Q3 2023 Aflac Inc Earnings Call
Good morning, and welcome to the Aflac Incorporated's third quarter 2023 earnings Conference call.
Participants will be in listen only mode.
If you need assistance, please circle Crawford specialty for Christmas Star followed by zero.
After today's presentation there'll be an opportunity to ask questions to.
So that's a question you May press Star then one that I touched on phone.
Two as part of your question. Please press Star then two.
Please note this event is being recorded.
Now I'd like to turn the conference over to David Young Vice President of Investor and rating Agency relations. Please.
Please go ahead.
Good morning, and welcome.
This morning, we will be hearing remarks about the third quarter related to our operations in Japan, and the United States from Dan Amos Chairman and CEO of Aflac incorporated and Fred Crawford, President and C. O O of Aflac incorporated Max Broden Executive Vice President and CFO of Aflac incorporated will provide.
An update on our financial results and current capital and liquidity, which can also be found with the materials that we posted along with our earnings release and financial supplement on investors thought Aflac Dot Com. We also posted under financials on a same site updated slides of investment details related to our commercial reach.
Real estate and middle market loans. In addition, Max provided his quarterly video update which you will find there also.
Other members of our executive management team, who are joining us for Q&A include virtual Miller President of Aflac U S.
Charles Lake Chairman and representative director President of Aflac International.
Mass of Toshiba, Guido <unk>, President and representative director Aflac Life insurance, Japan, Brad disciplined global Chief Investment Officer, President of Aflac Global investments 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 can 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 releases available on investors thought Aflac dot com and includes reconciliations of certain non U S. GAAP measures I'll.
Now hand, the call over to Dan Dan.
Thank you David Good morning, we're glad you joined us reflecting on the third quarter of 2023, our management team employees and sales distribution have continued to work tirelessly as dedicated stewards of our business.
This has allowed us to be there for the policyholders when they need us most just as we promised aflac incorporated delivered very strong earnings for both the quarter and for the first nine months.
Beginning with Japan, I am pleased with our 12.4% year over year increase in sales, which was largely driven by a nearly 23% increase in cancer insurance sales with a significant contribution from Japan Post company and Japan Post insurance.
Yes.
I'm also pleased to see continued improvements in cancer insurance sales through our other alliances Dai Ichi life and Dido lives.
These alliance partners, along with agencies and banks combine to form our extensive distribution channels that are so important to being where the customer wants to buy insurance and providing them with financial protection.
We continue to work hard to support each channel. We also introduced our new medical insurance product on September the 19.
The product design is simple to appeal to younger policyholders with basic needs and older or existing policyholders, who desire additional or updated coverage, while it's too early to evaluate the success of this product launch early indications show that is being well received we continue.
To gain new customers through ways and child endowment, while also increasing opportunities to sell our third sector products.
Since the launch of our refreshed ways product approximately 80% of our sales are to younger customers below the age of 50 and the level of concurrent third sector sales remains approximately 50% thus.
Thus far our product strategy in Japan has served us well and I'm encouraged by our progress so far turning to the U S. I am encouraged by our sales increase of 7.5% in the quarter. This reflects continued productivity improvements and the contribution from our <unk>.
The initiatives of group life, and disability consumer markets network dental and vision, we remain focused on driving scale stabilizing new platforms and leveraging our ability to bundle our central product lines as we work with brokers on larger groups agents and brokers contribute.
It to the growth of our individual business our group platform benefited significantly from the sales of group life and disability I am very excited about our new cancer protection assurance policy, which provides enhanced benefits at no additional cost.
We know that when people experience the value of our products it increases persistency, which benefits our policyholders and lowers our expenses I believe that the need for our products and solutions, we offer is strong or stronger than ever before in both Japan and the United.
We are leveraging every opportunity an avenue to share this message with consumers, particularly given that our products are sold not ball as we communicate the value of our products. We know that a strong brand alone is not enough, we must paint a better picture of.
Or how our products help address the gap that people face when they get medical treatments, even though they may have major medical insurance, knowing our products help lift people up when they need. It most is something that makes all of us at Aflac very proud and propels us to do more and achieve more.
We continue to reinforce our leading position and build on that momentum as always we are committed to prudent liquidity and capital management. We continue to generate strong investment results, while remaining in a defensive position as we monitor evolving economic.
In addition, we have taken proactive steps in recent years to defend our cash flows and deployable capital against a weakening yen.
As an insurance company our primary responsibility is to fulfill the promises we make to our policyholders.
At the same time, we're listening to our shareholders and understanding the importance of prudent liquidity and capital management.
We remain committed to maintaining strong capital ratios on behalf of the policyholder and balanced this financial strength with tactical capital deployment.
