Aflac Inc (AFL) — Q4 2021 Earnings Call Transcript

Good morning, and welcome to Aflac Inc.'s fourth 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 both countries. Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the 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 quarterly financial results and current capital and 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; Brad Dyslin, Deputy Global Chief Investment Officer; 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 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 Koichiro Yoshizumi, Director, Deputy President and 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 discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available at investors.aflac.com and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan.

Good morning and thank you for joining us. 2021 was another year of uncertainty with vaccines incrementally gaining some momentum as the year progressed. There were hopes that the severity of COVID-19 would fade and allow us to return to some type of normalcy. Unfortunately, one year and several variants later, normalcy has not returned. However, we did not remain idle. We have worked hard to adapt using virtual technology and seize the opportunity to accelerate investments in our platform. Considering what the global and national business landscape has experienced over the last two years, I think Aflac has been very fortunate with some tailwinds while simultaneously working hard to achieve our objectives and continue our strong earnings performance. While Max will address the quarter in more detail, I'd like to highlight some of the items for the year. Adjusted earnings per diluted share, excluding the impact of foreign currency, increased 21% in 2021. This result was largely supported by the continuation of the low benefit ratios associated with pandemic conditions and better-than-expected returns on alternative investments. We were pleased with this result, especially when you consider the pandemic pressure on revenues, accelerated investment in our core technology platforms and initiatives to drive future earned premium growth and efficiency. In 2021, Aflac Japan generated solid overall financial results with an extremely strong profit margin of 20.2% and solid premium persistency of 94.3%. We continue to navigate Japan's evolving pandemic conditions, including various degrees of COVID-19-related restrictions that created headwinds for our face-to-face sales opportunities. Especially given this backdrop, I am encouraged by Aflac Japan's annual sales increase of 7.7%. This reflected the first quarter introduction of our medical product, EVER Prime, and the September launch of our new nursing care product. Amid evolving pandemic conditions, we continue to enhance and actively leverage our virtual sales technology to connect with customers as we monitor the recovery of face-to-face sales. Our goal in Japan is to be the leading company for living in your own way. This approach captures how we tailor our products to fill consumers' needs during the various stages of their lives, reaching them where and how they prefer to purchase insurance. This includes through our agencies, strategic alliances, banks, and virtually. Aflac Japan continues to offer various measures of support to Japan Post Group as they gradually increase proactive sales activities in preparation for the start of their new fiscal year in April of 2022. This will include the transfer of approximately 10,000 Japan Post company employees to Japan Post insurance products, most importantly for us, Aflac Japan's cancer insurance. We expect this continued collaboration to further position the companies for long-term growth and gradual improvement of Aflac cancer insurance sales in the interim. Turning to Aflac U.S., we saw a strong profit margin of 22.8%. This result was driven by lower incurred benefits and higher adjusted net investment income, partially offset by higher adjusted expenses. I am pleased with the 16.9% annual sales increase, especially considering the constraints face-to-face activities continue to be somewhat of a