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Text: As we all know COVID-19 pandemic as lasted in some of the most difficult times for so many people around the globe, and we continue to pray for all those affected.
I'd like to share my appreciation for our employees and sales force in Japan and the United States for their tireless work in helping our policyholders and communities impacted by the pandemic.
During this difficult time, it's important to note, that we remain focused on doing what we do best, that is providing protection products to help consumers when they need it most.
Financially, backlog continues to be impacted by the pandemic, but remain strong in terms of capital and liquidity.
In addition, our investments are high-quality diversified and they are among the highest return on capital and lowest cost of capital in the industry.
Amid the challenges of COVID-19, this quarter was also significantly impacted by the release of favorable US tax regulations related to the utilization of foreign tax credits.
You'll recall that our Japanese subsidiary is taxed as a US domestic company for US tax purposes.
In the quarter, we recognized a cumulative year-to-date benefit from these regulations of $202 million or $0.28 per share compared to our previous run rate.
Max will provide additional details.
Turning to our operations starting with Aflac Japan, the effects of COVID-19 continues noticeably impacted our results, as seen in the third quarter, with sales decreasing 32%.
We continue to have around 50% of the workforce working from home in Japan and in September, traffic coming into the shops remained at 70% of pre-pandemic levels.
While these sales results represent sequential improvements relative to the last quarter, the effects of the reduced face-to-face activities are evident and we continue to promote virtual sales.
2020 as also ushered in a change on the Japanese political front.
Prime Minister, Abe, was Japan's longest serving Prime Minister and a source of political stability with nearly eight years in office.
Mr. Suga, was a core member of Abe's administration leadership team, serving as the Chief Cabinet Secretary.
We believe Mr. Suga's administration will carry on skilled leader skill.
This will continue to promote a good business environment in Japan and emphasize policies and terms of the response to the COVID-19 and economic policies.
Prime Minister Suga is accelerating efforts to move toward -- to move forward with regulatory reforms for a post-pandemic world, promoting digital transformation.
In that respect, I'm pleased that flagged Japan's paperless initiatives is well under way and Fred will share more.
Turning to Aflac US.
The effects of COVID-19 continued to noticeably impact our results in this segment as well, largely due to the reduced face-to-face activity, third quarter sales were down 35.7%.
In the US, we continue to feel the impact of temporary business closures and lack of access to the work side, especially among our career agents who have historically relied upon face-to-face meetings to engage our small business owners and their employees.
At the same time, the fourth quarter, typically when we see strong results and the broker driven group market, which is generally been more resilient to face-to-face to not face-to-face conditions.
As a result, we remain cautiously optimistic for modest sequential sales improvement for Aflac US in the fourth quarter compared to the second and third quarter, contingent upon the pace of the economic recovery.
We are also on track to close our acquisition of Zurich Group business benefits soon, which allows us to extend our distribution reach and appeal to brokers and large employers, while having little effect on the fourth quarter, the acquisition positions us more expanded capacity as we look forward to 2021.
To place Aflac in a position of strength, we know that we must balance investing in growth with an eye toward reducing expenses in the long run.
As such, we took an opportunity to offer a very generous voluntary separation package to eligible employees who expressed an interest.
As a result we have achieved an approximate 9% reduction in our US and corporate workforce with expected one-time expenses of $45 million in the fourth quarter.
You'll recall that the US benefit ratio was significantly affected by policyholders limited visits to the doctor.
With this in mind, we lost the US initiatives early in the third quarter to remind policyholders of the value of their wellness benefits attached to their products.
The wellness benefits pays on certain routine doctor, dentist and hospitalizations visits.
In addition, we made sure that it pays a benefit for COVID-19 testing.
The wellness initiative has been a success.
We are glad we emphasized this important aspect of our policies as it reinforces how we are there for the policyholder when they need us most.
This wellness campaign and the voluntary separation programs are a couple of near term headwinds to the profit margin.
However, we expect that they will serve us well as we enter 2021.
To conclude our operational discussion, as I've said before, we want to be where the people want to purchase insurance.
That applies to both Japan and the US.
In the past, this is meeting face-to-face with individuals to understand their situation, propose a solution and closed the sale.
However, the pandemic clearly demonstrates the need for virtual means.
In other words, non-face-to-face sales to reach potential customers and provide them with the protection that they need.
Therefore we have accelerated investments to enhance the tools available to our distribution in both countries.
As always, we are committed to prudent liquidity and capital management.
This includes maintaining strong capital ratios on behalf of the policyholders in both the US and Japan and a tactical approach to capital allocation.
It goes without saying that we treasure our record of dividend growth.
With the fourth quarter declaration 2020 will mark the 38th consecutive year of dividend increases.
Our dividend track record is supported by the strength of our capital and cash flows.
