Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Good morning. I'm David Young, Vice President of Capital Markets at Aflac Incorporated. And welcome to Aflac Incorporated's 2024 Financial Analyst Briefing. We are so happy to have you joining us here in person at the NYSE as well as those who could not make it, but are joining our webcast. We have an agenda full of a great slate of speakers and panelists today, as you'll see in the slides, which are posted also at investors.aflac.com. I also want to recognize three directors on Aflac Incorporated's Board of Directors who were able to join us in person today. First, Georgette Kiser, joined Aflac Incorporated's Board of Directors in 2019. Georgette is a financial expert serving on both the Audit and Risk and Compensation Committees of the Board. Karole F. Lloyd joined Aflac Incorporated's Board of Directors in 2017. Karole is a financial expert serving as Chair of the Audit and Risk Committee and she also serves on the Executive, Finance and Investment and Corporate Development Committees of the Board. And Joseph L. Moskowitz joined Aflac Incorporated's Board in 2015. Joey is a financial expert serving as Chair of the Compensation Committee, and he also serves on the Executive, Audit and Risk and Corporate Development Committees of the Board. I thank you all for coming. Now turning to our agenda. We will begin our meeting today with a strategic overview of Aflac Incorporated by our Chairman and CEO, Dan Amos, Masatoshi Koide, President and Representative Director of Aflac Life Insurance Japan, will then provide a strategic overview for Aflac Japan and address its growth strategy. Then we will have our first Q&A panel focused on both Dan's and Koide-san's presentations. Then following that, Virgil Miller, President of Aflac U.S. effective next month, President of Aflac Incorporated, will present a strategic overview for Aflac U.S., including its growth strategy. We will then have our second Q&A panel focused on Virgil's presentation. Then we wrap up our presentations today with Brad Dyslin, Global CIO; and Max Broden, CFO of Aflac Incorporated. Followed by the final Q&A panel for the day. And we will then conclude our day with lunch. We are also webcasting today's presentation live, so I ask that you now take the opportunity to check and silence your cell phones and other electronic devices. And before we begin today, some statements made during 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 includes reconciliations of certain non-GAAP measures and definitions for these non-GAAP measures are included in the appendix. These slides are also available at investors.aflac.com, so you can follow along and make notes. At this time, I'd like to introduce our first speaker. Dan Amos 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 been named by the Harvard Business Review as one of the 100 best-performing CEOs in the world 5 times. And under his leadership as CEO, Aflac Incorporated's total return to shareholders has exceeded 21,300% as of September 30, 2024. That compares with 3,500% for the Dow Jones Industrial average and 3,400% for the S&P 500 index as well as 1,800% for the S&P 500 Life and Health Insurance Index. Dan will now provide a strategic overview of Aflac Incorporated. Dan?

Good morning, everyone. Thank you for joining us this morning. Our third quarter results rounded out a solid nine months for Aflac in 2024. I am very proud of our management team and their many accomplishments since our last financial analyst briefing. Before members of our management team cover our operations and financials, I'd like to take a moment to note two very special milestones in 2024 that had happened over the last five decades in the making. First, on June 14th marked the 50th year since Aflac Incorporated stock was first listed on the New York Stock Exchange. I was here that day and the first stock traded and I will never forget it. On that day, our stock was trading at $7 per share. Adjusted for stock splits, would anybody like to take a guess, it was $0.06 per share. Today, of course, it's $111 per share. To this day, the excitement of being listed left such an impression on me that I'll never forget it. Second, on November 15th marked the 50th year of doing business in Japan, a milestone established by the vision of Aflac's Principal Founder, my uncle, John Amos and Yoshiki Otake and every dedicated employee at Aflac Japan since. And immeasurable number of events have taken place over these last five decades, but it's not just the number of years that matter most. It's the opportunities and the privilege and the benefits of lives of millions of people. Most notably, we've accomplished this by providing protection and peace of mind to our policyholders during some of the most difficult times of their lives. But it also extends to the shareholders, the employees, the sales associates and teams and the communities in which we operate. I've had the pleasure of working with some of the finest members of the management team, Board of Directors, employees, sales force that one could ever imagine. Our strong focus on people is not surprising because I have always said that if you're in the business of insurance, then you're in the people business. Even all the technological innovations that are taking place, including AI, it's still true today. You've probably heard me say this before, but in conjunction with the Board, one of my main responsibilities is succession planning for key roles. We are focused on cultivating a strong bench of leaders to lay the groundwork for a seamless transition as well as continuity and experience and expertise and strategic execution. I look forward to continuing to work with this team and prepare for the future. Today, you'll hear from some of those leaders about our strategic plans and outlook for 2025 through 2027. But let me be clear, I'm still enjoying what I do, building and cultivating the management team to grow the company. Recently, the board and I recognized the expanded roles of significant contributions of Virgil Miller, Max Broden and Audrey Tillman by announcing their promotions effective January 1st of 2025. Both Virgil and Max will present today as well as Koide-san and Brad Dyslin. From Japan, Charles Lake, Steve Beaver and Yoshizumi-san, will join Koide-san with me and the Aflac team on the Q&A session. In fact, Steve did such an outstanding job coordinating the conversion of Aflac Japan from a branch to a subsidiary in 2018, that he has transitioned easily in his seat in the U.S. to become CFO of Aflac Japan. When Steve took the Aflac Japan CFO role, Fred Simard joined as CFO of Aflac U.S. Fred Simard has been critical in helping us with the issues of Aflac Dental and Vision. He will also add the title in Aflac U.S. of Chief Operating Officer to his current role effective January 1, 2025, and will join Virgil and me in the Aflac U.S. Q&A panel. Through the years, I've always been excited about Aflac generating strong financial results and performance and adapted all types of macroeconomics. Whether it is a weak or strong yen, inflation or deflation or numerous other factors that we cannot control. It's our people who have adapted to make the financials happen. We are addressing a vital need in our countries. Citizens face rising health care costs that are not covered by their national health care plan in Japan or major medical insurance in the United States. We believe that we have the right strategy to close the gap that so many Americans face when a medical event occurs, as Virgil will tell you about. This convey simply in some of our recent U.S. commercials with the tagline, get help with expenses, health insurance doesn't cover. Koide-san, who has been doing an outstanding job as President of Aflac Japan for 7 years, will explain Aflac Japan's new long-term vision. He will also cover not only product distribution, but also customer-centric solutions, form an ecosystem aiming to address the strain on national social security and public health insurance systems in Japan. We have broadened our product line in both countries. In the U.S., our sales results reflect strong growth in our group life absence management and disability, which is encouraging as we continue to scale up that platform. In addition, it's good to see the continued increase in cancer insurance sales, given our efforts to enhance the value proposition to the cancer policyholder. In Japan, we have maintained our initial momentum from the June launch of the Tsumitasu product, which combines asset formation and nursing care benefits and options. It is part of the strategy to attract new and younger customers while also introducing them to the third sector products and policies. Tsumitasu also played an important role in our sales growth in our agencies. These examples highlight our acquisitions and expanded portfolio in both countries and the real potential to open doors for our business. My job as CEO is to run the company in such a way that empowers capable management team to drive strong results, but it's really -- doesn't stop there. My job is also to ensure Aflac is a trusted, respected and powerful brand. We are continuing to build on our leading position in Japan and the United States. We believe Aflac's powerful brand and wide-reaching distribution will boost our ability to be where people want to purchase insurance. An outstanding and trusted brand and reputation go a long way, not only with sales opportunities, but with value in other ways. For example, you may not have seen this, but Dr. Pepper's popular Fansville advertising campaign for football currently features the Aflac Duck in one of their commercials. The Aflac Duck showing up continues to make us relevant in pop culture, which is very important to us. So not only does this advertising help reach key demographics for us, but it also aligns with our busiest sales period when Aflac's name, we want, to be everywhere. I don't think it's coincidental that Aflac has achieved our level of success while focusing on doing the right things. In fact, I believe they go hand-in-hand. I'm proud of what we've accomplished in balancing both the purpose of our earnings performance, which results in strong shared value. Doing the right thing is an approach Aflac has taken as far back as I can remember. Since 1995, the Aflac family has been giving back to the Aflac Cancer Center and Blood Disorders of Children's Healthcare of Atlanta, with more than 185 million in donations. About half of that comes from our sales force who makes their own personal donations. In Japan, through the three Parents Houses, which is like the Ronald McDonald's in the U.S., we have also helped more than 150,000 children and their parents who are facing cancer and other diseases. In both countries, we funded and developed My Special Aflac Duck, which we have one out front, a social robot companion to help them cope -- help the children cope with difficult cancer treatments. Let me be clear, this particulate (sic) [particular] Invention is not a toy. It is truly to help the kids fight the issues concerning cancer. In fact, it was named to Time Magazine's list of the best inventions for 2018, the year in which we introduced it. And it also won best in show at the Consumer Electronics Show in Las Vegas. We have invested more than $7 million and given out over 32,000 My Special Aflac Ducks to pediatric cancer centers in sickle cell patients throughout the United States and in Japan. We give My Special Aflac Duck to any child diagnosed with cancer in the United States or Japan and will continue to do so as we move forward. We find that people want to be associated, in fact, with a company, that does the right thing, and we look forward to continuing to do so. At Aflac, we manage our business for the long term while maintaining focus on achieving near-term financial results. As a management team and as CEO, we are dedicated to addressing the challenges of growth. Our approach to driving long-term shareholder value is straightforward: the pursuit of growth, strong pretax margins, and tactical capital deployment. I think that our shareholders have benefited from our approach as demonstrated in this slide. As for capital deployment, I am very happy with how management has handled capital deployment and liquidity. And specifically how well we've adapted to this environment. Many of you have even mentioned that to me. Max has done an exceptional job as CFO over the last 5 years, investing the challenges and the environment, including the weakening yen, which has positioned the company for the future. I am thrilled that we still are among the highest return on capital and the lowest cost of capital in the industry. Max will cover this more shortly. But let me just say that we work hard to maintain 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 know you saw yesterday's announcement that we've increased the first quarter of 2025 dividend by 16%. This increase follows 42 consecutive years of increasing the dividend and compound annual growth of 13% over the last 5 years. This track record is supported by the strength of the capital and cash flows. Year-to-date, Aflac Incorporated deployed more than $2 billion in capital to repurchase 23.5 million shares of our stock. Combined with dividend, this means that we have delivered $2.9 billion back to the shareholders for the first 9 months of this year. All of this is to say that I am well pleased with what our management team has accomplished so far this year. And our goal is to finish strong. You'll hear more about this from the team today, as we are all very excited about our future. So now, let me turn the program over to David. David?

Thank you, Dan. Our next speaker is Masatoshi Koide. Koide-san first joined Aflac in November 1998, and stayed until March 2006. He then worked for Nikko Asset Management before rejoining Aflac in December 2008 as Vice President. He has held roles of increasing responsibility since then, and in July 2016 was promoted to Deputy President and then to President and Chief Operating Officer. In April 2018, he was named Aflac Japan President and Representative Director. Koide-san?

