Q1 2023 Aflac Inc Earnings Call
Speaker 1: And way.
Speaker 2: Good morning and welcome to the ASLAC Inc. first quarter 2023 earnings conference call. All participants will be in listen-only mode.
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Speaker 2: After today's presentation, there will be an opportunity to ask questions.
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Speaker 2: Please note this event is being recorded.
Speaker 2: I would now like to turn the conference over to David Young, Vice President of Investor and Ratings Agency Relations and ESG. Please go ahead. David Young, Vice President of Investor and Ratings Agency Relations and ESG Thank you Andrea. Good morning and welcome. This morning we will be hearing remarks about the quarter related to our operations in Japan and the United States. Please take your seats as the candidates are present to pass the
Speaker 2: From Dan Amos, Chairman and CEO of Afflac Incorporated.
Speaker 2: Fred Crawford, President and COO of APLAC Incorporated, is joining us from Japan and we'll touch briefly on conditions in the quarter and discuss key initiatives.
Speaker 2: And Brad Bisland, Global Chief Investment Officer, President of Aflac Global Investments, will discuss the investment portfolio and its positioning given recent market events and volatility. For more information on this shift from before title and future events check out www.oldownre injury.org
Speaker 2: Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com.
Speaker 2: We also posted several slides of investment details related to our bank, commercial real estate and middle market loan exposure.
Speaker 2: In addition, Max Broden, Executive Vice President and CFO of Aflac Incorporated, provided his quarterly video update addressing our financial results in current capital and liquidity.
Speaker 2: The following, Virgil Miller, President of AppLac US, Al Rajeri, Global Chief Risk Officer and Chief Actuary, June Howard, Chief Accounting Officer, and Steve Beaver, CFO of AppLac US.
Speaker 2: We are also joined by members of our executive management team at Aflac Life Insurance Japan.
Speaker 2: Masatoshi Kuide, President and Representative Director.
Speaker 2: Todd Daniels, Director and CFO .
Speaker 2: Koichi R? Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy.
Speaker 2: Before we begin, some statements in this teleconference are forward-looking within the meaning of federal security laws.
Speaker 2: Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature.
Speaker 2: Actual results could differ materially from those we discussed today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results.
Speaker 2: As I mentioned earlier, the earnings release is available on investors.applike.com and includes reconciliations of certain non-US GAAP measures.
Speaker 3: I'll now hand the call over to Dan. Dan? Thank you, David, and good morning. We're glad you joined us. Reflecting on the first quarter of 2023, our management team, employees, and sales distribution have continued to be devoted stewards of our business.
Speaker 3: being there for the policyholders when they need us most, just as we promised.
Speaker 3: The first quarter marked a good start to the year. Afflac delivered another quarter of solid earnings results, especially considering our material weakening of the yen.
Speaker 3: Looking at our operations in Japan.
Speaker 3: And as noted last quarter, we are actively focused on numerous initiatives in Japan involving new and refreshed products and distribution that continues to cover as we recover from the pandemic.
Speaker 3: In addition, we are encouraged by the planned May reclassification of COVID-19 to the same level as influenza.
Speaker 3: as Japan continues to emerge from the pandemic.
Speaker 3: I am pleased with the continued sales improvements which reflect the ongoing rollout of our cancer insurance policy initially through Associates and Daito Life followed by Daiichi Life and the financial institutions.
Speaker 3: First quarter sales also reflected the refreshed first sector ways in child and down-up products which we're using as a way of reaching new customers to whom we can also sell third sector products including cancer and medical products.
Speaker 3: I am also encouraged by the fact that Japan post-group began selling our new cancer insurance product earlier this month. We expect this close collaboration to produce continued gradual improvement of Aflac cancer insurance sales over the immediate term.
Speaker 3: and to further position the companies for the long term.
Speaker 3: In addition to product, another important element of our growth strategy is our intense focus on being where the customer wants to buy insurance. Our broad network of distribution channels, including agencies, alliance partners, and banks continually optimize opportunities to help provide financial protection.
Speaker 3: to Japanese consumers, and we are working hard to support each channel. Turning to the U.S., while the first quarter tends to generate the lowest sales of the year, I'm encouraged by the continued improvement in the productivity of our agents and brokers, as well as the contributions from the build-out of our network dental and vision.
