Welcome to the Aflac 2021 First Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. David Young, Vice President of Aflac Investor and Rating Agency Relations.

Thank you, Parsha, and good morning and welcome to Aflac Incorporated first quarter earnings call. As always, we have posted our earnings release and financial supplement to investors.aflac.com. This morning we will be hearing remarks about the quarter related to our operations in Japan and the United States amid the ongoing COVID-19 pandemic. Dan Amos, Chairman and CEO of Aflac Incorporated, will begin with an overview of our operations in Japan and the U.S.; Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the fourth quarter and discuss key initiatives, including how we are navigating the pandemic; 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 on liquidity. Members of our U.S. Executive Management team joining us for the Q&A segment of the call are Teresa White, President of Aflac U.S.; Virgil Miller, President of Individual and Group Benefits; Eric Kirsch, Global Chief investment Officer and President of Aflac Global Investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac U.S. We are also joined by members of our executive management team in Tokyo 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 and Koichiro Yoshizumi, Assistant to Director 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 discussed 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 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. Good morning and thank you for joining us. At our first quarter conference call one year ago we were facing the early days of the pandemic, at that time I shared with you actions that we had taken to ensure that we protect the employees, the distribution partners, the policy holders and the communities. I'm proud of our response and our ability to handle these challenging times for everyone. Our people first embodies the spirit of corporate culture which we refer to as the Aflac way. Within the pandemic environment we are encouraged by the production of the distribution of the COVID-19 vaccines but we also recognize that vaccination efforts are still in the early stages around the world. Our thoughts and prayers are with everyone affected and we are cautiously optimistic while also remaining diligent. There is one essential message that I continue to emphasize with our management team. It is imperative that we control the factors we have the ability to control, and what we don't have the ability to control, we must monitor continually to be ready to adapt. This approach allows us to respond in the most effective way possible. In the first quarter adjusted earnings per diluted share increased 26.4% while earnings are off to a strong start for the year. It's important to bear in mind that they are largely supported by low benefit ratio associated with the pandemic condition. Before covering our segments I'll make a few comments about the overall perspective. Pandemic conditions in the first quarter continued to impact our sales results, as well as earn premium and revenues, both in the United States and Japan. We continue to expect these pandemic conditions to remain with us through the first half of 2021, but look for improvement in…

Thank you, Dan. I'm going to touch briefly on current pandemic conditions in Japan and the U.S., then focus my comments on efforts to restore our production platform in 2021. Japan has experienced approximately 575,000 COVID cases and 10,000 confirmed deaths since inception of the virus. Through the first quarter of 2021 and since the inception of the virus, Aflac Japan's COVID impact has totaled approximately 10,500 claimants, with incurred claims of JPY 1.9 billion. We continue to experience a low level of paid claims for medical conditions other than COVID, as policyholders refrain from routine hospital visits. . There are essentially 3 areas of focus in building back to prepandemic levels of production in Japan: Our traditional product refreshment activities, online sales driving productivity in the face of pandemic conditions, and active engagement with Japan Post to begin the recovery process in cancer insurance sales. As Dan noted, there has been a positive reception to our revised medical product. This product was designed to better compete in the independent agent channel, where we had seen a decline in market share heading into 2020. Sales of medical insurance are up 34% over the first quarter of 2020 and up 8% over the 2019 quarter. The new product, called Ever Prime, has enhanced benefits that, on average, result in 5% to 10% more premiums per policy versus our old medical product. The product also includes a low claims bonus structure that has contributed to growth among younger demographics. We have technology in place to allow agents to pivot from face-to-face to virtual sales and an entirely digital customer experience. The agent is not removed from the process. The agent can make the sale and process the policy from point of solicitation to point of issuance, entirely online without face-to-face contact. We…

