Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Good morning. I'm David Young, Vice President of Investor and Rating Agency Relations and ESG for Aflac Incorporated. Welcome to our 2021 financial analyst briefing, and thank you for joining us this morning for our virtual event. We will begin our meeting today with an overview of Aflac Incorporated by our Chairman and CEO, Dan Amos; Fred Crawford, President and COO of Aflac Incorporated, who will then cover strategic execution before we turn to our segments in the U.S. and Japan; Teresa White, President of Aflac U.S. and Virgil Miller, President of Aflac's Individual and Group Benefits Division will cover strategy and growth initiatives in the U.S.; Masatoshi Koide, President and Representative Director of Aflac Life Insurance, Japan, will provide a strategic overview of Aflac Japan; and Koichiro Yoshizumi, Director and Deputy President, Director of Sales and Marketing, will then give us an update on Aflac Japan's growth strategy. We will then have our first Q&A session. Those of you who have received the dial-in information for the Q&A may ask your questions during this time. After the first Q&A session, Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments will provide an overview of the investment strategy for Aflac Global Investments. Max Broden, CFO of Aflac Incorporated, will be our final presenter and address our financial focus and outlook followed by our final Q&A session for the day. Before we begin, let me remind you that some statements made at today's meeting 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. Please look at our latest 10-K filing for some of the various risk factors that could materially impact our results. I would also note that we refer to certain financial measures that are not calculated in accordance with U.S. GAAP. Our most recent earnings release is available at investors.aflac.com and also includes reconciliations of certain non-GAAP measures. Definitions for these non-GAAP measures are included in the appendix. Copies of the slides are also available at investors.aflac.com, so you can follow along and make notes today. At this time, I'd like to introduce our first speaker, Dan Amos. Dan has been with the company on a full-time basis since 1973. In 1990, he became CEO of Aflac and Aflac Incorporated. And in 2001, he was also named Chairman. Dan has appeared 5 times on Institutional Investor Magazine's list of America's Best CEOs for the insurance category, and he has been recognized as one of the 100 best-performing CEOs in the world by the Harvard Business Review 5 times. Most recently, under Dan's leadership, Aflac Incorporated was included in the Bloomberg Gender Equality Index, which tracks the financial performance of public companies committed to supporting gender equality for the second consecutive year. Dan will now provide a strategic overview of Aflac Incorporated. Dan?

Good morning, everyone, and thank you for joining us. As we near the end of 2021, we find ourselves looking forward to a time when we can again meet face to face. While we're seeing some signs of improving pandemic conditions, uncertainty lingers as the world races to vaccinate the population while fending off any potential surges in cases that are variant in nature. I want to make one important point very clear. Although we at Aflac were certainly impacted by the pandemic, we have not remained idle, waiting for the pandemic to diminish. We have taken decisive actions, step by step, continue to effectively invest in our business and our brand. You'll hear more about the actions that we've taken today from the leaders who initiated them. 2021 marks the 39th consecutive year that we have increased the dividend to our shareholders. Today also marks my 32nd year speaking at this conference. I don't know where time went. I'm still enjoying what I do, building and cultivating growth for the company. As you've heard me say many times before, I believe that one of my key roles in conjunction with the Board is developing our leaders to lay the groundwork for strong succession planning. We place a high priority on ensuring we have the right people in the right places at the right time. In doing so, we have continued our focus on building a strong, deep bench of leaders, preparing to take on more responsibility, many of whom will be presenting today. This environment has been challenging for all. And Fred has been busy executing an enterprise strategy for growth that he laid out at the briefing last year. This strategy is not only focused on navigating the pandemic but also on building out our platforms for growth while also targeting efficiencies. To place Aflac in a position of strength, we know that we must balance the growth investments with an eye toward reducing expenses in the long run. Fred will update you on this progress before handing the program over to Teresa and Virgil. While many of you know Teresa, Virgil is President of Aflac U.S. Group and Individual Benefits division. Like Teresa, he's also a prime example of a leader cultivated from within our ranks. Virgil has been with Aflac since 2004 in various operational leadership roles. Along with Teresa, Virgil will provide a more detailed overview and update on growth strategies for Aflac U.S., including our goals of $1.8 billion in annual new sales by 2025. Masatoshi Koide, who many of you know, will cover the Vision 2024, Aflac Japan's medium-term plan and our near-term strategic growth plans. Our goal in Japan is to be the leading company for living in your own way. This is a declaration of how we tailor our products to fit the needs of the customers during different stages of their life. We have worked hard to be where they want to buy insurance through agencies, strategic alliances and banks. As I mentioned earlier, we have also significantly enhanced our ability to connect with consumers and sell to them through virtual means. As you can imagine, our recovery in Japan is largely contingent upon the resumption of face-to-face interactions and the timing of Japan post recovery. Koide-san will join by Koichiro Yoshizumi, Deputy President and Director of Sales and Marketing, who joined Aflac in early 2021. Yoshizumi-san brings a tremendous wealth of experience within Japan's life insurance industry. I believe we have the right person who can help achieve a recovery to the 2019 pre-pandemic sales levels of JPY 80 billion for 2025. After a strategic operational and sales-focused Q&A, we will turn to investment and financial portions of our business. Eric Kirsch will provide an update on our recent, refreshed strategic asset allocation as well as our responsible investing and strategic alliances. Our portfolio has generated strong returns while experiencing low loss levels and demonstrating the effectiveness of our disciplined investment process, risk management and strategic asset allocation. Later, Eric will be joined during the Q&A by Brad Dyslin, Senior Vice President Director and Deputy Global Chief Investment Officer. Brad was the fourth employee at Aflac Global Investments back in 2012. Along with Eric, Brad provides senior leadership across the spectrum of investment initiatives. Finally, Aflac remains strong in terms of our capital and liquidity. We are maintaining strong capital ratios on behalf of the policyholders in both the United States and Japan while at the same time remaining tactical in our deployment of capital. I hope you saw yesterday evening's announcement that we have increased the quarterly dividend by 21.2%. Our 39 consecutive year track record is supported by the strength of our capital and cash flows. Aflac Incorporated deployed $525 million in capital to repurchase 9.8 million shares in the third quarter and has repurchased over $1.8 billion today. Keep in mind, in addition, we have among the highest return on capital and the lowest cost of capital in the industry. As CFO, Max Broden has done an outstanding job preparing us as we entered the pandemic and as we continue to progress, and we will cover that more later. As I've said, we look to emerge from the pandemic with our company in a position of strength and continuing to build on our leading position in Japan and the United States. In the midst of this uncertainty, one thing is certain. The need for Aflac's products is just as strong, if not stronger than ever. Keep in mind regardless of whether we're talking about an environment of universal health care like Japan or one of private major medical, there is no plan that is designed to cover all of the out-of-pocket expenses. That's where our products come in. We believe Aflac's powerful brand, wide-ranging distribution will boost our ability to be where people want to purchase insurance. We know consumers' habits and buying preferences have been evolving, and we are looking to reach them in ways other than the traditional media and outside the work site. This is part of our strategy to increase access, penetration and retention, which Teresa will address. My job as CEO is to run the company to achieve strong results, but it really doesn't stop there. My job is also to ensure that Aflac is a trusted, respected and powerful brand. I don't think it's coincidental that Aflac has achieved our level of success while focusing on doing the right things. And in fact, I believe they go hand-in-hand. I am proud of what we've accomplished in balancing both our purpose and our earnings performance, which results in strong shareholder return. ESG is certainly a hot topic today. You'll hear more from Fred on this. But doing the right thing is an approach Aflac has taken as far back as I can remember. In the United States, the Aflac family has been giving back to the Aflac Cancer Center and Blood Disorders at Children's Healthcare of Atlanta for 26 years, with more than $155 million in donations. And in Japan, through Aflac's Parents House, we have been helping more than 130,000 children and their families who are facing cancer and other diseases. Our Board of Directors has directly overseen ESG for many years. In addition to our Corporate Governance Committee, our Board formed the Green Committee 12 years ago. We didn't really know what to call it, so we called it the Green Committee. This committee today has evolved into the current corporate social responsibility and sustainability committee. With respect to diversity and inclusion, just look around to our Board and our officers and the employees at every level and who has been with us how many years. You will see the importance we place on ensuring that Aflac reflects the communities in which we operate. Aflac continues to receive a tremendous amount of positive feedback, letting us know that we've got amazing people doing great things for our company. I think I can sum it up. Our focus on ESG by just sharing that over the last few days we have been notified that we are going to be included in the Dow-Jones Sustainability Index. We're also excited that we've just been approved as a signatory of the Principles of Responsible Investments, or PRI. At Aflac, we manage our business for the long term while remaining focused on achieving the near-term financial objectives. As our management team and as CEO, we are dedicated to addressing the challenges of growth amid a global pandemic. Our approach to driving long-term shareholder value is straightforward. The pursuant of growth through strong pretax margins and tactical capital deployment. Despite the headwinds over the last couple of years, I believe our operations are on solid footing. This is directly due to the resolve of our people, the way we leverage technology in the current environment and the underlying need for our products in both markets. I want to point out that the world has changed in many ways that surprises even the most cynical. But what hasn't changed is the fact that the pandemic or no pandemic, people are facing the same illnesses, accidents and health conditions every day. We are committed to be there for them in their time of need. It has been harder to reach many of them over the last 1.5 years to share how Aflac can help. At the same time, many people facing health conditions have not felt comfortable making or keeping medical appointments as regularly as they did prepandemic. But the need is still very much there, and so are we. Despite uncertainty, we have maintained our focus on controlling the things that we have the power to control. We can and will control our efforts to build our business and take care of those who depend on us. Our policyholders, our shareholders, our customers, our employees, our distribution and the communities in which we operate. By doing this, I believe that we will continue to enhance shareholder value. We offer products people want and need through sales distribution that we continue to grow and empower. Not even a global pandemic is going to deter from our mission. And today, you will hear the long-term vision and the strategy that will chart our course. Thank you all for being here today. And now I'll turn the program over to Fred. Fred?

