Welcome to the Aflac First Quarter 2020 Earnings Conference Call [Operator Instructions]. Please be advised, today's conference is being recorded. I would now like to turn the call over to Mr. David Young, Vice President of Aflac Investor Relations.

Thank you, Brittany. Good morning, and welcome to Aflac Incorporated first quarter call. As always, we have posted our earnings release and financial supplement to investors.aflac.com. There you will also find slides relevant to today's remarks. This morning, we will be hearing remarks about the quarter as well as our operations in Japan and United States amid the COVID-19 pandemic. Dan Amos, Chairman and CEO of Aflac Incorporated, will begin by discussing the impact of the pandemic and our response. Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the first quarter before providing perspective on future clinic exposure to COVID-19 and commenting on our Group Benefits acquisition. Then Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments will provide investment highlights from the quarter, including an update on our investment portfolio and related stress test. Max Broden, Executive Vice President and CFO of Aflac Incorporated will conclude our prepared remarks with a summary of first quarter financial results and current capital and liquidity. Joining us this morning during the Q&A portion are members of our executive management team in United States. Teresa White, President of Aflac U. S.; Rich Williams, Chief Distribution Officer; and Al Riggieri, Global Chief Risk Officer and Chief Actuary. We are joined by members of our executive management team in Tokyo as well at Aflac Life Insurance Japan; Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; and Koji Ariyoshi, Director and Head of Sales and Marketing. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although, we believe these statements are reasonable, we can give no assurance that they will prove to be accurate, because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release is available on the company’s Investors site, investors.aflac.com and includes reconciliations of certain non-U.S. GAAP measures. I'll now hand the call over to Dan. Dan?

Thank you, David and good morning, everyone. Normally, I’d begin by providing a high-level view of the quarter and how we performed, but we're in an unusual and unprecedented time. Instead, I want to start by thanking all of those who are on the front lines fighting the spread of COVID-19 and those who are providing essential services including our own employees. We truly appreciate all that you do. Our thoughts and prayers are also with those who are among the confirmed cases. This is a challenging time but we will get through it together. Let me start by addressing our enterprise-wide COVID-19 response efforts. The guiding focus of our actions has centered around; first, the health and safety of our employees and distribution partners; second, the well being of our policy holders; third, the business community and maintaining our operations; and fourth, prudent financial and risk management. I will concentrate on how we're protecting our people, operations and brand and ask Fred, Eric and Max to collectively cover how we've positioned from an operational, financial and risk perspective. First, I want to note that we took early actions when the news of the virus broke. We benefited from Japan providing us with an early window into the potential response efforts as they were about three weeks ahead of the U. S. in combating the spread of the virus. We also benefited from the Board expertise, specifically long time director, Dr. Barbara Rimer, who is the dean and Alumni Distinguished Professor of Gillings School of Public Health at the University of North Carolina at Chapel Hill. She advised us back in early February about the emerging threat of the virus. Early on, we implemented travel restrictions, shifted to working remotely and installed several social-distancing measures, both in Japan and the…

Thank you, Dan. I'm going to touch briefly on conditions in the first quarter and key variables we are tracking, provide some perspective on future claims exposure to COVID-19 and comment on our Group Benefit acquisition, which we expect to close later this year. As you can see from our first quarter results, we entered this crisis with strong margins, both in Japan and the U. S. We have the capacity to absorb a period of elevated claims, while maintaining important investments in our franchise. In terms of Japan, COVID-19 claims in the quarter amounted to ¥1.8 million. We also increased our medical product IBNR reserves to include ¥500 million specific to COVID-19. Taken together, there was very little impact from the claims related to the virus in the quarter. Thus far, in the month of April, we have paid out approximately ¥8 million in COVID-19 claims. As we look at expenses for the rest of the year, we expect downward pressure related to reduced overall activity, offset by a decision to accelerate ¥2 billion investment in our going paperless in our policyholder services operation. This paperless initiative is important for ongoing efficiency, supporting our distribution partners as they move towards digital production and business continuity in the current environment. Turning to the U. S., we had very little in the way of COVID-19 claims during the first quarter, but did add approximately $3 million to IBNR reserves specific to COVID-19 and based on disclosed infection rates as of the quarter end. Thus far in the month of April, we have paid a total of $1 million in COVID-19 related claims. As we look at the U. S. expense dynamics, we would expect expenses to remain stable as we push forward on key growth initiatives and factor in the Zurich…

