Aflac Incorporated ($AFL)

All right. Good morning, everybody. We're privileged to have Verge Miller, the President of Aflac Incorporated; and then Max Broden, the CFO of Aflac here with us today. So again, thank you both for taking the time and come to our conference. I really appreciate it for being exciting discussion. If we can maybe start with just the overall broad strategy and themes, right, Max, 1 thing I asked you in Japan, same thing I'm going to ask here is that -- over the last 5 years, Aflac is 1 of easily 1 of the best-performing life insurance stocks in the space.

Now that being said, right, going forward in today's environment, how should we think about the growth and the earnings opportunities both in Japan and U.S. kind of sort of to keep you -- continue to outperform S&P?

Bob, I'll start with this an overview and then turn it over to Max to go into a later deeper. But if you think about Aflac, the strength in the organization has been in 2 business segments, we operate in the 2 largest insurance economies in the world. starting with Japan, which is still our largest segment of the business. If you think about Japan over the last few years, during the pandemic coming out of pandemic that we had seen negative growth with our overall earned premium. We've been very innovative and creative though to launch some new products over the last couple of years. Starting with Sumatas, we launched an asset accumulation type product that continue to demonstrate growth it helps also to target a younger demographic there in Japan with a declining population. Next, we launched a new cancer product [indiscernible] . And the key to the way we approached the environment there in Japan is more through an entire ecosystem. So this cancer product is looking at how we can really deliver mental benefit starting with somewhat in pre-diagnosis, encouraging health and wellness outlay through diagnosis and are we carrying somebody all the way through to an actual nursing care benefit, which we also launched in Japan and then find category, we wanted to strengthen our ability to sell in the medical product field, we launched in December last year, a new product uncomplete, -- and the key to this product is that it has compartmentalize benefits you can sell to an existing customer or you could sell to an existing customer of another client of another competitor because you're able to buy the benefit that you need. And so you can buy all way up where you can buy just an individual rider to take care of yourself. I start there to tell you that we're seeing growth in each of those product categories. And that is 1 of the things that we are optimistic about going forward here in Japan. Couple that then with the U.S. In the U.S., we have done a good job of strengthening our product categories in the group space. Rather in 2025, 81% of all products in the U.S. were sold in the group space. The market grew by 2.5%. Aflac grew our earned premium 3.5% in the U.S., exceeding the market. We are strong in every category we can fill in the upper case market. We bought new products, life and disability that we are doing very well, and we're performing paid family medical leads, administrative services for the states of Maine and the states of Connecticut, all the way down to the middle market and only down to -- we have a direct-to-consumer platform. If you combine those by-to-bills, we grew 14% last year in those biomills investments. that's what's encouraging in the U.S. And then before I turn over to Max. I want to give him credit for what he's been able to do in establishing us in Bermuda will Bermuda reinsurance category that we have been able to take the Japan balance sheet and take it and make sure we move it over to our Bermuda engagement. And now we've also launched our first client in Japan beyond the Aflac Japan balance sheet. So I am optimistic about the ability we have in each 1 of these categories if you look at Aflac holistically. And Max...

Well, Bob, your question was on the what we're going to do to continue to drive the share price and just reflecting on that, that's history. And I can tell you that our boss both Virgil and I have got phone calls this morning, and it was more along the lines of what have you done for me lately. So he is not happy. So for us, it's a lot of comes down to make sure that we drive this for the future to make sure we keep that up. Another thing that I think has been a factor is how we think about the balance sheet, and that is both in terms of risk and return. I personally believe that our sector is spending a lot of time focusing on driving return on equity. But I don't think that our sector is spending a lot of time thinking about driving cost of capital. And the valuation of stocks in our sector and also what drives share prices to some extent, it's spread between the 2. And we've been able to expand that spread, and that's something that we actually spend a lot of time thinking about, both in terms of what is potentially driving the cost of equity, what is potentially driving the ROE today but also going forward. So what can we do to actively push the ROE up and actively push the cost of equity down just not just now but also for the next 5 years. So I think that's been 1 of the drivers.

