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spk10: Good day and welcome to the AFLAC Incorporated Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to David Young, Vice President of Investor and Rating Agency Relations. Please go ahead.
spk05: Good morning and welcome. Thank you for joining us for Aflac Incorporated's second quarter earnings call. While I have your attention, I also want you to mark your calendars to join us for our financial analyst briefing at the New York Stock Exchange on December 3rd. Now, this morning, Dan Amos, Chairman, CEO, and President of Aflac Incorporated, will provide an overview of our results and operations in Japan and the United States. Then, Max Brodin, Executive Vice President and CFO of Aflac Incorporated, will provide an update on our financial results in current capital and liquidity. These topics are also addressed in the materials we posted with our earnings release and financial supplement on investors.aflac.com. In addition, Max provided his quarterly video update, which also includes information about the outlook for 2024. We also posted under financials on the same site updated slides of investment details related to our commercial real estate and middle market loans. For Q&A today, we are also joined by Virgil Miller, President of Aflac US, Charles Lake, Chairman and Representative Director, President of Aflac International, Masatoshi Kuide, President and Representative Director, Aflac Life Insurance Japan, and Brad Dislin, 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 perspective 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-US GAAP measures. I'll now hand the call over to Dan.
spk14: Thank you, David, and good morning. And we're glad you joined us. Aflac Incorporated delivered another quarter and six months of very solid earnings results. Net earnings per diluted share were $3.10 for the quarter and $4.64 for the first six months. On an adjusted basis, earnings per diluted share for the quarter were up 15.8% to $1.83. And for the first six months, we were up 11.5% to $3.49. From a broad operational perspective, we've generated profitable growth in the United States and Japan with new products and distribution strategies. We believe our strategy will continue to create long-term value for the shareholders. At the same time, we believe that the need for our products we offer is as strong or stronger than it has ever been before in both the United States and Japan. Beginning with Japan, We have continued to focus on third sector products, like our cancer insurance product called WINGS. As the new fiscal year began in Japan, we saw continued improvement in cancer insurance through the Japan Post channel. We have continued our strategy of introducing life insurance products, including Sumitatsu, which we launched on June 2nd. This product offers policyholders an asset formation component with nursing care option. It was designed to attract new and younger customers while also introducing opportunities to sell them our core third sector products. While still very early, we are pleased with how our agencies have sold this product, which drove a 4.5% sales increase for the second quarter. Being where consumers want to buy insurance remains an important element of the growth strategy in Japan. Our broad network of distribution channels, including agencies, alliance partners, and banks, continually optimize opportunities to help provide financial protection to the Japanese consumers. We will continue to work hard to support each channel. Overall, Koide-san and his team have done a great job of turning around sales in Japan and delivering record profit margins for the quarter. I am very pleased with their efforts. Turning to the U.S., we achieved a 2% sales growth for the quarter benefiting from good growth in group life absent management and disability and individual voluntary benefits. This is a welcome result as we enter the second half of the year that tends to be the heaviest enrollment period. At the same time, we continue to focus on more profitable growth by exercising a stronger underwriting discipline. Additionally, we've increased benefits in certain policies to improve the value for the policyholder. We believe persistency will remain strong as customers realize the value of their policies and the related benefits. We have also continued our disciplined approach to expense management, which Max will address. As we enter the second half of the year, we are continuing to focus on optimizing our dental and vision platforms. Overall, I'm pleased with what Virgil and his team are doing to balance profitable growth, enhance the value proposition for the policyholders, and curb the expense ratio. Their efforts contributed to the very strong pre-tax profit margin of 22.7% for the second quarter. Now I'll turn to our ongoing commitment to prudent liquidity and capital management. Max has done a great job leading his team to take proactive steps in recent years to defend our cash flow and deployable capital against weakening yen, as well as establishing our reinsurance platform in Bermuda. We have been very pleased with our investment portfolio's performance as it continues to produce strong net investment income with minimal losses and impairments. 