Thank you, Fred. Let me follow my comments with a review of our Q1 performance with a focus on how our core capital and earnings drivers have developed. For the first quarter, adjusted earnings per share increased 26.4% to $1.53, with a $0.02 positive impact from FX in the quarter. This strong performance for the quarter was largely driven by lower utilization during the pandemic, especially in the U.S. and a lower tax rate compared to last year. Variable investment income $24.5 million above our long-term return expectations. Adjusted book value per share, including foreign currency translation gains and losses, grew 20.6%, and the adjusted ROE, excluding the foreign currency impact, was a strong 16.7%, a significant spread to our cost of capital. Starting with our Japan segment. Total earned premium for the quarter declined 3.6%, reflecting per policies paid up impact while earned premium for our third sector product was down 2.2% as sales were under pressure in 2020. Japan's total benefit ratio came in at 68.4% for the quarter, down 100 basis points year-over-year, and the third sector benefit ratio was down -- was 58%, also down 100 basis points year-over-year. We experienced slightly higher than normal IBNR release in our third sector block as experience continues to come in favorable relative to initial. This quarter, it was primarily due to pandemic conditions constraining utilization. Persistency remains strong, with a rate of 95%, up 50 basis points year-over-year. Our expense ratio in Japan was 21.3%, up 130 basis points year-over-year. With improved sales activity, expenses naturally pick up in our technology-related investments into converting Aflac Japan to a paperless company continues, which also includes higher system maintenance expenses. Adjusted net investment income increased 6.9% in yen terms, primarily driven by favorable returns on our growing private equity portfolio…

Thank you, Max. Now we are ready to take your questions. [Operator Instructions]. Pasha, we will now take the first question.

[Operator Instructions]. Your first question is from the line of Nigel Dally with Morgan Stanley.

So Max, perhaps we can start on capital management. Capital ratios look very strong. Cash balances, obviously very high. Concerns regarding credit are dissipating. In the quarter, you bought back more stock than expected given that, could we perhaps see some upside to your capital management plans? Or should we view the outside in buybacks this quarter as being a little more tactical in the decision to front-end your annual plans?

So Nigel, obviously, as we travel through the pandemic, we're now moving into more, I would call, normal economic conditions in environment, i.e., less impacted over time by the pandemic. That means that obviously, we gain confidence in how we can deploy capital, and you saw that in the quarter. At the same time, we're not fully out of this yet. And we will continue to look at the -- all the different deployment opportunities that we have. In the quarter, $650 million was a step-up from what we've seen previously, and that reflects our confidence in what we see the franchise driving and coming through over time. And going forward, we will continue to make sure that we hold capital in the right places around the company and deploy capital at favorable IRRs.

Great. And just a follow-up on premium persistency as well. In the space where the premium waivers have been lifted. Do you tend to see a spike in lapses? Any color there would be would be interesting. I just wanted to try to get an understanding as to whether there's perhaps a challenge for the remaining states that are yet to lift the executive orders?

Nigel, it's Fred. You do tend to see a bit of a spike in lapse rates when the state orders subside. And we have actually a fairly good amount of historical experience on this, as I might have mentioned in past comments. It's not unusual to have these state mandates put in place during natural disasters and the like. And so we've seen this before. What I would tell you, however, is when it comes to our financials, we try to account for a level of this in the form of do premium allowance, if you will, meaning the idea of what is an uncollectible amount of premium that may be out there embedded in the book of business that are being suspended, if you will, related to the grace periods. So we try to take into account such that when you do see these state mandates lifted, there's not a pronounced impact, if you will, or measurable impact to our actual financials, even though you may see lapse rates move around.

Your next question is from the line of Humphrey Lee with Dowling & Partners.

I guess my first question is on the U.S. underwriting. So Max, in your prepared remarks, you talked about lower claims incidents in January. Do you -- can you share in terms of like how the number claims submitted in January or in the first quarter in general compared to kind of the second and third quarter of last year?

So I can give you one example. So in the month of January, we had paid claims drop about 28% in the U.S. compared to prepandemic conditions. That's a very significant drop. We saw a significant normalization from that level in the month of February and further normalization in the month of March. This, to a large extent, explains the low benefit ratio in the quarter.

And you have to think that one of the reasons for it. And of course, no one knows for sure. But if you think back, we had just had the holidays, and we were seeing on the TV constantly by the government, be careful, don't go out, protect yourselves. We're going to have a spike and I think that brought in the lower numbers.

And one thing I would like to add, Humphrey, as well, as we look forward, is that there are certain of our products, you could see an increase in claims being filed as people go back for their physicals, go back for elective surgeries. Even in the line of cancer, we could see a step-up in terms of claims being filed in the future that did not occur during the pandemic. That's why we view the period that we just have been through as abnormal.

