Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Good day, and welcome to the Aflac Inc. Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the call over to David Young, Vice President of Capital Markets. Please go ahead.

Good morning, and welcome. Thank you for joining us for Aflac Incorporated's fourth quarter earnings call. This morning, Dan Amos, Chairman CEO of Aflac Incorporated, will provide an overview of our 2024 results and operations in Japan and the United States. Then Max Broden, Senior Executive Vice President and CFO of Aflac Incorporated, will provide an update on our fourth quarter and 2024 financial results, current capital and liquidity as well as some color on our outlook for 2025. These topics are also addressed in the materials we posted with our earnings release and financial supplement on investors.aflac.com. In addition, Max provided his quarterly video update, which also includes information about the outlook for 2025. We also posted under financials on the same site, updated slides of investment details related to our commercial real estate and middle market loans. For Q&A today, we are also joined by Virgil Miller, President of Aflac Incorporated and Aflac U.S.; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available on investors.aflac.com. and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan. Dan?

Thank you, David, and good morning, everyone. We're glad you joined us. Before Max provides a more detailed view of our financial results, I'd like to reflect on what was another very good year. Aflac Incorporated, delivered very strong earnings for the year with net earnings per diluted share up 23.8% to $9.63, and adjusted earnings per diluted share, up 15.7% to $7.21. Aflac Japan represented more than 70% of pretax adjusted earnings and 3/4 of the company's consolidated balance sheet in 2024. Aflac Japan also generated a 15.5% increase in pretax adjusted earnings, and a record 36% pretax profit margin in 2024. I am pleased with Aflac Japan's 93.4% premium persistency and 5.6% year-over-year sales increase, which included a 9% sales increase in the fourth quarter. By maintaining strong persistency and adding new premium through sales, we are partially offsetting the impact of reinsurance and policies reaching paid-up status. This will be integral to the future growth of Aflac Japan. Taking into account Japan's demographics, our product strategy is to fit the needs of customers throughout all stages of life, acquiring younger customers is critical to our success. We believe Tsumitas appeals to younger customers in Japan. Our strong sales in Japan reflect the success of our agencies have had selling Tsumitas. As the pioneer of cancer insurance and leading third sector insurer, we also aim to sell these Tsumitas policyholders a medical policy or cancer policy. Our last cancer insurance, WINGS was launched in stages in 2022. Therefore, we are planning a staged launch through our distribution channels of our new cancer insurance product between March and April. This new product includes our unique Yori-sou cancer consultation support service, along with insurance coverage that offers enhanced protection before, during and after cancer treatment. This product also features a flexible coverage and introduces a new plan for children, thus providing comprehensive protection for customers. We will also maintain our focus on being where the customers want to buy insurance through our broad network of distribution channels, including agencies, alliance partners and banks. This reach continually optimizes opportunities to help provide financial protection to Japanese consumers. Turning to Aflac U.S. We have focused on updating our products to ensure that our policyholders understand the value of our products provide. When people experience the value of our products, we believe it enhances product persistency, which both benefits our policyholders and lowers our expenses. In the U.S., I continue to be pleased with our 70 basis point improvement in premium persistency to 79.3%. We also generated a 2.7% increase in net earned premiums, a measure we continue to focus on improving. Additionally, our pretax profit margin for the year was strong at 21.1%. Sales were lower than expected in the fourth quarter, leading to a 1% decline for the year. We continue to focus on more profitable growth through our stronger underwriting discipline. At the same time, we are engaging agents and brokers following the stabilization of our network dental operation. As always, we continue our prudent approach to expense management and maintaining a strong pretax margin. I believe that the need for our products and the solutions we offer is as strong or stronger than they have ever been before in both Japan and the United States. We are leveraging every opportunity and avenue to share this message with consumers, knowing our products help lift the people up when they need it most is something that makes all of us at Aflac very proud and inspires us to reach more people. We continue to reinforce our leading position and build on that momentum. We continue to generate strong capital and cash flows while maintaining our commitment to prudent liquidity and capital management. We have been very pleased with our investments, which have continued to produce strong net investment income. As an insurance company, our primary responsibility is to fulfill the promises that we make to our policyholders, while being responsive to the needs of our shareholders. Our solid portfolio support our promise to our policyholders as does our commitment to maintain strong capital ratios. We balance this financial strength with tactical 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. Year-to-date, Aflac incorporates deployment of $2.8 billion in capital to repurchase more than 30 million shares of Aflac stock. Additionally, we treasure our track record of what is now 42 consecutive years of dividend growth. At the same time, we have maintained our position among companies with the highest return on capital and the lowest cost of capital in the industry. Combined with dividends, this means that we delivered $3.9 billion back to the shareholders in 2024. We believe in the underlying strengths of our business and our potential for continued growth in Japan and the United States, 2 of the largest life insurance markets in the world. I'll now turn the program over to Max to cover more details of the financial results. Max?