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. We remain committed to maintaining strong capital ratios on behalf of the policyholders. We balance this financial strength with tactical capital deployment. We intend to continue prudently managing our liquidity and capital to preserve the strength of our capital and cash flows. This supports both our dividend track record and tactical share repurchase. We treasure our track record of 41 consecutive years of dividend growth and remain committed to extending it. I am pleased that the Board set us on a path to continue this record when it increased the first quarter 2024 dividend 19% to 50 cents and declared the second and third quarter dividends of 50 cents. We repurchased a record $800 million in shares during the quarter and intend to continue our balanced, tactical approach of investing in growth and driving long-term operating efficiencies. Our management team, employees, and sales distribution continue to be dedicated stewards of our business. Being there for the policyholders when they need us most, just as we promised, this underpins our goal of providing customers with the best value in the supplemental insurance products in the United States and Japan. In November, we celebrate our 50th year of doing business in Japan. Additionally, in June, we celebrated our 50th year as a publicly traded company on the New York Stock Exchange. We are reminded that one thing has not changed since the founding in 1955. Families and individuals still seek to protect themselves from financial hardships that not even the best health insurance covers. Today's complex healthcare environment has produced incredible medical advances that come with incredible costs. It's more important than ever to have that partner. We believe our approach to offering relevant products makes us that partner. We believe in the underlying strengths of our business and our potential for continued growth in Japan and the United States, two of the largest life insurance markets in the world. AFLAC is well positioned as we work toward achieving our long-term growth while also ensuring we deliver on our promise to our policyholders. I'll now turn the program over to Max to cover in more details the financial results.
spk02: Max? Thank you, Dan, and thank you for joining me as I provide a financial update on Aflac Incorporated's results for the second quarter of 2024. For the quarter, adjusted earnings per diluted share increased 15.8% year-over-year to $1.83, with a $0.07 negative impact from FX in the quarter. In this quarter, re-measurement gains on reserves totaled $51 million, and variable investment income ran $1 million above our long-term return expectations. We also received a make-hold payment, adding approximately $20 million, or 3 cents per share, to our adjusted earnings. Adjusted book value per share, including foreign currency translation gains and losses, increased 9.4%. and the adjusted ROE was 14.3%, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid. Starting with our Japan segment, net-earned premiums for the quarter declined 5.7%. This decline reflects a 7.4 billion yen negative impact from internal reinsurance transaction executed in the fourth quarter of 2023. and 4.8 billion yen negative impact from paid-up policies. In addition, there's a 1.2 billion yen positive impact from deferred profit liability. Lapses were somewhat elevated, but within our expectations. At the same time, policies in force declined 2.4%. Japan's total benefit ratio came in at 66.9% for the quarter, up 120 basis points year-over-year, And the third sector benefit ratio was 57.8%, up approximately 160 basis points year over year. We estimate the impact from re-measurement gains to be 140 basis points favorable to the benefit ratio in Q2 2024. Long-term experience trends as it relates to treatment of cancer and hospitalization continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid with a rate of 93.3%, which was down 50 basis points year-over-year. This change in persistency is in line with our expectations. Our expense ratio in Japan was 17.8%, down 170 basis points year-over-year, driven primarily by the expense allowance from reinsurance transactions and continued disciplined expense management. Adjusted net investment income in yen terms was up 28.4%, mainly by favorable impact from FX on US dollar investments in yen terms, lower hedge costs, higher return on our alternatives portfolio compared to second quarter of 2023, and call income. The pre-tax margin for Japan in the quarter was 35.3%, up 490 basis points year-over-year, a very good result. Turning to US results, NetBend Premium was up 2.1%. Persistency increased 50 basis points year-over-year to 78.7%. We are encouraged by early signs from our persistency efforts and will remain focused on driving profitable growth. Our total benefit ratio