Thank you, Dan, and good morning to all of you. I'll focus my comments this morning on key areas of execution. Our focus in the coming year and medium-term outlook for growth. Our executive team will then provide you with greater detail. We spent much of 2020 refining our global strategy. We thought of our strategic focus in terms of horizons with particular focus on navigating the pandemic and near-term platform build. A short list of essential areas of execution have emerged that are outside of the pandemic and within management control. In Japan, expanding our third sector product set beyond a 2-product story of cancer and medical, recognizing the revenue pressure that comes with operating in a saturated Japanese insurance market, we need to move from paper-based manual to digital processes reducing expenses and improving productivity. In the U.S., the focus is transitioning from launch to production on recently acquired and developed growth platforms, while reversing negative trends in our agent small business franchise. Like Japan, we recognize the need to advance our digital platform with a focus on ease of doing business. Other areas include capitalizing on our global investments and insurance platforms, forming strategic alliances and funding venture investments designed to advance our business model. Finally, ESG initiatives, including tangible investments and measurable targets. Let me conclude on this slide by saying the pandemic as impactful, as it has been has only reinforced the relevancy and urgency of our strategic plan and associated investments. So how are we doing on these key areas of execution? Entering 2021, we fully expected pandemic conditions to persist, but onset of the delta virus extended weak conditions well into the second half of this year. We have navigated the pandemic in a strong position in terms of core margins, cash flow generation, investment results and overall capital deployment. However, pandemic conditions set our platforms back in terms of sales trajectory and associated revenue build. Our U.S. buy-to-build platforms are now fully up and running. Integration is effectively completed on our acquired life and disability business. Network dental and vision sold cases are building, and we are quickly developing a network of providers powered by the Aflac brand. Our digital direct-to-consumer platform has expanded available product and is building an owned licensed call center. The bottom line, these platforms moved from 5% of sales in the first quarter of 2021 to now 13% of sales in the third quarter. In terms of operations, it's still early days in realizing the benefits of our One Digital Aflac program. However, we have identified areas of incremental revenue and cost savings over our 5-year planning horizon. Turning to Japan. Our nursing care product is off to a strong start, as we seek to develop a leadership position in this important class of third sector products. While overshadowed by the pandemic, we've also refreshed our cancer, medical and income products over the last 2 years to better compete and defend market share. Our paperless initiative is well ahead of plan. Benefits realized through this multiyear project and transitions from net investment, this project will transition from a net investment of JPY 3 billion in 2021 to a net savings of JPY 2 billion come 2023. Aflac Global Investments now has 3 active strategic alliances in place that support expansion of asset classes and responsible investing. Our Trupanion investment is performing well. Our worksite alliance is set to launch in early 2022, focused on the larger case brokers sold marketplace. While the alliance does not result in sales of Aflac for Aflac, we closed a gap in our voluntary benefit offering that is quickly becoming mainstream. Our venture portfolio of investments is in a healthy, unrealized gain position with 10 commercial partnerships in place and 18 in various stages of consideration. Finally, on ESG, we focused our efforts on tangible impact investments and measurable progress tied to our incentive compensation. As Dan noted in his comments, our focus in these areas have delivered noteworthy results. As we look forward, while growth is naturally elusive in Japan, defending and distributing economic value in the form of investable cash flow is a critical underpinning of our long-term strategy. To place a finer point on it, if you value our track record of dividend increases, our capital deployment story, including share repurchase and having the lowest cost of capital in the U.S. life and health insurance industry, you can, in large part, thank our Japanese franchise for those attributes. Having said that, we are focused on key deliverables, including sales recovery, measurable progress within the Japan post alliance, continued momentum with our new nursing care product, addressing our competitive position with independent agencies and advancing our noninsurance cancer and care service platform. Finally, and longer term in nature, managing expenses in line with revenue trends. While we do not expect to return to 2019 pre-pandemic sales levels in 2022, we do expect continued recovery as compared to our 2021 forecasted sales. We expect to return to JPY 80 billion in annualized sales in the 2024 to 2026 time frame, with timing dependent on the pace of Japan Post recovery. While GAAP revenue is expected to decline as we run off first sector savings product and with paid-up policy dynamics, we do expect third sector policies in force to increase, and with it, a steady build in the value of our Japan franchise. Turning to the U.S. We are in growth mode. We expect sales recovery approaching pre-pandemic levels in 2022. Despite a setback from prolonged pandemic conditions, we are maintaining our long-term sales growth expectations in the range of $1.8 billion by 2025. In addition, we see a healthy pattern of revenue growth driven by the combination of sales recovery, building our new growth platforms and a multidimensional effort to drive better retention. With that general overview, let me hand off to my colleague to provide greater detail and context beginning with Teresa White, the President of Aflac U.S. Teresa?

Thank you, Fred. Good morning. I'll start the U.S. section, with a macro view of the marketplace trends and then provide insight into how we're responding. The U.S. market continues to change in response to evolving customer preferences. The pandemic has accelerated digital business transformations, as consumers are more empowered today to become digitally engaged with brands. With that, people now expect connected and easy experiences. Consumers are no longer making decisions based solely on product or price. They're assessing what a brand says, what it does and what it stands for. In fact, 94% of consumers say that it's important that the company they engage with have a strong purpose. Our recent studies show that purpose creates stronger connections. As Americans continue to navigate the pandemic and the health and well-being of their families, almost 40% are concerned about paying for medical expenses that health insurance doesn't cover. In fact, Americans today owe $140 billion for unpaid medical debt. The desire for peace of mind when it comes to health coverage has never been more relevant for our industry. And as a result, we're seeing 3 major trends emerge. First, brokers have recognized the growing demand and need for supplemental products to help employees given the rising cost of health care coverage. With that, many large brokers have embedded national and regional supplemental practice leaders in their business to accelerate their knowledge of the industry. As brokers continue and become more prevalent in this space, this competitive -- their competitive edge relies on their ability to offer clients both relevant and differentiated product bundles as well as seamless end-to-end experiences. In addition, benefits administration platforms have been table stakes in the larger employer market. But recent research indicates that over half of small market brokers are also leveraging benefits administration platforms. And finally, we continue to see acquisitions by carriers to extend their selling footprint online, delivering modern administrative platforms with advanced analytics capabilities to reach and retain new customers and segments. I'm proud of the way Aflac has been responding to these market and industry trends. We focused on expanding the Aflac value proposition and positioning Aflac U.S. for growth in the future. Our vision is a world where people are better prepared for the expected and unexpected with benefits health insurance doesn't cover. Now more than ever, we believe consumers need our products, and we're taking advantage of the consumer sentiment to put Aflac U.S. in the best position to help those consumers to prepare for those health expenses. As I said earlier, consumers are more thoughtful today about who they do business with. With our strong brand awareness, Aflac has a unique opportunity to create connections with consumers through the caring efforts of our entire enterprise. Our brand promise has always been to be there for our policyholders in their time of need. And we've adopted care on purpose as a brand strategy and guiding light to engage consumers with the Aflac brand. Our objectives are focused and clear: Increased access to the marketplace by offering product sets that are more highly demanded by consumers, increased participation in Aflac's new and core products by creating cross-sell opportunities and increased policyholder and account retention by enhancing our digital experience and offering products with higher engagement and therefore, higher persistency. We will achieve our objectives by defending our core business and continuing to advance our model by accelerating the digital footprint for Aflac U.S., driving operational efficiency to be that low-cost provider and by retooling the organization for the future. We will achieve our objectives by defending our core business and continuing to advance our model by accelerating the digital footprint for Aflac U.S., driving operational efficiency to be that low-cost provider and by retooling the organization for the future. Over the last year, we've been executing on all of these strategies. We've accelerated the expansion of our product portfolio and now have a full suite of individual and group products, including Aflac network dental and vision and group life, absence management and disability. We focused on digital tools, capabilities and services that reduce costs and create digital experiences across the employee, customer and distribution life cycles. And we've made adjustments to our go-to-market approach to accommodate the many ways consumers buy within and outside of the work site. As we review our performance and projections over the next 4 years, despite the headwinds brought on by the pandemic, we continue to be within our publicly stated guidance for 2025. We communicated a goal of new sales in the range of $1.8 billion by 2025 and premium persistency in the range of 79% to 80%. These goals would allow Aflac to reach a 2% to 2.5% compounded annual growth rate for earned premium by 2025. I'll close with this. Our goals are aggressive but attainable. We believe that doing the right thing for our customers and driving business growth go hand-in-hand. Consumers trust brands that demonstrate that they care and put people first. Carrying on purpose and meeting our commitments is how we will continue to grow today and into the future. At this time, I'll ask Virgil Miller to provide an overview of our individual and group benefits businesses. Virgil?

Thank you, Teresa, and thank you for having me. Today, I'll provide an overview and an update on our Aflac U.S. growth and operation strategies. Let me start by giving an overview around Aflac U.S. growth strategy I mentioned. We have a 2-pronged approach that focuses on maximizing our core sales channels, while advancing our sales model to extend our reach and offerings. First, let's talk about the career channel. Like most of the world, Aflac was not immune to the impacts of COVID-19 pandemic. And our career agents were hit the hardest, as they rely on traditional face-to-face approach, operating predominantly in the small market business. While we are seeing normalization across the nation, we still have ways to go. We're realizing progress and seeing recovery in the second half of the year, which we anticipated. This is due in part to our efforts around stabilizing the career channel by equipping and training our agents on the latest virtual sales technology and increasing the number of producers selling our products. As we continue to rebuild, we believe we are well-positioned for future growth. Now let's talk about our broker channel. As Teresa mentioned earlier, we are seeing more interest in voluntary benefits from the broker community, specifically group benefits. When looking at the 2015 to 2020 5-year CAGR, our Aflac broker channel sales outperformed the industry average according to [indiscernible] study. In 2021, the Aflac U.S. broker channel is realizing pre-pandemic sales activity, and we are optimistic of continued growth in this channel with the deepening relationships that we forged over the past years. Now let's look at how we advance our model. Now we've evolved our go-to-market strategy approach as the marketplace has changed by expanding our value proposition with the recent acquisitions of the Aflac network dental and vision and group life, absence management and disability. Aflac made these strategic decisions to ensure we can meet our customer needs as the demand for these products continue to grow in the marketplace. We've also launched a fully digital direct channel to reach customers, who would normally not have access to our products via the worksite model. To complement our value expansion efforts, we continue to increase access to our products. We drive participation and we improve retention of our business. We believe we're well-positioned to meet the needs of the 177 million workers in the U.S. workforce. Now I'd like to provide a brief update on our acquisitions and direct-to-consumer channel. We're continuing to invest in these businesses to support successful integration and strong performance. You heard Teresa mentioned the importance of low-cost operating models due to competitive pricing for our acquisitions or as we call them, buy to builds. For our network dental and vision business, we continue to invest in digital enhancements and lean processes to drive operational efficiency. Network dental and vision continue to be the second most requested products after health insurance with over 2/3 of small businesses offering these products. As we move forward, we see a strong play with our career channel leveraging these products in new and existing relationships while strengthening our position in the broker space, as we remain focused on an increased market presence. Our group life, absence management and disability business allows Aflac to provide product enrollment technology and administration solutions for premier clients. As we mentioned before, we believe that when priced appropriately, persistency rates are typically higher in this industry than traditional volunteer benefits. While we're using a phased approach for integration with this acquisition, we are pleased with our progress. This business will achieve first year sales while providing industry-leading service levels. Most recently, we were selected as the claims administrator for the state of Connecticut's Paid Leave program due to our premier absence management technology, and we will continue to explore these opportunities in the market. Now in addition to our acquisitions, our consumer markets platform continues to drive access to Aflac's direct products. We believe our robust product road map will meet the needs of the 127 million workers, who don't have access to Aflac's product solutions through a traditional worksite model. Starting last year, we began our focus on implementation on a fully digital administration and operations platform. While we continue to test and learn with this growing business, it now represents 4% of new sales. We are seeing sales come through unassisted and 80% of all transactions are automated. We're also seeing increased interest in the technology and capabilities consumer markets offers to the marketplace. As we continue to see an increase in the number of consumers working outside of the traditional worksite model, we are optimistic of the growth potential for this business. In summary, we are pleased with the progress made by our buy to builds and are on track to be within our projected range of over $1 billion in sales by 2025, cumulative for these buy to builds. Now I'd like to provide an update on our operations strategy. Our one digital Aflac strategy was formalized over 2 years ago with a focus on growing revenue, being a low-cost provider and driving ease of doing business by way of digital solutions. Now while these principles are still foundational to our strategy, we, like most industries realize an increase in digital utilization during COVID-19 pandemic. With its increased demand and a need for digital, we've leveraged the opportunity to reimagine the way we do business to meet consumer and producer needs in a digital-first world. We are creating an end-to-end digital experience from sales to service. We've launched a new enrollment platform, provided virtual enrollment solutions for our agents when on site is not feasible. And we've created one-stop digital tools for our customers and producers allowing more self-service and customer preference when communicating with Aflac when things happen like following the claim. We're also implementing more automation throughout the customer life cycle and driving digital adoption to increase operational efficiencies. Now in conclusion, we've taken a well-balanced approach to our strategy, we're focused on driving growth, operational efficiency and owning the customer experience with investments in each of these core tenets. We're positioning Aflac for the demands of tomorrow. We aim to take our enrollment tool from being the largest individual voluntary benefits enrollment platform in the U.S. to being the best overall for individual enrollments. We're implementing enhancements in leveraging our new group administration platform to provide a best-in-class experience for all of our group businesses. And we're also adding advanced technology to include artificial intelligence and machine learning to provide the fastest and most accurate claims service for our customers. While we're laser focused on implementation and optimization, Aflac U.S. remains committed to our investors, producers and customers. Our strategy remains sound, our execution road map remains on target and we remain encouraged by the market opportunities. We thank you for your time. I will now turn the program back over to Koide-san.