I am very pleased with the board's declaration of the fourth quarter dividend in declaring this dividend of 2023 marks the 40 <unk> consecutive year of dividend increases.
A record that we treasure I am even more pleased with the board's action to increase the first quarter of 2024 dividend by 19% to 50 cents per share. We also remain in the market purchasing shares at a historically high level of 700.
As seen in the first two quarters of this year, we intend to continue prudently managing our liquidity and capital to preserve the strength of our capital and cash flows which support both our dividend track record and tactical share repurchase.
Overall, I think we can say that it has been a very strong quarter, especially when a vast number of factors are in our favor Aflac, Japan had a strong quarter for sales.
We executed product and distribution strategy.
Aflac U S continued to build on its momentum as it nears pre pandemic levels pre tax profit margins remain strong in both Japan at 32, 8% in the U S and 28.8% plus our capital ratios remain very strong.
Prong in our quarterly share repurchase was like last quarter, one of the largest in the company's history before I hand, it over to Fred I want to address an announcement of his retirement I've enjoyed working closely with Brad over the last eight years and certainly understand his desire to.
<unk> and spend more time with the family and personal interest.
Brad you will be missed and I'll look forward to working with you and Aflac executive team to ensure a smooth transition until your official retirement day and I wish you. Many happy years as for me and the company. We have some outstanding candidates who are capable of.
Running aflac. It is my responsibility to continue to train and watched the progress of these potential error parents, while the board oversees the process to be prepared for any unknowns. We have always had an interim CEO ready should something abruptly happened to me as well as the <unk>.
Strong process within the Board's corporate governance Committee I recently had a physical at Emory University and received an excellent report so I plan on being around to prepare our leaders for the future and drive shareholder value with that I'll now turn the program over to Fred Fred.
Thank you Dan as announced last night I plan to retire in September of next year to spend more time with my family and pursue other interests.
It's a personal decision, but also a recognition of the very capable leadership team surrounding Dan in the company being in a very strong position.
While I believe this is the best for me and my family I also believe it is in the best interest of Aflac I.
I've enjoyed 25 years as an executive in the insurance industry and feel blessed to have worked with talented professionals and leaders throughout <unk>.
However, the highlight has clearly been my time here working for Dan and for Aflac.
Over the next year I will be focused on transition and helping on select initiatives, where I can add value.
Ill hand, the call back over to Max Max.
Thank you Fred for a third quarter adjusted earnings per diluted share increased 27, 8% year over year to $1 84, with a six cents negative impact from FX in the quarter.
With this being the third quarter under the new <unk> accounting regime, we evaluate our reserve assumptions for morbidity persistency.
And mortality at least annually to see if an update is needed if necessary. These assumptions will be unlocked on a prospective basis as they were in this quarter, leading to re measurement gains of $205 million.
Variable investment income ran $13 million or two cents per share below our long term return expectations.
We also wrote down certain software intangibles in our U S segment impacting our results by four cents per share.
Adjusted book value per share, including foreign currency translation gains and losses increased 10, 3%.
And the adjusted ROE was 15, 6% a significant spread to our cost of capital.
Overall, we view these results in the quarter as solid sorry.
Starting with our Japan segment net earned premium for the quarter declined two 8%, reflecting the impact of paid up policies are January 1st reinsurance transaction and deferred profit liability.
Lapses were somewhat elevated but within our expectations.
However, if adjusting for all these factors the earned premium declined an estimated one 7%.
Japan's total benefit ratio came in at 65, 1% for the quarter.
Down 170 basis points year over year in the third sector benefit ratio was 54, 8% down approximately 460 basis points year over year, we continue to experience favorable actual to expected on our well priced large and mature in force block.
We estimate the impact from re measurement gains to be 260 basis points favorable to the benefit ratio in Q3.
Long term experienced trends as it relates to treatment of cancer and Hospitalisation continued to be in place leading to favorable underwriting experience.
Persistency remained solid with a rate of 93, 5%, but was down 80 basis points year over year with product refreshments, we tend to experience some elevation in lapses as customers update and refresh their coverage.
Which was the case with the recently refreshed cancer and first sector products.
Our expense ratio in Japan was 19% down 100 basis points year over year.
Driven primarily by good expense control and to some extent by expense allowance from reinsurance transactions and a DAC Commission true up.
For the full year, we would expect to end up towards the low end of our expense ratio range of 20% to 22%.
Adjusted net investment income in yen terms was up seven 2% as we experienced higher yields on our U S dollar denominated investments and related favorable FX.
Q3, 2022, we estimate that the remeasurement gains impacted a benefit ratio by 12.1 percentage points in the quarter.
Claims utilization remain subdued and asked we incorporate more recent experience into our reserve models, we have released some reserves.
For the full year, we now estimate our benefit ratio to be materially below our outlook range of 47% to 50%.