came in at 46.7%, 140 basis points higher than Q2 2023. driven by product mix and lower remeshment gains than a year ago. We estimate that remeshment gains impacted the benefit ratio by 170 basis points in the quarter. Claims utilization has rebounded from depressed levels during the pandemic and are now more in line with our long-term expectations. Our expense ratio in the U.S. was 36.9%, down 210 basis points year over year. primarily driven by platforms improving scale and strong expense management. We tend to benefit from seasonality in the first half and would expect higher expenses in the second half. Our growth initiatives, Group Life and Disability, Network Dental Ambition, and Direct-to-Consumer, increase our total expense ratio by 230 basis points. This is in line with our expectation, and we would expect this impact to decrease going forward as these businesses grow to scale and improve their profitability. Adjusted net investment income in the US was up 7.4%, mainly driven by higher yields on both our alternatives and fixed rate portfolios. Profitability in the US segment was solid, with a pre-tax margin of 22.7%. also a very good result. Our total commercial real estate loan watch list stands at approximately $1 billion, with less than $300 million in process of foreclosure currently. As a result of these current low valuation marks, we increased our CISO reserves associated with these loans by $14 million in this quarter net of charge-offs. We had six loan foreclosures and moved nine properties into real estate owned. We continue to believe that the current distressed market does not reflect the true intrinsic economic value of our portfolio, which is why we are confident in our ability to take ownership of these assets, manage them through this cycle, and maximize our recoveries. Our portfolio of first lien senior secured middle market loans continue to perform well. with losses below our expectations for this point in the cycle. In our corporate segment, we recorded a pre-tax gain of $23 million. Adjusted net investment income was $39 million higher than last year due to lower volume of tax credit investments at Aflac Inc. and higher volume of investable assets at Aflac REIT. These tax credit investments impacted the corporate net investment income line for US GAAP purposes negatively by $30 million with an associated credit to the tax line. The net impact to our bottom line was a positive $4 million in the quarter. To date, these investments are performing well and in line with expectations. We are continuing to build out our reinsurance platform and I am pleased with the outcome and performance. Our capital position remains strong, and we ended the quarter with an SMR above 1100% in Japan, and our combined RBC, while not finalized, we estimate to be greater than 650%. Unencumbered holding company liquidity stood at $4.1 billion, $2.3 billion above our minimum balance. These are strong capital ratios, which we actively monitor, stress, and managed to withstand credit cycles as well as external shocks. U.S. statutory impairments were a release of $7 million, and Japan FSA impairments were 10.4 billion yen or roughly $67 million in the quarter. This is well within our expectations and with limited impact to both earnings and capital. Adjusted leverage is 19.5% and below our leverage corridor of 20 to 25%. As we hold approximately 60% of our debt denominated in yen, our leverage will fluctuate with movements in the yen dollar rate. This is intentional and part of our enterprise hedging program, protecting the economic value of Aflac Japan in US dollar terms. We repurchased $800 million of our own stock and paid dividends of $283 million in Q2, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital. Thank you. I will now turn the call over to David. Thank you, Max.
spk05: Before we begin our Q&A, we ask that you please limit yourself to one initial question and a related follow-up. Then you are welcome to rejoin the queue. We will now take the first question.
spk10: To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Joel Hurwitz with Dowling and Partners. Please go ahead.
spk06: Hey, good morning. So the new product launch in Japan that happened in June had very strong sales. I guess, can you just talk about the target return on that first sector product and how it compares to the third sector product? And then what do you see as the cross-sell opportunity there?
spk14: I think Max might take that.
spk02: Yeah, let me start on product profitability. So when we look at this product through a gap lens, it has at or higher gap margins than our core third sector business. And on an IRR basis, this is obviously lower than our third sector business because of the very significant new business strain associated with the high reserves. But we have lined up reinsurance that we then expect on a post-reinsurance basis. It brings us to very, very attractive returns as well. Not too different from our core third sector business.
spk06: Okay. And the cross-sell opportunity there with the third sector products?