Today, I will talk about Aflac Japan's strategic overview, strategies for growth and outlook. Japan's market dynamics are contributing to increased customer awareness of the need for protection against severe financial burdens and supporting continued expansion of Japan's third sector insurance market where Aflac Japan is the market leader. Japan's social security and universal healthcare systems continue to be challenged by long-term trends, including a low birth rate and an aging population. Today, more than 1 in 4 Japanese citizens is over aged 65, and by 2065, nearly 40% of Japan's population will be aged 65 and over. This trend is placing growing pressure on Japan's finances and social security system. And Japan's public continues to have significant concerns about the long-term viability of the health care system. Over the past 20 months, the COVID-19 pandemic has greatly accelerated trends such as digitization and significantly heightened customer awareness of potential financial and health care burdens. In this environment of rapidly changing societal and customer needs, Aflac Japan is pursuing growth initiatives that can create shared value through products and services that meet customer needs and address the changes of rapid change. Japan's life insurance market is the third largest in the world behind the United States and China. Aflac is the leader of Japan's growing third sector market, which consists primarily for cancer and medical insurance. The third sector has more than doubled over the past 15 years, and now includes more than 67 million in force policies. Of those policies, approximately 25 million policies stand around cancer insurance and 42 million policies, medical insurance products as of March 31, 2021. Overall insurance penetration is high in Japan with more than 82% of Japanese citizens enrolled in some form of life insurance. According to industry data, approximately 73% of Japanese citizens are enrolled in some form of medical insurance, and the market is growing increasingly competitive. Cancer insurance, however, has a penetration rate of only approximately 43% with room to grow further. In addition, nursing care insurance is also considered part of the third sector. As Japan's population ages and the customers seek insurance products to supplement Japan's strange social security system, there is an increasing need for nursing care coverage. Aflac Japan builds nursing care as a potential growth area, especially given its penetration rate of just 12%. As you can see in the graph on the right, the nursing care market is significantly smaller than the medical and cancer insurance markets. Aflac Japan's focus is to be the market leader in nursing care products and to further expand the market through innovation. Yoshizumi-san will address Aflac Japan's approach to nursing care later in today's discussion. In 2024, Aflac will celebrate its 50th year in Japan. As we look towards this milestone, Aflac Japan developed the Aflac Vision 2024 with the aim of positioning Aflac Japan as the leading company for Creating Living in Your Own Way. To realize this vision, Aflac Japan will strengthen its third sector leadership, reflecting our core business areas. Aflac Japan will also expand into new areas to create the value that complements our core capabilities and expertise. As we aim to leap forward as the leading company for Creating Living in Your Own Way, Aflac Japan is cultivating an innovation-driven corporate culture to help us better meet rapidly changing customer needs. Aflac Japan's medium-term management strategy provides a roadmap for achieving Vision 2024. Even in the pandemic environment, Aflac Japan strategy has led to important developments to position the company for growth over the medium term. For example, Aflac Japan launched a new medical insurance product in January followed in September by the rollout of our new nursing care product to further strengthen our leading position in the third sector. Aflac Japan's robust governance framework enabled management to accelerate agile and digital transformation initiatives, which were essential for the company's response to COVID-19 and enabled Aflac Japan to be the first life insurance company to roll out for agile sales and policy application tools to support sales in the pandemic environment. Aflac Japan also established a small amount short-term insurance company, SUDACHI, to provide new products for customers who do not qualify for traditional coverage and explore new areas for insurance products. In 2020, to promote growth and innovation, Aflac Japan launched Hatch Healthcare to provide supporting services as a value add for our cancer and nursing care policyholders through arrangements with third parties. Medical data analysis services are also provided through Hatch Insight. In June, Aflac and Japan Post Holdings, Japan Post Company and Japan Post Insurance reached an agreement that confirmed Aflac cancer insurance sales are an important part of Japan Post Group's 5-year medium-term management plan, which it announced in May. We agree that Aflac Japan would cooperate with Japan Post Company and Japan Post Insurance to establish and strengthen their individual insurance sales structures. We also agreed that Aflac Japan and the Japan Post Group would expand its areas of collaboration to include digital transformation and agile methods, among other areas. While we do not expect such further development of the strategic alliance to have an immediate impact on sales recovery, it will contribute to enhanced cancer insurance sales from a mid- to long-term perspective. Yoshizumi-san will speak more about Japan Post later in the presentation. Lastly, in 2020, Aflac Japan introduced its new human capital management system based on the job grade system to bring out the capabilities of its diverse human capital. As we look to achieve the Aflac Vision 2024, Aflac Japan has accelerated its strategic planning processes to build on the progress to date. We are developing our next medium-term management strategy, which will include an ecosystem strategy that will integrate insurance products and health care services to strengthen our core business. In addition, we are developing a digital transformation of what we call DX, an agile strategy to continue to leverage technology and drive agile operations to enhance the customer experience, ensure business continuity, reduce operating expenses and achieve flexible business operations. These and other growth strategies will be supported by Aflac Japan's finance strategy to promote operational efficiency and strategic investment. In the face of expected revenue pressure, we believe it is important to continue investment in key initiatives designed to defend our third sector leadership position, find new growth avenues and lower our future operating costs. Max will cover our outlook for expense ratios, but we are focused on benefit realization, delivering on the growth and efficiency targets embedded in our near-term investments. Aflac Japan is also putting in place a human capital strategy to draw out diverse human resource talent and governance and ERM strategy that will serve as a foundation for Aflac Japan's growth strategies and further strengthen our already robust corporate culture. Through its clearly articulated vision and medium-term strategies, Aflac Japan will build on its leading position in the third sector to continue to meet customer and societal needs and be the leading company for Creating Living in Your Own Way. Thank you. I will now turn it over to Yoshizumi-san.

Today, I will talk about Aflac Japan's sales performance and strategy. In 2021, the COVID-19 pandemic environment under deserving state of emergency affected the sales activities throughout the year, including the third quarter. The introduction of our new medical product in January and expanded use of non-face-to-face sales activities, including online proposal and applications helped reduce the pandemic's impact. In the first quarter, sales were essentially flat year-over-year and began to recover in second quarter, which significantly exceeded results from the same period in 2020. In the third quarter, a significant COVID-19 wave created a sales headwind and led to results on par with 2020. Aflac Japan's continued use of non-face-to-face sales activities and to extend the September 21st launch of the new nursing care product helped keep results level year-over-year. On October 1st, the government of Japan lifted its declared state of emergency nationwide and Aflac Japan expects to see gradual sales recovery beginning in the fourth quarter with our improving ability to meet face to face. We aim to return to JPY 80 billion in annualized sales over 5 years up. Aflac Japan aims to provide customers with insurance for waiving by designing products that can flexibly add updated coverage based on changes in the public medical insurance system, advances in medical technology and various risks during each stage of life. To do so, Aflac Japan will strengthen its product in 4 main areas. The first 2 areas are cancer and medical insurance. Aflac Japan has secured its position, as the overwhelming market leader in cancer insurance. Therefore, rather than launching product in response to competitors, Aflac Japan has adopted a product strategy of providing coverage that customers need based on change in the environment surrounding cancer. Regarding medical insurance, Aflac Japan launched a new medical product this January with enhanced coverage. The product was well received and contributed to solid results in the second quarter. Given the increasingly competitive market for medical insurance, Aflac Japan will ensure competitiveness through product revisions every 2 to 3 years. In addition to cancer and medical insurance, Aflac Japan is also focused on nursing care insurance. In September, Aflac Japan launched a new nursing care product, which like Aflac Japan's health and medical insurance product, is designed to supplement Japan's public insurance system and provide coverage for out-of-pocket costs incurred when receiving public nursing care services. We believe this product line will mature into a meaningful driver of further third sector sales. Income support insurance is our fourth area of focus. COVID-19 has accelerated the economic uncertainty, and there is now greater awareness among workers, especially those of small and medium-sized enterprises of shortfalls in the employment benefit and potential hardships associated with a loss of income if they become unable to work due to illness or injury. Against that backdrop, Aflac Japan's exploring a new product that can address this growing concern and provides support for those whose income may be affected by health event such as short-term hospitalization. With regard to our nursing care insurance, it is important to note that it is not like other insurers as long-term care policies. From a risk perspective, this is a supplemental product aligned with coverage provided by the Japanese government and targeting the mass market. Benefits kept both in amount and duration, the product is designed for protection burdens saving with modest interest rate sensitivity. In summer, the product has a similar risk profile to our existing third sector products. In addition to providing innovative products that for policyholders through rightful stages, Aflac Japan aims to reach customers when or where they want to purchase protection by enhancing, expanding and deepening channels for the most diverse and broad distribution. Aflac Japan intends to enhance its support to further develop customer service capabilities across a range of channels, including the Japan Post Group. As part of Aflac Japan's efforts to strengthen its traditional agency channel, we will increase the number of agency sales representatives, improve productivity and provide further support for management of large agencies. In addition, we will step up efforts to expand market share among large nonexclusive agencies which are popular among young and middle-aged customers. The Japan Post group with over 20,000 postal outlets nationwide has great potential and is an important distribution channel. To help reach this potential, Aflac Japan will further strengthen its training support for Post office sales staff, motivate and implement measures to increase sales activity and volume. In addition, as we aim to work with Japan Post in a manner consistent with its medium-term plan, Aflac Japan will continue to promote new collaborative initiatives such as the promotion of digital transformation initiatives in the finance and insurance fields to further strengthen our strategic relationship. Although the pandemic environment has improved in Japan, there is still a sense of uncertainty as experts have pointed out that infection may rebound in the winter. Even in this environment, we are determined to ensure our recovery in sales by utilizing our product strength, powerful brand and wide-reaching distribution to boost our ability to be where people want to purchase insurance. This concludes my presentation. I will now hand it back to David to begin Q&A. Thank you very much.