Good morning. Today, I will provide overview of Aflac Japan's strategy for growth over the mid to long term. Aflac Japan was founded in 1974 with a desire to save cancer patients from financial hardship. We became the first company to offer cancer insurance in Japan. That was the time when even mentioning the world cancer was considered taboo. However, as the pioneer for cancer insurance, Aflac Japan confronted the issue head-on, worked to raise societal awareness and was able to establish a cancer insurance market to meet customers' changing needs. Since then, Aflac Japan has created value based on its corporate purpose and core philosophy. We have done this by introducing innovative products that meet the needs of society like the medical stand-alone whole life policy ever in 2002, our cancer insurance product wins in 2022, and Tsumitasu in 2024, which is the industry's first hybrid asset formation product with a third sector coverage option. We also want to ensure that we are where people want to purchase protection through agencies, banks and partnerships including our strategic alliance with the Japan Post Group. As Dan has shared many times, we also are a company that takes pride in doing the right things, which includes being the first life insurer in Japan to name a female executive in 1997. We also established the first Parents House in Tokyo in 2001. And later a second and third, allowing families to be near their children as they seek treatment for serious illness like cancer. We also believe people, associates, employees, policyholders and others want to be associated with a company that does the right thing. Over the decades, we have worked hard to address societal issues such as the financial hardship of a major health event, and have met customers' changing needs while delivering shareholder value. I am pleased to say that this year, Aflac celebrated 50 years in Japan, and I am proud of what we have accomplished. This year, while we celebrated the past, we were also indeed focused on the future. Today, I would like to provide an overview of the major trends impacting Japan's insurance market, share with you our vision for the future and introduce our medium-term strategy for achieving growth over the mid and to long term. As we have discussed over the years, Japan's population is aging and birth rates continue to be -- to decline. Today, over 29% of the population is over age 65, with those under age 14 representing a shrinking population of the overall population. At the same time, people in Japan are living longer and healthier than ever before. This trend, coupled with the declining working age population means that Japan's social security and national health care systems are under increasing strain. The government of Japan, for example, projects total overall social security expenditure will increase by approximately 20% over the next 10 years. This dynamic is leading to concerns about sustainability of the social security system and is contributing to greater awareness on the part of the young and middle-aged of the need for self-sufficiency. As it relates to insurance, this dynamic is contributing to continued gradual growth in Japan's data sector market, which is Aflac Japan's core business area. As Japan enters an era of 100-year life spans and begins its exit from deflation, the government is actively promoting a shift from savings to investment and is striving to make Japan an asset management powerhouse. Growth of the Nippon Individual Savings Account or NISA indicates the strong demand, especially by the young and middle-aged for asset formation opportunities. It is in this environment that Aflac sees opportunities to address diverse customer needs and create shared value. This year, as we celebrated 50 years in Japan, we also developed a new long-term vision for the future, which is by creating living in your own way, create new shared value. This vision highlights Aflac's practice of using the company's unique knowledge and resources to address societal issues in a manner that meets customer needs and create economic value over the long term. Our vision is customer-centric and captures our desire to be the leading provider of not only insurance for living, but also for creating value beyond insurance. As we sustainably increased sales to achieve this vision, Aflac Japan will strengthen the Aflac brand and maintain sales quality and profitability. To achieve the long-term vision, Aflac Japan has developed a growth strategy which includes at its core, a "Living in Your Own Way" ecosystem. Specifically, Aflac Japan aims to leverage the cancer knowledge, expertise and relationships developed over the past five decades to build an ecosystem that addresses issues that arise during the customers' life journey. Creating value through collaboration with a full range of stakeholders will be key to our efforts to meet customers' changing needs. Aflac Japan's cancer insurance product wins and the Yori-sou cancer consultation support are initial steps in developing a cancer ecosystem. I will speak more about this in a moment, but Yori-sou cancer consultation support, for example, is a unique service that provides customers with access to cancer related experts and provides a full range of services from getting second opinions, employment consultations, to support for daily living and more. These services provide policyholders with value beyond insurance and further differentiated Aflac from the competition. In the future, we aim to leverage knowledge gained from the cancer ecosystem for integration into the nursing care and the medical areas, which will be used to further enhance and differentiate our core products. By doing so, Aflac Japan aims to address societal issues and create economic value. Over the next 10 years, Aflac Japan will build out its ecosystem. Our aim is to remain as the customer's first choice for cancer and medical insurance in terms of share of policy in force. We also aim to expand our core business of cancer and medical insurance and to include asset formation and nursing care insurance. We will explore new business areas to further expand our ability to meet customers' changing needs. Robust technology utilization such as AI and other digital tools will help enhance our cost competitiveness, and drive exchanges through operational transformation. Human capital management will also be a foundation that will enable Aflac Japan to innovate and deliver on its business strategies. So far, I have shared Aflac Japan's vision described our ecosystem strategy and introduced a view of our future state. Now, I would like to shift to our near-term view highlighting specific steps we planned to take over the next 3 years, based on our medium-term management strategy and annual management tactics, which we monitor and adjust as necessary on a quarterly basis. This slide depicts the areas we will highlight. The key element of our next medium-term strategy is to implement our marketing and sales transformation by which we tailor our marketing efforts to each product area, cancer, medical and asset formation and nursing care to meet customer needs. Aflac Japan will create a brand-based organizational structure by taking a vertical approach to everything from product design to sales promotion and beyond for our cancer, medical and asset formation and nursing care brands. Cross-functional elements will be incorporated into the new structure to ensure a cohesion. Aflac Japan has hired a Chief Marketing Officer, who will start on January 1st. The CMO will drive the marketing and sales transformation and oversee all brands and brand managers who will be responsible for revenues of individual product lines. Having attractive high-value products available when and where people want to purchase insurance is essential for our growth strategy. To drive growth, Aflac Japan aims to deliver products that are unique, flexible and easy to understand. As indicated earlier, we plan to integrate our core products with services to bring added value to the customers. In early 2025, we plan to launch a new cancer insurance product. The new product will combine the latest cancer treatment coverage with comprehensive support for cancer patients and their families, and it will be coupled with the Yori-sou Cancer Consultation Support services. The Yori-sou Cancer Consultation Support allows policy holders to connect with experts who listen and provide information tailored to the policyholder's situation. To date, over 12,000 consultations have taken place, and Aflac Japan is steadily building a knowledge and experience base, that will infer further development and expansion of the service to other product lines, including nursing care services and eventually medical areas. Medical insurance remains Aflac Japan's core product after cancer insurance. As we have discussed over the years, the medical insurance market is highly competitive. We rebranded our medical insurance vision in August. Vision features innovative principal and affordable monthly coverage. In addition, Vision includes our medical value-added service, Duck Reliable, which provides policyholders with additional resources and discount opportunities when they have a medical event. Going forward, we plan to roll out new medical products on a 2-year cycle. Consistent with our pioneering past, Aflac Japan was the first to introduce a hybrid asset formation product with option for third sector coverage. Tsumitasu was launched in June 2024, and we believe that this will be an effective solution for customers seeking a desirable and denominated asset formation solution. The product was designed to attract new, young and middle-aged customers and contribute to Aflac Japan's core third sector product sales. We are pleased with the product sales thus far, including to both new customers and concurrent data sector sales. Overall, product sales performance has exceeded expectations. Aflac Japan aims to be where people want to make their insurance purchasing decisions. Over the past five decades, the company has built one of Japan's most robust distribution platform. Aflac Japan's products are sold through associates and alliance partners, including the Japan Post Group, Dai-ichi Life, Daido Life and financial institutions. As we aim to further enhance sales activity and achieve JPY 67 billion to JPY 73 billion in new AP in 2026, Aflac Japan is taking special steps to support our core associates channel. Aflac Japan will continue its efforts to strengthen sales promotion with Aflac exclusive and Aflac preferred agencies, focusing on hiring and increasing the total number of producing agents, enhancing new agent training and ensuring improved productivity through education and developments. Furthermore, promoting digital transformation among our associates and business partners will be another way, we work to promote sales activity and effectiveness. For example, Aflac Japan will leverage generative AI to streamline administrative activities, match agents with clients, enhance agent training through role-play simulation and the like. Finally, our strategic alliance with the Japan Post Group continues to be robust and multifaceted. We have seen steady improvement over the past year and expect this trend to continue. Beyond cancer insurance sales, Aflac Japan is working with the Japan Post Group on business collaboration with startups in health care, nursing care and insurance through a joint acceleration program. These collaborative efforts aim to address societal issues, enhance customer service and strengthen our relationship with the Japan Post Group. It is a key part in building the ecosystem, and we believe it will expand sales opportunities and lead to future profits. In closing, let me say that this year, as we celebrate the past and look to the future, Aflac Japan is committed to realizing growth over the mid- to long term. By combining our pioneer spirit with our willingness to confront societal issues as they relate to our core business, we are proud to create shared value. As I hope you have seen we have a vision and a plan to do so. Thank you, and I will turn the program over to David.

Thank you, Koide-san. We will now have our first Q&A panel joining Dan and Koide-san here on stage. We have Charles Lake, Chairman and Representative Director, President of Aflac International; Steve Beaver, CFO of Aflac Japan; Koichiro Yoshizumi, Executive Vice President and Director of Sales and Marketing and Alliance Strategy. I would like to ask if you want to ask a question, please raise your hand. We will have one of our team members come and provide a microphone. And if you will, introduce yourself at that point for the sake of the webcast and transcription and ask your question and a related follow-up. At that point, please return your mic to our team member who can get the mic to the next person to ask their question. We're going to pause for a moment because we do have an issue with a translation device. And on that note, I do ask that you please speak slowly to some degree so that translation can occur efficiently. Dan, while we wait, do you have any good jokes?

I will say one thing, the Dr. Pepper commercial was very nominal cost for us compared to what it could have been. So they wanted to do it. So then they're one of our customers. So I could have talked about it because I'm really excited about that.

All Right. So Suneet, here.

Suneet Kamath from Jefferies. I wanted to ask about your distribution in Japan, in particular, the mix of distribution and how that compares to the industry. And in particular, I was curious about the nonexclusive agency channel, how big that is for you? And how big is that for the industry?

[Interpreted] This is Yoshizumi. May I confirm your question? Is that the proportion of like the agencies disparate -- different -- okay, this is Yoshizumi. Let me ask the question. Let me confirm the question. Are you asking about the proportion of the different distribution channels that we have?

What percentage of your sales comes from each channel? And how does that compare to the industry with a particular focus on the nonexclusive agency channel?

[Interpreted] Well, Aflac is one of the most unique companies in Japan among the 42 insurance -- life insurance companies in Japan. We have a history of selling our products through our exclusive agency channel. There are not many other companies or competitors that have this kind of a unique exclusive agency channel. So if I am to divide our distribution channel into exclusive and nonexclusive, exclusive agency accounts for 60%. So now let me go into the nonexclusive agencies channels types because there is a type of agency -- nonexclusive agency that mainly just sell Aflac's third sector products. That accounts for about 30%, which means that the remaining 20% is the true nonexclusive agency. So this shows that the structure or the proportion of distribution agencies that we use in Japan to sell third sector products, and I think this is a very strong structure that we have. Thank you for the question.

[Interpreted] As I mentioned in my speech, let me just add a little bit more color to it, that it's Aflac's unique structure that we have very diverse channel -- distribution channel. As I referred to in my speech, Aflac has its core exclusive agency channel and then -- but then we also have alliance partner as well as a bank channel. So that is really our strength as well. So for -- to just give you an example, as you know, we have Japan Post Group as our alliance partner. And Japan Post has post offices nationwide. And Aflac is the only company that Japan Post channel sells outside of their own products.

Okay. My related follow-up is just on the consumer because it seems like you're trying to attract the younger consumer. And my understanding is the younger consumers in Japan want to comparison shop products, which I would imagine is harder to do an exclusive channel. So if you can just comment on that, if you agree with that trend and how you're positioned against it?

[Interpreted] Thank you for the question. This is Yoshizumi once again. It is not always that necessarily that the young people always want to compare and buy. What they are really wanting to do is to select a product that is most appropriate and matches their needs. And as Koide-san mentioned earlier, as we undergo our marketing transformation going forward, we will have our product development to sell -- product promotion to sales from end to end this process by each brand. And we will be aiming to see what young people would want through that process. One of the important measures that we are about to start from next year as part of our strategy as well as the tactics is through the marketing and sales transformation that I referred to earlier. And within that process, what we would like to pursue is where these young people will go to purchase insurance work or where -- what they will be referring to before they choose a product. And that is what we are planning to do through our marketing process. And at the same time, we will also be strengthening our touch points with young people as well. So let me just add one more information about our current product, Tsumitasu, which is an asset formation product. And this is a product that we've launched to target young people in Japan. And because the current young generation in Japan is thinking about asset formation for their future and the product that we've launched is very popular, and we did aim to have this Tsumitasu product being well taken or received by young people.

