Aflac Inc (AFL) — Q1 2021 Earnings Call Transcript

Thank you, Parsha, and good morning and welcome to Aflac Incorporated's first-quarter earnings call. As always, we have posted our earnings release and financial supplement to investors.aflac.com. This morning we will be hearing remarks about the quarter related to our operations in Japan and the United States amid the ongoing COVID-19 pandemic. Dan Amos, Chairman and CEO of Aflac Incorporated, will begin with an overview of our operations in Japan and the U.S.; Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the fourth quarter and discuss key initiatives, including how we are navigating the pandemic; Max Broden, Executive Vice President and CFO of Aflac Incorporated, will conclude our prepared remarks with a summary of first-quarter financial results and current capital on liquidity. Members of our U.S. Executive Management team joining us for the Q&A segment of the call are Teresa White, President of Aflac U.S.; Virgil Miller, President of Individual and Group Benefits; Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac U.S. We are also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koji Ariyoshi, Director and Head of Sales and Marketing and Koichiro Yoshizumi, Assistant to Director of Sales and Marketing. 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 discussed 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.

Thank you, David. Good morning and thank you for joining us. At our first-quarter conference call one year ago we were facing the early days of the pandemic. At that time, I shared with you actions that we had taken to ensure that we protect the employees, the distribution partners, the policyholders, and the communities. I'm proud of our response and our ability to handle these challenging times for everyone. Our people first embodies the spirit of corporate culture which we refer to as the Aflac way. Within the pandemic environment, we are encouraged by the production and distribution of the COVID-19 vaccines, but we also recognize that vaccination efforts are still in the early stages around the world. Our thoughts and prayers are with everyone affected, and we are cautiously optimistic while also remaining diligent. There is one essential message that I continue to emphasize with our management team: It is imperative that we control the factors we have the ability to control, and what we don't have the ability to control, we must monitor continually to be ready to adapt. This approach allows us to respond in the most effective way possible. In the first quarter, adjusted earnings per diluted share increased 26.4% while earnings are off to a strong start for the year. It's important to bear in mind that they are largely supported by a low benefit ratio associated with the pandemic condition. Before covering our segments, I'll make a few comments about the overall perspective. Pandemic conditions in the first quarter continued to impact our sales results, as well as earned premium and revenues, both in the United States and Japan. We continue to expect these pandemic conditions to remain with us through the first half of 2021, but look for improvement in the second half of the year, as communities and businesses further open up, allowing more face-to-face interactions, despite the fact that sales in both the United States and Japan have been suppressed considerably due to the constrained face-to-face opportunities. We did not sit still. We continue to make progress in the integration of our accelerated investment in our platform while continuing strong earnings performance. Looking at the operations in Aflac Japan, we generated solid overall financial results with a profit margin of 23.1%, which was above the outlook range that we provided at the Financial Analyst briefing. Aflac Japan also reported strong premium persistency of 95%. Sales were essentially flat for the first quarter, with the January launch of our new medical product overshadowed by the continued impact of the pandemic conditions. We are encouraged by the reception of the new medical product by both consumers and the Salesforce. In addition, Japan Post group's announcement to resume proactive sales in April paves the way for gradual improvement in Aflac's Cancer Insurance sales in the second half of the year. We are actively working with Japan Post to ready the platform, recognizing that it will take time to return to full strength. We continue to navigate evolving pandemic conditions in Japan, including the recent reestablished state of emergency for Tokyo, Osaka, and two other prefectures affected from April 25th through May 11th. Restrictions will be tightened to curb the movement of people and group activities during the major holiday known as Golden Week. Turning to the U.S., we saw a strong profit margin of 27.3%; Aflac U.S. also reported very strong premium persistency of 80%. Max will cover the persistency later. Current pandemic conditions continue to notably impact our sales results, largely due to reduced face-to-face activity. As expected, we saw modest sequential sales improvement in the quarter with an overall decrease of 22.1%. In the U.S., small businesses are still in recovery mode, and we expect that they will be that way for most of 2021. At the same time, larger businesses remain focused on returning employees to the worksite rather than modifying the benefits for their employees. We strive to be where the people want to purchase insurance; that applies to both Japan and the United States. In the past, this has meant meeting face-to-face with individuals to understand their situation, propose the solution, and close the sale. Face-to-face sales are still the most effective way for us to convey the financial protection only Aflac products provide. However, the pandemic has clearly demonstrated the need for virtual means, in other words, non-face-to-face sales that help us reach potential customers and provide them with the protection that they need. Even prior to the pandemic, we've been working on building our virtual capacities. Given the current backdrop, we have accelerated investments to enhance the tools available to our distribution in both countries and continue to integrate these investments into our operations. In addition, we continue to build out the U.S. product portfolio with previously acquired businesses that serve as a base for Aflac Network Dental and Vision and group management and disability. While these acquisitions have a modest near-term impact on the top line, they better position Aflac for future long-term success in the United States. Our core earnings drivers, which are persistency, underwriting profits, investment income, and expense ratios, continue to drive strong pre-tax margins, both in the United States and Japan, where we experienced sequential sales growth in the months of January, February, and March. In addition, provided we don't experience a setback in terms of pandemic conditions, we're forecasting a sequential increase in absolute sales in the second quarter over the first quarter in both the U.S. and Japan. As always, we place significant importance on continuing to achieve strong capital ratios in the U.S. and in Japan on behalf of our policyholders and shareholders. We remain committed to prudent liquidity and capital management; we issued our first sustainability bond in March, as we seek to allocate proceeds from the issuance to reinforce our commitment to social and environmental initiatives. As we balance purpose with profit, we treasure our 38-year track record of dividend growth and remain committed to extending it, supported by the strength of our capital and cash flows. At the same time, we will continue to tactically repurchase shares while focusing on integrating the growth investments we've made in our platform. By doing so, we look to emerge from this period in a continued position of strength and leadership. I've always said that the true test of strength is how one handles adversity. This past year confirms what I knew all along, and that is that Aflac is strong, adaptable, and resilient. We will continue to work to achieve long-term growth while also ensuring we deliver on our promise to our policyholders. By doing so, we look to emerge from this period in a continued position of strength and leadership. I don't think it's a coincidence that we've achieved success while focusing on doing the right things for the policyholders, the shareholders, the employees, the sales distribution, the business partners, and the communities. In fact, I believe success and doing the right things go hand-in-hand. I'm proud of what we've accomplished by balancing purpose with financial results. This has ultimately translated into a strong long-term shareholder value. Now I'll turn the program over to Fred.

