Aflac Inc (AFL) — Q4 2025 Earnings Call Transcript

Good morning, and welcome. Thank you for joining us for Aflac Incorporated's Fourth Quarter 2025 Earnings Call. This morning, Dan Amos, Chairman, 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 financial results for the quarter, current capital and liquidity. These topics are also addressed in the materials we posted with our earnings release, financial supplement and quarterly CFO update on our investors.aflac.com. For Q&A today, we are 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.

Thank you, David, and good morning, everyone. We're glad you joined us. Aflac Incorporated reported fourth quarter net earnings per diluted share of $2.64 and adjusted earnings per diluted share of $1.57. For the year, Aflac Incorporated reported net earnings per diluted share of $6.82 and adjusted earnings per diluted share of $7.49. Max will expand upon these strong results for the quarter in a moment. But before he does, I'd like to comment on our operations. Beginning with Japan, I am very pleased with Aflac Japan sales increase of 15.7% for the fourth quarter and 16% for 2025. These strong sales results were driven largely by the remarkable 35.6% sales increase, mainly due to Miraito, our latest cancer insurance product launched in March. While still early, we are also excited about the positive reception our newest medical product, Anshin Palette has received since its late December introduction. As part of our ongoing strategy, we also continue to emphasize and promote the importance of third sector protection to new and younger customers with our innovative first sector product, Tsumitasu, which was repriced in September. While premium persistency reflected lapses tied to the launch of Miraito, it still remains strong at 93.1% for the year. Our success with so many policyholders who realize the value of Aflac's products and keep them is a testament to Aflac's reputation, our strategy and our customers' recognition of the value of our products. By maintaining this level of persistency while adding new premium through sales, we look to offset the impact of reinsurance and policies reaching paid-up status in the future. Maintaining strong persistency continues to be vital to the future of Aflac Japan. For the year, we also saw an increase in sales through each distribution channel. Being where the customer wants to buy insurance has always been an important competitive strength of our growth strategy in Japan. Our broadened networks of distribution channels, including agencies, alliance partners, and banks are dedicated to continually optimizing opportunities to help provide financial protection to Japanese consumers. We will continue to work hard to support each channel as we evolve to meet customers' changing needs. Overall, I believe we have put in place the right people and the strategy to meet our customers' financial protection needs through their different stages of life. Turning to Aflac U.S. We generated nearly $1.6 billion in new sales in 2025, over 1/3 of which came from the fourth quarter. More importantly, we maintained strong premium persistency of 79.2% and increased net earned premium by 2.9% for 2025. We continue to focus on driving our profitable growth by exercising a strong underwriting discipline and maintaining strong premium persistency. We believe this will continue to drive 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 shortly. In both Japan and the United States, consumers continue to face financial hardships due to increasing out-of-pocket medical expenses. That is exactly where we come in as partners to be there when our policyholders need us most. As the pioneer of cancer insurance and the leader in the industry, our management teams, employees and sales networks approach every day as a chance to help our policyholders fill the gap during challenging times, providing not just financial protection, but also compassion and care. At the same time, we generate strong capital and cash flows on an ongoing basis while maintaining our commitment to prudent liquidity and capital management. We continue to be pleased with our investments, producing solid 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 financial strength is the foundation that backs up our promise to our policyholders balanced with the financial flexibility and tactical capital deployment. I am very pleased with the company's financial strength, which supports our capital deployment, including the Board's decision to increase the first quarter of 2026 dividend by 5.2%. In 2025, Aflac Incorporated deployed a record $3.5 billion to repurchase 33 million shares of our stock and paid dividends of $1.2 billion. We treasure our 43 consecutive years of dividend increases and remain committed to extending this record. Combining share repurchase and dividends, we delivered nearly $4.8 billion back to the shareholders in 2025. In doing so, we have maintained our position among companies with the highest return on capital and the lowest cost of capital in the industry. 2025 also marked 3 significant milestones for Aflac: the 70th year since the company's founding, the 30th anniversary of what is now Aflac Cancer and Blood Disorder Center of Children's Healthcare of Atlanta, and the 25th anniversary of the Aflac Duck. Each of these noteworthy milestones demonstrates the staying power of the financial protection Aflac's products help provide and the privilege of helping enrich the lives of millions of people. In today's complex health care environment, our relevant products, financial strength, powerful brand and broad distribution network uniquely position Aflac as the ideal partner for consumers as they navigate the financial strain from out-of-pocket medical costs. The enduring foundational strengths of our business and our capacity for continued growth in Japan and the U.S., two of the largest life insurance markets in the world, support 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.