spk02: I think it will evolve over time, where obviously this product targets a younger clientele. That gives us the opportunity to build that relationship. And as we travel with that customer through their lifetime, we have an opportunity to then cross-sell both medical and cancer as well. So over time, I think there's a good opportunity for us to both and get the Sumitasa product to the younger clients, but then also over the lifetime cross-sell cancer and medical to those new clients.
spk14: Yeah, I think half-life campaign maybe would explain this better, but it's important that I say it, is remember with the Sumitasa product, we are writing a younger group who may have less disposable income than does an older set of potential policyholders. And so whereas with the older we might offer the Sumitas product or another product and our supplemental or third sector product, with this group we'd start by putting in one product, which would be the Sumitas product, And then in a year or so later, follow up and add more. So it's different as we're building that policyholder base, which of course is one of the things we promised you we would work toward doing. And Athlete Japan, we believe, is doing the right thing here for us.
spk10: The next question comes from Jimmy Bular with JP Morgan. Please go ahead.
spk11: First question just on the expense ratio in both the Japan and the US businesses. I think it was the best it's been in the past several years. So wondering how much of that is sustainable and driven by expense savings or other actions versus maybe just being timing driven by the timing of discretionary and spending and advertising.
spk02: Thank you, Jimmy. Let me start with Japan. 17.8% in a quarter is a very low number. We have a guidance range of 19% to 21%. And long-term, I think that is the range that we will operate within for the Japan segment. We tend to have some seasonality in Japan with the second half having a little bit higher overall spend. And I would specifically call out that Athlete Japan turns 50 this year, so we will have some promotional spend associated with that, including advertising and a lot of sales activities around that. Therefore, I would expect that for the full year that we would end up in the lower end of that 19% to 21% range. For the U.S., we also have had very good expense control, especially in the first half. There are timing differences where I would expect our spend would increase in the second half. And I would also caution you to please keep in mind that the fourth quarter every year has the highest level of sales activity. With that comes expense spend as well. So our expense ratio in the fourth quarter tends to be the highest. Over time, the U.S. still have a number of businesses that are not at scale, and therefore we're running those businesses with expense overruns right now. This includes our group life and disability business. It includes our dental and vision business. And it includes our direct-to-consumer business and to some extent also our group VB platform. As those businesses really reach that scale, then they will come down in expense ratio and we will no longer have that expense overrun. So that means that there is downward pressure over time to our U.S. expense ratio. But we're very pleased with the expense management and expense control uh for the first half and in particular in the in the second quarter but i would caution you um when you think about the full year i still would expect us to be inside of the range of 38 to 40 percent for the expense ratio in the us okay and then just maybe for dan or the japanese team you talked a lot about uh competition in japan on the last call
spk11: And it seems like as rates have gone up in Japan, some of the companies have cut prices to adjust for that. But what are you seeing in the competitive environment? And is it any different than what you've seen in the last few months or over the past few years?
spk14: Yoshizumi, would you like to take that?
spk01: Yes, thank you. Good morning, everyone. My name is Yoshizumi, and I'm in charge of sales.
spk09: Thank you for the question. Good morning, everyone. I'm Yoshizumi. I am in charge of sales in Japan.
spk01: So as you have mentioned, our competitors have entered third sector market. And so the environment is totally different compared with maybe five years ago or 10 years ago. And there are competitors that are launching very reasonable or low-priced products.
spk09: However, in Aflac, our concept is to launch and sell products that have values to our customers and not just lower products for the sake of lowering prices. Aflac is celebrating its 50th anniversary this year.
spk01: At that time, the treatment of the disease has changed.
spk09: And this is based on the history and the trust that we have from our customers in providing the appropriate insurance policies at all times by thoroughly thinking about what is needed in each environment or at times because the illnesses change, the treatment methods change.
