Good morning, and welcome to the Aflac Incorporated Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. 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.

Thank you, Andrea. Good morning, and welcome to Aflac Incorporated's fourth quarter earnings call. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated. Fred Crawford, President and COO of Aflac Incorporated, who is joining us from Japan, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com, along with a video for Max Broden, Executive Vice President and CFO of Aflac Incorporated, who provided an update on our quarterly financial results and current capital and liquidity. Max will be joining us for the Q&A segment of the call, along with other members of our executive management; Virgil Miller, President of Aflac U.S,; Brad Dyslin, Global Chief Investment Officer and President of Aflac Global Investments; Al Roziere, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac U.S. We are also joined by members of our executive management team at Aflac Life Insurance Japan; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurances that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. And we encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available on investors.aflac.com, and includes reconciliations of certain non-GAAP U.S. measures. Please also note that after we file our 10-K, we plan to post, on our investor site, a recast quarterly financial supplement, showing the effects of the new long-duration targeted improvement accounting standard had it been applied to the 2022 and 2021 fiscal years. I'll now hand the call over to Dan. Dan?

Thank you, David, and good morning. Thank you for joining us. Reflecting on 2022, our management team, employees and sales distribution have continued to be resilient stewards of our business, being there for the policyholders when they need us most, just as we promise. From an overall standpoint, pandemic conditions impacted operations in Japan, especially in the first half of 2022. But they are gradually improving. Meanwhile, pandemic conditions in the U.S. have largely subsided. Turning to our financials, when adjusting for material weakening in the yen, the Company delivered another quarter of solid earnings results that rounded out a year of overall strong performance, as Max addressed in this quarterly video update. For 2022, Aflac Incorporated reported adjusted earnings per diluted share, excluding the impact of foreign currency, of $5.67, which was the Company's second best year in the history following a record 2021. Aflac Japan generated solid overall financial results in 2022, with an extremely strong profit margin of 24.9%. One of the consistent key contributors to Aflac Japan's strong financial results is its persistency, which was 94.1% in 2022. As anticipated, our benefit ratio returned to a more normal level in the fourth quarter after seeing a spike due to the practice of deemed hospitalizations, the scope of which was narrowed last September. Throughout the year, we continued to navigate the waves of COVID in Japan. We expected sales would pick up in the second half of the year, especially in the quarter, and that's exactly what we saw happen. Sales in Japan rose 10.8% in the second half of the year, including an 11. 4% increase in the fourth quarter, which led to a full year sales coming in essentially flat. These results reflected the August launch through Associates of Wings, our new cancer insurance products.…

Thank you, Dan. I'm joined here in Tokyo by our Aflac Japan leadership team led by Masatoshi Koide, President of Aflac Japan. Let me begin by saying 2022 was an important year of operational and strategic progress across the organization. Our U.S. growth platforms, dental and vision, group life and disability and consumer markets have moved from integration to full production, with comprehensive product portfolios that are broadly filed and marketed across the U.S. under the Aflac brand. These businesses have modernized operating platforms built to support the scale we anticipate in the future and are now fully contributing to sales and earned premium growth. In Japan, our refreshed cancer product is now further enhanced with the launch of our new [Yuriso] consulting support model after nearly a year of successful testing. We launched a revised and tactical approach to the sale of our WAYS and child endowment products, leveraging the strengthened product appeal to promote third sector cross-sell. While navigating difficult COVID conditions, we were proactive in addressing our expense structure, defending strong margins in the face of revenue pressure. From a corporate perspective, we remain focused on risk management and capital efficiency. Two areas of focus included our approach to hedging the U. S. dollar portfolio in Japan and efforts to improve enterprise return on equity and Japan product competitiveness with the launch of Aflac Re, our Bermuda-based reinsurer. Finally, across the organization, we launched a coordinated effort to address the balancing act of investing in and delivering on growth, reducing expenses simplifying our business model and improving overall customer experience. This includes comprehensive project governance, a network of agile teams and regular reporting up to the Board level. The financial goal is simple: to deliver on the outlook provided at this year's investor conference with respect to…

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 followed by a related question. And then get back in the queue to allow other participants an opportunity to ask a question. We'll now take the first question, Andrea?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jimmy Bhullar of JP Morgan Securities. Please go ahead.

So I had a question for Fred on long-term Japan sales outlook. I think you mentioned ¥80 billion in the '25 period. If we look back historically, that's still -- while it's up a lot from here, it's still consistent with what you had in 2019 and a lower number than '18. So is it that the market opportunity is less than it was before? Or do you think -- or should we assume that your market share has declined?