Thank you for joining me, as I provide a financial update on Aflac Inc. results for the fourth quarter of 2024. For the quarter, adjusted earnings per diluted share increased 24.8% year-over-year to $1.56 with a $0.01 negative impact from FX in the quarter. In this quarter, remeasurement gains on reserves totaled $43 million, reducing benefits. Variable investment income ran $17 million above our long-term return expectations. Adjusted book value per share, excluding foreign currency remeasurement increased 3.2%. The adjusted ROE was 12% and 14.5% excluding FX remeasurement, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment. Net and premiums for the quarter declined 5.4%. This decline reflects a JPY 7.2 billion negative impact from an internal cancer reinsurance transaction executed in the fourth quarter of 2024, and a JPY 4.4 billion negative impact from paid-up policies. In addition, there's a JPY 300 million positive impact from deferred profit liability. At the same time, policies in force declined 2.3%. Japan's total benefit ratio came in at 66.5% for the quarter, up 40 basis points year-over-year and 62.5% for the year. The third sector benefit ratio was 56.9% for the quarter, up approximately 70 basis points year-over-year. We estimate the impact from remeasurement gains to be approximately 100 basis points favorable to the benefit ratio in Q4 2024. Long-term experience trends as they relate to treatment of cancer and hospitalization continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid at 93.4%, which was unchanged year-over-year and in line with our expectations. Our expense ratio in Japan was 20.8% for the quarter, down 30 basis points year-over-year, driven primarily by a decline in expenses. For the year, the expense ratio in Japan was 19.1%. For the quarter, adjusted net investment income in yen terms was up 3.7%. As a transfer of assets to Aflac Re Bermuda associated with reinsurance and lower floating rate income was more than offset by higher returns from structured private credit, infrastructure and our alternatives portfolio. Adjusted net investment income was up 12.1% for the year. The pretax margin for Japan in the quarter was 31.6%, up 120 basis points year-over-year, a very good result. For the full year, the pretax margin was even stronger, 36%, which is also the highest in 30 years. Turning to U.S. results. Net term premium was up 2.7%. Persistency increased 70 basis points year-over-year to 79.3%. Our U.S. total benefit ratio came in at 46.3%, 170 basis points higher than Q4 2023, driven by lower remeasurement gains than a year ago. We estimate that the remeasurement gains impacted the benefit ratio by approximately 170 basis points in the quarter. Claims utilization has rebounded from depressed levels during the pandemic, and are now more in line with our long-term expectations. For the full year, the U.S. total benefit ratio was 46.8%. Our expense ratio in the U.S. was 40.3%, down 310 basis points year-over-year, primarily driven by platforms improving scale and strong expense management. For the year, the U.S. expense ratio was 38.5%. Our growth initiatives, group life and disability, network dental and vision and direct-to-consumer increased our total expense ratio by 170 basis points for the quarter. This is in line with our expectations, and we would expect this impact to decrease going forward as these businesses grow to scale and improve their profitability. Adjusted net investment income in the U.S. was up 0.9% for the quarter, mainly driven by higher returns from alternatives and 3.3% for the year. Profitability in the U.S. segment was solid with a pretax margin of 19.7%, also a good result, as was the 21.1% for the full year. We continue managing through the worst commercial real estate downturn in decades. During the quarter, we increased our CECL reserves associated with our commercial real estate portfolio by $40 million, net of charge-offs, as property values remain at distressed valuations. We also foreclosed on 2 loans, adding them to our real estate-owned portfolio. We continue to believe that the current distressed market does not reflect the true intrinsic value of our portfolio, which is why we are confident in our ability to take ownership of these assets, manage them through the cycle and maximize our recoveries. Our portfolio of first lien senior secured middle market loans continue to perform well with losses below our expectations for this point in the cycle. In our Corporate segment, we recorded a pretax loss of $4 million. Adjusted net investment income was $153 million higher than last year, due to a combination of continued lower volume of tax credit investments, higher rates and asset balances, which included the impact of the reinsurance transaction in Q4 of 2024, which was similar in structure and economics in yen terms to our October 2023 transaction. These tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $46 million in the quarter, with an associated credit to the tax line. The net impact to our bottom line was a positive $4 million in the quarter. To date, these investments are performing well and in line with our expectations. Our capital position remains strong. and we ended the quarter with an SMR above 1,150%, an estimated ESR about 270%. Our combined RBC, while not finalized, we estimate to be greater than 650%. These are strong capital ratios, which we actively monitor, stress and managed to withstand credit cycles as well as external shocks. U.S. statutory impairments were $3 million, and it was JPY 700 million of Japan FSA impairments in Q4. This is well within our expectations and with limited impact to both earnings and capital. Our leverage was 19.7% for the quarter, which is just below our target range of 20% to 25%. As we hold approximately 60% of our debt in yen, this leverage ratio is impacted by moves in the yen-dollar exchange rate. This is intentional and part of our enterprise hedging program protecting the economic value of Aflac Japan in U.S. dollar terms. Unencumbered holding company liquidity stood at $4.1 billion, $2.3 billion above our minimum balance. We repurchased $750 million of our own stock and paid dividends of $277 million in Q4, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. On December 3, we shared estimated ranges for annual key metrics for both segments for 2025 through 2027 at our financial analyst briefing, and we continue to stand by these ranges. However, for 2025, we expect the benefit ratio in Japan to be toward the higher end of the 64% to 66% range. And we continue to expect the expense ratio to be at the lower end of the 20% to 23% range, as we pursue various growth and strategic initiatives. As a result, we expect the Aflac Japan's pretax profit margin to be at the lower end of 30% to 33% range. In the U.S., we expect the benefit ratio for 2025 to be at the lower end of the 48% to 52% range, and the expense ratio to be at the upper end of the 36% to 39% range, as we continue to scale new business lines. At the same time, we expect pretax profit margin for 2025 in the U.S. to be at the upper end of the 17% to 20% range. Thank you. I'll now hand it back to David to begin Q&A.

