Frederick J. Crawford
President; Chief Operating Officer at Aflac
Thank you, Dan. I'm joined here in Tokyo by our Aflac Japan leadership team led by Masatoshi Koide, President of Aflac Japan.
Let me begin by saying 2022 was an important year of operational and strategic progress across the organization. Our U.S. growth platforms, dental and vision, group life and disability and consumer markets, have moved from integration to full production with comprehensive product portfolios that are broadly filed and marketed across the U.S. under the Aflac brand. These businesses have modernized operating platforms built to support the scale we anticipate in the future and are now fully contributing to sales and earned premium growth.
In Japan, our refreshed cancer product is now further enhanced with the launch of our new [Indecipherable] consulting support model after nearly a year of successful testing. We launched a revised and tactical approach to the sale of our WAYS and child endowment products, leveraging the strength and product appeal to promote third sector cross-sell.
While navigating difficult COVID conditions, we were proactive in addressing our expense structure, defending strong margins in the face of revenue pressure.
From a corporate perspective, we remained focused on risk management and capital efficiency. Two areas of focus included our approach to hedging the U.S. dollar portfolio in Japan and efforts to improve enterprise return-on-equity and Japan product competitiveness with the launch of Aflac Re, our Bermuda-based reinsurer.
Finally, across the organization we launched a coordinated effort to address the balancing act of investing in and delivering on growth, reducing expenses, simplifying our business model and improving overall customer experience. This includes comprehensive project governance, a network of agile teams and regular reporting up to the Board level. The financial goal is simple; to deliver on the outlook provided at this year's Investor Conference with respect to growth and margins in the U.S. and Japan. We're proud of our efforts, but it's clear from our results that we have work to do in a few key areas. This includes addressing weak premium persistency in the U.S. and revitalizing our production platform in Japan. Furthermore, we need to address these issues while continuing to advance our technology and associated process improvement across the organization.
With that quick review, let's turn to current conditions and what we're focused on in 2023, starting with Aflac Japan. As Dan noted, claims recovered in the fourth quarter, as did the benefit ratio. In January 20th, Prime Minister Kishida announced plans to downgrade under the law COVID-19 to the same level of seasonal influenza, which will be enacted in mid May. Importantly, this removes the immediate option to implement quarantine and other restrictive measures, such as state of emergency orders. We believe this move is designed to signal and encourage a return to normal, including business activity. While claims processing volumes remain high, this is driven by a natural lag in reporting of claims generated during Japan's seventh wave of COVID under the old deemed hospitalization rules. You can think of this as working the IBNR claims that were financially recognized in the third quarter. Despite continued waves of COVID, we expect our team in Japan to improve on the performance in 2022 as COVID, like the common flu, appears destined to become a way of life in Japan and elsewhere. In that regard, we're focused on the following. First, in terms of distribution recovery and productivity across our channels, our powerful associates channel requires aggressive approach to training and development to drive new customers. Separately, we are working with Japan Post on a campaign surrounding the introduction of the new cancer product in the second quarter. As Dan noted, we have strong commitment at the top of Japan Post and we are cooperating at levels throughout the organization. It should be noted late this January, we also introduced the new cancer product in our Dai-ichi alliance as well as the financial institutions channel, both of which have performed below our expectations in recent periods.
Turning to core product refreshment. Our new cancer product will add a critical illness lumpsum benefit rider in April, available on old and new cancer products and through Japan Post Group and our associates channels. Cancer ecosystem development is moving from launch to expansion. When analyzing current call volume, over 50% of the calls that are coming into our consulted related service platform relate to treatment, thus suggesting a value proposition beyond the pure financial benefit of paying a claim. Our 2022 refreshed approach to first-sector savings is yielding expected results with approximately 80% of all sales representing customers who are under the age of 49 and approximately 50% of all new first-sector customers purchasing a third-sector product, which is twice our target of 25% cross-sell.
Finally, in the face of increased competition and focus on selling the new cancer product, we have seen in our medical sales decline and have plans to refresh our product in the fourth quarter.
When stepping back to consider these activities, we are and have been taking broad action across product and distribution with an eye towards returning to and JPY80 billion production platform in the 2025 and 2026 period. The path to that level of production will build over time, but as we look towards 2023, we expect the continuation of our experience in the second half of 2022 where we generated consistent growth in production. Meeting our long-term targets will require strong execution on all fronts, as well as supportive market conditions and the cooperation of third-party alliances and partners to aid in driving productivity improvement.
