Aflac Inc (AFL) — Q4 2018 Earnings Call Transcript

Thank you. Good morning and welcome to our fourth quarter call. This morning, we will be hearing remarks from Dan Amos, Chairman and CEO of Aflac Incorporated, about the quarter as well as our operations in Japan and the United States. Then, Fred Crawford, Executive Vice President and CFO of Aflac Incorporated, will follow with more details about our financial results. Eric Kirsch, Global Chief Investment Officer, will also provide some updates related to investments, before we open our call to questions. In addition, joining us this morning during the Q&A portion are members of our executive management team in the United States: Teresa White, President of Aflac U.S.; Rich Williams, Chief Distribution Officer; Al Riggieri, Global Chief Risk Officer and Chief Actuary; and Max Brodén, Treasurer and Head of Corporate Development. We are also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan: Charles Lake, Chairman and Representative Director; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and Principal Financial Officer; and Koji Ariyoshi, Director and Head of Sales and Marketing. Before we start, let me remind you that 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. The earnings release is available on Aflac's website and includes reconciliations to certain non-GAAP measures. I'll now hand the call over to Dan.

Good morning and thank you for joining us. Let me kick off this morning by saying that 2018 was another great year for Aflac as we continue to focus on supplemental insurance in the United States and in Japan. That focus sets us apart from every other competitor and has been a major contributor to our success. Through Aflac Incorporated subsidiaries in Japan and the United States, we have the privilege of helping provide protections to more than 50 million people. In both countries, we have earned our position as a leading supplemental insurer by paying cash fast and when the policyholders get sick or injured. I'm especially pleased with the Company's overall performance in 2018. Total pre-tax adjusted earnings increased 6.6%, which exceeded our expectations. This increase was driven by increased pre-tax profit margins, especially in Japan. These results are even more meaningful when you consider that we have increased our investment in our core technology platforms and growth initiatives with the goal of driving future growth and operating effectiveness. Investing in growth and innovation will continue to be a critical strategic focus in 2019. In 2018, Aflac Japan, our largest earnings contributor, converted from a branch to a subsidiary at the beginning of April and generated strong financial results. Aflac Japan's 2018 third sector sales resulted in a 1.6% increase, which was consistent with our expectations of low-single digit third sector sales growth for the year. 2018 also marked Aflac Japan's largest combined sales of third and first sector products in more than a decade with ¥93.9 billion in sales. As medical sales came off a strong 2017, bolstered by a refreshed product line, our distribution turned its focus in 2018 to the Cancer Days One and Cancer Days One Plus products, which were tremendously successful. This laid the groundwork for a great year for Aflac Japan's third sector sales, which came in at ¥88.8 billion. As we progressed into 2019, we expect to see a slight decline in Aflac Japan's total earned premium in 2019, mainly due to the limited paid policies reaching paid-up status. We expect net earned premium of third sector and first sector protection products combined to grow in the 1% to 2% range. Our focus remains on maintaining our leadership position in the sale of third sector products. In addition, while we don't lead in first sector sales products, they complement our third sector lineup very well and have similar profitability. From a profitability perspective, we tend to be agnostic when it comes to selling cancer, medical, or first sector protection insurance. To that end, we will continue to refine our existing product portfolio to introduce innovative new products that our policyholders want and need. I think that the December announcement of the enhanced strategic alliance with Japan Post Holdings is an indicator that we are doing just that. Japan Post's announcement to purchase approximately 7% of Aflac Incorporated’s common shares speaks volumes about the overall strength and reputation of the Aflac brand and our products. We look forward to working with Japan Post to explore areas to grow our respective franchises in 2019. Turning to Aflac U.S., we are pleased with our strong financial performance. 