Well, I'd like to make one comment about overall sales as it relates to your question. And that is with younger people, they don't see a need for insurance as much. They don't think they're -- they think they're -- nothing's going to happen to them. So whereas when you asked the question about comparisons, they're not as interested in benefits as why do they need it? So it's a different sale. When they get to middle age, it's different. And then with older, as we get older, it's even easy to sell. In fact, that's where we have to be careful from a loss ratio standpoint. So I just want to make sure we distinguish which is which. And in cancer insurance, especially they don't think they'll get cancer when they're young, and hopefully, they won't do it, but we do have a percentage that do get that, and they're covered accordingly. So I just want to make sure.

[ Kathy ], across the aisle to Jimmy there?

Jimmy Bhullar from JPMorgan. I just had a big picture question for your sales in Japan. They have recovered recently. But if you look at what you're likely to do this year, the number is still a lot below where you were sitting prior to COVID. So what are the main reasons for the decline? Is it the demographics, competition I'm assuming the COVID impacts are mostly gone or is it Japan Post, but just if you could just outline why is it that your sales are still running at a significantly lower level than a few years ago?

[Interpreted] Okay. Let me answer this question once again. And as Koide-san mentioned earlier that in a third -- when we're talking about the third sector market, since the Japanese population is declining with low birth rate, that is one of the reasons. And as the COVID hit, the things -- the competition has become much more severe as a result, and it occurred at the same time. But how we are positioning in Aflac is that we are #1 in third sector in terms of the number of policies in new business as well as the in-force policy, and that's where we are.

And just maybe on -- can you give us an update on what -- how drastic is the cancer revision that you're planning for next year? Is it more of a normal update? Or should we expect more bigger changes?

[Interpreted] Let me answer this question once again. And we do believe that the new product that we are planning to launch will be very attractive to our existing customers as well as new customers because the key feature is that it is going to be a very simple and flexible product. And because we have been developing new products meeting the needs of the times as well as consumers' needs, so we have been doing a lot of research on it. And therefore, the product will be somewhat different from what we have in the past.

Tom Gallagher, Evercore ISI. Question for Charles Lake, just on the regulatory landscape in Japan. Obviously, you have an economic solvency regime coming in the next year and 1.5 years. Curious if you think that's going to be disruptive at all to the industry? Or do you feel like the industry is very well prepared? And how do you see that impacting Aflac in the industry more broadly?

I don't see any disruption coming as a result of the adoption. Because I do well know, Tom, in Japan's way of doing it, is well prepared for this transformation that was being discussed for over the years. And of course, pilot testing it, in fact, as the reference capital standards that we use, all companies view. So the transition, it's a dual system in essence that we have had in place, and now we're finally moving to that. So I don't certainly expect -- I think Steve might have a comment. Well, he doesn't even need to comment. We don't expect any disruption. Koide-san, I assume you agree. So the industry has well prepared for it. And as you know, this week, as we speak, the global standard is moving in that direction, formal adaptation by IAIS of the economic base sort of standards. So I think the industry is well prepared for it ready.

And then just as a follow-up, the first sector product that you rolled out in June, can you comment on whether or not you've seen any of your competitors roll out similar products? Or is that fairly unique in the market at this point? What is the comp -- how has the competition reacted if it has, to what you've rolled out?

[Interpreted] Okay. Let me answer the question. To start, for the conclusion, our competitors have not launched a similar unique products with us.

I do want to complement our team and the job they've done developing a new product as we certainly move into more competitive environments, our ability to find ways to still hold the profit margins that we've been able to keep become harder and harder. But yet we found ways to do it. This goes back almost 20 years as we've been seeing a squeeze as it's been changing because of interest rates. And now we're having a little positive movement in the way. But this new product certainly is helping us with the younger people to get them in because they can see the savings element and, therefore, bringing new people on and then the rate that we're having in terms of adding a third sector product. And even the ones that we're not adding a third sector product, we think we can go back to the next year or the year after and add to them are all things, I think, are positive for strengthening our base going forward and what they're doing. So the adaptability -- I've always said I want our strength to be evolution, not revolution. And so we're constantly changing under to where, hopefully, it's smooth waters but yet, a lot of things are going on in the meantime. And I think that this movement is a positive one and one that we've learned a lot of good things from and will be -- and it's certainly what Max and his team have done with Steve in terms of our ability to do reinsurance and the other things, put all this together to make it work.

Wes Carmichael, Autonomous Research. I had a follow-up on the Tsumitasu product. But I think when you outlined the sales target for Aflac Japan a couple of years ago at the last financial analyst briefing, I don't think we expected really a significant contribution from Tsumitasu. So can you just give us a little bit of perspective on how big of a contribution you expect from first sector in meeting our sales target?

[Interpreted] Well, let me just first of all mention that Aflac is a third sector company, and that's what I want to start out with. So rather than trying to focus on first sector product sales on its own, we would like to use -- leverage this product to really invite more customers to purchase third sector products. And when we launched this product in June, which was the first month of its launch, since this is a first, first sector product in quite a long time, we prepared fully and the sales turned out to be pretty big. So we are now in the fourth quarter. And when we look back to the third quarter numbers, we do see that the sales number has pretty much stabled (sic) [ stabilized ]. And as I answered in the previous question, there's really no competing product as well. So we are gaining a certain level of sales from the Tsumitasu product on a stable basis. And then as I mentioned earlier, we would like to sell more third sector product using this product so that Tsumitasu's customers, the concurrent sales as well as the new customer base are as expected.

[Interpreted] So as I mentioned in my speech earlier, the Tsumitasu sales is to really increase our touch points with young customers and also sell cancer and medical insurance accordingly. We are selling these third sector products concurrently right now, and the number is actually slightly above what we have initially expected. And I did mention about concurrent sales with Tsumitasu. But then the Tsumitasu purchasers or the policyholders not only buy third sector products at the same time as with Tsumitasu, these customers will be with us for years and maybe perhaps a year later, 2 years later or 3 years later, these customers may purchase a third sector products from us. So there's a great opportunity there, and there's a great opportunity for these customers to be with us for lifetime and sell and have us sell them our third sector products.

I just wanted to add one contextual sort of information to answer your question in that. In Japan, there's been a very historic important transition to the need for asset formation products. The government of Japan under Prime Minister Ishiba was very aggressive in preparing this package of programs, which led to the NISA the individual retirement tax saving account that Koide-san talked about. We knew this was coming. We knew that the banking sector, security side were all very focused on this national campaign in a very strategic way. We prepared Tsumitasu as an asset formation product that younger people looking for, but with the conversion or option to convert the third sector as well as the sales that we can then as a result of having that conversation complete. So I think that's what happened this year, we're very pleased to see the strategy and understanding of the external environment led to that initiative that's not producing real results.

But one thing I would add to all of that is that we are very aware of ways and some of the issues that people were concerned about. And all of those things have been taken into account, and we don't look for spikes. We have all kind of limitations within what we'll do in terms of sales to make sure our focus still stays on third sector products. We're not trying to find a way to get in the asset accumulation business. This is to build a base of younger people going forward, who don't seem -- going back to my original comment, who don't seem as concerned about getting cancer or whatever. And when we have them as part of our base going forward, it will continue to set up for future sales, which at that time, they'll be more interested in once they have a family and once they move forward.

Very helpful. My follow-up and maybe, Charles, you partially answered this, but can you just talk about what's driving the need for the change in the organizational structure in Aflac Japan?

I think I'm happy to answer, but probably Koide-san will be better.

[Interpreted] So Aflac Japan, up until now, had its sales and marketing division structure created based on the functions. For example, product development would do product development for like cancer, medical as well as other products. And then the promotional departments would do the promotion for all these different products. And the purpose of this -- the change that we are about to go now is to really respond to customer needs from end to end by meeting what customer wants and what customers we are aiming for by truly focusing on customers. We are planning to change our organization to more functional-based but by brand and so a brand-based cross-functional organization. For example, we would divide the organization into three lines that is cancer, medical and then asset formation and nursing care brand. And so in the cancer line, the planning for the products, development of products and also sales promotion will be done from end-to-end under that just one cancer brand. So as I mentioned, we will be launching a new cancer product next year. And that cancer product will be done by the cancer brand team from the planning to the actual sales promotion. And while the cancer team does that other medical insurance team as well as asset formation and nursing care line will also do their own sales promotional thinking and planning. And so -- at one end, cancer will be launched and will be promoting cancer, but then the other teams will still be working on their areas simultaneously.

We're finally moving to this stage as a result of many of the initiatives that we undertook, particularly since the conversion to a subsidiary with Board and the operations. And Koide-san probably is one of the most aggressive leader in the -- particularly in the insurance industry in adopting the agile method. And we have pilot tested that and have practiced. So in an integrated way, the finance team, the marketing, we have done different projects in a way that makes us confident that now we're finally able to do an organizational change in a way that will make our business design thinking, customer-centric driven by customer needs at different generations. I don't know if that helps answer that.

Mike Ward at UBS. So maybe just on Tsumitasu, again, and sort of the competitive differentiators. I guess my interpretation is that none of your competitors maybe have this combo of asset formation and nursing care, but I have to imagine that there's an established market for asset formation products. So I was just wondering, is that the case? And how competitive is that side of the equation? The asset formation?

Let me make one comment. We don't think for a minute that we're going to have an exclusive on this. We think, sure, they're going to get in our business. but we're ahead of the game. So whatever they want to give you for their answer. But I just want to be clear, we're not naive in thinking that we're not going to -- we're just waiting for whoever is going to drop and do it, but we're ahead of the game and are setting -- and just like we started cancer insurance we like the idea of Tsumitasu and what's taking place from that standpoint. So I'll let them answer it.

[Interpreted] In asset formation business, as I mentioned in my earlier answer and speech, that NISA is something that a lot of the companies are focusing on. For example, banks and securities companies are also focusing on NISA and asset formation. And the reason why our product is so well taken by the market is that because we are using or leveraging the strength of a life insurance company that this product is yen denominated with fixed amount and has -- is a long-term investment or long-term policy. So the only life insurance company would be able to provide the kind of product. And the reason why Tsumitasu is so successful is that we have been able to deliver this product to our existing customers as well as our potential customers through our diverse channels such as our associates and banks. And by using Aflac brand, this is also another strong reason why this product is very much well taken by the market. And another thing is that customers very much like this feature of this product that only perhaps Aflac can provide. And that is that, of course, this is an asset formation and has nursing care aspect as well. But then once the policy is paid up, the policy can be changed to nursing care and medical or death benefit to annuity. And these are the third sector products that we are very strong in. So that is another feature that customers very much like.

Just to be certain, we are completely thinking always that we are a third sector company, and this is responding to customer needs and development in the marketplace. So there's no -- our focus is always clear in how do we get to the various third sector products.

Understood. Very helpful. Maybe just to sort of expand on the demand. I know it's an earlier -- you launched it in June, Tsumitasu. But long term, do you think that we should sort of look to expect the demand for the product to fluctuate with any macro factors like interest rates or anything like that longer term?

[Interpreted] From a macro point of view, as I have referred to earlier, that asset formation needs of young and middle-aged customers is already high and is likely to continue going forward as well. Well, in terms of the macro environment going forward, and as you've mentioned, interest rate fluctuation would impact our product. But in order to really maintain our competitiveness of the product, we are constantly monitoring and we are planning to be flexible as the market environment changes.

So again, the context for this is the Japan Society as you know, as Koide-san talked about, my deck will confirm that further. Aging society, low birth rate, that's structural -- big, big structural issue. And then the fiscal challenge that Japan has and you add to that the need to now increase defense spending and all of that. So the government of Japan is basically in the campaign mode to have the citizens prepare for their retirement by also not just relying on the social security and national health care system but invest on your own, okay, tax savings, tax benefits, maybe, but that nevertheless be of the mindset that individuals have to take care of themselves by investing in asset formation as well. So this all informs the customer in a way of thinking about retirement, but without relying on the government of Japan and for that purpose, asset formation, yes, but not only that care, cancer, medical, the third sector demand is getting even stronger as a result of this macroeconomic trend that we talked about.

Steve.

Yes, Charles, can I add to your point, this is a very interest rate-sensitive product. And we've designed what we've talked about earlier, an agile team that cuts across actuarial, our finance team, our GI team or we're evaluating on a regular basis, interest rates. But not only interest rates. We're also looking at what the competition is doing. We're looking at what the competitor -- or I'm sorry, the policyholders are expecting. So we're taking a very thorough look at this on a regular basis, and we have steps to accelerate if we need to raise the rate on the product or decrease the rate on the product depending on what rates are doing in the macro.