Thank you, Max. Before we begin our Q&A, we ask that you please limit yourself to 1 initial question and a related follow-up. You may then rejoin the queue. We will now take the first question.

[Operator Instructions] And our first question will come from Joel Hurwitz of Dowling & Partners.

I wanted to start on U.S. sales. Virgil, can you just provide some more color what you're seeing in the competitive environment that's impacting your sales? Is it specific products or specific areas of the market?

Thank you, Joel. Good morning. Yes, look, first, let me set the stage for going into the fourth quarter. We knew going through the fourth quarter, Joel, that we were up against one of the tougher comparisons for Q4. In Q4 of 2023, that was one of the largest sales quarters we've had in the history of Aflac. So we knew we had to have strong, solid performance. The second thing I would say is that we also knew that we would stick to underwriting discipline we have put forth in our group [ DB ] products. What that really means is that we're not going to be bringing business on board that does not fit our profit profile. Therefore, businesses that have high turnover, businesses that you have low claims filing, we're not going to accept those because they're not good for the company longer term. The stronger underwriting discipline helps sets us up for a profitable business and profitable growth in the long-term vision that we have at Aflac. Then the third thing I would say is we knew that the market needs to respond to the improvements we've made with our Dental and Vision platform. I had disclosed prior -- and prior conversations that we had a failed system implementation that we were recovering from. I'm very pleased with the recovery that we've seen, though, partnership that we formed. We're one of the industry-leading third-party administrators out there and helped substantially move the needle on improvements, and we are open for business. We needed to get the brokers and our veteran agents to come back on board and really put that product back in the market is a very competitive product. And quite frankly, we did not get the response that we needed? We saw a 33% decline in our dental sales for Q4. Along with the dental sales themselves though, there is the impact that we call halo, which means that on a general sense as we get additional voluntary benefit sales when we sell the dental product. Those are really the things that we add them up that impacted how we really performed in our Q4. I would say, Joel, that I'm disappointed with the self to sales, but I'm very pleased with our overall performance. We did demonstrate the solid financial management. As you heard from Max, you heard from Dan, they mentioned that our pretax earnings were up 9.3%. Margins were up 1.3%, earned premiums up 2.7%, persistency up 0.7%. Overall, very pleased with that. That tells you, though, this management discipline of making sure that we're looking at profitable business is generating the response that we need. We reduced expenses by 3.1%. And then overall, we were able to give additional value to our policyholders with an increased benefit ratio. And now we're watching that very closely, but very solid performance based on that discipline when we put out there in the market.

All right. Very helpful. And then for my second one, I just wanted to move to the 2025 [indiscernible] commentary that Max provided. So for Japan, you guided to the pretax margin to be at the low end of the range, which is below where I was at, I think most were -- I think it's largely on net investment income, and there's some misunderstanding on how the accounting works on the floating rate security hedges. Can you just provide more color on how the benefits from those hedges flow through earnings?

Yes. Thank you, Joel. So we obviously have a floating rate book in the Japan segment, that is a little bit less than $9 billion of notional balance. Also at the Corporate segment, we have a little bit over $4 billion of cash that is invested at the short end of the curve. That means that all these asset balances are very sensitive to SOFR. And that is both the 1-month and the 3-month SOFR that they reprice at. As we go into 2025, obviously, we had a rate cuts in December, and there is an expectation about further rate cuts in 2025, when you look at the forward curves. When we just inject the forward curves on to our projected yields for 2025. That means that they are likely to be lower than what they were in 2024. So that is why our floating rate income is expected to be lower. As it relates to our interest rate swap, this is really a tail hedge swap that made sure that we protected our floating rate income from any significant declines in interest rates at the short end of the curve. That means that, obviously, we are at higher rates now than when this swap was entered into. That means that it is out of the money and somewhat ineffective at this point. And that's why you see the full brunt of any relatively -- even relatively small declines of interest rates at the short end, immediately flows through and impacts our net investment income in 2025. Also, the mark-to-market component of the interest rate swap that falls below the line in the realized gains losses, i.e., outside of adjusted earnings, but obviously included in our U.S. GAAP earnings. I hope that's helpful.

