Aflac Inc (AFL) — Q1 2025 Earnings Call Transcript

Good morning, and welcome. Thank you for joining us for Aflac Incorporated's First Quarter 2025 Earnings Call. This morning, Dan Amos, Chairman and CEO of Aflac Incorporated will provide an overview of our results and operations in Japan and the United States. Then Max Broden, Senior Executive Vice President and CFO of Aflac Incorporated, will provide more detail on our first quarter financial results, current capital and liquidity. These topics are also addressed in the materials we posted with our earnings release, financial supplement and quarterly CFO video update on investors.aflac.com. For Q&A today, we are also joined by Virgil Miller, President of Aflac Incorporated and Aflac U.S.; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director, Aflac Life Insurance Japan; and Brad Dyslin, Global Chief Investment Officer, President of Aflac Global Investments. 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 with reconciliations of certain non-U.S. GAAP measures and related earnings materials are available on investors.aflac.com. I'll now hand the call over to Dan. Dan?

Thank you, David, and good morning, everyone. We're glad you joined us. Although we just have one quarter under our belt, the first quarter marked a good start for the year. Aflac Incorporated reported net earnings per diluted share of $0.05, which was significantly impacted by net investment losses this quarter compared to net investment gains in the first quarter of 2024. At the same time, the company reported adjusted earnings per diluted share of $1.66, which is unchanged from the first quarter of 2024. Beginning with Aflac Japan, I am pleased with the 12.6% year-over-year sales increase. This quarter sales reflected a continued significant contribution from Tsumitasu and a 6.3% increase from cancer insurance sales, taking into account Japan's demographics and our product strategy to fit the needs of customers throughout all stages of life. Acquiring younger customers is critical to our success. We believe Tsumitasu helped us appeal to and, more importantly, reach younger customers in Japan. Our strong sales in Japan reflect the success our agencies have had selling Tsumitasu. As the pioneer of cancer insurance and a leading third-sector insurer, we also aim to sell these Tsumitasu policyholders a medical policy or another cancer policy. We have also launched the initial stage of sales in Miraito, our newest cancer insurance, on March 17th. While it is still very early, the results that we have seen thus far have been positive. As of April 21st, the product has been available through all of Japan's sales channels. Our ability to maintain strong premium persistency is a testament to Aflac's reputation and customer recognition of the value of our products. By maintaining this level of persistency and adding new premium through sales, we are partially offsetting the impact of reinsurance and policies reaching paid-up status. This will be vital to our future growth of Aflac Japan. Turning to Aflac U.S., I was pleased by the 3.5% year-over-year increase in sales and encouraged by the momentum we are seeing within all areas of our group business, especially our group life and disability, as well as network dental. In addition, we believe our efforts to drive more profitable growth with a stronger underwriting discipline have contributed to our strong premium persistency and net earned premiums growth. At the same time, Aflac U.S. has maintained its prudent approach to expense management and maintaining a strong pretax margin as Max will expand on in a moment. In both Japan and the United States, I believe that consumers need the products and solutions Aflac offers more than ever for our policyholders who become claimants. Aflac is more than an insurance company. We are a partner in health, a supporter of families during their times of need, and a pioneer and leader in the industry. We are leveraging every opportunity to convey how our products can help fill the gaps during challenging times, providing not just financial assistance but also compassion and care. At the same time, we continue to generate strong capital and cash flows while maintaining our commitment to prudent liquidity and capital management. We have been very pleased with our investments, which have continued to produce strong net investment income. As an insurance company, our primary responsibility is to fulfill the promises we make to our policyholders while being responsive to the needs of our shareholders. Our solid portfolio supports our promise to our policyholders, as does our commitment to maintaining strong capital ratios. We balance this financial strength with tactical capital deployment. I am very happy with how management has handled capital deployment and liquidity and specifically how well we've adapted to this environment. In the first quarter, Aflac Incorporated deployed $900 million in capital to repurchase 8.5 million shares of our stock. Additionally, we treasure our track record of 42 consecutive years of dividend growth. At the same time, we have maintained our position among companies with the highest return on capital and the lowest cost of capital in the industry, combined with dividends. This means we delivered $1.2 billion back to the shareholders in the first quarter of 2025. We believe in the underlying strength of our business and our potential for continued growth in Japan and the United States, two of the largest life insurance markets in the world. On an ongoing basis, we are taking action to reinforce our leading position and build on our momentum. I will now turn the program over to Max to cover more details of the financial results. Max?