Thank you, Dan. I'm going to touch briefly on current pandemic conditions in Japan and the U.S., then focus my comments on efforts to restore our production platform in 2021. Japan has experienced approximately 575,000 COVID cases and 10,000 confirmed deaths since the inception of the virus. Through the first quarter of 2021 and since the inception of the virus, Aflac Japan's COVID impact has totaled approximately 10,500 claimants, with incurred claims of JPY 1.9 billion. We continue to experience a low level of paid claims for medical conditions other than COVID, as policyholders refrain from routine hospital visits. There are essentially 3 areas of focus in building back to pre-pandemic levels of production in Japan: Our traditional product refreshment activities, online sales driving productivity in the face of pandemic conditions, and active engagement with Japan Post to begin the recovery process in cancer insurance sales. As Dan noted, there has been a positive reception to our revised medical product. This product was designed to better compete in the independent agent channel, where we had seen a decline in market share heading into 2020. Sales of medical insurance are up 34% over the first quarter of 2020 and up 8% over the 2019 quarter. The new product, called Ever Prime, has enhanced benefits that, on average, result in 5% to 10% more premiums per policy versus our old medical product. The product also includes a low claims bonus structure that has contributed to growth among younger demographics. We have technology in place to allow agents to pivot from face-to-face to virtual sales and an entirely digital customer experience. The agent is not removed from the process. The agent can make the sale and process the policy from point of solicitation to point of issuance, entirely online without face-to-face contact. We introduced this capability in October 2020, and for the month of November, we processed 1,600 applications utilizing this digital experience. In the month of March, that number doubled to approximately 3,200 applications. Not surprisingly, we are seeing higher adoption rates among younger demographics. On March 26, we launched a national advertising campaign promoting the capability and expect to see increased utilization. We see this capability contributing to productivity even after pandemic conditions subside. On Japan Post, as Dan noted, we anticipate sales volume will recover gradually in the second half of 2021. Separate from Japan Post activities to revive sales, Aflac Japan is actively supporting recovery in the sale of cancer insurance. This includes reinforcing communication on Japan Post sales policy down to the postal branch level, training and education on our latest cancer products and sales proposal strategies, and identifying existing cancer policyholders in the Japan Post system to both explain the benefits of their current products and create an opportunity for potential upgrade. It's important to remember that the Japan Post sales force has been inactive for 18 months. Therefore, product training and sales coaching are critical efforts in the coming months. Turning to the U.S., there are approximately 32 million COVID-19 cases and 575,000 deaths as reported by the CDC. As of the end of the first quarter, COVID claimants, since the inception of the virus, have totaled approximately 38,000, with incurred claims of $130 million. Along with infection rates declining from peak levels in 2020, our data suggests hospitalization rates and days in the hospital have trended lower. However, infection hotspots in areas of the U.S. remain, and as is the case in Japan, there is concern over a potential fourth wave of infection. Executive orders requiring premium grace periods are still in place in 9 states, with 6 states having open-ended expiration dates. Persistency has improved. However, most of that improvement is attributed to the combination of state orders and lower overall sales as we typically experience higher lapse rates in the first year after the sale. Turning to recovery and restore efforts, we have seen our agent channel and small business benefit franchise hurt by the pandemic. It's important to note that roughly 390,000 of our 420,000 U.S. business clients have less than 100 employees. Critical areas of investment include recruiting, training, technology advancement, and product development. Key indicators of recovery include agent and broker recruiting, a build in average weekly producers, and