The operator welcomes participants to the Aflac Incorporated Third Quarter 2023 Earnings Conference Call and introduces the speakers. The speakers will discuss the company's operations in Japan and the United States, as well as provide updates on financial results and investments. The call includes a Q&A session with members of the executive management team. The operator also mentions that some statements may be forward-looking and reminds listeners that actual results may differ from the discussion.

During the third quarter of 2023, Aflac Incorporated reported strong earnings and a 12.4% increase in sales in Japan, primarily driven by a 23% increase in cancer insurance sales. The company also introduced a new medical insurance product, which has received positive feedback. Aflac continues to focus on supporting its various distribution channels and gaining new customers through WAYS and Child Endowment.

The company's refreshed product has been successful in attracting younger customers and maintaining a high level of sales in the third sector. Sales in the US have also increased due to productivity improvements and growth initiatives. The company is focused on driving scale and leveraging bundled product lines to work with brokers. The new cancer protection policy has been well received and the company is emphasizing the value of their products to consumers. The company's strong brand and products address the gap in medical treatments and they are proud to continue building on their momentum.

The company is committed to prudent liquidity and capital management, generating strong investment results while remaining defensive. They have taken steps to protect against a weakening yen and fulfill promises to policyholders. The Board has declared a fourth quarter dividend and increased the first quarter of 2024 dividend by 19%. They are also continuing to purchase shares at a high level and managing liquidity and capital to support their dividend track record and share repurchases. The company had a strong quarter, with Aflac Japan and Aflac US both performing well and strong pre-tax profit margins. Capital ratios remain strong and the share repurchase was one of the largest in the company's history.

The speaker addresses an announcement of Fred's retirement and expresses their appreciation for his contributions to the company. They assure a smooth transition and mention the strong candidates in line to potentially take over as CEO. The speaker also mentions their own plans to continue preparing future leaders and drive shareholder value. Fred then speaks about his retirement and the reasons behind it, as well as his enjoyment of working for Aflac. He plans to focus on transition and select initiatives in the next year before officially retiring. The call is then handed back to Max.

In the third quarter, the company's adjusted earnings per diluted share increased by 27.8%, with a negative impact from foreign currency. Under the new LDTI accounting regime, the company evaluates its reserve assumptions and made adjustments, resulting in remeasurement gains. Variable investment income was below expectations and there was a write-down of software intangibles. Adjusted book value per share and adjusted ROE both increased. In the Japan segment, net earned premium declined due to various factors, but the total benefit ratio improved. The company continues to experience favorable underwriting experience and solid persistency.

In this paragraph, the speaker discusses the company's performance in Japan and the US. In Japan, there was a decrease in expense ratio due to good expense control and reinsurance transactions. Net investment income increased due to higher yields and a more efficient use of investment risk capital. In the US, net earned premium and persistency increased, while the benefit ratio was lower than expected due to remeasurement gains and subdued claims utilization. The company expects the benefit ratio to be below their outlook range for the full year, but within the range when excluding remeasurement gains.

The company's expense ratio in the US increased due to a software intangibles write-down, but is expected to decrease as growth initiatives become more profitable. Net investment income in the US also increased. The commercial real estate market is experiencing significant declines, resulting in an increase in reserves and write-downs for the company. However, the company believes these values do not reflect the true economic value of the properties.

In the Corporate segment, the company recorded a pretax loss of $49 million, which was smaller than the previous year due to a reinsurance transaction. Adjusted net investment income was lower due to increased tax credit investments. The company plans to execute another similar transaction in the fourth quarter. The company's capital position remains strong and it actively monitors and manages its capital ratios. Impairments were within expectations and leverage remains at a comfortable level. The decline in leverage was primarily due to the weakening yen.

In the paragraph, Dan Amos discusses the company's succession planning and mentions that there are several strong candidates to potentially replace Fred, who currently holds the Chief Operating Officer role. He explains that Fred's move to Japan was due to the COVID-19 pandemic and the company's desire for more interaction with their Japanese operations. Amos also mentions that they will continue to rotate employees between the US and Japan. He concludes by stating that decisions about the succession plan ultimately come from the company's Board of Directors.

The speaker discusses the two ways to look at transition and mentions that the company prefers internal candidates for the job. The Board will review all aspects to ensure the best person is chosen. The speaker enjoys working with the company and will continue to do so. They also mention a strong quarter and the potential for new people. The speaker also addresses an operational question about reserve release in the US and Japan.

The speaker, Virgil Miller from the US, is addressing the impact of the COVID-19 pandemic on the company's morbidity experience and actuarial models. He explains that there was a significant difference in hospitalization and behavior changes between the US and Japan, leading to a more pronounced impact on the US's morbidity experience. He also mentions potential tri-agency rules and the impact they could have on the company's business, depending on the scope and concessions given.