That's new products.

On Tsumitasu.

Yes. But on new -- we don't change the existing rate on people that just bought it.

Correct. On new products.

On new products.

Correct, Going forward.

Graham Tanaka, Tanaka Capital. We've been fortunate enough to be investors Dan with you for over 40 years. And your durability and consistency has been really amazing. My questions are sort of the longer term based on a lot of dynamic change, aging demographics, better yields on your investment portfolio, I'm talking about Japan. And I'm wondering if your new products in terms of the value to the customers, what percent is perceived benefits from the sort of the savings part, the asset formation part as opposed to the insurance function. And then what kind of returns are you expecting going forward on your new product or in terms of returns on capital, returns on equity relative to your more standard cancer insurance products in Japan?

I think maybe Max you ought to come on up and address that with Steve. Steve, do you want to take...

I would just say that we expect our new products to have a similar profile and return as our old products have in the past. And Tsumitasu fits into that mold -- fits into that profile with reinsurance. Given the strain upfront on Tsumitasu, we have to use reinsurance to get the IRR up to comparable levels with other products. Obviously, the profit margin on Tsumitasu is strong, but we don't expect any change in our expectations from a return on our new products from the past. Max, I don't know if you want to add anything?

Yes, just one comment. Through a GAAP lens, Tsumitasu has in line profitability as our third sector business. If you look at it on a cash-on-cash IRR basis, it is clearly lower pre reinsurance, on a post reinsurance basis, then you get up above our cost of capital.

That's Great. And in terms of future growth rates longer term as you is segueing into different kinds of products and diversifying, what would be -- I don't know if you can answer this question, but your long-term sales growth rates in Japan and what percentage would be from new products as opposed to growth in the traditional cancer products?

[Interpreted] We are not able to announce any long-term sales target because we have not disclosed any sales target or guidance apart from the 2026 numbers.

Okay. I think that wraps up our Q&A panel for this session. Thank you all especially the left side of the room, you have a special bag waiting for you at the end, you ask more questions than the right side. So you guys got to pick it up this afternoon.

We'll stay up here during the break for a moment to see if anybody wants to ask us anything.

On that note, we will pick up in other sessions, if there's a question that you need to come back with, please ask it during that, too. Thank you. Thank you to all the panelists.

We will now turn to the next section of our program for the Aflac U.S. It is my pleasure to introduce our next speaker, Virgil Miller. Virgil was recently named President of Aflac Incorporated, Effective January 1, 2025. In this Aflac Incorporated role, his footprint includes aspects of Aflac's U.S. and Japan businesses, while supporting key company-wide profitable growth and efficiency initiatives, and driving the evolution of product and service offerings to meet market needs. Today, he will be providing a strategic overview of Aflac U.S. Now welcome Virgil Miller, Virgil?

Good morning, everyone. Thank you for the opportunity to share more about the Aflac U.S. and our strategy for growth and continued success. I'm proud what we have been able to accomplish in the U.S., and I appreciate the strong partnership my friend, Max Broden, who continues to develop capital management strategies to maintain Aflac's strong financial position. He will cover our financials later, but I want to spend a few moments reinforcing our strategy and our key priorities for the U.S. business. I firmly believe that everything starts with strategy and results happen by chance -- not by chance but by actions. And my role as President of the U.S., I've been very focused on designing strategic plans and priorities where deliberate actions drive deliberate results. That is our formula and one I will continue in my recently announced expanded role as well. From a strategic positioning standpoint, Aflac is more than an insurance company. We are a partner in health, a supporter of families during times of needs and a pioneer and a leader in the industry. As we navigate the complexities of health care and financial security, the evolving marketplace, ever-changing technology and the shifts in consumer preferences and expectations, we're continually evaluating our strategy and priorities to ensure they are driving the desired results. Here's what we know to be true. Financial toxicity associated with health care is increasing. Some of the health and wellness statistics are staggering and employer trends are in favor of voluntary benefits. Here are some stats I want to share with you this morning. 50% of employees could not pay approximately $1,000 in out-of-pocket costs in the event of an unexpected illness or injury. One in two men and 1 in 3 women will be diagnosed with cancer in their lifetime. More than 70% of employees say that mental health coverage is just as important as physical health coverage. 2/3 of employers have seen an increase in benefit costs. And life and Dental are the top 2 most requested products in the market. As health care costs continue to rise and consumer interest continues to grow, we believe the products and services we offer are becoming increasingly more relevant. We stay closely connected to the market insights and trends to fully understand what is happening from an economic, market, regulatory, competitive and consumer standpoint that will impact our business and our strategy. One item of note in this regard is that although we were very pleased with the outcome of the proposed regulatory rule that would have adversely impacted our customers, we cannot underestimate the impact that regulatory and government bodies have on our business. We partner closely with our compliance and federal relations teams to build relationships, to drive education and partner to ensure we can uphold our promise to our customers who put their trust in us. You heard from our partner Koide-san, and while I look forward to partnering with him to drive continued growth and success in Japan -- but the U.S. continues to present an incredible opportunity for growth. The U.S. working population is 161.2 million people. Of this, 111.02 million individuals work in a business where Aflac is not offered by the employer. Furthermore, of the 33.3 million who do have access to Aflac through the employer, 25.8 million do not currently have Aflac coverage. There lies the opportunity for us for growth right here in the United States, and I know that some of you in the audience today have all products, and I want to say thank you for doing that. The tremendous opportunity for Aflac is right here, and we have the strategy and the differentiators to capitalize on this opportunity. Our Vision is clear. Our strategy is consistent. Aflac is here to provide policyholders with peace of mind during difficult times, helping them to focus on their recovery rather than the financial stress. We feel confident in our ability to achieve our target range of 3% to 6% net earned premiums and we expect to maintain annual pretax margins of 17% to 20% during '25 to '27. We are focused on exercising a strong underwriting discipline to ensure we are bringing persistent and profitable business to the books. We've outlined our key strategies, our objectives and enablers to reach the specific goals that we have set forth, all of which are supported by a culture of care. Aflac is the largest supplemental health insurer in the nation. We are #1 in critical illness, #1 in disability, #1 in the hospital, #1 in cancer and #1 in accident insurance. To drive continued growth and maintain our leadership position in the industry, we will capitalize on our market strengths and our core competencies while also driving new areas of differentiation and also new areas of innovation. These areas include distribution expansion, product innovation and a segmented go-to-market approach, how we approach our claims and our customer experience. Additionally, I will spend some time in talking about our brand. We believe that having a leading brand not only drives awareness and knowledge of the need for the supplemental products, but also having a strong presence, it drives utilization. Utilization and what leads to the recognition of the value of the products. At the end of the day, we want our policyholders to experience the value of the benefits that we provide. Aflac continues to lead the industry and set the bar for voluntary and supplemental products in addition to being the pioneers for cancer insurance. In the recent years, we have incorporated mental health benefits into some of our products. significantly enhancing the value of benefits we offer through ongoing product endorsements. We have pushed on wellness filing campaigns that encourage early detection, and we launched new and enhanced product offerings. Additionally, because we know that not every American can get coverage at the work site, we developed a state-of-the-art platform and experience for those not affiliated with an employer, to still have access to this valuable coverage. The expansion of our product portfolio to include group life and disability solutions as well as network Dental and Vision was a strategic differentiator for the company. This makes us a unique carrier with the ability to win in every market segment whether we're speaking of direct-to-consumer small market, the regional market or the large market. In 2024, we initiated a national accounts and market segmentation strategy to further tailor our operating model and customer experience to the unique needs of customers in each of these segments while furthering our ability to sell Aflac Life and Disability products, Aflac Dental and Vision alongside our voluntary benefit offerings. I am very pleased with the service model and a top-tier reputation that we've built thus far in the Life, Absence and Disability market. While Dental and Vision business require remediation, we have forced a relationship with an industry-leading player in SKYGEN and are confident in our ability to grow this business in 2025 and beyond. In addition to the work we've done to drive diversification and innovation among our product portfolio, we are proud to have such a broad national distribution practice. We place a significant emphasis on strengthening our field force as well as our relationships and our partnerships in the broker market. We recognize that both are critical to our success. We are concentrating on expanding our field force distribution through focused recruiting and productivity initiatives as well as specific strategies to approach the sale of cancer insurance and the sales through public sector while all improving persistency. Our goal is to ensure that our agents are not just sellers, but are trusted advisers to those that they serve. The prevalence of small, regional and large brokers has only increased in recent years, and we expect this to continue to grow. As a result, developing strong relationships and developing solutions for brokers to tell it to their clients a unique situation is a high priority for us. As our results indicate, we continue to successfully evolve both our distribution channels and our portfolio of products as part of our strategy for continued growth. Now in today's market where competitive pressure is increasing and products can be duplicated, customer experience is more important than ever. Our strategy is twofold. It includes developing and deploying digital experiences to drive ease, automation, self-service, while also designing a segmented experience where appropriate that are tailored to the product and the market segment of that customer. From a digital experience perspective, we are focused on creating digital experiences for each of our customer groups. We continue to develop tools, leveraging advanced analytics and proactive triggers. These tools help our producers to be more productive and effective for our account administrators. They helped to reduce their billing and administrative burden. For our insurers, they help with filing claims, and they help our insurance also when making changes or other service requests. We stood up a digital innovation center both in the U.S. and abroad where we've been able to hire talent in areas such as Northern Ireland, specifically for technology development and also for cyber security expertise. Regarding segment experiences, we know that these will become even more important as we scale up our premier group life absence management disability solutions, as we refer to commonly as PLADS, also with our network Dental and Vision. Our segmentation approach includes product bundling, and pricing approaches that take in consideration the various lines of business that Aflac now offers. In addition, we developed a premier service experience for our national accounts particularly with the group life and disability service offerings. And finally, we are creating an integrated experience for those customers who may have coverage with one of our [ by-to-bills ] in addition to one of our voluntary products. The differentiator that is truly priceless though is our brand. The Aflac Duck has maintained its relevance through deliberate efforts to be bold. As Dan mentioned earlier, the commercial with Dr. Pepper, a bold move while still maintaining the core values and principles that make the company and our brand so special. And next year join us in celebrating the 25th anniversary of the Aflac Duck, many of you here today, you may remember the first commercial in 2000, with 2 gentlemen sitting on a park bench talking about the unexpected medical expenses that Aflac can help with. Through powerful storytelling, we've been able to illustrate how Aflac is committed to filling the gap during challenging times, providing not just financial assistance, but compassion and care. Partnerships with talent like Coach Saban and Coach Prime, Coach Dawn Staley, Daymond John and others have not only allowed us to reach new audiences but also leverage these individuals as champions of care to help support our commitment to fighting childhood cancer. Now to ensure we are able to consistently deliver value to our customers we will establish a foundation of operational excellence. This includes maintaining efficiency, minimizing waste and optimizing processes throughout the entire organization. It's not just about doing things right, it's about doing the right thing better each and every day. This includes a customer-centric focus on service excellence, continuous process improvement and continuous process reengineering, data-driven decision-making, expense management and risk mitigation. Now finally, our company stands on a strong foundation of culture, doing good and giving back. We're committed to employee wellness and care, diversity and leadership development, community engagement and support and integrity and ethics in everything we do. These are central to our identity and a part of our core values. Whether it's through the Aflac Kickoff for a Cause, that raises funds for cancer and blood disorders, our care grant programs that brings financial support for organizations, making a difference in underserved communities or our ongoing support for the Aflac Cancer and Blood Disorders Center of Children's Healthcare of Atlanta. And many other hospitals nationwide to help children facing childhood cancer, we are committed to making a positive impact in those communities where we live, where we work and where we all serve. We also placed a high priority on our internal culture and providing environmental awareness for all employees. We're giving opportunities for development, for advancement, for engagement and for wellness. It's because of these core values that we consistently receive industry recognitions and industry accolades. Now as we look ahead, Aflac is poised for continued growth and positive financial results. Although our industry continues to evolve, Aflac remains committed to being a reliable partner in financial protection and peace of mind. Through sound strategy, strong financial management, social and corporate responsibility, we are committed to continue to bring value to our customers and to our shareholders. Thank you for your attention. David, I'll turn the program back over to you.