headwind in the U.S. as well. Aflac U.S. also continued to generate strong premium persistency of nearly 80%. In the U.S., small businesses have gained some incremental ground toward recovery, and we expect this to continue gradually. Within the challenging small business and labor market, we continue to engage our veteran agents. Meanwhile, larger businesses appear to be more resilient given their traditional reliance on online virtual self-enrollment tools, and we are making ongoing investments in the group platform. Excluding our acquired platforms, 2021 group sales were more than 104% of 2019 group sales. We remain focused on being able to sell and service customers whether in person or virtually. As part of the Vision 2025, we seek to further develop a world where people are better prepared for unexpected health expenses. Fred will provide more detail, but as we seek to fill the needs of customers, businesses, and our distribution channels, we continue to build out our U.S. product portfolio with Aflac network Dental and Vision and premier life and disability. These new lines modestly impact the top line in the short term. In combination with our core products, they position Aflac U.S. for future long-term success. Depending on continued progress in pandemic conditions, we remain cautiously optimistic for continued sales improvement in the U.S. The need for our products is as strong or stronger than it has ever been. Meanwhile, we recognize that consumers' habits and buying preferences have evolved, and we are looking to reach them in ways other than traditional media and outside the worksite. This is part of our strategy to increase access, penetration, and retention. I've always said that the true test of strength is how one handles adversity. While the pandemic has been and continues to be this type of test, I am pleased that 2021 confirms what we all knew. Aflac is strong, adaptable, and resilient in both Japan and the United States. We look for ways to be where people want to purchase insurance. Related to capital deployment, we place significant importance on continuing to achieve strong capital ratios in the U.S. and Japan on behalf of our policyholders and shareholders. When it comes to capital deployment, we pursue value creation through a balance of actions, including growth investments, stable dividend growth, and disciplined tactical stock repurchase. It goes without saying that we treasure our record of dividend growth. The fourth quarter's declaration marks the 39th consecutive year of dividend increases. Additionally, the Board approved a first quarter dividend increase of 21.2%. Our dividend track record is supported by the strength of our capital and cash flows. At the same time, we remain tactical in our approach to share repurchase, deploying $2.3 billion in capital to repurchase 43.3 million shares in 2021. Keep in mind, in addition, we have among the highest returns on capital and the lowest cost of capital in the industry. We have also focused on integrating the growth investments we have made in our platform. As always, we are working to achieve our earnings per share objective while also ensuring we deliver on our promise to the policyholders. By doing so, we look to emerge from this period in a continued position of strength and leadership. I want to point out that the world has changed in many ways that surprise even the most cynical, but what it hasn't changed is the fact that the pandemic or no pandemic, people are facing the same illnesses, accidents, and health conditions every day, now with COVID added to that. This means that the need for our products is even greater now. And we are committed to being there for them in their time of need. I don't think it's coincidental that we've achieved success while focusing on doing the right things for policyholders, shareholders, employees, distribution channels, business partners, and communities. I am proud of what we've accomplished in terms of both our social purpose and financial results, which have ultimately translated into strong long-term shareholder return. Now, I'll turn the program over to Fred.

