Aflac Inc (AFL) — Q2 2025 Earnings Call Transcript

Thank you, David, and good morning, everyone. We're glad you joined us. Aflac Incorporated reported net earnings per diluted share of $1.11 and adjusted earnings per diluted share of $1.78 for the second quarter of 2025. We believe that these are solid results for the quarter, leading to a very good first half of the year. Max will expand upon these results in a moment. But before he does, I'd like to comment on our operations. Beginning with Aflac Japan, I am very pleased with Aflac Japan's 23.2% year-over-year sales increase, especially the 53% increase in the cancer insurance sales. These strong sales were driven largely as expected, by sales of our newest cancer insurance product, Miraito. They include the final stage of the launch of Japan Post Insurance and Japan Post in April. We also saw positive overall sales growth across all distribution channels. This positive result also reflects our new marketing and sales structure in Japan that integrates members of the Actuarial, IT and Policy Service into agile teams focused on bringing a specific product line to the market like cancer, medical, asset formation and nursing care. We also continue to introduce the need for the third sector protection to new and younger customers with our innovative first sector product, Tsumitasu, which has third sector optional benefits. Overall, I believe we have the right strategy to meet our customers' financial protection needs throughout their different life stages. Our ability to maintain strong premium persistency is a testament to our strategy, Aflac's reputation and our 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. Maintaining strong persistency will be vital to the future of Aflac Japan. Being where customers want to buy insurance has always been an important element of our growth strategy in Japan. Our broad network of distribution channels, including agencies, alliance partners, and banks, continually optimize opportunities to help provide financial protection to Japanese consumers. We will continue to work hard to support each channel as we evolve to meet the customers' changing needs. Turning to Aflac U.S. We generated $340 million in new sales during the second quarter, which was a 2.7% year-over-year increase. More importantly, we maintained strong premium persistency of 79.2% and increased net earned premium of 3.4%. We continue to see momentum within all areas of our group business, especially our group life and disability as well as our 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 premium growth. At the same time, Aflac U.S. has continued its prudent approach to expense management and maintaining a strong pretax margin, as Max will expand upon in a moment. In both Japan and the United States, I believe the 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 help, a supporter of families during their times of need and a pioneer and leader in the industry. We are leveraging every opportunity to convey our products can help fill the gap 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 solid net investment income. As an insurance company, our primary responsibility is to fulfill the promises we make to the policyholders while being responsive to the needs of our shareholders. Our solid portfolio supports our promise to the policyholders as does our commitment to maintaining strong capital ratios. We balance this financial strength and tactical capital deployment. I am happy with how management has handled capital deployment and liquidity. In the second quarter, Aflac Incorporated deployed $829 million in capital to repurchase 7.9 million shares of our stock and paid dividends of $312 million. Combined with dividends, that means that we delivered $1.1 billion back to the shareholders in the second quarter of 2025. 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. 2025 marks 3 important milestones for Aflac. In June, we just celebrated the 30th anniversary of what is now known as the Aflac Cancer and Blood Disorders Center of Children's Healthcare of Atlanta. We look forward to celebrating the 70th anniversary of the company's founding in November. And we also are celebrating the 25th anniversary of the Aflac Duck this year. Even though these milestones are noteworthy, it's not the number of years that matters most, it's the privilege of benefiting the lives of millions of people. We are reminded that one thing has not changed since the founding in 1955, families and individuals still seek to protect themselves from financial hardship that not even the best health care insurance can cover. Today's complex health care environment has produced incredible medical advancements that have come with incredible costs. It's more important than ever for people to have a partner in their time of need. We believe our approach to offering relevant products makes us that partner. We also believe in the underlying strengths of our business and our potential for continued growth in Japan and the United States, 2 of the largest life insurance markets in the world. On an ongoing basis, we are taking actions to reinforce our leading position and building on our momentum. I'll now turn the program over to Max to cover more details of the financial results.