I think one thing you guys talked about that's kind of interesting is the opportunities in Japan, right? One thing A lot of folks talk about in Japan is really the demographic challenges. And then everyone is trying to find their own way of navigating this trend. Does this make competition more difficult in Japan? And can you maybe talk about the competitive positioning in Japan just given the environment we've been in for a decent amount of time now.

So when you have a shrinking market because that's what we have in Japan, you have a population that is shrinking. What we predominantly ensure is the out-of-pocket expenses. And the 2 main product categories for us being cancer and medical are also from a penetration standpoint, reasonably well penetrated, i.e., it's unlikely that the penetration levels will materially shift. That means that the underlying demand is flat to maybe slightly negative. And I think you need to accept that, that's the environment that you're operating in. And we also size our operations accordingly. So what you have seen us do is -- we are currently shrinking slightly from an earned premium standpoint. In the first quarter, we had an underlying earned premium decline of 1.3%. At the same time, we are executing on plans to get that back to 0 and hopefully, into the positive category or positive level. So over time, we want to be sort of stable to slightly growing in Japan. If you see us growing at 5%, 10% earned premium growth, you should ask us some very serious questions because most likely, we are mispricing product. So our strategy continues to be consistent be very profitable and be disciplined in the way we price new business because in a stable market like Japan, it's very easy to be too aggressive in terms of the pricing. So what you've seen in our in-force do is that you've seen the earned premium slightly decline, while at the same time, pretax margins have continued to expand. And I think that's a reflection of those underwriting decisions.

Okay. And Bob, I'll just add, though. And given the situation, we must still be innovative, right? So the product categories that we created were in digital to go after a younger demographic. The ability -- if you think about the population in Japan and the culture of Japan and the life expectancy, we know that people little longer. The question and the key to what we've done is try to reach them at an earlier stage in life. And then once we get them to invest in our products earlier, the loyalty and the reason why we have such a high persistency, yes, service, but it's absolutely cultural, right? The lower that you have there. And so we want to build that and then carry it throughout the life cycle. If you look at the way we strategize in Japan, everything that's built around giving back inside the community and understanding the ecosystem of early life all the way through the end of life, and that's how we develop our product categories.

Got it. One thing I thought was interesting in terms of capabilities you have in Japan. Recently, you insured a whole life annuity business from Japan Post. Is that something that would allow you to kind of leverage that balance sheet to get to that breakeven or maybe even slightly positive growth going forward. Can you maybe give us a little bit more color on your thoughts on the reinsurance piece going forward?

Yes. So I'll think about those separately. And you can think about it this way, that we are in both the U.S. and in Japan. We are in the retail business, i.e. we originate liabilities on 1 policy at a time. What Reinsurance is doing is essentially to step into the wholesale business where we originated a big block of liabilities and assets onto our balance sheet at 1 go. So they're a little bit different from that standpoint. What we are, we are in a situation where we had built capabilities in Bermuda to transact between Japan and Bermuda. And that we wanted to then leverage those capabilities to also offer up solutions to other insurance companies in Japan as well. So we've been driving some pretty significant capital efficiencies through the internal transactions that we began executing in 2022. And we are now taking that and offering these solutions to other insurance companies in Japan. And we have a couple of benefits here and that I think also gives us some competitive advantages. And the first one is that we have -- our reinsurance entity is AA rated. -- and the rating goes straight into the capital model for the cedent, i.e. they need to hold capital relative to the credit rating of the reinsurer that they're using. And most of our competitors do not have a AA rating in Japan. So that gives us a benefit. The other thing is that if you look at our balance sheet, where we're coming from, we're very, very long morbidity. And we're relatively underweight mortality, longevity and spread risk. What this transaction that we did with Japan Post Insurance do is it brings a small level of additional mortality risk, longevity risk and spread risk onto our balance sheet. When we add some of these risks and we co-mingled that with a very significant morbidity risk that we have, they become quite diversifying, both on an economic capital model, but also on a regulatory capital model. So that is also an additional benefit for us.