Yes. I guess, like the -- I understand people getting reminded during January, but at the same time, I feel like was state kind of opening up in the first quarter compared to where we were in the second or third quarter that the entire country was pretty much fully locked down. I guess I was just a little surprised to see the first quarter results being so much better than second or third quarter when we're kind of deep in the pandemic. So...

I think we were, too. I mean, we certainly would have given you closer projections, had we thought that was the case. So we were certainly surprised for January. But I think what Max is also saying is February and March, we're on target.

Our actuaries also remind us constantly that there is a little bit of a lagging environment, and that is there's a bit of a timing gap, as you can imagine, between the actual incident taking place, i.e., going to the doctor and then the filing of the claim. And so you can see some lagging. So we watch the trends and try to embed that in our forecasting as well.

So there wasn't any kind of IBNR reserves for non-cover claims that you both in previous quarter that given the projected incidents never materialized that you had a release. So it's not like that, just simply pure from an incidence perspective?

Yes, there was an element of that coming through as well. That moved our benefit ratio by about 1.5 points down.

Your next question is from the line of Jimmy Bhullar with JPMorgan Securities.

I had a question on just your sales in the U.S. and Japan through the quarter. And if you saw a noticeable improvement in March versus what was happening in January? And then relatedly, in Japan, what do you think of the impact of the lockdowns as well as the Olympics coming up and could that affect your sales negatively in late 2Q, early 3Q?

Well, I'll start and then turn it over to Japan. But in my talk, I said that we saw improvement with January -- February numbers were better than January, and March numbers were better than February, and we expect the second quarter to be better than the first quarter. And that was true in both countries. So from that standpoint, so let me let or whoever he would like to speak talk specifically about your questions.

Yes. This is from Japan. First of all, let me start out with the current situation in Japan, followed by the sales and our business in Japan as well. Well, first of all, as Fred mentioned earlier, the number of infections in Japan is 575,000, and the number of deaths in total is about 10,000. So compared to other countries, this number is much smaller. And this is -- the reason why we have been able to control much of the infection is because of the nature of our citizens that we normally wear masks, and we care very much about our hygiene. And on top of that, instead of taking the risk, people are really worrying about eating and dining outside, and the restaurants are reducing their business hours, and these things have been very effective. However, even still then, there has been a number of increase of the new infections in Osaka and Tokyo. And as a result, there is a third declaration of emergency, which was issued on April 25. However, the third emergency declaration in Japan is not a lockdown. It is much more focused measure. And for example, the state of emergency declaration that was issued this time only covers four prefectures, and the period that it covers is up to May 11. So compared with the past state of emergency declarations, it's very much limited in terms of time and location. However, the government is imposing much stronger restrictions on restaurants and shopping -- large shopping centers that they are asked to shut down their response and shops for the time being. And the vaccination started in April, starting from the elderly population. And since older population accounts for about 30% of the overall population, we are expecting that this will have a positive…

One thing I would add that's interesting, just to give you some color on the relative nature of the state of emergency. We sell product through what we would call retail shops, about a little over 20 of those shops are actually owned by Aflac and about 380 of those shops are through affiliate ownership, and we'll do about JPY 6 billion a year in a normal year of production through those shops. During the peak of the emergency orders in the pandemic in April of 2020, essentially all 400 of those locations were shut. Today, under the state of emergency issued around the Tokyo and Osaka and Kobe area, 13 of those shops are closed. And so it gives you a little bit of a perspective on the difference between the early days of the pandemic and more severe approach to emergency orders and the current period that's trying to balance productivity and businesses remaining open, while at the same time, exercising caution.

Okay. Any comments on how the Olympics would impact?

I'm sorry, Jimmy. Can you ask again?

Yes. I was just on like on the Olympics, is there going to be an impact on sales from the Olympics, do you think? Or should that not be much of a factor?

Go ahead.

This is Koji. We do not think there will be any impact.

Yes. That's essentially what I was going to say is we have not factored in any impact, and so we are not expecting.

I think the second part of that question was from the U.S. perspective. And I'll just mention this, as we see increase in vaccinations in arms and state mandates being lifted we are now starting to see the markets open up. We've also opened up our market offices, sales offices around the U.S. as well. So we're starting to see a lot more activity from a sales perspective. Virgil, did you have anything else you wanted to add to that?

