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Text: Dan Amos, Chairman and CEO of Aflac Incorporated, will begin with an overview of our operations in Japan and the US.
Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives, including how we are navigating the pandemic.
Members of our US executive management team joining us for the Q&A segment of the call are: Teresa White, President of Aflac US; Virgil Miller, President of Individual and Group Benefits; Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US.
We're also joined by members of our executive management team in Tokyo 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; Koji Ariyoshi, Director and Head of Sales and Marketing and Assistant to Director Sales and Marketing.
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.
aflac.com and includes reconciliations of certain non-US GAAP measures.
I'll now hand the call over to Dan.
At our first quarter conference call one year ago, we were facing the early days of the pandemic.
At that time, I shared with you, actions that we've taken to ensure that we protect the employees, the distribution partners, the policyholders, and the communities.
I'm proud of our response and our ability to handle these challenging times for everyone.
Our People First embodies the spirit of corporate culture, which we refer to as the Aflac way.
Within the pandemic environment, we are encouraged by the production of the distribution of the COVID-19 vaccines.
But we also recognize that vaccination efforts are still in the early stages around the world.
Our thoughts and prayers are with everyone affected.
And we are cautiously optimistic, while also remaining diligent.
There is one essential message that I continue to emphasize with our management team.
It is imperative that we control the factors we have the ability to control.
And what we don't have the ability to control.
We must monitor continually to be ready to adapt.
This approach allows us to respond in the most effective way possible.
In the first quarter adjusted earnings per diluted share increased 26.4%.
While earnings are off to a strong start for the year, it's important to bear in mind that they are largely supported by low-benefit ratio associated with -- excuse me associated with a pandemic condition.
Before covering our segments, I'll make a few comments about the overall perspective.
Pandemic conditions in the first quarter continued to impact our sales results, as well as earn premium and revenues, both in the United States and Japan.
We continue to expect these pandemic conditions to remain with us through the first half of 2021, but look for improvement in the second half of the year, as communities and businesses, further open-up, allowing more face to face interactions.
Despite the fact that sales in both the United States and Japan had been suppressed considerably due to the constrained, face-to-face opportunities, we did not sit still.
We continue to make progress in integration of our accelerated investment in our platform, while continuing strong earnings performance.
Looking at the operations in Japan in the first quarter, Aflac Japan generated solid overall financial results with a profit margin of 23.1%, which was above the outlook range that we provided at the Financial Analyst briefing.
Aflac Japan also reported strong premium persistency of 95%.
Sales were essentially flat for the first quarter, with the January launch of our new medical product.
All said, that continued impact of the pandemic conditions.
We are encouraged by the reception of the new medical product, by both, consumers and the Salesforce.
In addition, Japan Post group's announcement, to resume proactive sales in April, paves the way for gradual improvement in Aflac Cancer Insurance sales in the second half of the year.
We are actively working with Japan folks to ready the platform, recognizing that it will take time to return to the full string.
We continue to navigate evolving pandemic conditions in Japan, including the recent reestablished state of an emergency, for Tokyo, Osaka and two other prefectures, affected from April, the 25th, through May the 11th.
Restrictions will be tightened to curb the movement of people and group activities during the major holiday known as Golden Week.
Turning to the US, we saw a strong profit margin of 27.3%, Aflac US also reported very strong premium persistency of 80%.
Max will cover the persistency later.
Current pandemic conditions continue to notably impact our sales results, largely due to reduced face-to-face activity.
As expected, we saw modest sequential sales improvement in the quarter with an overall decrease of 22.1%.
In the US Small businesses are still in the recovery mode, and we expect that they will be that way for most of 2021.
At the same time, larger businesses remain focused on returning employees to the worksite rather than modifying the benefits for their employees.
We strive to be where the people want to purchase insurance.
That applies to both Japan and the United States.
In the past, this is meeting face-to-face with individuals to understand their situation, propose the solution and close the sale.
Face-to-face sales are still the most effective way for us to convey the financial protection only Aflac products provide.
However, the pandemic has clearly demonstrated the need for virtual means.
In other words, non face-to-face sales that help us reach potential customers and provide them with the protection that they need.
Even prior to the pandemic, we've been working on building our virtual capacities.
Given the current backdrop, we have accelerated investments to enhance the tools available to our distribution in both countries, and continue to integrate these investments into our operation.
In addition, we continue to build out the US product portfolio with previously acquired businesses that serve as a base for Aflac network dental and vision and group, absence management and disability.
While these acquisitions have a modest near-term impact on the top line, they better position Aflac for future long-term success in the United States.