Got it. So -- I mean, it does sound like it's a very attractive business from both an earnings and a balance sheet perspective. How robust do you envision the pipeline to be going forward? Is there a way to think about the -- the market for this -- or the opportunity for this for Aflac specifically?

We would expect that over a reasonable time period for this to be meaningful to Aflac overall as a business. It will not take over and be the majority of our balance sheet or our earnings, but we do expect it to be meaningful.

Okay.

Thanks, Bob. Max, is this going to be a separate segment? And where is it in today's current reporting and documents this third-party reinsurance business that you're standing up and building?

So it is sitting inside of corporate and other at the moment. Over time, if it grows and becomes a significant portion of the overall business, then under U.S. GAAP, you would have to break it out. .

I think we have another question from the audience right there.

One question in terms of lowering the cost of equity cost of capital point. How much of that are you driving it from the financial actions and how much of that you're driving from the business mix actions, i.e., the reinsurance and other areas?

I think that the absolutely biggest driver is how we design products. i.e., with the benefits being capped, the way Aflac always have it sort of priced its policies. That is the absolute bedrock of the risk management. So we are facing very high frequency risks, but very low severity risk. And that is the key to it. What we're doing on the financial side, I would say that adds to it. Probably 1 of the biggest components is how we have worked with foreign exchange risk, where that was something that was pretty significant to the company. . And I feel like we've gotten it to the point now where it is very limited, both in terms of how it impacts the economic value of the company, but also how it impacts cash flows as well.

Thank you for the question. I don't see you because the podium, I apologize in advance. I always love the engagement. Maybe another question just on the Japan piece before we move to the U.S. Aflac Japan targets about 60% to 63% margin in 2026. First quarter '26 benefit ratio was more towards the higher end of that target, right -- sorry, on the benefit ratio side. This is due to last and older age cancer blocks, things of that nature. Curious as to your expectation going forward. Obviously, it feels like the full year outlook is still very achievable, but just curious how we should think about the benefit ratio and then the margin profile in Japan at this point.

Yes. We feel good about the full year outlook of 60% to 63% benefit ratio. We did see in the first quarter a little bit of elevated lapsation, especially of younger policies where the reserve has not built up and up over time. So when we see a mix shift a little bit between different cohorts of lapsation. They all their cohorts when they lapse that reserve gets released through the benefit ratio and pushes the ratio down -- in this quarter, we saw a little bit more of younger policies lapsing, where there was less of a reserve build up and therefore, it doesn't push down the benefit ratio as much. . But for the full year, we feel very good about the 60% to 63%.

So it's really just a timing on business mix rather than anything serious. Okay. No, that's very helpful. maybe pivoting to the U.S. side, Richard, you talked about this a little bit earlier. Maybe if we can add more color in terms of growth and sales opportunity, right? Like sales has been improving in the U.S. year-on-year for several quarters now. In the most recent quarter, all areas of the group business has been very strong and then especially voluntary products. Can you maybe help us with a little bit more in terms of how you think about the growth trend going forward, especially from a more of a medium to longer-term side of things and then how that momentum from this year kind of carries forward.