2018 was another year in which Aflac U.S. produced record new annualized premium sales and, more importantly, generated record pre-tax adjusted earnings. The pre-tax profit margin exceeded our expectations both in the quarter and the year. As I mentioned, these results indicate increased expenses as a result of accelerated investments in our platform following U.S. Tax Reform. Aflac U.S. sales for the year rose 3.2%, while our net earned premium increased 2.6%, both of which were in line with our expectations. As we indicated on our most recent outlook call, we expect Aflac U.S. to deliver continued solid growth in 2019 with earned premium growth in the 2% to 3% range and stable sales growth. As you consider our U.S. sales, keep in mind that Aflac is unique compared to our peers, and the majority of our sales come from independent sales managers and associates. We are fortunate to have such a strong independent field force, which is truly distinctive within our industry. These career sales agents are best positioned within the industry to accept and therefore succeed with smaller employers and groups with fewer than 100 employees. Aflac’s independent career agents have been the powerhouse behind Aflac’s ability to dominate the smaller case market, and I continue to believe this market offers our highest growth potential. Aflac’s agents have also partnered with local and regional brokers as we continue to grow broker sales. Our team of broker sales professionals has made great enhancements, bolstering Aflac’s relationships within the large brokerage community. While broker business accounts for a smaller percentage of our overall business, it is representing a larger portion of sales, both in the market and at Aflac. It is very encouraging that as brokers look for solutions for their clients, they have found that Aflac’s product portfolio provides solutions that help fill those needs. Brokers are looking to connect with a strong brand like Aflac and leverage our outstanding track record of experience and excellent fulfillment capabilities. Aflac’s expert agents and our independent fieldforce have demonstrated their ability to accelerate growth by working with brokers and broker sales professionals. Across the Company, we continue to invest in digital initiatives designed to address pain points in the development, sales, administration, and customer experience related to our products. I am very pleased with our progress both in Japan and in the United States and our ability to continue these investments without losing focus on driving strong profits. Our investment supports our distribution strategy, which is focused on being where the customer wants us to purchase protection. Turning to capital deployment, we remain committed to maintaining strong capital ratios on behalf of the bondholders, shareholders, and policyholders, all while balancing our financial strength with increasing the dividend, repurchasing shares, and reinvesting in our business. We continue to anticipate that we will repurchase in the range of $1.3 billion to $1.7 billion of our shares in 2019, allowing us to be more tactical in our deployment strategy. It goes without saying, we treasure our record of dividend growth. I am pleased with the Board's recent decision to increase the dividend coming off 2018, which marked the 36th consecutive year of dividend increase. Our dividend track record is a reminder of the relative stability of our business model and earnings. Looking ahead, we believe our strong earnings growth will continue to reflect the underlying earnings power of our business in Japan and the United States, as well as our disciplined approach to deploying excess capital in a way that balances the interest of all stakeholders. This also reinforces our dedication to fulfilling all our promises made to our policyholders. I'll conclude by reiterating how proud I am of our management team, our employees, and our sales organization in both Japan and the United States, as they have worked incredibly hard to generate strong results that we have shared. Now, I'll turn the program over to Fred for the financial results. Fred?