Thank you, Yoshizumi-san. We'll now turn to our first Q&A session.

[Operator Instructions] For this first panel, Charles Lake, Chairman and Representative Director of Aflac Japan and President of Aflac International will join Dan, Fred, Teresa, Virgil, Koide-san and Yoshizumi-san. And now I'll hand it over to the operator for last-minute instructions. Operator?

[Operator Instructions] First question comes from Jimmy Bhullar with JPMorgan.

I had a question just on Japan sales first. And your guidance of getting to JPY 80 billion in 5 years. That's obviously a level that you were already at in 2019, and it's lower than the level prior to that. So obviously, the last 1.5 years, you've seen sales impacted by a lack of face-to-face and Post has been depressed as well. But what are the -- and I'm assuming that face-to-face will return to normal in 5 years. So what are the factors either by product or by distribution channel or otherwise, that are preventing sales from getting to sort of pre-pandemic levels because I'm assuming the market should grow slightly over time and you're expanding product categories as well.

[Interpreted] This is Aflac Japan's Yoshizumi. I thank you for the question. And I would like to answer the question. Well, this pandemic impact in the third quarter was extremely large in Japan. We were very much impacted. However, as we got into October and November, things have settled down. And although it's still gradual, the sales are recovering. And assuming that the pandemic situation will improve, Let me start from the product strategy. And as I mentioned in my speech, we have launched our nursing care product and the sales has been very smooth and successful as we started this product. And we would like to maintain the momentum of the sales of this product in 2022. And in March, next year, regarding the product, we are planning to launch a new income support product. And for our core product cancer, we are planning to launch it in 2023 and this will be a new approach to the market and launch into a -- to the market by having service integrated-type products. And these core products, cancer and medical, because these are our core products, we will be refreshing them towards 2024, 2025. And at the same time, although it's very, very gradual, JP is recovering and we do believe that in 2022, JP will recover and come back much more than it has this year. In both JP and we have agreed and are working on to recover to certain figures by 2023. And regarding our associates channel or our traditional channel, which is our main channel, we are also enhancing the training and also hiring of sales agents of these associates, and we are enhancing those efforts. And Aflac Japan because of its very strong brand power in Japan and with our ability to develop good products and with our diverse distribution channel and as a result, we should be able to get back to 2019 level in the next 5 years. And that's all for me.

Let me make a comment about the question that he asked. First, let me say Japan Post has been slower than we initially thought. We were hoping that it would jump back a little bit more so. It hasn't. So these pandemic times have made us be conservative in how we're approaching our numbers. We've got a lot of good things going on. We see some strength coming back, but we don't want to over promise when we're simply having to look and gauge accordingly. Certainly, the third quarter was a poor quarter for almost everyone in Japan. Charles knows more details, but ultimately, the shutdown of the country did affect almost every industry. And we're thinking that is an anomaly and that will go back, and we're certainly seeing that some in the fourth quarter. But I go back to it's our ability to get Japan Post going. I think that is the number we're really watching closely. And it's really going to hopefully take place starting April 1. They finish out March 31, and it's going to be increases, yes, but not the kind of increases that you're really asking about at this time. So hopefully, we'll see that movement back in that direction. I certainly feel like Yoshizumi is well trained, knows the business and is going to help lead us into these times ahead that should be positive. But we don't want to overpromise at this particular point, and this is the way we see it right now.

And then on the U.S., are you starting to see a return to face-to-face already or not yet? And just agent's ability to be able to get into a business because I'm assuming that a lot of businesses are not allowing nonessential people on their premises. But how are you seeing trends in terms of face-to-face in the U.S?

I'll ask Virgil to respond.

Thank you, Teresa. Yes, we're starting to see a return to somewhat normalcy, not to say, though, there's still now some pre-pandemic challenges. I would say that going face to face, what businesses are asking for really is a verification that our agents have been vaccinated and that we are following safety precautions. What we've noticed also, though, is more of a hybrid approach. So if you think about larger corporations and you think about some small businesses, many have not returned fully back to the office yet. So therefore, they're approaching it in a hybrid situation where we can see some of the employees face to face and then we use our virtual tools to connect with others. So I would say that's more of what we're seeing evolve as we kind of move forward throughout.

And the other point I would make is you're seeing a shift in mix in terms of -- the business is really growing. It's the group business, which are the large accounts. And in the large accounts, it's been less one-on-one and more intranet enrollments. And those will do well in the fourth quarter. That's not to say that we're not hurt to some degree, but it's certainly an area that we're glad we got in, and we're doing very well in that. It's getting the individual agents back to work, which is really we're counting on Virgil and his team to get the people back and work on those small accounts, and those are the ones that it's a little bit harder to see them at the worksite, too.

And our next question will come from Humphrey Lee of Dowling & Partners. [Operator Instructions]

My first question is about the dividend increase that you announced yesterday. Just kind of looking at your track record, you clearly have a very long and impressive track record of annual increases in dividends. But I feel like they used to be more kind of -- typically have been more modest than we've seen lately. So with the 18% increase last year and the 21% increase this year, is the company starting to change your kind of capital return strategy to pivot a little bit more to dividend going forward?

Well, I'm going to make a few comments as Chairman of the Board and meeting with the Board on these issues. The Board certainly is encouraged by the liquidity and cash flow that we've seen. And we've always studied the returns to see where was our best use of capital. And certainly, buyback has been very important. And at the same time, the dividend has been a little bit low compared to some in the industry, partly due to the price of our stock moving up and therefore, the overall yield. So we thought it made sense to make a consideration of jumping to 21% because we had that opportunity and things are so strong financially. So I think you can look for us to continue to look at dividend and share repurchase. And then Fred, on the other hand, has been looking at other areas to invest the money along with Max and of course, from an acquisition standpoint to buy to build. And then Eric and his team have looked for investments as well. Fred?

Yes, I'd just say a couple of things, Humphrey. And then realize Max Broden later on today will -- or this morning, will talk a bit about our capital deployment strategies and can get into more detail. But 1 fundamental thing I would tell you is we just got done talking about Japan and the dynamics in Japan, and there's no question that there's going to be a bit more of a slower grind to rebuilding that sales platform. But don't lose sight of the fact that 1 of the big shifts the company has gone through in the last 5 or 6 years, is both the size and the stability of the cash flow and cash flow generating and capital-generating capability out of Japan. And so as we've moved to more reliable, sustainable level of cash flows out of Japan, it allows us to turn back to things like the dividend and the dividend payout ratio and be recommend to the Board something that is more aggressive given our current state. And then the Board has made their decision on the dividend increase itself. But I think at the root of it is, frankly, stability and reliability of the cash flow, much of which is attributed to the strong cash flows out of Japan.

Appreciate the color. My second question is you talked about expanding your market share in the large nonexclusive agency market. I guess, first, can you remind us your sales contribution from this channel? And secondly, my understanding is that the channel is highly competitive and these agents tend to focus on the big ticket items that have higher commissions. So how do you plan to entice this market to put more attention on your products?

I think it's probably best for Japan to address that in terms of the sales mix and then how we're approaching the independent channel in Japan.

[Interpreted] This is Yoshizumi again. And let me address this question. With a nonexclusive agency channel, especially the large nonexclusive channel or the agency is a very competitive market. We have expanded our market, focusing on our traditional channel, which are our exclusive agencies. And recently, large nonexclusive agencies are growing their sales to the young and middle-aged customers, especially using the third sector products. So Aflac Japan too, of course, would want to go into that market and compete by targeting young and middle-aged customers. And as we, of course, are focusing on third sector, well, the product development capability of third sector and based on our long-term knowledge and experience, we have been launching a product that really meets customers' needs. And as I mentioned earlier, I would like to -- we would like to change our product to a more competitive product that is more wanted by customers. So what we are doing right now is at the same time, increasing our competitiveness of products. We are also enhancing our training to our Aflac employee salespeople to look after the non-exclusive agencies. Well, myself before joining Aflac have focused on doing sales with nonexclusive agencies for 30 years, and that's really been all my focus. So I do have the experience of approaching these kind of nonexclusive agencies. And therefore, I would like to establish our organization as an organization that will not be defeated in this kind of market in the competition. And I believe your question has referred to the incentives that are being paid. In the Japanese market, the incentives that are paid to nonexclusive agencies are very much restricted, which means that without going into a very big incentive competition, we should be able to obtain or acquire a certain position within that market. Thank you for asking the question.

Our next question comes from Suneet Kamath at Jefferies.

So my first question, I guess, is for Fred. I think in your script, you had mentioned by 2023 the paperless initiative in Japan should be JPY 2 billion positive. Is the expectation that, that would fall to the bottom line? Or is that going to be reinvested in the business?

Suneet, the expectation is that will fall to the bottom line. Now obviously, we have ongoing commitments in Japan around technology and the platform. But certainly, the motivation of the paperless project is to drive our expense ratio flat it out in the face of reduced revenue and then eventually drive it to the more of the midpoint of our range. That's ultimately the goal and the paperless project is 1 path to getting there. So it's over 2 years, it's a JPY 5 billion swing from investment to savings, and that starts the process of bending what I call the expense ratio curve.

Okay. Got it. And then I guess switching to the U.S. Your persistency target of 79% to 80% is about where you're running today despite some of these initiatives that you've talked about -- So is there an opportunity to push that a little bit higher? Or do you think 79% to 80% is about where it sits long term?

Suneet, this is Teresa. Fred, did you want to respond first?

No, go ahead, Teresa. Yes.