traction in the rollout of our dental and vision products. For the first quarter, we are running at approximately 70% of the average weekly producers during the same period in pre-pandemic 2019. Trends are positive, and we expect to narrow this gap throughout the year, assuming pandemic conditions improve. We are experiencing favorable recruiting numbers, have reopened training centers closed during the pandemic, and veteran agents are reengaging after a difficult year. We are in the early days of our national rollout of Aflac Network Dental and Vision. Our dental product is approved in 43 states, and vision in 41 states, with more states coming online throughout the year. Network Dental and Vision is critical in the small business marketplace and a key component to agent productivity along with new account growth retention and penetration or seeing more employees at a given employer. This month, we are completing the national training programs, making select product refinements, and reinforcing incentives to drive new dental accounts. In addition, we are busy upgrading our administrative platforms to ready for increased volumes. 2021 is the year of launch, learn and adjust, and we expect to see our pipeline, close rate, and new accounts gradually increasing throughout the year. Our Premier life and disability platform acquired from Zurich is now operating under the Aflac brand. We have started to see our quoted pipeline build in the last 45 days. However, many employers are reluctant to move critical benefit plans while sorting through returning to the worksite and changing workforce dynamics. In addition, consultants often proceed with caution in a year or so after an acquisition. We need to remain patient over the next few years as we settle into this new line of business. Our competitive calling card is the proven premier service and technology capabilities of the acquired platform, coupled with Aflac Group's core leadership in supplemental worksite benefits. We will not resort to winning business via relaxed underwriting and pricing standards in this highly competitive market. Finally, earlier this year, we launched our new e-commerce direct-to-consumer platform, Aflac Direct. We offer critical illness, accident, and cancer and are approved in approximately 30 states with more states and products coming online throughout the year. This platform targets individuals, the self-employed, gig workers, and part-time employees. In short, those who are not offered traditional benefit packages at the worksite. We are actively building out a licensed agent call center to better manage conversion rates and control overall economics. With a modest amount of committed marketing dollars, we are attracting about 500,000 visitors per month to aflac.com. This has resulted in 120,000 leads for call center conversion this year. We are currently experiencing a 15% conversion rate once in the call center. This is a data analytics-driven business and core metrics will improve as this model matures. In terms of the contribution of these businesses to overall sales in 2021, we expect these 3 growth initiatives will make up roughly 10% of sales in 2021 after having contributed less than 5% to 2020 sales. We remain committed to the revenue growth targets discussed at our November investor conference. We expect these initiatives to drive incremental revenue in excess of $1 billion over the next 5 to 7 years. As these separate initiatives mature, they leverage off each other. Network dental and vision drives agent recruitment and conversion of average weekly producers, employer-paid benefits drive supplemental worksite sales, and direct-to-consumer expands our addressable market while being leveraged to funnel worksite leads to our agents in the field. In the future, as employees leave the worksite, a digital relationship directly with Aflac helps with persistency and customer satisfaction. To close out my comments this morning, we continue to advance ESG initiatives in 2021. As Dan noted, we issued our inaugural sustainability bond, raising $400 million to be invested towards our path to net 0 emissions by 2050 and investments that support climate as well as diversity and inclusion efforts. The bond offering itself is an important step in that it requires formal processes around reporting, tracking, and auditing of qualified sustainable investments. This rigor benefits the control environment surrounding our enterprise-wide ESG reporting and accountability.