Excluding remeasurement gains. However, we are tracking well within the 47 to 50 per cent outlook range or expense ratio in the U S was 40.6 per cent up 70 basis Pointy every year. This includes at 190 basis points impact from a software intangibles right down.
Adjusting for this right down we are trending in the right direction.
Our growth initiatives group life, and disability network down Lobation and direct to consumer increase our total expense ratio by 330 basis points.
We would expect this impact to decrease over time as these businesses grow to scale and improve their profitability.
For the full year, we now expect our expense ratio to come in slightly above our outlook range of 37 to 40 per cent.
Adjusted net investment income in the U S was up 13% <unk>.
Mainly driven by higher yields and both are fixed and floating right portfolios and variable investment income in the quarter more in line with long term return expectations.
Profitability in the U S segment was solid with a pretax margin of 28.8% driven primarily by the Remeasurement gains from unlocking as you know the commercial real estate markets are going through the worst cycle in decades, especially in the office sub sector.
We're seeing most property values quoted down 25% to 40%, but some distressed situations are driving market values down as much as 60% far exceeding the 35% to 40% declines of the financial crisis.
Our total commercial real estate watch list remains approximately $1 billion with around two thirds of these in active foreclosure proceedings.
As a result of these current low valuation marks we increased our Cecil reserves associated with these loans by $34 million this quarter.
We also move to properties into real estate owned which resulted in a $53 million right down.
We do not believe the current distressed market is indicative of the true intrinsic economic value of the underlying properties currently undergoing a foreclosure process.
We continue to believe our ability to take ownership of these quality buildings and managed them through this cycle will allow us to maximize our recoveries.
In our corporate segment, we'd recorded a pretax loss of $49 million, which is somewhat smaller than a year ago, primarily due to our reinsurance transaction.
Adjusted net investment income was $8 million lower than last year due to an increased volume of tax credit investments.
Higher rates began to earn in an amortized hedge income increased.
These tax credit investments impacted their corporate net investment income line for U S gap purposes negatively by $64 million with an associate a credit to the tax line.
The net impact to our bottom line was a positive $3.8 million in the quarter.
To date these investments are performing well and in line with expectations.
We are continuing to build out a reinsurance platform and I'm pleased with the outcome and performance.
In queue for we attempt to execute another tranche with similar structure and economics to our first transaction from January this year are capital position remains strong and we ended the quarter with an S. M are above 1000% in Japan and.
<unk> are combined RBC, while not finalized we estimate to be greater than 650 per cent.
Unencumbered holding company liquidity stood at $3.3 billion $1.6 billion above our minimum balance.
These are strong capital ratios, which we actively monitored stress and manage to withstand credit cycles as well as external shocks.
U S stat impairments or $4 million in Japan, FSA impairment 2.9 billion yen or roughly $20 million.
This is well within our expectations and with limited impact to both earnings and capital leverage remains at a comfortable 18.8% just below our leverage corridor of 20% to 25% the decline into quarter is primarily driven by the weakening yen.
As we hold approximately two thirds of our debt denominated in yet or leverage will fluctuate with movements in a yen dollar right.
This is intentional and part of our enterprise hedging program protecting the economic value of App like Japan in U S. Dollar terms, we'd repurchased $700 million of our own stock and pay dividends of $248 million in Q3 offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical and how we manage the balance sheet and deploy capital in order to drive strong risk adjusted Ottawa with a meaningful spread to our cost of capital.
Thank you I will now hand to call back to David to begin Q&A.
Thank you Max.
Before we begin our Q&A, we ask that you. Please limit yourself to one initial question and a related follow up.
Then you're welcome to rejoin the queue to ask an additional question we.
We will now take the first question.
We will now begin the question and answer session to ask a question <unk>.
Excuse me the speaker phone please pick up your hair before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, if possible material assemble roster.
Our first question will cover Tom Gallagher with Evercore ISI.
You May now go ahead.
Good morning.
Wanted to start with your comment about succession planning and having several strong candidates.
Should we take that to mean you won't be looking to do an outside church to replace Fred.
And are you looking to replace Fred and this yellow role.
<unk> little bit of color on on what you're thinking over all their thanks.
Sure.
First I would say that you have to understand that one of the reasons that we created the chief operating officer and also for Fred to go to Japan.
Part of it was due to the Covid period of time, and we had a situation where with Covid. We wanted more interaction with Japan, and so crave was willing to go over there and and do that and that that was very helpful to us and and we continued to rotate people over to G.
Pan and from Japan to the United States and its for example state Beaver, who you probably know it's been around a long time will be working with them as far as how and what will evolve. These decisions ultimately come from the board I think there's always two ways to.
