Aflac Inc (AFL) — Q2 2022 Earnings Call Transcript

Thank you, Andrea. This morning, we will be hearing remarks about the quarter related to our operations in Japan and the United States from Dan Amos, Chairman and CEO of Aflac Incorporated. Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives. Yesterday, after the close, we posted our earnings release and financial supplement to investors.aflac.com along with a video with Max Broden, Executive Vice President and CFO of Aflac Incorporated, providing an update on our quarterly financial results and current capital and liquidity. Max will also be joining us for the Q&A segment of the call along with other members of our U.S. executive management: Teresa White, President of Aflac U.S.; Virgil Miller, Deputy President of Aflac U.S.; 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; Koichiro Yoshizumi, Director, Deputy President and Director of Sales and Marketing. Before we begin, some statements in the 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 can materially impact our results. As I mentioned earlier, the earnings release is available on investors.aflac.com and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan. Dan?

Good morning, and thank you for joining us. As I reflect on the second quarter of 2022, our management team, employees and sales force have continued to adapt tirelessly to be there for the policyholders when they need us the most, just as we promised. Aflac Incorporated reported solid results for the second quarter with net earnings per diluted share of $2.16 and $3.73 year-to-date. Adjusted earnings per diluted share were solid at $1.46 in the second quarter and $2.88 for the first six months, supported in part by the continuation of the low benefit ratio associated with the pandemic conditions. Also contributing was a better-than-expected investment income, including returns from alternative investments. We remain cautiously optimistic as our efforts focus on growth and efficiency initiatives amid this evolving pandemic backdrop. Looking at our operation in Japan in the second quarter, Aflac Japan generated strong overall financial results with a profit margin of 27.4%. This was again above the outlook range we provided at the November 2021 financial analyst briefing. Persistency remains strong. However, sales continued to be somewhat constrained as the pandemic conditions impacted our ability to meet face-to-face with customers. Also contributing to the quarterly results was the 2021 comparison following the launch of our new medical product. Regarding the Japan Post strategic alliance, as part of our ongoing collaboration and governance framework, I traveled to Japan towards the end of June to meet with Japan Post Holdings' CEO, Mr. Masuda, along with the presidents of Japan Post Postal and Insurance Companies. We had an understanding and productive visit discussing our plans. This included a renewed commitment from executive management to drive sales with a focus on distribution, growth and marketing of cancer insurance. Aflac Japan has continued to offer sales support to Japan Post, especially after the new fiscal year began in April of 2022 and following Japan Post's sales structure transformation. This support includes further aligning our sales offices with Japan Post regional offices to strengthen support and to share our best practices. As you may recall, under the new structure, sales employees focus solely on selling Japan Post insurance products and Aflac Japan's cancer insurance product. We have made gradual progress towards providing cancer insurance protection to more consumers, demonstrated by the increased proposal activity and sequential monthly sales growth during the second quarter. There is more progress to be made, and we continue to work to strengthen the strategic alliance to create a sustained cycle of growth for both companies. We believe that sales through Japan Post Group will improve in the second half of the year as sales employees gain more experience and momentum. As we look forward to 2023, we will introduce our new cancer insurance product through Japan Post likely in the second quarter. This will allow both entities to invest in a more complex, coordinated effort required by the distribution system of this size. We plan to launch our revised cancer product and agencies in the second half of 2022, and we continue to expect stronger overall sales in the second quarter of the year. This assumes that pandemic conditions do not escalate and that sales productivity continues to improve at Japan Post Group and that we execute on our product introductions and refreshment plans. Turning to the U.S., we saw a solid profit margin of 21.4%. I'm pleased with the U.S. sales momentum which has continued with a 15.6% sales increase in the second quarter. This reflects continued adaptation to the pandemic conditions, growth in the core products and our investment and build-out of growth initiatives. While Aflac network dental and vision and group premier life, asset management and disability solutions, which we call PLADS, are a relatively small part of our sales, we are pleased with how they are contributing to our growth. Our growth initiatives modestly impacted the top line in the short term, but also tend to be accompanied by the sale of our core supplemental health products. In combination with our core products, they also better position Aflac U.S. for future long-term success. The need for our products is as strong or stronger than ever before. At the same time, we know consumers' habits and buying preferences have been evolving. We remain focused on being able to sell and service customers whether in person or virtually. This is part of the ongoing strategy to increase access, penetration and retention. Turning to capital deployment, we placed significant importance on continuing to achieve strong capital ratios in the U.S. and Japan on behalf of our policyholders and shareholders. We continue to generate strong investment results while remaining in a defensive position as we monitor evolving economic conditions. In addition, we've taken proactive steps in recent years to defend cash flow and deployable capital against a weakening yen. When it comes to capital deployment, we pursue value creation through a balance of actions, including growth investments, stable dividend growth and disciplined and tactical stock repurchase. It goes without saying that we treasure our 39-year track record of dividend growth, and we remain committed to extending it, supported by the strength of capital and cash flows. In 2022, we remained in the market repurchasing shares with a tactical approach. In the second quarter, Aflac Incorporated deployed $650 million in capital to repurchase 11.2 million of its common shares, bringing the six-month total to $1.15 billion in purchases and 19.2 million of the shares. With this approach, we look to emerge from this period in a continued position of strength and leadership. Keep in mind, in addition, we have among the highest return on capital and the lowest cost of capital in the industry. We've also focused on integrating the growth investments that we've made. We are well positioned as we work towards achieving long-term growth while also ensuring we deliver on our promise to the policyholders. I don't think it's a coincidence that we have achieved success while focusing on doing the right things for the policyholders, shareholders, employees, sales distribution, business partners and communities. I'm 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. We also believe that the underlying strength of our business and our potential for continued growth in Japan and the United States, the two largest life insurance markets in the world. Thank you again for joining us this morning. And now I'm going to turn it over to Fred. Fred?