Thank you, Fred. I would like to provide an overview of our Q1 performance, highlighting the development of our core capital and earnings drivers. In the first quarter, adjusted earnings per share rose by 26.4% to $1.53, benefiting from a $0.02 positive impact from foreign exchange. This strong performance was mainly due to lower utilization during the pandemic, particularly in the U.S., and a reduced tax rate compared to the previous year. Variable investment income exceeded our long-term return expectations by $24.5 million. Adjusted book value per share, which includes foreign currency translation gains and losses, increased by 20.6%. The adjusted return on equity, excluding foreign currency effects, was a robust 16.7%, significantly higher than our cost of capital. In our Japan segment, total earned premium for the quarter fell by 3.6%, reflecting the impact of paid-up policies, while earned premium for our third sector product declined by 2.2% due to sales pressure in 2020. Japan's total benefit ratio was 68.4% for the quarter, down 100 basis points year-over-year, with the third sector benefit ratio also decreasing by 100 basis points to 58%. We noted a slight increase in IBNR release within our third sector block as actual results continued to be better than initial expectations, primarily due to pandemic-related constraints on utilization. Persistency remained strong at 95%, an increase of 50 basis points from the previous year. Our expense ratio in Japan rose to 21.3%, up 130 basis points from last year, mainly attributable to increased sales activity and investments in technology aimed at transitioning Aflac Japan to a paperless operation, which also led to higher system maintenance expenses. Adjusted net investment income grew by 6.9% in yen terms, mainly due to favorable returns on our expanding private equity portfolio and reduced hedge costs, although offset partially by a lower reinvestment yield on our fixed and floating rate portfolios. The pretax margin for Japan was 23.1%, an increase of 60 basis points year-over-year, marking a strong start to the year. In the U.S., net earned premium decreased by 4.1% due to softer sales results, but persistency improved by 240 basis points to 80% thanks to our efforts to retain accounts and decrease lapsation rates. As Fred mentioned, we are keeping a close eye on the nine states with premium grace periods in effect. Analyzing the persistency improvement further, 70 basis points were linked to emergency orders, 90 basis points to reduced sales as first-year lapse rates are nearly double the total in-force lapse rates, and the remaining 80 basis points stemmed from conservation initiatives implemented last year. Our total benefit ratio was notably lower than expected at 39.1%, a full 900 basis points lower than Q1 2020. We saw reduced paid claims, particularly in January, as the pandemic influenced our policyholders' behavior. This trend aligns with our disclosures from 2020, indicating a negative correlation between infection levels and claims-generating activities like accidents and elective surgeries. The significant decrease in non-COVID related claims primarily drove the year-over-year drop in the benefit ratio. Our total incurred COVID-related claims were also lower than anticipated, with new COVID claims estimated at around $42 million, offset by an IBNR release of $41 million. We have refined our assumptions as our experience accumulates, leading to this IBNR reserve release. We anticipate the benefit ratio will gradually increase as normal activities resume in our communities and among our policyholders. For the full year, we now expect the benefit ratio to trend towards the lower end or slightly below our guided range of 48% to 51%. The expense ratio in the U.S. stood at 38.5%, an increase of 10 basis points year-over-year, though influenced by several factors. Weaker sales negatively affected revenue, but the overall impact on the expense ratio was largely mitigated by lower DAC expense. Increased advertising spending raised the expense ratio by 70 basis points, along with ongoing investments in strategic growth initiatives in group life, disability, network, and direct-to-consumer efforts, contributing an additional 110 basis points. The impact of these initiatives was balanced by our commitment to reducing core operating expenses as we aspire to be the low-cost provider in the voluntary benefit market. Overall, despite various influencing factors, Q1 expenses are aligning with our expectations. Additionally, we incurred $6 million in integration expenses related to recent acquisitions, which were not included in adjusted earnings. Adjusted net investment income in the U.S. saw a slight decline of 0.6% due to a 22 basis point reduction in portfolio yield year-over-year, partially offset by favorable variable investment income. Profitability in the U.S. segment remained strong, with a pretax margin of 27.3%, largely driven by a low benefit ratio. Following Q1, we are raising our full-year pretax margin expectation, now aiming for the upper end of the initial range of 16% to 19%. In our corporate segment, we reported a pretax loss of $26 million as adjusted net investment income fell by $20 million compared to last year due to lower interest rates at the short end of the yield curve. Other adjusted expenses were $7 million lower, reflecting our successful cost reduction efforts. Our capital position remains robust, ending the quarter with a strong SMR over 900% in Japan and an RBC of approximately 563% in Aflac Columbus. Unencumbered holding company liquidity was $3.9 billion, which is $1.5 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond issued in March that reinforced our ESG initiatives. We view sustainable investments not only as beneficial for the environment but also as valuable long-term investments. While leverage, including the sustainability bond, increased, it still remains at a comfortable 23%, well within our target range of 20% to 25%. During the quarter, we repurchased $650 million of our own stock and paid out $227 million in dividends, providing good relative IRR on these capital deployments. We will continue to be flexible and strategic in managing our balance sheet and capital deployment to enhance risk-adjusted ROE with a substantial spread to our cost of capital. Now, I will hand it over to David to start the Q&A.