Thank you, Dan. For the fourth quarter of 2025, adjusted earnings per diluted share increased 0.6% year-over-year to $1.57, excluding effect of foreign currency in the quarter. In this quarter, remeasurement gains on reserves totaled $36 million, reducing benefits. Variable investment income ran $12 million below our long-term return expectations. Adjusted book value per share, excluding foreign currency remeasurement, increased 0.5%. The adjusted ROE was 11.7% and 14.5%, excluding foreign currency remeasurement, a solid spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment. Net earned premiums in yen terms for the quarter declined 1.9%. Aflac Japan's underlying earned premiums, which excludes the impact of deferred profit liability, paid-up policies, and reinsurance, declined 1.2%. We believe this metric provides a clearer insight into long-term premium trends. Japan's total benefit ratio came in at 65% for the quarter, down 150 basis points year-over-year. We estimate the impact from reserve remeasurement gains to be approximately 110 basis points favorable to the benefit ratio in Q4 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 year-over-year and in line with our expectations at 93.1%. With refreshed product introductions, we generally see an uptick in lapse and reissue activity, causing reported lapsation to increase. We did experience this uptick with our recently launched cancer insurance product, but overall lapses remain within our expectations. Lapses on our first sector savings block remained low and in line with previous periods despite the increase in yen interest rates. Our expense ratio in Japan was 22% for the quarter, up 120 basis points year-over-year, driven primarily by sales promotion expenses associated with higher sales. For the quarter, adjusted net investment income in yen terms was down 3.9%, primarily driven by lower floating rate income on our U.S. dollar book and lower variable investment income, partially offset by higher U.S. dollar fixed income due to higher volume. The pretax margin for Japan in the quarter was 31.3%, down 30 basis points year-over-year, a very good result. Now turning to U.S. results. Net earned premiums were up 4%, while premium persistency declined slightly by 10 basis points year-over-year. It remains strong at 79.2%. Our total benefit ratio came in at 48.6%, 230 basis points higher than Q4 2024 driven by prior year endorsements and higher claims activity on our individual voluntary block as well as a higher benefit ratio on group life and disability. We estimate that reserve remeasurement gains impacted the benefit ratio by approximately 140 basis points in the quarter. Our expense ratio in the U.S. was 40.4%, up 10 basis points year-over-year, primarily driven by timing of spend from previous quarters. Our growth initiatives, group life and disability, network dental and vision and direct-to-consumer increased the expense ratio by 60 basis points in the quarter. This is in line with our expectations as these businesses continue to scale. Adjusted net investment income in the U.S. was down 2.8% for the quarter, primarily driven by a reduction in floating rate assets and corresponding rates. Profitability in the U.S. segment was solid with a pretax margin of 17.4%, a 230 basis point decrease compared with a stronger quarter a year ago. In Corporate and Other, we recorded pretax adjusted loss of $31 million in the quarter. Total premiums decreased on closed blocks of business. Adjusted net investment income was $1 million higher than last year due to a combination of lower volume of tax credit investments and higher asset balances. Our tax credit investments impacted the net investment income line for U.S. GAAP purposes negatively by $43 million in the quarter with an associated credit to the tax line. The total fourth quarter earnings benefit from tax credit investments was $13 million. Adjusted earnings declined due to lower revenues and higher adjusted expenses, driven primarily