I think really -- so first of all, over the long run that is beyond 2025 and '26 we obviously would expect to continue some level of growth pattern. We simply stopped the timing around that time frame as a reasonable forecasting period. But there's no doubt, in the short run, meaning the next three to four years, that one of the shortfall compared to pre-pandemic levels was strength in the Japan Post distribution platform, including some very strong years of introducing new cancer in that platform. And it's clear to us at this point in time that while that platform is recovering, it's going to recover in a more linear fashion over time as opposed to a step function with dramatic increases. And that's because Japan Post is under a very diligent program of improving and investing in their platform, retraining their sales force and recovering from effectively halting and being out of the market for a period of time, as you know. So I think it's more of that gradual approach to the build that we expect that is playing on the slower growth rate. Now having said that, we're doing a lot of different things, as you know, we're refreshing our cancer product. We're adding to that cancer product competitiveness with our [Yuriso] consulting practice. We're also adding lump sum critical illness benefits, and we continue to focus on our other product development, including refreshing our medical product, particularly with an eye towards competing better in non-exclusive channels that are very competitive on the medical product, and we need to compete better there and build share. And then we're excited actually about the developments with WAYS and child endowment, particularly with WAYS. While it is not as high a return product as our other third sector, we're very pleased with the cross-sell activity, and it's also serving to build a little bit of momentum back in our core associate channel who needs more product to generate more commission and have more opportunity to recruit and build the sales force. So, so far, it's very early in that program. We're only a few months into reviving the WAYS product, but so far, the data is very supportive of the halo effect, if you will, particularly cross-sell. So we're doing a lot of different things here in Japan. But ultimately, the reason you see muted recovery is when we look at the throughput of these new products and capabilities, meaning the throughput through agents at Japan Post, agents at Dai-Ichi, agents and agencies in our associate channel, they're busy recovering from COVID, getting back out into the marketplace with face-to-face meetings. And of course, Japan Post is going through their own dynamics of recovery. So it's really the recovery in those third-party platforms that's causing us to be more cautious.

Okay. And then on the change in classification of COVID as a seasonal flu beginning, I think, you said mid-May, how should we think about the impact of that on your claims and potentially sales?

I think from a claims perspective, you're seeing the recovery already, and that is we're expecting it to recover back to previous traditional levels of claims activity. I think I mentioned to you last quarter, a normal week in Japan for us is processing something in the neighborhood of 30,000 claims in our operating center. That rose to north of 90, 000 claims a week during the deemed hospitalization period and seventh wave of COVID. So we've seen that dramatically come back down to normal levels with the exception of working the backlog that I mentioned in my comments. So I think the idea is to return back down to normal levels of benefit ratios, and that's the answer there. In terms of new sales, we have Yoshizumi-san here and Koide-san and they can add their commentary. I think the trickier thing is, when you're talking about thousands of agents, some of whom were forced into quarantine conditions during COVID, the issue becomes not only are more agents out there able to produce and share numbers undisrupted by COVID, but will there be a recovery in face-to-face activity, which is more effective. This is still an extremely cautious society here. As we sit here today, we are all wearing masks on the way into work, on the way home from work, while at work and while walking the streets of Tokyo. So there's still some time to take place to recover the full normal activity. Yoshizumi-san, I don't know if you feel differently or have anything to add about COVID conditions.

First of all, this COVID environment last year in the first quarter between January and March, sales have been severely impacted. And following that, the next peak, or the largest peak was between July and August, and many of the sales offices and branches were forced to shut down. However, the environment gradually changed, of course, at the timing of cancer launch, the things have been changing. And at the same time, agencies and sales agent activities became much more active. And as you've seen in our sales results, you can see that our new cancer insurance sales, is increasing and there's been a great momentum in sales as a result. And the result is that compared with 2021, we have about 30% increase in cancer sales. And also, our product strategy really was successful. For example, we were able to propose to customers more comprehensively of our products using WAYS. And as a result, third sector product sales increased because sales were done in a more cross-sell way. And as a result, we were able to exceed our second half 2021 sales in 2022. And as we enter this year, the COVID situation has been improving. And as a result, the agency's activities are even more active. And we are seeing that we now are gaining really good momentum with our strategies related to products plus the channel strategy in this new environment and in this environment with living with COVID. So what I am thinking now is that we are starting to really see an environment where we would like to be aiming for ¥80 billion in 2025 or 2026 time frame. That's all from me.

The next question comes from John Barnidge of Piper Sandler. Please go ahead.