Finally, while we have made progress, we seek further advancement in digitizing paper and manual processes for greater operating efficiency. This is not entirely an Aflac Japan issue. It's a Japan financial service industry issue. In recent years, we have moved from 30% to approximately 50% of our applications submitted in digital form with only 10% of claims processed digitally. Over time, we seek to drive digital applications to 80% and digital claims processed to over 40%. This will allow us to take additional cost out of our operations, but requires the commitment of our distribution partners, their agents and customers to drive adoption.
I'm here in Japan, in part, recognizing this is an important time for Aflac Japan. We are engaged in transformative activities that have long-term franchise implications as we seek to leverage our financial strength and leading third-sector position. My focus will be partnering with our leadership team and revitalizing our distribution, incubating new product end markets and digital adoption to drive down expenses and improve customer experience.
Turning to the U.S.. As Dan noted in his comments, we continue to deliver a balanced attack to the marketplace. Split by product class, group benefits were up 28%, individual benefits up 8%. Split by channel, agent sales were up 7% and broker up 25%. With respect to our expansion businesses, network dental and vision and premier life and disability sales were up 98% and 75%, respectively, for the full year. The underlying signs of momentum are encouraging. For example, in our agent's small business franchise, average weekly producers are up 3%, the second consecutive year of growth after a period of steady decline. Dental and vision is proving out our thesis of cross-sell as roughly $0.80 of supplemental health and life products are sold with every dollar of dental and vision. Our life and disability platform not only has strong sales, but a successful renewal year and recorded 97% premium persistency. Now fully integrated and expanding, we see 2023 as a year of leveraging this platform to both defend and grow voluntary group business. While it was a difficult year industry wide for direct-to-consumer sales, we are encouraged by consumer markets 5% increase in sales in the fourth quarter with new alliances coming online.
Finally, it was a challenging year for persistency in the U.S.. Persistency has stabilized in our individual business. However, weakness earlier in the year continues to impact our trailing 12-month metric. Group voluntary, a smaller contributor to earned premium, drove most of the 260 basis-point decline in overall persistency. Account persistency across the organization has remained relatively flat, but we lost a few very large accounts during the year. The industry has experienced weakness in voluntary persistency, which tells us there are also labor force dynamics contributing. We have stepped up our focus on persistency, establishing a dedicated office to drive and oversee a series of efforts including product development, client service, technology solutions and incentive designs.
Turning to investment results. Investment income in the quarter was stable with strength from higher yields on floating rate portfolios, offset by increased hedge costs and anticipated weakness in alternative investment income. As expected and discussed last quarter, our alternative investment portfolio remained under pressure, posting a loss of $21 million in the quarter. By comparison, last year's quarter enjoyed a $127 million in gains. This decline was anticipated, given the natural correlation to the public equity markets and the lag in private equity reporting. Despite losses in the quarter, year-to-date, the alternative portfolio generated $103 million in income, following an exceptional 2021. Throughout the year, we have refined our hedging strategy, reducing $2 billion in notional currency forwards in exchange for options that reduced hedge costs while protecting capital against material moves in the yen.
Overall, as we look at 2023, we are staying the course with respect to our strategic and tactical asset allocations as we watch closely the risk of economic slowdown, driven by Fed action to fight inflation. We are also watching the Bank of Japan as they introduce a new governor this spring, which many believe could lead to a change in policy.
Before turning the call back to David, it's worth following up on Max's recorded comments to reinforce how we are positioned with respect to potential for a period of U.S. or global weakness. Our morbidity-based insurance model is defensive in nature with relative stability in sales, earned premium and profit margins through economic cycles. Among traditional life insurance peers, we maintain low-asset leverage as defined by the ratio of general account assets to regulatory capital, particularly if you exclude our concentration in JGBs. We believe our portfolio is well positioned to weather the current economic uncertainty, recognizing we would anticipate some pressure on our $12 billion loan portfolios. We work closely with our external managers for middle-market and real-estate loans and have conducted a comprehensive stress test designed to apply recessionary pressure to these portfolios. Our approach included a moderate and severe recession, applying loss rates consistent with past economic cycles. Both scenarios resulted in elevated but manageable losses with no immediate need to change our disciplined approach to these asset classes and putting new money to work. When looking at the impact of core capital ratios, we developed a market pricing, ratings migration and loss scenario that falls in between a mild and severe recession and includes the entirety of our general account assets. When applying these stress tests, our core ratios of RBC, SMR and ESR all came out the other side, well above our minimum thresholds. While it is wise to proceed with caution, we do not see recessionary conditions as disruptive to our capital deployment plans.
I'll now hand the call back to David for Q&A. David?