Yes, I get asked that question, I mean we're performing so well in the group space, and we are very, very appreciated in the broker market, and why don't we see a larger overall growth number. And it's really the base of the individual block of business. our individual block of business is so large, right, that when it is not growing, and we have not seen growth in our individual with traditional block. So it has not been overcome with the great growth we're seeing on the group side. So -- what I would say, Bob, is that we're going to continue to double down though in the group space. So what I mentioned earlier, according to the East bridge reported 2025, 81% of all products sold in the U.S. last year were group products, group file products. [indiscernible] of that was driven through brokers. And so I would say that we're positioned well. When you look at our group product space, we grew 14%. Overall, though, when you combine it with a negative on an individual, that is why you didn't see the tremendous explosiveness. So what we intended to do this year, the focus is on taking the properties that we've invested in. The life absence and disability which we've seen better-than-expected growth there. And what we're doing with the absence management continues to strengthen our reputation of having a white glove high-touch customized service that is absolutely at the top end of the market. And so as we continue to do that, I will see more growth there. We also recovered. I sat on the stage a couple of years ago and said that we have felt what I've done on vision property, operational failures there cost us some of the sales. We recovered that in the last year, we grew 48.8% in Dental. This year, the focus is going to be to get those on a single experience. So today, we sell dental Envision, we sell Group B. We sell our life apps and disability, and they have each unique experience. We're rolling out a single experience, which we will bundle and then go to market as 1 Aflac. That will continue to be, I think, a nice differentiator for us.

Okay. Do you -- just given this momentum you have, do you see competitors respond? I'm curious as to what you've seen in the competitive dynamics overall?

Yes, I think we surprised some -- and we all know each other, we're all friendly competition. I think we surprised some of them in the upper case space. And I would describe it as generally more than 5,000 employee sizes that we're able to win. Remember, a lot of them have been in comments for sometimes 20-plus years, and we're able to going to win. And why is that? It's our brand. Generally, when you take Aflac, our penetration rate or the number of employees will take the more flat because of the brand recognition. People know that we will pay them cash. And so therefore, -- we get a competitive advantage for that. Any time we're going into a files meeting. We've been able to win in that space. And so pricing becomes the issue. I've seen some of our competitors that are competing on price. I won't go as far as say price gouging, but they are certainly competing on price. We're not going to play games like that. We're going to continue to keep a strong underwriting discipline. We will maintain that because we know long term, that is what would be beneficial to our shareholders of the organization. We've also seen them go out and highly recruit some of our agency force. And so that makes how the -- we are pricing when it comes to commissions and overpaying the sales force. Again, we're going to hold firm that we're not going to do that. We're going to stick to all underwriting guidelines. We're going to pay our people fairly, and we're going to let how we manage operations on a strong point.

So I think this is kind of interesting, right? So you're gaining momentum on the growth side, but at the same time, competitors feel like there -- it feels like they are responding to that as well in the market. And then if we line that up with your earnings trajectory in the U.S. business, the benefit ratio is tracking on a very better end of your guidance first quarter right? And as you see the broader dynamic of the market shifting and as you continue to grow -- should we see that kind of move more into the middle part of that guidance range? Or you feel like you have a little bit of cushion here, so to speak.

Yes. Well, so we set a 17% to 20% range on our margins. And we did that knowing though that, a, first, it's a product mix. the individual product has a better margin on it. And as we sell more in the group space, the margins are slightly, of course, lower than the current traditional and we took that into consideration. We were able to come in above 20%, though in Q1. And again, that has like to do a strong underwriting discipline and also the fact we are managing our expenses. . We maintained our expense ratio below 40% during Q1, and I expect us to continue to be within the range of guidance we set there. So I would say the strength comes into stand discipline, staying disciplined and make sure our strategy is sold. What we've been able to do, if you think about it this way, Aflac was known in a small market agency-driven force, we've been able now to win in the broker market and take all products up. And as you think about the competition, the looking to come down. And so therefore, it's a different type of new access that they had to consider. I'm confident in the trajectory we laid out and I feel good about where we're headed.