My question is around the paperless initiatives that have been moved to digital and claims. You mentioned, I think it was 10% of claims digitally now moving higher, I think. Can you maybe talk about how this may impact benefits ratios over time for maybe a one-day pay style approach to digital?

Well, I think the primary benefit, there is certainly an ease -- customer ease element to moving to digital. But the primary motivation of moving to digital is increased agent productivity, yes, ease of doing business with the customer and the agent. There is, in fact, speed of processing claims that would pick up. For example, imagine paper-based claims processing when your claims went from 30,000 to over 90,000 a week during the last seventh wave of COVID. Had we been -- frankly, as an industry, this is not an Aflac thing. Had the industry been far more digitized in the level of claims they process digitally, you would have had much greater speed of claims adjudication. Normally, we'll pay a claim on average in around three days or so in Japan, sometimes four days. It had gone up to around 12 days during that peak level. It's now come down to around five days, so we've recovered quite a bit. But if you are in a digital environment, there's no doubt, John that you could speed that up and also protect against elevated claims periods to keep the speed and turnaround time faster. But I will tell you, a big motivation on our part to move to paperless is taking cost out of our structure. So when you're dealing with paper applications and paper claims processing and a heavy call volume related to customer service activities, all of that adds to cost structure. And in order for us to get that cost structure down, we've got to move it to digital, and that's what we're on a path to doing.

Okay. That's fantastic. And then my follow-up question, if we can stick with expenses. You had talked about a joint work with Japan Post for cancer launch. And then you talked about that backlog of claims from that seventh wave being the review mirror. But with that joint work on the cancer launch, are there any planned onetime expenses we should be thinking about?

Not materially. I'm looking at Todd Daniel's here, our CFO, and no, we wouldn't expect that. It's not unusual, however, when we launch a new cancer product in general and then launch in a major system that there is, in fact, a level of marketing expense that comes into play and launch expense. But quite candidly, while you may see it have modest implications to your expenses and expense ratio, it's not material and it's nothing I would characterize as a onetime thing that would pop out on our financials. It's just sort of normal way of doing business and normal business activity. So I wouldn't anticipate that, John.

The next question comes from Alex Scott of Goldman Sachs. Please go ahead.

I just wanted to get an updated view on just capital management and capital management priorities. Just looking at even just in the U.S., I mean, how strong the RBC ratio is, I mean I think there's companies that run with around half of your RBC level. There's seemingly a lot of excess capital around the organization. So, I was just interested in your views on that and how that's evolving?

Thank you, Alex. So, we have, obviously, throughout the COVID times, we made an active decision to hold capital in the subsidiaries given that we initially didn't know exactly where our benefit ratios and underlying profitability were going to go. So we opted to hold capital at a high level, both in Japan and in our U.S. subsidiaries. Coming out of COVID obviously, realizing that we are now operating at a high level, especially in the U.S. with an RBC ratio, on a combined basis, north of 60%, we do agree that, that's an excess capital position and that, over time, we would expect to operate our U.S. entities closer to 400%. That means that there will be capital coming out of those entities over the next couple of years. But we will do it when we sort of need it, and we will hold capital where we think it makes the most sense. There are times when it makes more sense to hold the capital centrally at the holding company, and other times when it makes more sense to holding at the subsidiary level. And we will, over time, optimize that.

Got it. And then the second question I had, I think it was mentioned earlier that Fred was going to be in Japan for some time. And I'd just be interested in sort of what the focus is for you, Fred, as you're over there? It sounded like maybe a year or something. What is your focus? What are your key objectives as you spent some time over there?

Sure. Yes, this is the result of Dan and I sitting down in the few months or so leading up to the year-end, and why Dan signaled that fab that I'd be shifting a bit of my weight to focus a bit on Japan. To be clear, I'm spending effectively 2023 in Japan. It started mid-January and will run through mid-December. There'll be times where I'll be back in the States for critical activities and other Board-related activities, et cetera, in the U.S. So I won't be here entirely. And very importantly, I haven't changed any of my job description. And so a s Dan mentioned, I remain actively involved in driving U.S. activities. But the main reason I'm here in Japan is that it's a recognition that, at Aflac, this is very different in how we operate Japan is not a subsidiary in what you would consider to be a normal global corporate company. Japan is intertwined in the fabric of the entirety of Aflac. There's extremely coordinated and close activities shared governance committees, shared intellectual capital around technology, digitization, product development techniques of going to market. We're really, in many respects, one company despite being 13, now 14 time zones away from each other. And so in order for me to do my job effectively, that is being President and Chief Operating Officer of this company, you've got to immerse yourself in understanding the Japan marketplace, our business model and the unique dynamics that drive this business. And you really -- you can do some of that making four to six trips a year for one week at a time or two weeks at a time, which I've done for seven years, eight years -- coming on eight years now. But it's entirely different when you immerse yourself…