Speaker 3: We believe this will increase persistency, which will benefit our policyholders and lower our expenses.
Speaker 3: I believe that the need for the products we offer is stronger than it has ever been before in both Japan and the United States. At the same time, we know consumer habits and buying preferences have been evolving. We also know that our products are so not bought.
Speaker 3: As we communicate the value of our products, we know that a strong brand along is not enough. We must pay in a better picture of how our products help address the gap that people face when they get medical treatment.
Speaker 3: We continue to reinforce our leading position and build on that momentum. As always, we continue to prudent liquidity and capital management. We continue to generate strong investment results while remaining in a defensive position as we monitor evolving economic conditions.
Speaker 3: In addition, we've taken proactive steps in recent years to defend cash flows and to a poorable capital against the weakening in.
Speaker 3: We treasure our track record of dividend growth, highlighted by 2022 marking the 40th consecutive year of dividend increases. We remain committed to extending this track record, supported by the strength of a capital and cash flows.
Speaker 3: At the same time, we remained in the market, repurchasing shares with tactical approach focused on integrating the growth investments we made in the platform to improve our strength and leadership position. We also believe in the underlying strength of our business and our potential for continued growth in the United States and Japan.
Speaker 3: two of the largest life insurance markets in the world. We are well positioned as we work toward achieving long-term growth while also ensuring we deliver on a promise to the policymakers. I'm proud of what we've accomplished in terms of both our social
Speaker 3: purpose and financial results which have ultimately translated into strong long-term shareholder return. Now I'll turn the program over to Fred in Japan. Fred?
Speaker 4: Thank you, Dan. Let me first begin with brief comments on our Japan and U.S. operations.
Speaker 4: Thank you, Dan. Let me first begin with brief comments on our Japan and US operations. As Dan noted, we're off to a promising start.
Speaker 4: The revised cancer product is doing well and now supported by our Ureso cancer consultation platform. This providing concierge care to cancer policyholders and connecting them with non-insurance services. As we look ahead this year, we are focused on the following here in Japan.
Speaker 4: continued recovery with our long-standing alliance partners fueled by a refreshed cancer product and joint marketing and training support.
Speaker 4: Based on our preliminary read of activity levels within Japan Post, the Wings product appears to be off to a promising start and gaining traction.
Speaker 4: We are preparing to launch a new medical product in the fourth quarter.
Speaker 4: We are operating in a highly competitive environment with medical product representing 70% of the third sector marketplace.
Speaker 4: We are focused on simplifying the product and appealing to both younger policyholders with basic needs and older or existing policyholders who desire upgrading to a more comprehensive coverage. The sale of ways is delivering on our strategy.
Speaker 4: of attracting younger policyholders.
Speaker 4: younger policy holders and cross-cell activity.
Speaker 4: We are primarily selling in our Associates channel and are beginning are being cautious.
Speaker 4: with respect to selling in the bank channel with limited volume expected.
Speaker 4: We understand that over the long term, leveraging the bank channel will require marrying a competitive medical and cancer product.
Speaker 4: with a formal asset formation strategy to drive shelf space. Finally, our short-term insurance subsidiary, Sudachi, launched a line of affordable term medical and cancer product in April .
Speaker 4: We anticipate a modest level of sales as measured in annualized premium.
Speaker 4: The focus is on introducing young first-time buyers to the importance of medical and cancer insurance to then upgrade to more comprehensive coverage in the future.
Speaker 4: From an operations perspective, we are pleased with our expense ratio coming in below 20% in the face of continued revenue pressure.
Speaker 4: This is in part a cumulative result of addressing expenses over the past few years.
Speaker 4: Turning to the US, we have discussed our balanced attack, and this remains the case with individual, dental and vision, group life and disability, and consumer markets all contributing.
Speaker 4: to sales growth in the quarter.
Speaker 4: The underlying signs of momentum remain encouraging. In our agent-driven small business franchise, recruiting, the number of average weekly producers, and agent productivity are all up in the quarter.
Speaker 4: Dendolin vision sales increased 40% in the quarter with continued strength and cross-sell.
Speaker 4: and vision sales increased 40% in the quarter with continued strength and cross-sell of core voluntary products.
