package I know the fourth quarter of 'twenty two big Rollouts since it has pet insurance. Thanks.
So on the topic of pet insurance, we have in fact rolled out.
The pet insurance align alliance. This is the Aflac pet insurance powered by <unk>.
We are focused on the.
The larger broker driven case size for that product.
We characterize that is our premier broker relationships, which tend to travel in the thousand employee and up case size it.
It is really just getting off the floor I think we have been awarded four accounts.
So far and are in the process of building that out.
I would characterize this year is still somewhat of a proof of concept year in terms of getting out there with the product successfully landing accounts integrating those accounts between the two parties our partnership with <unk>.
And then making any tweaks or adjustments that we think are necessary to better compete as we roll towards 2023, but we are up running and launched were filed in all the states. The product is ready to go but concentrated in the large case market. So it will have obviously fairly small level of sales. This year also be <unk>.
Sinful. If this is really earned premium and economics for true Pan Ewen.
Our play from a pet insurance perspective is to fill out our portfolio as you suggest to where we're able to offer a broader array of benefits to brokerage clients, who desire that plus also their end clients.
Other than that I would say our product upgrades have been relatively routine in nature, meaning natural upgrades covering things like mental health and other dynamics that have become more important to the broker and the consumer this year and we continue to do that as a normal part of our business activities.
This is Dan let me make one comment.
Yes.
For example, with dental and vision, it's not so much selling that product as it is open the door to sell our existing products and for every five dental and vision products, we sell we sell an additional three.
Supplemental health insurance products. So that's what we're really looking towards the other is gravy.
How were doing those other things and we like that and I'm glad to have it but.
It's being on the front page of the benefit section.
The employers.
HR that really makes the difference and this is what we're counting on long term.
Thank you.
The next question comes from Nigel Dally from Morgan Stanley . Please go ahead.
Great. Thanks, So I just wanted to start on the new cancer product how long should we expect this product to boost sales. It seems like product life cycles have shortened perhaps 20, a quarter or two so we'll be interested whether that's consistent with U b for this product and also if you can touch on additional product introductions you had slated for 2023.
You mentioned the cancer product to Japan post the other products also GSV refresh next year. Thanks.
What are your debt.
It was commodity.
Susan.
Hold on all of those sorts of details.
Another question. This is yesterday in Europe me answering a question.
Okay.
Coca Cola zero.
Essentially quarter placements as well.
Well in.
The cost of insurance, we have launched a new product.
August 22nd.
That's all.
Bundled in full launch on a pro forma calculation.
The camera that we have the new product.
General Agency channel on tanker life channel.
This.
No. We'll go we'll go Humber just thank you all.
Then put us in a good you're profitable on June <unk>.
And through these charts between August and September this year has been quite successful actual sales was up 50%.
Sure.
Although there's one quarter left.
No I don't quote on Huntington.
Well done.
<unk> put up a little.
In Harper with idea simple.
Johnny.
Oklahoma <unk> Stifel.
Who need it the only mode.
And we are seeing a great momentum still in the fourth quarter in the fourth quarter as well regarding this cancer insurance and we are seeing about 47% increase year on year at the moment.
How do I need to snacks.
We do fundamentally she got cut off.
<unk>.
Couple of thoughtful hookups thinking a couple of them just going to the mall.
We've gone in Philadelphia.
Shlomi.
And also from January 2023, we will start offering more comprehensive support related to Catherine.
Bert Hazlett consolidations service.
Or <unk>.
This alone.
On the Holdco, taking a couple of years.
I don't off obviously with them. This is a new service that will comprehensively support the patients of the policyholders from the time, they develop cancer and up to the point that they recover to their work at home, but we got Laguna clearly Miami.
It continues.
The progress is there.
Also had a good quarter globally.
Hudson ethanol or total 90 months.
And this is a first of its kind in the industry.
This service will be able to respond to the other struggles and other things.
Patients as well as the family members have difficulties risks or cannot service because I think it's.
Obviously this is a great differentiator against other Catherine Shine.
Hello <unk>.
<unk> group.