This is Dan. I want to make a comment is that actually, I wanted Fred to go in 2020. And of all things, as you know, that was the year he got promoted to Chief Operating Officer and then COVID. So the year really is behind because I just thought -- it was actually his idea to stay there. My idea was to go there and live three months. And so that just shows how committed he is to the Company and doing well, and at the same time, working with the U.S. So I'm very pleased with Fred being over there. And that knowledge you cannot buy. It takes being over there, either the way I've been going for 40 -- over 40 years of the Fred's doing in the last seven. So thank you, Fred, and... David?

The next question comes from Suneet Kamath of Jefferies. Please go ahead.

On the Japan sales, can you give a sense of how much of those sales represent to the lapse and reissue -- and when we think about the sales metric that you show in your supplement, is that a sort of a gross number? Or is that a net number when we think about policies that may be lapsing?

When you look at sales, it's a gross number. So it includes the sale of policies to new customers or customers without the policies and replacement policies. At the same time, a replacement policy also counts towards lapsation. So in other words, yes, it counts as a sale on a gross basis, but also a replacement policy is considered a lapsed policy as well. So you end up having higher lapse rates and higher sales when you have replacement activity. That's why, in fact, you see our amortization expense pop up in the fourth quarter when we launch a new cancer product or a new medical product because you effectively have a greater level of lapsation. But there's nothing wrong with a replacement policy. It's really nothing more than going out to a customer and saying, you may benefit from an upgraded structure of benefits and pricing and other additive writers, et cetera., and there's nothing wrong with that. The issue isn't the lapse and replacement policy. The issue is when it's too much of what you sell, meaning you want to be driving more new customers and have the proportion of your lapsed and reissued or replacement policies be a lower percentage of your overall sales. That's why you're seeing what we're doing, developing coming back out with WAYS, which attracts a younger, as I mentioned, and newer cohort of investors. Creating products like the disability or income products that are sold and now small businesses to employees who lack that type of coverage, and elderly care product, which is a growing market, albeit a slow growing market. All of this is designed to try to attract and develop new customers. And we believe we can make progress on that. But right now, the lapse reissue is naturally higher when you launch a new cancer product. And that's really typical of what we've seen in the past.

And just to add, Suneet, to how this impacts our P&L, it obviously impacts our benefit ratio and expense ratio as well. The benefit ratio was lower by about 90 basis points in the quarter from increased lapse and reissue activity, and our expense ratio was roughly 50 basis points higher because of higher DAC monetization that Fred referenced.

Got it. I think last quarter, you had said that the lapse reissue is over 50%. Is that kind of still where it's running in Japan?

Yes, Suneet, this is Todd. It's still running around that rate. We saw it a little higher in the third quarter when we launched. And naturally, that rate starts to come down. So I think as a whole, over the first six months or so, we anticipate being around 50%.

The next question comes from Ryan Krueger of KBW. Please go ahead.

Could you talk a little bit more about what you saw in terms of the elevated U. S. lab activity in the fourth quarter? And then, also if you can provide any commentary on if that's continued into January or is settled down?

I commented in my script, this is Fred, about the lapse rates in the U.S., and it really mimics what I said. And there's really two categories to look at it. One is our individual products. You can think of these as our traditional products sold to small businesses, the largest portion of our in-force and sales. And that lapse rate was down around 1% and, honestly, down 1.5-or-so early in the year and then slowly recovered to where, by the fourth quarter, it was down more modestly.

Yes, Fred, Steve's got some numbers here on that, I think. Steve?

Yes, I would just add that Fred's script and talking points were spot on. We did see account lapses in the fourth quarter, particularly in our group business. not attributable to anything specific or systemic. We do have -- we did experience some large account lapses. We did pick up, as Fred highlighted, in the third quarter, some large accounts through the last half of the year. But net-net, we were down through the last half of the year at group. I would just add that looking forward into 2023, we are going to -- we have this office on persistency where we're going to approach this experience that we had in 2022 through product development, client service, technology solutions and incentive designs, but moderating that or modifying that to how the economy performs in 2023. That's an important thing for us to make sure that we use data to drive our actions in 2023 to get persistency back online.