Speaker 4: While this is traditionally a slower quarter in the life and disability markets, our platform is off to a strong start for the year. Finally we are encouraged by consumer market sales up 29% in the quarter and with new products gaining traction and alliances coming online.
Speaker 4: With expanded business lines and new distribution channels, product development is a key focused in the US.
Speaker 4: We have launched a refreshed approach to cancer, as Dan mentioned. We've advanced coverage for mental health conditions.
Speaker 4: and are adding non-insurance services to our group disability products. We are proactively driving benefit utilization through wellness campaigns and benefit endorsements to enforce policies. We know that utilization drives persistency.
Speaker 4: In terms of operations, our expense ratio remains elevated, but as Max commented on in his recorded remarks, roughly 300 basis points are due to the pace of investment in emerging growth businesses all performing in line with our expectations.
Speaker 4: So what bends the expense curve in the U.S.? Traditional managing of expenses along with investment in process automation in our mature individual and career driven small business franchise.
Speaker 4: A multi-year technology modernization path including a new group administrative platform driving process improvement and cost reduction.
Speaker 4: Finally, delivering on revenue build in our acquired and green fielded properties. That requires investment upfront.
Speaker 4: to secure and retain quality business.
Speaker 4: Now I would like to hand over to Brad Dizzelin to discuss our investment portfolio and positioning with respect to recent market events and volatility. Brad?
Speaker 5: Thank you, Fred. Given recent events with the global banking system and the uncertain macro outlook, as the Fed continues to raise rates to fight inflation, I would like to provide a brief update on those segments of our portfolio that are most directly impacted by the current environment.
Speaker 5: Let me start with our bank exposure. As at the end of the quarter, our total global bank portfolio is $5.6 billion, with an average credit rating of single A minus.
Speaker 5: Our holdings are concentrated in large, systemically important banks located in stable countries.
Speaker 5: As of today, our U.S. bank exposure is limited to the largest banks. We have virtually no exposure to smaller U.S. regional banks. We do not have holdings or other direct exposure to any of the three U.S. banks that failed in early March. For more information, visit www.usda.gov
Speaker 5: While the swift and decisive action of regulators has helped to calm markets, we are watching very closely for signs of further instability in the global banking system and feel good about our holdings.
Speaker 5: Like the rest of the industry, we are seeing pressure in the commercial real estate markets. Office properties are the current area of focus given the difficult market for office leasing.
Speaker 5: Office represents approximately 30% of our total $8.1 billion commercial mortgage loan portfolio, with most of our exposure in our transitional real estate book.
Speaker 5: We currently expect approximately $500 million of loans to enter into some form of foreclosure, approximately 6% of our total mortgage holdings.
Speaker 5: When going into foreclosure, we revalue the property to current market levels.
Speaker 5: In those cases where we do not yet have an independent third-party appraisal as an interim step, we establish an updated value based on our external managers' current assumptions of the local market and updated cap rates. This process resulted in a small $10 million of additional
Speaker 5: that loan to value.
Speaker 5: If you apply a simple stress scenario that assumes we foreclose on the entire amount and each property declines 50% in value, a drop which would exceed what we saw during the financial crisis by about 15 percentage points, we would have to establish approximately 200 million of reserve.
Speaker 5: will allow us to hold these properties to maximize our recovery.
Speaker 5: Turning to our middle market loan portfolio, despite the headwinds from rates and inflation, this portfolio continues to perform quite well.
Speaker 5: Our borrowers average leverage is stable, they have largely been successful passing through higher costs and sponsors have generally been supportive whenever required.
This quarter we did take reserves of $20 million related to two names that were struggling with issues unique to them and not reflective of broader systemic issues in the asset class.
is the primary outlet for our below investment grade exposure. We very deliberately built this portfolio with a strong focus on managing through the inevitable downturns in the credit cycle.
Our average loan size is a very modest 16 million. We only invest in senior secured first lien positions.
We utilize strict limits on position size, diversification, and other characteristics.
Should conditions worsen, we believe this approach will serve us well. We expect market volatility to remain elevated as the global economy absorbs the impact of higher interest rates. We will, of course, experience the impact of this volatility across our portfolio.