The next question comes from Jamie Bhullar of JPMorgan.

So first just had a question either for Dan or for Charles on Japan sales, you obviously grew at a strong pace this quarter. But if you look at where sales are versus where they used to be prepandemic, they're so fairly depressed. So just wondering what's changed in the market. And what's your optimism of being able to get to in an absolute sense, the sales level that you had before that will allow you to potentially grow your in force as opposed to report declining premium growth?

Koide, Dave, do you want to start with that? I'll let you.

Yes. This is Koide from Aflac Japan. [Interpreted] Well, after the pandemic, most of several activities amongst the public has recovered. So we do not see -- we see that it has recovered and that is [indiscernible]. So we have been focusing on making a recovery solicitors activity because during the 2, 3 years of the COVID that sales activities have been stagnant. So that has been a focus point, which is to make a recovery activity.

This is Yoshizumi from Aflac Japan. [Interpreted] So let me answer. This is Yoshizumi. First of all, we have gone through this marketing and sales transformation starting January. This is to conduct integrated or end-to-end marketing activities based on the different brand group pipeline, starting with medical, cancer, asset promotion and nursing care. And we will be continuously injecting our competitive products centered around our main products, cancer and medical insurance. And we plan to launch a new cancer reinsurance product in stages from March to April in order to respond to changing customer needs. Now with the launch of the new product, Tsumitas, which was launched last June 2024, we have managed to expand our product lineup and now being able to approach more greater customer audience. And we will be executing measures in order to develop and enhance the potential of the solicitor agents. With these efforts, we would like to recover our performance on the pre-COVID level that's all.

And then maybe for Joe. In the U.S. business, I think there have been a couple of reasons that you've cited for sales being weak in '24. One is just the dental DPA issues? And then secondly, competition in -- and margins in supplemental products or in the voluntary market. I'm assuming that the competition and market issue is something that's not going to change. But -- and if that is the case, assuming that, that will be an ongoing headwind to your sales. But then on the dental rollout, should -- is that starting to get too normal? Or is that more of a 2026 event?

No, thank you for the question. The -- we absolutely want everyone listening know we're open for business. We've invested time, resources and dollars to make sure we've got a strong platform. We went through a very diligent process to get the right partner who is an industry-leading partner to make sure that we're prepared to deliver on the customer experience that we need. So we are confident in our dental platform the way we have it now. The concern, though, is making sure that the brokers and the agents are back in market with it and that they're on board to sell it. I expected to see a stronger return for them in the fourth quarter, but I'm looking forward to see how we deliver on that this year. We're out meeting with them. We'll let them know about how the process works. We're energetic to say come back and sell the product. I would also say, though, what's going well for us if you look at the investments we made in our life and absence and disability platform. We determine is PLADS. We exceeded our sales expectations there. We are strong in that lowest case market now, very competitive against some very known brands that have been in that space for a long time. Our disability products are competitive. We have a world-class absence management discipline, where we are doing it for one state in particular, and we're delivering well on that. And then we are also selling our -- what we would call our paid-up life or employee life products. We also invested in a direct-to-consumer platform; we term as consumer markets. We saw a better-than-expected sales year there. So those are the things that are going well. We get our dental platform back in line this year, and I expect it to demonstrate an increase in sales over last year.

And this is Dan. I am encouraged about what I'm seeing. Virgil talked to me early on in the first quarter and said, there's some ways we can make this -- make the sales number. And -- but I've got to push some areas. And I said, don't push lower profits for the sake of making the sale of them. That's the wrong way. I want to look at earned premium. I want to look at what's going on. And I think our model for the future is much stronger today than it was a year ago, especially on this dental and vision side, and we are expecting that to come through for the full year.

The next question comes from Mike Ward of UBS.

I was just wondering just on the contribution to the Japan sales growth from Tsumitasu, it seems like a primary driver of the growth. I guess, is it -- how fair is it to assume that we might be relying on first sector sales maybe more heavily than we previously thought in order to reach the Japan sales targets?

[Interpreted] For Tsumitasu to begin with, we do not announce or disclose the sales percentage or contribution. However, Aflac is a company centered around the third sector insurance products. And the main way to conduct our sales activity today is to also offer medical or cancer insurance whenever third sector product Tsumitasu is been offered. So although it is true that Tsumitasu will make a certain contribution to our first sector performance, but our goal is to grow our third sector performance. And last year, right after the launch of this Tsumitasu, we have enjoyed significant growth in sales. And we expect sales to set up compared to 2024. However, we believe the product will continue to generate solid results.

[Interpreted] This is Koide may I add. And Tsumitasu is unlike the traditional product feature in the first sector product, it is developed to respond to the needs of the younger generation who are looking to accumulate their asset. And another nature of this product is that in addition to the asset provision nature, it also carries the nursing care feature. And another characteristic is that after the pare policy premiums are paid up, you can convert it to the medical insurance or other type of insurance products. And it also carries a strategic objective, which is to expand our customer base by capturing the younger generation and through concurrently as offering this product together with the third sector products. So this is a very unique product. That's all.