We'll have somebody just going into the mall.
And regarding the fair to start in the Japan Post group dining cool.
Or you will see us still anymore.
We are hoping to have it locked in the second quarter next year.
So when you look at it isn't it.
Can we price it.
Kaka that quarter, one point, you thought always showing up the cycle.
<unk> income 90 months.
We are thinking of working closely together with the Japan Post group.
Kris the actual sales channel ourselves route as well as training.
The <unk> content, how do you what type.
San Antonio more dynamic.
Or is there still enough and in terms of the other channels such as financial institutions and Dai Ichi life. We are planning to launch the product in January next year.
Or does she documents at Huntsville or line and nice quarter.
<unk> got Hogan.
So if you were taking a humble.
Okay.
Continental.
We will be actively on a retro referring Catherine insurance in the fourth quarter of this year as well as the first quarter next year and that's all for me.
That's great and then just as a follow up sort of step up in the pace of buybacks. This quarter just wanted to understand what was behind that.
Your excess capital position seems to be at a level, where you could easily continue at that pace inversely with the risk of recession might be you want to hold onto some more capital. So just some comments as to way, how we should be thinking about buybacks.
Thank you Nigel it's Max.
So $650 million in the quarter and as always we look at our capital levels. The capital generation current and future that we expect from our subsidiaries in the overall enterprise as well as the opportunity set that we see in terms of deploying capital that being through dividends.
Buybacks opportunistic deployment et cetera, and that's really what sort of drives how much of a buybacks. We are doing at any point in time.
And generally speaking, we want to deploy capital, where we see good irr's and.
The buybacks that you saw in the quarter was a reflection of that.
In terms of looking forward, we feel good about our overall capital position and liquidity as well.
Despite the very significant movement that we've seen in the yen.
That's great. Thanks.
The next question comes from Jimmy Mueller from J P. Morgan. Please go ahead hi.
Good morning, Theresa and good luck in the future.
So first a question just on policy usage in the U S. The benefits ratio has been lower than normal through the pandemic. It was fairly low and <unk> as well do you feel that you are still benefiting from low usage in the U S or is the benefits ratio reflected but what do you expect it to be going forward.
It's Mike again.
And I would just say that overall.
Claims utilization continues to be at a relatively low level in the U S.
Especially on some lines of business like accident hospital et cetera, and we have been a little bit surprised that we haven't sort of come back to before normal levels.
As well as cancer.
That have not gone.
Sort of above.
Pre pandemic trend, we would expect that to actually happen for a short period of time.
Just simply because there was some catching up to do in terms of cancers.
Should be detected and also some severity come through as well we have not seen that yet we do expect that in the cancer lines of business, but overall, we have seen favorable claims utilization in the quarter and throughout the full year, so far and I ask the U S team and at <unk>.
It's sort of feeling with your comments as well.
I'll just add to that.
Absolutely spot on.
With your comments, we are seeing lower hospital benefits as well coming out of the pandemic and more outpatient focused therapies wherever possible.
Possible so.
We were seeing first occurrence benefits rebound to 2019 levels, but hospitalization has lagged that's really all I wanted to add to that.
Okay.
And Fred you had commented on in your prepared remarks about I think you implied that people wearing masks.
It's still a hindrance to sales in Japan.
Are you seeing lower appointment than normal and are there other things. Besides just nothing like social distancing people not coming back to work full time that are <unk>.
Also being on sales results.
Yes, I think there's a couple of things going on one is yes, there is a general headwind to face to face communication unless necessary.
That persists in Japan, although as I mentioned, it is improving and in fact, the actual government of Japan is now coming out and encouraging people to.
Open up a little bit.
And get back to traditional business. So it's not at pre COVID-19 levels of activity.
And that's what I mean by remains a headwind, but it certainly is improving I think the other dynamic that we mentioned last quarter that remain the case during the third quarter is when you have a high level of cases and high level of infection rates of Covid. You naturally are going to have actual agents that are infected and impacted and are pulled out of the <unk>.