Thank you, Dan. I'll reflect briefly on 2021, but my comments will primarily focus on growth and efficiency initiatives in 2022. Beginning with Japan, COVID conditions continue to negatively impact our business. We expect sales to build from 2021 levels. However, there are currently 34 prefectures, soon to be 35, subject to COVID prevention measures that can restrict economic activity. There are no restrictions that directly impact the sale of insurance or our operations; however, consumers are naturally more reluctant to engage in face-to-face meetings with prevention measures in place. As we look to 2022, we're focusing on the following: first, strengthening our associates channel through increased policy solicitations at the worksite, marketing new products to existing policyholders, and building market share in non-exclusive agencies where we have historically been weaker. The associate channel responds to periodic medical and cancer product refreshment, but we believe these efforts will defend sales in this channel at 2021 levels, despite it being a year without a major product refresh. Following on Dan's comments regarding Japan Post, we have seen proposal activity to potential customers grow materially during 2021. We are a long way from recovering to the volumes enjoyed in 2018. However, as part of our organization-wide coordination with Japan Post Group and building on past initiatives, we ran a test pilot initiative during the fourth quarter that provided sales process management tools and practices to Japan Post in support of customer-centric engagement. This initiative was implemented by model post offices and led to increased written proposal activity and ultimately increased sales. Through our strategic alliance framework, the Japan Post companies have agreed to a nationwide campaign to roll out the best practices learned from our fourth quarter initiative. As the campaign will be linked with the transfer of 10,000 postal network sales employees to Japan Post Insurance this April, we are confident this will result in a meaningful recovery compared to 2021. In terms of product development, we ended 2021 with a little over ¥1 billion in sales of our new nursing care product. We are introducing targeted incentive programs and TV advertising that profiles the mental and financial burden of caring for an aging parent. Additionally, we plan to launch a new work leave or short-term disability product in March. The new short-term disability product targets small- and medium-sized businesses that tend to have less comprehensive coverage. We expect both products to combine for 5% to 10% of our sales in 2022. Turning to operations, we are focused on initiatives designed to stabilize our expense ratio in the face of declining revenue as sales recover and we continue to run off first sector interest-sensitive products. These initiatives include a transition away from paper-based processes to digital, IT modernization, and reimagining policyholder services, our largest operating platform within Aflac Japan. Turning to the U.S., COVID conditions are not expected to be the headwind faced in 2021. We can't control the risk of new variants, but we plan to return to near-normal operating conditions as we enter the second quarter while cautiously following CDC guidelines. We are seeing promising new business formation and associated momentum in sales. Having spent time with our agents and brokers in January, the overall energy among our distribution partners gives us confidence that results will certainly build from 2021 levels. Dan covered our core small business and group voluntary results. We are focused on continued recovery in our agent-driven small business franchise. Recruiting is critical, as is converting those recruits to average weekly producers. Recruiting was up 17% in 2021. However, this is on the back of a significant jump in small business broker appointments, which unlike agent recruiting, takes time to convert into producing new business. Our broker-sold group voluntary business performed at a higher level than pre-pandemic 2019. It's important to note that we are one of the few companies focused specifically on driving voluntary products through specialized VB brokers and in partnership with leading benefit administrators. In 2021, group sales through brokers, which focus on the mid- to large marketplace, accounted for one-third of Aflac's total U.S. sales. Turning to our building platforms, our network Dental and Vision line of business continues to develop. We now have over 7,000 agents trained, with 50% of 2021 quote activity occurring in the last four months of the year. Sales were $23 million in 2021, with an additional $15 million of voluntary products sold alongside, capturing what we refer to as the halo effect. Today, we have a network of 90,000 providers, of which 15,000 are proprietary and the remainder leased. We expect to double the size of our proprietary dental network in 2022. Controlling the quality and design of our network is critical as we seek to create a competitive advantage and move upmarket into broker-sold business. Our Premier Life and Disability business ended the year with $62 million in sales and has carved out a strong reputation for having a unique client care model, advanced lead management capabilities, and a building referral network as consultants and clients realize bigger is not necessarily better. Not included in these sales results, we officially launched our Connecticut paid family medical leave administrative platform and hope to see additional states consider outsourcing PFML administration. Our consumer markets business recorded sales of $39 million for 2021. The platform is in expansion mode with plans to add network dental, vision, and hearing along with senior market products in 2022. Later this quarter, we expect to roll out, through select brokers, our new Aflac Pet insurance powered by Trupanion. We are targeting the larger case market and believe our solution is superior to the competition and leverages both the powerful worksite brand and a recognized leader in pet insurance with a unique value proposition. Operations will continue to be a key area of execution with the goal of bending the expense ratio curve in the next few years. You can see from my comments, we are clearly in building mode along with platform modernization. Investments include stabilizing our small business enrollment tool, modernizing our dental and vision platform to handle increased volumes, and migrating off a legacy group voluntary platform armed with an expanded product portfolio. These are a few of the initiatives elevating our current expense ratio, but as discussed at our investor conference, we'll turn the corner in the next few years, moving from the higher end of our forecasted range to the lower end by 2024. Commenting on our investment operations, we completed our strategic asset allocation work in 2021 and are now executing that strategy. Together with corporate finance activities at the holding company, we are confident we have engineered a prudent approach to our U.S. dollar program in Japan. This program is constantly refined and optimized to drive yield, maintain diversification, lower hedge costs, reduce exposure to negative settlements, all while sheltering our investors' exposure to a weakening yen. While late in the game as compared to some in the industry, our disciplined approach to building an alternative portfolio resulted in strong variable investment income last year. We understand these portfolios are likely to see reduced gains compared to last year, but we are off to a strong start in generating the favorable returns expected from these portfolios. Lastly, I’m very pleased with our progress made on the ESG front in 2021. We are now a PRI signatory, we have returned to the Dow Jones Sustainability Index, and last week we were once again named to the Bloomberg Gender Equality Index. Great progress and more to come. I'll now hand off to Max to cover financial performance.