Thank you, Dan. Thank you for joining me, as I'll provide a financial update on Aflac Incorporated results for the first quarter of 2025. For the quarter, adjusted earnings per diluted share was flat year-over-year at $1.66, with a $0.01 negative impact from FX in the quarter. In this quarter, remeasurement gains on reserves totaled $41 million, reducing benefits. Variable investment income ran $27 million below our long-term return expectations, while one make-whole call generated income of $16 million. Adjusted book value per share, excluding foreign currency remeasurement, increased 2.2%. The adjusted ROE was 12.7% and 15.6%, excluding foreign currency remeasurement, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment, net earned premiums for the quarter declined 5%. Aflac Japan's underlying earned premiums, which adjusts net earned premiums to exclude the impact of deferred profit liability, paid-up policies, and reinsurance, declined 1.4%. We believe this metric better provides insight into long-term premium trends. Japan's total benefit ratio came in at 65.8% for the quarter, down 120 basis points year-over-year. The third sector benefit ratio was 56.3% for the quarter, down approximately 120 basis points year-over-year. We estimate the impact from remeasurement gains to be approximately 150 basis points favorable to the benefit ratio in Q1 2025. Long-term experience trends as it relates to treatment of cancer and hospitalization continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid at 93.8%, which is up 40 basis points year-over-year and in line with our expectations. However, beginning in this quarter, we have revised the premium persistency definition to better reflect the economic trends for the business. As a result, we do not treat annuitization as a lapse for persistency purposes. This revised definition raised the reported persistency by roughly 30 basis points. Our expense ratio in Japan was 19.6% for the quarter, up 160 basis points year-over-year, driven primarily by an increase in technology expenses. For the quarter, adjusted net investment income in yen terms was down 7.6%, primarily driven by lower floating rate income, the transfer of assets to Aflac Re Bermuda associated with reinsurance and variable investment income, somewhat offset by higher returns from the structured private credit portfolio. The pretax margin for Japan in the quarter was 31.8%, down 100 basis points year-over-year, but a very good result. Turning to U.S. results, net earned premium was up 1.8%, persistency increased 60 basis points year-over-year to 79.3%. Our U.S. total benefit ratio came in at 47.7%, 120 basis points higher than Q1 2024, driven by business mix and lower remeasurement gains than a year ago. We estimate that the remeasurement gains impacted the benefit ratio by approximately 100 basis points in the quarter, as claims have remained below our long-term expectations. In the quarter, we benefited from favorable underwriting on our small, but growing long-term disability block. Our expense ratio in the U.S. was 37.6%, down 110 basis points year-over-year, primarily driven by platforms improving scale and continuous focus on expense efficiency. Our growth initiatives, group life and disability, network dental ambition, and direct-to-consumer increased our total expense ratio by 50 basis points for the quarter. This is in line with our expectations, and we would expect this impact to decrease as we continue to approach scale. Adjusted net investment income in the U.S. was down 1.9% for the quarter, primarily driven by lower floating rate income. Profitability in the U.S. segment was very strong, with a pretax margin of 20.8%, a 20 basis points decline compared to a year ago. During the quarter, we increased our CECL reserves associated with our commercial real estate portfolio by $2 million net of charge-offs as property values remain at distressed valuations. We also foreclosed on two loans, adding them to our real estate owned portfolio, consistent with our strategy for maximizing recovery values. Our portfolio of first lien senior secured middle market loans continue to perform well with increased CECL reserves of $7 million in the quarter, net of charge-offs. In our corporate segment, we recorded a pretax gain of $43 million. Adjusted net investment income was $47 million higher than last year due to a combination of lower volume of tax credit investments and higher asset balances, which included the impact of the reinsurance transaction in Q4 2024. Our tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $8 million in the quarter, with an associated credit to the tax line. The net impact on our bottom line was a positive $0.4 million in the quarter. To date, these investments are performing well and in line with our expectations. Unencumbered holding company liquidity stood at $4.3 billion, $2.6 billion above our minimum balance. We repurchased $900 million of our own stock and paid dividends of $317 million in Q1, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. Our capital position remained strong, and we ended the quarter with an SMR above 950%, an estimated regulatory ESR above 250%. Our combined RBC, while not finalized, we estimate to be greater than 600%. These are strong capital ratios, which we actively monitor, stress, and manage to withstand credit cycles as well as external shocks. For U.S. statutory, we recorded a $6 million valuation allowance on mortgage loans as an unrealized loss. We ended the quarter on March 31, with net ¥5.2 billion of Japan FSA realized gains net of losses for securities impairment. This is well within our expectations and with limited impact to both earnings and capital. Our leverage was 20.7% for the quarter, which is within our target range of 20% to 25%. As we hold approximately 59% of our debt in Yen, this leverage ratio is impacted by movement in the Yen-dollar exchange rate. This is intentional and part of our enterprise hedging program protecting the economic value of Aflac Japan in U.S. dollar terms. On a U.S. GAAP basis, we are impacted by moves in the Yen as our Yen-denominated earnings will translate into U.S. dollars at different exchange rates. We currently estimate that every ¥5 to the dollar move would impact our underlying EPS by roughly $0.07. As foreign currency markets have experienced a marked increase in volatility, I would like to reiterate our approach to managing foreign currency exposure. Fundamentally, we size our unhedged U.S. dollar exposure to the estimated economic surplus associated with our Japanese business. At the end of Q1, we held $25.5 billion of unhedged U.S. dollar assets in our Japan general account. Forward contracts at Inc, with a notional balance of $2.7 billion, and $4.4 billion of Yen-denominated debt. We also hold $24.2 billion of notional out-of-the-money put options, which provide tail protection against a large appreciation in the Yen. Adding this up, we feel that we are very well positioned on an economic basis. I'll now turn the call over to David to begin Q&A.