Now joining us for this next Q&A panel is Fred Simard, CFO of Aflac U.S. Just as before, if you have a question, please raise your hand. We'll get a mic to you. All right. I'm glad to see our left side has come through. Joel?

Joel Hurwitz, Dowling & Partners. Virgil, can you just provide an update on where you are with the build-out of the Dental and Vision platform and the Life and Disability? I think there's some work to be done, but are you fully rolled out nationwide now?

We're fully rolled out. Let me just take a step back and talk about the original strategy and how we progressed. We knew that Dental continues to be the #2 most requested product and #2 sole product in our market in the U.S. It is critical that we get our operations to working to drive shareholder value and to make sure that the consumers get the experiences that they purchased. It's not just about the Dental though. It's about what we term as the halo effect. When we were selling the Dental before we moved to new system, remember, in third quarter 2023, I disclosed that we had a system failure and we had a write-off for that. That is what caused all the operational concerns around what was happening with that platform, moving from one platform to the other was a failure on our apart. Having said that though, we remain committed to getting that platform up and running. And today, we have forged the relationship with SKYGEN. SKYGEN is a leading provider out there of how they not only bill, apply administration, but also had the paid claims. Having done that and really wrote over last quarter, it moved the portfolio to them to manage as far as administration goes, we're now seeing strong customer experiences. We have testimonies coming from those that have not only sold the products, but those who have used the product by way of filing claims. We are now back in the market telling producers that the platform is stable and return to selling the product. It doesn't have overnight because you have to regain trust. There are other products out there, they can sell to other carriers. We have to earn that trust back. And quite frankly, it's been slow in the fourth quarter, slower than I would have expected, but I'm expecting this to take off going to 2025 and beyond. The Dental product, when we were selling it, we have predicted that we would also sell out $0.30 worth of voluntary benefits alongside of it. When we were selling it in 2023 before the platform failure, we were getting about $0.70 to $1 of also VB, way more than we expected. I expect those things to continue and now that we're getting back on track. Now I want to thank Fred Simard, he is a critical hire for us, and he's been critical in helping us stand up that relationship, and I'll give him an opportunity if he wants to comment any further.

Yes. We're very pleased with the progress. The whole book has been moved to them at the beginning of October and things are going now. The previous platform was not doing well at all. We're having issues, billing, paying claims, or portal not working, we made a call at the beginning of the year to look at the marketplace and look for vendors, which we did, and we're very pleased with progress. And we think we're going to be able to leverage the solution up market and down market and sideways, in quite an efficient way also.

And then just on life and disability. I think there was where you're expanding that platform so you could sell your voluntary with that? Where do we stand on that?

Yes. So where we are today, first, just to let you know that we're very pleased with how we're progressing there. We've exceeded our expectations 2 years in a row, what I was expecting for growth by way of sales, but also by way of the business that persists with those product lines, very pleased with that. What we're doing now is continuing to scale and grow the product. We are now ready, though, to begin to let the market know we can cross sell and push all VBs alongside that. Now with that becomes a risk. We want to first make sure we had gained the reputation as being an expert in providing life and disability of products. We know that these are -- you get one chance to get it right in the market of this size. Word travels very fast. The brokers are committing to trust us in that space, and that's how we've been able to win. When you go into a case of this size, there's always an incumbent. These incumbent carriers have been there sometimes 20 years. So for us to win against them has been a great accomplishment for us. We wanted to get it right this year in 2025, we're going to focus on the customer experience going across both of those platforms, to ensure we have the right technology and the right support. What we've done today though, because it already happens today, is make sure we have customer care experts. The people that we've hired for life and disability or case managers, they're actually licensed to provide critical care and services for those that are filing claims and as they undergo their treatment to help the return to work, and we're going to be leveraging those people to also support the voluntary benefits to get that same top-notch experience. So it is a top focus for us this year, and you'll hear us pushing more and more of that in the market.

John Barnidge from Piper Sandler. So my first question, Slide 26, you talk about the growth opportunity, 161 million U.S. working population, looks like just over 10% of that is in D2C, can you give us an update on the consumer markets initiative there, please?

Yes. We're going to exceed our original targets that we set this year for sales for D2C. You might remember going backwards, let's say, 2 or 3 years ago, the original concept was to test and learn. We said that we all know that at some point in time, digital is going to become even more important to reach, especially workers in this gig economy. So it was more of a test and learn as we go. I can tell you now, John, that I am pleased to say that it is now one of the core components of how we're going to grow sales. This year, we saw our sales from last year almost double. And I expect the new rate of sales that we have to continue to go. A couple of things that we've done, though. We need to make sure that we're driving profitable business also through that platform. Fred, again, has been instrumental in making sure we get the right efficient operations to run that. If you think about it this way, those sales were really made online. We're one of the first carriers to file our products digitally, so you can actually complete the entire process without any agent intervention. That also eliminates the ability for us to having to pay commissions on those types of policies sold. So it gives us an opportunity to be able to make a margin on those products. The second thing I would tell you, though, is we also have a partnership. We leverage strategic partnerships where there's someone out there who can provide expertise, they pay the claims on those products for us, and that helps us drive an even more efficient model. As we continue to grow, I would just say this to you that the individual product set will always be on a foundation at core. We added our group VB, that has continued to grow also. Now we have these [ by-to-bills ]. We've got the life and disability, the Dental and Vision, but the consumer markets will probably be anywhere from 5% to 10% of our sales. You look at it today, is less than 2%. But I can see it getting up at some point over the next few years, it's about 5% of our sales.

And then my follow-up question. Slide 13 on the Japan external environment on demographics. It talked about a shrinking population, low birth rate and aging society and rising costs on social security benefits. That all feels like the future here in the U.S. How does supplemental and voluntary benefit market penetration grow short of national health care coming in?

As you've seen the trends over the past few years, you've seen now a couple of things. First thing I would note is, take a look at the average deductible in the U.S. on major medical insurance. I was up in D.C. a couple of months ago, and we were talking about the ACA, the Affordable Care Act and those buying through the exchange. I just went out there and Google a couple of times. You can see deductible rates anywhere from $7,000 to $11,000. The point I'm making to you is that, that continues to make our products even more relevant. Even the people that still have major medical it's just not enough. That is the reason why you've seen those in our commercials. Now go back to the term Gap, we're covering those Gap of expenses, not normally covered by major medical, the relevance will always be there. The -- I can see deductibles continue to rise and the expenses associated with getting treatment will always be there for individuals. The other thing I will tell you is that it's also supported by a look at the competition today. If you looked at the U.S. years ago, there were Aflac and a few other supplemental carriers. Today, you see the same players, but you also see the life and disability carriers and you also see the major medical carriers all selling supplemental, it demonstrates the relevance of what the products really mean in this market. And I see that relevance not going away anytime soon. Fred, Dan, any comments?

Well, the only other thing I would say is that, that applies to Japan as well. Even though this is a U.S. I just want to make sure they're trying to shift more cost to the customer to ultimately bring down the overall cost and usage rate by doing that.

The only thing I would add is if you think about the strategy of adding PLADS in Dental and Vision to make it more relevant for customer and cross-sell. And Virgil talked about the over 5,000 solution, which is very strong. The persistencies there is over 90% to 95%, which I think is very strong for that market. And doing that well will help us cross-sell and retain customer with group voluntary benefits. And so if you go back to the strategy of why did we add Dental, Vision in PLADS, you sort of have it right there.

Yes. And I'll close one more comment is, look at the shift in the market of who sells supplemental products also. Aflac agents continue to be the foundation of Aflac in our existence going back in 1955. They're very important. But last year, I told you for the first time in Aflac history, brokers some more product than our field force, just above 50% -- by around 51% this year, I expect it to be higher. The point I'm making is that brokers have always been in the space of medical -- major medical benefits, to life and disability products, and they are continuing to shift now to supplemental. So now you have an entire distribution force out there that are saying, these products are extremely relevant.

Tom Gallagher, Evercore ISI. Virgil, I just wanted to come back to, I guess, some of the comments you were making earlier. It sounded like you were a bit disappointed on how things have gone in the last year or 2. Can you just drill down a little bit further into what you think went wrong? Was it on the group side? Was it in your traditional voluntary business? And what are the steps you're taking to improve things that you -- in areas where you were falling short?

Yes, thanks for the question, Tom. I coined a term in Aflac that I use called the sum of all parts. The way we set our goals and it's really because Aflac traditionally, in the U.S., we focus on the traditional products. We went out in 2009, we bought Continental American. We added our core VB products. Well during the pandemic -- right around the pandemic, we went out from Zurich, and we bought our life and disability and then we got the Dental and Vision down at Argus. My point on that is when we set our goals, I first look at those as independent, not companies, but divisions delivering different products for different consumer types. When we talk about market segmentation, if you think about it, our traditional products are normally bought and sold in the smaller market. You think about that mid-market, is our core VB, if you think about this jumbo, a larger case is really the life and disability where we are winning. My point on that, Tom, is -- so in setting the goals, the Dental product was a core element of how we were predicting our sales, but also, as I mentioned before, it also drives additional VB sales. And in this particular case, the disappointment lies in our failure to transition from one system to the other, that pretty much stagnated us because we weren't delivering the customer service that we deliver as an organization to our consumers, and therefore, we stop pushing on those sales. We want to make sure we stabilize that platform so we spent pretty much all of this year getting the platform stable. I am now stating to you that our platform is stable and open for business. But saying that, though, the sales are about 34% less than I anticipated on that particular line of business for our Dental sales. That is my main disappointment. We have one of the sum of all parts, 1 aspect of the business behind is very hard to make it up with another part of the business. And that's really -- Tom, was my comment.

And what I would tell you that has affected us is with COVID, okay, it happened in 2020, 2021. The amount of people that, when you're total commission and all of a sudden, you can't go out and make sales, the people we brought on that are relatively new don't have the renewals built up where they can continue to stay with you, and they're not calling on people. And we didn't train them to do it through telephone or technology, and we're looking at that, but it's still more one-on-one sales, meaning the distribution channel that is the 50% of our business. So bringing that back, and then we have brought it back and it has turned. But getting back to what we had in 2019, that has a longer life on it of catching up than does, say, just other aspects. So that's the one thing that's been very impactful is, building back that distribution channel of people that were individual salespeople that maybe we hired in '18 -- '17, '18 and '19 is they just couldn't make it in '20 because they just stopped production.

And Tom, to put a finer point on what Dan just said, to that extent of that, if you look at our original individual business, which was really more impacted with what Dan just described, the pandemic, were still at 95% of 2019 numbers. So then why did we have our largest sales year in the history of Aflac last year, because I called the sum of all parts. We added to life and disability. We did get some Dental sales and we got some of direct-to-consumer sales. So that's really the point. These other lines of businesses now have added an incremental growth. Last year was the largest sales year in Aflac U.S. history. The fourth quarter was the largest quarter we've had in the U.S. history. But it's because of all these other aspects working. And then the last thing I'll tell you, I did mentioned too in my speech that we're committing to a 3% to 6% earned premium growth. So why am I committed to that though? It's because we've been able to continue to improve our persistency. If you look at our persistency even in third quarter, I announced that we were up 20 basis points. We've seen that continued steady progress of persistent growth for the past 2 years.

Ryan Krueger, KBW. Maybe just to come back to -- we've discussed the new platform a lot between traditional group direct-to-consumer and Dental and voluntary, can you give us a sense of when you add all those up, what percentage of your sales does that account for at this point? And then where do you see that going over the next few years?

Yes. If you look at it year-to-date, we're about 16%. And that is the life and disability plus the Dental and Vision plus what I'm terming direct-to-consumer is about that. And now we're predicting it will be 20% to 25%. This is over a 5-year time period that we've set. So going from '24 to -- we did '24, '25, '26, '27, '28. And that's what we're predicting 20% to 25%.