Thank you, Dan. I will now provide a financial update on Aflac Incorporated's results. For the second quarter of 2025, adjusted earnings per diluted share decreased 2.7% year-over-year to $1.78, with a $0.04 positive impact from FX in the quarter. In this quarter, remeasurement gains on reserves totaled $37 million, reducing benefits. Variable investment income ran at $35 million below our long-term return expectations, while one make-whole call generated income of $35 million. Adjusted book value per share, excluding foreign currency remeasurement, increased 5.2%. The adjusted ROE was 13.7% and 16.4%, 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 4.8%. Aflac Japan's underlying earned premiums, which excludes the impact of deferred profit liability, paid-up policies and reinsurance, declined 1.1%. We believe this metric better provides insight into our long-term premium trends. Japan's total benefit ratio came in at 66.5% for the quarter, down 40 basis points year-over-year. The third sector benefit ratio was 57.4% for the quarter, also down approximately 40 basis points year-over-year. We estimate the impact from remeasurement gains to be 83 basis points favorable to the benefit ratio in Q2 2025. Long-term experience trends as they relate to treatments of cancer and hospitalization continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid at 93.7%, which was up approximately 40 basis points year-over-year, in line with our expectations. Our expense ratio in Japan was 20.6% for the quarter, up 280 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 10.5%, primarily driven by lower floating rate income, the impact of foreign currency on U.S. dollar investments in yen terms and lower variable investment income, somewhat offset by higher call income and higher returns on U.S. dollar fixed rate portfolios. The pretax margin for Japan in the quarter was 32%, down 330 basis points year-over-year, but a very good result. Turning to U.S. results, net earned premium was up 3.4%. Persistency increased 50 basis points year-over-year to 79.2%. Our total benefit ratio came in at 47.3%, 60 basis points higher than Q2 2024, driven by business mix. We estimate that remeasurement gains were in line with a year ago and favorably impacted the benefit ratio by 160 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 36.3%, down 60 basis points year-over-year, primarily driven by platforms improving scale and continual focus on expense efficiency. Our growth initiatives, group life and disability, network dental and vision and direct-to-consumer increased our total expense ratio by 70 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 5% for the quarter, primarily driven by lower floating rate income. Profitability in the U.S. segment was very strong with a pretax margin of 22.5%, a 20 basis points decline compared with a strong quarter a year ago. In our Corporate segment, we recorded a pretax gain of $20 million. Adjusted net investment income was $37 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 internal reinsurance transaction in Q4 of 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 to our bottom line was a positive $1 million in the quarter. To date, these investments are performing well and in line with our expectations. Higher total adjusted revenues were offset by higher total benefits and adjusted expenses of $90 million, driven primarily by internal reinsurance activity, higher costs pertaining to business operations, and higher interest expense. During the quarter, we raised debt of JPY 150 billion, which translates into slightly over $1 billion to prefund our 2026 maturities and to create liquidity and capital flexibility at the parent company. This debt issuance, combined with a significant dividend from Aflac Japan, increased our unencumbered holding company liquidity to $5.1 billion, which is $3.4 billion above our minimum balance. Our capital position remains strong, and we ended the quarter with an SMR above 900% and an estimated regulatory ESR above 240%, following the previously mentioned dividend. While not finalized, we estimate our combined RBC 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. We repurchased $829 million of our own stock and paid dividends of $312 million in Q2, 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. During the quarter, we increased our CECL reserves associated with our commercial real estate portfolio by $33 million net of charge-offs as property values remain at distressed valuations. We also foreclosed on 3 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 continued to perform well with decreased CECL reserves of $23 million in the quarter, net of charge-offs. For U.S. statutory, we recorded a $7 million valuation allowance on mortgage loans as an unrealized loss during the quarter. On a Japan FSA basis, there were no security impairments in Q2, but we did book a net realized gain of JPY 17 million related to transitional real estate loans. This is well within our expectations and has a limited impact on regulatory earnings and capital. Our leverage was 22.5% for the quarter, which is within our target range of 20% to 25%. As we hold approximately 65% of our debt in yen, this leverage ratio is impacted by moves 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. 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 Q2, we held $27.1 billion of U.S. dollar assets in our Japan general account, forward contracts at Inc. with a notional balance of $1.9 billion and $5.7 billion of yen-denominated debt. We also hold $25 billion notional of out-of-the-money put options, which provide tail protection against a large appreciation in the yen. Adding this up, we feel we are very well positioned on an economic basis. Thank you. I will now turn the call over to David.

My first question was on cancer sales. You obviously had a really nice pickup following the launch of the Miraito product. My question is more on how long you think the benefit from the new product could have on sales, understanding that you tend to get the biggest benefit initially, but do you think you'll continue to see stronger cancer sales for the balance of the year because of the new product launch?