Thank you, Dan. Before commenting on our results, let me start with some perspective on how we're positioned when considering current U.S. economic conditions. We have not witnessed this level of inflation in the U.S. in many years, and we are closely monitoring conditions. Wage inflation and full employment are generally supportive of growth in worksite benefits. However, when considering voluntary products, there is a question as to how much of any increased income is available for supplemental products as real wages are likely neutral to down. Our benefits are defined at the time of purchase and do not adjust for health care inflation. Therefore, we do not expect any measurable impact on claims. In terms of recruiting and retaining agents, it can be more of a challenge as agents are commission-only and need to keep pace with any increase in costs. When looking at enterprise margins, the impact of inflation does apply upward pressure on expenses. However, this is mitigated by rising rates and additional investment income, having built a significant floating rate loan portfolio. In terms of the risk of economic slowdown and recession, our business model is generally defensive in nature with low asset leverage and exposure to risk assets. Profits and cash flow are driven largely by morbidity margins that tend to remain stable during periods of economic volatility. While employment levels may decrease, we often benefit on the recruiting side during an economic slowdown versus today's tight labor markets. Max spoke in his recorded comments about the work we have done to defend our cash flow from weakness in the yen. We have built a sizable unhedged U.S. dollar portfolio in Japan, shifted most of our senior debt to yen for both hedging and cost of capital purposes and maintained a flexible hedging position at the holding company. It's important to understand what makes all this possible: significant economic value, strong capital ratios and predictable cash flow out of Japan. Overall, in recognizing the balance we have in operating in the U.S. and Japan, we like how we are positioned to defend our performance under today's U.S. inflationary conditions and the potential for economic slowdown. We see no interruption in our core margins and return of capital to shareholders, including the dividend pattern and share repurchase. Turning back to our businesses and beginning with Japan, COVID cases have surged again with daily new cases reaching 200,000, up significantly from already elevated levels earlier in July and considerably higher than levels experienced in the second quarter. However, hospitalization and deaths remain low. Based on commentary from the Japanese government, there do not appear to be plans to introduce a nationwide state of emergency, which are typically triggered by both increasing cases and declining hospital capacity. We continue to experience elevated COVID-incurred claims, driven by its designation as an infectious disease which allows for payment of claims for care outside the hospital. We would expect the recent surge in COVID cases to apply pressure to near-term benefit ratios. While not guaranteed, this may be partially offset by other drivers of hospitalization and care, which have remained low during periods of higher COVID. Our data suggests this is driven by increased and less expensive outpatient treatments as policyholders and their doctors seek to avoid going to the hospital with COVID cases on the rise. With respect to COVID's classification under the Infectious Disease law, as of August 1, a special committee of the Ministry of Health, Labor and Welfare started reviewing COVID's classification under the law. Revision of the classification requires amending the law, which is expected to be discussed at the extraordinary Diet session beginning in September at the earliest. Having just spent a few weeks in Japan, the general population remains cautious with respect to the potential for COVID infection. With widespread infection, this is not simply a matter of customer behavior and face-to-face interaction but also agents who are sidelined temporarily with COVID. As a result, we typically experience reduced proposal volumes during periods of elevated cases, an early indication of potential sales weakness. While COVID conditions remain outside our control, our work continues to position Japan for sales recovery in the second half of the year and as we move into 2023. These actions include items that Dan referenced in his comments, such as accelerating the launch of our new cancer product, direct marketing campaigns more closely tied to targeted TV advertising and adjusting our distribution model for better alignment with our third-party partners. We continue to review our broader product portfolio, both first and third sector, for enhancements designed to increase the value proposition for our policyholders, offer a broad product lineup for our core distribution partners and secure our competitive position in the market. We have been making investments in technology and in working with our distribution partners to reduce launch costs associated with product refreshment and development. It's becoming clear that both the competitive environment and our broader product line create a product refreshment cycle that is more continuous in nature. Separately, our incubated businesses continue to develop. We are seeing favorable results piloting Hatch Healthcare, our provider of noninsurance support, to develop the ecosystem for both cancer and nursing care policyholders and expect to expand availability in early 2023. Our short-term insurance subsidiary, Sidachi, was launched in early 2021 and currently offers 2 products: a substandard medical product and a disability product aimed at the contingent or freelance workforce in Japan. Sidachi serves two strategic purposes: to grow and develop these specialized markets, and second, as a proof-of-concept platform for product innovation that may become more broadly popular in the future. We can't control COVID conditions but we are not standing still. We will develop these themes in more detail at our financial analyst briefing in November. Turning to the U.S., and as you are aware, COVID conditions are also elevated. This is not currently causing any issue in terms of either our operations or distribution in the U.S. We saw persistency recover to more normal levels when isolating results in the quarter and accounting for seasonality. Account persistency has remained stable throughout the year. So we believe this is driven by an increase in employee turnover with tight labor markets. There are moving parts when looking year-over-year, including the retirement of state mandates that served to reduce lapsation. As Dan noted in his comments, we continue to deliver a balanced performance. We see recovery in the small business market with growth in veteran average weekly producers while also continuing to strengthen relationships with our broker partners. For example, split by product type, group voluntary was up 16%; individual benefits, up 11%; split by channel, agent sales were up 11% and broker up 22%. The combination of network dental and vision and premier life and disability were ahead of our plan as we continue to see strong performance with our buy-to-build properties. We were up 175%, albeit off a smaller but building base. Direct-to-consumer is down 7% and largely the result of the increase in costs associated with organically generating, purchasing and converting leads and meeting our return expectations. In terms of the U.S. expense ratio, it's important to identify the impact of our build investments. We have three important business initiatives underway that are essential to the future growth of the company. These investments include group life, disability and asset management, network dental and vision and having a digital direct-to-consumer platform to reach consumers that are outside the traditional workforce. In the quarter, investment in these efforts impacted our expense ratio by 280 basis points, and we would expect this pace of investment to continue for the rest of 2022 and into 2023. Our 2021 outlook for a 3% to 5% compound annual growth rate in revenue through 2026 is largely driven by these three growth platforms and related halo impact of cross-sell and retention of core voluntary products. In the next three years, we expect a natural swing in these platforms from contributing to an elevated expense ratio to being the principal driver of returning to more normalized levels. In the interim, we are navigating investment in future growth, advancements in our digital platform while maintaining strong profitability.