And then at this point, do you feel that you need any new additional products or capabilities? Or are you pretty content with what you have now and it's more about just continuing to build the growth from them.

One thing I've learned from Dan Amos is focus and execution are critical. What we need to do is focus on what we have and get it right. I believe that if we can get the Dental platform consistently running where we built the trust back with our producers, that is what's going to take us to achieving those goals that we've set. I'd also say to you that the opportunity is what we discussed earlier is the fact that we have already gained a strong reputation with life and disability is now our ability to cross-sell those products. And then cross-selling is not just a cross sell. It's how you bundle, we're able to provide a discount. We're able to provide a unique experience. That's where we should focus. Now, beyond that, of course, we're always open and looking for things out there. Max Broden is my partner, Fred and I, we look at anything that may be of interest, we have yet to find it. There's no other product interest that we think that will add additional value, no additional properties out there that bring a technology or distribution capability beyond what we already have.

Suneet Kamath from Jefferies. Your pretax margin guidance of 17% to 20% is lower than where you've been running. Can you just talk about some of the reasons why that's the case?

Suneet, it's two reasons. Business mix and then a conscious decision to give a point toward our benefit ratio, driving additional policyholder value. So what we've done is we talked a lot about this year of making sure we get to -- and you'll hear in Max's presentation, he'll talk about the U.S. benefit ratio getting to a 48% to 52%. We shifted that upward. That took about 1 point right there, and then the rest is all with the business mix. The PLADS or the life and absence disability products bring a different set of margins with it and also the Dental is lower than our normal voluntary benefit products. And so when you put that in a mix, it really changes our margins. And that's the reason why we are putting 17% to 20%. I think before when we did originally [ Vision 2025 ] -- excuse me, we had back in 2021, we set a Vision we call it [ Vision 2025 ]. We were pushing to 18% to 21%, but that's where that difference comes in.

Got it. And then at one point in the past, we were talking about a sales level of, I think, $1.8 billion for 2025. And I didn't hear that again today. I don't know if we're off that, but can you just provide an update in terms of, is that still the objective? Or are we not focusing on earned premium?

Yes, we absolutely are focused on earned premium. You're going to hear Max, Fred and Dan and I continue to say, we want to shift your focus to earn premium, the growth percent of our business because the focus on persistency and the business mix of what these products will bring to us, the life and disability will have a higher persistency to it than our normal VB products. So we're going to continue to push you towards that, however, though, we did in 2021, commit to $1.8 billion. One of the reasons why we set the commitment was we wanted to demonstrate the ability for us to grow the [ by-to-bills ] but also to demonstrate the recovery coming out of the pandemic that we're going to have with an individual and the VB products. Where we've done that, we've shown continuous growth year-over-year-over-year. But the $1.8 billion, I will tell you, due to the challenges we've had at Dental and Vision, missing part of those sales that we accounted in our models, we'll not -- will push it from 2025 into our 3 years strategic range though. We will get to $1.8 million within '25 to '27, but likely at 2025, I'm taking that off the table. It's going to be more shifted towards 2026.

All right. That's just big enough of a pause, I think to clear this Q&A panel. We'll go into a break, and I just want to let you all know that marking a special occasion, 50 years on the NYSE, 50 years in Japan, we have the closing bell today. As a result, the Aflac Duck has flown in. It will be in the foyer there if you want to get a picture with the Duck, but always take time to get a refreshment, whatever break you need. We'll come back in about 15 minutes. Thank you. [Break]

All right. I'll give everyone a minute to gather. And I apologize, the duck is a little delayed. That's what happens when he's flying south and you redirect him north. So he will be here later. So with that, our next speaker is Brad Dyslin, who, as I mentioned, is Executive Vice President, Global Chief Investment Officer and President of Aflac Global Investments, the asset management subsidiary of Aflac Incorporated. In his role, he oversees all the company's investment efforts, including Aflac's $105 billion portfolio and a team of more than 180 investment professionals in the U.S. and Japan. And now welcome to the stage, Brad Dyslin. Brad?

Thank you, David, and good morning, everyone. For my remarks today, I have chosen to focus on some of the main drivers of how we manage the portfolio. We have provided material outlining some important information, including a snapshot of our key metrics, details on our new money allocation and an update on our loan portfolios, but my comments are geared towards providing more insight into our general approach to portfolio management. Our goal is to create an all-weather portfolio that deliver strong risk-adjusted returns while withstanding the extremes of various market conditions. This includes the impact of credit cycles, different interest rate regimes, foreign currency changes and general market volatility. We have an unbending focus on fundamental security-level underwriting further supported by disciplined diversification at the asset -- at the security and asset class level. Capital preservation through strong risk management is a critical element of our culture. Every 3 years, we update our strategic asset allocation or SAA to account for refreshed capital market assumptions and specific Aflac objectives for capital, risk and liquidity. The SAA process provides the optimal asset allocation for maximizing our returns while protecting our strong economic capital levels. This year's updated SAA reinforces our core approach to managing currency, interest rate, credit and liquidity risks. As you know, Aflac Japan is our largest portfolio at approximately 80% of our total investment assets and over 70% of our consolidated net investment income, this creates some unique challenges as it relates to managing currency risk. Our approach is to manage the impact of currency moves by creating 2 sub portfolios, each currency matched against our obligations to both policyholders and shareholders, respectively. At the top of our Aflac Japan portfolio capital stack is $57 billion of yen assets, which are primarily Japan government bonds and other yen-denominated assets, predominantly investment-grade credit. It may also include assets and other currencies hedged back to yen exposure such as U.S. dollar floating rate assets hedged with short-dated currency forwards. This portfolio supports the product reserves, which represent the amounts due to policyholders over time. Our entire book of business is denominated in yen, so we back this liability with a portfolio of entirely yen assets. The balance of our Aflac Japan portfolio is the company surplus, which backs policyholder reserves and represents our equity claim on the Japanese business. This portfolio consists of U.S. dollar assets as we are a U.S.-based enterprise with shareholders expecting a U.S. dollar-based return. These assets are unhedged and are part of the broader Aflac efforts to minimize the impact of the yen and maintain U.S. dollar-based exposure to the economic value of Aflac Japan. This U.S. dollar portfolio also represents the regulatory capital required to support the Japanese business. We protect the value of this U.S. dollar capital through derivative strategies. These derivative strategies have evolved over time, but today are represented by a relatively straightforward out-of-the-money put option strategy. This option strategy does not hedge small moves, but provides cost-effective tail risk capital protection against a weakening dollar. In 2023, prior to implementation of this option strategy, we spent $157 million protecting our U.S. dollar surplus portfolio. In 2024, that number will be closer to $27 million. Shifting to interest rates. Our SAA optimization process incorporates appropriate asset liability management to ensure our capital levels remain strong regardless of the interest rate regime across both yen and U.S. dollar markets. In Japan, for the first time in a generation, interest rates are rising. The yield on the 30-year Japanese government bond has increased nearly 85 basis points over the last 18 months, which is especially noteworthy considering this represents a more than 50% increase in the absolute level. As an active investor in the Japanese markets, we welcome the increase in yen yields. As a long-term investor, we can continue holding bonds with unrealized losses from interest rates from rising rates. We are also benefiting across the organization from U.S. dollar interest rates remaining at relatively high levels when compared to the last several years. Our U.S. dollar new money yields for both Aflac U.S. and Aflac Japan for 2023 and 2024 are significantly higher than the prior few years. While lower U.S. dollar interest rates from further Fed cuts will create a headwind, the overall impact to our net investment income should be manageable. Recall that we have interest rate hedges on approximately 70% of our U.S. dollar floating rate portfolio, which provide protection against a big move lower in rates and our portfolio consists of approximately 86% in fixed rate assets. Our approach to asset liability management as embedded in our SAA seeks to protect our portfolio from large currency and interest rate moves while our strong balance sheet and capital position allows us to embrace credit and liquidity risk, 2 areas where we have a proven track record of managing for enhanced returns. For the last several years, we have been actively increasing our allocation to private credit through both internally and externally managed asset classes, including traditional private placements, direct middle market lending, structured credit and also private equity. We maintain a high-quality credit bias with 94% of our portfolio rated investment grade and an average portfolio rating of A. We continue seeking opportunities to swap our substantial JGB portfolio into yen-denominated credit for yield enhancement. Our primary outlet for below investment-grade exposure is through a well-diversified portfolio of first lien senior secured loans supported by modest leverage and strong covenant packages. We are successfully managing through the worst commercial real estate downturn in decades, thanks to our disciplined approach to asset level underwriting and our ability to hold foreclosed assets through the cycle to maximize our recoveries. Our overall loss rates remain at manageable levels. During 2024, our internal credit team completed a series of switch trades that repositioned $2 billion of public corporate bonds into higher rated holdings that yields approximately 200 basis points higher, adding over $40 million of annual net investment income while avoiding losses, thanks to substantial currency gains. We repositioned JPY 65 billion of JGBs in the yen credit, adding approximately 80 basis points of incremental yield. Our internally managed structured private credit portfolio has grown to $2.3 billion with an average rating of A and a book yield of 7%, an incredible accomplishment in just 3 years. In 2024, we continued our disciplined build of our alternatives portfolio currently standing at $2.9 billion of net asset value. Our strategy is focused on private equity with a modest allocation to real estate equity. Year-to-date, our portfolio has posted a positive 6.1% total return, and we remain committed to our expectation of 10% long-term results despite what is near-term volatility of returns. Leveraging our external manager platform, in July, we closed another strategic partnership focused on private assets. We purchased a 40% stake in Tree Line Capital, a direct lender focused on the lower middle market with a great track record who shares our strong credit culture. Tree Line joins our other strategic partnerships in commercial real estate with Sound Point Capital and in sustainable infrastructure with Denham Capital. Credit underwriting is a core strength of our platform and a risk that we actively manage. Our strong overall liquidity profile allows us to capture the incremental yields associated with private assets. We will continue to actively engage these 2 risk factors as a source of strong performance in our portfolio. As a result of our disciplined approach to portfolio construction, our global portfolios continue to perform quite well in 2024 and are on track to post the highest adjusted net investment income in recent years. We are focused on maintaining a high-quality portfolio while growing our private assets to add incremental yield. Our disciplined underwriting has enabled us to weather the current commercial real estate cycle with very manageable losses, while our middle market loan portfolio continues to produce minimal credit losses. Over this last year, a period when the yen has been especially volatile, our capital levels remained strong from both a yen-denominated regulatory lens as well as a U.S. dollar shareholder perspective. The updated SAA reinforces our strategy of protecting against significant moves in currency and interest rates while embracing credit and liquidity risk, plus the benefits of a disciplined build of our alternatives portfolio. Thanks to the hard work and dedication of our global investments team. We continue to meet or exceed our investment targets while maintaining a high-quality portfolio consistent with Aflac investment objectives. Now let me turn it back over to David.

Thank you, Brad. Our next speaker is Max Broden, who was recently named Senior Executive Vice President, effective January 1, 2025. Max is responsible for leading enterprise-wide corporate development, investment and rating agency relations, corporate finance, capital management, financial reporting and financial planning and analysis. More recently, Max assumed oversight of the company's global investments, risk and actuarial functions as well as its reinsurance strategy, including Aflac Re Bermuda Limited. I now welcome to the stage, Max Broden, Max?