Our core earnings drivers, which are persistency, underwriting profits, investment income and expense ratios continue to drive strong pre-tax margins both in the United States and in Japan.
Both Japan and the US, we experienced sequential sales growth in the months of January, February and March.
In addition, provided we don't experience the setback in terms of pandemic conditions, we're forecasting a sequential increase in absolute sales in the second quarter over the first quarter in both the US and in Japan.
As always we placed significant importance on continuing to achieve strong capital ratios in the US and in Japan on behalf of our policyholders and shareholders.
We remain committed to prudent liquidity and capital management.
We issued our first sustainability bond in March as we seek to allocate proceeds from the issuance to reinforce our commitment to social and environmental initiatives as we balance purpose for profit.
We treasure our 38-year track record of dividend growth and remain committed to extending it, supported by the strength of our capital and cash flows.
At the same time, we will continue to tactically repurchase shares.
Focus on integrating the growth investments we've made in our platform.
By doing so, we look to emerge from this period in a continued position of strength, and leadership.
I've always said that the true test of strength is how one handles adversity.
This past year confirms what I knew all along, and that is that Aflac is strong, adaptable and resilient.
We will continue to work to achieve long-term growth, while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in a continued position of strength and leadership.
I don't think it's a coincidence that we've achieved success, while focusing on doing the right things for the policyholders, the shareholders, the employees, the sales distribution, the business partners and the communities.
In fact, I believe success, and doing the right thing go hand-in-hand.
I'm proud of what we've accomplished by balancing purpose with financial results.
This is ultimately translated into a strong, long-term shareholder value.
Now I turn the program over to Fred.
I'm going to touch briefly on current pandemic conditions in Japan and in the US, then focus my comments on efforts to restore our production platform in 2021.
Japan has experienced approximately 575,000 COVID cases and 10,000 confirmed deaths since inception of the virus.
Through the first quarter of 2021 and since the inception of the virus, Aflac Japan's COVID impact has totaled approximately 10,500 claimants with incurred claims of JPY1.9 billion.
We continue to experience a low level of paid claims for medical conditions other than COVID, as policyholders refrain from routine hospital visits.
There are essentially three areas of focus in building back to pre-pandemic levels of production in Japan.
Our traditional product refreshment activities, online sales driving productivity in the face of pandemic conditions and active engagement with Japan Post to begin the recovery process in cancer insurance sales.
As Dan noted, there has been a positive reception to our revised medical product.
This product was designed to better compete and the independent agent channel where we had seen a decline in market share heading into 2020.
Sales of medical insurance are up 34% over the first quarter of 2020 and up 8% over the 2019 quarter.
The new product called EVER Prime has enhanced benefits that on average result in 5% to 10% more premium per policy versus our old medical product.
The product also includes a low claims bonus structure that has contributed to growth among younger demographics.
We have technology in place to allow agents to pivot from face to face to virtual sales, and an entirely digital customer experience.
The agent is not removed from the process.
The agent can make the sale and process the policy from point of solicitation to point of issuance entirely online without face-to-face contact.
We introduced this capability in October of 2020 and for the month of November, we processed 1,600 applications utilizing this digital experience.
In the month of March that number doubled to approximately 3,200 applications.
Not surprisingly, we are seeing higher adoption rates among younger demographics.
On March, 26, we launched a national advertising campaign promoting the capability and expect to see increased utilization.
We see this capability contributing to productivity even after pandemic conditions subside.
On Japan Post, as Dan noted, we anticipate sales volume will recover gradually in the second half of 2021.
Separate from Japan Post activities to revive sales, Aflac Japan is actively supporting recovery in the sale of cancer insurance.
This includes reinforcing communication on Japan Post sales policy, down to the postal branch level, training and education on our latest cancer products, and sales proposal strategies and identifying existing cancer policyholders in the Japan Post system to both explain the benefits of their current products and create an opportunity for potential upgrade.
It's important to remember that the Japan Post sales force has been inactive for 18 months.
Therefore product training and sales coaching are critical efforts in the coming months.
Turning to the US, there is approximately 32 million COVID-19 cases and 575,000 deaths as reported by the CDC.
As of the end of the first quarter, COVID claimants since inception of the virus has totaled approximately 38,000, with incurred claims of $130 million.
Along with infection rates declining from peak levels in 2020, our data suggests hospitalization rates and days in the hospital have trended lower.
However infection hotspots in areas of the US remain.
And as is the case in Japan, there is concern over a potential fourth wave of infection.
Executive orders requiring premium grace periods are still in place in nine states with six states having open ended expiration dates, persistency has improved.
However, most of that improvement is attributed to the combination of state orders and lower overall sales as we typically experienced higher lapse rates in the first year after the sale.