Thank you, Max. Before we begin our Q&A, we ask that you please limit yourself to one initial question and a related follow-up. You may then rejoin the queue to ask additional questions. We'll now take the first question.

Good morning. Max, I have a couple of questions regarding Japan's solvency and general macro sensitivities. My first question is why did the ESR ratio drop significantly in Q1? Looking at the sensitivities, I would expect the sharp increase in Japan rates to have balanced out the strengthening of the Yen. I'll start with that, and then I will have a follow-up. Thank you.

Thank you, Tom. I appreciate your question. In the first quarter, we experienced a slight decline in our ESR, which was influenced by the strengthening Yen. This was somewhat counterbalanced by increased interest rates in Japan, particularly the 30-year JGB that saw a rise in the same period, which certainly benefited us. Additionally, we had significant dividends being transferred from Aflac Japan to Aflac Inc. during the quarter. This explains why the cash balances at Inc. increased significantly, even with substantial capital deployment through dividends and buybacks in that quarter. I believe the key factor here is the dividends flowing to the holding company.

That makes sense, Max. My follow-up concerns everything that's changed on a macro level with the Yen strengthening and the current long rates in Japan. How should we approach that in terms of forward capital planning? Do you still believe that reducing excess and returning it is the best strategy? While you still have significant excess, I'm not suggesting you reduce it. However, the volatility in capital seems quite high given the recent macro changes. Are you considering any changes in your philosophy regarding capital return or how you're managing this situation? Right now, you have some very deep out-of-the-money hedges. Are you thinking about locking in that capital strength, or are you satisfied with your current structure? Thank you.

