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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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?
[Technical Difficulty] growth, retention and penetration or seeing more employees at a given employer. This month, we are completing the national training programs, making select product refinements and reinforcing incentives to drive new dental accounts. In addition, we are busy upgrading our administrative platforms to ready for increased volumes. 2021 is the year of launch, learn and adjust, and we expect to see our pipeline, close rate and new accounts gradually increasing throughout the year. Our Premier life and disability platform acquired from Zurich is now operating under the Aflac brand. We have started to see our quoted pipeline build in the last 45 days. However, many employee employers are reluctant to move critical benefit plans while sorting through returning to work site and changing workforce dynamics.
In addition, consultants often proceed with caution in a year or so after an acquisition. We need to remain patient over the next few years as we settle into this new line of business. Our competitive calling card is the proven premier service and technology capabilities of the acquired platform, coupled with Aflac Group's core leadership in supplemental work site benefits. We will not resort to winning business via relaxed underwriting and pricing standards in this highly competitive market.
Finally, earlier this year, we launched our new e-commerce direct-to-consumer platform, Aflac Direct. We offer critical illness, accident and cancer and are approved in approximately 30 states with more states and product coming online throughout the year. This platform targets individuals, the self employed, gig workers and part-time employees. In short, those who are not offered traditional benefit packages at the work site. We are actively building out a licensed agent call center to better manage conversion rates and control overall economics. With a modest amount of committed marketing dollars, we are attracting about 500,000 visitors per month to aflac.com. Which has resulted in 120,000 leads for call center conversion this year. We are currently experiencing a 15% conversion rate once in the call center. This is a data analytics-driven business and core metrics will improve as this model matures.
In terms of the contribution of these businesses to overall sales in 2021, we expect these 3 growth initiatives will make up roughly 10% of sales in 2021 after having contributed less than 5% to 2020 sales. We remain committed to the revenue growth targets discussed at our November investor conference. We expect these initiatives to drive incremental revenue in excess of $1 billion over the next 5 to 7 years. As these separate initiatives mature, they leverage off each other. Network dental and vision drives agent recruitment and conversion to average weekly producers, employer paid benefits drives supplemental work site sales, and direct-to-consumer expands our addressable market while being leveraged to funnel work site leads to our agents in the field.
In the future, as employees leave the work site, a digital relationship directly with Aflac helps with persistency and customer satisfaction. To close out my comments this morning, we continue to advance ESG initiatives in 2021. As Dan noted, we issued our inaugural sustainability bond, raising $400 million to be invested towards our path to net 0 emissions by 2050 and investments that support climate as well as diversity and inclusion efforts. The bond offering itself is an important step in that it requires formal processes around reporting, tracking and auditing of qualified sustainable investments. This rigor serves to benefit the control environment surrounding our enterprise-wide ESG reporting and accountability.
In addition, Aflac Global Investments announced late February, a partnership with Sound Point Capital Management to create a new asset management business focused on the transitional real estate loan market. As part of that alliance, we have made an initial $1.5 billion general account allocation to the newly created Sound Point commercial Real Estate Finance, LLC, with $500 million of that amount dedicated to providing transitional and other debt financing to support economically distressed communities designated as qualified opportunity zones. Aflac will hold a 9.9% minority interest in this newly created investment LLC, with the ability to grow our stake over time in line with future growth of the new venture.
I'll now pass on to Max to discuss our financial performance in more detail. Max?
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 and lower hedge costs, partially offset by lower reinvestment yield on our fixed and floating rate portfolio. The pretax margin for Japan in the quarter was 23.1%, up 60 basis points year-over-year. A very good start to the year.