Thank you, Fred. We ended the first quarter in a strong asset quality position, which I will comment further on in a moment. Impairments experienced in the quarter were partly due to the adoption of a new accounting treatment for loan losses, which many of you know as CECL. This accounted for approximately half of our loss reserves. In addition, we impaired two energy names, both of which are below investment grade. Net investment income was modestly positive to our plans, a result of stable rates in Japan. And in the case of U. S. dollar loan portfolios, because we locked in the majority of our floating rate income and our associated hedge costs prior to the large drop in LIBOR. As we look forward, the low rate environment will be a headwind to net investment income. In addition, our full year 2020 plan presume certain deployment objectives for our middle market loan portfolio, which includes our recent strategic alliance with Varagon. We have seen that markets slow and do not currently expect to invest as much money in 2020, which will negatively impact income. As an offset to these challenges, we also expect to slow down in prepayments in our loan portfolio. Many of these higher yielding loans have LIBOR floors that protect our income against low rates. So, we expect to retain much of this protection in the current environment. We also expect out performance from our floating rate income hedges due to more loans hitting LIBOR floors, given the significant LIBOR decline. In terms of our alternative investment portfolio, namely private equity and real estate equity, we like the rest of the industry, are likely to experience lower returns in the second quarter as these results typically lag by quarter and track public equity valuation. Fortunately, since…

Thank you, Eric. Let me start my comments with a review of our first quarter performance with a focus on how our core capital and earnings drivers are positioned heading into the COVID-19 crisis. For the first quarter, adjusted earnings per share increased 8% to $1.21. The strengthening yen benefited earnings in the quarter by $0.01. As a result adjusted earnings per share on a currency neutral basis rose 7.1% to $1.20 per share. Adjusted book value per share, including foreign currency translation gains and losses, grew 8.9% and the adjusted ROE excluding foreign currency impact was a strong 15.8%. A significant spread over our cost of capital. There were no onetime items to call out for normalizing purposes in the quarter. Turning to our Japan segment. Total net premiums for the quarter declined 2.1%, reflecting perspective policies paid up impact and to pay medical policies sold in 2018 reaching paid up status, while net premiums for our served sector protection and served sector products was flat year-over-year. Japan's total benefit ratio came in at 69.4% for the quarter with served sector benefit ratio coming in at 59%. We did not experience any increased incidents rates in our cancer block this quarter as we did during the back end of last year. Our expense ratio in Japan was 20%, down 20 basis points year over year. In the current environment, we experienced lower promotional spend, which we view as primarily timing related and lower surrenders brought down our back amortization. Both factors contributing about the same to the decrease in the expense ratio, which was driven by strong expense discipline as revenues are under pressure. Net investment income increased 4% in yen terms despite variable investment income coming in at the lower end of plan, driven primarily by higher allocation…

Thank you, Max. Before we begin, I just want to ask that you please limit yourself to one question and a related follow up to allow participants an opportunity to ask a question. Brittany, we’ll now take the first question.

Thank you. We will now begin our question-and-answer session [Operator instructions]. And our first question comes from Humphrey Lee from Dowling Partners.

Good morning, and thank you for taking my questions. In terms of the capital and liquidity stress test, I was just wondering like when you look at the potential kind of downgrades and rating migrations. Can you share some of the -- what was your findings were related to that, how's that impact your RBC or your capital position?

We're not disclosing in detail the underlying assumption for specifically for rating migration. But at a high level I can comment that rating migration is predominantly an issue when it comes to risk based capital and less so when it comes to our solvency margin ratio in Japan. It's obviously a factor in Japan as well but it's really to RBC formula that is more sensitive to rating migration. Our asset leverage in the us is fairly low. And even when we'll look at rating migration, it has a fairly limited impact on our capital conditions in the operating subsidiaries.