Turning to Global Investments. With the rise in short-term interest rates driven by the Federal Reserve as they combat inflation, together with deployment activity, net investment income generated from our $12 billion floating rate portfolio is currently estimated to increase approximately $160 million for the year as compared to our original plan. As mentioned last quarter, we have locked in the favorable LIBOR curve on a large portion of our portfolio and expect continued tailwinds to floating rate income going into 2023. Along with being an attractive asset class and strategic to our U.S. dollar program in Japan, our floating rate book acts as a logical hedge against inflationary cost pressure. We maintain a book of foreign exchange hedge instruments on our U.S. dollar portfolio in Japan that is also impacted by inflation as the cost of these forward contracts are generally aligned with short-term rates in the U.S. However, we have locked in those costs for 2022 and have offsetting hedge instruments at the holding company that serve to neutralize the impact to the enterprise. Our alternatives portfolio continues to deliver strong results. We fully expect lower valuations of these portfolios in the second half of the year as private equity marks track public equity valuations, likely resulting in giving back much of their 2022 gains. There is a well-understood lag in reporting numbers on private equity, and this is a natural expectation given private equity's correlation to the public equity returns. Naturally, we are closely monitoring economic conditions and the chance of recession. We maintain a defensive position to risk assets in terms of private and real estate equity; our investment thesis and risk appetite remain the same. We are willing to accept some equity market volatility to earn 10-plus percent over the long term, adding to net investment income on a risk-adjusted basis. We maintain a conservative allocation of under 3% of our invested assets with marginal growth expected over the next five years. We closely monitor our middle market and transitional real estate portfolios where recessionary impacts could be felt sooner. We expect these portfolios to perform well given their senior, secured, first lien structure, protective covenants, reasonable leverage and private equity sponsorship for middle-market loans as well as a high degree of diversification. The portfolio has performed well during the stressful period of COVID, and we expect they will continue to.