by higher costs pertaining to business operations and higher interest expense, partially offset by lower net benefits and claims. We continue to be pleased with the performance of our investment portfolio. During the quarter, we did not record any charge-offs for the commercial real estate portfolio. Additionally, we did not foreclose on any properties in the period. On our portfolio of first lien senior secured middle market loans, we recorded charge-offs of $22 million in the quarter. For U.S. statutory, we recorded a $3 million valuation allowance on mortgage loans as an unrealized loss during the quarter. On a Japan FSA basis, there were net realized gains of JPY 380 million for securities impairments in Q4, and we booked a valuation allowance of JPY 87 million related to transitional real estate loans. This is well within our expectations and has a limited impact on regulatory earnings and capital. In the third quarter of 2025, we enhanced our liquidity and capital flexibility by $2 billion with the creation of 2 off-balance sheet precapitalized trusts that issued securities commonly referred to as PCAPs. With increased off-balance sheet capital resources and improved liquidity flexibility, we have lowered our minimum liquidity balance at the holding company by $750 million to $1 billion. This means that Aflac Inc. unencumbered liquidity stood at $4.1 billion, which was $3.1 billion above our minimum balance at the end of the quarter. The full PCAP facility remains undrawn. Our adjusted leverage was 21.4% for the quarter, which is within our target range of 20% to 25%. As we hold approximately 63% 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. Our capital position remains strong. We ended the quarter with an SMR above 970% and an estimated regulatory ESR with the undertaking specific parameter or USP, of 253%. We estimate that the USP benefits the regulatory ESR by 18 points. We estimate our combined RBC to be 575%. These are strong capital ratios, which we actively monitor, stress and manage to withstand market volatility and credit cycles as well as external shocks. We last updated our ESR sensitivities at our financial analysts briefing in December 2024. Since then, we have seen significant movements in both the dollar yen and yen interest rates. So we wanted to provide an updated estimate before the ESR comes into effect on March 31. We have deliberately improved our ALM during this time, which has led to reduced exposure to interest rate risk. We generally have lowered our sensitivities to market risk factors. We have also refreshed the sensitivity analysis related to our combined RBC ratio in the U.S. I will characterize these refreshed estimates also as being in line with what we shared at FAB in December 2024. Given the strength of our capital and liquidity, we repurchased $800 million of our own stock and paid dividends of $303 million in Q4, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in the way 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. Before concluding, I would like to address our 2026 outlook. At our 2024 financial analyst briefing, I provided ranges for net earned premiums, benefits and expense ratios and pretax profit margin for each segment for 2025 through 2027. These ranges remain substantially intact for 2026, but with a couple of exceptions. For Aflac Japan, we expect underlying earned premiums to decline 1% to 2% in 2026. And we also expect the expense ratio to be in the 20% to 23% range. However, we expect the benefit ratio in Japan to be in the 60% to 63% range and the pretax profit margin to be in the 33% to 36% range. In the U.S., we continue to expect net earned premium growth to be in the lower end of the 3% to 6% range. We also expect the benefit ratio for 2026 to be in the 48% to 52% range, and the expense ratio to be in the 36% to 39% range as we continue to scale new business lines. At the same time, we expect pretax profit margin for 2026 to be in the range of 17% to 20%.