The company continues to advocate for their policyholders and saw no impact on sales in the third quarter despite the proposed changes to pretax benefits. The CEO also met with senators and congressmen to discuss the issue and believes that removing pretax benefits would negatively affect average Americans.

The speaker addresses concerns about a submitted proposal and acknowledges that it will result in a direct tax. They mention their experience selling in a pre-tax environment and express confidence in adapting to change. The speaker also discusses the challenges of the commercial real estate market and explains why their CECL reserve is relatively modest compared to their $1 billion watch list. They mention factors such as the average LTV of their portfolio and the ongoing workout negotiations with borrowers.

The company has a conservative loan-to-value ratio and about half of their portfolio is still subject to appraisal. They recently made changes to their FX hedging program, resulting in a decline in hedge costs for the third quarter. This is expected to continue in the near future, but may be subject to changes in capital markets inputs. This decrease in hedge costs will drop to the bottom line of the company's profit and loss statement.

The company has gradually shifted from using forwards to put options, which has increased volatility for small moves in the yen-dollar ratio. However, this has reduced risk exposure to dramatic moves in the currency. The reinsurance transaction last year freed up $900 million of capital, and the company plans to deploy it appropriately in business units or return it to shareholders. The US reserve releases were partially due to lower hospitalizations from COVID, but it is unclear if this trend will continue or revert to historical levels.

Max Broden and Al Riggieri discuss the changes in hospitalizations and treatments during the COVID-19 pandemic. They mention a shift in hospital operations and individuals seeking treatment, which has been factored into their models. They also mention that the pandemic is now in the rearview mirror and they have broadened their experience base for 2022. They believe they have adequately reflected the new experience into their models and may see more reserve releases in the future.

The speaker discusses the potential impact of current trends on the company's future performance. They mention that these are estimates and can go both ways. They also discuss the expected drop in earned premium in Japan due to paid-up policies, which will return to a more normal schedule in 2024 and 2025.

The speaker, Yoshizumi, discusses the progress of sales and partnerships with Japan Post. He mentions the strong sales of cancer insurance and the company's efforts to support and train sales agents. The CEO, Amos, also comments on the strong alliance with Japan Post and the importance of maintaining strong capital ratios in their subsidiaries.

The company is focused on increasing efficiency in Japan by digitizing their platform and improving customer self-service. They have been making progress in this area and are currently updating their tools to modernize them and improve the customer experience. This will lead to natural efficiencies over time, but it will take time to fully implement.

The company is working on transitioning to digital processes for customer and agent experience, which will yield benefits in the long term. However, the claims side is more challenging due to the paper-based healthcare system in Japan. There are efforts to modernize the system, but progress will be slow. The company expects to improve over time and this will result in lower expenses. Two properties were taken back with low to mid-50% occupancy rates, while the overall portfolio ranges from 55% to 65% occupancy.

Virgil Miller, from the US, states that Aflac is taking precautions to prepare for the potential DOL-HHS rule and is confident that they can comply without compromising the attractiveness of their product. They have a process in place to continuously innovate and enhance their benefits, as demonstrated by their recent cancer enhancements. A reinsurance deal has freed up around $900 million of capital, which will be prioritized for use in writing new business and operating entities, and potentially for shareholder returns.

Brad Dyslin, a representative from a financial institution, discusses the risk associated with their commercial loan portfolio. He explains that the properties most at risk are those with maturities in 2023 and 2024, and that they have reduced their investment in this asset class due to market conditions. He also mentions that they have adjusted their underwriting standards and are being more cautious in their terms and conditions. There is no specific mention of the capital consumption or rating agency charge for these properties.

Max Broden, Aflac's CFO, discusses the company's transition from being a commercial mortgage loan (CML) to real estate owned (REO). This results in a slight increase in the capital charge for the company, but it is still relatively small. When considering the distribution of the investment portfolio between Japan and the US, roughly 85% falls into Japan and 15% falls into the US. Regarding capital deployment, Aflac's first priority is to use excess capital within its subsidiaries for organic growth. The company has a track record of not being acquisitive and has only made tuck-in acquisitions to broaden its product portfolio. Broden does not see any gaps that need to be filled through M&A. Additionally, the middle market loan book has a high yield of around 11%.

The speaker discusses the strong performance of the middle market loan portfolio and attributes it to factors such as strong fundamentals, disciplined underwriting, and a focus on good businesses. They also mention the possibility of incurring some losses in the future, but overall the portfolio is performing better than expected. The speaker also addresses RBC being above their target and mentions plans for managing it down towards the target.

The company is running with a higher capital and RBC due to the strain associated with the pandemic. They expect to return to a 400% RBC level in the next few years, driven by growth and potential dividends. They will not be hosting their financial analyst briefing this year, but will provide an outlook for 2024 on their fourth quarter 2023 earnings call. The investor and rating agency relations team can be contacted for any questions.

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