Thank you, Fred. For the fourth quarter, adjusted earnings per diluted share increased 19.6% to $1.28, with a $0.05 negative impact from FX. Full year adjusted earnings per diluted share of $5.94 was 19.8% higher than a year ago. This strong performance for the quarter and full year was largely driven by lower claims utilization due to pandemic conditions. Variable investment income rent $0.13 per share above our long-term return expectations for the quarter and $0.40 per share for the full year, a very good outcome for our growing private equity portfolio. Adjusted book value per share, including foreign currency translation gains and losses, grew 7.7% year-over-year. The adjusted ROE, excluding the foreign currency impact, was 13.6% in Q4 and 16.1% for the full year, a satisfactory result with significant spread to our cost of capital. Starting with our Japan segment, total net earned premiums for the quarter declined 4.3%, and for the full year, it was down 3.9%. Policy count in force declined 1.8%, which better reflects our overall growth in our business. Low new sales and a slight uptick in lapse rates were the main drivers for earned premium decline. Japan's total benefit ratio came in at 67.3% for the quarter, down 160 basis points year-over-year, and the third sector benefit ratio was 57%, also down 160 basis points year-over-year. For the full year, the benefit ratio was 67.2%, down 270 basis points year-over-year. We experienced a slightly greater than normal IBNR release in our third sector block as experience continues to come in favorable relative to initial reserving. This quarter, it was primarily due to pandemic conditions constraining utilization and a slightly higher lapse rate within our medical block. Adjusting for greater than normal IBNR releases and in-period experience, we estimate our normalized benefit ratio for Q4 to be 68%. Persistency remained strong with a rate of 94.3%, down 80 basis points year-over-year. Our expense ratio in Japan was 22.6%, down 40 basis points year-over-year. Good cost controls combined with higher-than-expected NII have helped our expense ratio despite the overall decline of policies in force and earned premium. For the full year, the expense ratio increased 30 basis points to 21.5%. Adjusted net investment income increased 16.8% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by a lower reinvestment yield on our fixed-rate portfolio. For the full year, adjusted NII was up 17.6%. The pretax margin for Japan in the quarter was 24.7%, up 380 basis points year-over-year, a good result for the quarter. For the full year, the pretax margin was 25.2%, supported by a very low benefit ratio and stronger-than-expected variable investment income. Turning to U.S. results, net earned premium was down 1.3% as lower sales during the pandemic continued to impact our earned premium. For the full year, earned premium declined 2.5%. Persistency improved 30 basis points to 79.6%, driven partially by emergency orders continuing in certain states. Our total benefit ratio came in lower than expected at 46.7% or 490 basis points lower than Q4 2020. Lower and deferred claims utilization impacts our IBNR held for incurred claims within a year, and as we get more data, our long-term models, increased reliance on source data both leading to IBNR releases. This quarter, the IBNR release amounted to a 1.5% net impact on the benefit ratio, which leads to an underlying benefit ratio, excluding IBNR releases of 48.2%. Our expense ratio in the U.S. was 43.8%, up 30 basis points year-over-year. Q4 seasonally experiences a higher expense ratio as business activity and enrollment picks up toward year-end. For the full year, the expense ratio was up 90 basis points to 39.5%. Our continued build-out of growth initiatives, group life and disability, network dental ambition, and direct-to-consumer contributed to a 120 basis points increase to the ratio. These strategic growth investments are largely offset by our efforts to lower core operating expenses as we strive towards being the low-cost producer in the voluntary benefits space. We also incurred $6.1 million of integration expenses associated with recent acquisitions, which are not included in adjusted earnings or the reported expense ratios. Adjusted net investment income in the U.S. was up 8.2% in the quarter and 7% for the full year, mainly driven by favorable variable investment income. The U.S. segment reported a pretax margin of 16.1% for the quarter and 22.8% for the full year, with a low benefit ratio as the core driver of improved results in both periods. In our corporate segment, we recorded a pretax loss of $155 million as adjusted net investment income was $109 million lower than last year due to low interest rates at the short end of the yield curve, lower amortized hedge income, and changing value of certain tax credit investments. These tax credit investments run through the NII line for U.S. GAAP purposes with an associated credit to the tax line. In the quarter, the impact to NII was a negative $104 million, and the offsetting credit to GAAP taxes was a favorable $80 million, leading to a net impact on our bottom line of a negative $23 million in the quarter. To date, these investments are performing well above our cost of capital and in line with expectations. Our capital position remains strong, and we ended the quarter with an SMR north of 950% in Japan and a combined RBC north of 600% for Aflac U.S. Unencumbered holding company liquidity stood at $4 billion, $1.6 billion above our minimum balance. Leverage remains at a comfortable 22.4% in the middle of our leverage corridor of 20% to 25%. In the quarter, we repurchased $625 million of our own stock and paid dividends of $217 million, offering good relative IRR on these capital deployments. For the full year, we repurchased $2.3 billion of our own stock and paid dividends of $888 million, returning a total of $3.2 billion to shareholders. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. Before closing, I'd like to reiterate the outlook given at FAB for our key value drivers for the time period 2022 and 2023. With that, I hand it over to David to begin Q&A.

