The Aflac Incorporated Second Quarter 2023 Earnings Conference Call is taking place and David Young, Vice President of Investor Relations, is introducing the members of executive management who will be providing remarks. Dan Amos, Fred Crawford, and Brad Dyslin will be discussing the quarter's operations in Japan and the United States, and Max Broden, Virgil Miller, Al Roziere, June Howard, and Steve Beaver will be joining for the Q&A segment. Additionally, members of executive management from Aflac Life Insurance Japan will be present.

Aflac Incorporated reported strong earnings for the second quarter of 2023 and the first six months of the year. In Japan, the company has rolled out its WINGS cancer insurance and refreshed WAYS and Child Endowment policies. This has led to a 26.6% increase in sales premiums, with a 60% increase in cancer insurance sales, in part due to Japan Post Company and Japan Post Insurance selling a new cancer product in April.

The company has seen improvements in sales through agencies and strategic alliances, and has gained new customers through WAYS and Child Endowment. The company is preparing for the launch of a new medical product, and has an extensive network of distribution channels to provide financial protection to Japanese consumers. In the US, the company is seeing productivity improvements of their agents and strong growth through brokers. They have a cancer protection insurance policy that provides enhanced benefits at no additional cost, and are leveraging every opportunity to share their message with consumers. They are committed to prudent liquidity and capital management and have taken proactive steps to defend cash flow and deployable capital against a weakening yen.

Aflac had a strong quarter, with strong pre-tax profit margins in Japan and the US, strong capital ratios, and one of the biggest share repurchase quarters in the company's history. In Japan, the revised cancer product, WINGS, was rolled out to the Japan Post group and Yorisou Cancer Consultation services were implemented to provide conscientious care to policyholders. WAYS and Child Endowment products were successful in attracting younger and new policyholders, and market research showed a positive impact on net promoter scores.

The launch of the WAYS product has been successful, with 80% of sales going to younger customers and a concurrent third sector sales rate of 50%. The company is launching a new medical product later this year and is focusing on simplifying products to attract new and younger policyholders and lower operating costs. Expense ratio is below 20% and digital adoption is being increased to remain competitive. In the US, individual, dental and vision, group life and disability and consumer markets have all contributed to sales growth, with group voluntary sales being down from a strong 2022. The growth platforms of dental and vision, group life and disability, and consumer markets are up over 50%.

Fred is discussing the focus on driving scale, stabilizing new platforms, and leveraging the ability to bundle core voluntary products for larger groups. He notes that the investment in growth platforms has pressured the expense ratio, but that they are refining their approach to drive efficiencies and long-term profitability. He then mentions the renewed focus on product development in the US, including a new group voluntary term life product, and a cancer product which has seen a 23% increase. He also notes that they have seen a return to premium growth in the US and modest recovery in persistency, which they are driving through wellness campaigns and benefit endorsements. He then turns the call over to Bradley Dyslin to discuss the health of the investment portfolio.

The commercial real estate loan watchlist has remained steady at $900 million and the total value of these loans has also remained relatively stable, with only a modest increase from the first quarter. The loan-to-value ratio is 65%, resulting in a small $11 million of additional reserves being recognized in the quarter. This brings the total amount of additional reserves recognized in the first half of the year to $21 million, which is 26 basis points of the $8.1 billion total commercial real estate portfolio. This is due to property value declines of 25-40%, similar to the financial crisis.

Varagon Capital is being acquired by Man Group, resulting in the exit of the equity position, but remaining a major client. The $900 million watchlist is expected to have manageable additional reserves of $50 million due to a 40% price decline. The net investment income will decline due to the transitional nature of the properties. The portfolio of loans to middle market companies is performing well and exceeding expectations for credit losses. Varagon has managed $3 billion of middle market loans for the last three plus years, resulting in strong returns and 3 times the invested capital.

Brad discussed the relationship with Varagon and other strategic equity partners, which has enabled them to invest in high value-add forms of private credit. Fred then noted that their investment strategy, hedging, and capital engineering have greatly reduced their enterprise economic exposure to movements in the yen. Additionally, their low asset leverage has enabled them to absorb weak or volatile economic conditions and maintain capital deployment plans. David concluded by asking participants to limit themselves to one initial question and a follow-up before getting back in the queue.

The paragraph discusses the growth in Japanese sales, specifically regarding the launch of a cancer product through Japan Post, and how it contributed to the increase in cancer sales in the first and second quarters. It was noted that there is still more potential for growth in Japan Post, but that there is usually an initial jump in sales followed by a calming down.

Koichiro Yoshizumi discussed in a foreign language the trainings conducted by Aflac in January and the support offered to Japan Post after the launch of the product. It was also mentioned that Aflac is managing the sales process at each level and trying to identify and solve issues on a monthly basis. Frederick Crawford then asked Todd Daniels to address the question of revenue in Japan and the impact of the move to LDTI accounting. Todd mentioned that the deferred profit liability from the benefits line to the earned premium line would cause some noise in the stability of the revenue.