Tom, our approach to capital management is fundamentally long-term oriented. We analyze various scenarios, including stressed situations, and our strategy remains largely unchanged. Our business model focuses on offering products that are inherently stable during fluctuations in lapsation rates, volatility in benefit ratios, and overall profitability. This is supported by a conservative asset leverage, limiting the risks tied to our asset portfolio. Consequently, our profitability and cash flows remain stable and predictable. You mentioned the volatility of our Economic Solvency Ratio (ESR) related to foreign exchange (FX), which is a result of our strategic decisions. We hold $25.7 billion in U.S. dollars on our Japanese balance sheet to safeguard the economic value of Aflac Japan, contributing to ESR volatility. We have established a put option program that protects us against upward moves in the Yen while allowing us to retain benefits if it weakens. Despite the recent movements in interest rates and FX, we do not plan to significantly alter our hedging strategy at this time, although we will continue to monitor the situation closely and may make minor tactical adjustments as needed. Overall, our FX hedging program is performing well and aligns with our expectations.

Hi, good morning. Just a question on the new cancer product launch. Can you talk about what you're seeing so far in the uplift of sales you saw this quarter? I know the launch is in stages, so maybe you'd see more of a benefit in the second quarter as well. So just curious what your expectations are for sales of that product this year?

Well, yes, this is Dan. I want to make a couple of comments before handing it over to Aflac Japan. Generally, I believe we are on the right track. I expect to see continued growth in the new cancer policy. Virgil has dedicated a significant amount of time in Japan this quarter, and I'd like him to provide a comprehensive overview covering both the U.S. and Japan. After that, the Japanese operation can elaborate on their insights. Yoshizumi will cover that, and then Max and Brad can add any thoughts they might have on the matter. So Virgil, please share a few comments, and then let’s pass it on to Japan.

Yes. Well, thanks, Dan. I'll just make a few comments. It was a great visit I had to Japan. And I would just say that as Max's point earlier, our business is really more a view from a long-term perspective. And we remain confident in the strategies we have with our products and all services that what we have is what customers need and want. I think too, Dan, I would just add, though, that as you look at Japan in particular, what we've done with the launch of the cancer product, also how we approach the market with similar trials and the focus that we have on selling more third-sector products is what will help us during this time. Yes, we do look at economic downturn. Max just shared with you about how we go through that methodology. But specifically on the cancer though, I'm going to let Japan talk about how the launch went into what we see for the remainder of the year. So I'm going to turn it over to you guys.

Thank you for the question. I'm responsible for marketing and sales, so I will address that. The new cancer reinsurance was launched in March this year and is progressing as expected. Let me briefly describe the features of this new product. First, we provide full and straightforward coverage. In addition to enhancing coverage during treatment, we have also improved accessibility to benefits before and after treatment. The qualification process for receiving benefits has been made easier to understand. The coverage design is flexible, allowing it to be combined with existing policies and other products, such as add-on plans for those who already have medical insurance. Our sales channels, Daido and Daiichi, began selling on March 18, and in April, we expanded to bank channels within the Japan Post Group. All channels have had a great start, and we are still seeing positive results. Regarding our forecast for 2025, we restructured in January and created a new Chief Marketing Officer position to oversee sales and marketing across all brands. This position will manage our cancer and medical product lines and will be entirely focused on designing effective sales strategies. We are adapting to changing customer needs in a cross-functional manner by collaborating with our IT, actuarial, and policy service teams. We take pride in the successful marketing activities led by the CMO across all channels, and we are seeing positive results from the cancer insurance launched in March. We expect the sales of our third-sector products to continue growing, especially with our extensive product lineup, including Tsumitasu and the new cancer insurance. We are also concentrating on recruiting agents and key associates. With these efforts, we anticipate that our sales in 2025 will exceed those of 2024.