At the same time we have remained tactical in our approach to share repurchase, buying back $400 million of our shares in the third quarter.
We have also focused on integrating the growth investments that we have made in our platform.
By doing so, we look to emerge from this period of continued position of strength and leadership.
As always, we are working to achieve our earnings per share objective, while also ensuring we deliver on our promise to our policyholders.
We look forward to going into greater detail on our strategic growth plans and efforts to drive efficiency at the Financial Analyst Briefing Conference Call in a few weeks.
So now, I'd like to turn the program over to Fred.
I'm going to touch briefly on conditions in the third quarter, and how we're navigating the pandemic.
I'll also provide an update on key initiatives in Japan and the US to include our approach to managing expenses.
There are currently approximately 97,000 COVID-19 cases and 1,730 deaths in all of Japan.
Through the third quarter Aflac Japan COVID-19 impact totaled 1,750 unique claimants with incurred claims totaling approximately JPY550 million in the quarter and JPY760 million year-to-date.
In short, we are tracking well below our stress assumptions with no measurable impact from COVID-19 claims.
However, reduced sales and delaying the promotion of the new cancer rider and refreshed medical product are contributing to revenue pressure.
This pressure is offset somewhat by favorable persistency.
COVID related expenses in the quarter totaled JPY1.7 billion, which included the rollout of virtual distribution tools, employee teller working equipment and distribution support.
In the US, the dynamics are understandably more complex.
COVID-19 case levels in the US now exceed 8.5 million with deaths nearing 230,000.
Through the end of the third quarter, COVID-19 claimants in the US totaled 12,800 with incurred claims of approximately $23 million in the quarter and year-to-date approximately $57 million.
We are closely monitoring the recent surge in infections, but continue to see the rate of hospitalization, length of stay in the hospital and transition to ICU traveling below our expectations.
We believe this is attributed to advancements in treatment and the nature of the work site which is generally younger and healthier population of policyholders.
As Dan noted in his comments, we launched an initiative early in the third quarter to remain policyholders of their wellness benefits, which drove increased utilization.
This effort involved connecting with 2.7 million accident and hospital policyholders through a combination of email and direct mail in the month of August.
This impacted our benefit ratio in the period, but is designed to reinforce the value proposition of our products.
We have thus far seen limited impact persistency, however, we believe this is partially attributed to state executive orders requiring premium grace periods.
These executive orders are still in place in 13 states as of the end of the quarter.
In those states where the executive orders have expired, we have reduced pressure on lapse rates through proactive outreach to policyholders and employers, actively converting policyholders from payroll deduction to direct bill and notifying policyholders of the wellness benefits.
Turning to key operating initiatives in both Japan and the US, we are balancing investments in growth, while addressing our expense structure.
A material driver of elevated expense ratios in Japan and the US is weakness in revenue.
Thus, the need for a balanced approach.
Beginning with Japan, we are set to promote a simplified cancer rider in the fourth quarter in launching our refreshed medical product in the first quarter of 2021.
Rolled out in late October, we have the technology in place to pivot from face-to-face to virtual sales and an entirely digital customer experience.
We continue with direct mail campaigns aided by data analytics that serve to enhance the close rate.
We expect the combination of product development, a recovery in pandemic conditions and our alliance with Japan Post to be important growth drivers as we make our way through 2021.
We view the pandemic as a call to action on accelerating investment in our digital roadmap and related process improvement.
On our second quarter call, I noted, our paperless initiative across all operations in Japan.
This is a three year, and roughly JPY10 billion investment with approximately JPY2 billion spent in the third quarter, along with another JPY3.6 billion estimated spend in the fourth quarter.
While elevating our 2020 expenses, this effort will reduce the production and circulation of 80 million pieces of paper per year with run rate savings in the range of JPY3 billion annually.
As we move to the fourth quarter, we have budgeted an increase in general, administration expenses over our third quarter of approximately JPY6 billion.
This includes 50% of our 2020 annual advertising spend, concentrated in the quarter to raise new product awareness as well as a stepped up level of investment in the paperless initiative.
We are effectively accelerating investments in our digital platform into 2020 and 2021.
Turning to the US, the build out of network, dental and vision remains on track.
We have successfully filed our new network products in 48 states with approvals received in 37 states.
We are up and running with sales in 10 states and expect to ramp this up as we move into 2021.
Our consumer markets platform remains on track with hospital accident and cancer product filings expected to be completed in early 2021.
We also plan to include life insurance in 2021, recognizing that is a natural product to sell digitally empowered by the Aflac brand.
Finally, we will soon close on our Zurich Benefits acquisition having successfully completed the required regulatory approvals, along with efforts to improve overall persistency, these are the three largest incremental drivers to earn premium growth in the coming years.
Anticipating further pressure on near term earned premium as we move into 2021, we are addressing expenses in the US with a sense of urgency.