Okay. All right. This is Teresa White. And from a persistency perspective, we're expecting, especially as we unravel all of the state emergency orders, we're expecting to stabilize our persistency through the end of this year. And we continue to look at the mix of business that we have to assess how we'll evolve the persistency will evolve in the future. But at this point, we're looking at product design, we're looking at engagement of clients and the digital capabilities to continue to drive persistency in all of the businesses. And we believe that we're zeroed in, in the right range, 79% to 80% at this time.

Our next question comes from Greg Peters of Raymond James.

I guess the first question will focus on the U.S. business. And I was listening to your comments about the strategies for growth, both with the brokers and the small business market. And I feel like there's been some increased noise coming out of the PEO business, the PEO market about growth in the small business area. And I know you've talked about this before, but I was wondering if you could just freshen up your views on the PEO market. And I know -- I'm pretty sure you have some partnerships with some PEOs out there. Maybe you could just talk about that. That would be my first question.

Just from my perspective, the PEO market, certainly, we see growth in that market. Aflac actually has been partnering with various carriers, various organizations, specifically through brokerages when we hit PEO organizations. So we continue to see our growth in the broker side of the market. We continue to drive increase -- are deepening those relationships with those brokers. And that's really our engagement. That's our way into the PEO markets. From an individual perspective or from a small group perspective, we're seeing a lot smaller accounts with various PEOs as well. So again, but we're working with brokerage houses to get into those particular offices. Did I respond to your question?

You did. Yes. I mean I probably could have a couple of follow-ups, but I'm mindful that I only have 1 question, 1 follow-up. So I wanted to pivot, and I think it's important. You're spending a lot of time talking about ESG and the initiatives you've had and the success you've had, can -- as we sit on the outside listening to talk about this, can you give us the metrics that we should be watching and evaluating your performance versus your peers? I know there's a bunch of different platforms that you could report on. Maybe you could just give us some perspective there.

I think, Greg, here's a couple of comments for you. First, the relative comparability from peer to peer is, as you know, challenging. It's challenging because the broader universe of ESG players, governance bodies and the like are trying to come to common measures and a common view of looking at things. What we try to focus on is less how we might compare to a particular peer and more simply advancing the [ incremental ball ]. We know, for example, core diversity statistics, everything from the makeup of our Board to the makeup of our executives and employees, both in terms of diversity of color in the U.S. and then diversity of gender in Japan. We know those statistics are leading in terms of industry and broader corporate America. But we continue to look for areas and ways we can advance that ball. In the areas of sustainability, we are very proud to be included now in the Dow Jones Sustainability Index. That is a marker that suggests you are among the top tier players involved in sustainability efforts. And we think that's a good independent third-party view of how we stand as a company. But aside from that, a lot of the power and focus is on where we are driving our investment portfolio. At the end of the day, we do a number of things to reduce our own company carbon footprint, but most insurance companies do not have a particularly large Scope 1 and 2 carbon footprint. Ultimately, at the end of the day, it becomes managing where you invest your money, and that's the most challenging, and it's also the greatest opportunity. And Eric will talk a bit about that in his comments later this morning. But you'll see we've made meaningful advancements in investing in underserved communities, roughly $600 million of incremental commitments and investment in those areas. And then on the sustainability front, a series of investments that all told are approaching $1 billion or more in that category, including even a strategic alliance designed around sustainability investing, which, again, Eric will comment on. And so at the end of the day, Greg, our main mission here is advance the ball and advance it in a tangible, measurable way. How we may relate to our peers. We obviously want to be viewed as leading in that regard, but we're more importantly, looking to just advance our capabilities.

Thank you, Greg, and we will have opportunities in the second Q&A as well. Our next question comes from Tom Gallagher of Evercore. Tom, please go ahead.

First question is, can you talk about the competitive dynamics and what those are like in Japan. I think the last time we visited Japan, it seemed like the medical market was hypercompetitive at least as it related to the domestic insurers on features and pricing. Just curious what it's like today, I presume things that might have changed a bit during the pandemic. So if you can comment on competitive conditions in medical and also in the cancer market.

Yoshizumi?

[Interpreted] This is Yoshizumi again. And let me answer your question. And as you mentioned, the medical insurance market is very, very competitive. And competition is becoming even more intensified as large domestic insurers have entered the market. And the reason why large domestic insurers are coming into the third sector market from the originating first sector market is because of the following. And the reason is, of course, because this medical market is -- has a very big potential. As you know, Japan is a country with aging population and more and more households are becoming a single household. So and as you know, of course, Aflac is focusing on the third sector market, especially medical market. And the market that we are focusing in is becoming bigger and bigger in other words, which means that there will be more potential customers and more lease for this market. So what we believe is important is to really strengthen our ability and our approach to our customers and deliver our products to customers with a very much Aflac taste product under this kind of an environment. And as I mentioned earlier, we have a very strong brand in Japan. And also the trust from customers based on our history and tradition and also the product development capability. And with these strengths, we are helping to even further strengthen and expand our market in the medical insurance. And that's all for me. Okay. Sorry, let me just refer to the cancer insurance as well. Well, in the cancer market, our competitors are coming in as well. But in the cancer market, we have this overwhelming share in the cancer market in Japan, of course. And our new business share of cancer is declining in terms of the number, and that is very much due to the Japan Post issue. But then, as I mentioned in my previous comment, that we have already started to go into the area of service integrated cancer market. This only not will aim to increase the sales of cancer insurance what we plan to do is also to try to solve the issue of cancer, the societal issue of cancer in an active manner. That way, we will be able to address many of the needs of customers, and that is the kind of product that we plan to launch. And as I mentioned, JP will gradually recover in the cancer insurance market. And I do believe that we will be able to establish a cancer insurance market with an unwavering position within the Japanese market. And that's all from me.

Okay. And just a quick follow-up on the U.S. I know the agency channel has struggled to grow for a long period, and the pandemic has added to that pressure. And I know you've talked about your direct initiative, but is there any way to accelerate the pivot into the faster-growing broker market or rejuvenate your legacy agency channel?

Yes. Thank you. This is Virgil. Let me separate the comments there. First, let me give you a few comments on the agency channel itself. -- that has absolutely been a main focus this year for us. So if you think about looking back 2020, we saw a tremendous impact from the pandemic, we saw many of our agents in the first quarter not yet growing. So when I make comments like rebuilding is really talking about coming off of a pandemic 2020. Here's what gives us optimism this year as I've observed, in Q1, we've seen growth each quarter of the number of veteran agents who returned back to selling for. So the number increased from Q1 to Q2, Q2 to Q3, and we're looking very optimistic going into Q4. So we're seeing our veterans come back, and we've had different types of incentives out there to make sure we get them going. The veteran population is a critical part of stabilizing that career channel. During the time of COVID, we made sure that all veterans were completely trained and equipped on all virtual tools. As I've mentioned before, it doesn't matter how the employer responds to us, especially in that small business. Our veterans can go face-to-face. But if necessary, they are ready to go virtually, and that's why we're optimistic. We've seen that channel respond. As I looked at the traditional business, again, each quarter-over-quarter, we've seen the growth start to come back. Now if I focus on the broker channel, they're predominantly selling in the group space. Dan mentioned earlier we kind of dissecting the market. In that large case market, they were more used already to online sales and more virtual tools. We haven't missed a beat there. We've been performing at pre-pandemic levels most of the year in our group space. Right now, we're 146% of 2019 levels in selling out group [ VV ] products. And that's driven by brokers. Our broker production is also over 100% when compared to 2019. I'm anticipating this year, we'll see about anywhere from [ 48% ] to 50% of all business to be driven by brokers. So very optimistic. They're also our pipelines are strong for Q4, and we're looking that we're on track to deliver what we said we're going to do. So that's why you see us continue to have the optimism. That space was already used to those virtual and online sales.

I want to make 1 comment about the broker versus the individual sales and the market and what's going on. The individual sales by our individual agents in small accounts, that market is really not being tapped. And so it's a tremendous market if they stay focused on the accounts of less than 100. The midsized market, the brokers have moved down from the large to the midsize which has put some of our agents and positions where they're working with brokers and been able to do that. But it has certainly made the overall market for the individual agents somewhat smaller in everything that takes place. However, there's no competition in that area just to any great degree in the smaller ones. So we just have to keep them focused there. Our goal is to just keep that stable and the growth will also come from the other areas. But let's be sure here you understand, we want our individual agents. They're an integral part, and we've got this market, nobody else has really to speak of in any great degree. And we want to keep that 100-and-less market and believe we can continue to grow it, but it is -- in the old days, as we used to say, we would say an agent can sell anywhere. The reality is they're welcome to try, but they're not going to be as successful we know that because of the brokerage and what's going on. So we encourage our people as we recruit them to work with the 100 or less, and they can make an outstanding living and at the same time, take care of people that probably have not quite as good a health insurance as some of the major employers. And so it ultimately helps them in their coverage.

Dan, just to add on, again, this is Virgil what you just said, I want to make it clear that what differentiates Aflac in the market is our ability to work together. So when our agents that are working right alongside our brokers, which we see about 50% of the time, it is through fulfillment, helping with enrollment. That's what gives us the uniqueness of what no one else in the industry has when our 2 channels go to market together.

And that business counts under the broker, not under the agent when it shows up. So when you see the agent channel not doing as well, you have to understand in the old days, if they had that account, it would show up under an agent. If the broker then got the account even though the agent would help the enrollment, it's going to show up under a broker account.

Thank you. And our final question for the Q&A panel this morning is from Andrew Kligerman at Credit Suisse. And Todd, Andrew was asking our competitors in Japan offering a similar nursing care product to Aflac. And if so, how long has their experience been to date? What has their experience been? And how does it compare to the -- how does your product compare to U.S. long-term care products that was helpful, but what else gives you confidence that your nursing products will be profitable?

Yes. Thanks, David. And Andrew, starting with the second question first. We designed the product with competitive benefits while balancing the premium levels so that we can benefit the consumer. Our product is supplemental to the national government plan and a big difference between U.S. long-term care and our product. U.S. long-term care pays roughly $5,000 to $6,000 a month with an inflation rider and all these other benefits. Ours is indemnity-based where at lower levels, we're paying a lump sum benefit and at higher levels where people need more money for services and things, we're paying a 10-year annuity. So our benefits are fixed and indemnity in nature much like our other products. I also -- getting to your first question, there are a couple of companies in Japan that have a similar product. But what we're looking to design with having an entire ecosystem around care that's offering people these services that will allow them to stay home longer not required to go to a nursing home, I think, is going to be a big differentiator for us in the care market.