Thank you. I just wanted to add a few comments as well, Mike. We do not have a sales cap on Tsumitasu sales, and the reason why is that number one, we do believe that we get very good profitability out of this product. This is both on a GAAP basis, but also on an IRR basis post reinsurance. And what it means is that we also now have a very good hook product that ultimately will drive higher third sector sales as well. So we definitely see ourselves as a third sector company, but this is an additional product that will help grow both our first sector business and the third sector business, while also giving another tool to our distribution to sell more and make more commissions. And I do want to say that the reason why now is because interest rates are higher in yen terms, but more importantly, we have built reinsurance expertise in and around the company, which means that we can now conduct these operations and get the better capital efficiency associated with these products, so we can really make them work.

And I will add that I have been so impressed with the job that Koide and his team has done in monitoring this through the guidance of Max and what -- and Steve Beaver and what we've done to watch this. And every Sunday night, I get a report when we have our call on what is taking place and how the interest rates are going and where the lines are, and our actuarial department is on it. And it's just I think you'd be proud if you saw the inner workings of what has taken place over the last couple of years with reinsurance. It shows that we're a company that's evolving over time and just getting stronger in what we're doing and having better financial controls over the things that are taking place.

The next question comes from Wes Carmichael of Autonomous Research.

My first question just on remeasurement gains/losses. It appears that the gains benefit has been slowing, which is perhaps not surprisingly given pretty sizable unlocking in the third quarter. But when you look at trends going forward, would you expect that to continue Max? Or should that be relatively muted?

Yes. we obviously have experienced very significant remeasurement gains and also a favorable gains from unlock of our actuarial assumptions in the U.S. in 2023 and in Japan in 2024. As it relates to our assumptions going forward, we do feel that we obviously have realistic and very good assumptions that, by definition, otherwise, we would have to change it. This is something that we look at every quarter. But we -- and if something material were to change, we will unlock assumptions, but our deep dive study occurs in the third quarter of every year. Each quarter, though, there is a remeasurement gains, losses that are coming through our results as we true up for the experience in that quarter. And that has continued to be favorable as we have come out of the pandemic. That being said, I do want to be a little bit cautious as we are seeing higher claims come through, especially on products, for example, in the U.S. on our accident and our hospital products and to some extent, also cancer. And that means that our remeasurement gains may not be as strong going forward as they have been in the past. But generally speaking, we are a company that take a cautious approach to our underwriting to make sure that we get good results. And I think that the remeasurement gains that you have seen is a testament to that of very good underwriting decisions that the company have taken in the past.

And my follow-up, I guess, in the press release, Dan, you mentioned efforts on reengaging agents in the U.S. Can you just talk about the recruiting environment in the U.S.? Are you seeing progress there? Or is that kind of slowed?

This is Virgil. Let me give you a little color on that. I mentioned last year, we're in a new regime here. So definitely, there is a lot of competition. There are things like the economy that would impact recruiting from time to time. Over and all and all, I'm sticking to the point that we're going to always be around the 10,000 mark with our recruiting. We've demonstrated that now back-to-back, although it's a little bit down from the year-over-year, we're still right around that 10,000 mark. Here's what I would say is that the core strength of Aflac has always been in our distribution. When you think about that, we will continue to go out, recruit agents, convert them, and make the field force strong and dominant in that small market. I've added some new levels of leadership where we continue that focus. Our compensation plans are built around recruitment and conversion average weaker producer and opening new small accounts. We continue to be strong doing our partnership with brokers in the mid-market. And as I mentioned earlier, very strong in the upper-case market now with the relationships we formed in our life and absence disability discipline. So we've got the market cover when it comes to distribution. I expect to recruit another 10,000 -- around 10,000 this year, and I'll continue to invest in what we're doing in that field force.

The next question comes from Elyse Greenspan of Wells Fargo.

I guess my first one is on capital. Buyback picked up $750 million in the quarter. You guys' obviously pretty healthy capital positions in both the U.S. and Japan. Does that $750 million feel like a good run rate level? Or how should we think about share repurchase in '25?

Thank you, Elyse. Your observation is correct that we obviously have a very healthy capital position around the company. And together with that, we also have a very good free cash flow generation overall as well. And that is what gives us the opportunity to reinvest into our operations and to redeploy capital back to our shareholders as well. We are very IRR driven. And as of right now, I would say that we get by far the best IRR on selling another policy. So as it relates to capital, that is the #1 area that our capital is going to. So we're looking for areas to grow our business organically. On top of that, we obviously have increased our dividends quite significantly over the last 5 years where we've almost doubled our dividend per share. And on top of that, we want to be opportunistic and tactical in the way we deploy capital back to shareholders through share repurchase. We stepped that up a little bit in the fourth quarter by $750 million, which I believe is the most that we've done in a single quarter. So that's a meaningful return back to shareholders. But going forward, we will continue to obviously evaluate all the opportunities that we have, and make sure that we get good IRRs on all the deployments that we do.