Thank you, David, and good morning. In my section today, I would like to lay out our near-term financial outlook as well as our strategy going forward, showcasing how we intend to grow economic value creation through a disciplined risk reward framework. Specifically, I would like to address our approach to FX hedging and reinsurance through this lens. Starting with Japan. Japan has been a solid performer in the last couple of years, experiencing higher pretax margins driven by diligent underwriting and improved expense efficiency. The recent combination of both lower benefit ratios and expense ratios means that we are now in a position to reinvest in growth initiatives as can be seen by our recent launch of a new asset-formation life insurance product, Tsumitasu. This is also a function of improved investment returns, as you heard from Brad, leading to both improved GAAP profitability and the ability to price products more competitively. Relative to our FAB 2022 ranges, our underlying net earned premiums trajectory remains in negative territory as sales remain below in-force lapses. During the 2025 to 2027 forecast period, we expect sequential improvement in this trajectory, but it will remain in a range of negative 1% to 2%. When you exclude the impact of certain variables, such as internal reinsurance and limited pay products reaching paid-up status and the deferred profit liability reclassification. The benefit ratio range continues to trend lower as favorable experience has been reflected in a lower net premium ratio and an increased proportion of our in-force is third sector policies carrying a lower benefit ratio. We do expect our expense ratio range to trend up slightly as we have launched a series of initiatives to drive higher sales volumes. The stringent expense discipline in Japan is now taking us to a level where these investments make sense. Long term, we expect these initiatives will drive higher sales volumes and lower unit cost assumptions for new business pricing, thereby advancing our competitiveness. We firmly believe that in the long run, the low-cost producers win in our business. Pretax margin range is improving as a function of lower benefit ratios while being partially offset by the slightly higher expense ratio. The 30% to 33% level is a very strong profitability, striking a good balance between enjoying very high in-force margins while also increasing investments for future growth. I should add that all ratios assume no unlock of future LDTI assumptions. To sum up, Japan is hard at work, getting back to growth, while also preserving the solid in-force margins as well as FSA earnings and cash flow. In the U.S., the COVID years were challenging for our new business franchise while the financials remained solid, driven by low claims utilization. As we look forward, we see some reversal of these trends as clearly outlined in Virgil's presentation. With platforms, products and customer solutions now in a stronger position, we anticipate this to be reflected in a slightly improved net premiums trajectory. This trajectory is especially driven by group life and disability. Subsequently, group life and disability will impact all of these ratios as it becomes a greater proportion of our in-force and flows through our financial statements. The higher benefit ratio is a combination of our efforts to improve the value proposition of several voluntary benefits products through benefit enhancements as well as endorsements of existing benefits, and the growing presence of higher benefit ratio lines in our in-force product portfolio. The expense ratio outlook reflects both platforms getting closer to scale as well as mix. This means that we would expect a downward trend throughout the forecast period. Pretax margins remained stable as the higher benefit ratios are mostly offset by lower expense ratios. Next, I would like to address a topic that is very near and dear to my heart and sits right in the very epicenter of managing risk and reward for a company trading in U.S. dollars but with an income statement and balance sheet, predominantly denominated in yen. To begin with, we fundamentally believe and would like to limit FX risk as much as possible as it makes the company easier to manage, lowers risk and reduces the cost of equity capital. We take an economic approach while protecting our capital base as different accounting and capital regimes can, in tail scenarios, give a very undesirable outcome. I think this is a lesson that our industry has learned a hard way over the years. As we look at Aflac Japan balance sheet, we begin by actuarially establishing the best estimate liability or BEL. Per the BEL, its present value of benefits and expenses that we expect to pay out on our policies netted against the present value of future premiums. This liability, we will always match with yen assets. Anything else, though, would be currency speculation, which we would not accept. On top of this, we established a margin for error, recognizing that we are dealing with estimates of long-duration liabilities based on many assumptions. This margin, we also hold in yen assets. Any assets above the BEL and the margin for error, we do not anticipate to pay out in claims to policyholders. And we therefore consider these as surplus assets that we expect over time will flow up to the parent in the form of dividends. As Aflac Inc. trades in U.S. dollars, holding this surplus in yen would create a currency risk for the shareholder. So in order to reduce this currency risk to the shareholder, we hold this surplus in U.S. dollars. We believe that this means that holding U.S. dollar assets on our Japan balance sheet is predominantly a risk-reduction exercise to the shareholder with the very nice outcome of higher income in -- if U.S. dollar rates are higher than Japanese yen rates. So there's no free lunch, though. And as Brad outlined, holding U.S. dollar assets on the Aflac Japan balance sheet introduces risk and volatility to our ESR. So through a pure Aflac Japan lens, we use put options to reduce the impact of currency risk on our ESR in line with our risk appetite. To further improve the risk reward of our enterprise currency hedging program, we have in recent years begun to use FX forwards at Aflac Inc. as well as issuing debt denominated in yen. At the end of Q3 of this year, our total program was made up by $27.7 billion of U.S. dollar assets on the Japan balance sheet. $1.9 billion of FX forwards at Aflac Inc. and $4.6 billion of yen-denominated debt issued at Inc. We use these 3 tools to both calibrate the total level of the program and also use the tool with the best risk-adjusted return on capital to optimize the risk reward of the total program. Again, the intent is to reduce the economic impact to Aflac Inc. from FX risk, and therefore, ultimately reducing the cost of equity, improving shareholder value creation. With the introduction of ESR, we've gone through an exercise to recalibrate our target operating ratios to both our risk appetite as well as the capital toolkits we have built to support our capital base and ratios in times of stress. As you can see on this slide, we are operating with ratios above these ranges as a function of the COVID years, which caused significant capital build through low claims utilization that drove above-trend statutory results as well as low new business strain. Going forward, we intend to drive these ratios down into our declared target ranges through the use of both subsidiary dividends and greater new business strain from the growth initiatives laid out in the business sections. As Japan is by far the largest balance sheet, I would like to point out that the first official filing for ESR with the FSA is March 31, 2026. The ESR is the metric we believe is the most relevant for dividend decisions in Japan. As of right now, our ESR is approximately 269%, which is slightly higher than our targeted range. In the U.S., we're taking actions to reduce RBC volatility of our group company, CAIC, reinsuring the in-force internally for a larger Aflac Columbus entity. This in combination with additional Q1 2025 statutory dividends to Aflac Inc. will lead to a reduction in combined RBC. We expect this dividend to bring the ratio below 600%. The BSCR for Aflac Re Bermuda remains very strong, which in combination with very significant in-force capital generation means that we are in an excellent position to manage both in-force growth and any capital markets volatility. And now it's time for my favorite slide of all the slides that we have in the deck showing the spread or value creation that we believe Aflac has generated for its shareholders. This is how everything we do comes together in 1 slide, capturing both earnings and capital as well as the risks we take generating it. While our adjusted ROE has been quite stable, cost of equity has fluctuated during the COVID years. And 2024 year-to-date has seen very strong value spread, which I'm quite proud of. Under U.S. GAAP, the weakening yen has significantly boosted our reported shareholders' equity through FX remeasurement gains on U.S. dollar assets held in Japan. The functional currency of Aflac Japan is yen. So in yen terms, the weakening yen relative to the dollar has created gains in the yen. When these gains are consolidated, they boosted retained earnings and shareholders' equity, which ultimately lowered the ROE as reported. Two years ago, we announced our internal reinsurance strategy, outlining how we intended to execute a series of transactions to drive reduced risk, better balance sheet efficiency and ultimately a higher ROE for the group. Since then, we have executed 3 transactions between Aflac Japan and Aflac Re Bermuda as well as innovation of a block previously ceded to a third party. As you see on this slide, our ROE has sloped upwards, and an important driver to this has been the realization of this strategy. We estimate that we have already achieved the 100 to 200 basis points run rate ROE enhancement outlined at our 2022 financial analyst briefing. Going forward, we still think it is reasonable to expect to cede about 10% of Aflac Japan U.S. GAAP assets to Aflac Re Bermuda over time with approximately 6% done to date. To better reflect the performance of the business, we intend to introduce an additional view of ROE holding both the numerator and denominator at constant FX that better demonstrates the business performance, excluding FX. On this basis, you can see how we have further improved the ROE over the last couple of years, which is predominantly driven by the executed reinsurance transactions and subsequent achieved balance sheet efficiency improvements. This is an additional metric that we believe will help in analyzing and evaluating business performance as well as management execution. With strong subsidiary dividends, especially from Japan, as a result of reinsurance transactions, we have enjoyed increased capital deployment of late, resulting in greater ROE overall. As we look forward, taking into consideration earnings as well as new business strain outlook, we would expect run rate annualized subsidiary dividends to be in the range of $2.4 billion to $3 billion. The lower end of this range is slightly lower than the previously guided at our 2022 financial analyst briefing, which is a function of the weaker yen when translating FSA earnings and expected dividends into U.S. dollars. This range excludes any management actions around reinsurance, any special dividends driven by rightsizing of capital ratios or any debt issuance. We are very proud of our shareholder dividend track record of increasing the dividend uninterrupted for 42 years, including last night's announcement of a 16% increase for the Q1 2025 dividend to $0.58 per share. This is a testament to both the stability of our business model and risk management in executing our financial strategy. To sum it all up, we have cleared the corner post COVID. Now we see further investments in growth ahead of us, supported by strong financial discipline and solid capital management driving a very significant spread to our cost of capital. So I thank you for your time, and we will now transition to our final Q&A. David will call on any of you that have any questions, and I would ask Dan, Brad and Alycia to join me up here on stage. Thank you.

Thank you, Max. Good news, the duck has arrived. So we've got that going for us. Okay. Jimmy, you want to start us off?

So first, just a question for Max. On the 10% that you are outlining as a potential cede to Bermuda, how firm is that target? And should we assume that over time, you'd most likely exceed it?

So when we think about this, we have to take the lens of all individual companies into consideration. So before we execute and evaluate any transaction, we think about it through the lens of Aflac Japan and why it makes sense for Aflac Japan to execute any reinsurance, why it makes sense for Aflac Re to execute such a transaction and then ultimately for the whole group as well. When thinking about the 10%, that's an internal initial risk limit that we set. And it's important to understand that we execute these transactions on an arm's length basis. That includes -- that means that we are now taking internal counterparty risk between Aflac Japan and Aflac Re. So therefore, it's very important that you follow and you set those risk limits, but I would also tell you that over time, we will evaluate this limit as well because we are well aware of other companies who are using much, much higher ratios. That being said, I do think that it is something that we need to sort of think about and it's important to analyze it through all those lenses. So over the medium term, I would expect us to get to that 10% level. And when we get there, we will sit down and think through if it makes sense to revalue that for any different level.

And then just for Brad, if you could just talk about where is it that you're allocating new money incrementally more or less than before? And then just any views on your CRE portfolio.

Sure. So let me start with new money. The predominance of the new money for next year is going into U.S. dollar assets. Obviously, the U.S. portfolio is U.S. dollar denominated. But then for Japan, the bulk of the investable cash flow is continuing to go into U.S. dollar asset classes to maintain our exposure. As suggested by my comments, we are continuing to focus on private asset classes. We have been building internally our structured private credit capabilities. We continue to like the value there. And we continue to deploy a lot of our new capital in that asset class as well as the loan portfolios. On the TRE portfolio, there's not much new to report. It has been relatively consistent really for the past 18 to 24 months. Our watch list remains at about the same level. We are foreclosing on properties as the workout process goes through. And if we think that's the best course of action, we're very fortunate. We've got the liquidity and capital that allows us to do that. But really not much has changed. We are seeing some early green shoots, but it's very early in the recovery process.

Ryan?

Ryan Krueger, KBW. I have one for Max on special dividends out of the subs. I guess, it sounds like that's a consideration. Can you -- I guess, at least on Japan, can you help us think about the magnitude of moving from the [ 269% ] down to the [ 230% ] or give some perspective on what you might consider?

Yes. So let's begin with thinking about timing of this. I do want to be clear that officially, we -- even though we manage the company on an ESR basis today, that is still not the official regime in Japan. So until that is the case, i.e., April 1, 2026, it's unlikely that you will see any significant rightsizing of that capital ratio and then subsequent significant dividends. If you think about the size of the ESR in Japan, one rule of thumb is that you can think about 10 ESR points being in the range of $750 million to $1 billion. That will fluctuate over time. That's driven by many factors like rates, FX, et cetera. But that's a reasonable range to think about.

And then just one separate question. On the benefit ratio targets that you gave, is it -- I know you said that it doesn't include any assumption review impacts. I assume it also -- you're assuming 0 remeasurement gains, I guess, as well in those.

There is a small level of remeasurement gains that are included in that, but no change of -- sorry, no unlock assumption changes are in it.

Tom?

Tom Gallagher, Evercore ISI. Brad, just a question on overall NII, should that be a headwind, tailwind when you think about the planning period for the next 3 years?