No, I'll just reemphasize, Teresa, that as Dan stated and stated earlier, we did see the sequential improvement month-over-month with all sales is really driven by activity of opening up the markets in the offices, along with ensuring that we're continuing to drive our average weaker producers do mine.

That's it from the U.S. side.

Your next question is from the line of Tom Gallagher with Evercore.

Just wanted to follow-up on the U.S. just to get a handle on what you're thinking about earned premium. I guess, particularly the commentary about the small businesses still being in recovery mode, large employers, focusing on returning employees to work rather than modifying benefits. I guess that commentary sounded a bit cautious to me, but how are you thinking about those issues impacting your sales as -- and overall earned premium? It doesn't sound like you're adjusting your 3-year guidance for earned premium of flattish? Is it changing the trajectory of what you expect for '21 versus '22? Just a little more elaboration on those issues?

Will -- go ahead. Well, shorter answer is it's not we -- meaning, we have not adjusted our guidance or even really the path of that guidance, while down for the reasons we've talked about, most notably just simply sales being down. It is actually essentially on plan, meaning it is meeting our expectations and what we thought would take place, Tom. So we're not adjusting any of our thoughts for the roll forward.

Because persistency is 80% doing better than we thought.

Yes, it is doing better. And -- but I would say, overall, it's coming in just as we thought might happen.

Okay. And then just a follow-up on the benefit ratio. Max, can you give a sense for when you talk about very favorable in January and then gradually elevating, was March back up to around 48%, 49%? Or was it still below that? And is this still the possibility that 2Q is going to trend favorably based on the trend you saw in March?

The total benefits ratio is obviously heavily impacted by quarter end actuarial review studies. But I would say there's just tracking sort of paid claims. We were getting closer to a normal level in the month of March, still not all the way up to what I would say to be prepandemic levels, but we're getting fairly close.

Okay. So slightly favorable, but much closer to that level.

And that is factored into when we then look at our full year benefit ratio, as we sit here today, and we look out for our benefit ratio we obviously incorporate a whole host of different factors when we look at the full year, including the possibility of some pent-up demand in terms of claims being filed as well. I touched earlier on that, including a potential increase in cancer claims. That's factored into our revised guidance of being towards the low end or slightly below the 48% to 51% for the benefit ratio for the full year in the U.S.

Your next question is from the line of John Barnidge with Piper Seller.

The last time Japan closed proactively selling cancer insurance, the world looked a whole lot different. Can you talk about digital tools? I mean you talked about the new medical product and digital tools that help the distribution there. But can you talk a little bit about the digital tools you're working to bring to Japan post as they work to ramp up proactively starting the product, please?

Currently, digital tools are into both medical insurance and health insurance. The younger generation uses more than digital tools, it is being very much used by your people. Regarding the, we are preparing them to start using the digital tools. And we already have a plan to get started with the test marketing in some part of the JV. And the really has an intention that wanting to emphasize using the digital tool. So I'm sure that they will be fully leveraging the digital tools going forward. And that's it for me.

Yes. Even though -- what's interesting is even though sales were somewhat suspended in the system during this period of recovery for Japan post, the alliance never stopped. And that's important to understand. And so other areas of the alliance, including investing in the distribution platform, investing in mutual technology, certain investment in venture-related strategies. The entire governance structure and regular meetings with executive management and with frontline management, none of that was suspended. It kept moving forward. And much of it was designed around advancing technology and advancing process improvement between the two parties, taking advantage of this pause in the action to be ready to come back into market.

Our next question is from the line of Michael Ward with UBS.

I just had a quick question on the idea of delayed cancer screens. I know you've kind of touched on incidents or frequency but I was wondering if you had any updated expectations on the trend in cancer severity once the economy reopens? Just on the idea that delayed screenings are delaying the detection or worsening cancer conditions. And I thought maybe if you had some historical experience managing premium grace periods from natural disasters, maybe you've kind of seen this happen before.

I don't think that we have really gone through such a prolonged time, something like COVID and the type that has had. We saw in the very beginning of COVID that cancer screenings dropped significantly. That then started to normalize. So it's still sort of difficult to fully sort of see or have a clear expectation of it, what the impacts may or may not be. We are trying to be conservative in the estimates that we have and our expectations for what the different outcomes could be in general. I would also remind you that generally, severity does have a little bit of an impact on our claims, but it's relatively small. We're -- primarily frequencies really what drives our benefit ratio.