spk01: 2022年の4月から2023年の3月までの公表されているデータですが、 販売件数の中では第3分野はAFLACがNo.1です。 今後もこのNo.1を維持していくべく、
spk09: What we will aim for is to continue to provide customers the most appropriate products for our customers so that we can maintain our number one position. That's all from me.
spk10: The next question comes from John Barnage with Piper Sandler. Please go ahead.
spk12: Good morning. Thank you for the opportunity. My first question is on distribution, the new first sector product in Japan. Your closest customer is an existing customer and one that doesn't have that product. I know the product was introduced in early June. Have you identified how much of the existing customer base is a target for this new product? Thank you.
spk14: They're translating. Give us one second. And Koie or Yoshizumi, please.
spk09: Hey, this is Yoshizumi once again. Let me continue to answer your question.
spk01: We have a large number of existing customers, as you know. And our target customers are young and middle-aged customers. And the reason why I say our target is young and middle-aged customers is as follows.
spk09: Well, first of all, the Japanese government is really pushing and encouraging the Japanese citizens to go after asset accumulation products and the Japanese government is offering various systems so that the Japanese citizens can do that.
spk01: And as a result of that, asset formation needs is heightening very strongly in Japan.
spk09: そこでその資産形成ニーズに応えるべく新しい商品を出したというところです。 And we've launched our new product in order to respond to that kind of asset accumulation needs in Japan.
spk01: この商品は発売後非常に好評で販売額を伸ばしているわけですけれども And this product is very well taken by the market and selling well and it is increasing our sales. これは After the payment is completed, the purpose is to use it as a death insurance, or to use it as a nursing insurance, or to create assets as a source of pension money. The fact that it can be chosen as an option at that time in various ways is a big feature that the customer is now wearing.
spk09: And the reason why this product is attracting attention is because there are various options that would allow our customers to choose after they paid up their premiums. For example, after paying off the premiums, this policy can be converted to death benefit or nursing care benefit, or the customer can receive cash value and use that cash as asset accumulation.
spk01: There are more and more touch points with customers, and sales patterns have been decided to talk about the third field. In this way, we are also providing training to our applicants.
spk09: and as we go through these kind of discussions with our customers there will be more touch points with our customers and there will be more opportunities for our sales people to talk to our customers about third sector products and we've already have this established sales pattern and we have trained our sales agent to do so というのが我々の目的 です。 So our purpose is to increase our third sector sales by using this new product Sumitas as a hook.
spk01: 我々は第三分野を中心に販売額を伸ばしていく会社です。 Because we are the company that would increase sales by centering on third sector product sales. その時代の若中年層の方々のニーズに従って
spk09: And a way of doing sales is to really ultimately sell third sector products by launching first sector product. And that is based on the needs of young and middle-aged customers at each time and period of time. That's all for me.
spk12: Thank you for that. Very helpful, my follow-up on distribution. Is the 50th anniversary plans mainly related to this product, or is it broader? Good to talk about that. Thank you.
spk01: Say it again, Yoshizumi. And as I just mentioned, it's not just about Tsumitas, but since we are a company that mainly sells third sector products. So for example,
spk09: for the 50th anniversary, we will be pushing for a cancer insurance sales. And in order to increase our touch points with our customers, we will be having campaigns to offer gifts to our customers.
spk01: We also have a concierge service that no other competitor have.
spk09: And so what we are planning to do is to appeal this concierge service in line with our 50th anniversary through the websites, TV commercials, and video services.
spk01: AFRAC Japanには AFRACだけを販売する AFRACと共に50周年を祝うアソシーツすなわちエージェントが
spk09: We have a large number of sales agents and agencies that only sell Aflac and have worked together with Aflac for the past 50 years. And these agents and agencies are extremely pleased and happy about celebrating 50th anniversary. And there's a very big momentum for these sales agents and agencies to sell a large proportion of third sector products.
spk01: We as a sales team would like to support these sales agencies at our maximum. That's all from me.