Thank you, Dan. As Dan noted in his opening remarks, we are very pleased with our overall financial performance in 2018. Earnings results for both the quarter and the full year exceeded our expectations. For the quarter, adjusted earnings per share of $1.02 primarily benefited from stronger than expected pre-tax margins in Japan. For the full year, adjusted earnings per share on a currency-neutral basis came in at $4.13 per share, above our guidance range of $3.90 to $4.06 a share. Setting aside the impact of tax reform on our effective tax rate and currency impact, pre-tax earnings for the year were up 5.7%. Coupled with $1.3 billion of share repurchases, we generated strong core EPS growth and impressive shareholder returns in a year of increased market volatility. In terms of segment results for the quarter, and beginning with Japan, our benefit ratio, expense ratio, and investment income came in favorable to our expectations. The lower benefit ratio reflects continued favorable claims strengths and associated reserve adjustments. In addition, our new cancer insurance product has driven alleviated lapse and reissue activity. We believe this is a result of an improved value proposition since the product now includes a new premium waiver feature. Depending on the mix of policies being replaced, alleviated lapse and reissue activity has the effect of lowering our benefit ratio, increasing our expense ratio, and only marginally contributing to profitability. Investment income in the quarter was driven by efforts earlier in the year to increase our allocation to floating-rate loans, benefiting from both higher spreads and higher LIBOR rates. In addition, we experienced approximately ¥2 billion in variable income, which includes alternative investment returns and ¥1 billion of one-time call premium and consent fee income. Variable and one-time sources of investment income are not embedded in our run-rate expectations. Finally, while our expense ratio came in higher compared to last year's quarter, overall expenses came in below our fourth quarter forecast as a result of lower sales promotion and systems development spending. Overall, we posted a 21.4% pre-tax margin in Japan, among the highest quarterly performances in recent history, and a very strong 21.1% for 2018. Turning to our U.S. results, our total benefit ratio for the quarter was in line with guidance. Along with favorable claims trends, we are seeing the effects of business mix with a gradual shift towards product lines with a naturally lower benefit ratio and higher expense ratio. Our expense ratio in the U.S. for the quarter came in as previously guided at 38%. Accelerated spending related to post-tax reform investments and timing related to advertising spend drove expenses higher. Our U.S. pre-tax profit margin for the quarter was 17%, and for the year was 19.9%. As Dan noted, 2018 represents a record level of U.S. segment pre-tax earnings. For both Japan and the U.S., our fourth-quarter performance does not change our 2019 guidance ranges for benefit ratios, expense ratios, and pre-tax profit margins. I would now like to ask Eric Kirsch, our Chief Investment Officer, to discuss the positioning of our investment portfolio in view of credit markets in 2019. Eric?

Thank you, Fred, and good morning everyone. We don’t try to predict exact market moves or the starting and ending dates of economic and credit cycles. We do analyze market themes. As investors, we want to position our portfolios with a long-term investment strategy in mind. For the last year or so, we have felt the credit cycle was in its late innings and we could see it turn soon. With this in mind, we have managed our credit portfolio with a bias for higher quality supported by a disciplined underwriting process for new investments and an eye towards improving our credit profile to mitigate potential impairments and losses, positioning us well for future changes in the credit cycle. Let me review highlights of the actions we have taken this past year, along with some perspectives and key portfolio characteristics. Over the past 12 months, I would highlight our relative value point of view: we have been underweight in our investment grade corporate bond purchases, given how tight spreads have become. The recent spread widening validated our concerns of not getting paid for the credit risk. We focused a large amount of our new investments in private markets such as middle market loans and transitional real estate. I want to stress that we have high underwriting standards and diversification goals. Our discipline has kept our exposure to some of the private market issues you may have read about, such as excessive leverage, lack of confidence, and aggressive underwriting, to the bare minimum. While we have seen spreads compress in these markets, in the latter part of 2018, the majority of our purchases were made in the first half of the year at higher spreads. We have cut back our deployment goals in 2019 while maintaining our high underwriting standards. We implemented a number of de-risking strategies designed to eliminate or reduce credit positions that we felt could underperform in a shifting credit cycle. Highlights include, in 2018, we disposed of over ¥34 billion of our more illiquid legacy private placements, all below investment grade. Some names we reduced include exposure to the governments of South Africa, Tunisia, Trinidad and Tobago, and Catalonia. We also reduced exposure to Navient Corporation. In December, we initiated a $550 million relevant value de-risking trade, of which $500 million was to reduce exposure to energy names, including approximately $150 million to CCC-rated issuers. The proceeds will be reinvested across a diversified pool of investment-grade credits. In fact, throughout 2018, including the $550 million trade initiated in December, we traded over $3.4 billion of public bonds to improve the health of our credit portfolio. This includes selling $1.2 billion of investment-grade bonds held by Aflac Japan, including reducing energy by $243 million and swapping $340 million of BBB assets into higher-rated transitional real estate while improving our maturity profile and income. Selling $500 million of BBB-rated investment-grade names in Aflac U.S. and reinvesting in AA-rated tax-advantaged municipal bonds, improving quality and increasing after-tax income. Selling $600 million of BBB-rated bonds in the Aflac U.S. portfolio to fund corporate capital activity. Most recently, as you know, PG&E has been in the news and has filed for bankruptcy. We hold about $147 million and conservatively decided to take a $21 million impairment as of December 31. This situation will take time to sort out. We currently believe holding our position through the bankruptcy process will provide the best economic outcome. Let me also mention that these activities supporting our high-quality bias come at a cost to net investment income; with new investment opportunities such as private credit, we have been able to offset some of these headwinds. Our main objective is always to ensure the safety and quality of our portfolio to minimize potential losses while balancing our objective of delivering appropriate risk-adjusted net investment income. At the end of the year, we managed to improve the credit quality of the overall portfolio, having 4.6% in below investment-grade credit, of which 2.2% are fallen angels, and the remainder are high-yield bonds and loans that we purchased within our credit standards. We believe we have a lower consolidated exposure to BBB names than our peers. BBBs make up approximately 23% of the portfolio, with an average position size of slightly over $50 million. Overall, we continually look to maintain a very diversified portfolio, shaping it with an eye toward safety through the cycle. As we look forward, despite a strong equity recovery in January, credit spreads remain elevated, signaling that credit investors are concerned that this may be the initial innings of a turn in the credit cycle. Regardless, our view will continue to be biased toward maintaining a relatively higher quality overall portfolio while proactively managing exposure to credits that may perform poorly under a slower growth backdrop. Finally, I should highlight that this type of market environment presents opportunities, especially when dislocations occur. Our strong current portfolio combined with a healthy capital position will allow my team to put new money to work and capture those opportunities that become apparent, improving future performance. Now back to Fred.