Thank you, Fred. We are now ready to take your questions. Andrea will take the first question.

I would like to discuss the losses in the U.S. Last quarter was somewhat concerning, but this quarter seems to have returned to normal levels. Could you elaborate on what contributed to that? Was it solely due to macroeconomic conditions? I understand you're considering various initiatives to improve the situation. Did those play a role as well? Looking ahead, do you anticipate that rising inflation will affect activity?

Nigel, it's Fred. Let me discuss lapse rates. We report our lapse rates on a trailing 12-month basis, which is why you might see pressure in our year-over-year lapse ratios. We've examined our quarterly lapse rates with seasonal adjustments when commenting on a recovery in these rates. In the second quarter, our lapse rate was approximately 79%, which aligns closely with the pre-COVID levels we typically see during this period. Historically, we maintained around that 79% rate, which had risen to about 81% over the past couple of years due to state mandates requiring policies to be kept in force. As those mandates have now mostly expired, we've returned to normal persistency levels. In the first quarter, we were concerned because our persistency was around 74.5%, which was about 200 basis points lower than anticipated. We typically expect lower persistency in the first quarter due to the annual enrollment process, but this quarter was particularly low. We're relieved to see it return to expected seasonal levels in the second quarter, and we will continue to monitor this trend. Regarding inflation, we do not currently observe it affecting lapse rates. We haven't seen evidence of this connection, but given the unusual inflation period we are experiencing, we are cautious as we lack historical data on inflation at these levels. So far, there are no acute implications from inflation, but we will keep an eye on it. We notice some opposing dynamics related to inflation and do not expect it to impact overall U.S. financial performance.

So I had a question on sales trends in the U.S. and in Japan, and if you could talk about how sales trended through the quarter. And specifically on Japan, it seems like your comments are pretty positive on an expected improvement in sales. Are you seeing that? Or are you just hopeful that things will get better? And then just relatedly, any impact that you're seeing on your production activities in Japan because of the recent increase in COVID cases?

Let me let ask Yoshizumi to answer that.