spk10: As a reminder, if you would like to ask a question, please press star then 1 to be joined into the question queue. The next question comes from Tom Gallagher with Evercore ISI. Please go ahead.
spk03: Good morning. A couple of follow-up questions on the Sumitaz product in Japan. In response to John's question, I just want to be clear. I'm assuming you're not selling this product. product to existing customers that already have third sector Aflac products. This would be all brand new Aflac customers. Is that correct?
spk14: Correct. Our thrust is to write new customers. But if someone wants to buy it, we certainly will sell it to them because, as was mentioned by Max, the profit margin is very acceptable on this product. And so, yes, we'll take anyone that wants to buy it. But it is not our push. We want the younger customers is what we're working toward.
spk03: And, Dan, do you have a – Are you keeping track of that to make sure this doesn't become a situation where the sales force kind of monetizes the in-force customer base and does a lot of selling there? Because then obviously that would limit the cross-sell opportunity.
spk14: Absolutely, we are. Now they can talk more about it. I just was cutting through the translation and Max can cover that a little bit more too.
spk02: Tom, we track that closely so we know what those numbers are. We will not necessarily publish those publicly, but it's an important factor that we keep track of.
spk10: The next question comes from Nick Anito with Wells Fargo. Please go ahead.
spk13: Hey, thanks. Good morning. Just wanted to touch on the U.S. a bit. You know, I know sales came in a little light in the quarter relative to the full year guidance. So just wanted to get your overall thoughts there on the confidence of hitting something in the guidance for the year.
spk08: Yeah, good morning. This is Virgil from the U.S. Let me say that I think the big takeaway is a very strong quarter for the U.S. because of the balanced approach. You heard and you saw from Max earlier, heard from Dan earlier, what we saw was an increase not just in sales of 2%, but we had an increase of 50 basis points in our premium persistency. We drove a higher benefit ratio that was intentional, some intentional actions to put more value into the hands of our customers. We lowered our expense ratio, and then that led to one of the highest pre-tax margins we've had in the U.S. in some years, 50 basis points and 22.7%. My point on that is that we knew going into the quarter, we came up negative in Q1. Second quarter, I mentioned previously earlier that we had made a lot of changes to go to a more profitable business. That was really focused in our group VB business. formerly this continental American business that we bought. We wanted to make sure that we are only bringing business that has higher benefits where people are actually filing claims and less churn. So we knew that would have an impact. So the 2% is actually right on target what I expected, but I am expecting a stronger push in the second half of the year. A lot of that is seasonality, but it's also what Max mentioned earlier, some scale we'll see from our buy the bills. We're going to see a stronger performance with the new products we bought with life and disability that we call plaids. We're going to see better performance in the second half from our dental and vision property. I mentioned before that we're making huge investments to stabilize that platform. We also announced a partnership with Skygen, who's bringing some operational excellence to the table with us to help manage that property. And so all in all, I'm expecting higher sales on the dental property, stronger push with Plads, and then continue what we have driven year over year with our veteran agents and with our broker partnerships, good performance with them, and we'll see a higher yield in the second half of the year.
spk14: And I just want to make a comment. I think that we've seen one of the best years and certainly one of the best quarters in the US in terms of we've got a lot of balls in the air. And to realize that they brought up the loss ratio, they brought down the expense ratio, they have switched business And our business is more complicated as we go into other products. They're training their people better. I just have kudos to Virgil and the team for the hard work they're doing. And I think long term, our U.S. operation is going to be a much stronger company because we're doing all the right things I think we need to do to prepare us for the future. So the sales, yes, I want more than 2%, but I promise you the 2% that we had is much bigger than a normal 2% because it's cleaner business, it's more profitable, and it should compound as we move forward.