Thank you, Max. We are now ready to take questions. But first, let me ask that you please limit yourself to one initial question and a related follow-up to allow other participants an opportunity to ask a question. And with that, Jason, if you will, open up the line to our first caller.

I wanted to start on network dental, vision, group life, and disability. I appreciate the color on sales. I guess how do those results compare to your expectations? And as we look to 2022, do you have a number in mind as to what portion of total U.S. sales would come from those platforms?

Nigel, this is Fred. Let me address this and then I’ll invite Teresa and Virgil to add their thoughts. Firstly, I am very pleased with our PLADs, which stands for Premier Life and Disability and Lead Management. Not only did we meet our sales expectations at the time of the acquisition, but we also exceeded them, particularly with the contract in Connecticut for leave management, which represents a significant revenue opportunity. We don’t count it in our traditional sales metrics because it’s not tied to a life and disability contract, but it is a substantial business that we did not anticipate when we acquired the property. We couldn’t be happier with that performance. Additionally, we successfully renewed all our contracts this year with an average price increase of 4%, which is excellent news. Our PLADs team focused closely on service quality and metrics leading into the renewal period, and this attention really paid off. The earned premium, which is just as crucial as sales, is performing on par with or better than our expectations. So, both sales and retention are strong. As we dig deeper into this property, having integrated it over the past year, the outlook continues to improve; it’s an outstanding platform, and we are very satisfied. Regarding our Dental and Vision offering, we acquired a TPA but needed to develop the actual dental and vision products and networks from the ground up. We've been in a development phase for that business. Sales in 2021 were below our initial expectations but that wasn’t due to poor performance; it was a strategic choice to launch the business carefully and there were timing issues related to integrating these products into our enrollment tool. For Dental and Vision, we are starting in the small business segment, aiming at companies with 100 employees or fewer, which requires state approvals that we obtained throughout the year. The rollout has also required considerable time and resources to integrate into our enrollment platform. The conditions created by COVID impacted the small business sector, which in turn affected our distribution model through agents. We had planned for a small business agent-driven approach, which we did not foresee being affected by COVID. Consequently, our performance fell short of our initial forecasts. Nonetheless, I am very pleased with the results. One standout area is the halo effect I previously mentioned. We sold $23 million in network dental and vision and an additional $15 million in associated voluntary products, exceeding our halo expectations. While we anticipated a halo effect around 30%, reaching over 50%, and possibly up to 70%, has greatly surpassed our expectations. I don’t expect this level to persist, especially as we move into larger markets, but it’s still a positive outcome. Overall, I would describe the performance as very good. Looking ahead to next year, our sales from these offerings have gradually been increasing and are expected to reach about 10% to 15% of total sales in 2022. This range is a good estimate, and while we don’t want this percentage to be too high, we do anticipate significant growth in our other business areas as well.