And then my second question, I believe there was a data sharing issue with Japan Post, not related to Aflac, I believe, right? But in general, if you could just comment on that. And then -- does that have any impact on your sales in the fourth quarter? Would you expect there to be an impact in 2025?

[Interpreted] This is Koide speaking from Aflac Japan. First of all, let me be clear, but there was no issues with the sales of Aflac Japan's cancer insurance upon this incident. And given its past experience, Japan Post is taking a conservative approach to addressing this matter. The Japan Post Group is committed to selling our products and for our standard practice, Aflac Japan is in close communication with Japan Post Group at all levels of the organization. So we'll continue to work closely with Japan Post Group in support of its sales of Aflac cancer. That's all.

The next question comes from John Barnidge of Piper Stanley.

Virgil, in your comments, you talked about a failed implementation that was corrected. And how much of the market was dental and vision not present?

John, great to hear from you. Asking that question one more time, I didn't catch the last part, please.

So yes, you talked about a failed implementation that was corrected. And how much of the market was dental and vision not present as -- to be offered by brokers as a result of the sale of implementation?

No, I had it. Thanks, John. Yes, we were available, John. So I would tell you this, though, that we had some service degradation earlier in the year. That definitely impacts the perception of trust, and making sure that the brokers and the agents will come back and sell it. So during the fourth quarter, we were open for business and ready to go. We have tested all of our processes. We work with a partner who has a strong reputation and who's doing a good job with Aflac. Our network of dentists is one of the largest out in the industry. We do a rented network, and we also have a proprietary network both to offer. What I would say to you, though, is that in this business where agents and brokers have choices, to go in a business, we have to earn trust. And that's what we're focused on, getting back that trust and demonstrating that the processes work. So if you look again, just to mention in Q4, sales from prior year were down 33%. Now although they don't make up a large part of our overall sales right now. I would say to you, though, that we get the additional voluntary benefits alongside. So it's not just impacting demo, it also has this halo effect where you're not bringing other business that you normally would have. Seeing progress here. As we look into January, we're regaining some confidence. We are going around to all of our broker partners. And we put all types of messages out, demonstrating confidence to our agents, and I'm looking forward to seeing them come back and sell the product. It is a competitive product. We spend a lot of time developing it, and I think it's good for our consumers out there to give it a try.

And my follow-up question remains on distribution ahead of the anticipated new cancer product launch? Should we expect more modest sales in the near term for that?

[Interpreted] This is Yoshizumi speaking. So this new cancer insurance will be launched in March 2025. And we're expecting this to be a big driver. And we have been introducing innovative cancer insurance to the market so far. But this time, in addition to the insurance coverage, we'll be integrating our Aflac Yori-sou cancer consultation support, which is our Yori consult service into the coverage. And I would like to mention 3 characteristics. It carries a very rich and simple coverage structure. And not only during the treatment, but there will be coverage will be enhanced before and after the treatment. And we have changed the payment conditions for the benefit to be more easy to understand. The next nature is the fact that it has a very flexible coverage design that allows to combine the existing policies and other products. And we have also newly established a tired plan with lower premium to support pediatric cancer patients' family, whose economic burden tends to be high with longer treatment period. And we expect to see a big increase in the performance by introducing this product to various channels in stages. That's all.

Let me add one thing that I think is part of your question is that any time we introduce a new product, our revised product, we'll call it, there's a little dip in sales waiting for the new product and then the product should take off, and with the excitement of it being introduced throughout the country. So I just want to be clear on that. You can see a little dip and then a strong growth.

The next question comes from Wilma Burdis of Raymond James.

First question, could you talk a little bit about any change in your thinking regarding the 10% reinsurance of the Japan block to Bermuda? And also just maybe touch on how you would reevaluate that, if at all?

Thank you, Wilma. So we currently have no change in our thinking. To date, we have ceded roughly 6% of our asset base of Aflac like Japan to Bermuda. And so we have significant capacity as it relates to our internal cap of 10%. I want to stress that this is not an external cap, but it's an internal cap. And I think it's a good risk management practice to have these kind of caps in place because it means that we now have an opportunity to evaluate what we have done. And once we get closer to that 10%, then obviously, all legal entities involved will make their own evaluation of if it makes sense to then move forward and increase that level for reasons where it may make sense for that legal entity, that applies to Aflac Bermuda that applies to Aflac Japan and obviously, to Aflac Inc. as well. To date, we are very pleased with the outcomes of our reinsurance operations both in how they are being conducted, but also the overall outcomes of it as it relates to improved balance sheet efficiency. And as you can see, improved return on equity overall for the Group. And in fact, it has also reduced the risk of our Aflac Japan operations as well. So overall, we're quite pleased with where we are. And as we get closer to that 10% level, we will reassess.

And then are there any dynamics of the weaker yen that could impact Aflac's operations or results aside from, I guess, the repatriation impacts?