Field, so to speak unable to meet with clients or meet effectively with clients and so that has played into it you are talking about our distribution model through third parties has several thousand agents.
That we sell through and.
And so when you have something as widespread as the third quarter level of Covid cases, you naturally will see less feet on the street so to speak.
Selling again, we think this will naturally improve for the same reasons, we see our benefit ratio in claims activity improving in the fourth quarter.
And Fred and I have discussed this but one other point is.
Just remember Japanese we're aware of the math before COVID-19.
So.
I don't think I'll win anywhere that asphalt anyone that did not have on the math, but it begins to look more normal.
And so we'll have to wait and see but everyone's hardly ever see anybody with mass accepted hospitals and other places in the U S. But they are still wearing them, but they are beginning to function and I think thats. The point that we're both making is that things are moving back to normal, but if you take a snapshot.
Youre going to see everybody with mask on and Youre going to say Oh, well, it's awful while it's their culture to so don't.
Don't not think about that as you look going forward.
Thank you.
The next question comes from <unk> Kamath from Jefferies. Please go ahead.
Hi, Good morning, just on the Japan cancer sales can you give a sense of what percentage of the sales were lapsed re issue and how that compares to prior product launches.
Yeah.
Hi, <unk>. This is Todd I think I'll I'll take that.
Takes time for us to look back and know exactly how to identify the lapse and reissue.
We don't see it until the laps actually is process. So right now, we're seeing slightly higher lapse and reissue rates over 50% and we believe that this could go higher as we look backwards, but this is within our expectation.
Okay got it and then I guess, just curious on the timing of when Youre going to start.
<unk> through Japan post in the second quarter, I think thats, probably the start of their fiscal year. So maybe that's the reason, but any color on what the client overlap is between Japan post is in some of your other distribution channels.
Okay.
I don't know if <unk> have any color they can provide on the <unk>.
Overlap.
Hi.
Susan we caught up with the customer.
The new plant the group, who no humbug.
Diner quarter.
Oh, you quickly Congo, Dolby Atmos is shrinking Costco. So this is yes, there's any once again with regards to the September sales of new tests are we're thinking of it to start in the second quarter.
I'll now turn it on a home by law.
Forget all of them or most of them are starting <unk> got her.
Can you count on adult type similar to China at all.
And in other channels, we are thinking of having the product launched engineering, such as the bank channel or the Daiichi life channel.
From a local dialup theyre going to go up I do think there's more alternatives.
Hum.
Got it.
Speaking about single day.
So I'm very comfortable I think you're using you want them.
And I'm not quite sure whether I'm answering to your question or not.
Also the overlapping omnichannel launch timing difference, but with the launch in each channel.
It will be smooth launching of products from one channel to another quite an estimated almost have to have a cost method. So this is going to let me just add a little bit once it all on Sundays or an alternative debt or something like that.
All that upset at all.
And of course in each channel there are some overlap of customers.
It doesn't have a ton of that alternative.
Coca Cola keep angle on the market that you must not that I thought sorry about that.
First of all good or not.
Coca Cola Keybanc.
How do you must know that are cutting your hawkeye alongside that of ethane Costa homebound status symbol Lyne and Scott equally.
Equally.
<unk> quarter.
That's a nice set of stem all Japan post a good of a studied thoughts on Japan Post group Monaco keep any harm by stick with Audi.
And although.
There are some overlaps of customers between channels.
At the same time in each channel has its own specific customer base and therefore for example in Japan Post group.
But other accountants may start selling the product before the Japan Post group.
Because of Japan post will not start itself until the second quarter. However, because of Japan Post group has a very solid customer base on its own there should be a great sales from there as well.
Okay.
Okay. Thank you.
The next question comes from.
<unk> <unk> from Raymond James Please go ahead.
Yes.
Hi, Good morning, My understanding is that of the 940 basis points of higher Japan benefits ratio.
From the games hospital patients about half of that was reported in the other half with IV and oral.
Just talk a little bit Conservative I don't know if you agree is it possible.
Could be reversed in <unk> or is that just help us think about the benefit ratio for Q between.
Really what's.
What's going on there.