Brett, you actually covered most of what we would address. So, I do agree that in 2022, we will see about 13% to 15% of our buy to bill as a percentage of U.S. sales. We are actually expecting that by 2025, about 20% of U.S. sales will be from the buy-to-bill property.

That is great. And just as a follow-up, I want to stay on the U.S. career agency recruiting. Broker recruits were up meaningfully. Creating was under pressure. Is that a reflection of the labor markets, and should we be thinking about that as a headwind for 2022, or are there other initiatives to try to accelerate that from here?

Virgil, you take that, but let me just make sure I'm very clear on something that I just listened to Teresa. I want to ensure that it's clear. Nigel, when you asked the question, you asked specifically about our life and disability business and our dental and vision. When we say 13% to 15%, we consider our buy-to-build properties to be those two properties plus the building of our direct-to-consumer platform. So just note that we consider those three businesses when we quote you 13% to 15%, just to clarify. Sorry, Virgil, why don't you or Teresa take the recruiting question?

Okay. Well, thank you for the question, Nigel. Actually, we're very pleased with where we're sitting with recruitment. I think you noticed, as you indicated in your question, that we achieved about 17.5% growth but we changed our focus. If you think about it, there were some headwinds with the labor market. So, instead of just relying on new recruits, which we were able to recruit over 10,000, we pivoted our model to focus on small brokers. We activated over 5,000, and we're starting to see them perform going into the second half of last year. So we're very pleased, as you can see, contributing to our overall increase in productivity. As I look into 2022, I expect to see more of the same. It's going to be a combination of new recruits, but we will continue our focus on that small broker space as well.

So, a question just on sales in Japan. And obviously, it seems like sales have bottomed and they recovered a little bit, but still depressed versus historical levels. Is it possible that in the early part of 2022, you actually take a step back given some of the restrictions that the government imposed in Japan and you don't see the ongoing improvement that we've seen recently?

Okay. This is Yoshizumi of Japan. Thank you for the question. So, it is true that the quality emergency measures for 34 prefectures, and today, I think it will be 35 prefectures. So, it is true that there is some impact on our sales. However, as we promoted online and virtual sales last year actively, we are also enhancing these virtual sales, which began this year. This virtual sales plus the physical sales have been established as hybrid sales, and we will continue to promote this method.

Yes. I think one thing I would add is... and this is Fred. Again, to remind you, there are various grades, if you will, of severity that the government will impose, led by prefecture, the most severe being the state of emergency. When we talk about 35 prefectures being under prevention measures, that is one step below the state of emergency level. It's important to note that the government of Japan is trying to balance containing the virus while minimizing the effect on economic activity, and they're attempting to handle that balancing act. So even state of emergencies have been less restrictive than in the early days of COVID. These cautionary practices and the prefectures in themselves don't restrict our activity and our ability to sell and meet with potential clients. The difficult aspect to measure is if you are a citizen of Japan, and you reside in a prefecture with prevention measures in place, do you feel less comfortable meeting face-to-face and conducting business normally? That is very challenging to quantify, but we see it reflected in our results. There is, without a doubt, a bit of a headwind as we head into 2022, but it's certainly not as severe as a state of emergency, and definitely not as restrictive as the early days of COVID.

Okay. And then just on Japan as well, can you just talk about what's going on with the Post? And what's your expectation of longer-term expansion of that relationship beyond cancer?