I mean I would say on the benefit ratio for the U.S. We're off to a good start for the year. In Q1, we did have a pretty low benefit ratio on LTD, and that is something that can be lumpy. And so that's why we were obviously sticking with our guidance of 48% to 52%. Over time, you should see a mix shift impacting our benefit ratio, our expense ratio and pretax margin. So as we grow faster, as Vergel outlined, in the group space, the group life and disability business that carries a significantly higher benefit ratio, a significantly lower expense ratio and also a lower GAAP pretax margin than our average. So when as that becomes a bigger proportion of our in-force, you should see our benefit ratio over time creep up and you should see our expense ratio creep down and you should see our pretax margin marginally go down.

And we'll just give a perspective on the numbers, Max has done about to last year's 2025 sales [ 57% ] of total U.S. sales were individual or traditional product, 43% group. You go back to 2010, that number of route was 6%. So we've gone from 6% of total U.S. sales to 43% last year. .

Right. So and -- but if we kind of put everything together, your growth is very strong. Even if you're giving up a tiny EBITDA margin here, your overall dollar income for this business should, at the very least, be fairly stable, if not increase -- Okay. Got it. No, that's very helpful. So it's not a financial conference this day and age without talking about AI. So maybe we can dig into that a little bit. Now when you were laying out your prior guidance, right, AI wasn't nearly as powerful as it is today. As you think about technology opportunities in the longer term, I'm curious to how you think about your implementation and your technology overall as maybe an added piece to your guidance? Is there a way for us to think about that?

Let me lay out our strategy for technology and then I'll let Max go deeper to the guidance. Just to give everyone a perspective sitting as an insurer in an environment where insurance is not trusted by the consumer. Were to be very careful of how we leverage AI. I was with a bunch of CEOs recently. And the 1 thing commonality is that we all agree that we're in the business to build trust, but we are in the relationship business. . The way I describe our usage of AI in the U.S. and in Japan is a human-centered, human-centered meaning that the human is at the Senator relationship, enabled by AI. And what we mean by that is we're going to make our humans better. The employee becomes better leveraging AI, but we make it better for the consumer through expediting those transactions that the consumer is facing. We've absolutely used AI to expedite claims payments to make the billing simpler and easier and to make the enrollment process simpler and easier and to deliver projects faster than to go to market with new products faster in both countries. We're more advanced in Japan, the FSA there, you're dealing with 1 regulator that is encouraging all companies to use AI. We have an innovation lab there that we are testing new cutting-edge things -- for the most part though, we've been able to make processes easier and expedite with a human in at the center. In the U.S., same thing. We focus a lot on claims because that's absolutely the promise we deliver. We would not let AI deny claim, but we help pay and we've been able to now on that traditional business automate 70% of all claims, putting it less than a pain rest in 24 to 48 hours. And that's ultimately what our promise is.

There is no doubt that AI will improve efficiencies and make our policy and administration platforms much better. It will improve efficiency of our enrollment platforms. it will improve the overall customer experience. So overall, all of that is very positive. As that feeds into our financial numbers and guidance, I'm actually of the view that we are most likely going to be charged very well for the AI products that we purchase. And what I mean by that, if you look at the largest companies in the world by market cap, well, they're all driven by AI they're all very good at charging for their products, maybe not necessarily the new ones yet. But if you look at the established technology companies, and they're very good at charging. They know the value of the products that they give. So we are not betting on at this point that efficiencies will lead to lower expense ratios as an example. If that happens, I'll be super happy and I probably make flips up in the hallway, but we are not betting on that. We are not pricing new products for a future lower expense ratio because of that. because I actually honestly believe that expenses will find its way to us in just other forms. So as we become more efficient, we probably will be charged for it.

Okay. No, that's actually a very interesting thought. We also have a lot of cameras outside. So if you do, we'll post it on YouTube. So another point, I think a lot of folks have been debating obviously, is the fear of private credit. From our perspective, Aflac doesn't have an issue here. But can you maybe talk about maybe not just private credit, but your investment philosophies in general as well as risk management because I think there's 2 things here, right? One is how you think about private credit and how you manage the risk. But really, the other point here really is every time we have some type of investment asset side risk people get scared. And every time Aflac turns out to be okay. Can you maybe just talk about the 2 components here?