This is Yoshizumi. Let me answer. We all are feeling the product has gained traction, and it is doing very well so far. And Miraito was responding to diverse customers and maintaining a high level of competitiveness. The biggest feature of Miraito is its flexible protection design. Normally, the cancer reinsurance offers that other companies generally offer are provided as a single package. This means even if the policyholder does not require particular coverage, it is already included in what they buy. However, Aflac Miraito allows customers to purchase only the necessary coverage, offering a high degree of customization. For those seeking extensive coverage, they can select a comprehensive plan, while those who already have sufficient coverage can opt for a minimal plan. Additionally, Miraito includes coverage options that were previously unavailable from Aflac. Along with these product characteristics, this also offers our supporting service, the Yorisou Cancer Consultation Service. This has been developed thanks to our 50 years of expertise and relationships with specialists. This consultation support is unique to Aflac. Therefore, we anticipate the positive performance to continue for some time, potentially longer than that of previous cancer insurance products. Let me reiterate once more that the product has gained traction and has been successful thus far.

I have a separate question regarding Japan's investment income. Even after making adjustments for foreign exchange and other items, it appears there has been an increase in net investment income in Japan. Could you provide more details on what contributed to the positive trend in net investment income there? Do you think the performance this quarter is sustainable moving forward?

Sure. Thank you, Ryan. We did have a nice strong second quarter. It was a nice improvement over the first quarter. And there were a few things that drove this. The largest contributor was our variable NII from our alternatives book, which accounted for about half of the improvement. There's a little bit of seasonality there in the second quarter due to the timing of some of the marks we get on fourth quarter results that come in a little late in the first half of the year. Additionally, we had better marks on the portfolio overall. The make-whole you mentioned contributed positively in the second quarter compared to the first quarter. The rest of the improvements stemmed from a combination of factors. We accelerated some deployment and pulled forward activities to capture attractive opportunities we encountered in the first half. We were quite active in what we call switch trades, selling lower-yielding Japanese Government Bonds (JGBs) and purchasing current yield JGBs at higher yields. We also swapped into some appealing credit assets to enhance our yields. Regarding the outlook for the third quarter, we recommend you adjust for the make-whole, although we have had two this year. Those tend to be one-off items that are difficult for us to predict with certainty. On variable NII, we are optimistic for a solid second half of the year, with several favorable elements anticipated to continue; however, it remains challenging to project quarter-on-quarter. The benefits from the acceleration in switch trades should continue to be evident in the latter half of the year. Overall, we believe we are well-positioned for a solid third quarter.

Max, I wanted to ask on ESR for a minute. One of your competitors disclosed their view that some of the companies in Japan are using sort of adjusted metrics that aren't true to the FSAs, I guess, formulas. Just wanted to get your thoughts on that and how you're approaching this ESR as you provide the disclosure every quarter?

Thank you, Suneet. I'll kick it off, and I'll also ask if Steve Beaver in Japan has any comments as well. So ESR overall, you have today three versions of ESR. You have the regulatory ESR, you have the regulatory ESR with USP, and you have the internal models. We use the regulatory model with USP because this is the model we believe we should manage to. This model provides the opportunity to adjust the regulatory model using risk factors specific to our business. This makes our internal metrics more realistic compared to the regulatory model. Right now, it gives us roughly an uplift over the regulatory model of about 30 points. Over time, we hope that an approval of our internal model will enhance accuracy, as it would incorporate our full internal experience. We believe that this is the right approach and the correct model to use.

Okay. That's helpful. Can you discuss the impact of lapse and reissue on cancer sales for the quarter? Are you focusing these sales on new customers, or are you targeting your existing customer base to sell the cancer policy?

Let me kick it off on that, and Japan might want to provide additional insights. The early data we have on lapse and reissue indicates that we are roughly in line or slightly below our internal expectations. We have not seen a spike greater than what we normally expect when we refresh a product in the market related to lapse and reissue. Of course, there's always a slight uptick, which is anticipated, but currently, the data indicates we are in line with expectations. There is typically a small lag, meaning that as we move into the third quarter, we wouldn't be surprised to see a slight increase in lapsations.

Let me answer from the sales perspective from Japan. We are selling to both our existing customers and new customers. For existing customers, we can offer additional coverage that policyholders do not currently possess. With the flexible nature of this product, we can develop our new customer base. One characteristic of Miraito is its plan for children, with extremely low premiums, allowing continued enrollment until children reach the age of 23. They can transition to regular cancer insurance later. This product is attracting significant attention from customers, particularly younger and middle-aged demographics. By leveraging the characteristics I just mentioned, we anticipate expanding our business to new policyholders in the future.