I'll let the Japan team fill in some of the blanks and discuss. But as I mentioned in my comments, first of all, there is no specific plan to expand products. However, we consider our cancer business within Japan Post to be a line of business. So, for example, when we upgrade cancer products or add riders or features to cancer products, we do that within the Japan Post system. As you may know from our comments at the investor conference, what we're really excited about is that we are starting to introduce concierge non-insurance services to support our cancer business. This involves a cancer policyholder being able to call into a concierge line and access non-insurance services that support their needs, whether they are going on claim or for prevention or detection needs, care needs, or even oncologist recommendations. All of that product capability will be available to Japan Post policyholders and will help with retention and growth. Thus, while there are no new product lines, the cancer line continues to expand and develop within the Japan Post system. I'll let my colleagues in Japan speak about the momentum from our fourth-quarter pilot exercise and upcoming 2022 projections.

This is Yoshizumi once again. Specifically, what we refer to as the pilot is to take examples of branches and sales offices that are performing well and not performing well. Particularly those that are doing well are taken as models for all the other new offices and outlets. Therefore, we normally reflect the successful sales office practices to other sales offices. The three particular initiatives we are planning to implement are to provide guidance to those sales professionals, conduct training, and enhance proposal capabilities. By going through the PDCA cycle, we will improve each of these initiatives. Since we have seen success from our fourth-quarter pilot, we will aim to promote our sales in 2022 by utilizing similar measures.

Yes, and I might add just to provide you with numbers because I know there's a question about what we mean by improved. Just to give you an idea when we looked at those model offices, we found significant increases in our results from our test pilot program in the fourth quarter. From the third quarter to the fourth quarter, we observed over a 50% increase in the number of proposals made and the resulting sales. So it was clearly successful. The executive teams and sales teams are now sitting down and analyzing those results and considering more of a national spread of that platform. It's been an exciting and encouraging development for us heading into 2022.

My question seems to be about claims normalization. Each new quarter, there seems to be an expectation for claims normalization to occur over the future quarter that hasn't happened over the last 1.5 years. Could you talk about how claims utilization has trended, especially in the U.S., but also in Japan, as the Omicron variant has emerged and with COVID fatigue setting in?

Thank you, John, and thank you for highlighting that my prediction about claims utilization has been off for the last year. In 2021, we observed a gradual increase in claims utilization each quarter, with exceptionally low claims utilization in the first quarter, followed by a slight increase throughout the second quarter. Then, we began to see normalization in the third and fourth quarters as well. We're not fully back to normal. However, when I analyze paid claims data for the fourth quarter, I see that November's figures were higher than those of October, and December’s figures were higher than November's. So we are nearing a more standard claims utilization as we start 2022. COVID-19's correlation between infection rates and claims utilization appears weakened, as people are living more normal lives. Mobility is returning to normal levels, which translates into more accidents and individuals seeking physical checkups, contributing to a more typical claims pattern among our policyholder base in the U.S. Therefore, I believe we are close to normal claims utilization for 2022. We anticipate that our benefit ratio in the U.S. will fall within the normal range. For Japan, we have a somewhat similar pattern but it lags behind the U.S. The reactions and changes are not as rapid in Japan. The claims utilization pattern in Japan is much flatter and prolonged. We are trending slightly below but not significantly under what we would categorize as normal claims utilization.

That does help. And then my follow-up is regarding pet insurance for 2022. How significant a contributor do you think that will be?

A couple of observations regarding the pet insurance product. As I previously mentioned, later this quarter, we plan to launch it and are taking a very targeted approach. We will launch what we characterize internally as our premier broker platform. These are some of the largest brokers in the country, typically dealing with larger companies - think companies with around 1,000 employees or more. That's where there’s considerable demand for pet insurance. We anticipate high interest in the product. We must keep in mind that we won’t record earned premiums or sales from this product directly. That earned premium and sales will be booked by Trupanion. Our strategy for creating an Aflac-branded product powered by Trupanion checks many boxes. It fulfills the desire for a pet insurance product many brokers and their clients are interested in and opens unique conversations in finalist presentations about overall voluntary benefits. Therefore, it truly enhances our broader voluntary product discussions. We have no fixed sales expectations for it, other than to introduce it gradually, getting it right is essential. When debuting a new product with premier brokers, we have one chance to make a great first impression. It's critical to start strong; if it doesn't launch well, it could lead to issues in that broker community. However, we believe we have built a unique value proposition that distinguishes our product. We think it goes beyond being simply a pet insurance product. Our veterinary-driven type of offering sets us apart as a unique differentiator. We've included benefits where employees can purchase a rider that compensates for out-of-pocket costs if they need to take time off for their sick pet. We truly believe we've developed a unique value proposition that should stand out.