Let me kick off and I'll have al or caught sort of add their comments as well. So for the full year, we would expect to have a Japan benefit ratio in the range of 69% to 70% and we were sitting at 69, 8% as of first nine months that obviously.
Means that we are expecting.
More normal benefit ratio in the fourth quarter, if you compare it to where our underlying run rate has been more recently, so I'll stop there now have.
Alan Todd sort of give their thoughts on on the <unk> that we put up in the quarter.
Yes, <unk> I'll give you a quick comment I think it's.
Much of all of the content on the <unk>.
Or do you think about that peak in claims happening around August .
Think about how long it takes to actually come through our peak infections were in August .
Financial.
Approximately 60 days later, it's going to start really Washington, its way through so the 50 50 split in the third quarter.
Be reasonable in the sense that half of the claims that you saw in the quarter were actually cash and the other half is sitting there will be cleared during the fourth quarter sort of a rough rough estimate of how that 50 50 will play out during the fourth quarter.
Yes. This is Todd just to give you an idea of how the claims are coming through our peak of paid claims was in the middle of September and for the last two weeks, we've been running at about 60% of that level. So we anticipate as al said with the.
Six week to two months.
Time period. These claims will begin to come down and then with the change in definition at the end of September .
Should come down even further.
Thank you for question.
Could you just talk about the potential impact of a recession on the group disability business, maybe talk about why that is or isn't it takes time to get into that business.
One thing Thats important and thank you for the question generally speaking when you enter into weak economic conditions you would find.
Some weakness in loss ratios related to disability.
Short and long term that has not traditionally been the case with our more voluntary sold small business short term disability and remember even though we have acquired.
Zurich business, a few years ago.
In terms of the amount of premium that we're running through that business, which I think is approaching $300 million. It is a relatively small business as compared to our total.
The <unk> business in the U S. Obviously, we're seeking to change that over time and are working actively to do that but right. Now we're not a company that is particularly exposed to the disability volatility that comes with recession.
And and again, our voluntary business tends not to see that type of loss ratio behavior at least by historical measurements.
Thank you.
The next question comes from Alex Scott from Goldman Sachs. Please go ahead.
Hey, good morning.
First of all I have for you is just to follow up on capital deployment.
When I think about your yen hedging strategy, a big part of it is the capital hedge and at least my crude understanding of it is that the yen is weakening your capital position in Japan is getting stronger.
And so in my mind.
To sort of offset the dilution and earnings some of that capital has got to be redeployed.
So when you answered the question earlier I didn't gather from that response that there was a whole lot of incremental capital deployment being considered so I just wanted to probe there a bit and see if you could help me understand the way that works and is there a lag or am.
Am I thinking about it right.
Where there should be more capital deployed as a result of that strategy and the yen weakening.
So Alex you are you're right in your thinking that generally speaking given the significant dollar assets that we hold in Japan that works relatively well ASIC capital etch and in fact to your point it strengthens the <unk> ratio and the ESR ratio in a weakening yen scenario.
We now have been and that means that over time, the dividend capacity of Aflac, Japan, all things being equal is.
Slightly higher than before and you should unexpected overtime more capital to find its way up to the holding company now that is not immediate and it's coming through over time.
So over time, you would then see liquidity and capital at the holding company build unless we were to deploy that and obviously if you want to have sort.
Sort of a restored EPS trajectory, you would need to deploy that capital either through dividends buybacks or opportunistic deployment.
And obviously, we are trying to deploy that as best as we can to obviously generate an IRR that is north of our cost of capital and preferably.
With a cushion.
<unk> way above our cost of capital.
Also when you think about the capital hedge that are sitting at the holding company. The two components, there which is the first one the yen debt.
We have that is currently we hold about $3 $8 billion of equivalent debt denominated in yen.
Right now our leverage then obviously it has declined in the low our leverage corridor of 20% to 25%, but I also know that.
<unk> could strengthen.
And it could strengthen strengthening sharply and then all of a sudden our leverage will move up sharply as well so we need to be quite thoughtful and sensitive to what our underlying and really look through that capacity yes.