Look at transition and what would take place would be the abruptness of something happening and then well it was structured so we work with the concept that this will be planned over a long period of time and we'd have internal candidates. It's always been my preference would it be.
Internal candidates because of the Japanese operation and the uniqueness that we have they're saying that I would say the board would the corporate governance Committee, specifically and then the full board would be reviewing every aspect to make sure you have the best person for the job.
And so we would also take that into consideration as we're moving forward.
I said in my comments.
Enjoy in life I'm enjoying working with the company and want to continue to do so at the same time. These adjustments of April retiring and moving on happens and I've been around to see a lot of them, but I think there's a little element of pride that keeps me around.
Because of the family and frankly, I just enjoy doing it. So I look forward to working with these people. There are several that are on the horizon. We continue to add new people that have potential. So I'm encouraged about that and I think we're in a strong position and.
I think this quarter.
Signal how strong we are manager Willie wise and will continue to do that.
Gotcha. Thanks, Thanks for that then and just an operational question for my follow up.
Max the can you comment on what's behind the bigger reserve release in the U S.
And if if there's a go forward earnings impact associated with that.
I I would've thought there might have been a bigger benefit coming from Japan, just given how strong.
And the sufficiency of margins there are.
So any maybe any color comparing and contrasting how how the actuality review stacked up U S versus Japan. Thanks.
Thank you [laughter]. Thank you Tom so.
Obviously this is the first year, we were running on a nail VPI basis, and the third quarters. When we do the unlocking including prospective unlocking when you think about it if you go back and look at the last couple of years. So can you see the morbidity trends and and also trends in hospitalization an outpatient.
Treatments.
And you compare and contrast to Japan, and the United States in the U S. We shut down a lot more than what you ended up doing in Japan as it relates to how how people went to the hospital and how people change their behavior and that is coming through in our morbidity experience. So we did see for example accident hospitalized.
Patients et cetera drop a lot more in the United States and what you saw in Japan, and it was simply a factor of the Covid virus had a much more significant significant spread.
In the U S and what it did have in Japan in Japan, you really had a big spike in the third quarter of 2022, but outside of that it was is significantly lower spread and what you had in the U S. S.
And that is why you know seeing that having a much more pronounced impact on the M. Morbidity experience that is feeding into our actuarial models that is done leading to the outcome that you saw this quarter.
Okay. Thanks.
Our next question will confirm Jimmy Bueller with J P. Morgan.
That's all I needed.
Good morning, So afraid I'm sure, we'll be dealing with you a little bit more over the next year, but good luck in the future.
I had first a question on just the any updates you have on the potential power agency rules and instead of the worst case scenario what are the products that are in scope and what could be the impact on your business assuming that the industry does not get any concessions from the rule is it's initially.
Good morning. This was virtual Miller from the U S. I'll take that question for you. So we continue to advocate on behalf of all policyholders.
To provide them the protection when they need it most the comment period is closed but you can see a review our comments out there as well as others.
I'll, just say that we saw no impact in the third quarter to our sales.
Think about it a hospital hospital indemnity product.
Can be one that's impacted we had relatively flat sales in third quarter, but her damn mentioned in his comments about our capture assurance protection plan with our cats ourselves up in the third quarter.
I would say this also that remember what are the considerations as part of the proposal.
Around a pretax applications alpha like has been selling we were selling our policies without those pre tax benefits long before it actually occurred years ago. So I think we'll be positioned well, even if the if the reward of the past.
Let me make one other comment I was in Washington for three days about three weeks ago.
And met with probably.
18th Senators and congressmen to just see their positions on it.
I want to go back to the pre tax situation that vergil was talking about because it was an anomaly what actually happened was it ended up being pass.
And we as a company backed 20 something years ago, we we didn't sell pre tax for the first two years because.
The the Congress said it was a mistake and it was never really meant to happen and so.
Once it was in the Bill then when they tried to take it at thought about taking it out there.
It looked like it was a free taxes.
If they took it out it became attacks on the average American.
And you know you do you take for example, a.
A school teacher that is Ah come down with cancer to all of a sudden say you're going to tax their benefits.
Will not sit well with their constituent the contingency of people that they deal with it and so we were able to talk to a lot of people about it and we had no feedback that thought that it should be the opposite now saying that we know that this has been submitted.
At.
The branch outside Congress through the executive branch and we've got a handle it and where we plan on talk into them, but it is.
It will absolutely be a direct tax, but we sold in that environment I'm one of the once one thing about me being around long time as I remember a lot of things and we solved and Ah I was around when we sold in a pre tax environment. In fact I was in the sales force for 10 years and saw it and so it's a matter of adjust.
No matter, what happens and what I've always says is with change comes opportunity and so no matter what happens we're going to find a way to do.
Do well in that environment.
Okay, and if I could ask this one more your comments on C. R. A.