Fred mentioned that the reinsurance transaction and the paid up impact caused a ¥8 billion reduction in earned premium in the quarter. Max Broden added that in order to get to an earned premium growth of zero, the company needs to get back to pre-pandemic production levels in all distribution channels and the Japan Post channel needs to restore its production level. Daniel Amos mentioned that the benefit ratios have been running lower than anticipated and the company has been trying to counter this with increased benefits on certain policies.

The company is focusing on increasing utilization of their wellness benefits in the US, and have seen a 22% increase since the start of the year. They are continuing to push for more utilization and expect to see continued improvement. The pandemic has caused utilization to be lower than pre-pandemic levels, so the company is enhancing their products to try and get back to those levels.

Frederick Crawford discusses the changes in the healthcare system during the pandemic and how it has led to a lower benefit ratio overall for the company. He then addresses Alex Scott's question about how Japanese interest rates affect their strategy, saying they are continuing to work on their asset formation product strategy in Japan, including the WAYS product, training and development, and cross selling. They have also mentioned that the recent recovery in rates in Japan has helped support those types of products.

Bradley Dyslin commented on the rise in yen rates, which is welcome news, but they are still having difficulty finding attractive spread products. They have been successful in finding yen credit with an acceptable level of risk, but the yields still pale in comparison to dollar assets. Suneet Kamath asked how quickly the utilization benefits would be reflected in their financial statements under the LDTI remeasurement concept, and it was noted that it would take a while for the impacts to be fully seen.

Max Broden and Suneet Kamath discussed how the Lower Deferred Tax Rate (LDTI) affects the company's financials, with Broden explaining that remeasurements are done each quarter to reset the net premium ratio for forward reserves, meaning that the benefits of the LDTI are reflected in the financials more quickly. Kamath asked if the benefits seen in the second quarter would persist going forward, to which Broden responded that the reserves would remain adequate as long as utilization trends stay the same, but that worsening trends would result in higher reserves. Frederick Crawford then asked Todd Daniels to comment on the lower persistency rate in Japan, which Daniels attributed to the introduction of a new cancer product and the natural replacement activity in the Japan Post channel.

Masatoshi Koide from Aflac Japan explains that the new cancer insurance product, WINGS, has been very successful since its launch in August of the previous year. It has been progressively distributed through Aflac's associates, Dai-ichi Life, and Japan Post. This product has allowed for face-to-face interactions between Aflac's distribution partners and their clients, leading to cross-sell activities with individuals and their families.

Aflac U.S. has seen an increase in its persistency rate, which is now at 78.2%, and is 10 basis points higher than last year. The company has created an Office of Persistency, which is a team of data scientists dedicated to improving the rate, and they have also launched a Yorisou Cancer Consultation service to help increase sales of their new product. Additionally, they are preparing to launch a new medical product in September.

Max Broden and Steven Beaver discuss the importance of driving persistency and utilization in order to increase US sales and revenue. They also mention the impact of back amortization on the second quarter expense ratio, which was 50 basis points. Additionally, they mention that the net earned premium growth in Japan was negatively impacted by 260 basis points related to the reinsurance transaction and some lapses.

Koichiro Yoshizumi explains that the associates channel, which will be launching a new medical product soon, will see a decline in sales of its cancer product as it has been around for a year. However, other channels, such as Japan Post, Dai-ichi Life, and Daido Life, which only sell cancer products, will not be affected by the medical launch as it has not been a year since the launch of the new cancer WINGS product.

Daniel Amos and Frederick Crawford discussed expanding their alliance with Japan Post beyond cancer, with Crawford mentioning the possibility of expanding within the line of cancer and introducing new products and services such as Yorisou cancer consulting. They also discussed the potential for Japan Post to become their largest shareholder.

Joshua Shanker and Max Broden discuss incentive compensation for senior management and employees, which is based on earned premium. Daniel Amos explains that the company ties the bonuses to the success of the company and employees. Frederick Crawford adds that earned premium is an essential part of how they compensate and Max Broden reminds Joshua Shanker of the outlook for earned premium growth for 2023 and 2024.

Virgil Miller is pleased with the performance of recruitment for the first half of the year, which saw a 8% increase in total recruited agents and a 35% increase in career agents in Q1. Average weekly producers are up 2% for the quarter. Daniel Amos commented that recruiting is favorable for the remainder of the year despite being in a post-pandemic period.

Dan gives kudos to Virgil and their team for their success in recruiting during high unemployment, and Virgil Miller mentions that they had expected this and are on target with their expectations. Masatoshi Koide then adds a few comments about their alliance with Japan Post.

David Young concluded the call by thanking the participants and encouraging them to reach out to the investor relations team if they had any questions. He also mentioned the collaborations between the Japan Post group and the company, such as the cancer insurance sales, a concierge service on nursing care area, and a startup acceleration program.

This summary was generated with AI and may contain some inaccuracies.