John Barnidge: Good morning. Thanks for the opportunity. I had a question of – going back to the Japan sales target. I know you put out a press release in December about the Trupanion pet insurance partnership for Japan. Did that pivot remove any sales contribution from the ¥80 billion assumption? And can you talk – thank you.
Dan Amos: No, it did not.
John Barnidge: Okay. Then can you maybe talk about the growth opportunity for that product in the U.S. that was called out in the pivot and commitment to ownership stake? Thank you.
Max Broden: Pet insurance, we think, has a significant opportunity in the U.S. market because of the very low penetration of the product itself. For Aflac, we act as a distributor where these premiums, claims, et cetera, do not hit our income statement. So it’s an opportunity to – for our distribution to earn additional commissions, so in that sense, it’s very positive to Aflac. We do, obviously, have an alliance and a partnership with Trupanion that is strong through the equity ownership that we have in the company, and we capture significant economics over time through that equity ownership.
John Barnidge: Thanks for the answers. Appreciate it.
Operator: Your next question comes from Joel Hurwitz with Dowling & Partners. Please go ahead.
Joel Hurwitz: Hi. Good morning. First, a question on U.S. expenses. So the outlook looks to be largely in line with prior year. You’ve talked in the past on bending the expense curve and getting closer to a mid-30% expense ratio. Can you just provide an update on those expectations and when we should start to see a more significant drop in the expense ratio in the U.S.?
Max Broden: So you are starting to see a drop in 2024, and I would expect that to continue. There are two forces at play here, both expenses and our revenues. Expenses, we have active plans to improve our expense efficiency and reduce expenses both from a tactical and transformational standpoint. But also do not disregard the impact from revenues here. So as we have a number of businesses that are not at scale today, they will grow to scale. And when they do that, their expense ratios will drop significantly, and that will improve overall our expense ratio, i.e., push that down. The last piece to all of this is also where is our future growth coming from. It is generally coming from low expense ratio businesses. Predominantly, the group life and disability business that operates at a significantly lower structural expense ratio than the voluntary benefits business.
So if you take all of that together, we should have a trajectory that is going lower, and we would expect to operate in the 35% to 37% over time.
Joel Hurwitz: Okay. Makes sense. And then just on the recapture. Any color on the economic benefit? And then are there other blocks that you could potentially execute something similar on?
Max Broden: So overall, we’re very pleased with the economics. In terms of the impact on future run rate results, they’re relatively small, but they’re obviously favorable. So there’s a favorable run rate going forward. In terms of the other blocks out there, I do deem that this is – was the one that we really had out there. I wish we had more than we could do, but this was really the one that we had outstanding.
Joel Hurwitz: Okay. Thank you.
Operator: The next question comes from Ryan Krueger with KBW. Please go ahead.
Ryan Krueger: Hi, thanks. Good morning. First, I just wanted to follow up on the U.S. expense ratio, given that the group products also tend to have higher benefit ratio. So just curious, as you continue – as you do grow those business lines and the expense ratio comes down, would you expect, ultimately, for the margins in the U.S. is to increase? Or to what extent would that be offset by naturally higher benefit ratios on those products?
Max Broden: So I think that we have been in a structurally low benefit ratio period, which means that over time, I would expect our benefit ratios to increase. And you’re right, Ryan, to acknowledge that the mix impact will also push our benefit ratios higher. So we’re always going to see that mix impact impacting both expense ratio and benefit ratios going forward. And that will have a slightly negative impact to the pretax margin going forward because of mix. But I’ll kick it over to Virgil Miller to give his comments as well.
Virgil Miller: Thank you, Max. So first, we’re not pleased where we sit with the expense ratio. That is absolutely a focus for the U.S. And one of the things we’re doing is making sure we have plans that are going to continue to be in that curve, and you’ll see that happening over a period of time. And we’re basically challenging all of the U.S. leadership to be accountable for that, and it is tied to our little compensation. Now I’ll go step further, though, I mentioned that when we talked about the actual sales growth this year, one of the things we mentioned – you heard Dan mention earlier, is our strong underwriting discipline. We are making sure that we only put policies and business on the books that actually have better persistency and lower turnover rates with employees.
So the underwriting discipline itself will continue to help drive and bend that expense curve and drive up that benefit ratio, along with, as Max mentioned, the continued growth that we’re seeing in our vita bills, it would change the overall business mix in the U.S. So just to conclude, it is absolutely a focus for us and that we are confident we’ve got the right plans in place to start bidding that curve starting next year.
Ryan Krueger: Thank you. And then on Japan internal reinsurance, you’ve done a transaction two years in a row. Is there any practical limitation on doing something like that kind of pretty regularly? Or is there anything that would omit your ability to do that?
Max Broden: So Ryan, over time, we would expect that we could see at about 10% of the Aflac Japan balance sheet to Aflac Bermuda. There are no real legal limitations to it, but at the same time, we got to acknowledge any sort of risks associated with internal reinsurance to make sure that we don’t overexpose ourselves or we make sure that we can handle everything associated with it. So over time, I would expect us to see something like 10%. And to date, we have done about 4%.
Ryan Krueger: Okay. Great. Thanks a lot.
Virgil Miller: And this is Virgil. Let me just go back to add, when I was talking about being on that curve, that starts this year, in 2024. I just want to make sure you got that. I said next year, but I mean 2024.