Yes. We certainly expect the continued decent velocity of the labor force and so that will continue to be there. But at the same time, we do expect the recovery overall in our persistency going into 2023 relative to 2022.

I think you have to put it in perspective, too. This was largely focused on large accounts, the loss of large accounts, which will happen from time to time in the group business and the group business represents 15% of our earned premium. So in other words, look at our earned premium. It was down 0.2% in the fourth quarter. It was down 0.8% or less than 1% for the full year. That's not what we want. We want growth in earned premium. But we can recover from periods of week persistency. We have to focus on it. We have to bring it back. But the largest lapse rates were in the group business, which currently represents a smaller portion of our earned premium and is the fastest-growing part of our company so generated tremendous sales, which helps make up for some of that lapse rate. So we're trying to hold the line on earned premium, which is the most important component to manage.

And then just one question on the critical illness rider that you're going to be operating in Japan. Can you help frame how big of an opportunity that is? And it seems like trying -- I know that Japan Post is in a gradual recovery mode, but it seems like that would be a fairly meaningful opportunity given that you can add it to the existing policies.

Yes, I'd like Kite to answer that or Yoshizumi to cover that.

This is Yishizumi. I will cover your question. We are currently planning to launch this lump-sum serious disease rider in April in Atria. But then that assumes that this product will be approved by the SSA, This product responds to customers' needs of having to want to prepare against, not only cancer, but also for cerebral vascular diseases as well as heart diseases. And the Japan Post Group as well as with Aflac, we are trying to fully prepare to launch this product. And as you know, the Japan Post sales is gradually recovering. And what we are expecting is that this new rider will also help accelerate sales and recovery of the Japan Post.

So let me just add a little bit here. This is Koide. And this new rider that is to be attached to cancer product was jointly developed by Aflac and the Japan Post Group as part of our strategic alliance collaboration. That's all from me.

The next question comes from...

Excuse me, let me just make one other comment. I don't think the rider is going to be that much premium. But what it does is it gives an opportunity to get with the salespeople and go back to everyone telling them what we've got, which will ultimately help sales of the cancer policy as well. So I would look at it that way. Now that's just my viewpoint. Thanks.

The next question comes from Wilma Burdis of Raymond James. Please go ahead.

This is Wilma. Maybe you could give us some color on how modestly higher interest rates in Japan will impact Aflac in the longer run.

I think it may be good for Brad island to talk about that. It's largely an investment question.

Wilma, thanks for the question. We are expecting to see a little bit of volatility in rates in first quarter. As you're probably aware, there is an expected change in the governorship scheduled for February. And there is a lot of expectation that, that could lead to a policy change -- we saw a bit of a move in December when they widened the range on the 10-year JGBs by 25 basis points. So the magnitude of the opportunity is really going to depend on how much rates move. Remember, we are still at very low levels. And while a 25- or 50-basis-point move is certainly welcome, it's unlikely to result in a very big left or right turn on our asset allocation. But of course, yen assets are very important to us for the obvious asset liability management reasons, and we'll be keeping a close look as well as any opportunities to swap JGBs into higher-yielding yen credit assets.

And Rima, just a reminder in terms of the impact on our capital ratios, our SMR sensitivity to 100 basis points shift in the yen yield curve is 35-point -- negative 35 points on our SMR. Our ESR, more importantly, goes the other way. And obviously, higher yen rates are positive to our ESR. So a 100-basis-point shift in the gain yield curve would increase our ESR by 34 points.

And I guess could you give us a more specific examples of the lapses in the U.S. and some of the things you're doing to address it address those?

Virgil?

I'm sorry -- this is Virgil Miller, coming off mute. So Steve talked a little bit about it, let me give a little bit more color though. At the end of the day, when Steve and Fred both mentioned the office of persistency, what we're really looking at is, how do we drive utilization so that people understand the benefits they even acquired? When we're looking at selling our products, we do so making sure that our products are benefit-rich and -- but also that they're being utilized, so some of the things you'll hear us talk about is activity to make sure people have a knowledge and education around the benefits of how do we partner with our brokers, how we partner with our agents out there, and then with the employer to help drive utilization. We know that when they actually use the benefits, they have more of a tendency to keep it. And so you'll hear us talk a little bit of share more results around activities like that.

This concludes our question-and-answer session. I would like to turn the conference back over to David Young for any closing remarks.

Thank you all for joining our call this morning. And I just want to say, if you have any questions, please feel free to reach out to the investor and rating agency relations team. We look forward to speaking with you soon, and wish you all continued good health. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.