Thank you, Max. We'll now take the first question.

I had a question on the Japan business. And Max, I think you touched on this a little bit in your prepared remarks. But in particular, in the savings products way for the sector, we've seen super long yields in Japan rise pretty considerably. And I think more broadly, there's some concern that we could see additional, I guess, surrenders with interest-sensitive products. So curious if you expect higher levels of surrender going forward. I know that was pretty stable recently.

Thank you, Wes, for the question. Yes, obviously, we've seen quite significant moves up, especially at the long end of the yen yield curve lately. And if everybody is 100% efficient in their behavior, you would expect both demand and potentially lapsation of in-force policies to increase somewhat. We have not experienced that yet, but obviously, it's something that we closely monitor and prepare the company for.

Got it. And my follow-up is just on capital. It seems like you've got a lot of flexibility in terms of regulatory solvency in Japan and the U.S., but also at the parent too, and you continue to be pretty tactical with the buyback. But curious if once ESR is printed in 2026, is there any change to the thinking around M&A or capital deployment, just given the capital flexibility you have? And maybe what could be incremental for you?

From a capital standpoint, we've been traveling with significant capital for quite some time. And we continue to both enhance and increase the flexibility of both the sources and how we can use that as well. When it comes to M&A, that's predominantly an operational and strategic question and that secondarily is a financial question. So the way we evaluate M&A, it really goes through those lenses and it needs to tick all those boxes. But the fact of the matter is, do we have capital available if we wanted to do something? That is absolutely true. But I would also acknowledge that we are operating in a relatively narrow niche, both in the United States and in Japan and to sort of find operational and strategic targets within those niches is relatively difficult to find. So we continue to obviously evaluate things. But for the time being, we're very happy with the businesses that we have.

My question is around Japan. Can you maybe talk about the lower benefit ratio embedded in the guidance? I think it's based on Japan new business versus the in-force block. I know there's been some repricing and new products being introduced. But how enduring does that benefit seem to be?

Thank you, John. So there's a couple of factors that is pushing our benefit ratio down on a GAAP basis in 2026. The first one, I will put in a more permanent category, and that is as we updated our actuarial assumptions in the third quarter of 2025, we lowered the net premium ratio by about 130 basis points. That is for the full in-force block, and that was obviously a one-timer in the third quarter, but it also feeds through into the future net premium ratio as well. So that is directly impacting the benefit ratio for future periods by 130 basis points lower, all things being equal. The other impact is with new product introductions that we've seen on our cancer product and as we now introduce our medical product, we've seen an elevation of lapse and reissue activity when those product introductions take place. When you have lapse and reissue increase, the old policies that lapse, we will then release the reserves associated with those policies and it runs through our GAAP financials, lowering the benefit ratio. And generally speaking, we have lower reserves on our older policies than the new policies that we are reissuing. So that also has an impact for us. The last piece is if you go back and analyze our full in-force, we did sell quite a lot of life insurance savings policies in the years 2010 through 2016, and this is the old waste product. That waste product runs through our GAAP financials with a very high benefit ratio. On an economic basis, it carries a significantly lower benefit ratio. But on a GAAP basis, it's very high. That block obviously is in runoff. And as that block shrinks, then obviously, the mix impact is such that our total benefit ratio is then lower. So I will characterize those 3 factors as the main factors for the lower benefit ratio expected in 2026.

Thanks, Max. And my related follow-up, sticking with Japan on distribution, it looks like Tsumitasu got repriced and Anshin Palette got introduced. Can you talk about what you see as the total addressable market for these new products? And then within the context of Miraito and ability, do you need to reprice that?

This is Yoshizumi from the Marketing and Sales division of Aflac Japan. As mentioned, we underwent a rate revision last September, and since then, our sales have been growing steadily. The launch of Tsumitasu aims to meet the needs of citizens in asset formation, as the government encourages a shift from saving to investment. Our goal is to inspire the younger and middle-aged generations to engage in these activities. Our target audience consists of individual customers seeking yen-denominated level payment products. Interestingly, Tsumitasu is also attracting attention from the middle-aged to older generation. This popularity stems from affluent customers who prefer options like paying with discounted advanced premiums. One key strength of Tsumitasu is our ability to adjust the premium rate quickly and flexibly. As we observe changes in the interest rate market, we will increase or decrease our premium rate as needed.

This is Dan. Let me just make a couple of comments about sales to have a more concise way of you looking at it. Miraito, our newest cancer policy did terrific better than we even thought. And we feel like it was a product that was wanted and needed by the consumers, and that's what's driving it. Saying that, we had enormous sales in 2025, and we would expect sales to be more level where I think you'll see an increase in sales will be at the medical product and also the potential is for Tsumitasu depending on what interest rates do, but that has the potential. But overall, cumulatively, we expect a good year in Aflac Japan in regard to sales and the job they're doing. And I want to personally thank all of them on the other end from Japan for the job that they did in 2025 in setting an enormous record for us to work forward again in 2026.