Thanks, Eric. Picking up where I left off, let me comment briefly on our corporate segment. We continue to make progress on managing our economic exposure to the yen while lowering enterprise-wide hedge costs associated with Japan's U.S. dollar portfolio. We accomplished this by entering into an offsetting hedge position at the holding company, which ended the quarter at a notional amount of approximately $2.5 billion and contributed $18 million on a pre-tax basis to the quarter's earnings. In terms of capital, we ended the year in a strong position. As of year-end, our Japan solvency margin ratio is estimated at approximately 970%, and our U.S. risk-based capital ratio is estimated to be in the mid-600% range. 2019 will continue the excess capital drawdown process in the U.S. as we target 500% by year-end. Over time, we believe we can run our U.S. RBC down towards 400% given the risk profile of our U.S. business. We ended the quarter with approximately $2.8 billion of capital and liquidity at the holding company, recognizing this balance naturally fluctuates. We have set aside one billion as a capital buffer and an additional one billion of contingent liquidity. Our liquidity position supports our holding company derivative positions that serve to lower our enterprise exposure to currency movement. Including dividends and share repurchases, we returned $574 million to our shareholders in the quarter and $2.1 billion for 2018. As Dan highlighted in his comments, the Aflac Board approved an increase in our quarterly common stock dividend by 3.8% after back-to-back increases raised dividends 19.5% in 2018. The Board continues to take a balanced approach with a desire to sustain our long-term track record of increases. While we ended 2018 strong, we need to manage through national headwinds in 2019. Net investment income is expected to modestly decline compared to 2018 due in part to the de-risking activities Eric mentioned and rolling U.S. dollar hedge positions into higher-cost contracts. While reacting somewhat to market developments, our forecast remains essentially unchanged from the outlook call, but we ended 2018 stronger than expected. We anticipate lapse and reissue activity in Japan will slow in the second half of 2019. We are enhancing our medical products by offering Riders that address a range of coverage needs and are available to existing policyholders. This strategy preserves and builds upon the favorable economics of our enforced policies but naturally pressures sales as defined by incremental annual Rider premium versus lapse and reissue for policyholders. Finally, with long-term top-line growth as a primary objective, we continue our investments in product development, digital consumer-driven distribution, and overall venture and incubation efforts to create future market opportunities. We have affirmed our currency-neutral EPS guidance of $4.10 and $4.30 per share and, as Dan noted, we are maintaining our share repurchase range at $1.3 billion to $1.7 billion. We remain tactical within the range, guided by relative returns and other options for our use of excess capital. I'll now hand the call back to David to begin the Q&A session. David?