This is Yoshizumi. Let me answer your question. For the second quarter of 2022, so a downturn continuing from the first quarter, as sales of the new medical insurance product had run its course after its release in January last year. Additionally, COVID-19 continued to have a negative impact on sales activities as the number of new cases increased 8.2 times compared to the same period last year, although intensive infection prevention measures have been lifted. While COVID-19 infections have been rapidly increasing since the start of July, Japan is experiencing its seventh wave and uncertainty remains. While having said that, from the third quarter, we are hopeful that sales will exceed last year's results, building on the new cancer insurance product launch and the gradual recovery of Japan Post Group sales. That's all for me.

I'll ask Virgil to respond to the U.S. sales question.

Thank you, Teresa. As Fred and Dan shared earlier, we did see a 15.6% increase in sales. Very pleased with the second quarter performance. I think Fred said it well, though. It's a combination of what we're seeing from our distribution channels. If you think about the small market, which was disrupted quite heavily at the beginning from COVID, we've seen a solid recovery. It's really driven by our veterans returning to producing. We saw another increase in our veteran average week of producers, and we saw an increase in productivity from our veterans. And then when you look at the large case space, it was less disrupted by COVID. We continue to see great performance from our broker partners in that space. We saw a 24% quarter-over-quarter increase in production from our brokers. So when you look at it, how we're going to the market with our brokers, large case space with our brokers and continue to see recovery in the small market with our veterans, overall, we're pleased with that quarter.

I’d like to discuss the benefit ratios in Japan. When considering the 190 basis points related to unfavorable COVID claims, the normalized benefit ratio is significantly higher. Could you provide clarity on the over 400 basis point difference linked to the IBNR releases? I'm having trouble understanding this since I know you've experienced favorable IBNR over time. Can you help us break this down, particularly regarding the outpatient treatments tied to COVID? Any insight into how we should assess these figures on a run rate basis would be appreciated.

Thank you, Alex. If you consider the reported benefit ratio of 67.4% and adjust for the various special factors from the quarter, you arrive at 69.8%. I believe it’s reasonable to add back the more permanent reserve releases we've seen due to favorable hospitalization trends, which totaled about 170 basis points for the quarter. This aligns with historical trends in our results. Adjusting for that, to reflect the ongoing reserve releases typically seen each quarter, gives us an adjusted underlying benefit ratio of 68.1% for the quarter. Looking ahead, these reserve releases have been consistently high lately, and while we may not maintain the 170 basis points level, we do expect some continuation of that trend going forward.

Got it. That was really helpful. Next one I had is just on inflation and the expenses. I heard some of the comments that could put upward pressure on expenses. I mean, is that material enough for us to think about maybe a different range for expense ratios? I know things are a little more focused on the back half or expenses as well. So I was just wondering if there's any update to sort of the expense ratio guide that you guys have out there.

I think essentially, where we face inflation is in just a couple of areas. One, predominantly is simply wage inflation, so your overall headcount and what we're all experiencing and seeing in the market with wage inflation and salary inflation. And we've got to do that. We've got to fall in line to retain and keep our talent, and we'll do so. Having said that, for a company our size, our employment levels are quite manageable. I mean, we're a very large U.S. and Japan company, but we have 5,300 employees in the U.S. and approximately 7,000 in Japan. And so we don't have the type of business model that is overly concentrated from that perspective. And so therefore, the wage inflation numbers, while they do apply pressure, they're more manageable. There's also certain contracts that we have, and quite frankly, the industry has that will have inflation riders. And so certain IT and servicing contracts often have inflationary provisions that kick into place when inflation gets out of control. That can also calm back down as inflation gets back into control. Overall, what I would tell you is inflation in and of itself is not causing us to rethink our guidance on expense ratios. The bigger moves on expense ratios are what I noted in the fact that we're heavily investing in growth platforms. We're very pleased to see that the growth is coming through in those platforms, as I mentioned in my comments. But that's really going to weigh on expense ratios in the U.S. more than inflationary pressure issues.

And just to add one reminder. Obviously, the expense ratio, it's a ratio. And you have net investment income coming into play here as well, and it helps boost the top line, and therefore, gives you some relief on the expense ratio when you think about the inflationary pressures. And the last piece is that, yes, we do obviously acknowledge that it is putting upward pressure on expenses in dollar terms as well, and we are taking active actions in order to combat that as well.