And then my final question related to sales in U. S. and Japan. I clearly understand that there's going to be a very fluid situation, there's a lot of unknowns, but looking at the decline in April. Is there any of difference between the beginning of the crisis versus kind of more towards the late April? Do you see a change in productivity or sales decline maybe in a sense and maybe how your agents are adapting to the new situation?

Let's, do this. This is Fred. Let's split this up and have our colleagues speak directly to their markets. And so perhaps we'll start with Koide and Koji to address how they're adapting in Japan to the new environment and then we'll switch to Teresa and Rich Williams.

Yes, Koji will answer to that question…

This is Koji, let me talk about agency first. So the state of emergency has been declared effective April 7th to seven prefecture, major prefectures in Japan and this state of emergency expanded to all prefectures in Japan on April 16th. So as a result, activities of the agencies have turned to be refraining from voluntary training from face to face activities. And we have also decided to suspend or close down our shops. And in Japan, there has been some impact from coronavirus from mid-February. So as a result, the number of people coming to our shops or going to face to face solicitation have been declining. And then as we got into April, because of the state of emergency, face to face solicitation was refrained, as well as we had to stop or close down our shops as well. So as a result, the agencies are not doing face-to-face solicitations anymore. Instead the combination of phone calls and mail outs are being done by agencies. However, because of more and more customers are staying home, there's a better chance of being able to communicate with customers. Although, the policies may not be purchased right away, it is good to maintain relationship with customers and expand or enhance relationship with customers and also to develop new prospective customers as well. And in May, we are trying to send out a direct emails nationwide and there will be follow up calls made after direct mails. So, we do believe that this will be successful and see some results in May. And during this time, we are also conducting trainings to the sales agents of a large exclusive agencies using the web. So, there are some advantages that we are able to conduct the training in a very efficient manner rather than visiting them or having them visit us. And at the same time, our agencies are starting to feel that the benefit or the convenience of using digital tool. So as a result, we do believe that there will be some improvement in efficiencies, as well as productivity by leveraging digital tools. That's all from sales perspective.

Let me say one other thing. I want to make sure it's clear. The closing of shops is only temporary. We're still going to be using the shops. It very much plays an important role in Japanese culture. They actually like to bring the families in and sit down and discuss their overall products that they own and what they have and what this has done for us, talking about with change brings opportunity, it forced our singles associates to use technology more and ultimately will enhance us long-term. So, I wanted to be sure we said that.

And Rich Williams, why don’t you comment on the U. S. and our activities to pivot.

So Humphrey, thanks for the question. I'll just speak maybe near-term about what we see, the preparation for work site and then really what the future holds. Really through the first 11 weeks, we're seeing a very favorable quarter play out. And then as everyone knows, we had 42 state stay at home or shelter in place and that basically just stopped the progress of worksite sales. So, near term until businesses get back in business, I think we'll see about this level. From a preparation perspective for the worksite, we've always had multiple enrollment options, face to face, enrollment call center, self enroll using digital means. And what you're seeing right now is really the ingenuity of our sales force in leveraging those latter two tools enrollment call center and co-browsing and self enrollment to be able to sell in this in a sort of impaired environment. I think thirdly and more broadly, I know both Dan and Fred made these comments is the plan for the future. We're expanding our value proposition to increase access and distribution diversification, with our consumer markets, building at that business, as well as our Aflac dental and vision and now with our Aflac Group Benefits, I think that that's the perspective of the U. S.

So Humphrey, hopefully that covers it for you and others in terms of what we're seeing out there production wise and this attempt to pivot. I think one general theme we're seeing, both in Japan and the U. S. is that digital communication non face-to-face communication has always been the secondary approach, the primary being face-to-face. Now you have agents and distribution partners having to pivot to making digital the primary and face-to-face a secondary, that takes a little bit of time to make that switch. And so we'll just have to be patient and work to support those efforts. We can go to the next question.

Thank you. And our next question comes from Nigel Dally from Morgan Stanley. Sir, your line is now open.

So, I wanted to question, I had a question on the U. S. operations, small businesses clearly being hit very hard and in addition to lower sales, you mentioned pressure on persistency. How much high should we expect lapses to go? Is there going to be a major hit? And I think you mentioned 3% potential premium decline, but I don't think you mentioned the sales and persistency assumptions and we should base that. So any color there would be helpful.