Thank you, Max. We are now ready for your questions. Pasha, let's take the first question.

So Max, perhaps we can start on capital management. Capital ratios look very strong. Cash balances, obviously very high. Concerns regarding credit are dissipating. In the quarter, you bought back more stock than expected. Given that, could we perhaps see some upside to your capital management plans? Or should we view the buybacks this quarter as being a little more tactical in the decision to front-end your annual plans?

So Nigel, obviously, as we travel through the pandemic, we're now moving into more, I would call, normal economic conditions in the environment, i.e., less impacted over time by the pandemic. That means that, obviously, we gain confidence in how we can deploy capital, and you saw that in the quarter. At the same time, we're not fully out of this yet. And we will continue to look at all the different deployment opportunities that we have. In the quarter, $650 million was a step-up from what we've seen previously, and that reflects our confidence in what we see the franchise driving and coming through over time. And going forward, we will continue to make sure that we hold capital in the right places around the company and deploy capital at favorable IRRs.

Great. And just a follow-up on premium persistency as well. In the space where the premium waivers have been lifted, do you tend to see a spike in lapses? Any color there would be interesting. I just wanted to try to get an understanding as to whether there's perhaps a challenge for the remaining states that are yet to lift the executive orders.

Nigel, it's Fred. You do tend to see a bit of a spike in lapse rates when the state orders subside. And we have actually a fairly good amount of historical experience on this, as I might have mentioned in past comments. It's not unusual to have these state mandates put in place during natural disasters and the like. And so we've seen this before. What I would tell you, however, is when it comes to our financials, we try to account for a level of this in the form of premium allowance, if you will, meaning the idea of what is an uncollectible amount of premium that may be out there embedded in the book of business that are being suspended, if you will, related to the grace periods. So we try to take into account such that when you do see these state mandates lifted, there's not a pronounced measurable impact on our actual financials, even though you may see lapse rates move around.

I guess my first question is on the U.S. underwriting. So Max, in your prepared remarks, you talked about lower claims incidents in January. Can you share in terms of how the number of claims submitted in January or in the first quarter in general compared to the second and third quarter of last year?

So I can give you one example. In the month of January, we had paid claims drop about 28% in the U.S. compared to pre-pandemic conditions. That's a very significant drop. We saw a significant normalization from that level in the month of February and further normalization in the month of March. This, to a large extent, explains the low benefit ratio in the quarter.