Well, let's take 1 step back. I kind of view it as we are exposed to 4 different types of financial risk, that being insurance risk credit risk, FX risk and interest rate risk. And we look at these differently. So insurance risk, this is how we make money. -- that's how we underwrite, and we want as much as possible of it. Credit risk, it's part of how we make money. We underwrite it, but there's a limit to how much credit risk we want to take on. FX risk is a risk that we do not on the right. And therefore, we do not take any risk on it, and we want to eliminate it as much as possible. And I'll spoke a little bit about that earlier. And the same thing applies to rate risk. . We don't underwrite rate risk, and therefore, we actually do not want to take any risk on rates. As you then think about the asset side, you cannot think about the asset side without the liability side. They are 100% linked -- and if you think about our portfolio, we need a certain level of duration. We have a certain level of liquidity, but we also have a very significant liquidity of our balance sheet because of the liabilities that we originate. What that means is that private credit actually fits very, very well on to a liability structure that we have. i.e., we can hold for a very long period of time. We don't necessarily have liquidity events that we need at certain points. We easily fund our short-term liquidity needs with very liquid instruments that predominantly being both government bonds, but also through money market funds, et cetera. as we have a relatively liquid portfolio, I would argue. So adding a level of private credit exposure to it, it's very beneficial for us, both in the form of the credit risk that we're taking on, but also our ability to clip that illiquidity risk premium. -- that from time to time, it can be quite substantial. Obviously, it's been coming down over the last couple of years. But I think that we, as a company, and I think our industry are very good holders of private credit that reason. My read on what's been going on this year is not necessarily a credit situation, but much more a liquidity situation. And I think that's the lens that you really need to start looking through it.

And Bob, let me make a comment on the habit of the company. Our CEO, been CEO over 36 years, Dan Amos. We've got talented people -- we got talented people here in New York City and Agiaoperation. -- how we managed the company, Dan's expertise is risk management. We run our entire organization through that lens of making sure we protect that a shareholder to the integree. .

Really appreciate that. Yes. Last 1 for me. We're getting close to time as capital deployment, right? You generate very strong free cash flow. And then you also talked about financial flexibility and tactical capital deployment. It's an interesting environment we're living in, right? -- ample capital somewhat of a volatile market. Can you maybe talk about where do you think capital deployment could be the most interesting where we can get the best return. -- maybe buybacks, maybe -- well, dividends for sure, buybacks, M&A, just curious to your thoughts also on those things?

Well, let me start, and I'll let Virgil follow. But Yes, we have significant capital capacity. We will continue to make sure that we have that -- last year, we added off-balance sheet liquidity to our liquidity tool kit, which was quite important. We were able to structure a transaction where we went down in on-balance sheet liquidity, but we went up significantly in off-balance sheet liquidity, and that helped us further improve the overall liquidity profile, but also it have boost our available capital and buyback last year. As we look forward, we will continue to find ways to do this. I would say that our underlying cash flow generation is sort of on a run rate basis, about $2.5 billion to $3 billion. . On top of that, from time to time, we do find ways either through internal reinsurance transactions, rationalizing our debt profile and other ways to improve that. but those will be more onetime in nature. But over the last couple of years, we've done quite a number of one-timers, and I would expect the team to continue to find those. And we will use that to obviously continue to increase our dividend. We are a dividend aristocrat company, where we have increased the dividend for 43 years in a row. So that will continue. And on top of that, we obviously have significant capital flexibility, both for buybacks and if we find a value-enhancing M&A, that's something that we would evaluate as well.

Consistency and focus, strengths of Aflac. We are focused in Japan. We're focused in the U.S. We're focused on what we're doing with our reinsurance there in Bermuda. And as we do that, we'll continue to assess and to see if there's anything else we need to do. .

Really appreciate that. And thank you both for taking the time.

Thank you...