I wanted to give you one number.
That data I actually kind of look at and I'll find interesting. So if you take our leverage right now.
What what sort of again, the move would take us to the middle of the range I E 22, 5% and that's roughly an immediate move of the $1 to 102.
So that gives you a little bit of a sense for how.
We.
Think about what our debt capacity potentially could be.
And then the.
The last piece as well is the forwards that we have at the holding company they are spread out in terms of maturities and.
Obviously, they are in a net gain position so they will settle into cash but that will occur over the next 24 months and it's fairly spread out so the increased cash flow to the holding company from a weakening yen is not immediate on a mark to market basis, they are but I don't count that until.
Till they have fully settled and we have received all that cash.
That's when we move the cash out.
To become unencumbered in terms of definition, so if I take all of this and sort of wrap it up I would say that there is a lag in terms of the cash flow to find its way to the holding company from all of these capital hitches and that means that you have a little bit of a lag in terms of capital deployment that will then ultimately leads.
To your sort of restored EPS capacity on a run rate basis, and we are currently in that sort of lag.
Period, I E. Our reported EPS has dipped.
Because of the yen.
But then we will.
If the yen stays at these levels.
The capital hedges will start to kick in and then over time as we deploy that capital that should restore our earnings power on an EPS basis going forward.
So long answer, but I hope that was helpful.
Yes that was very helpful. Thank you.
Second question I had is on net investment income.
Net investment income.
Some more ins and outs for us to think about in terms of hedge cost the two currencies.
Having a floating rate portfolio offsetting some them so for us so.
Just hoping maybe you could help us just think about when we think about all those different things higher yields what is your sensitivity to higher yields.
How would you think about the benefit in net investment income from increasing yields in the U S and how we should be.
Forecasting that as we look into the future.
Thanks, Eric and Brad take that.
Thank you Alex it's Eric I'll start and then Brett.
Supplement.
In terms of higher yields those are really good tailwind for us we do get the benefit in the floating rate portfolio as Fred mentioned some of that is hedged a good portion of it is but we're still enjoying the upside.
Right now our reinvestment yields are higher more or less in a redemption yields. So it really this interest rate environment, and where we're investing is accretive to net investment income.
Obviously, there are some offsetting headwinds as well.
Headwinds being higher hedge costs for next year that we expect but those will be offset by higher income and of course, we have the offset of the ink on the forward that Max mentioned.
Then variable net investment income we will just have to see we expect some pressure in the fourth quarter, given where public equity markets are and we will have to see for next year, if equity markets start to stabilize we would expect to see a positive trend there.
Again, I'll also mentioned.
As was mentioned we had a significant amount of all income this past quarter. So that's not going to replicate.
Obviously, but net net higher rates are generally going to be accretive towards our net investment income.
The last thing I'll mention is the weakening yen.
Obviously lowers income in dollar terms.
A headwind for us as well.
Thank you.
The next question comes from Ryan Krueger from <unk>. Please go ahead.
Thanks, I had a follow up on Alex's last question I.
I guess first on the floaters could you give us a sense of.
How much is hedged and then and I guess, how much additional upside you could you could have from here based on the forward curve on the SP.
Sure thing.
Approximately 70% that number can fluctuate based on market values in the movement.
And interest rates, but it is approximately 70% in terms of the sensitivity we still have upside.
But I think when we get to fab will be able to illustrate that better for you in terms of some sensitivities.
Realized win.
And one thing also to realize that one Eric.
Use the 70% term that's specific to the floating rate book, Obviously, then 30% of it left free to enjoy upside or downside of rates, but in addition to that we have a fairly good amount of liquidity at the holding company, which is not hedged or remains largely floating.
And enjoying our rate movement. So we look at both on a combined basis to just judge our overall enterprise exposure to floating and locking in.
Thanks.
My follow up is also related to this can you.
Update us on where the yen hedge costs are running at this point and then how to think about.
The offset to that.
Before that the holding company.
And then Max may want to make some comments as well.