Thank you, Fred. Before we begin the Q&A, please limit yourself to one initial question and one related follow-up to allow everyone an opportunity to ask a question. And we will now take that first question.

Hey, good morning. Question on Japan sales guidance of low to mid-single digit decrease. Does that contemplate the possibility that you might sell an additional product through Japan Post?

I'm going to let our Japanese operation answer that. So Koji Ari or whoever will respond, but I will say that no, that does not contemplate Japan Post. 2018 was about working out the deal; 2019 is the planning process, coming up with something that we believe might benefit their customers. I think 2020 would be more in the execution line. So I'll let Koji talk.

In terms of Japan, there have been no changes since our last call. We are aligning our targets with customer needs. In January, we launched a protection-type product in medical insurance that allows customers to review their medical or insurance products based on their current situation. This feature enables young customers to add a lump-sum coverage option, and we also offer an income support-type rider. For elderly customers, our nursing care-type rider is available. For policyholders, we have introduced mid-term rider additions to help customers expand their coverage. This shift focuses not just on acquiring new business but also allows existing customers to enhance their coverage without needing to purchase a completely new policy. The new annual premium for these additions will be smaller, but we will maintain our existing policies, positively contributing to our earned premium. This strategy aims to keep existing customers without requiring them to buy entirely new policies.

This is Koide from Aflac Japan. I want to clarify that the new medical product Koji explained was launched in January and is available across all channels except for Japan Post.

I want to make sure all of you on the line pick this up because this is a little bit of a change, and it's very similar to the way we used to do business in the United States. In essence, what you're talking about here is there won't be a new policy written in, and one lapses. We will keep the existing policy in force, which will be a medical product, and we will add a Rider on top of it. Therefore, the premium of that Rider will be a smaller amount than a normal policy. However, it won't be less than the old policy, so the earned premium will ultimately be growing. But you will see a lower sales number because of that impact. So I just want to make sure everyone got that.

Yes, that makes a lot of sense, and just a quick follow-up on corporate and other where investment income went to $38 million versus $11 million, and that was the drive down of excess capital. Fred mentioned that you might go from mid-600s RBC to 500 again, drawing down more capital. So the question is, can we expect this elevated investment income in corporate to continue ticking up? Or is it possible you might even achieve your $1.3 billion to $1.7 billion guidance on buybacks?

At this point in time, I wouldn't change our guidance on the range of buyback. That range in buyback takes into account moving additional excess capital of approximately $500 million up to the holding company. What I would say, though, is from an investment income perspective in corporate and other, you will likely see that most likely increase, but not necessarily because of the volume of assets at the holding company and associated investment income. It's more driven because that's the line item where we house the benefits of our enterprise hedging program offsetting the hedge costs and hedging dynamics in Japan. As you may recall from the outlook call, we guided to pre-tax approximately $60 million to $80 million worth of amortized offset to the hedge costs in Japan that will run through that line. To give you a comparison, that was approximately $36 million in 2018. So you will see as you look at corporate and other, most of those line items will remain relatively consistent in terms of revenue and expense lines. The one line that stands out will be investment income, not so much because of the excess capital at the holding company but more so due to our enterprise hedging program.

Hi, good morning. I just had a question on the portfolio. Eric, you mentioned sort of positioning it conservatively given the environment, but you had fairly high investment losses in Q4. So maybe if you could talk about to what extent do you think this is representative of what you would expect if the environment remains challenging or was this more of an aberration, given how much the market moved in Q4?