Turning to the U.S. Net earned premium was down 4.1% due to weaker sales results. Persistency improved 240 basis points to 80%, as our efforts to retain accounts and reduce lapsation show early positive results. As Fred noted, there are still 9 states with premium grace periods in place. So we are monitoring these developments closely. Breaking down the 240 basis points persistency rate improvement further. 70 basis points can be explained by the emergency orders in place, 90 basis points by lower sales as first year lapse rates are roughly twice total in-force lapse rates. And the residual of 80 basis points includes conservation efforts executed on last year. Our total benefit ratio came in much lower than expected. At 39.1%, a full 900 basis points lower than Q1 2020.
In the quarter, we experienced lower paid claims, especially in the month of January. As pandemic conditions impacted behavior of our policyholders. This is in line with disclosures in 2020, indicating a negative correlation between infection levels and claims generating activities like accidents, elective surgeries and physical exams. This low activity level related to nonCOVID claims accounted for most of the year-over-year drop in the benefit ratio. Our total incurred COVID-related claims also came in lower than expected due to an IBNR release. We estimated new COVID claims at approximately $42 million, and this was offset by an IBNR release of $41 million. As our experience accumulates, we have refined our assumptions, and this led to this IBNR reserve release. We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders..
For the full year, we now expect our benefit ratio to be towards the lower end or slightly below our guided range of 48% to 51%. Our expense ratio in the U.S. was 38.5%, up 10 basis points year-over-year, but with a lot of moving parts. Weaker sales performance negatively impacts revenue, however, the impact to our expense ratio is largely offset by lower DAC expense. Higher advertising spend increased the expense ratio by 70 basis points along with our continued build-out of growth initiatives, group life and disability, network and direct-to-consumer. These contributed to a 110 basis point increase to the ratio. The strategic growth initiative investments are largely offset by our efforts to lower core operating expenses as we strive towards being the low-cost producer in the voluntary benefit space. Net-net, despite a lot of moving parts, Q1 expenses are tracking according to plan.
In the quarter, we also incurred $6 million of integration expenses not included in adjusted earnings associated with recent acquisitions. Adjusted net investment income in the U.S. was down 0.6% due to a 22 basis points contraction in the portfolio yield year-over-year, partially offset by favorable variable investment income. Profitability in the U.S. segment was very strong, with a pretax margin of 27.3%, with a low benefit ratio as the core driver. With Q1 now in the books, we are increasing our pretax margin expectation for the full year. Initial expectations were for us to be towards the low end of 16% to 19%. We now expect to end up for the full year towards the high end of this range indicated at. In our corporate segment, we recorded a pretax loss of $26 million as adjusted net investment income was $20 million lower than last year, due to lower interest rates at the short end of the yield curve. Other adjusted expenses were $7 million lower as our cost reduction activities are coming through. Our capital position remains strong, and we ended the quarter with an SMR north of 900% in Japan and an RBC of approximately 563% in Aflac Columbus. Unencumbered holding company liquidity stood at $3.9 billion, $1.5 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments.
Leverage, which includes the sustainability bond, increased but remains at a comfortable 23% in the middle of our leverage corridor of 20% to 25%. In the quarter, we repurchased $650 million of our own stock and paid dividends of $227 million, 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.
And with that, I'll hand it over to David to begin Q&A.
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 effect. However, the situation of the pandemic is very fluid. Therefore, we really need to watch out for the variance and the vaccination status going forward as well.
And because of the situation and since the COVID-19 infection is still rising it is very difficult to mention how it is going to be going forward in terms of our projection. But as you can see, as a result of -- in our results of the first quarter, even under the state of emergency declaration, we have been able to promote our medical insurance, and it's been and also because of the extent of the use of online proposals and applications, we haven't been able to mark the same level of performance as this last year.
And even from the second quarter and on, we would like to maintain this positive benefit or positive effect from the medical insurance, and we will also be further expanding the use of online proposals and applications. And on top of that, we would also like to be expanding the enrollment through online for group as well. And furthermore, we would also like to be using direct mails, which will enhance the non face-to-face solicitation. And by doing so, we should be we should be minimizing the impact from COVID-19. And that's all for me.
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.