For this year as you know for 2022, we locked in most of our hedge costs at the beginning of the year and if you go back to the beginning of the year LIBOR and hedge costs were very very low. So I think we're running this year around 80, some odd basis points, if I recollect right.
<unk>.
Look at the market today for one year forward.
You're in the neighborhood of high fours low 500 basis points, so there'll be a significant pickup in our hedge costs in 'twenty three.
Having said that remember for the Japan entity.
<unk> set we've got floaters against those so.
Floating rate income is going up and even though it's 70% hedged as we said a moment ago that 30% unhedged should track the amount of that those hedge costs increase if not even exceed those.
And then finally for the enterprise.
Because at Inc. We have offsetting hedges for the enterprise the cost increase should be relatively neutral not exact obviously, but we're pretty pretty well offset.
Yes, just adding to Eric very good memory.
In terms of hedge cost.
Just in terms of notional.
Forwards in Japan that we are rolling in today's higher hedge cost environment is $4 $1 billion of notional and then at the holding company, we have $5 billion of notional that obviously benefits from the higher hedge costs and runs through as positive.
Net investment income at the corporate and other segment.
That will not be immediate as those are spread out.
And some of that have already started to earn in but the real impact also at the corporate and other segment will sort of occur in the in the 2023 time frame, but overall. This is also designed to make sure that we are not as an enterprise to exposed to any sort of <unk>.
Movements in hedge costs up or down quite frankly.
So net net we are actually point $9 billion.
Positively exposed in terms of the notional balance.
The higher interest rate differential between the yen and the dollar.
Very helpful. Thanks, a lot guys.
The next question comes from Erik Bass from Autonomous Research. Please go ahead.
Hi, Thank you can you provide some more color on the group voluntary benefits case lapses you alluded to both this quarter and year to date was there any common trend that youre seeing in should we expect any more case movement during <unk> enrollments.
Thanks, Eric It's Fred Yes.
As I mentioned in my comments, we've been seeing a little bit weaker persistency on the group side this year individual having recovered.
But theres no systemic.
When we look at each of the case losses, we don't see anything systemic in them.
Jerry from one of the large cases for example that we lost there wasn't really a loss to competition.
The company in question is simply decided to reduce the number of <unk>.
Payroll deduction slots, if you will for voluntary product and so they eliminated some of their voluntary product holdings period.
And in another case, there was a merger of one large company in another.
We ended up not being on the winning side of that merger, which will happen from time to time, and then normal competitive landscape will come into play and so.
The themes are varied, but not frankly unusual what can be unusual from time to time as it can be lumpy. There are years, where some of the cases that that laps are not particularly sizable as compared to the cases. One there are other years, where you might have lumpiness with the loss of a larger case.
We are in fact, starting to gain ground.
In larger case wins and so we're starting to build out some larger cases on our platform which is good.
And we've won several large cases this year as you can see in some of our sales results on the group side and so with those larger cases, you'll naturally have some lumpiness. Realizing this is just 15% of our earned premium so it doesn't take much in the way of a large case to move the lapse rate on the group side.
But nothing nothing systemic I would note one thing too to I think Jimmy as earlier question around benefit ratio.
We realize that there is an interplay between lapse rates benefit ratio and expense ratio.
When you go through a period of higher lapse station you will normally find downward pressure on your benefit ratio and upward pressure on your expense ratio.
They're not big movers, which is why we don't call it out but there is a relationship between the two.
It's not necessarily a profit loss or profit one dynamic.
You usually on a lap lapsed case simply end up releasing reserves, but also writing off DAC for us somewhat net neutral impact to profitability, sometimes even a benefit to profitability, although that's not the design of what we'd like.
So, it's not really a P&L or margin issue.
But we are going to spend more time and make sure that we do what we need to do to improve persistency over time.
A major focus of ours, because we know it's something that represents opportunity.
Thank you and then maybe a follow up on Alex's question, a little bit but based on the <unk> sensitivities that you provided at last year's fab. It seems like the most challenging scenario would be higher interest rates globally wider credit spreads and a strengthening yen year to date, we haven't really seen that because of the boj is actions, but how do you think.