Sure, you really need to look and attribute all the gain and loss numbers. But if I think about impairments and loan losses, they were about $61 million for the quarter. For us, that probably was a bit elevated compared to where we have been running, but recall over the last two to three years, our loan losses and impairments have been minimal. Also, part of that $61 million was the PG&E situation, which accounted for $21 million. Taking the PG&E situation out, the remaining $40 million is really kind of expected with a large loan portfolio now. Other assets, nothing really too surprising in there. I certainly know that going forward, the credit cycle is beginning to change with a large portfolio like ours and other insurers. We are going to expect certain industries might have some challenges. We will be tracking that closely. As I said, our job is to continue to shape the portfolio to avoid those credits that may struggle in a tougher cycle, and we have been proactive, as I mentioned in my speech, doing that. No doubt if the credit cycle changes, we will likely have larger impairments than we have had over the last three years, but I believe they will be very manageable and minimal relative to the industry.

We made a decision after the financial crisis that we wanted to ensure we would have all types of assets to avoid being in a position like what happened before. Therefore, when you have all types of assets, as you well know, the likelihood of experiencing hits is much higher, but they will be small hits and that supports our strategy.

Exactly, and just to build on that, as you know, we have attracted a diversified portfolio over time. We are diversified by different asset classes and strategies, and importantly, from a risk perspective, we are also diversified by position size. We no longer hold oversized concentrated positions. So when something occurs, it will be in a much smaller size compared to where we were historically.

Okay, and then maybe if I could ask one more question, Fred. Just on the timing of buybacks. I think the Japan Post can begin buying either late February or early March when your structure is completed. Would you consider front-ending buybacks to ensure you're not active at the same time as the Post is buying shares, or do you believe it will be more evenly spread through the year?

Yes, we are not tactically changing our approach to buybacks based on the Japan Post agreement. What we are doing is what we always do; we will be tactical at times. For example, we accelerated a bit of our buyback rights just at year-end to take advantage of what we thought were compelling economics. We will continue to be tactical within the range that will always continue. But we are not designing or being tactical with our repurchase surrounding the Japan Post agreement and their share accumulation. So you should expect the buybacks will generally be spread over the year.

Thanks. Just on the first sector protection products in Japan. My sense is the market is pretty saturated with first sector products, which may be why a lot of the domestics are moving into the third sector in the first place. So can you give us a sense of what is it about your first sector protection product that stands out versus the group, and are you essentially selling to the same customers that you already have, or is it allowing you to reach a new group of customers?

Koji?

In many cases, we are selling our first sector protection tied to our existing policyholders because we can enhance their current policies. We have achieved premium rates that are very attractive to non-smokers. The coverage with this smaller amount is also appealing, and it currently represents about 5% of our protection-type sales.

Okay. And then on the medical Rider. Yes, I believe you guys went through this years ago with Rider Max, which was a source of sales for several years. So how long do you think you will have this ability to sell this medical Rider? How long will it take you to work through your existing customer base in terms of folks that might be interested in adding the Rider?

Koji, would you take that?

This product is designed for our existing policyholders. We offer various products tailored to different age groups; for instance, younger customers can benefit from specific Riders we provide, while older customers have Riders that meet their needs. Notably, we hold the top position in the industry for the number of active medical policies. This capability enables us to keep and maintain our customers over the long term, leveraging our existing customer base. It sets us apart from our competitors and is expected to help boost our earned premium.

Good morning, and thank you for taking my questions. In Fred's prepared remarks, you talked about some redundant reserve releases because of the lapse and reissue activities that happened in the quarter. I was just wondering if you could size the benefit of those reserve releases for the quarter, and how we should think about that throughout 2019?