So Wilma, the -- obviously, the yen-dollar exchange rate does have an impact on our GAAP financials. As you know, we do not hedge our GAAP financials. So as you translate our yen-denominated earnings into U.S. dollars, it does have an impact. And you obviously have seen that, especially over the last 3 years, when you have had -- experienced a significant depreciation of the yen versus the dollar. That being said, we do believe, and we have the philosophy that we protect the economic value of Aflac Japan through an enterprise hedging program. And this is, as you know, 3 components to it, where we hold U.S. dollar assets on the Aflac Japan balance sheet. It is us at Aflac Inc. We are borrowing in yen, and we also have an overlay of FX forwards at the holding company as well. And you add that up, and we believe that we -- that gives us very good protection on an economic basis to any moves, both small and significant to the yen-dollar rate.

The next question comes from Tom Gallagher of Evercore ISI.

Max how much of the Japan margin coming in at the low end of the guide is floating rate impact on NII? And how much of it is more limited benefit ratio improvement, if you can unpack that?

I would say that the vast majority of it is obviously driven by net investment income. And I'll let Brad comment a little bit on that because, obviously, we -- we're coming off a very good base here in 2024. That being said, when you think about the components of the benefit ratio, I would expect that over the forecast period of 2025 to 2027, that as we travel through that forecast period, the benefit ratio, all things being equal, we would expect to decline. So it will start at the high end of the range and end -- at the lower end of the range. And the reason for that is that as our in-force mix is changing, and it's each year tilting a little bit more towards third sector and a little bit less towards first sector. That means that the third sector lower benefit ratio business makes up a bigger component. So the mix impact of that is going to push us from the higher end of the benefit ratio range towards the lower end of the benefit ratio range. But what it also means is that from a pretax margin standpoint, it means that we expect to travel throughout the forecast period starting at the lower end of the range and then travel higher towards the higher end of the range throughout the forecast period. But I'd let Brad give some more color on net investment income as we go into 2025.

Yes, Tom, you're right that we are definitely facing some headwinds with the floating rate portfolio. As discussed, this is driven by the decrease in short rates, the 100 basis points decline we saw last year in SOFR. It does hit our $9 billion floating rate portfolio, but it also impacts our cash holdings and other short-term opportunities that we can see throughout the year, which we were able to take advantage of in 2024. We also had a couple of one-off items that had a strong contribution last year that we're facing this year. One was a rather large make whole. And then we were also able to accelerate deployment in certain asset classes that had very attractive spreads earlier in the year. So there's a variety of things that contributed to a very strong 2024 that puts us up against some very difficult comps for 2025 that is the source of that headwind.

Got you. And then just for a follow-up, around looking at your capital position in Japan, it looks like you have about $4 billion of access under the new ESR framework anyway. Would you anticipate getting an extraordinary dividend out of that entity? And any updated thoughts on what you might do with that much level of access. I guess it's a high-class problem, but still without robust growth opportunities. I can't imagine it makes a lot of economic sense to leave that much access in Japan.

So Tom, I would characterize, say, our capital position in Japan is very strong. We are still going through the transition of the capital regime framework from SMR to ESR. And while ESR has not formally been implemented yet, I think it would not be very smart to go and try to rightsize your capital base on a future capital regime basis. So step 1 is we would expect to certainly wait and fully evaluate this until after the ESR has been implemented. And as you know, that is at the end of the first quarter of 2026. So that means that over time, we would expect to be in the target operating range of 170% to 230%. But for the time being, I would not expect any special dividend in the near term.

The next question comes from Josh Shanker of Bank of America.

I guess this is for Virgil. I was wondering with the elevated expense ratio in Aflac U.S., how long do you expect the investments in the work you're doing to accelerate growth weighs on the expense ratio?

Yes. Thanks, Josh. I would say we started to be in that curve. We had 1 time been up to 40% -- around 41% of the expense ratio. This year, we came in around 30 -- not looking at 38.5%. I think, to be exact. So very, very pleased with that performance that we are been in that. And that is why we're still, as you pointed out, investing in the buy-to-bills. The key is to get buy-to-bills to scale. And we are experiencing a solid better-than-expected growth on the platform, better-than-expected growth on the consumer markets platform, and like I said, it sounds like I'm a broken record, but we've got to turn the curve with the dental and vision platform. We're doing all the right things to get that done. If we do that, right, that will help not only contributed to the top there, about bringing in additional new sales revenue that we need to offset that expense ratio, but we will continue to do a strong though disciplined expense management. I expect the curve to come down even further this year in 2025.

If we think out more long-term '26, '27, are we thinking it's on the margin? Or this is several hundred basis points?

Yes. So I would tell you that, we at -- we put forth the range on the margin between 17% and 20%. We're going to stay within our range because we're going to make sure that our disciplined expense management hits those marks. If you look at '25, '26 and '27, I am showing a decrease, though in expense margin and expense ratio incrementally year-over-year-over-year.

Okay.