And you have to think that one of the reasons for it. No one knows for sure. But if you think back, we had just had the holidays, and we were seeing on the TV constantly by the government, be careful, don't go out, protect yourselves. We're going to have a spike and I think that brought in the lower numbers.

And one thing I would like to add, Humphrey, as well, as we look forward, is that there are certain of our products where you could see an increase in claims being filed as people go back for their physicals, go back for elective surgeries. Even in the line of cancer, we could see a step-up in terms of claims being filed in the future that did not occur during the pandemic. That's why we view the period that we just have been through as abnormal.

Yes. I guess, I understand people getting reminded during January, but at the same time, I feel like was state kind of opening up in the first quarter compared to where we were in the second or third quarter that the entire country was pretty much fully locked down. I guess I was just a little surprised to see the first quarter results being so much better than second or third quarter when we're kind of deep in the pandemic.

I think we were, too. I mean, we certainly would have given you closer projections had we thought that was the case. So we were surprised for January. But I think what Max is also saying is February and March were on target.

Our actuaries also remind us constantly that there is a little bit of a lagging environment. There is a bit of a timing gap, as you can imagine, between the actual incident taking place, i.e., going to the doctor and then the filing of the claim. You can see some lagging. So we watch the trends and try to embed that in our forecasting as well.

So there wasn't any IBNR reserves for non-cover claims that you both in the previous quarter that given the projected incidents never materialized that you had a release. So it's not like that's simply pure from an incidence perspective?

Yes, there was an element of that coming through as well. That moved our benefit ratio by about 1.5 points down.

I had a question on just your sales in the U.S. and Japan through the quarter. And if you saw a noticeable improvement in March versus what was happening in January? And then relatedly, in Japan, what do you think of the impact of the lockdowns as well as the Olympics coming up, and could that affect your sales negatively in late 2Q, early 3Q?

I'll begin and then pass it to Japan. In my presentation, I mentioned that we observed improvement with January numbers, February showed better results than January, and March numbers were an improvement over February. We anticipate that the second quarter will surpass the first quarter in both countries. With that said, I'll allow whoever wants to speak to address your questions directly.

Yes, this is from Japan. First of all, let me start out with the current situation in Japan, followed by the sales and our business in Japan as well. Well, first of all, as Fred mentioned earlier, the number of infections in Japan is 575,000, and the number of deaths in total is about 10,000. Compared to other countries, this number is much smaller. The reason why we have been able to control much of the infection is because of the nature of our citizens that we normally wear masks, and we care very much about our hygiene. On top of that, instead of taking the risk, people are really worrying about eating and dining outside, and the restaurants are reducing their business hours, and these things have been very effective. However, even still, there has been an increase in the number of new infections in Osaka and Tokyo. As a result, there is a third declaration of emergency, which was issued on April 25. However, the third emergency declaration in Japan is not a lockdown. It is a much more focused measure. For example, the state of emergency declaration only covers four prefectures, and the period it covers is up to May 11. Compared to previous state of emergency declarations, it's very limited in terms of time and location. However, the government is imposing much stronger restrictions on restaurants and large shopping centers that they are asked to shut down their response and shops for the time being. The vaccination started in April, starting from the elderly population. Since the older population accounts for about 30% of the overall population, we are expecting that this will have a positive effect. However, the situation of the pandemic is very fluid. Therefore, we need to keep an eye on the variance and the vaccination status going forward as well. Because of the situation, and since the COVID-19 infection is still rising, it is very difficult to mention how things are going to go forward in terms of our projection. But as you can see, in our results of the first quarter, even under the state of emergency declaration, we have been able to promote our medical insurance, and it's been and also because of the extent of the use of online proposals and applications, we haven't been able to match the same level of performance as last year. Even in the second quarter and beyond, we would like to maintain this positive benefit from medical insurance, and we will also be further expanding the use of online proposals and applications. Additionally, we would also like to be using direct mails, which will enhance non-face-to-face solicitation. By doing so, we should be minimizing the impact from COVID-19. And that's all for me.