Namely, in our alternatives holdings. Relative to many in the industry, our exposure is rather modest, but we expect our $2.4 billion portfolio to experience volatile marks in the near term.
We remain committed to our discipline, systemic approach to building this portfolio and fully expect to enjoy the benefits of enhanced returns over time. Let me turn it back to Fred.
Thanks Brad. Let me just give some additional perspective before we go to Q&A and that is connecting Brad's comments to capital.
Our low asset leverage, which we define as the ratio of assets to statutory capital, particularly when you consider our natural concentration in JGBs, places us in a strong position to absorb weak economic conditions.
We watch SMR in Japan carefully as historically it is more volatile during periods of economic stress. However, our SMR as you can see remains very strong. We are also comforted by a stable ESR ratio that like our US statutory RBC is robust and more resilient to market volatility.
disruption to our capital deployment plans.
So with that, let me hand back to David who will take us to Q&A. David? Thank you, Fred. Now we are ready to take your questions, but first let me ask you to please limit yourself to one initial question and a related follow-up to allow other participants an opportunity to ask their question.
Andrea will now take the first question and if you want to let people know how to get back in the queue, that would be great. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
Our first question will come from Wes Carmichael of Wells Fargo. Please go ahead. Hey, good morning. In Japan Post, you talked about the revised cancer product doing well, but how are you seeing the sales trajectory play out in the second quarter?
through the balance of the year. Should we see it kind of accelerating in the near-term rule that takes some time to play out? Sure. Let me, this is Fred. Let me do this. Let's go to Kui Desson to comment on Japan post and Yoshizumi-san can follow up with any color from his perspective. Kui Dess.
Can it accelerate in the near term or will that take some time to play out? Sure. This is Fred. Let me do this. Let's go to Kuida-san to comment on Japan Post and Yoshizumi-san can follow up with any color from his perspective. Kuida? Hi.
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And regarding the Japan Post Group, our new cancer wings have been launched in April this year.
And we believe that the start of the sales has been very successful because we have been preparing to launch this product towards April by doing a lot of preparation as well as training.
If you would like to add anything, please do so.
Thank you, this is Yoshisumi of Affleck Japan. To launch this product in April , we have been thoroughly preparing for the launch.
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We are seeing the start of the sale of this new product is very good and it is gradually growing and it is meeting our expectation. However having said that, because this product has just been launched, it would probably be a bit too early to say whether this is truly successful or not, but this is the product that we have launched this year as a counter new product.
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And I do believe that we haven't been able to get started with a very good new product process because we have been training since January and we have also introduced digital means. So we do believe that this product can be successful at the same time. This can be a trigger to even more success.
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So let me just repeat this again. Our start of the sale of this product has been very successful and that can be proved by the number of calls that we are receiving at the call center and also the number of illustration estimates that we are providing to customers.
Thank you very much. Thank you, Yoshizumi. Again, we have been rolling this cancer product out gradually across channels, which is different than we've done in the past. So, started in our associates channel, but then it's spread onto other affiliate channels, Dial to life.
Daiichi and the financial institutions and so we've seen this product roll out or roll out successfully And we know it's considered one of the ranked products in the country in terms of the attractiveness of the product So we do come at it with a level of confidence, but as Yoshizumi-san said it's still early in their system
On capital, the capital ratios are pretty strong with RBC north of 600 and SMR 850 plus. HoldCo capital is strong at 3.3 billion. How do we think about the outlook for dividends or distributions out of the insurance companies this year?
And you know, I think you had proceeds from the reinsurance transaction, but it seems like there may be a lot of capital coming. So, any help you can give us there? So, I would start by going back to our investor day where we announced that on an underlying basis we expect to generate $2.6 to $3 billion of capital each year.
And that's a reasonable starting point. And on top of that, we will periodically generate additional capital through different actions that we take, reinsurance being one of those actions.
And we would use that capital pool to then obviously redeploy that capital generated in conjunction with any additional capital that we may be freeing up from having high capital ratios in our operating subsidiaries or at the holding company.
But I do think that over time as a run rate base, you should think about the $2.6 to $3 billion. That's a reasonable annual capital deployment for us with periodic additional capital deployments from other actions taken. And as you know, that goes through our capital management policy where we allocate capital obviously to the dividend.