I would like to remind you that 1.5 years ago, we implemented a voluntary retirement program in the U.S., and approximately 10% of our workforce chose to retire. This has been a priority for us.

I was hoping you can provide a little bit more detail on the NII outlook. I think Fred mentioned $160 million of higher expected NII in 2022 than the original plan. Just wanted to confirm, is this gross or net of hedge costs? And then how should we think about the impact moving into 2023 when, I guess, floating rate NII should continue to build but hedge costs will also reset and probably move higher?

Fred, would you like me to take that?

Yes, please, Eric.

The figures that Fred mentioned exclude currency hedge costs but include interest rate hedging, as we have implemented some hedges concerning the floating rate book. I want to clarify this distinction. Additionally, for this year, our FX hedge costs are largely secured, with about 95% to 98% already locked in. Looking ahead to next year, the cost of hedging is set to increase significantly, and we currently have around $4.1 billion in forwards on the Japan dollar program, meaning hedging costs will rise. However, we have a back-to-back program at the holding company to help maintain relatively stable net FX hedge costs for the enterprise. We also hold some FX options for additional protection on the unhedged portion of the dollar program in Japan, and we expect these option costs to rise as well. Regarding next year's forecast for floating rate income, as Fred noted, we anticipate positive trends. The forward curve for LIBOR continues to trend upward, and we're monitoring the Fed's actions. If they remain steady, we expect to see continued benefits in floating rate income next year. However, the Fed's decisions will depend on inflation dynamics, and their latest meeting signaled a more dovish outlook. Earlier this year, in response to the Fed's aggressive rate hikes and rising LIBOR, we placed interest rate hedges on our floating rate book. This decision was guided by our financial planning, which indicated a substantial increase in floating rate income based on forward curves. While there are no guarantees regarding future LIBOR levels, the purpose of our interest rate hedge was to secure a portion of that expected income and provide greater certainty. This strategy affords us protection in the event of an economic downturn and potential rate cuts by the Fed, while still leaving room for some upside if rates continue to rise. This paints a comprehensive picture of our future outlook and specific details about hedge costs.

That's helpful. Just to confirm, should we expect most of the increase in net interest income from higher floating rate yields to benefit the overall enterprise, noting that the impact may be less noticeable in the Japan segment and more significant in corporate?

That's correct. Basically, you would see as the locked-in hedge costs roll off and we go into a new level of hedge costs in Japan, you would see those hedge costs increase. But then that same increase would be offset by increased hedge income at the corporate level so that there'd be no effective impact to the enterprise. And then also keep in mind what Eric said, that of the $12 billion in floating rate portfolio, our hedge instruments are around $4 billion notional. And so we still have an ability to enjoy outside net investment income despite the rise in hedge costs.

Just a follow-up on Eric's question. So if we're getting $160 million of higher NII from the floaters, does that influence your thinking around expense initiatives, maybe an opportunity to accelerate that in order to generate maybe faster growth going forward?

There are two different topics to address. If you're asking whether we would speed up our initiatives and increase our level of investment in light of the additional net investment income, we are not modifying our plans based on NII fluctuations. Our investment strategies are primarily focused on core growth in earned premiums, active policies, sales, and overall efficiency improvements. Therefore, these plans will not be affected. Additionally, as Dan noted, we are actively working on reforming our long-term expense structure in both Japan and the U.S., with multiple initiatives in place aimed at enhancing productivity and efficiency. While these initiatives will require some short-term investments, we have strategies to manage our expense dynamics and counter any inflationary pressures moving forward. However, these considerations are not influenced by changes in NII.

Okay. Got it. And then just shifting to Japan. I was hoping to get a little bit more color on this COVID as an infectious disease policy that the government has. Maybe what are your expectations for the, I guess, early September conversation around this that the government will have? And I believe that your products have certain caps in terms of the number of days where benefits can be drawn. Is there any risk to potentially that changing in the future?

I think perhaps Koide-san can address that. We can add our color here in the U.S. But Koide-san, maybe address your views of the Diet conversation in September.