Thank you very much. And then just a follow-up on the medical insurance market in Japan. I mean can you talk about competitive dynamics there and how you see the outlook for sales of your medical product?

Once again let me talk about our competitive landscape. First of all, about the third sector overall. Based on the latest data, we have the largest share of total new policies of cancer and medical insurance or core products in fiscal year 2023. In 2025, we expect to maintain our #1 share of new policies by expanding sales of cancer and medical insurance. Let me talk about cancer reinsurance. Although competition has increased, we are a pioneer in cancer insurance having faced cancer for the longest time in Japan. The knowledge we have accumulated over 50 years of history is something no other company can have. We continue to provide services like unique consultation services, that no other company offers in addition to insurance coverage. By doing so, we will meet the needs of our customers and maintain a competitive advantage. And we aim to achieve further sales growth with the new cancer reinsurance product launch in March. The medical insurance sector is a much more competitive market than cancer reinsurance. This is largely due to the large number of insurance companies entering the market and launching products. We will revise our product line every two years or so in order to gain a higher market share. Under this intensified competition in the medical market, we will conduct some optimized activities on each channel and bring about better results.

Good morning. Thank you for the opportunity to ask questions. So my question is focused on remeasurement gains. They continue to be present in both Japan and the U.S. We're further removed around the dislocation in individuals' behavior. How should we be thinking about the waterfall or decay of remeasurement gains and will they primarily be concentrated in the third quarter? Thank you.

Let me start by saying that the third quarter is when we evaluate our actuarial assumptions, which leads to significant remeasurement gains and losses related to the claims patterns we observe in the market. In the other quarters, we adjust the experience from those periods, which usually results in smaller changes. However, we have seen positive claims utilization in both the U.S. and Japan for an extended period, even before the LDTI, where it appeared as IBNR releases affecting our benefit ratio. Now, it is reflected as remeasurement gains and losses under LDTI, continuing a long-term trend, especially in Japan. In the U.S., we have also noticed some shifts in claims patterns following COVID. I'll pause here and see if Alycia has anything to add from her viewpoint.

Thank you, Max. The only thing I'd add is that we do unlock our assumptions annually in the third quarter to reflect all of our best estimate actuarial expenses and our experience to date. And then you'll see that flow through the third quarter earnings. Thank you so much.

Thanks for the answers. That's it for me.

Hey, good morning. So first, I had a question just along the lines of what you were commenting in terms of the dental or medical product in Japan, sales have been weak, and you've pointed out competitors coming out with maybe lower benefit type products and just that affecting your business. Should we assume that if the competitive environment stays the way it is, sales will muddle along at these levels? Or are you doing anything that would suggest that there could be a recovery, because that line has been sort of steadily dropping over time?

I'm going to answer that. Let me just say that everything that we do tends to be cyclical in nature with a rebound of a new product and although we can't talk about that because of FSA and the way they operate. As Yoshizumi mentioned, every two years or so, we come back to the table with changes in the marketplace, whether it be consumers and what they want or need or medical treatments and what are happening, whether it's more outpatient than inpatient. Whatever it might be from a medical standpoint or even the cancer insurance standpoint. So this year is the year where cancer insurance should be dominating along with our new product. So we should continue to see that. I can't stress enough how much we like what's going on in the life insurance area of adding new and younger policyholders that we've never had before. And that opens the opportunity to go back and add cancer and medical to them. So this year will be that. I think you can look for next year us to revisit, which campaign we'll be looking at. But all in all, I'm very excited about us making our numbers this year in sales and believe we'll ultimately do that. And the breakdown, although we continue to watch and monitor, it's the overall sales numbers that we want to see us achieve because the profit margins are there for our success long-term.