Currently, that is about a billion dollars that we spend on our dividend each year, and we cherish our dividend highly.
and expect to continue to increase the dividend. On top of that, we are then allocating capital to buybacks where we see appropriate IRRs.
and also for opportunistic deployment where we can accelerate our growth long term.
The next question comes from Sunik, Kamat, out of Jeffries. Please go ahead.
Yeah, thanks. Just a bigger picture question for Japan. Obviously, you've had a lot of success there with the cancer block for years, but it sounds like you're losing market share in medical. If you look at the benefits, there's definitely some overlap in terms of hospitalization and surgical benefits. So I guess my question is, is there a risk that people will just start using medical insurance?
to sort of cover their cancer exposure and in the consequence, the cancer insurance market will just continually shrink. We're going to go to Kuiru-san and Yoshizumi-san to help you out with that. Yes, first of all, I'm going to ask you about the first step. Let me start. This is Aflac Japan, Kuiru. When you visit the hospital, or you see, walking back in time, I'm going to have a great meal. I'm going to have a great meal.
it would require long-term treatment as well as some mental support or treatment required. Therefore when you try to prepare for cancer, you would definitely be needing cancer protection type of policy.
And the awareness regarding cancer is very high in cancer. The reason is because...
1 in 2 in Japan does suffer from cancer in their lifetime.
And by looking at the penetration or enrollment of cancer insurance, the cancer insurance penetration is lower than that of medical insurance. Therefore, we do see that there is a bigger potential in cancer insurance sales going forward. Thank you very much.
So the conclusion here is that it is not that there is no need for counseling insurance just because you have medical insurance.
One of the things I would also add is that I had mentioned in my comments are Eureso cancer care consulting practice which is really wrapping non-insurance services around our cancer policies for our policyholders and that's gotten off to a good start and is building and I mentioned that only because
One of the things we do have to do, Sunit, is continue to differentiate and protect our leadership position. And we differentiate the overall value proposition of a cancer product, not just from the enhanced coverage, advanced treatments, advanced types of care, but we also wrap that policy with non-insurance services.
And that really differentiates it from a traditional and often basic medical product sold to individuals.
Got it. And then I guess one on the transitional real estate and middle market loans. If I just look at the book yields that you're disclosing and compare them to what we saw at fab. I mean, I think they're up 175 to 200 basis points in 6 months. So I'm just. Curious how have these borrowers essentially been able to.
pay what is a pretty sizable increase in interest payments and kind of what's the outlook there.
Yeah, thank you. This is Brad. It's a very good question. A couple of things I'd say in response to that. On the transitional real estate book, most of those loans contain rate caps. So the sponsors are protected from the large increase in rates. In fact, our average rate cap is about 200 basis points below where SOFR is today. Now that...
benefits the borrower, we still get the benefit of the higher rate. They just get the offset through the rate cap and the hedging that they put in place. On the middle market loan portfolio, there's a couple of things at play here. First, these are largely service-oriented companies, which means they generate a fair amount of free cash flow. Now that's less free cash when you have a higher cost structure.
But these companies have also been part of a growth strategy for the underlying sponsors who own these. So they've continued to perform well. They're continuing to grow. Margins have been relatively stable. And while cash flow may be reduced, they are taking actions to mitigate that. And the overall thesis for most of these companies remains intact. This is Dan. And I want to go back.
to want the question about the cancer insurance. Sorry it took me a second to get my connection here. But we've got an aging society in Japan. Cancer is a disease of age. I've been around since we got licensed in Japan and I think there's more need.
And more emphasis on buying cancer insurance today than ever in Japan. And it only makes sense that that should be the case because of it being a disease of age. And so...
Not only do I disagree with that question, I feel very strong about that it's the opposite. People are wanting cancer insurance more. We've done a good job in buying it. But as you can imagine, it's the middle-aged people more than the younger ones.
And our challenge there is how to get younger people involved because they're not as frightened of cancer. And that's no different than it was in 1974. It's just a matter of being able to do that and we've come up with some things to do that as well. But I think, if anything, I want to leave you with confidence that...
We feel like the market is more important now than it was in 1974. Okay, thanks, Dan. The next question comes from Jimmy Belar of JP Morgan Securities. Please go ahead.