That concludes our first Q&A panel. While we prepare the room for the next set of presentations, we would like you to enjoy some of our latest commercials. [Break]

Welcome back. I'm going to have to get 1 of those Aflac, its myself. But I'd now like to turn the meeting over to Eric Kirsch. Eric joined Aflac in November 2011 as 1st Senior Vice President, Global Chief Investment Officer and was promoted to Executive Vice President in 2012. In 2018, Eric's role was expanded and he was named President of Aflac Global Investments. Following Eric's presentation, Max Broden will be our final presenter and will cover our financial focus and outlook, and then we'll go to our final Q&A. I'll now turn it over to Eric. Eric?

Thank you David. Good morning, I would like to start by acknowledging that this is the 10-year anniversary of global investments. Many of you were here when I joined Aflac and we started the journey of building a world-class investment platform. I would also like to introduce Brad Dyslin, Deputy Global Chief Investment Officer, who works with me to run the global investments platform. As Dan mentioned, Brad was employee #4 back in 2012 and has been responsible for building our credit platform, a core of all of our investing activities today. Brad will be available during the Q&A session. Investment markets are having a strong year in 2021, which obviously benefits our portfolio. We continue to have a sharp focus on our disciplined investment process and maintaining a high-quality and well-diversified portfolio that includes a growing allocation to private credit and alternatives. We deployed approximately $8 billion of new money with 78% allocated to U.S. dollar assets. We continue to find attractive opportunities in private U.S. dollar credit and transitional real estate debt and middle market loans posting attractive new money yield of 5.3% in these asset classes this year. Our portfolio has had minimal losses reflecting the quality of our credit underwriting. This year, we further reduced our most vulnerable names by over $410 million, a good portion of it in below investment-grade energy names. We placed an interest rate hedge on about 1/3 of our floating rate portfolio to capture the spike in rates and to help protect future net investment income in the event interest rate should reverse course in the face of continued uncertainty around the pace of economic growth. Finally, we just completed a new strategic asset allocation study or SAA, which showed opportunities to defend net investment income with growing allocations to private credit and alternatives while maintaining appropriate risk and capital measures. Every 3 years, we update our SAA work to account for refreshed capital market assumptions and specific Aflac constraints such as capital, risk and liquidity considerations. In this study, our optimization exercise identified target portfolios that can continue to defend net investment income while providing increased diversification and capital efficiency. Highlights of this study show we can decrease Japan government bond exposure and increase yen credit investments, which can earn higher returns while providing asset liability management benefits. In addition, there is an opportunity to increase our U.S. dollar portfolio for Aflac Japan and focus on private credit assets, including alternatives, all creating a tailwind to income against a low rate in reinvestment environment. Offsetting this would be a decrease to public credit, where we expect yields to remain at relatively low levels. And as a reminder, it takes years to converge to this potential future portfolio allocation, which we do gradually primarily through new money investing sourced from maturities, calls and investment income. About 5 years ago, we started Aflac's alternatives investment strategy, primarily focused on private equity and some real estate equity. Our investment principles include diversification by vintage year and strategy and a deliberate deployment pacing with an understanding it would take us about 5 years to realize longer-term higher returns. You can see we have committed about $2.9 billion in total. And today, we have about $1.1 billion invested in the ground. Our portfolio is well diversified across primary investments such as small and mid-cap buyouts, co-investments, secondaries and real estate. This year, we are enjoying the benefits of this strategy, with over $280 million in variable net investment income, which is about $200 million above our long-term return expectations. For planning purposes, we will use a 10% long-term rate of return, although we expect our active manager and strategy selection will earn returns above this rate over time. Aflac Japan has approximately $32 billion in U.S. dollar assets. The portfolio is well diversified across fixed and floating rate assets and alternatives. Our hedging strategy of maintaining a large unhedged U.S. dollar portfolio serves to balance the use of Japan's excess capital while lowering our enterprise exposure to yen. We have about $26 billion in unhedged economic exposure and $6 billion hedged with forwards to replicate yen synthetic exposure. We continue to use forwards against floating rate assets to maintain a match and movement in hedge costs and floating rate yields. This has proven successful since we initiated the strategy, generating a net positive and net investment income every year. Of the $26 billion in unhedged dollar exposure, we now focus on using put options for about $12 billion, which provides tail risk protection against the rising dollar and creates capital benefits in the form of reduced solvency margin ratio charges. And for the remaining portion, we maintain a purely unhedged exposure. The put options provide efficient pricing for the protection while removing the risk of negative settlements in a weakening yen environment. We consider ESG and responsible investing to be an evolving journey over time. This is partly because capital markets continue to adjust to investor preferences, evolving standards and related regulation, new investment opportunities and risks. In addition, the practice of defining ESG data and reporting continue to evolve. With that backdrop, Aflac has made many strides building upon our existing framework of proprietary scoring in our credit analysis and application to external mandates, along with the desire to source ESG-focused investments that provide good risk-adjusted returns. This past year, we committed to over $3 billion in new ESG-oriented investments. These commitments include new real estate loans dedicated to qualified opportunity zones and affordable housing, a new strategic partnership focused on sustainable infrastructure lending and a mix of social and sustainable public and private investments. Some of these investment opportunities will be directed to the proceeds of Aflac's recent sustainability bond issuance of $400 million. Our journey continues as we further enhance and refine our responsible investing framework, develop portfolio targets for achieving carbon neutrality and net zero emissions while expanding investments in diversity and inclusion-oriented strategies. We are excited to become a signatory to the principles of responsible investments or PRI as we build our capabilities and further align to ESG best practices. Our investment toolkit includes making equity investments in money managers who can provide Aflac with access to specialized asset classes that can earn premium returns over traditional asset classes at similar quality and risk levels. We believe private markets will continue to grow and provide those opportunities. Given our large balance sheet and annual new money pools of capital to invest with long and stable liabilities, we believe this strategic approach will defend NII and provide additional revenue opportunities, making for an attractive return on our capital investments. We currently have strategic investments in 3 external managers, with 2 new transactions this year with Sound Point and Denham Capital. Combined, we have invested about $60 million in equity stakes and committed about $8 billion of committed assets under management. Based on expected spread over comparable public credit, we believe we can earn as much as $200 million in incremental income annually, helping to defend against low reinvestment yields. To date, we are generating strong returns on our invested capital and hope in the long term to generate gains upon any potential exits and monetization. We will continue to explore and build a portfolio of specialized money managers over time enhancing our results. In closing, I would like to complement our investment and support teams in New York and Tokyo whose extraordinary skills have allowed us to meet and exceed our investment targets while maintaining a very high-quality investment portfolio, consistent with Aflac's investment objectives. On our 10-year anniversary, I am also proud to represent Aflac whose Board of Directors and management in the U.S. and Japan have provided tremendous support and confidence in us. We will continue to execute and deliver while sourcing new investment opportunities in the future. Thank you. And now I'll hand it over to Max Broden.

Thank you, Eric. Let me begin with a few comments on long-duration targeted improvements or LDTI, which goes into effect on January 1, 2023 before moving on to our financial outlook. LDTI adoption is the most profound accounting change for the insurance industry in 40 years, and it will have a significant impact on AOCI. However, it is important to understand the uniqueness of our products and business model, especially as it relates to our very profitable Japanese business. LDTI will have no impact to FSA or stat earnings, cash flows, capital, dividend capacity, debt covenants or how we manage the company and deploy capital. Aflac Japan operates a business with very high persistency, leading to long-duration liabilities with a natural ALM gap and low economic sensitivity to a low-for-long rate scenario. We also utilize the held-to-maturity category for certain designated yen assets in order to reduce capital volatility. And as of December 31, 2020, we had an unrecognized gain of $4.7 billion post tax. As of December 31, 2020, we estimate a negative noneconomic impact on AOCI upon adoption of $18 billion to $20 billion, which gives us $13 billion to $15 billion in total equity, but no significant changes to key value drivers. $20 billion, which gives us $13 billion to $15 billion in total equity, but no significant changes to key value drivers. The impact on our income statement and key value drivers will be limited. Benefit ratios will increase slightly as favorable experience will be earned over the life of the policy. Expense ratios are expected to be slightly lower as DAC will be amortized over a longer time period. Net-net, this is expected to lead to a slightly higher pretax profit margin in Japan and an insignificant impact to U.S. pretax profit margin when compared to current GAAP. So overall, we generally expect no change to our P&L, capital base or value of our businesses. So why is there such a big impact on AOCI? And why is it noneconomic? The very high persistency of our Japanese block means that we have an in-force of a large number of policies sold with locked-in discount rates in a much higher interest rate environment. The reality is that compared to underwriting assumptions, the investment margins have been negative as rates have declined, but the morbidity margin has been very favorable and has, over time, dwarfed to negative investment variance, leading to a total very favorable variance in earnings experience. LDTI bifurcates each policy in-force and accelerates in the negative investment margin through AOCI, hence, a very large negative impact. But it does not accelerate in the favorable and more than offsetting morbidity margin, represented in green in the walk on this slide. When looking at our AOCI sensitivities, it is important to remember that almost 90% of our liabilities are discounted with a yen curve and have an average duration of more than 20 years. So moving on to our Japan segment. Our core margins continue to be very strong as we enter 2021 and are underpinned by a familiar pattern of improving benefit ratios. This trend was somewhat offset by a slightly elevated expense ratio. In 2021, the pandemic has led to a slightly lower claims utilization, driving increased IBNR releases in a lower than trend benefit ratio. We estimate this impact to be roughly 200 basis points in 2021. At the same time, we have accelerated expenses tied to digitizing processes, going paperless, and transitioning our business model. All of our ratios experienced some level of revenue pressure due to the impact of paid up policies and reduced sales during the pandemic. And we now forecast revenues to experience an annual decline in the range of 3% to 4% in 2022 and 2023. Looking out through 2023, we expect our total benefit ratio to be reasonably stable within the 67% to 69% range, supported by the long-term favorable actual to expected claims experience, particularly on our large cancer block. Reported benefit ratio on our first sector block runs north of 100% as the block has matured, and we don't book interest credited into the benefit ratio. This means that the mix of third and first sector in-force matters when evaluating the total benefit ratio. Our interest-adjusted per sector benefit ratio remains favorable to pricing assumptions supported by a good mortality component. The decline in revenues further emphasizes the need for expense discipline as it brings added pressure to the expense ratio. Taking all these components together, we would expect to continue to operate with an expense ratio in the range of 20.5% to 22.5% near term towards the upper end of the range. Adding net investment income to the equation leads to a projected pretax margin in the range of 22.5% to 24.5%. Our U.S. business remains in investment mode to position the business for the future. Therefore, we expect our expense ratio to remain elevated in 2022, pressuring pretax profit. Our U.S. revenues have faced some near-term headwinds due to reduced new sales during the pandemic, but we expect they will soon return to growth. The U.S. benefit ratio benefited from very favorable overall claims experience in 2021, which we anticipate will normalize in the range of 48% to 52%. Over time, growth of our new lines of business will push our benefit ratio higher as they grow to become a greater part of our in-force. The expense ratio will remain elevated going into 2022 and then begin its decline as the investment spend fades and new initiatives begin their revenue generation. In the 2022 to 2023 planning period, we expect the expense ratio to be in the 38% to 41% range due to these investments, which we anticipate will help us achieve a long-term expense ratio of 35% to 37%. The reference pressure from expenses will near term lead to a decline in profit margin, putting us in the range of 16% to 19%. Both our FSA earnings and SMR reflect a strong capital formation and cash flow generated by favorable underwriting associated with our in-force. Key to this has been our focus on ensuring protection with a limited amount of policies with a cash surrender value attached to it, greatly reducing the economic risk from a low interest rate environment. As of September 30, we estimated Aflac Japan's SMR to be 959%, which is up from the 881% at the end of fiscal year 2020. The SMR also included 151 percentage points of unrealized gains on AFS securities. Since we are primarily a hold-to-maturity investor, there is a pull-to-par effect on our investment portfolio which leads us to look at our SMR, excluding unrealized gains on AFS securities. On this metric, the SMR is estimated to be 808% as of September 30. We continue to monitor economic solvency ratio, which is based on internal models and historical experience, similar to Solvency II. Our ESR continues to be the guiding model for capital decisions and is regularly reported to the FSA as part of our ORSA submission. Currently, our ESR is approximately 153% without an ultimate forward rate, which we estimate would add 85 points if incorporated. Overall, both FSA earnings and our capital ratios remain strong and have experienced relatively low volatility lately, and we will continue to evaluate the sources, levels and structure of our Japan balance sheet. We expect to end the year with an RBC of approximately 600% in Aflac Columbus. When we stress test the capital levels of our U.S. entities and evaluate the risks of both the assets and liabilities as well as compare ourselves to peers, we intend to target an RBC closer to 400% over time given the strength of the earnings profile, low risk and stability of our operations and low asset leverage. Statutory earnings have benefited significantly in 2021 from a low benefit ratio and reduced new business strain as a function of lower sales. This leads to a higher RBC ratio as well as improved future dividend capacity. As we move into 2022, we would expect a more normalized benefit ratio and statutory earnings in the range of $850 million to $950 million. Key to driving value for our company is the spread between adjusted ROE and cost of equity. We are an active manager of both components. The expanded value spread has been generated off of a higher absolute level of shareholders' equity ex AOCI, driving a greater value of dollars created each year. Given our strong capital ratios, we view this as a high-quality value stream that we generate each year, driving long-term shareholder value. Management of our consolidated balance sheet is a function of risks and opportunities we experience and could face in the future. When further breaking it down into each local balance sheet, we intend to hold capital where it makes the most sense and generates the best economic return on capital for the time being. These actions can be to reduce risk, boost income or support strategic initiatives. In Japan, we calibrate our capital base in order to secure an uninterrupted dividend flow even in stress scenarios as it supports not only corporate capital deployment, but also our overall low cost of capital. Furthermore, our strong capital base, both from an SMR and ESR lens, creates flexibility when opportunities arise, both from the asset and liability side of the balance sheet. As a company, we faced both revenue and expense pressures, and we are hard at work addressing these. The positive is that we have placed well-priced policies on the books over many years, which generate very significant cash and lead to an increased short-term capital generation. This gives us the opportunity to not only continue what has been 39 consecutive years of increasing the annual dividend, but also to step up our capital deployment. An example of this is last evening's announcement of a 21% increase to our quarterly dividend to $0.40 per share. We would expect total capital deployment from 2021 through 2023 in the range of $8.5 billion to $9.5 billion, a meaningful increase in deployment compared to our recent history. In summary, our strong morbidity margins from a foundation of predictable cash flows that well managed translate into very strong value creation through a strong ROE with a material spread to our cost of equity, creating long-term shareholder value. And with that, let me hand over to David to begin Q&A. David?