I wanted to touch on U.S. sales. So the overall growth tracked pretty in line with what you guys saw in the first 3 quarters of the year, but it looks like the supplemental health growth was better while disability sales were down. Virgil, can you just talk about what you saw in terms of sales in the quarters? And I guess, any color on how the group life and disability and dental sales were versus expectations?

Yes. Thank you, Joel. Yes, let me just give an overview of sort of the performance throughout, and I'll give you a little bit more detail of some of the numbers behind the scenes. Again, overall for the year, we did $1.6 billion overall. So I'm pleased with that sales number, how we came out. And when you asked about the buy-to-bill specifically, they made up 20% of that overall number. So what am I calling the buy-to-bill? Just a reminder, the life absence and disability. And overall, for the year, that line of business was up 11.3%. Network dental and vision, but just the dental product itself for network was up 48.8% for the year. And then our direct-to-consumer platform, we refer to as consumer markets was up 10.5%. So that's where I get the combined 20% of total of the $1.6 billion. So overall, I am very pleased with how those businesses performed. And a lot of that sales in that life and disability was sales of our life product, to your point. But again, definitely overall good performance. The other thing I would say to you is when you look at the year, it was pretty much consistent. We ended up overall 3.1%, but we did have good earned premium growth of 4% during the quarter, right at 2.9% to 3% for the year. Persistency remained strong, 79.2%. So when I look at the overall, I look at a good solid balanced performance for the year for us.

In your prepared remarks, you had said that the uplift from the USP was 18 points. I think the last time you disclosed it a couple of quarters ago, it was 30 points. Can you just take us through the drivers of the decline in that? The main driver of that decline is related to the level of yen interest rates. So as yen interest rates increase, the impact from the USP tends to decrease slightly.

I just have one follow-up on the Japan benefit ratio. Any way for us to think about the kind of the statutory or economic margin change that you're seeing? I know there's different dynamics between how the ways product accounting works and there's the net premium ratio change is also a big driver of the GAAP update. But just wondering, putting it all together, are you still seeing a better trend on a statutory margin basis?

Yes. So the main difference between the FSA benefit ratio and the U.S. GAAP benefit ratio, it relates to the net premium ratio. So what I referenced there was that the net premium ratio on a U.S. GAAP basis will lower our benefit ratio by roughly 130 basis points in 2026 relative to the first 3 quarters of 2025. That impact will not occur on an FSA earnings basis, but the other drivers will. So think about it this way that essentially, when you look at the decline in the benefit ratio in 2026 over 2025, about 1/3 of that is driven by the lower net premium ratio. The other 2/3 will occur both on a U.S. GAAP basis and on an FSA earnings basis. Yes. So to date, we've ceded roughly 6% of our Aflac Japan balance sheet to Bermuda. We have a midterm target to get to 10%. We do not think of that as an absolute limit. I think over time, we will risk assess that number and evaluate if there's a higher internal limit that would make sense for us. The bottom line is that we see significant capacity for continuing ceding business between our subsidiary in Japan and our reinsurance affiliate in Bermuda.

That was helpful color on the Japan benefit ratio, Max. I appreciate that. I was wondering if you could maybe do the same for the U.S. benefit ratio because the guide is 48% to 52%, I believe. And it looks like you've been traveling kind of more in the mid-40% range. So I don't know if you're assuming some reversion to the mean or something, but just some color on that would be helpful.

So there's a couple of factors going on impacting the benefit ratio in the U.S. And some of them are for specific lines of business and some of it is driven by mix of business as well. So we have, as outlined in the script, we have actively increased the benefit ratios on a number of products, utilizing endorsements, also increasing benefits. This applies specifically to our cancer product in the U.S. on an individual basis. It also applies to our accident policy. These products were running very low during the pandemic due to low claims utilization, and we have actively gone in and increased those future benefit ratios associated with those products. So that in itself will continue to push our benefit ratio slightly higher. At the same time, when you look at the total benefit ratio, there's a mix impact as well. Virgil just outlined that the sales of group life and disability and dental and vision specifically are increasing quite significantly for us. These businesses are gradually becoming an increased proportion of our total in-force, and they carry a higher benefit ratio than our core voluntary benefits products. So what that means is that over time, that mix impact will move our benefit ratio slightly higher as well. And you see some of that happening in 2026.