Fairly negative and the environment pretty challenging as well, but how do you square the watch list of over $1 billion around a billion dollars with your seats are reserved.
Which it seems pretty modest around $34 million.
Yeah. Good morning, Jamie. This is this is Brad there's one I'll take that there's a couple of things behind the relatively modest reserving Ah, but you've seen so far compared to that 1 billion dollar watch list, but one is the average L. T V of the portfolio and the price declines we've seen what has.
<unk> when we go through the foreclosure process is we have to mark that asset to the lower of the principal balance it alone or the value of the asset. So when you're starting it is 60% L. T V. You've got a fair amount of cushion before you start to realize losses on that Mark.
Second dynamic at play here is we are still in process on about half of that $1 billion of watch list, which means we are in.
Work out negotiations with the borrower those can be very long lasting very intense and they can ebb and flow a lot of different directions.
Once we get certainty that we expect a foreclosed we have to order a third party appraisal those take time to come in and as big and as they come in that's when we ended up re marketing our assets.
It's a combination of our relatively conservative L. T V's and the fact that we've still got about half that portfolio subject to appraisal.
Thank you.
Our next question will come from Ryan Kruger was K E. W. You.
You May now go ahead.
Hey, Thanks. Good morning. My first question was on the changes you've made to the FX hedging program.
I just wanted to confirm you had a pretty major decline.
Decline in the hedge costs in the third quarter versus the last couple of quarters.
Just wanted to confirm that you.
A reasonable expectation on the hedge cost going forward for the foreseeable future.
Yeah. Thank you Ryan Yes, I would think you know what you saw in terms I had caused for the third quarter and it's a blend of a as rolling into our new structures. It's a mix between the old structure on the new structure in terms of run rate heche costs going forward and I do think that the third quarter.
Heche caused that you saw it's certainly not going to be higher it would probably gonna on a run rate basis going forward.
At this level or slightly lower going forward in terms of actual heche cause that is obviously, a subject to capital markets inputs and.
And everything that impacts the the cost of a of a put option and also to some extent.
If we decide to increase our poor what exposure in the future as well so things like the ethics volatility interest rates, etc will come and play here, but in the near future I would expect our hedge cause to be <unk>.
Similar to the third quarter level or slightly lower.
And there's no offset anywhere else right that that would drive to the bottom line.
Sorry, Ryan I didn't quite catch it I can't even repeat blaster.
I just wanted to just know opposite.
On the way to think about this.
In terms of the P&L this will drop to the bottom line.
When you think about the P&L here, what we have done when we move EM.
Gradually prom using for what's to put options. What happens is that we are now a increasing the volatility for small moves at a young dollar as it relates to our capital ratios in Japan, Aida <unk> and ESR.
So for.
Ah strengthening yen or a weakening yeah, and you're gonna see slightly higher volatility in that ratio for small moves, but what of put options give us is that we have dramatically reduced details so any dramatic moves or shock moves in a young dollar we have reduced our risk exposure to dose.
[noise] of events and we feel that that this is a very good risk reward for us.
Thanks, and then on the reinsurance transaction the transaction you did.
Last year, a prenup $900 million of capital, but then.
Around half of it or so was with retained and then the other half.
Available for <unk>.
Redeployment to shareholders on this next transaction would you expect closer to all of it to be available to to return to shareholders.
We will deploy to capitol appropriately in the respective.
Business units and if we have good opportunities to deploy capital there we will do so if we feel that we have significant surplus capital. It would be moved up there holding company and a holding company will deploy it.
In the different sort of capital distributions that the hold accompanying generally dos ie dividends buybacks et cetera.
Thank you.
Our next question will come from semi come off Jeffries.
You May now go ahead.
Thanks, Good morning, I, just wanted to follow up to Tom's question on the U S reserve releases it sounded like some of the benefit here was lower hospitalizations in the U S due to COVID-19.
And I just want to understand is that are you assuming that kind of that lower level of hospitalization sort of persist going forward or are you, assuming some sort of a version to historical trend.
Let me kick off on that question I would ask an outage area to fill.
Fill in any blanks his color as well, but the fact of the matter is that we have seen lower levels generally speaking in terms of hospitalizations and come through.
And we also seeing changes in the way treatments are being done I E more outpatient treatments as well. So we believe that we have seen a shift in the way hospitals are operating and also the way individuals are going forward there are treatments.
And we have factored that in to some extent.
Yes, the hours here, just adding a little bit on that.
Remember the Covid period dropped all hospital utilization treatment patterns any of that.
During COVID-19 would have some ups and downs during the period as hospitals have more capacity and people would return and get like elective surgeries and all of that.
What we did this year was begin to recognize that.