Thank you, Max. [Operator Instructions] While we are doing this, again, we're going to allow you to enjoy some of our commercials and we'll roll those now. Thank you. [Presentation]

Welcome back. We're now ready to begin our Q&A. [Operator Instructions] Our first question comes from Erik Bass at Autonomous Research.

Max, I was hoping you could provide a little bit more color on the LDTI impacts on go-forward earnings. And is the main change how profits will emerge on new business? Or will there also be impact from unlocking assumptions on in-force policies and resetting prospective net premium ratios?

Thank you, Erik. And I'll kick off, and then I'll hand over to Al Riggieri, our Chief Actuary, to give some comments as well. But generally speaking, when you compare our earnings profile from current GAAP and LDTI, I would say that the benefit ratio is expected to actually be a little bit more stable than what we have experienced in the past. And that is because our actual experience during a certain period will sort of get levelized into our existing reserves and be earned over the lifetime of the block. So that will actually smooth out the benefit ratio more than what you have seen in the past, excluding any certain unlockings. And if you then take the expense ratio, the [ main ] impact there for the expense ratio to then be a little bit lower going forward is that the DAC will be amortized over a slightly longer period of time, but I'll stop there and I'll let Al to sort of give his comments as well.

Thank you, Max. And Erik, thanks for the question. I'll make a few comments here just on some of the actuarial dynamics, we'll call them. As of the transition date, there's no meaningful difference in the opening reserve balances. So over the long run, earnings is going to be about the same between the 2 systems. The blocks will kind of run off. Even new business will have a similar sort of pattern. And if you really want to get that earnings comparisons, it's important to consider what flows in and out of the reserves in each period as Max was commenting on. In current GAAP, we have significant, what I call, in-period gains. In other words, reserve margins and favorable morbidity results fall right to the bottom line every quarter, and that produces an in-period gain, we call it. Under LDTI, like you said, we're going to unlock assumptions and set a lower net premium. So under LDTI, we put less into the reserves. But on the flip side, we don't get as much in terms of the in-period morbidity gains. And the important thing is with a large block of business like Aflac's, they kind of offset each other. So in-period gains in the current system turn into lower net premiums, therefore, releasing more of the gross premium for the profit. And the 2 earnings streams on that basis when you step back are just -- they're very comparable to each other. [ So you have an actuarial comment on that ].

That's very helpful.

And Erik, let me just add one more thing. So obviously, capital market assumptions will be updated each quarter. When it comes to morbidity and mortality, that we will periodically -- if needed, we will adjust that on a quarterly basis as well, but we will do deep dives generally to be expected in the third quarter each year.

And then a follow-up, can you talk about how the revenue CAGR that you provided for the U.S. business breaks down between growth in earned premiums and growth in NII or other revenues?

It's a fairly similar pattern between the earned premium growth and the NII. It's not a significant difference.

Got it. So looking forward, you would expect NII kind of adjusted for, obviously, the favorable alternative this year to grow at a similar rate to premiums?

We would obviously not expect the variable investment income returns that we have had this year to be repeated. But as we look at it on a more normalized basis going forward, we would expect NII to grow in a fairly similar pattern to earn premium. And the reason for that is our stable NII or traditional NII will be fairly -- will continue to come down, but the SAA that Erik can talk to will add some income as well. So those 2 are sort of offsetting each other.

Our next question comes from John Barnidge at Piper Sandler.

A question on the ESG and responsible investing with the $3 billion in 2021. As we look forward and as a signatory of the PRI, are there going to be certain investment or asset classes that will be off limits due to ESG and responsible investing efforts?

Thank you, John, for the question. I wouldn't say that as a hard matter. And as I said in my speech, standards continue to evolve and we're continuing to evolve. And obviously, we have a base of our proprietary credit scores that we do as part of our credit analysis, but we're also advancing the ball with respect to how to measure carbon and emissions in the portfolio, for example. And that will influence investment strategy as we go forward. But we're at the beginning of that journey. So over time, obviously, we're going to have to look at investments that are good guys relative to reducing emissions, getting us to carbon neutrality, perhaps underweight and eventually minimize investments that aren't good with respect to that. But in terms of outright not buying anything today, for example, we don't buy tobacco. We don't have anything in our sights that would be an outright prohibition, but this will evolve over time. So never say never.

Great. And my follow-up, maybe going back to -- some machine learning is being added to [indiscernible] management that Virgil talked about, will that drive ultimate savings on a net basis by reduction in human capital? Or can you maybe talk about that a little bit more?

Ultimately, it will. So what you're talking about is a terminology we use internally as code-based processing related to claims. And it helps with adjudicating claims both quickly as well as accurately to make sure you capture all claims components across all business lines because many of our customers in the U.S. have multiple products. So it's designed around that. So it's a good solution for automation and for customer service. But then at the same time, it also brings down a lot of manual intervention that takes place today as part of claims management. So over time, you would expect to gain efficiencies to your point.

Our next question comes from Ryan Krueger at KBW.

I had a follow-up on GAAP profit emergence under LDTI. I think you also have to remove reserve pads when you recalculate the net premium ratio. So I would have thought that would have led to more acceleration of your earnings emergence. Is the offset really just the smooth recognition of the in-period gains that you've talked about? Or is there something else that mitigates the earnings emergence from rising?

Al, do you want to take that take that?

Yes. Thanks, Max. Yes, and thanks for the follow-up. They do -- those are the offsets. Those in-period gains, part of those in-period gains are that the pads do release every quarter now. So our claims come in at x and our pads release and is more there, so it comes out. All those pads plus all the favorable morbidity we have now turn into the lower net premiums. So it's getting the same morbidity gains just in a different form in both systems. And like I said, with a very large and stable block, you kind of expect some of those offsets when you implement the new GAAP accounting.

That makes sense. And then, Max, you showed a bar with the unrealized morbidity margin, which looks like maybe it's $40 billion to $45 billion. I just wanted to get a better sense for what -- how you're measuring that. Is that essentially like an embedded value of future morbidity margins on -- is that how you -- or can you give any more detail on kind of what exactly that calculation represents?

Yes. But with a big difference, the discount rate used here is the LDTI discount rate, which is not a cost of capital rate. So I would caution you to use this as an embedded value because you would use cost of capital in order to do that. But everything else in terms of the cash flows would be similar to an embedded value framework.

Our next question comes from Jimmy Bhullar at JPMorgan.

So first, I had a question on LDTI as well. I think the initial balance sheet impact you mentioned, I think you're using year-end rate levels. And if that is correct, can you sort of give us an idea on what the sensitivity of that number would be, either rough or precise, to changes in interest rates, so we get an idea on like how it will actually affect your balance sheet once it's implemented?

So Jimmy, we are not giving those updates today. We're only giving you numbers as of 2020, but directionally, higher rates will reduce the -- upon adoption impact on our AOCI and high rates would lead to a higher total shareholders' equity, including AOCI. But other than that, we're not giving an update.