spk13: That's helpful. Thanks. I guess sticking with the U.S., can you just touch on recruiting trends there? I know you said you still have
spk08: bit of a way to go to get back to pre-pandemic level so it would be just good to get your thoughts on the recovery there yeah uh in the first quarter you know we came up negative on recruiting came in uh with the second quarter though very strong i think we're over a ten percent increase uh i see us continuing that trend uh going forward in the second half but What I mentioned, if you kind of go back and look pre-pandemic and you look at where we are today, we're going for quality recruiting, we're going for better conversion rates, and then that's leading to the higher productivity. You continue to see better productivity from what we're seeing with our agents, and that is really the bigger factor for us. Last year, we recruited over 10,000. I would expect the same this year. We've got some national recruiting efforts going on right now across the country. What we really do is we leverage support from headquarters to drive a message, and then we leverage what we call a nomination process. It's the local agents, local brokers going out telling people about the Aflac career path and bringing people in to listen to that story. And then we actually turned them into recruits and ultimately trying to get them to be average weekend producers. I am very pleased with what we did in the second quarter. Some of those efforts will definitely continue in the third and fourth quarters also.
spk10: The next question comes from Tom Gallagher with Evercore ISI. Please go ahead.
spk03: Hey, thanks for taking my follow-up. It is Sumitas product follow-up question. Can you talk a little bit about how you think this rollout is going to go? Clearly, the June rollout seems to have been a big success. Would you expect this to become a much larger percentage of sales as you think about the rollout? over the next couple of quarters here. How do you think third sector sales are going to hang in there? Because I think it's being sold through the same distribution as your third sector. So I'm just wondering, while this gets rolled out, are we going to see a slowdown in third sector? How do you see that all playing out, I guess, over the near term, next couple of quarters? Thanks.
spk02: Let me kick it off, and then I'll hand it over to Yoshizumi-san for some more details. We do not have any explicit caps around this product. And the reason why is because it's producing very good returns for us, both from a profit margin standpoint and also from an IRR standpoint, i.e. with a significant spread to our cost of capital. So we actually do want to sell quite a bit of this product. That being said, this product is very much about how it can lift our third sector franchise. We still believe that we are a third sector company, and we want to make sure that we keep our exceptionally strong position in that marketplace as the number one third sector player in Japan. So that is the context of this product, and Yoshizumi-san can help give you some more details in terms of the timing of the full rollout of the product.
spk01: Thank you. This is Yoshizumi.
spk09: I would like to answer your question.
spk01: First of all, this product was launched on June 2nd. We have been able to record a very successful big sale. To put it simply, we were preparing to sell at a target that was easy to sell.
spk09: And the reason why we haven't been able to record such big sales at the beginning of its launch is because we, meaning our distribution channel, has been fully prepared to sell this product, where they should be selling, how we should be selling, and that's what we've been working on since the beginning of the second quarter. And the reason why this kind of preparation was needed was because And as our agents talked about Tsumitas to our new customers, our agents really need to practice how to sell this product.
spk01: And as a result, our agents did visit those customers that are easy for them to be talking to, and as a result, it made a big hit in the sales.
spk09: したがってこの7月以降、6月と同じような販売は到底見込めません。 And as a result of this full preparation for the June launch, we are not expecting the same level of sales from July and on. And we are quite sure that this product will serve that kind of a role.
spk01: And the big role that this product will play is to cross-sell third sector products.
spk09: And it would be easier for our sales agents to talk about third sector products to their customers once they start talking about Tsumitas. And that is the difference between other first sector products because Sumitaz has its own feature that can make the sales agents easily talk about third sector products.
spk01: So what we are expecting is to have Sumitaz
spk09: sell to a certain volume on its own, but on top of that, sell third sector products to a certain level as well. That's all from me.
spk14: This is Dan. I want to make a couple of comments. Number one is we normally don't show first month. We show a quarter of whatever the new product is. It is not unusual to have a spike. What I've always said is when we introduce a new product, no matter what it is, you have a spike and then it levels off. We're in the spike period, and we've seen that with others. But it will come down, as he said, and we expect that. So just keep that in mind. The other thing is that the numbers were small numbers in the past. And so that also as a percentage makes it look bigger than it normally is. There's nothing here that makes me think that it's any different from other new products other than it's doing very well, as a few of our products have. And we're excited about that and pleased that we were able to find a way to get the profit margins to acceptable levels so we could do this. We've been wanting to do it, but we haven't been able to do it. And given Max's credit, he has been able to find a way to help do this, and we appreciate that very much. on this part.