Yes. This is Aflac Japan, Koide. So as Fred mentioned earlier, the discussion and deliberation related to COVID-19 infection disease law discussion is really gaining momentum. And in light of the situation, experts from the government subcommittee on countermeasures against infectious disease and the National Governors Association have proposed a review of the classification. And also, as Fred mentioned earlier, starting from August 1, a special committee of the Ministry of Health, Labor and Welfare started reviewing COVID-19's classification under the law. The revision of the classification under the infectious disease law requires amending the law, which is expected to be discussed at the extraordinary Diet session beginning in September at the earliest. So we cannot predict the outcome of the Diet discussion, and we would highlight that it is not focused on the insurance industry. Rather, it is focused on how the law has pressured the overall health care system. However, we feel it is a positive development that a dialogue is taking place on the issue. That's all for me.

So I would also just note something that I think is perhaps obvious, but just to be clear. This is really not uniquely an Aflac issue. The major insurance companies in Japan are all facing substantial increased claims activity on medical policies. In fact, we're not even among the top few in terms of the volume of claims we have relative to other peers in the industry, domestic insurers with large platforms. So this is really broadly based. We can't confirm some of these statistics, but there's been recent news articles suggesting that the amount of claims paid in the month of June, for example, under medical policies was up nearly twelvefold over the same time period last year this time. So it is absolutely pressuring the system. And we think that the legislative community in Japan is taking this under consideration and realizing they've got to contemplate a change in the law.

While saying that, we're still very comfortable with our projections for 2022. So I want to make sure you grasp that.

I guess, first, could you just give us some sense of how much NII uplift in the current quarter did you realize from higher short-term rates on the floating portfolio?

Go ahead, Eric.

It's Eric. It was about $38 million for the quarter, but that's in total for the portfolio. But just from rates alone, it's around $2 million to $4 million. And that's pretty logical because if you think about the ascent of LIBOR, it really didn't start increasing until February, March, April, and these are 1 month of quarterly reset. So the impact from just rates alone on the floaters was rather small, but we did have other portfolio activity around deployment. The new money yield on deployment was better than planned. We were able to purchase some floating rate assets ahead of plan from a particular provider. So a number of portfolio activities really added to most of that increase. But as the year goes by, the impact from rates alone just continues to get higher because of that substantial rise in LIBOR.

I guess just to clarify, is the $38 million part of the $160 million? Or should we think about the $2 million to $3 million as...

$38 million is part of the $160 million, that's just for the second quarter. And the $160 million is for the full year forecast.

Okay. Understood. And then I guess, in the U.S. did you see any normalization in the benefit ratio as we went through the quarter or it was pretty spread throughout?

I think it's relatively well spread out over the quarter. There was no specific movements between the different reporting months in the quarter.

One thing back on Japan to just make sure that you're capturing is, again, when it comes to these COVID cases we're talking about, just want to make sure you take to heart Max's comments and Dan's comments and my script comments, and that is the very same dynamic that is giving rise to these higher infectious disease COVID claims, we believe are absolutely impacting the rate of hospitalization on other claims activities, not the least of which is cancer insurance related claims. And remember, again, as you all know, we are a dominant cancer insurance provider. And so when the world of Japan health care moves to more outpatient treatment, that has material implications for your cancer claims and how they trend over time. So this is why, despite all of the comments around COVID claims and increases in medical claims, you still see a low benefit ratio in Japan even by historical standards. There's no guarantee of that direct correlation, but it's certainly what we have seen in the data thus far.

First question, regarding the floating rate portfolio. With the $12 billion floating rate portfolio in transitional real estate, Eric, how do you assess the quality of those portfolios if we enter a recession? Do you anticipate maintaining the higher net yield, or do you expect some of that to be offset by impairments? Are you planning to expand that portfolio or maintain its current size?

Sure thing. And Tom, actually, since we have Brad Dyslin on the call, who's my deputy but also in charge of credit, I'm going to shift that question over to Brad.