2022 was the first year in the United States, where you would say that the pandemic was kind of in the rear view mirror. So we brought in the experience of 2022, we did still remove the experienced very low experience. During COVID-19 period, we brought in the post COVID-19 period and call. It for 2000.
22, and is Max was saying.
Continued to see even and in that period in 22 that we did have lower or experience. So we've built that into the into the experience base or updating the assumptions.
And I think Max he said you've factor some of that into your reserve does that mean that if things sort of persist the way. They are that there would be the potential for some more reserve leases down the road.
We believe that we have adequately reflected.
The new paradigm or.
The new experience that we're seeing now into our models now. Please remember these are obviously models. So what that means is that if these trends were to improve it further.
What we have experienced a date there there is the potential fit around walking's favorable or negative.
Can go the other way as well, we believe that we have reflected it to the to our best and the best way we can give.
Given the data that we see and it's important that we do reflected.
To the best way, we can but I also want to make sure that you understand that these are estimates and they can go both ways. Yeah, no that that makes sense. My other one was on Japan, and the earned premium drop of 1.7% sort of adjusted.
I would've thought at some point the impact of that paid up policies would sort of run its course and I know some of those policies are very long dated but I believe that there were sold quite a bit ago. So are we getting closer to the point where that impact is expected to fall off.
So.
When we look forward into the paid up scared yours, you you are going to see a little bit of a drop in 2014 sort of 2024, and then a further drop in 2025, and that's where I would say that I would expect us to run more of them on a normalized basis for paid up.
Keep in mind that the big sales that we had of the waste products. They really occurred in 2012 through 2014 time period, and there was five year pay and there were 10, the or pay so when you rolled out for what it that that's when you see that and you'll get a little bit of a drop off in 2024, and then a further in 2025 that.
That being said paid up it's something that we generally build into our products both for a sector anther sector, but when we I wanted to match in 2024 and 2025, because that's when we move into a more normal schedule and you're not not necessarily gonna C. DS more significant year over year deviations.
Okay. Thanks.
Our next question will come from Alex Scott with Goldman Sachs.
You may not go ahead.
Morning, It's Marley on for Alex I was hoping you could provide a little more color on the Japan post sales and partnership it looks like it's been progressing so I was hoping to hear a little more on this versus longer term say okay.
If you're interested in just about this kind of world.
She gave me I oversee the entire.
Oh, okay.
Ah well it'll be Judith.
Okay.
He keeps rookie coach.
What got us in all she that's kind of a homebody.
Cancer insurance and you can't see insurance screens and also a lump sum.
Benefits.
Continues to be very strong hold on.
Hum.
[noise], Yeah, corporate Greens, you it'll kill you at all.
Hopefully you can come up with him and I don't think they will.
Sort of humble.
Garlic at home I, just think you know slipped out all my stuff.
We will continue to an alcoholic and casualty insurance sales by providing support to the sales offices and post offices of Japan, Japan.
Japan first insurance nationwide.
Hurting.
Management.
Good practices.
Yeah cause you to an all or yoga.
And it's also gonna put on too tight.
Continue to stop Ah put any at all so.
Or just uncomfortable.
Particularly Oakland female.
Also actively working on the training and also developing.
Across all the branches nationwide by sharing good practices.
Oh could you drink is a physical thing.
Santa finishing torched I stay at a mental downhill.
Expecting to have grown in even more by having all of these activities done in a solid matter.
And that's all for me.
Yeah, I want to make one other comment we've been waiting for Japan post to come back for several years now and we had assurances that they would do that and I'm happy to see it.
It take place.
They are our largest shareholder and so what is good for US is good for them and vice versa. So I believe this is a strong alliance and we will continue to be strong as we move forward.
Thank you and then just as a follow up if we could turn to capital a little bit would you mind, providing an update on what your view is near term versus longer term capital management priorities and capital deployment.
So obviously the capital ratios in our subsidiaries they are strong and that's obviously priority number one to make sure that we have adequate and strong capital in our operating subsidiaries and then obvious if we want to move it.
Operating cash flow up to the holding company and then deploy it from there and you did see that in the quarter, we bought back $700 million of our own stock.
Have you done as a quite a strong and capital deployment, yeah, and we also increase the dividend by 19% starting in the first quarter of next year. So am overall the company is generating significant cash flow and we are deploying significant cash flow as well.
Thank you.
Our next question will come from John B Barnidge with proper Sandler.
You may not go ahead.
Good morning, and thanks for the opportunity bread congrats on the retirement.
Question is around Japan, and the expense reduction efforts I know there was a paper with suffered another expense efficiencies have you already completed any required software installations or do you have any plan to upcoming thank you.
Why don't I, just make a couple comments on that and then quite a son can comment, but what we are focused on in Japan.