And that's what I assumed. I think it would be helpful in the future if you sort of give some ideas on what -- either a range or something else. But -- and then on alternative investments, I think your current allocation is around 2%. And I'm assuming you're going to increase or you mentioned that you can increase that over time. How should we think about if there are any upper limits to how much you'd want to have in alternatives? And do you have any concerns about increasing alternative exposure in this environment when the market's already done extremely well recently?

Thanks, Jimmy. Yes, as we indicated in the strategic asset allocation chart, we do have room to increase. We did that as part of the SAA and based on long-term returns and volatility assumptions, calibrate it to capital. We have that room to go up to about 4% over the next few years. Having said that, though, let's go back to the basics of alternative investing. You put that money to work gradually, not all at once, which is how we did our entry into this program 5 years ago. So on average, we've committed to managers about $150 million to $200 million per year. But when we make that commitment, it then takes them a year to find the proper underlying investments. And then when they do, as you know, that capital will be called anywhere from 3 to 7 years, typically, sometimes even as long as 10. So in essence, you are creating natural diversification by having a few hundred million per year eventually get invested in the ground and seeing our portfolio balances increase. So it really provides natural diversification. We're not going to increase the amount of the commitments per year unless we felt strongly about the market. So we'll continue to pace it gradually and rely on natural diversification through credit cycles to smooth out our returns over time.

Our next question comes from Tom Gallagher at Evercore.

Max, I just wanted to come back to Ryan's question on the $40 million plus of unrealized morbidity gains. It's kind of a jarringly large number, still trying to wrap my head around what it means, what your perspective on the uniqueness of this for Aflac maybe compared to others in the industry? I mean, I -- it seems to me in a minimum, you would say it gives you great future earnings visibility, given this conservatism in your balance sheet. But any help on how you guys think about this? Do you have similar margins for both GAAP and statutory? And could you securitize some portion of these? Or just any further color on that, I appreciate it.

Yes. This is simply a function of being in the long-duration business. So many of these policies, they were written a long time ago in a significantly higher interest rate environment. And that is why I used the words that we -- and you see on the walk that we provided as well that as we sort of update those assumptions, there's a negative investment margin that runs through our AOCI upon adoption. But we also, as you know, have had a very favorable morbidity experience relative to our pricing assumptions. And upon adoption, that component is not running through the AOCI, and that's why you have this very significant AOCI impact. And these are associated with the same policy. It's not that we have favorable morbidity experience in some part of our portfolio and negative investment margin in other parts of the portfolio, it's literally the same policy that LDTI simply bifurcates and that's really the intent of showing you that over time, we have generated very strong earnings, and it's on the back of a very, very favorable actual to expected morbidity margin that has come through. And it's the long tail of the business that is really impacting it. I'll let Fred make a comment now.

Just the only comment I would make is in our in our investor booklet that we produce as part of this annual process, we contain an actuarial section in that book but we don't spend time on it during this call. But in there, you may recall that year after year, we post our gross premium valuation work in that document. And that's always shown extremely strong margins on both the GAAP as well as FSA and statutory basis. All that big green bar is on morbidity is effectively present valuing those margins over a long period of time and bringing that back up and showing it as a bar. Embedded in that gross premium valuation work are all the cash flows positive and negative related to the policies. And so in those wide margins are already negative margin related to interest rate assumptions versus actual interest rates that we're investing at. And so you can only imagine how large and now you see some of it on paper, how large the present value of that morbidity gain is when it's not only driving wide gross premium valuation margins but it's overcoming an interest rate environment that's been going down for 20 years.

And then coming back, Tom, to your question about, is this a risk that could be securitized. Well, if you think about it, it's a very stable, predictable risk, this morbidity component. Based on that, the answer would be yes. At the same time, it's a very, very profitable business for us. We would like to keep it for ourselves.

That makes sense. Appreciate it. My follow-up is for Eric. Just trying to fully understand what's going on, on this large USD portfolio back in the yen liabilities. And so I saw $6 billion of the $32 billion portfolio are fully hedged, I believe. The $12 billion that are protected by the put options. Can you just give a little color for what's going on there? How deep out of the money are those puts? I presume those are currency puts, not some other instrument. And then finally, is there a black swan scenario where things would become more painful for Aflac based on certain currency movements? Or do you feel like it's a pretty manageable max loss scenario regardless of various scenarios you've looked at on currency?

Thank you, Tom. There's a lot there to unpack, so I'll give it my best. First, and just to put in context, when you think of the U.S. dollar portfolio for Aflac Japan, as we've often said, a good portion of that is really backing surplus in Japan for U.S. shareholders, but it's one component of how we manage the enterprise exposure to the yen. And when I'm done, Max may want to pick up on giving you the bigger picture. But it's an important component. It's a large component. But ultimately, with the exception of the forwards, all the rest of the U.S. dollar exposure we want unhedged because that's what we're considering to be dollars for our shareholders. They want it unhedged, they want it in dollars. And that's pretty easy to do. The only complication is it cost us capital in Japan to keep everything unhedged. And also thinking about, as you point out, yen weakening, yen strengthening. Yen strengthening is the bad guy for Japan relative to capital. And those are the scenarios where you worry, if you will. And that's where, over time, we've evolved our hedging strategy in about a year, 1.5 years ago, we moved more to put options as opposed to collars. Collars had options on both sides. The reason for -- and they are currency put options, Tom, nothing else, but currency put options. And they're typically around 10% to 12%, 15% out of the money. That's typically where we target and some range in between. And the reason we target that number is: one, it's enough out of the money that it gives us the tail risk protection. It's also cost efficient, and we get a capital benefit. And over time, as you could see on the chart, about $12 billion is protected, $14 billion is not. We may adjust that based on economics. Ultimately, we're looking at the combination of cost, economics relative to capital and this bigger picture, if you will, of how much total enterprise value we have to the end. So with that, Max, I'll hand it over to you if you want to make some broader statements about the enterprise.

Sure. Thank you, Eric. You laid it out well. So also at the enterprise level, we enter into currency forwards as well. We currently have a notional balance of about $5 billion. And when we borrow, we borrow directly in yen through the global yen market, and we have yen-denominated debt of a little bit over $4 billion today as well. All these components, together with what Eric laid out, act as an overall enterprise protection or hedge to the yen. And I would say that upfront that we don't bet on the yen. We want to protect and limit the value fluctuations of Aflac Japan so that the U.S. dollar investor is not exposed to any significant movements in the yen. And at this point, I would say that we deem ourselves to be quite well protected to any movements in the yen. And lastly, Eric mentioned it, but I do want to reiterate it. We do this on a risk-adjusted return basis because it comes with capital implications, and we run everything through that lens. So the different kind of instruments that we use and the components and where to hold these currency hedges and what balance sheet to hold it on is done through a risk-adjusted lens.

Our next caller is Humphrey Lee from Dowling & Partners.

My first question is related to the run rate dividend from subsidiaries, now it's showing $2.6 billion to $3 billion, which is up from $2.2 billion to $2.7 billion last year. I was just wondering if you can talk about the moving pieces for the improvement.

Humphrey, I would say that it's a continued favorable underwriting experience that are coming through our results. Especially in Japan, you have another year of good underwriting experience coming through our FSA results. And it's also the fact that the products that we write and if you think about the new business we're putting on, it is less capital intensive than the old business that are running -- that is running off. So we sort of continuously replace the in-force to a more capital-efficient book of business, and that supports also the cash flow generation and the FSA earnings.

Got it. And just a clarification for you, Max. In the expense outlook for the U.S., I think you talked about 2022 will continue to be elevated because of the ongoing investments. But are you expecting the expense ratio to start to decline in 2023? And then when do you expect that to get back to your kind of long-term target of 35% to 37%?

We would expect it to improve in 2023 over 2022. And some of this is revenue-related. The expense ratio is a function of revenues and expenses. And we do expect that in 2023, our revenues are starting to kick in, in a higher gear, and that will improve our efficiency ratio. When we say medium term, it's really post that period. So think about that as a 2023 to 2025 period -- time period.

And our final questions were submitted online from Andrew Kligerman at Credit Suisse. Andrew writes, "Aflac has consistently cited a buy-to-build strategy in lieu of large M&A. Any change to that view? And would a large complementary individual insurance business with good growth prospects be of interest?"

I'll take -- I'll say something about that, then Fred can follow up. We never say never, but we have a strategy going forward that looks strong. It's working well. And I would say that, that should not be one of your concerns about our company.

Well, I don't have a lot more to add to that other than I agree. I would tell you that we're quite pleased with the nature of our portfolio right now, by that, meaning our portfolio of businesses. We've plugged some gaps that were necessary to remain competitive and grow in the U.S., mostly around so-called true group life disability and leave management and then, of course, network dental and vision. And so that -- those product lines complement our existing voluntary business very well and help us fill out the portfolio. We will come across ancillary lines of business, which fall a little bit outside the core. And in those cases, what we'll typically do is side with alliance construction versus acquisition. So for example, Trupanion is the best example that's becoming more of a mainstream benefit provided in the work site. Yet at the same time, as a company, we're certainly not positioned. We don't have a history to understand the dynamics of managing that business well and growing it over time the way Trupanion does. So our preference is to invest in Trupanion and work together in a partnership to drive, in our view, halo effect or filling out the rest of our portfolio in the eyes of brokers. That's a good example of the philosophy we're taking. We don't want to move away from our core and our expertise. We want to stay in that zone, both in Japan and the U.S. and are unlikely to go outside of that. I will say buy-to-build is a bit of a challenge in that it's no doubt it weighs on your GAAP margins, particularly in the early years, where you're moving more on investment side and yet to realize the revenue. So that's some of the pressure you see on U.S. margins. We're not afforded the luxury of not amortizing a large asset like the goodwill asset. And our view though is we really premise things on economics, cash-on-cash economics, and it's the best route for us to go over the long term.

And Andrew's follow-up is, "on the other hand, are there any products Aflac would consider reinsuring in order to free up capital for higher growth and return prospects?"

So Andrew, we have utilized external reinsurance in the past in 2012 and 2013. It is something that we continuously evaluate. At the same time, we're also very, very aware of that our very strong morbidity margins means that when we evaluate external reinsurance, we can really do that from a position of strength because we know the value of our blocks really, really well. So we're in a good spot when it comes to that, but -- and we also -- I would say that it's a tool that is at our disposal if we wanted or needed to.

The good news is that we don't really have legacy blocks that are an acute drag on our return on equity. They've -- even the first sector savings products that we put on our books over the years, we're well matched up from an asset standpoint and are profitable to the company. And so we don't have those stranded blocks of business that are often weight on ROE and companies wanting to reinsure those away to release capital.

That concludes our Q&A session for today and our financial analyst briefing for 2021. I want to thank you all for joining us. Please don't hesitate to reach out to our Investor and Rating Agency Relations department with any questions you may have. In the interim, please take care and wish you all the best. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]