Yes, I think as it pertains specifically to persistency, it's a very tricky dynamic. We have historically seen our persistency, for example, during the last financial crisis, track unemployment levels and that is that we see greater lapsation or weakness in persistency during periods of high unemployment. And so it stands to reason we would have that as a sensitivity test or a stress test as part of looking at the U. S. and that's why we provided that number. Obviously, it's quite severe in its approach, particularly any sort of prolonged level of unemployment at the levels I discussed 20%. But nevertheless, it's a worthwhile stress to apply. I would say that one other aspect to be aware of is that we're providing right now guarantees, if you will, waivers of premium payments while guaranteeing the policy remains in place. And it defers by state but generally speaking, it tends to be upwards of 90 days or so, 60 to 90 days depending on the dynamics. Similarly, we’re doing that in Japan. When you do that in the United States, what happens is you see actually persistency remain high until such time those efforts are released and then you'll find a level of shock last typically, particularly if there's unemployment associated with the crisis. We know this. We have some experience in this, because this is very commonly done in states where there's been natural disasters, hurricanes, even recently, tornadoes in Tennessee for example. And so this is not an unusual event. What is unusual is that it's nationwide. And so what we're trying to do is understand what that sensitivity might be like. It has very little bottom line implications, because you're releasing reserves, you're writing off DAC. And so this is not necessarily a profitability or margin issue, it's really more related to your earned premium. And that's why we provided that forecast. I think Nigel, that's a very severe stress. We certainly hope we wouldn't get there. We find it beneficial that the stimulus packages that are being announced are directed towards small businesses and are wired to payroll and maintaining employment, which is how we collect our premium and how we sell our product. So there are some offsetting or mitigating factors, but we have to take a conservative approach when we're applying a stress test.

Thank you. And our next question comes from Jimmy Bhullar from JP Morgan. Sir. Your line is now open.

I just had a question on the Japan Post and if you could just give us an update on what's going on there, and how you see your business sort of trending through the post over the next, especially in the near-term?

Well, I think Koide, you should start with that and then I might say something afterwards. Koide?

Japan Post Group is currently doing additional research or investigation into their policy holder base, and they are also trying to gain confidence of the policy holders at the same time. And although the administrative order for suspending their sales was until the end of March, Japan Post is voluntarily refraining from sales at this moment still from April and after as well. So from an asset perspective, we are supporting Japan Post Group’s activities to recover or reinstate the confidence of the customers and we do respect and we like to support their activities. So what we are trying to do right now is to help them conduct, to take in the customers’ needs and then try to sale and try to train them to do solicitation from that perspective. And then at the same time conducting these kind of trainings, we are also enhancing solicitation management activities as well. And what we are expecting is that whenever Japan Post sales resume, they are able to sell our counter insurance based on customer needs and have appropriate solicitation management in doing their sales. And the situation continues that since Japan Post Group is refraining sales of Japan Post insurance product, which means that our counter product is not selling that much as well, so we are in that situation. And that's all from me.

I'll make a couple of comments. I don't believe our Japan Post relationship’s ever been any stronger. I believe, and no one knows in these uncertain times, but this is just my personal belief and gut feelings from being an CEO for 30 years is that, when the COVID issues pass to some degree and we go back to whatever the new normal is, we'll see a pickup in Japan Post and things will start back again. And so, I'm encouraged about that. As you know, they're our largest shareholder and we are confident that that relationship was made even stronger with that acquisition and it's in their best interest and our best interest to see cancer insurance grow with them, and I think we'll see that moving forward.

Thank you. And our next question comes from John Barnidge from Piper Sandler. Sir, your line is now open.

This question is on the investment portfolio. Can you talk about rental forbearance experience, and then maybe based on communications what your expectations for May 1st are?

Today or at least through the end of March, we didn't have any. We certainly expect going forward there to be some. We don't necessarily think a huge amount just because of the nature of our properties. But where we do have them, as I mentioned in the speech, will be making more amendments to loans, getting other protections in return and just really adjusting cash flows. So, we do expect those but we don't expect financial difficulty at the end of the day for those sponsors that may need it.