Okay. And then just for Virgil on the Dental business in the U.S., it seems like sales have stabilized following the change in the tech platform, but are you expecting normal production this year and open enrollment? Or is it more likely that that will be next year?

Well, thanks, Jimmy, this is Virgil. I do expect us to have consistent momentum. What I mentioned in the fourth quarter, our focus is on stabilization of that platform, but making sure that the brokers and our veteran agents knew about that we were open for business. And we had a slow start there in Q4, but off to a much better start here in Q1. I can tell you a few things about that. We did invest and making sure we got the right talent. We hired some additional talent from the industry. We maintain the talent that we have there. We continue to invest in the technology to make sure we've got the best portals for the dentists that are doing business with us, as well as making sure there's an easy enrollment process for our agents of our brokers. And then the final thing I mentioned, though, is the partnership we launched that we had now flattish with SKYGEN they're doing a great job of the administrative services that they're providing for us behind the scenes. They are an industry-leading third-party administrator out there, and we're pleased with what we've seen. Now having said all of that, we have been going around to each market letting agents know to try it. For those agents that sold the demo product in Q1 along with our voluntary benefits products, their sales were up 20%. My point is that strategy works because we look at selling both together. I think that the more we get that message out, you will see that momentum carrying forward. I expect us to hit the plan that we set for this year, Jimmy.

Great. Thanks. Max, I wanted to come back to the ESR and the one-way hedge that you have. Is that program designed to keep you at your ESR target or is it possible if we see the dollar weaken significantly before those options sort of kick in, your ESR ratio could fall below your target? Thanks.

Thank you, Suneet. So that always depends a little bit on what your starting point is. Generally speaking, we originally designed this to size the risk associated with FX that we're willing to take on. And we generally sized that at around 40 to 45 ESR points. So that will give you a little bit of a sense for the impact and how we have overall sized that program. So that means that at that level, we are no longer having any significant FX volatility associated with our ESR. And our starting point today is, and I ran these numbers this morning, that we estimate that our ESR as of this morning is around 250%. So it's a good starting point for us.

Okay. That's helpful. And then I wanted to come back to something that we talked about last night in terms of the U.S. weekly average producers. And I think one of the comments around why it was down year-over-year, I think, 11%. Is that more of your agents are selling other non-Aflac products? I just want to get a sense of how prevalent is that? How common is that? And does that create some issues for you in terms of the recovery in sales if they're focused on other companies' products? Thanks.

This is Virgil. I'll address that question. I believe it's a matter of observation rather than concrete data. We've involved our veterans in assessing their productivity. Overall, productivity is rising, especially with the fat supplement, largely due to the contributions from our veterans, along with some brokers in that mix, and we've also achieved success in larger Aflac cases. However, we really need to concentrate on the smaller cases, specifically those averaging under 50 employees. That point was highlighted last year when our agents succeeded in selling the dental product. According to recent data from LIMRA and East Birch, dental remains one of the top two most requested and sold products. It's worth noting that when agents sell dental products from other carriers, they often also sell additional voluntary benefits. This quarter, however, we have observed a 23% rise in dental sales for Q1. Additionally, when agents sold the dental product, they experienced a 20% overall sales increase. This year, we are going to focus on our veterans, implementing compensation incentives related to this. We will communicate that dental is stable and effective, encouraging them to resume regular Aflac sales. I have noticed positive momentum in Q1, and I anticipate this momentum will carry through the year.

Hey, good morning. Sorry about that. On Tsumitasu, I know you're targeting younger customers, but I believe in the past, you've indicated that existing customers were a larger percentage of the sales last year. Is that still the case? Are you seeing more new and younger customers buy the product?

The short version is we're seeing more younger people buy the product. So that's what I'd give you as the answer.

Okay. And then just shifting to NII. So last quarter, you indicated there would be some pressure just given the floating rate portfolio, which we saw. I'm just curious how you see NII trending through the rest of the year? Is there a further impact from last year's rate cuts to still flow through?