About the potential scenario, where the boj eases its commitment to yield curve control and JCB yields rising currency appreciates is that a risk or are there other mitigating offsets.
It's absolutely a risk and that's why we obviously run stress tests on our <unk> ratio and capital base. All the time quite frankly, and we think about these kind of scenarios and we manage our capital accordingly.
Fred mentioned for example that we have a significant portion.
Significant notional level of put options protecting us from any severe strengthening of the yen that could happen in that kind of scenario that you just outlined.
We have that in place in order to protect our capital base.
So it is real and we you always have to manage for that we make sure that.
We always have a strong capital ratio. So we can continue to write business and capital does not become a constraining factor for our for our businesses.
Something.
On the topic of capital in Japan, something that will.
No doubt touch on at our Investor Conference, but you're starting to find the industry not just aflac slowly migrate and turn their attention more significantly to equal to.
<unk> ESR and away from <unk>.
<unk> will not fade to black or become an insignificant for the industry anytime soon but as we creep towards 2025 and the adoption of ESR were starting to pay more and more attention to that economic ratio and that ratio is far less sensitive to these mark to market rate.
Spread dynamics and will help with stabilizing capital position as you know we maintain a very strong ESR.
Okay.
Thank you.
The next question comes from Tom Gallagher from Evercore ISI. Please go ahead.
Good morning.
Just a question on Japan sales, if you're tracking up <unk>.
47% quarter to date is what I believe I heard.
In an earlier response and that was I think just for general agency entitled Life.
Can you just comment on what proportion of sales or those channels.
And.
Taking that all together would you expect a big increase in Q4, Japan sales overall.
Any perspective, there is appreciated thanks.
David I think we can say that those are mostly agency sales.
Thanks.
In other words the contribution from canceled.
Yes, just a follow up on his notes.
On July <unk>.
This is Jesse Jamie Youre right at 47% in the agency channel sales.
Yes.
Okay.
You think you will using holiday demand and we believe that we will be able to be maintained its momentum in the fourth quarter as well.
And that's all for me.
Well, just just a follow up on that any any perspective on.
What this means for <unk> sales and I'm not asking for a specific.
Forecast.
But are we looking at.
A pretty big sequential inflection in sales because of the launch of the new product was August as you said, so I just I just want to make sure I'm understanding the numbers here correctly. If we're looking at kind of a big upfront for sales or is it not broad enough yet to move the needle overall.
I think this is Diana I think what we're saying is is that.
It is.
A significant increase but it was expected.
Our fourth quarter is our biggest quarter, we're expecting that as we go against the fourth quarter last year, but all in all it's well within what we expected to do for the year for the quarter and for the year.
Okay. Thanks.
The next question comes from Mike Ward from Citi. Please go ahead.
Thanks, guys.
Kind of similar to Tom's question, just wondering on U S sales.
Growth is still solid and recovering, though I guess decelerating a little bit wondering if we should think about U S sales is maybe.
Pre COVID-19 levels, yet or.
I guess in addition could you comment on any visibility into <unk> think that's the most important quarter. Thanks.
Merger why don't you take that.
Thank you Dan This is Virgil yes.
We are optimistic we will see continued momentum into Q4 I remember.
The seasonality Q4 will be our largest sales quarter.
We also anticipate it will be our largest in terms of growth.
Gross so overall you can expect that momentum to carry forward.
Again looking for strong performance in Q4.
Okay and do you think we're back sort of at pre COVID-19 levels going forward.
I'll be specific event. So we finished third quarter at 97%.
Sure.
Pre pandemic sales.
And I would expect there'll be over 100% in Q4, and then a carryforward throughout 2023.
Thank you.
Alright, Jason I think Thats our last.
Question in the line and I appreciate everybody joining us today want to remind you that we will have our financial analyst briefing.
In New York on November 15th at the NYSE. There will also be webcast for those who can't join in person and registration is still open.
In the interim please reach out to Investor and rating Agency relations. If you have any questions, we'll be happy to help and look forward to talking to you soon take care.
Yes.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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