Just one on the remeasurement gains that you’ve been continuing to see in both Japan and the U.S. I guess, given that, should we be thinking about any kind of change in your assumptions as part of the unlocking next quarter? And then just curious in Japan, do your assumptions assume kind of further improvement in cancer and hospitalization trends? Or are you already assuming some degree of improvement, but the actual experience just continues to be even better than your expectations?

So let me just remind you of our policy. So each quarter, we adjust the experience reported in that quarter, which will flow through as remeasurement gains or losses, and this influences the reported quarter. In the third quarter of each year, we update our actuarial assumptions based on forward-looking trends. If we reflect on Q3 of 2024, there is a slight improvement in the forward-looking hospitalization trends expected in Japan. However, it remains modest, and it is not a flat forecast. A small incremental improvement is anticipated in the assumptions we set for 2024. We will update these assumptions next quarter. Well, our philosophy related to capital deployment is determined by the capital generation we see from the operating companies moving forward, as well as the capital we possess currently and what we project in future capital generation. We aim to deploy that capital first into our operations that maintain good returns. We also utilize capital to extend our business by evaluating M&A opportunities. However, predominantly of late, our capital deployment has focused on returning capital to shareholders through dividends and buybacks, where we have achieved strong returns on those capital deployment decisions.

I had a question first on U.S. sales. We thought the business would be growing over the past couple of years, but its sales have actually consistently been weaker than expected. I think last year, you were down. This year, they've been positive, but fairly sluggish, in low single digits. So maybe, Virgil, you could just talk about what's going on in this business and just general expectations for sales results over the next year or so?

Yes. Let me give a macro view first and just say that we're continuing to take some deliberate actions to drive long-term sustainable value. Some of these actions are intentional, as we are focusing on acquiring the right type of business for our books. This can be seen when we look at our overall performance for the quarter, our earned premiums being up 3.4%, our persistency also increased by 50 basis points for the quarter, and our expense ratio has improved significantly over the last five quarters. The 2.7% increase for the quarter was certainly at the low end of our range. What I'm expecting, Jimmy, is a stronger second half, primarily driven by fourth-quarter bookings. Our pipeline appears robust. We're seeing strong performance in our Lab business and have gained a solid reputation there. Additionally, as you may have seen, we recently announced taking over FML and PFML management for the State of Maine, similar to what we've done for the state of Connecticut. We're pleased with the performance of our dental products, which has seen double-digit growth in the first half. Although we did encounter operational issues last year, we have now overcome those. Overall, I expect to see stronger performance throughout the second half, driven by fourth-quarter enrollments. We recognize a need to improve recruitment rates in our traditional business, particularly through our career channel, which has remained flat for the first half of the year. I'm aiming for some positive recruitment numbers and enhancing productivity from our field team. I hope this gives you a comprehensive understanding.

No. And just maybe a little bit on the dental product. Has it gotten to what you would expect to be a normal level of sales for that business? Or is there still a catch-up related to the platform change?

Yes. I would say that during the second quarter, we are up 43%. However, you need to see that this is relative to last year’s underperformance, so be cautious with how you interpret the numbers. That said, we are at heights I predicted for this year, and I expect this trend to continue.

I think it's important, Jamie, to note that dental and vision is part of the overall strategy we have going forward. Monitoring this sector will be important as we believe it serves as a useful entry point for consumers into our supplemental offerings. We are closely observing its uptake, as we know that the learning curve is a natural aspect of entering new markets. We're optimistic, with most major issues seemingly resolved, and anticipate continuous positive growth.

My first question, I guess, is on the expense ratio within Japan. That's trended favorable, I guess, relative to your guide. And I think expenses are somewhat typically higher in the back half. So just how are you thinking about that ratio trending from here over the course of the year?

We still expect to be within our guidance range of 20% to 23% for that expense ratio. In the first half, we are at the lower end of that range, which included a product refresh and marketing campaign associated with our cancer product launch. As we look into the second half, we anticipate that continued technology projects will contribute to a year-over-year increase in expenses. We expect to remain in the middle or lower end of our guidance range.

And then my second question, I guess, goes back to capital. Obviously, elevated holdco cash right now. Is there a certain time period that you guys would look to take that down, whether that's organic, inorganic growth as well as repurchases? And how should we think about buybacks in the second half of the year? Should we think about that elevated relative to the first half, just given the higher holdco cash?