Sure. Thank you, Joe. You're right. We have seen some pressure in the first quarter. It's predominantly from the floating rate portfolio. It's both a reduction in balances as well as the roughly 100 basis point decline we've seen in SOFR year-on-year. We're going to be facing that headwind throughout the year. The comps do get a little better later in the year when the differential in SOFR is less because of the Fed action to cut later in the year last year. We are taking steps to try to offset that. We're doing more things to reposition the portfolio to capture higher yields, both in Japan and the U.S. We've also been able to deploy a significant amount of capital in the first quarter and take advantage of the wider spreads. And we also took advantage of the wider spreads in April and deployed a significant amount. So we are facing that floating rate headwind, but we think we've got some things in the toolkit that's going to help us offset that.

And Joe, just as a reminder that our floating rate portfolio resets with one month and three-month SOFR.

Got it, thank you.

Just to follow up, I wouldn't get the number. Over half of our sales are from younger people. So I wanted to validate that number for you. For Tsumitasu, and that was a question you had. Thanks.

Thank you, good morning. I have one more question about the sensitivity to the Yen. While we've mainly discussed the impact on ESR due to the Yen's strength, could you elaborate on the offsets within the rest of the organization? I believe the overall economic sensitivity is lower on a consolidated basis.

Yes, that's right. I mean the other components of this is that we hold $2.7 billion of forward contracts at the holding company. And obviously, as the Yen strengthens, they will move more into us being out of the money on those forwards. Now we also hold roughly $4.4 billion of Yen-denominated debt at the holding company as well. That means that when the Yen moves, our leverage will move with that as well. So you will in a strengthening Yen scenario, all things being equal, see our leverage ratio increased somewhat. All of these obviously then work in the negative category. As you think about the ESR, as you think about settlements on our forwards at Inc. and as you think about our leverage ratio. The offset to this is that we now expect higher future dividends in dollar terms from Aflac Japan. So when you then think about the long-term dividend cash flows in U.S. dollars, they are now going to be higher. And that offsets the decline that you see elsewhere on these other instruments. And that's what I mean by when we take an economic approach, we think about sizing what our expected cash flows are and they are offset by these other instruments. So that means that we are very well hedged, protected in U.S. dollar terms around the group.

Thank you. I have a quick follow-up regarding third sector sales in Japan. You provided extensive details about the new cancer product and your strategy for both cancer and medical. You mentioned that you expect overall sales in Japan to increase in 2025. Can you elaborate on whether we should anticipate a significant boost in sales during the second quarter due to the launch of the cancer product, given that you've typically experienced an uptick in sales with new product introductions?

That's how we think, this is even once again.

Good morning. Can you provide any updates on the Japan Post? I understand there may have been a data breach or something similar. Any information you can share would be appreciated. Thank you.

Well, you were asking about it. The Japan Post.

This is Koide from Aflac Japan. I believe that question is regarding the Japan Post company's inappropriate uses of non-publicized financial information. And right now, JPC or Japan Post Company has now established preventative measures and is implementing them. Japan Post Company is now focused on addressing this issue. So there is certain impact on the cancer insurance sales. Within the Japan Post Group, there's another entity called Japan Post Insurance. And Japan Post Insurance is not directly impacted by this recent news. And also this recent matter regarding the inappropriate uses of the data has nothing to do with an Aflac Insurance product. Therefore, the cancer reinsurance sales activity are still continuing today. As Yoshizumi described earlier, Japan Post Group has started the sales of new cancer products in April. And Japan Post Company has also started the sales of this new product.

Thank you. Good morning. I have another question for Max regarding the ESR. I appreciate the previous comments on it. How should we consider the future use of Bermuda for reinsuring the Japan balance sheet if the Yen keeps appreciating? Does this affect our ability or willingness to pursue more balance sheet reinsurance? Thank you.