One thing I would add that's interesting is just to give you some color on the relative nature of the state of emergency. We sell products through what we would call retail shops, about a little over 20 of those shops are actually owned by Aflac and about 380 of those shops are through affiliate ownership, and we'll do about JPY 6 billion a year in a normal year of production through those shops. During the peak of the emergency orders in the pandemic in April of 2020, basically all 400 of those locations were shut. Today, under the state of emergency issued around the Tokyo and Osaka and Kobe area, 13 of those shops are closed. It gives you a little bit of perspective on the difference between the early days of the pandemic and a more severe approach to emergency orders and the current period that's trying to balance productivity and business remaining open, while at the same time, exercising caution.

Okay. Any comments on how the Olympics would impact?

I'm sorry, Jimmy. Can you ask again?

Yes. I was just on like on the Olympics, is there going to be an impact on sales from the Olympics, do you think? Or should that not be much of a factor?

Go ahead.

This is Koji. We do not think there will be any impact.

Yes. That’s essentially what I was going to say is we have not factored in any impact, and so we are not expecting anything.

I think the second part of that question was from the U.S. perspective. And I'll just mention this, as we see an increase in vaccinations in arms and state mandates being lifted, we are now starting to see the markets open up. We've also opened up our market offices, sales offices around the U.S. as well. So we're starting to see a lot more activity from a sales perspective. Virgil, did you have anything else you wanted to add to that?

No, I'll just reemphasize, Teresa, that as Dan stated earlier, we did see the sequential improvement month-over-month with all sales being really driven by activity of opening up the markets in the offices, along with ensuring that we're continuing to drive our average weaker producers to mine.

I wanted to follow up on the U.S. regarding your thoughts on earned premium, especially considering the commentary about small businesses still recovering and large employers concentrating on bringing employees back to work instead of changing benefits. That commentary seemed a bit cautious to me. How do you believe these issues will affect your sales and overall earned premium? It appears you are not adjusting your 3-year guidance for earned premium. Is this changing your expectations for '21 compared to '22? Could you elaborate more on those issues?

Well, a shorter answer is, we have not adjusted our guidance or even really the path of that guidance; meaning, we have not adjusted for the reasons we've talked about. Most notably, just simply sales being down. It is, actually, on plan, meaning it is meeting our expectations and what we thought would take place, Tom. So we're not adjusting any of our thoughts for the roll forward.

Because persistency is 80% doing better than we thought.

Okay. And then just a follow-up on the benefit ratio. Max, can you give a sense for when you talk about very favorable in January and then gradually elevating? Was March back up to around 48%, 49%? Or was it still below that? And is this still the possibility that 2Q is going to trend favorably based on the trend you saw in March?

The total benefits ratio is obviously heavily impacted by quarter-end actuarial review studies. But I would say tracking sort of paid claims, we were getting closer to a normal level in the month of March, still not all the way up to what I would say to be pre-pandemic levels, but we're getting fairly close. And that is factored into when we then look at our full-year benefit ratio. As we sit here today, we look out for our benefit ratio. We obviously incorporate a whole host of different factors when we look at the full year, including the possibility of some pent-up demand in terms of claims being filed as well. I touched earlier on that, including a potential increase in cancer claims. That's factored into our revised guidance of being towards the lower end or slightly below the 48% to 51% for the benefit ratio for the full year in the U.S.

The last time Japan closed proactively selling cancer insurance, the world looked a whole lot different. Can you talk about digital tools? I mean you talked about the new medical product and digital tools that help the distribution there. But can you talk a little bit about the digital tools you're working to bring to Japan post as they work to ramp up proactively starting the product?

Currently, digital tools are into both medical insurance and health insurance. The younger generation uses more digital tools; it is being very much used by your people. Regarding that, we are preparing them to start using digital tools. We already have a plan to get started with test marketing in some part of the JV. Really, they have the intent to emphasize using the digital tool. I'm sure they will be fully leveraging the digital tools going forward. And that's it for me.

Yes. It's interesting to note that even though sales were somewhat paused during this recovery period for Japan Post, the alliance continued to operate without interruption. This is crucial to understand. Other aspects of the alliance persisted, such as investments in the distribution platform, mutual technology, and venture-related strategies. The governance structure and regular meetings with both executive and frontline management continued as planned. Progress was made in advancing technology and process improvements between the two parties, taking advantage of this downtime to prepare for a return to the market.