Currently, given the essentially flat U.S. dollar yield curve, the cost of holding cash right now is not as high as it was previously. We are generating a reasonable yield on that cash, which is still below our cost of equity capital. Therefore, while we certainly aim to deploy capital over time, we feel that there is no immediate rush to do so. We intentionally increased our holdco cash this quarter through a yen-denominated debt issuance, which allows for more yen debt on our balance sheet to assist with our overall foreign exchange exposure and to achieve a positive carry. In terms of deployment, we will maintain our standard capital deployment process, exploring opportunities to deploy capital across the company and enterprise where we find suitable IRR-generating options, whether that’s organically or tactically into dividends and buybacks.

I have a question regarding Japan sales and a follow-up on ESR. With JPY 21 billion in sales, if we annualize that, we're back to pre-pandemic levels now. I don't want to get ahead of ourselves since it was just one strong quarter, but could you share your perspective on this? Do you think there was a significant one-time benefit, or do you believe we might see a higher level of sales sustained for a while? Additionally, I noticed that your Tsumitasu product has also held up well. Typically, when launching a new product like the cancer product, you would expect to see a drop in sales of other products. However, it seems there is some sustainability in Tsumitasu as well. My main question is regarding sustainability; do you believe it's sustainable, and what implications would that have for premium revenue growth? Is it a game changer, or is it too soon to determine whether we might observe a plateau or actual improvement or growth in earned premium in 2026 or 2027 based on what you're observing currently?

Thank you for your question. This is Yoshizumi, in charge of sales. Yes, we are aiming to make a recovery to the level of pre-COVID in terms of sales. One initiative to further increase our sales is to focus on the cancer insurance, Miraito, which is performing very well. We will continue to make efforts throughout all channels. Tsumitasu is also maintaining its sales level, which contributes positively to third-sector products. We do not recommend distributors to only offer Tsumitasu on a stand-alone basis. Our approach is to instruct and train them to consistently bundle it with the third-sector product. With that strategy, not only Tsumitasu, but the entire third-sector sales are growing. Concerning medical insurance, the competition is quite fierce in this market, and medical insurance sales have yet to meet our expected levels. However, new products require regulatory approval, and we anticipate launching a new medical product within a year that will feature characteristics similar to Miraito. Furthermore, the primary sales channels are performing well, and we have been working to reinforce our solicitors for the past two years. Last year, we hired 1,100 agents, and we aim to maintain or exceed this level this year. A greater number of agents will positively influence our productivity. In January, we implemented a significant marketing and sales transformation led by our new Chief Marketing Officer, using data-driven methodologies to ensure increased agility. Consequently, we expect to reach pre-COVID sales levels as soon as possible. I am confident that 2025 sales will surpass those of 2024. That's all. Thank you for your question.

I can add on that. As I have observed Japan over the years, I believe there has been a noticeable shift in marketing and sales efficacy compared to 1.5 years ago. Following a minor stock drop, there was an evident wake-up call that prompted discussions to enhance performance, leading to recent improvements. The new marketing director has implemented significant changes and the Miraito product, being unique, has further enhanced our procedure. We are now better equipped for sales interactions, including communication with clients and managing the various processes. While we cannot precisely ascertain the duration or the extent of the growth, I sense we are currently operating at a higher efficiency than ever before. The success of the Miraito product is also helping us tap into younger customer demographics, validating our expectations. Overall, we remain vigilant regarding changes since it's a substantial shift, but I commend the team for their commendable turnaround.

Yes. So the range is established based on our metrics, and this encompasses the USP as well. Hence, the 170% to 230% range includes the USP and is what we're managing toward.

My question is on the distribution for the Miraito Product. Was it completely rolled out in totality by the end of 2Q '25 for all distribution that will be selling it?

Let me take that question. Do you mean whether we are rolling out to all channels? This is to confirm your question.

Whether it's been rolled out to all channels that it's planned to be rolled out to by the end of the second quarter?

The answer is yes to that question. We launched Miraito on March 17. For the bank channel in Japan Post, we began offering this in April. It is currently available through all distribution channels following our launches in March and April.

Great. And then my follow-up question. How do you think about the frequency of needing to refresh products now that you're trying to bundle products and solutions together? Is it an annual and every other year cycle? I'm asking, perhaps, in relation to the product you introduced late last year that sold quite well. How should we be thinking about the refresh cycle for that?