Our ability to execute reinsurance is not tied to our ESR levels; it does not make it more difficult or easier depending on the ESR level. However, when we execute reinsurance between Aflac Japan and Aflac Bermuda, we typically structure the transactions to reduce the overall risk for both entities. This often results in an increase in the ESR. Therefore, it's a tool we can utilize in managing the capital base of Aflac Japan and the ESR ratio. We have a wide array of tools available to us, and currently, we are trading well above our target operating range and midpoint. Consequently, we are pleased with our position regarding our ESR ratio.

Thank you. Good morning. I was just wondering how you guys are seeing the environment in Japan. And I'm just kind of curious, you guys are well tapped into their sort of cultural attitude. But is there any anti-U.S. sentiment growing there from a trade war that could pose incremental sales challenges?

Let me let Charles take that on. Charles?

Yes, thank you. This is Charles Lake. We do not see any reaction in a way that will be anti-American. As you know, the Japan government is a strong supporter of the U.S.-Japan alliance, deep economic relationship is the basis of the confidence that Japan has in the United States. As you know, in the past five years, Japan was the largest investor into Japan. So when you look at the national security side, when you look at the economic relationship side, it's a deep relationship. In addition to that, because of the exchange rate, a large visitor from the United States to Japan, that's booming in terms of inbound tourism. So at this stage, of course, the trade talks are getting a lot of attention. But it is not affecting in any way, in my view, this sentiment among the Japanese people about the United States.

Thank you for the helpful insights. Max, could you provide a high-level overview of the buyback? We've seen a significant amount this quarter. If there are ongoing sales challenges, should we expect you to feel comfortable continuing with buybacks beyond operating income at this level, regardless of whether those challenges persist?

Yes. Our buyback, it's really a function of the capital and liquidity we have on hand, the capital and the liquidity we see coming through to us in the future. And then obviously, the investment opportunities we have for that capital. And we look at the IRRs that we can get on different types of capital deployment that being organic growth, i.e., what returns are we getting by selling new products, and that's generally our #1 source of where we deploy capital, that's where we wanted to go. We want to grow our franchise and grow it at strong IRRs when there's capital over, we are looking at other deployment opportunities. And obviously, buyback has been one of the greatest sources of that over the last couple of years. And that has given us very good IRRs. So this framework, we just continue to run and operate.

Thank you for taking my question. I have one regarding the corporate segment. From an external perspective, it seems challenging to analyze because of the derivative program, the Bermuda reinsurance, and the usual corporate segment activities. Could you clarify the different components and share your thoughts on the expected trajectory, particularly in relation to the Bermuda business?

So Alex, I understand the difficulties in modeling this segment given that you have so many different pieces that are sort of rolling up into it. If you think about the most important pieces that are moving that number, it would be around any further reinsurance that we would do. The reinsurance profitability is very stable and predictable. But any further transactions that we would do would obviously increase the profitability of this segment. The other piece is interest expense. So if we were to issue any more debt and go up in leverage, that obviously would impact the profitability of this segment as well. And the last piece is the strategy that we have around tax credit investments and the way this is accounted for. And that is particularly interesting in this quarter. When you compare it year-over-year, there was a significant delta where in the first quarter of last year, we had pretty significant tax credit investments. They were lower this year. And as you know, the way they work is that we have a negative component to the net investment income in the Corporate segment with and more than offsetting credit to the tax line. So in this quarter, we only had, I believe $8 million of tax credit investments hitting the net investment income line. And that is why you also saw the tax line having a higher tax rate than what we normally run at on a quarterly basis. So if you boil all of that together, it means that you can expect the number to be on a pretax basis positive, but generally speaking, lower than what you saw in the first quarter.

Got it. Okay, that's helpful. I can leave it there. Thank you.

Thank you, Alan, and thank you all for joining us this morning. We appreciate your time. If you have any other questions, please reach out to Investor Relations. We'll help you with what we can and look forward to speaking to you soon. Thank you.