Yes. Let me step back and give you some context and then provide an answer. In terms of the reserves in the quarter in Japan, I wouldn't use the term redundant reserves; they are just released when policies lapse. Let me explain. The lapse and reissue activity impact the premium ratio, reducing the benefit ratio. We estimate about 30 to 50 basis points in 2018 vs. 2017. It's important to note that lapse and reissue activity occurs naturally every year, but this year, to some degree, was elevated due to a more medical product but more particularly this year with the new cancer product. Importantly, while the benefit ratio against premium goes down, you see a somewhat equal impact on the expense ratio because you are essentially amortizing the deck more quickly or writing down the deck upon the last policy. That has an effect of increasing your expense ratio against premium by 30 to 50 basis points, resulting in a somewhat negligible impact on your bottom line. You could have more of one and less of the other, impacting earnings depending on the age of the actual policies being lapsed and relapsed. In the fourth quarter, these metrics were like 70 to 80 basis points in terms of improvement to the benefit ratio, similarly increasing the expense ratio. You can see that in our actual numbers for the quarter. So that attribution is key. Now, setting aside lapse and reissue in terms of pre-tax profit margins, because it's fairly insignificant, the strong pre-tax profit margins this quarter were largely due to positive claims trends and the related release of IBNR. We released about ¥3 billion of IBNR predominantly related to our cancer book of business. This is not entirely unusual as we have been doing releases now for a few years because of consistent trends in the cancer book. However, there is no guarantee that will continue, and every year represents a variable, but there has been a pattern of this due to consistent trends.

Yes, thank you for the color. I understand that the improvement in the benefit ratio is offset by the expense ratio, but thank you for the additional detail. Also, regarding your early remarks about the potential to draw down towards 400%, can you share the timing for contemplating moving from the 500% target to the 400% target?

Yes, I think right now the plan is to settle into the 500% target. As I have mentioned before, this will represent the first year we will have printed U.S. Blue book in a long time. So we want to make sure we can digest the statutory moving parts. 2018 resulted in very strong statutory income, about $830 million, helped somewhat by tax reform. That was a strong year for state earnings, predicted right about where we planned. Given the stability of our business and low asset leverage in our U.S. business, we can comfortably move it down to 400%. Our plan is to take the Blue book, examine our final year-end results, and start coordinating with the rating agencies. My guess is that in 2020 we will start to work that ratio down.

Thanks. Eric, when I hear you have shifted out of public corporate bond purchases and emphasized middle-market loans and transitional real estate, I guess from a category standpoint, it's not clear that's a risk upgrade. Can you give some examples or statistics about how that risk is better or lower?

Sure, absolutely. First, I would say it's diversified, and that goes to the point of diversification paying dividends over time. Remember, in our program for middle-market loans, we determine the underwriting standards. So we have first lien secured loans, highly diversified, and can influence what companies do. The public sector involves larger companies, where we cannot influence management decisions as easily. If the credit cycle changes, we have to proactively manage those assets. In the public sector, credit recovery rates are lower as well. Confirmation through tough times shows that default rates in private markets are low, offering favorable recovery rates due to the negotiating leverage we have.

And Eric, from a yield perspective, was it a yield enhancement from shifting out of the public corporate bonds into transitional real estate and middle-market loans? Are you still making that excess spread?

Absolutely, Tom. Substantial yields there. Tech space offered returns of 375 to 400, while middle-market loans can yield 6.5% to 7%, typically with three to seven-year maturities. Coupons based off LIBOR have favored us. Additionally, these floaters play an important role. Starting at 6% to 7% instruments paying around 3% in hedge costs nets a spread of 4%. Investment-grade bonds yield significantly lower. Diversification is key for managing risk versus returns.

Thank you. This is a question on U.S. productivity. I know there are some seasonality that weighs Q4 more heavily. But this looks to be a record this year. Do you see this coming from a crack in the distribution for the broker or more from efficiencies delivered from your tech and digital investments? Reference point is Page 18 of the supplement.

Okay. As we noted, it was a record sales year coming off momentum from eight consecutive quarters of growth, resulting from balanced delivery. Our veteran associates provided strong contributions to our sales growth, while broker sales continued to demonstrate momentum. Broker sales professionals and associates working with brokers have also propelled growth. I would say it's a balance of all those factors.

Great. Thanks for your answers.