Turning to recovery and restore efforts, we have seen our agent channel and small business benefit franchise hurt by the pandemic.
It's important to note that roughly 390,000 of our 420,000 US business clients have less than 100 employees, critical areas of investment include recruiting, training, technology advancement and product development, key indicators of recovery include agent and broker recruiting, a built in average weekly producers and traction in the rollout of our dental and vision products.
For the first quarter, we are running at approximately 70% of the average with the producers during the same period in pre-pandemic 2019.
Trends are positive, and we expect to narrow this gap throughout the year assuming pandemic conditions improve.
We are experiencing favorable recruiting numbers, have reopened training centers closed during the pandemic and veteran agents are reengaging, after a difficult year.
We are in the early days of our national rollout of Aflac network dental and vision.
Our dental product is approved in 43 states, and vision in 41 states with more states coming online throughout the year.
Network dental and vision is critical in the small business marketplace, and a key component to agent productivity, along with new account growth, retention and penetration or seeing more employees at a given employer.
This month, we are completing the national training programs, making select product refinements and reinforcing incentives to drive new dental accounts.
In addition, we are busy upgrading our administrative platforms to ready for increased volumes.
2021 is the year of launch, learn and adjust, and we expect to see our pipeline, close rate and new accounts gradually increasing throughout the year.
Our premier life and disability platform acquired from Zurich is now operating under the Aflac brand.
We have started to see our quoted pipeline build in the last 45 days.
However, many employee -- employers are reluctant to move critical benefit plans while sorting through returning to work site and changing workforce dynamics.
In addition, benefit consultants often proceed with caution in a year or so after an acquisition.
We need to remain patient over the next few years as we settle into this new line of business.
Our competitive calling card is the proven premier service and technology capabilities of the acquired platform, coupled with Aflac Group's core leadership in supplemental work site benefits.
We will not resort to winning business via relaxed underwriting and pricing standards in this highly competitive market.
Finally, earlier this year, we launched our new e-commerce direct-to-consumer platform, Aflac Direct.
We offer critical illness, accident and cancer and are approved in approximately 30 states with more states and product coming online throughout the year.
This platform targets individuals, the self employed, gig workers and part-time employees.
In short, those who are not offered traditional benefit packages at the work site.
We are actively building out a licensed agent call center to better manage conversion rates and control overall economics.
With a modest amount of committed marketing dollars, we are attracting about 500,000 visitors per month to aflac.com, which has resulted in 120,000 leads for call center conversion this year.
We are currently experiencing a 15% conversion rate once in the call center.
This is a data analytics-driven business and core metrics will improve as this model matures.
In terms of the contribution of these businesses to overall sales in 2021, we expect these three growth initiatives will make up roughly 10% of sales in 2021 after having contributed less than 5% to 2020 sales.
We remain committed to the revenue growth targets discussed at our November investor conference.
We expect these initiatives to drive incremental revenue in excess of $1 billion over the next five to seven years.
As these separate initiatives mature, they leverage off each other.
Network dental and vision drives agent recruitment and conversion to average weekly producers, employer paid benefits drives supplemental work site sales, and direct-to-consumer expands our addressable market, while being leveraged to funnel work site leads to our agents in the field.
In the future, as employees leave the work site, a digital relationship directly with Aflac helps with persistency and customer satisfaction.
As Dan noted, we issued our inaugural sustainability bond, raising $400 million to be invested toward our path to net zero emissions by 2050 and investments that support climate, as well as diversity and inclusion efforts.
The bond offering itself is an important step, in that it requires formal processes around reporting, tracking and auditing of qualified sustainable investments.
This rigor serves to benefit the control environment surrounding our enterprisewide ESG reporting and accountability.
In addition, Aflac Global Investments announced late February, a partnership with Sound Point Capital Management to create a new asset management business, focused on the transitional real estate loan market.
As part of that alliance, we have made an initial $1.5 billion general account allocation to the newly created Sound Point Commercial Real Estate Finance, LLC, with $500 million of that amount dedicated to providing transitional and other debt financing to support economically distressed communities, designated as qualified opportunity zones.
Aflac will hold a 9.9% minority interest in this newly created investment LLC, with the ability to grow our stake over time in line with future growth of the new venture.
I'll now pass on to Max to discuss our financial performance in more detail.
Let me follow my comments with a review of our Q1 performance, with a focus on how our core capital and earnings drivers have developed.
For the first quarter, adjusted earnings per share increased 26.4% to $1.53, with a $0.02 positive impact from FX in the quarter.
This strong performance for the quarter was largely driven by lower utilization during the pandemic, especially in the U.S. and a lower tax rate compared to last year.