Okay. Got it. And then I guess maybe for Virgil or Dan, we're hearing a lot more about this sort of K-shaped economy and sort of given your target market, just wondering what sort of impacts do you expect in terms of both consumer behavior, but also in terms of agent recruiting potential?

Yes. This is Virgil. Let me start and let me work backwards, Dan, what you just said about the agent recruiting. So first, I would say we were up for the year with our career recruiting. To your point on the environment, we certainly monitor inflationary rates. We monitor unemployment rates. We look at any material impact. Of course, we look at anything related to interest rates, U.S. dollar rates. But I can't tell you right now that had any material impact on us this year. What we did was we put a deliberate focus on our career channel. We are dedicated and still believe in the agency force that we have out there. We increased it this year in new recruits. We were able to have a higher conversion rate than we normally have. So 16% of those converted into sellers as we go through that process. And then the last thing I'd say is that we increased the productivity. So I totally agree with you that there's volatility in the market if you look at through these lands, but they had no material impact on us. The other thing I would point out too, though, is that we're also looking at things that we can do to make sure that consumers get access to our products. You see us continue to be dedicated to making sure we have a strong brand out in the market. We know that there were some changes this year, about 22 million Americans were affected by ACA. We still sell our products though alongside major medical. We do not want to see people go uninsured, but you need to carry a major medical plan alongside our supplemental health. And we did see an increase though in activity coming from that group going through our direct-to-consumer channel. So we want to make sure that we offer our products however people need to get access to them, and we did have a 10.5% increase in that channel itself. So overall, I would tell you, no material impact. We are certainly making sure that our distribution is still networked through our agency force. We remain dedicated to it with recruitment and conversion. We have strong relationships with our broker channel. Again, we continue to see increase in broker sales and group sales year-over-year over year. So Dan, any further comment?

No, I think we're expecting 2026 to be a good year for us, and we're looking forward to it.

First question is back to Virgil on the U.S. I heard Max's comment that you've had significant increases in group sales. Can you talk about what kind of levels we're talking about here for group versus non-group sales? Yes, I'm just curious because I'm wondering if there's like explosive growth in group, what's happening to your voluntary benefits because the total sales number is still pretty low.

Thank you for your question. Let me start with the voluntary benefits. We have a substantial block of traditional products that many competitors don’t possess, which is advantageous for Aflac. This block has been generating high profitability for many years, and we remain committed to it, primarily through our agency force. It's important to note that while we are enhancing our products, including revising our accident and cancer offerings, our traditional business has been flat to negative over the past few years, including last year. This core business anchor means we do not see the significant explosive growth we see on the group side. If we look specifically at our group policies, the overall growth was 14%, significantly outpacing the industry and competitors. For instance, our network dental product, classified as a group benefit, saw an increase of 48.8%. Additionally, our life absence disability block rose by 11.3%, and our traditional group benefits from the acquisition of Continental American increased by 11.7%. We are experiencing solid growth in the group segment, largely driven by our strong broker relationships, which I am very pleased with. Our focus moving forward includes two main areas. First, we aim to unify our channels to provide a cohesive experience through platform and technology as we head towards 2026. Second, we will continue to invest in our traditional business by enhancing our products, recruiting, and improving our enrollment technology, which we launched in the first quarter of this year, anticipating it to benefit that channel.

This is Dan. I want to make one other comment, and that is, as we reflect back over the COVID period, and you look at our distribution channel, it wasn't the product that changed things. It was the number of producers out in the field force selling for us. They were pulled away to a degree because it was total commissions and they were shut down and replacing those people has taken some time, but we are having success with that, and we've been working on the quality of the producers, and they've been producing at a faster pace than our old new producers. And so that's to give you some context on why that old channel has slowed down. So it's part of recruiting, recruiting, recruiting.