Hey. The first question was kind of a follow-up on the investment conversations. Most what you've discussed have been U.S. dollar investments, and that’s clear. Just looking at tenure JGBs, they are back down to basically zero. There must be limitations to keep investing in U.S. dollar portfolio. How should we think about new money rates in Japan and where they should trend? At what point might you begin investing more heavily in JGBs or yen-denominated assets more broadly?

Yes, thank you. Good question. First, if you look at last year's final tally, we were over 50% yen assets and the rest in dollar assets. We have risk limits and limitations for dollar allocation. To frame the context, the 10-year JGB is a benchmark yield for Japan, but it’s not our benchmark compared to our investment strategy. We often target 20 to 30-year types in yen fixed income markets, ranging from 70 to 90 basis points depending on the curve. Importantly, from an asset liability management standpoint, all our liabilities in Japan are in yen. So we think about economic capital and solvency ratios; yen is the baseline. For our strategic allocation, 70% of our book is targeted towards yen assets to manage obligations to policyholders and regulators. While we don’t love low yields, we also identify other opportunities, such as private placements in yen, which we have improved. Overall, it is not just about abandoning JGBs. We're seeking to identify yen-denominated investments with greater yield and quality.

That's really helpful. Thanks. The second question I had was just on the Riders in Japan. I was wondering if you could provide more detail on what the Riders entail and what the sort of mix should be in terms of nursing Riders versus income protection Riders. With nursing care Riders specifically, could you talk a little bit about how this differs from standalone long-term care risk in the United States and what gives you comfort with that Rider in Japan?

Yes, Koji, would you elaborate on the Riders we are discussing and importantly the concept of maintaining policies throughout their lifecycle for policyholders—ranging from income protection to nursing? Todd, it’d be good for you to comment on how this nursing care Rider should not be conflated with long-term care benefits in the U.S.

Let me start with nursing care. This type of care offers long-term benefits to customers. The level of nursing care needs is determined by government certification. We make a lump-sum payment to mitigate risk. Since payments are based on eligibility set by the national government, there will be limitations. For the younger generation, we offer an income support Rider, which is also a lump-sum coverage for policyholders who are unable to work. We have standalone products that provide additional coverage and require detailed explanations of the social welfare benefits offered by the government. Therefore, standalone products are not as popular as medical products. The Rider we are discussing has simpler explanations, and if we identify customer needs, we should consider revising our income support standalone product. The medical insurance we launched this time offers more than just hospitalization or surgery benefits; it also includes outpatient coverage. As mentioned earlier, we are a leading provider of medical insurance in the industry, so there is great potential.

To emphasize, we want to ensure everyone understands that with the care Rider, it is a lump-sum benefit, and the claim definition is tied to the government definition. These details are what differentiate it from long-term care products in the U.S.

Hi. Thank you. You recently announced an investment in Singapore Life. I was hoping you could discuss the opportunity you see in the business and whether you expect to explore other investments in new markets with higher growth potential over time.

Yes, Max Broden led that investment for us, so I’ll have Max comment on the nature of the investment and our expectations.

We made a small investment of $20 million in Singapore Life. This company is in a region we see great potential for protection-type products. Along with the investment, we will collaborate on product development to develop cancer and protection-type products alongside Singapore Life. Additionally, we will enter into reinsurance agreements with them, reinsuring those products back to Aflac. We believe this is a very interesting opportunity for Aflac to leverage our skill set in this region. However, we recognize that pursuing this independently may be challenging, which is why we have partnered with a strong partner with excellent digital capabilities.

Yes, this aligns with our broader strategy; if we are to enter new markets, it should be via digital partnerships on the ground, ensuring it's managed wisely without significant capital at risk. We don’t see the value in a traditional approach involving large-scale acquisitions or building traditional distribution networks. This represents a smart way to evaluate new opportunities.

Thank you, operator. I believe that's the end of our call; we have reached the top of the hour. Please feel free to contact Investor and Rating Agency Relations if there are any further questions or for more information. We look forward to speaking with you soon. Thank you all for joining us today.