Variable investment income went $24.5 million above our long-term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses, grew 20.6%, and the adjusted ROE, excluding the foreign currency impact, was a strong 16.7%, a significant spread to our cost of capital.
Starting with our Japan segment.
Total earned premium for the quarter declined 3.6%, reflecting first sector policies paid up impact, while the earned premium for our third sector product was down 2.2%, as sales were under pressure in 2020.
Japan's total benefit ratio came in at 68.4% for the quarter, down 100 basis points year-over-year, and the third sector benefit ratio was down -- was 58%, also down 100 basis points year-over-year.
We experienced slightly higher than normal IBNR release in our third sector block as experience continues to come in favorable relative to initial.
This quarter, it was primarily due to pandemic conditions constraining utilization.
Persistency remains strong, with a rate of 95%, up 50 basis points year-over-year.
Our expense ratio in Japan was 21.3%, up 130 basis points year-over-year.
With improved sales activity, expenses naturally pick up in our technology-related investments into converting Aflac Japan to a paperless company continues, which also includes higher system maintenance expenses.
Adjusted net investment income increased 6.9% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed and floating rate portfolio.
The pre-tax margin for Japan in the quarter was 23.1%, up 60 basis points year-over-year, a very good start to the year.
Turning to the US, net earned premium was down 4.1% due to weaker sales results.
Persistency improved 240 basis points to 80%, as our efforts to retain accounts and reduce lapsation show early positive results.
As Fred noted, there are still nine states with premium grace periods in place.
So we are monitoring these developments closely.
Breaking down the 240 basis points persistency rate improvement further, 70 basis points can be explained by the emergency orders in place, 90 basis points by lower sales as first year lapse rates are roughly twice total in-force lapse rates.
And the residual of 80 basis points includes conservation efforts executed on last year.
Our total benefit ratio came in much lower than expected.
At 39.1%, a full 900 basis points lower than Q1 2020.
In the quarter, we experienced lower paid claims, especially in the month of January, as pandemic conditions impacted behavior of our policyholders.
This is in line with disclosures in 2020, indicating a negative correlation between infection levels and claims generating activities like accidents, elective surgeries and physical exams.
This low activity level related to non-COVID claims accounted for most of the year-over-year drop in the benefit ratio.
Our total incurred COVID-related claims also came in lower than expected due to an IBNR release.
We estimated new COVID claims at approximately $42 million, and this was offset by an IBNR release of $41 million.
As our experience accumulates, we have refined our assumptions, and this led to this IBNR reserve release.
We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders.
For the full year, we now expect our benefit ratio to be toward the lower end or slightly below our guided range of 48% to 51%.
Our expense ratio in the US was 38.5%, up 10 basis points year-over-year, but with a lot of moving parts.
Weaker sales performance negatively impacts revenue.
However, the impact to our expense ratio is largely offset by lower DAC expense.
Higher advertising spend increased the expense ratio by 70 basis points along with our continued build-out of growth initiatives, group life and disability, network and innovation and direct-to-consumer.
These contributed to a 110 basis point increase to the ratio.
The strategic growth initiative investments are largely offset by our efforts to lower core operating expenses as we strive toward being the low-cost producer in the voluntary benefit space.
Net-net, despite a lot of moving parts, Q1 expenses are tracking according to plan.
In the quarter, we also incurred $6 million of integration expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the US was down 0.6% due to a 22 basis points contraction in the portfolio yield year-over-year, partially offset by favorable variable investment income.
Profitability in the US segment was very strong, with a pre-tax margin of 27.3%, with a low benefit ratio as the core driver.
With Q1 now in the books, we are increasing our pre-tax margin expectation for the full year.
Initial expectations were for us to be toward the low end of 16% to 19%.
We now expect to end up for the full year toward the high end of this range indicated at start.
In our Corporate segment, we recorded a pre-tax loss of $26 million as adjusted net investment income was $20 million lower than last year, due to lower interest rates at the short end of the yield curve.
Other adjusted expenses were $7 million lower as our cost reduction activities are coming through.
Our capital position remains strong, and we ended the quarter with an SMR north of 900% in Japan and an RBC of approximately 563% in Aflac Columbus.
Unencumbered holding company liquidity stood at $3.9 billion, $1.5 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments.
Leverage, which includes the sustainability bond, increased but remains at a comfortable 23% in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $650 million of our own stock and paid dividends of $227 million, offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital.
And with that, I'll hand it over to David to begin Q&A.
[Operator Instructions] Natasha, we will now take the first question.

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q1 adjusted earnings per share $1.53.

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