Sure. We are coming off of a very strong 2024. We did have several things that we did that have contributed to the very strong year, that are going to create a bit of a headwind for us. And then of course, there is the current path of U.S. interest rates, which remains to be seen over the next -- really over the next 12 to 24 months. So we do have some challenges ahead of us. Our floating rate portfolio, as I mentioned, is -- about 70% of that is swapped. So we do -- are insulated from the bulk of the portfolio declining as short rates continue to drop. So we think we're going to continue to put up very good numbers, but we do have our share of challenges heading into next year.

And could you dimension that a bit in millions of dollars on a USD basis, what kind of numbers are we talking about from a headwind at $50 million or $100 million when you think about the annual headwind?

Yes. I'd rather not get into specific guidance. We're still finalizing our budgeting process. But we had a very strong year this year, and we're going to do our best to recover that in 2025.

Tom, the vast majority of it is coming from the -- pressure is coming from the floating rate portfolio. So think about it in terms of size. It's roughly -- a little bit over $10 billion of floating rate assets. And if you then look at what the 1-month and 3-month SOFR have been throughout the year of 2024 and then you can make your own assumption for 2025, and you can see -- you can sort of calculate what you think the impact will be.

Got you. And then if I could just ask one bigger picture question about philosophy of excess capital, you clearly have significant excess capital. You have conservative reserves, so a lot of dry powder on the balance sheet. You've one of the best multiples in the sector, probably the best multiple, best valuation in the sector. Have you -- now I know you haven't really historically done any big M&A, but just considering the fact that we've looked at a 3-year planning cycle out in Japan and you're still expecting negative revenue growth. Would you consider doing something more big, bold, strategic considering how strong your valuation is and some depressed prices out there for other assets that you could potentially buy?

I think the answer is, of course, we'll look and we'll see. We've had discussions at our Board meeting about that, but I'd like to see our Dental and Vision working as planned. I'd like to see continued growth in the PLADS business. And then we would look and see. But we took baby steps because we thought we could make mistakes because we've never been in it before with acquisitions other than the one we bought in, what was it, 2007, the group business. So yes, as our strength of our bench gets better and we bring on people that know more things, we will look at that. But I want to be very careful because I want to protect the assets we've got and make sure that we're taking into account what will ultimately enhance shareholder value, but it certainly has to be on the table to look at.

I want to add one perspective to it. And first of all, yes, we understand the value of our currency. We can also make calculations on what potential accretions would look like as well. We're quite aware of that. But I would also recognize that this company was not built by M&A. This company was built by selling 1 policy at a time and doing that over and over and over and over again and do that really, really well. And the focus that, that Dan has brought to the company, I really do think is part of the success. The returns that we showed you earlier is no coincidence and -- that they are significantly above our cost of capital, but also above what you generally find by most other companies in the industry. This industry, M&A is very, very tricky and difficult. And it's because of the very long duration of the balance sheet. That means that executing that being portfolio transfers and that being platform migrations, et cetera, becomes very difficult. So staying focused is something that served the company well, and we actually think will serve the company well going forward as well. And when you make an M&A decision, even though it may be very accretive in year 1 or year 2 or year 3, we have to think about what's the impact going to be to the company over the next 10, 15, 20 years. And that's when it may not look so bright anymore. So -- I just wanted to add that perspective to Dan's answer.

Wes?

Wes Carmichael, Autonomous Research. A question on reinsurance. Max, I wanted to follow up on your earlier comment on Tsumitasu and needing to use reinsurance to finance the stream to improve the IRR. I just want to clarify, are you using affiliated reinsurance through Aflac Re Bermuda as a third party? And does that eat into the capacity for the 10% limit?

We have the options to either use our affiliate in Bermuda for that or we can use third-party partners for that as well.

Got it. And Brad, I think you talked about some opportunities to swap JGBs into yen credit. Can you maybe size that, how we should think about the uplift to Japan's portfolio yield and are you crystalizing unrealized losses in order to do that?

Right. I'll take the last part first. We've not had to crystallize losses to do that as of yet because of our substantial JGB portfolio and gains that we've had embedded in that. And that's what's funding most of those swaps is JGBs to yen credit. And it's really an opportunistic trade for us. And one of our biggest challenges is finding yen-denominated credit opportunities. So we do find them and they meet our thresholds for investing. We're pretty active, maintaining, of course, size, discipline and other things. So it's really hard to put a number on it. But the JPY 65 billion we did last year is a pretty good benchmark to think about it as a run rate.

John Barnidge.

John Barnidge, Piper Sandler. So earlier in the presentation, there was a slide about pursuing marketing and sales, structural transformation in Japan. Is there a level of incremental cost to pursuing that, that's embedded in the expense ratio for '25 to '27?

Yes.

Can you define it?

Yes. It means that we have some level of upward pressure on -- of our expense ratio. It is not very significant, but it's certainly there. When you think about our expense ratio guidance of 20% to 23% for Japan, the way I want you to think about it is that we have reduced our expense ratio in the last couple of years by significant cost cutting in Japan. And that's done both on a relative and on an absolute basis, something that is really, really difficult to do. And we've now gotten the expense ratio down to such a low level where the economics of growing and investing a little bit more in sales and marketing to drive higher volumes becomes very attractive to us. So when we think about the option to increase the expense a little bit in order to then drive higher sales volumes, and therefore, future higher earned premium, that's an equation that is quite attractive to us at this point. So that's what's behind the expense ratio guidance of 20% to 23%.

Makes sense. And then on the 1% to 2% premium decline in Japan, does that assume any additional Bermuda transactions? Or is that the natural decline that we should be expecting absent that?

That excludes any reinsurance transactions done on an internal basis. So if we were to do any additional future reinsurance, that means that those earned premiums that previously would have showed up on the Aflac Japan P&L would then show up on the Aflac Re P&L. So we will simply shift geography. So when you think about it -- and when you evaluate Aflac Japan, that's why we think you should think about it as a negative 1% to 2%.

Wes?

Wes Carmichael, Autonomous Research. I wanted to follow up on that last point, Max, is -- from a reporting perspective, is there a reason that Japan and -- or Aflac Re needs to be reported in corporate? I imagine it would be simpler to just show it is all in Aflac Japan. So just curious why do that?

So I'm smiling. There's obviously a conversation we have had. GAAP unfortunately, does not allow us to do that at this point. If we could, I would have loved to do it that way. But we're simply following the U.S. GAAP rules, and that's why it's being reported outside of Aflac Japan. Also keep in mind that what we are doing is, it is risk transfer between the legal entities, and that's also why it has to lead. So from a pure segment reporting basis, I would have loved to kept it in the Aflac Japan segment, but U.S. GAAP simply does not allow for it.

Tom?

Max, just a clarification, when do you expect to get to the 10% level? Just assuming you do, I guess, it's what, 2% a year, does that include what you've done -- what you expect to do or complete in the fourth quarter? Or is that -- will that eat into it and then we just get us 1 more year? Like, when would you expect to be at the 10%?

So to be very clear, over the medium term. The 6% includes the transaction that we have executed in the fourth quarter.

Richard?

Richard Wegener from Citadel. Max, just a clarification on the FX sensitivity to the ESR. You provided strengthening of JPY 10 to dollar. How do we think about the weakening of the yen on the ESR? And maybe just a little more detail on the drivers of that?

You should have roughly the -- you would have roughly similar impact. When you get into more significant moves, you could have an asymmetric impact on the ESR and the reason why is because you have to then incorporate the impact on both the numerator, which is our U.S. dollar assets, but then also the denominator where the risk component comes in. So the risk charge may move if you have very significant moves in the yen-dollar rate. And the last piece, I would like to mention to you as well is that, as Brad outlined in his presentation, we use one-sided put options to protect the capital base from significant strengthening of the yen versus the dollar. That means that we have a very strong protection in -- if you were to have a dramatic shift of the yen-dollar rate to the strengthening scenario. But since they're one-sided, that means that if you have a significant weakening of the yen, all of that would be improving the ESR ratio and there's no cap there.

Joel.

Max, you talked about part of the drawdown of the excess capital being on new business strain. Can you just help quantify how much new business strain is at least for '24? I mean and how much of a driver should that be for bringing those capital ratios down over time?

It's not a huge impact, but it's -- we're not going to give you any exact new business strain. It's not a number that we historically have disclosed. So I don't necessarily want to go there. But it's a relatively small component. Think about our business still is predominantly relatively capital light, especially our third sector business in Japan. As we are currently growing in the first sector business, you have a little bit higher strain associated with that. So the Tsumitasu product clearly comes with significantly higher strain than both our cancer and especially the medical business. And that is also the reason why we do have the need for reinsurance as well to sort of long-term help support and reduce that new business strain. And I don't know if Alycia, if you have any further comments or insights on the new business strain.

Max, I think you thoroughly covered it. Thank you.

And then just one on the U.S. benefit ratio. Virgil touched on it briefly earlier, but the increase, how much of that would you attribute to these initiatives with policyholders and giving them additional benefits versus the mix shift to Life and Disability and Dental and Vision?

Let me kick it off and Alycia, please weigh in as well on this. We have, during the COVID years, seen significant reduced claims utilization. And we do recognize that it's important that you have a strong value proposition. So in order to boost that, we have done endorsements of products. That is obviously then increasing the benefit ratio structurally. And the other one -- the other component to this is mix. So you have different benefit ratios for different lines of business. And the biggest impact of that is the greater proportion of our in-force coming from group life and disability. And Alycia, if you want to talk a little bit about where those sort of benefit ratio levels are, that might be helpful.

Yes. So as Max mentioned, those benefit ratios are a fair bit higher than what we've traditionally seen on our other blocks of business. And that's why, over time, that's slowly going to grow over time. And then additionally, with the endorsements, we're continuing to deliver additional value to our policyholders, which is why we're in business. So that was a fundamental thing that we did over the last several years to ensure that we're having meaningful products to our consumers.

If you think about our traditional business, that tends to be a little bit below 50% in terms of benefit ratio. In our group life and disability, we'll run a little bit over 80%. So as that becomes a greater proportion of the mix, you naturally then have a gradual push up in the benefit ratio. That being said, the group life and disability business have a significantly lower expense ratio. So the combination of that both getting to scale and it structurally having a lower expense ratio will then have a mix impact on our expense ratio long term that will gradually have our expense ratio decline. So there are clear offsets there.

Ryan?

Just a quick follow-up, Ryan Krueger, KBW. I guess, with the expanded use of reinsurance internally, have you considered doing third party or attempting to do third-party reinsurance at all as an additional growth opportunity?

Yes, we would consider that as well. We want to make sure that we have all options on the table.

Just to be clear, I mean, you guys as the reinsurer for third parties?

Oh. We -- our reinsurance company is currently operating as an internal affiliate only, and that's the license that we have.

Any other questions? Left side is really carrying the questions today guys, John Barnidge, all right.

Maybe sticking with Bermuda. The slide around U.S. RBC ratios, it's well above the targeted range. Most of Bermuda has been focused on Japan as you think beyond medium term, is there an opportunity for U.S. liabilities as the sales composition changes more towards that 25% for the new initiatives?

It's possible. The benefit of utilizing reinsurance when I compare our Japanese reserves and our U.S. reserves, the benefit is not the same. There is a much, much greater benefit to our Japanese reserves. And that is both in terms of in the reserve levels and the risk reduction that you can achieve through utilizing reinsurance to the ceding entity. That means that for the time being, our focus remains Japan. Over time, there is potential benefits by utilizing reinsurance, especially to our group life and disability business in the U.S., but that in-force block is still relatively small. So as that grows and when that eventually gets to scale, that is something that we would contemplate. But at this point, we still remain focused on our Japanese business from a reinsurance perspective.

All right. As there are no other questions, I think we will end a little early. Just want to thank all of you for coming today. And to those of you that have joined us online. As I mentioned, the Aflac Duck is outside. For those of you who are staying for lunch, we will be in Siebert Hall, which is down on the sixth floor, just take the elevators right out here, and we should have everything ready to serve here momentarily. Again, thank you very much. Investor and Rating Agency Relations team is here if you have any follow-up items after the fact, we'll do what we can to help you out. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]