For cancer refresh insurance, the cycle is approximately 3 years. For medical insurance, the refresh cycle is around 2 years, contingent upon obtaining FSA approval.

I had one follow-up on ESR again. And Max, you confirmed on using the USP, undertaking specific parameters and that adding about 30 points. I guess, can I just get maybe a little bit of color on what that USP adjustment is and your view of the likelihood and timing of that? And then I guess, separately, the internal model you mentioned, is that timeline a few years down the road? Or how should we think about that?

The USP gives an uplift of about 30 points, and we expect that to be approved by March 31, 2026, or shortly thereafter. We believe we are in strong position for approvals. And similarly, the full approval timeline for our internal model will mirror the rollout of solvency two, which may take some time. Therefore, for now, we will continue to use the regulatory interpretations while we await full internal model approvals.

This is Koide speaking from Aflac Japan. Financial markets are stabilizing and recovering from the yen's sharp appreciation and stock prices declining in early April. Additionally, after the late July announcement of the agreement reached in the U.S.-Japan tariffs and trade negotiations, stock prices have risen to near record highs. However, uncertainty related to U.S. trade policies centered on high tariffs continues. As the implications for exports and global production becomes clearer, we will closely monitor potential risk to the domestic economy, particularly regarding household income and consumer sentiment along with the possibility of further market volatility. As regards to the impact of asset formation products, with uncertainty and volatility in the markets, customers may look towards Tsumitasu, which offers stable yen-denominated long-term fixed-rate asset formation. However, this may also drive competitors to consider offering similar products to Tsumitasu, contributing to increased competition. We regularly monitor interest rate and competitive environment trends and are prepared to revise premiums in an agile manner. With this agile approach, we have decided to revise the premium rate for Tsumitasu and will continue to closely monitor trends in the financial market and respond promptly as needed.

Was there any pause in U.S. sales due to the data breach that happened in the quarter?

This is Virgil. No, we saw no impact. We are not seeing anything material that comes to operational interruptions affecting our financials. We are operationally sound and continue to service our customers.

Some of your competitors have reported higher claims due to the increasing cost of cancer treatments. Is it correct that Aflac wouldn't be exposed to this type of inflation due to the fixed benefit nature of the products? And could this increase the attractiveness of the products given that expensive but effective treatments are becoming more widely available?

Yes. As you noted, we are primarily exposed to the frequency of cancer diagnoses, not necessarily the severity or cost of treatments that fall under primary insurance coverage. Our products are supplemental and are structured with predefined benefits; thus, we are not directly exposed to inflation risk and the severity that other insurance companies offering different health insurance types might encounter.

One aspect we consider when we revamp or amend our new product is whether it accounts for new treatments that become available. We ensure our policies cover these approaches when they receive approval from the American Medical Association or similar authorities. Companies often ask what happens if a cure for cancer is discovered. My answer is that they are developing cures daily, but it’s the treatment of these cures that we must cover. This encapsulates the essence of our business, and we aim to continue fulfilling that requirement going forward.

I wanted to ask about the larger dividend out of Japan. It seemed more significant this quarter. I just wanted to see if there’s anything underlying that’s changing the dividend policy there? And does it have any impact on appetite for reinsurance the way that you guys have approached it towards the end of the year and decision-making around that?

Yes, Alex, there's really no change in either the appetite for reinsurance or dividend policy here. It's primarily a function of very strong regulatory FSA results, and we closed the books for the fiscal year of 2025 on March 31, 2025. Because of those strong results, we then pay the final dividend in Q2 of 2026 as a function of that. So it's really down to very strong results that we had in the previous year based on an FSA earnings basis.

We are transitioning in two primary areas concerning digital transformation. The first involves enhancing customer experience value. We provide diverse digital services to customers, associates, and employees, ensuring the incorporation of new generative AI. This integration is significantly benefiting both our workforce and part of our associates, as they utilize this tool to improve their productivity. Starting this month, we have introduced digital human avatar services that will respond to a portion of customer inquiries. We believe this service will heighten overall customer service quality, as the avatar will be available to assist customers around the clock. The second point pertains to improving operational efficiency through digitization. We are currently ahead of our schedule in implementing generative AI and leveraging those advancements. Typically, when operations expand, we had to allocate more resources, which could increase costs. However, by utilizing digital transformation techniques, we can manage growth without increasing our workforce, thereby contributing to cost reduction.