I just had a quick question on the idea of delayed cancer screenings. I know you've kind of touched on incidents or frequency, but I was wondering if you had any updated expectations on the trend in cancer severity once the economy reopens? Just on the idea that delayed screenings are delaying detection or worsening cancer conditions. And I thought maybe if you had some historical experience managing premium grace periods from natural disasters, maybe you've kind of seen this happen before.

I don't think we've experienced a situation as prolonged as COVID. Early on, we noticed a significant drop in cancer screenings, but that trend began to normalize. So, it's still challenging to have a clear expectation of the potential impacts. We're being conservative in our estimates and what we anticipate the various outcomes might be. It's important to note that while severity does affect our claims to some extent, the impact is relatively minor. What really influences our benefit ratio is primarily the frequency of claims.

I had a follow-up on the situation in Japan. Can you provide any sense, understanding that it's early and there's considerable uncertainty, about how significant their sales might be this year? Additionally, how long do you think it may take for them to return to previous levels?

Yes, I think it's too soon to determine specifics. However, I want to emphasize that our relationship with the new management team is as strong, if not stronger, than with the previous team, and as significant shareholders, they are highly invested in their stock. This creates a mutually beneficial situation. I anticipate a recovery is forthcoming, but given the unpredictable nature of the COVID situation, we face challenges. While this isn't reflected in our forecasts, I have a strong intuition that performance will improve, albeit slowly in the second quarter, before picking up momentum. Historically, the Japanese tend to evaluate and reassess before making significant moves, in contrast to the U.S. approach of gradually ramping up. If we look at both regions at the beginning, the U.S. tends to start faster. Yet, at some point, Japan will decide to accelerate its progress and will catch up quickly. I believe we are currently in this transitional phase, which may continue through the first quarter. By year-end, I expect to see a recovery. Aflac Japan is more cautious about forecasts, and while I cannot speak for them, my 31 years of experience leads me to believe that Japan Post aims to be profitable and will pursue opportunities, especially in areas like cancer insurance that consumers are seeking. While there's always a risk from COVID or other factors, which affects all businesses, I remain optimistic about the outlook.

This is Alex calling in on behalf of Greg Peters. Maybe just one question on the Japan paperless initiative. Just curious if the adoption of digital has any acceleration of that initiative? And as well as are there any other social and environmental initiatives that you're pursuing related to the $400 million bond?

I think in terms of the Japan paperless initiative, it's on track. It's moving well. As you might recall, it's a JPY 10 billion, roughly 2.5-year investment. I would say we're probably in the range of JPY 3 billion, perhaps approaching JPY 4 billion of investment to date. It's designed to take about 80 million pieces of paper out of the system. It's largely oriented around our policyholder services platform, where when the application starts in paper form, it remains in a paper form through the processing environment. So we're looking to get that out of the system, and that benefits cost structure. It benefits business recovery because you can move information around the country of Japan, which can be prone to natural disasters. And then also finally has environmental benefits, of course. That's a big initiative. We expect to save about JPY 3 billion a year in the way of expenses, and it remains on track, and it is closely tied to the digitization of the platform. It's essentially one and the same. It's one of the major efforts, if you will, that's involved in the overall digitization of the platform. In terms of the $400 million sustainability bond, yes, we have very well-articulated and dedicated plans for the investment of those funds. They largely surround classic sustainability investments, meaning climate and climate-related renewable energy investments. They also include, among other things, investments in opportunity zones in areas that suffer from a lack of income equality. Those are largely the areas that we're targeting. As you may know, in the sustainability bond, so-called green bond, et cetera, marketplace, there are very strict and well-defined requirements around what you invest in, the qualification of those investments, the tracking of those investments, and the yielding of benefits from those investments. My point in my comments was it's a much bigger effort for the company because it serves to set the entire structure up for broader-based investment, far greater than the $400 million over time, particularly the utilization of our general account on ESG efforts.

We would expect to earn favorable risk-adjusted returns on these investments.

Thank you, and I believe that wraps up our call. I want to thank everyone for joining us. If you have any follow-up questions, please feel free to reach out to the investor and rating agency relations teams, and I look forward to seeing you soon and also talking to you in the near future. Thank you.