We are addressing expenses across two horizons.
Horizon one is near term focused and includes a series of actions in 2020 designed to take out approximately $100 million of annualized run rate expenses as we enter 2021.
This includes both the US platform and corporate expenses.
Early in the fourth quarter, we completed a voluntary separation plan for eligible employees, which will result in a 9% reduction to our US workforce.
We expect to record a one-time separation expense of approximately $45 million in the fourth quarter and we will realize annualized run rate savings in the $45 million to $50 million range.
Horizon two expense initiatives elevate near term expenses until such time the investment is complete.
Legacy platforms are decommissioned and business processes are adjusted.
The most significant investment is in our group business in migration off an old administrative platform to a new platform.
In addition, we are completing a broader digital roadmap, which includes approximately $25 million of accelerated investment in 2020.
Much of that investment coming in the fourth quarter.
As I noted, we need to balance these expense initiatives with investment in growth.
We have adopted a buy-to-build acquisition strategy.
While a tactical and prudent use of excess capital, this is not an inexpensive effort in the early years.
These build efforts include dental and vision, direct to consumer and Group benefits and taken together impacted our expense ratio in the third quarter by 110 basis points, and are expected to impact the fourth quarter by approximately 160 basis points.
I'll conclude my comments with investment conditions.
Our global investment team remains focused on asset quality, monitoring economic conditions and sourcing new investment opportunities in a low interest rate environment.
Our firm view is that we will experience a check mark-shaped recovery, meaning a slow road to recovery with pockets of volatility along the way.
Our actions prior to the pandemic tactically improved the risk profile of our portfolio combined with some additional derisking earlier this year has served us well with only modest losses on the sale of securities, impairments and loss reserve increases.
These actions have also positioned the portfolio defensively, should we see a second surge in the virus impact economic conditions.
We continue to watch closely our middle market loan and transitional real estate portfolios.
While we have seen credit rating downgrades, our middle market loan portfolio is more resilient to consisting a first-lien loans to high quality borrowers backed by strong equity sponsors.
In the case of transitional real estate, our portfolio is also consisting of only first-lien positions and is diversified with strong loans to value.
We continue to explore ways to optimize currency hedging.
Overall no material change, but we are further refining our approach to managing the unhedged dollars in Japan.
These unhedged dollars provide diversification and income benefits as well as lowering our enterprise exposure to the Yen.
As we look toward 2021, we will reset 2020 hedges on our floating rate portfolio and currency hedges at materially lower rates.
While we do not see this impacting net investment income to any great degree, you will see line item impacts to Japan's net investment income, hedge costs and corporate investment income.
Wrapping up my comments, we are not backing off critical investments to drive long-term growth and efficiency in the face of what we believe to be temporary weakness in sales results and earned premium.
We will provide further detail around this when we meet for our Annual Financial Investor Conference in the coming weeks and we will talk about the details of investments and when we expect them to turn the corner to having a positive impact on growth in profits.
I'll now pass on to Max to discuss financial performance in more detail.
Let me begin my comments with a review of our third quarter performance with a focus on how our core capital and earnings drivers have developed.
For the third quarter adjusted earnings per share increased 19.8% to $1.39 with no significant impact from FX in the quarter.
Adjusted book value per share including foreign currency translation gains and losses grew 17.4% and the adjusted ROE excluding foreign currency impact was a strong 16.8%, a material spread to our cost of capital.
This quarter was significantly impacted by the release of favorable US tax regulations related to the utilization of foreign tax credits.
As a reminder, our Japanese subsidiary is taxed as a US domestic company for US tax purposes.
In the quarter, we recognized a cumulative year-to-date benefit from these regulations, which lowered our tax rate on adjusted earnings for the quarter to 4.1%, a benefit of $0.28 versus our previous run rate.
Our tax rate for the quarter further benefited from tax credits in our solar and historic rehabilitation investments which lowered our tax expense by approximately $20 million more than in a normal quarter.
In addition, variable investment income came in $6 million above our long-term return expectations and together these two items boosted current quarter earnings per share by about $0.03.
When I go-forward basis, and under the current US corporate tax regime, we would expect our go-forward tax rate on adjusted earnings to be approximately 20%.
Turning to our Japan segment.
Total earned premium for the quarter declined 3.3%, reflecting mainly first sector policies pay up impacts while earned premium put a third sector product was down 1.7%.
Japan's revenue trends should be considered in light of impact on paid-up policies.
For example, year-over-year, earned premium was down 3.3% in the quarter while policies in force was down -- were down a little less than 1%.
This disconnect masks the strength of persistency, which has been rising during the pandemic.
In short, expenses related to managing our inforce tend to hold steady despite the drop in reported earned premium putting pressure on our expense ratio.