Thank you [Operator Instructions]. And our next question comes from Erik Bass from Autonomous Research. Sir, your line is now open.

Can you provide a bit more color on how you're thinking about the NII outlook both near-term and also beyond 2020, when some of the current hedges roll off? And I think you have some more reinvestment risk.

Well, as we reported, the first quarter was slightly better than we had expected. We did get most of our deployment and middle market loans drawn by the end of February for the quarter. So, that was fortunate just because as I reported, it'll be slower rest of the year. As we think of the rest of the year, I'll put it in two buckets, stable and variable, the alternatives just because it's two different stories. On the stable, we actually expect it to be a fairly decent year, despite some of the headwinds of lower rates. On our floating rate book, as I reported, we locked in our hedges and our income. So, despite the low drop in LIBOR, we're protected by the hedges we did and the LIBOR floors. And in fact because of the precipitous decline in LIBOR, our hedges actually ended up performing better than we expected, because more loans hit the floor that was so extreme. So actually we were able to book some of that extra income, if you will, which will help offset some of the headlines naturally from lower rates. The other thing to mention for the year, part of our allocation actually does go to yen assets. And in a surprise that we haven't seen in a number of years, yen yields have actually been stable to going up a little bit. So, relative to our plan that put us in a good position and when we are buying yen, we continue to see actually attractive opportunities in yen public credit as well as some yen private placements. So we can find good credit and earnest spread. So on that part of the allocation, doing relatively well. Obviously for alternatives, we're expecting lower variable income versus our plan. Now that will…

Thank you. And our next question comes from Tom Gallagher from Evercore. Sir, your line in now open.

Fred, just a follow up on your question about premium waivers that you had mentioned, 60 to 90 days in the U. S. Can you comment on what percentage of your in force in the U. S. is currently paying versus what percent is on this premium waiver? And is that a decent way to gauge some proportion of that might end up lapsing? Is that the way you're approaching it?

You know, it's a good question and we're studying all those metrics, Tom, for that reason, but it's a bit early, to give you anything with any sort of concise nature. It's just been rolled out state by state. We’re just getting into it. What I would tell you is we're collecting our received premium. We're calculating our received premium. And actually I just saw a report on that yesterday and it was into the month of April, which is really where things are kicking in. And so far we haven't seen much movement in terms of collected premium. I think it's down a little bit.

I think we have 86.2% of premium collected versus 87.6%. So we're still doing pretty well on premium collection and that's collected through invoices to the worksite. It's a little bit more on the group side, 89% collected. But we're doing relatively well.

So we're tracking that, Tom, and we'll have to continue to watch it. But we've been here before. You know, as I mentioned earlier we've had to do this in various states Florida, Texas, et cetera, with hurricanes, California fires and so forth. So we understand how this works and typically operates. And so, we've got a good handle on it.

Thank you. And our next question comes from Alex Scott from Goldman Sachs. Your line is now open.

My first one is just a quick follow-up on the last question actually, and I'd just be interested. Is there anything going on in Japan around premium relief and any way to think about an impact there as well?

We can have Koide add any comments he wants, but the answer is yes. There is a somewhat industry adopted conventional practice of allowing premium waiver for an extended period of time. I think the big difference in Japan is that you tend not to see necessarily implications for persistency, because these policies are age priced there. As you know, the Japanese consumer values the policy and that's very specific intentions around the policy protecting savings and their livelihood. And so while the waivers do matter from an economic perspective, we tend not to see dramatic movements in persistency related to what I mentioned earlier in the U. S. But if I'm off on that, either Todd or Koide if you want to add any color.

Todd, could you answer that question?

Yes, Fred's correct. Just to be clear, this is a premium grace period, not necessarily a premium waiver that's being put in place. So we're not forgiving premium in any of these cases. Japan does have special circumstances, and as Fred said, has been adopted by industry each company that operates in Japan, is looking at the situation and the states of emergency and adopting their practices during that time period.

Thanks for making that point, Todd that both in the U. S. and in Japan, these are grace periods, not waivers in the sense of outright waving the collection of premium.

Brittany, I think that concludes our call.

Thank you for your participation in today's conference. All parties may disconnect at this time. Speakers, please stand by for your post conference.