Your next question is from the line of Ryan Krueger with KBW.

I had a follow-up on the Japan post. Can you just give any -- I know it's early and there's a lot of uncertainty, but can you give any sense of, at least directionally, how meaningful you think their sales could be this year? And maybe how many years it might take for them to rebuild back to prior levels?

Yes. I think it's too early for us to tell. But what I would, Fred mentioned this, but I want to reinforce it, is we've got as good a relationship with the new management team as we had, if not better, with the old management team and being large shareholders that they are. They're also very interested and their stock and what they've invested in. And so it's a win-win opportunity. And I think it will be coming back but when you -- we're in uncharted waters with all of this COVID stuff. And so it's hard for us to go out when we don't know about it as well. But look, this is not in any projections, but my gut just tells me, and it's just mind. So for what it's worth, but that it's going to do very well, and it's going to be a little slow in the second quarter. And then they're going to ramp it up. The one thing I've seen with the Japanese over the years is they tend to analyze, reanalyze, reanalyze again and then all of a sudden move at once. So you don't -- in the U.S., we kind of ease into it, add a little more, add a little more and then it builds. If you take both groups at the starting line, the U.S. will always take off first. But at some point, halfway through that, Japan will all of a sudden decide, we're ready to go. And they will boil out and then all of a sudden go to that point. I believe we're in that stage right now. I believe that will go through the first quarter. But I think by the end of the year, you're going to see them coming back and pulling out. Aflac Japan is a little bit more reluctant than to say all of that. So I am not speaking on their behalf, but I've been doing this for 31 years. And I just have a real good feeling that also Japan post wants to make money, and they need to do those things. And Aflac's products with cancer insurance are something that consumer wants and needs. So when you add that to it, I would say there's a good chance. Now the downside is, something goes wrong with the -- with COVID or something like that. But that's not limited to us. That happens every business out there today. So I'm sure you take that into account. But if you exclude that, I feel pretty good about what's going to be taking place.

Your final question comes from the line of Gregory Peters with Raymond James.

This is Alex on calling in on behalf of Greg Peters. Maybe just one question on the Japan paperless initiative. Just curious if the adoption of digital has any acceleration of that initiative? And as well as are there any other social and environmental initiatives that you're pursuing related to the $400 million bond?

I think in terms of the Japan paperless initiative, it's on track. It's moving well. As you might recall, it's a JPY 10 billion, roughly 2.5-year investment. And I would say we're probably in the range of JPY 3 billion, perhaps approaching JPY 4 billion of investment to date. It's designed to take about 80 million pieces of paper out of the system. And it's largely oriented around our policyholder services platform, where when the application starts in a paper form, it remains in a paper form through the processing environment. And so we're looking to get that out of the system, and that benefits cost structure. It benefits business recovery because you can move information around the country of Japan, which can be prone to natural disaster, as you know, and so -- and then also finally has environmental benefits, of course. And so that's a big initiative. We expect to save about JPY 3 billion a year in the way of expenses, and it remains on track, and it is closely tied to the digitization of the platform. It's essentially one and the same. It's one of the major efforts, if you will, that's involved in overall digitization of the platform. In terms of the $400 million sustainability bond, yes, we have very well-articulated and dedicated plans for the investment of those funds. They largely surround classic sustainability investments, meaning climate, climate-related renewable energy investments. They also include, among other things, investments in opportunity zones in areas that suffer from a lack of income equality. And so those are largely the areas that we're targeting. And as you may know, in the sustainability bond, so-called green bond, et cetera, marketplace. There's very strict and well-defined requirements around what you invest in, the qualification of those investments, the tracking of those investments and the yielding of benefits from those investments. And so while it's a $400 million bond, my point in my comments was it's a much bigger effort for the company because it serves to set the entire structure up for broader-based investment, far greater than $400 million over time, particularly the utilization of our general account on ESG efforts.

And we would expect to earn favorable risk-adjusted returns on these investments.

Thank you, and I believe that wraps up our call. I want to thank everyone for joining us. Today, if you have any follow-up questions, please feel free to reach out to the investor and rating agency Relations teams, and I look forward to seeing you soon, hopefully, and also talking to you in the near future. Thank you.