My first question is regarding the Japan Post employee transfer of 10,000 to Japan Post Insurance. How should we think about the required time for them to ramp up? And how should we consider the potential impact on the sales outlook?

This is Koide of Aflac Japan. As you mentioned, there will be 10,000 salespeople moving from Japan Post Company to Japan Post Insurance in April, and this is well-planned. What is very important is that after these people are transferred to Japan Post Insurance, they will only be selling Japan Post insurance products and Aflac cancer products. While their transfer is planned for April and preparations are going well, we may not witness significant impact immediately. However, once they adapt, we anticipate a gradual increase in the sales momentum. We expect that after this transfer takes place, particularly in the second half of the year, we will observe more momentum in sales. I would like to add that these 10,000 salespeople currently working for Japan Post Company are already familiar with selling our cancer insurance, therefore, they possess the experience and knowledge necessary.

That's helpful. Just staying on Japan. You talked about some countermeasures for COVID not being really restrictive. One of the larger questions would be how consumers will react given the current environment. I think I read that lawmakers are looking at potentially more restrictive countermeasures for COVID and also that consumer confidence has dropped in Japan. I wanted to ask if you could elaborate a little more. If more restrictive measures are put in place and consumer confidence continues to drop, should we expect to see a more subdued sales outlook for 2022?

This is Dan. I want to make a couple of comments. First, it hasn't been stated yet, but around 90% of the population in Japan is fully vaccinated. Therefore, while we face new variants, the death rate is significantly lower than before, leading to improvements. However, we do not have specific answers at this time; I'll let them respond in terms of what the government will necessitate. I believe the death rates and concerns are trending downward as the population becomes vaccinated compared to the United States, where there is variation among states. There was also a recent report from Johns Hopkins indicating that the measures being implemented to control transmission of the variant have not been particularly effective. I believe we can expect more movement towards normalcy. We, as a corporation, in both Japan and the United States, are gradually moving forward. For example, we organized a meeting for 1,000 of our salespeople, testing all participants before attendance. Although some chose not to attend, over 800 showed up, and only about 15 cases of COVID were reported, which is a relatively low number for a random group of 1,000. I perceive things returning to normal in Japan. We should also note that over 50% of employees are now back in the office, which shows a positive trend. In summary, I believe things are moving towards normalcy.

This is Koide once again. It is true that even in Japan, the number of new infections is on the rise. However, as Fred mentioned earlier, the current infection control measures are significantly milder than during the previous state of emergency the government enforced. The Japanese government aims to strike a balance between infection control and promoting economic activity. Therefore, they are especially cautious about issuing severe measures and lockdowns similar to those from the past. So, there are no plans for stringent restrictions at this time.

Yes, one point to also consider is that there's caution about the relationship between economic activity in Japan and demand for our products. What we are discussing now pertains more to the practical implications of face-to-face engagement and the consequent higher close rates. Despite the pandemic, we believe there is a natural level of elevated awareness for supplemental medical, disability, elderly care, and cancer products. Therefore, the constraints relate more to execution than to demand and economic fundamentals in my perspective.

Thank you, Humphrey. Jason, I believe that was our last call. We've gone past the top of the hour. For anyone who has follow-up questions, I'm pleased to ask you to contact Investor and Rating Agency Relations. We're happy to assist. Thank you all for your time today, and we look forward to speaking with you soon.