Thank you, Eric. And thank you for your question, Tom. We are closely monitoring both portfolios. As Fred mentioned in his opening remarks, we anticipate that as the economy slows, we may see early signs of issues. Our primary focus is on their ability, particularly in our middle-market loan portfolio, to pass on cost increases and manage higher financing expenses. We have collaborated closely with our managers and tested the portfolio against severe outcomes, believing that any potential losses will be manageable. Overall, we consider our middle-market lending portfolio to be of high quality, consisting entirely of first lien loans, with modest leverage and good diversification. We have inherent characteristics that helped us perform well during COVID, and we expect these will continue to support the portfolio during a downturn. However, we do not expect to emerge without some losses if a downturn occurs, but we do not anticipate these losses to be significant.

Tom, I would also just add to Brad's remarks. Just as a reminder, for our TREs and middle-market loans, these are first lien, senior secured assets. We take a more conservative approach to those asset classes. We definitely earn higher yields and spreads, but that's to offset the risk that we're taking. The other reminder is just from a financial standpoint, we do take a CECL reserve for these asset classes. And those are, generally speaking, based on long-term historical default rates. Based on Brad's comments and our actual expected performance, while certainly we won't come out of this unscathed, my suspicion is we will outperform those CECL reserves. And in essence, while there could be some losses in the future depending on how deep a recession is, how long it will be, it will be much better performance than the expected CECL reserves that we've taken already.

Okay. Just one quick follow-up. The U.S. earned premium is still modestly declined despite the sales recovery and some improved persistency, and I know there's a bit of a lag here in terms of how that earns in. But based on what you're seeing now, would you expect earned premium to begin to grow again in the second half and then maybe pick up in 2023?

We would expect an improvement throughout the year and then that it really picks up in 2023 as lapses come down and we continue to see sales growth.

Can you maybe talk about foot traffic in shops in Japan in 2Q versus 1Q? Because I know that's a metric you've discussed previously.

Are you talking about our walk-in shops and shop traffic? Is that the question?

Yes, that's correct.

Yes. I think I would ask Yoshizumi-san in Japan to answer that question. I don't have that data right in front of me. Yoshizumi-san, do you have any data on the level of traffic through our retail shops?

Thank you, Fred. Let me answer the question. This is Yoshizumi. Well, the number of customers in-store or the shop in the second quarter was at the same level as the previous year, which indicates a recovery from the first quarter when we had a negative 9.3%. That said, this figure has not yet returned to pre-COVID-19 levels, and we will continue monitoring the trend in the number of visiting customers. That's all for me.

I just wanted to expand on the concept of delayed cancer screenings. I think Dan was actually talking about this on CNBC this morning. But just wondering if you could maybe give an update on what you're seeing in terms of cancer severity and the potential impact from delayed screening in the U.S. and Japan?

I mentioned this during my conversation with Joe on CNBC. We haven’t observed a significant increase that hasn’t been actuarially calculated, so we're operating within our expected ranges. That said, it has now been about 2.5 years since this started, which reduces the likelihood of a major spike as time goes on. However, it illustrates the uncertainty of predicting future developments. Our data indicates that if we were going to see a significant surge, we likely would have noticed it by now. An expert in actuarial computations concurs with this assessment.

One thing I would add to that answer is that we have seen first occurrences returning to more normal levels. This tends to be a leading indicator for our overall total cancer claims. Overall, we're still running slightly below where we would expect to be, at low pre-pandemic levels, but the component of first diagnosis and first occurrence has generally returned to more normal levels in both the U.S. and Japan. We have mentioned before and still believe that there is a level of cancer in our policyholder base that we anticipate will be detected eventually. We just haven't seen the full impact of that yet. All of this is factored into our guidance for benefit ratios moving forward.

But I think most people that were going to the doctor and, whatever, they were having checkups, are now back to normal. And it's been going on probably for a year or so. So we feel pretty good about those numbers. And that's one reason we said, overall, we feel good about even the issue in Japan regarding the government's move here and how we can handle those claims. So we feel well positioned.

All right. Thank you, Mike, and thank you, Andrea. I believe that was our last question, and we're a little past the top of the hour. I want to thank you all for joining us. I hope you'll mark your calendars for Tuesday, November 15, for our financial analyst briefing. And we look forward to seeing and talking to you then. Until then, please reach out to Investor and Rating Agency Relations with any questions that you may have, and we look forward to talking to you soon. Take care.