Japan's total benefit ratio came in at 71.3% for the quarter, up 130 basis points year-over-year and the third sector benefit ratio was 61.7%, up 170 basis points year-over-year.
The main driver for the increase was lower lapses associated with policyholders updating their coverage.
Given the current lower new business activity, this naturally pushes up our benefit ratio due to lower reserve releases, decreases back amortization and improves reported persistency.
We did experience all of this in the third quarter, manifested by our persistency improving by 80 basis points year-over-year.
The IBNR was also less favorable this quarter.
We've seen a drop in paid claims during the pandemic, more so in our medical coverages.
Our IBNR estimate has only partially reflected this drop given there is not much data to base an adjustment on.
We continue to monitor experience and we'll adjust our paid data as it gets more complete.
In addition, for our cancer claims that are more than three years old, we extended the completion of claims which led to a smaller release in IBNR compared to 2019.
Our expense ratio in Japan was 21.7%, up 110 basis points year-over-year.
Our paperless initiative kicked in at a higher gear as we digitize our operations and drive efficiencies throughout the value chain to a future state with significantly reduced paper usage.
Overall, when considering COVID related spend, promotional spend and digital and paperless initiatives, we anticipate expense ratios in Japan to remain elevated in the 22% range for the remainder of 2020.
Net investment income declined 0.2% in yen terms, despite the higher variable investment income, as our yen denominated portfolio generated lower yields, due to lower coal income in this quarter.
The pre-tax margin for Japan in the quarter was 19.4% impacted by both the higher benefit ratio as well as a higher expense ratio in the quarter.
Turning to US results.
Earned premium was down 2.6% due to weaker sales results.
Premium persistency improved 80 basis points to 78.8% as our efforts to retain accounts in key premium in-force show early positive results.
As Fred mentioned, there are still 13 states with premium grace periods in place at the end of Q3.
So we are monitoring these developments closely.
Our total benefit ratio came in at 48.3%, which was 80 basis points lower than Q3 2019.
We have seen a normalization of claims activity across our portfolio compared to the second quarter.
In order to improve customer experience and persistency, we conducted an extensive policyholder communication campaign highlighting the embedded wellness benefit in our accident product and we encouraged policyholders to utilize this benefit.
We estimate this initiative drove incremental claims of approximately $14 million and impacted our benefit ratio in the range of 100 basis points over what we would normally expect.
But we believe our efforts will add value for the customer and improve their experience along with improved long-term persistency.
Our expense ratio in the US was 37.3%, up 130 basis points year-over-year.
The inclusion of Argus added 80 basis points in the quarter and a decline in revenues, roughly explains the residual year-over-year impact.
The impact from declining revenues has become more pronounced on our ratios in this quarter relative to prior quarters.
We anticipate expense ratios in the US to remain elevated in the 39% range for the full year 2020, driven by near term weakness in revenue, uptick in seasonal business activity and expected inclusion of the Zurich Group Benefits acquisition.
Net investment income in the US was down 4.4%, due to a 14 basis points contraction in portfolio yield year-over-year.
Profitability in the US segment remains healthy at 20.5% with a low benefit ratio as the core driver.
In our corporate segment, amortized hedge income contributed $22 million on a pre-tax basis to the quarter's earnings with an ending notional position of $5 billion.
Our capital position remains strong and we ended the quarter with an SMR north of 900% in Japan and an RBC of approximately 700% in Aflac Columbus.
Our RBC is temporarily boosted by delaying statutory subsidiary dividends to Q4.
We still expect to end the year with an RBC in the range of 550% to 600%.
Holding company liquidity stood at $3.8 billion, $1.8 billion above our minimum balance.
This is down compared to earlier in the year, but reflects our decisions to delay regular Q3 subsidiary dividends to Q4.
On an annual basis we expect uninterrupted dividend flows to continue from our subsidiaries.
Leverage improved to a comfortable 22.9% due to the increase in shareholders' equity driven by the release of the tax valuation allowance of $1.4 billion.
While we remain cautious in terms of monitoring the pandemic, we have comfort in the strength of our capital ratios, excess capital, statutory earnings and dividend capacity and our ability to navigate any current and future stress brought on by the pandemic or associated economic conditions.
In the quarter, we repurchased $400 million of our own stock and paid dividends of $192 million.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive a strong risk adjusted return on equity with a meaningful spread to our cost of capital.
But first let me ask you to please limit yourself to one initial question followed by related follow-up question to allow other participants an opportunity to ask a question.
Adrian we'll now take the first question.

user
q3 adjusted earnings per share $1.39.
in yen terms, aflac japan's net premium income was ¥336.5 billion for quarter, or 3.3% lower than a year ago.
aflac - expect run-rate annual savings in range of $45 to $50 million, will record one-time expense associated with separation plan of about $45 million in q4.

assistant