I think the important factor to get from this sales part of dental and vision is we got it right in that we want that business. We just didn't execute to the level we needed to and made a mistake and have got that now on target, and we've just got to now come through with it. So it's something I think we can achieve and will achieve.

The next question comes from Alex Scott of Barclays.

First question I had is just on the competitive environment a bit. And going back to some of the comments you all made around sales and your remaining disciplined, like you could have shown better sales, but you're remaining disciplined. And I just want to dig into that a bit. I mean when I think about like the signposts that I look at, I mean, it seems like, well, you're doing reinsurance to Bermuda, the new money yields were in excess of 9% in the U.S. and 8% in Japan this quarter. I'm just trying to understand -- are you getting those targeted IRRs because of some of the levers you're pulling? Or do you still feel like there's the same opportunity here that you've had in the past?

Well, let me address our life insurance business in Japan, in particular, because I think that's what you're really driving at. Obviously, higher yields, they matter, especially in yen terms as we sell yen-denominated products. But it's really the new business strain associated with these products and high reserving levels still puts the IRRs under significant pressure. But if you look at it on a post reinsurance basis, we get very, very good IRRs. And that's why we feel very confident selling both our waste and our Tsumitasu product into the marketplace.

Okay. And maybe as a follow-up, I mean, one of the themes we've seen in group benefits this quarter from some of the peers is, there seems to be sort of a have versus have not in terms of like capabilities on the platform and having that translate to sales growth being favorable or less favorable. And I guess I just posed a question to you. I mean how do you feel about the capabilities in your Group Benefits platform, the scale? Do you have what you need? Is there -- is there more that you could go out and acquire whether inorganically or things that you may need to invest in.

I would say this is Virgil. I would say this that when we acquired the Life and Disability business, we have invested to make sure we've got the right platform for that business line. I've been very technical on this, meaning that we have the right technology, we have the right resources, the talent to scale. On the Group BB, we've made significant investments over the years to get the same with talent, with technology. And then we are doing it, and we just did the same with our dental platform. Where I'm going with this is we have put forth what I would call a market segmentation strategy. We've got the right products with each segment. We've got the right distribution for each segment. What we're investing in right now is the ability to bring those things together. So we're able to be more competitive with the ability to bundle and to present one unique experience to the market. Each platform stands strong independently. The talent stands strong independently. The product stay -- stands strong independently. Our core strategy will be bringing those things together. So there will be a little additional investment to do that over the next couple of years. We're currently doing it right now. We respond to RFPs in the market as one Aflac, and we're going to really demonstrate the ability to be best-in-class with the technology and the discipline to have those things fit together going forward.

The next question comes from Jack Matten of BMO Capital Markets.

I think most might have been answered, but maybe just one on commercial real estate. Could you just talk a little bit more about trends in that market and how you expect things to develop on Aflac's portfolio in 2025?

Sure. Thank you, Jack, for the question. As you're undoubtedly aware, the market remains pretty difficult. It does seem that we may have hit the bottom, but we're very slow to recover. We continue working through our portfolio. Our preference is to work with borrowers to find a solution. But if the best way to protect our interest is to foreclose, we've demonstrated, we're willing to do that to maximize our recoveries. We do expect this to be a long recovery. We have seen some early signs that things are moving the right way, but it's very early and values remain still quite depressed. At this point, we expect 2025 to largely play out much like 2024. We'll continue working through our watch list. We will manage our REO portfolio to maximize our long-term returns. We expect it is going to take quite some time for this recovery to happen. But that's our general outlook at this point. We do think it's going to be a manageable process, but it's one that's going to take time to work through.

And then just a quick follow-up on the Japan sales outlook. I guess other than the major kind of cancer product launch you have it coming in a couple of months, are there any kind of other launches or like refreshes that you have planned this year that could impact the cadence of sales in 2025?

[Interpreted] Yoshizumi will answer that question. As for the new product, we'll be launching the new cancer insurance in stages from March to April. And for the medical insurance, we have rebranded and -- we have found the rebranding and improved the service last August. And we have also been strengthening our sales with a new plan targeting the middle-aged and older customers that was launched September 2024. And we'll be able to provide with more strengthened promotion through our end-to-end structure, and that has been developed recently, and this structure is developed by each brand. In terms of the Tsumitasu, in comparison to the sales volume on 2024, this year will settle down. However, we believe that this will continue to generate solid results. As regards to the channel, we started a network 2 years ago to enhance an increase at the agent. And in 2023, we have hired approximately 600 agents, and they have made a great deal of contribution to our activities last year in 2024. But we have succeeded in hiring much more than 600 people in 2024. And we expect these new agents to be more active in 2025. As I said earlier, we will be utilizing the first sector product as a hook. To expand the third sector business largely and such training is being implemented and strengthened. That's all.

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

Thank you, Andrea, and thank you all for joining us on today's call. Just want to say if there are any follow-up questions, please reach out to Investor and Rating Agency Relations. We look forward to hearing from you and seeing you soon. Have a good day.

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