spk02: Tom, I want to address a question that you did not ask, but I think you wanted to ask, and that is, how is this different from the waste sales that we had in the years 2012 through 2014? And I would characterize it, there are three main differences. The first one is that we will do much more frequent repricing. of new business for this product and that's very important because this is a more interest rate sensitive product than our core third sector business the other one is that we will have a much more diligent management of the distribution channels and the third piece is that we are now utilizing reinsurance to make sure that we can relieve some of that new business strain and get the irrs higher And if you take all of that together, that is what makes this different from the way sales that we had that were very, very significant back in that timeframe of 2012 through 2014.
spk03: Thanks, Max. You stole my follow-up. That was great. Appreciate it.
spk02: Well, apparently it's teamwork.
spk10: The next question comes from Joel Hurwitz with Dowling and Partners. Please go ahead.
spk06: Hey, thanks for taking the follow-up. I just wanted to touch on net investment income in Japan and particularly the U.S. dollar portfolio. Unified Just for the May call and the slightly favorable VII, it seemed to have a pretty sizable step-up in yield from the first quarter. Just any color on what drove that, and do you think that the, I guess, the normalized NII level implied in Q2 is sustainable?
spk07: Hi, Joel. This is Brad Dislin. Thank you for the question. We did have a very solid second quarter, as you pointed out, and there were several things that drove that that we do think are sustainable into the back half of the year. Besides the adjustments that you've highlighted, short rates remain very attractive, even with the Fed likely to cut sometime this fall. Short rates remain very, very attractive compared to historical levels. And that benefits us in a few ways, including our significant floating rate portfolio. We also took some actions early in the year, some tactical things we did with the portfolio. We moved a few bonds around in our public portfolio to capture some yield opportunities. It was a pretty sizable switch trade. We also took advantage of some attractive spreads and accelerated deployment in our structured private credit portfolio. So we think the things that have carried us in the second quarter, these tailwinds, are going to continue through the second half of the year. Now, there are risks, of course, but we think we're pretty well positioned and should have a good second half.
spk06: Very helpful. And then just I had one on U.S. persistency. So, Max, you mentioned in your prepared remarks that you're encouraged by the early signs from some of the initiatives that you guys put in place. I guess just what are you seeing and how much improvement do you guys think you can drive in persistency in the U.S.?
spk02: I'm not going to put an exact number on that, but I would say that anything, if you get even something like 100 basis points is meaningful when you over time translate that into the economic impact that would have from additional net earn premium. So it's something that we will continue to drive over time. The other thing I want you to be aware of is that that persistency will jump around somewhat driven by mix of business. So our in-force in the US, it is gradually changing. So you are going to see more group life and disability business as a proportion of our in-force, which clearly has a much, much higher persistency rate than our average. And then also the same thing applies to, over time, our dental and vision business as well should have an improved persistency. We're driving all the underlying businesses and the way they improve persistency, but then the mix impact will be an important component as well. So over time, what we are driving is both that business-by-business improved persistency and then obviously the mix impact as well. So we will over time sort of call that out and give you some more colors on that as well.
spk06: I got it. Thank you.
spk10: This concludes our question and answer session. I would like to turn the conference back over to David Young for any closing remarks.
spk04: Thank you, Betsy, and thank you all for joining us this morning. I hope you'll be able to join us on the morning of December 3rd at the New York Stock Exchange or on our webcast for our financial analyst briefing. If you have any additional follow-ups, please reach out to the investor and rating agency relations team. We look forward to hearing from you. Thank you.
spk10: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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