Okay. My follow-up is on Japan. I guess listening, Dan, to you describe the sales outlook in Japan for '26, it sounds pretty good, which follows a very good '25. Curious why that's not translating to better earned premium growth. We're still in that negative 1% to 2% range on a core basis. Are we more likely to see an inflection in 2027?

So Tom, we're somewhat affected by very strong persistency. If you think about Japan, it has a very large in-force block, and the new sales we add each year are relatively small compared to the total in-force block because of our high persistency. It takes time for increased sales to contribute to growth in the overall in-force block. COVID impacted our sales for a couple of years, leading to a significant gap between sales and lapses. We are getting closer to closing that gap now, and once it turns positive, we will eventually see net earned premium growth in Japan. We anticipate that will happen in the near future, but even into 2026, we expect that lapses will still surpass total sales.

I just had a follow-up on the Japan premium growth. I know you guided to sort of the underlying growth, but could you talk about any of the more, I guess, non-underlying or noncore parts of it, just so we are making sure we understand how the guidance kind of looks with the actual premiums that will come in? Because I know there's some paid-up policies and maybe reinsurance impact. I just want to make sure I have that clear.

In our guidance indicating a negative 1% to negative 2% for that metric, we recorded a better figure of negative 1.2% in the fourth quarter. We account for the impacts of deferred profit liability, paid-up policies, and potential reinsurance. Any reinsurance executed during the year is not included in that guidance. For instance, if we were to transfer a substantial portion of business from Aflac Japan to Aflac Bermuda, it would affect the net earned premiums in Aflac Japan, but those premiums would be reflected in Bermuda's legal entity and the Corporate and Other segment instead. Essentially, this is merely moving premiums from one area to another without affecting the overall premium totals for the company. The significant difference between the net earned premiums, which were negative 1.9% in the fourth quarter, and the underlying 1.2% is primarily due to the paid-up status, with some impact also from the deferred profit liability. There was minimal effect from reinsurance in the fourth quarter. I would expect that impact to be slightly smaller because we have a declining balance of paid-up impact coming through.

I'll begin with the last part. The software sector is currently attracting significant attention due to developments in the AI field. In our credit portfolio, software-related companies represent approximately 1.5% of our total exposure. Half of this exposure is in our middle market loan portfolio, which is well-diversified with all positions being first lien senior secured, and an average loan size of around $15 million. The remaining half consists of investment-grade exposure and has an A- rating. There are many positive aspects of these software companies from a credit perspective. We are aware of the potential risks posed by AI and are monitoring the situation closely. However, at this moment, we are confident in our overall software exposure.

This is Virgil. Let me share our operational updates. I spent considerable time in Japan last year and want to acknowledge our Aflac Japan team. We are exploring AI investments in various ways and collaborating closely with the FSA. Our primary focus is on enhancing the enrollment process for our product distribution. Additionally, we are examining how AI can drive product innovation, applying insights from our Japanese team to our work in the U.S. In the U.S., we are assessing how AI can improve operations across the company. We’re not using technology to replace our people, as our business relies heavily on personal interactions for fulfilling promises and processing claims. We aim to leverage AI to support our efforts. We have automated over 60% of claims in our traditional business using machine learning techniques, and while AI assists claims adjudicators by providing guidance, no claims are fully resolved by automation without human oversight. We are also enhancing our enrollment process in the U.S., with new automation aimed at increasing agent efficiency during face-to-face meetings with consumers. Much of the rapid development of this technology was driven by AI, enabling us to bring it to market significantly faster than usual. In conclusion, we are committed to leveraging AI in our operations, with its current role focused on assisting our efforts in this rollout.

Thank you, Jamie, and thank you all for being here today. Please mark your calendars for December 3 for our financial analyst briefing; we will provide more details as that date approaches. In the meantime, if you have any questions, feel free to reach out to Investor Relations, and we will try to assist you as quickly as possible. Thank you all for joining us. Have a great day.