From an efficiency perspective is digitizing the platform. That's the major thrust of what we're looking at which is a long term plan of investment followed by returns.
And that is a plan to digitise or increase the usage of digital applications away.
Away from paper applications. They use of digital self service, where policyholders go online and serve themselves through technology as opposed to.
Inundating our call Center, and then claims payments are digital claims.
We've been making steady progress on both the digital application front and on the customer self service, but we are engaged currently in updating those tools think of it is no different than your iPhone. One to iPhone 11, we are updating those tools to modernise them and improve the <unk>.
Customer experience, we have been in a proof of concept over the last year and in fact have moved those digital adoption rates up and so with that will come natural efficiencies over time, but it will take time, so it's a longterm progress.
Moving customer an agent experienced to digital and away from paper, but that will yield benefits.
The claim side of it is more stubborn and the reason for that has nothing to do with Aflac, it's because of the Japanese healthcare system as a paper based health care system that requires the exchange of paper forms when one goes to the Doctor that's really a requiring a modernization of the healthcare system in Japan and interestingly they actually.
Do have an effort underway to attempt to modernize our digitize the healthcare system, but until that takes place our ability to process claims digitally will be somewhat contained but over time, we expect to improve so what you should expect as investors is that over the long time, we will be increasing that digital adoption it will yield.
A lower per policy expense outcome from an administrative standpoint, but it will be over multiple years of slow and steady progress. Because this is about adoption, it's not about installing software.
Okay.
Very helpful. Thank you very much and then on the investment portfolio. Those properties. Your cookies could you maybe talk about the occupancy rates in those versus the ones that remain on the watch list. Thanks a lot.
Sure. Thank you the two properties that we took back the current occupancy levels are in the low to mid fifties, which has been pretty stable. Since we first got involved and did the loan.
The occupancy across the portfolio. It does range a fair amount. We've got a few that are below 50% given the nature of the of the asset class the nature of transitional real estate, but for the most part are averages are right around the 55% to 65%.
Thank you very much.
Our next question will come from Walmart Burtis with Raymond James.
You May now go ahead.
Pardon me will meet your line is open for question.
Okay. Good morning.
Is there anything that I can rewrite it hospital indemnity policies to comply with the potential DLL agent accessible without compromising the attractive attractiveness of the product.
And has aflac started work on work on the <unk> burden appear manageable.
This is virtual from the U S.
We absolutely are taking precautions to make sure that we're prepared just in case.
Both of those go through and we are confident that we can do that you know we've been continued to enhance our benefits well current pulses are out there I think Dan was stated earlier, we were clear that we've sold before in that environment without some of the pre tax.
Benefits that currently exist where.
We're confident we'll be able to do that again.
We have a <unk>.
Random process here that we are always looking to innovate and reinvent our products and enhanced our benefits we demonstrated that this past year with our cancer.
Enhancements, we did that really had no additional cost of our policyholders.
You can expect more of the same related to that.
Okay. Thank you.
And then I just Wanna confirm [laughter] I know I know you get sort of set it and I just want to make sure that I understand alright, and the reinsurance deal that you. Just recently completed your free up around $900 million capital and it sounds like that could either be used to reinvest or maybe ultimately for shareholder returns.
Yeah, obviously, our priorities and with all the capital that we have is always two deployed into writing new business and use it in our operating entities.
That is where we get the generally the best Yeah IRR on that capital if we cannot deploy it in our operating entities then it will flow up to the holding company Mmm.
But it was it was around $900 million, it's like that's what your freedom.
And that is our estimate yes.
Okay. Thank you.
Our next question will come from Charles Schenker with Bank of America you.
You may not go ahead.
Yes. Thank you when I think about the commercial loan portfolio.
Are the are the properties most at risk for those that have been.
More recently loaned to or the ones that have a longer vintage in terms of when they were established and along those lines or when did you call. The deployment of new investment flows into commercial loans.
Sure. Thank you Josh the loans that we're dealing with now that are on the watch list are those that were made a coupla years ago. The transitional real estate book is our biggest focus area and that differs from a more traditional CML book and that the maturities are much shorter they tend to be.
Three year fixed maturities with options to.
To extend up to five in some cases up to seven years based on certain thresholds in the operating metrics being being Matt. So what we're dealing with now are those majorities predominantly in 2023 in a few in 2024 as obviously the maturity is coming up and when those loans needs to be addressed.
Either being repaid or if that is not an option then we get into the workout.
Discussions.
We have really substantially.
Reduced our deployment into the asset class. This year part of that is the market well not part of it is it is frankly driven by the market.
Very.
Very much a lack of activity.
We're seeing a large bedash between buyers and sellers the increase in rates is really put valuations upside down.
Buyers are trying to get to take advantage of the current level sellers are trying to get yesterday's prices and we're just not seeing a lot of good solid transactions.
And there's a lack of liquidity in the market. So that's that's really limited our opportunities and of course, we always adjust our underwriting standards to the current experience to the current market.
So we're being a little bit more difficult in our terms and conditions as well.
And then related is there any way you can frame the capital consumption or reading since he charged for those two properties what was it before they were a converted into holding on properties and what is it now.
Yeah, so when they moved from being I see them out to real estate owned there is a significant uptick in terms of the capital charges associated with that for US. It's still very small that so if you think about RBC points and it's very I'll I'll I would estimate it to be low single digits.
And a as it relates to ASMR the same applies.
Okay, but when you don't think about the did you generally should think about the distribution on what balance sheet or capital base that they go into as.
Follow it the same way the size of the investment portfolio is between the two segments Ie, roughly 85% falls into Japan, and 15 per cent falls into the U S.
Okay. Thank you very much for about.
Our next question will come from West Carmichael with Wells Fargo. You May now go ahead.
Hey, good morning, just wanted to follow up on on Capitol a bit Max I know you said that your your first priority is to deploy that within the subs on organic but to the extent that there's not that opportunity I just want I just wanted to get your.
Thoughts around potential M&A and.
Given that you got pretty significant excess at the hold Cohen the subs.
Yeah.
We.
If you think about what our track record and you have seen what we have done historically aflac has not been an acquisitive company. This is a company that has built selling one policy at a time and we've done a number of a I will call it talking acquisitions in the United States to <unk>.
And our product portfolio and and we do feel that we're in a good spot in terms of the products that we have to offer and our go to market strategy and so at this point I don't see that we have any holes that needs to be field using M&A.
Got it thanks, and then maybe it just to follow up on on the Middle market loan book away from commercial real estate. It seems like you know that's the.
The book yield now is nearly 11%. So just just wondering if you're seeing any any terms in any any collateral deterioration and if interest rates remain high for.
You know a year or so like you'd expect defaults within that portfolio.
Yeah. Thank you so far we have been extremely pleased with the performance of the middle market loan portfolio is frankly, performing better than we expected given where we are at this point in the cycle Ah there are several reasons for that and that ultimately it boils down to fundamentals underwriting.
[noise] and then how we've chosen to build a portfolio.
We have a very small average loan size, we have maintained a discipline around only first liens secured structures. We've kept leverage at a very modest level. We have maintained our use of strong covenants and then ultimately it's about good businesses. Good companies with sound business plans that are seeing good.
Top line growth and half the margins in cash flow avoiding cyclical companies and that's really play it out.
We have built this as our primary below investment grade portfolio. So we do expect to incur some losses, but relative to the outsize yields we've received they're really quite modest and as I said it is doing better than we expected at this point in the cycle.
Going forward, we're going to have to wait and see just how the macro environment does it does look like we've got the possibility of a soft or at least a softish landing.
And then how quickly rates turnaround is something that we're going to watch very closely.
Thank you.
Our next question will come from Joel are with <unk>.
Dialing and partners you.
You May now go ahead.
Hey, good morning, So RBC as strong at over 600 650 per cent well above your 400 per cent target and you just talk about plans and managing that down towards the target.
So obviously in the U S and we are seeing some growth and and we're seeing some growth in in in line. Some business there are driving a little bit more new business strain M and that's why we have a independent amick.
He wanted to run with a little bit more capital and then coming out of up and down and make we see a litte bit highest strain associated with that growth that we.
Are starting to see and expect to see come through.
That has led us to run with a little bit higher RBC didn't what.
And then the 400%, but we are at a point in time, now where I would expect us over the next couple of years to really get down to that 400 per cent level of long term.
Okay, and do you expect that to be driven by by the needs for growth or or do you expect to actually draw that down with with outside.
Besides dividends to the Holdco.
They preferred option would be to drive it by growth because that's where we're getting the best returns on our capital F. By just writing more policies and at the same time.
Even though we have some lines of business there are consuming a little bit more capital overall were relatively capital light business.
So given that we're operating at a 650 per cent of our B C. Right now I don't see that growth alone when necessarily drive us all the way down to 400%.
In order to do so we probably would over.
Overtime need to address or a capital base through special dividends et cetera.
Okay. Thank you.
Uh-huh.
This concludes our question and answer session.
I'd like to turn the conference back over to David Young for any closing remarks.
Thank you Anthony and thank you all for joining us this morning, while we're not hosting our financial analysts briefing. This year, we will be in 2024, but we will also be gaven, giving an outlook for 2024 on our fourth quarter 2000 twenty-three earnings call in the interim please reach out to.
The Investor in rating agency relations team. If you have any questions and we look forward to speaking to you then.
Everyone have a great day. Thank you.
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