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    AFL
    Earnings call· Mar 2025(Q1 FY25)

    AFLAC Q1 FY25 earnings call AFL

    May 1, 2025 Source

    Executive summary

    Aflac Q1 FY25 — Strong Japan Sales and Capital Deployment

    Aflac delivered a solid first quarter, marked by strong sales growth in both Japan and the U.S., driven by new product introductions and strategic focus on younger demographics. Despite headwinds from net investment losses and declining net earned premiums in Japan, the company maintained robust capital ratios and returned significant capital to shareholders. Management remains confident in its long-term strategy and product offerings.

    Highlights

    5

    • Aflac Japan sales increased 12.6% year-over-year, driven by Tsumitas and a 6.3% increase in cancer insurance sales.

    • Aflac U.S. sales increased 3.5% year-over-year, with momentum in group life, disability, and network dental.

    • Adjusted ROE (excluding FX remeasurement) was 15.6%, representing an acceptable spread to the cost of capital.

    • $1.2 billion was returned to shareholders in Q1 FY25, including $900 million in share repurchases (8.5 million shares) and $317 million in dividends.

    • Aflac Japan's premium persistency remained solid at 93.8%, up 40 basis points year-over-year.

    Concerns

    5

    • Net investment losses significantly impacted GAAP EPS, which was $0.05, compared to net investment gains in Q1 2024.

    • Aflac Japan's net earned premiums declined 5% for the quarter.

    • Aflac Japan's adjusted net investment income in yen terms was down 7.6%, primarily due to lower floating rate income and asset transfer to Aflac Re Bermuda.

    • Aflac U.S. adjusted net investment income was down 1.9% for the quarter, primarily due to lower floating rate income.

    • U.S. weekly average producers were down year-over-year, indicating a challenge in agent productivity.

    Guidance & targets

    2
    CategoryTargetConfidence
    Aflac Japan Sales
    above 2024 levels
    medium materiality
    Medium
    Aflac U.S. Dental Sales
    hit the plan
    low materiality
    Medium

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Aflac Japan
    Sales driven by Tsumitas and new cancer insurance. Persistency definition revised to exclude annuitization, raising reported persistency by 30 bps. Expense ratio increase due to technology expenses. NII decline due to lower floating rate income and asset transfer to Aflac Re Bermuda.
    Sales growth YoY: 12.6%Cancer insurance sales increase: 6.3%Net earned premiums decline: 5%Underlying earned premiums decline: 1.4%Total benefit ratio: 65.8%Total benefit ratio YoY change: -120 bpsThird sector benefit ratio: 56.3%Third sector benefit ratio YoY change: -120 bpsBenefit ratio impact from remeasurement gains: -150 bps (favorable)Premium persistency: 93.8%Premium persistency YoY change: +40 bpsExpense ratio: 19.6%Expense ratio YoY change: +160 bpsAdjusted net investment income (yen terms) decline: 7.6%
    		———31.8% pretax margin
    Aflac U.S.
    Sales momentum in group life, disability, and network dental. Benefit ratio increase due to business mix and lower remeasurement gains. Expense ratio improvement from platform scale and efficiency, partially offset by growth initiatives. NII decline due to lower floating rate income.
    Sales growth YoY: 3.5%Net earned premiums growth: 1.8%Premium persistency: 79.3%Premium persistency YoY change: +60 bpsTotal benefit ratio: 47.7%Total benefit ratio YoY change: +120 bpsBenefit ratio impact from remeasurement gains: -100 bps (favorable)Expense ratio: 37.6%Expense ratio YoY change: -110 bpsAdjusted net investment income decline: 1.9%
    		———20.8% pretax margin

    Operational metrics

    29
    Adjusted earnings per diluted share
    $1.66unchanged from Q1 2024
    Q1 FY25

    Includes a $0.01 negative impact from FX.

    Adjusted earnings per diluted share FX impact
    -$0.01
    Q1 FY25

    Negative impact from FX in the quarter.

    Remeasurement gains on reserves
    $41 million
    Q1 FY25

    Reduced benefits.

    Variable investment income below long-term expectations
    $27 million
    Q1 FY25
    Make-whole call income
    $16 million
    Q1 FY25

    From one make-whole call.

    Adjusted book value per share excluding foreign currency remeasurement growth
    2.2%YoY
    Q1 FY25
    Adjusted ROE
    12.7%
    Q1 FY25
    Adjusted ROE excluding foreign currency remeasurement
    15.6%
    Q1 FY25

    Acceptable spread to cost of capital.

    Aflac Japan premium persistency definition change impact
    +30 bps
    Q1 FY25

    Revised definition to not treat annuitization as a lapse.

    Aflac U.S. expense ratio impact from growth initiatives
    +50 bps
    Q1 FY25

    Driven by group life and disability, network dental and vision, and direct-to-consumer. Expected to decrease as scale is approached.

    CECL reserves increase
    $2 million
    Q1 FY25

    Net of charge-offs, due to distressed property valuations.

    CECL reserves increase
    $7 million
    Q1 FY25

    Net of charge-offs.

    Corporate segment pretax gain
    $43 million
    Q1 FY25
    Corporate segment adjusted net investment income YoY change
    $47 million higherYoY
    Q1 FY25

    Due to lower volume of tax credit investments and higher asset balances from Q4 2024 reinsurance transaction.

    Tax credit investments impact on corporate NII
    -$8 million
    Q1 FY25

    Negative impact for U.S. GAAP purposes, with an associated credit to the tax line. Net impact to bottom line was positive $0.4 million.

    Unencumbered holding company liquidity
    $4.3 billion$2.6 billion above minimum balance
    Q1 FY25
    Leverage ratio
    20.7%
    Q1 FY25

    Within target range of 20% to 25%. Impacted by yen-dollar exchange rate due to 59% of debt in yen.

    Yen-dollar exchange rate impact on underlying EPS
    $0.07
    null

    Estimated impact for every JPY 5 move against the dollar.

    Unhedged U.S. dollar assets in Japan general account
    $25.5 billion
    Q1 FY25

    At the end of Q1.

    Forward contracts notional balance
    $2.7 billion
    Q1 FY25

    At Inc.

    Yen-denominated debt
    $4.4 billion
    Q1 FY25
    Notional out-of-the-money put options
    $24.2 billion
    Q1 FY25

    Provide tail protection against large yen appreciation.

    ESR volatility associated with FX
    40 to 45 ESR points
    null

    Original design to size the risk.

    ESR estimate
    250%
    Q1 FY25

    As of call date.

    U.S. statutory mortgage loan valuation allowance
    $6 million
    Q1 FY25

    Recorded as an unrealized loss.

    Japan FSA realized gains net of losses for securities impairment
    JPY 5.2 billion
    Q1 FY25

    Well within expectations with limited impact to earnings and capital.

    Tsumitas sales to younger people
    Over half
    Q1 FY25

    Refers to sales of the Tsumitas product.

    U.S. dental sales growth for agents selling demo product
    23%
    Q1 FY25

    For agents who sold the demo product.

    Overall sales increase for agents selling dental
    20%
    Q1 FY25

    For agents who sold dental along with voluntary benefits products.

    Industry KPIs

    8
    MetricValueDetails
    Capital returns$1.2 billionUSD
    ROE operating ROE12.7%%
    Book value per share2.2%%
    Net investment incomedown 7.6%%
    Retention persistency93.8%%
    Life specific when presentOver half%
    Net premiums written earneddeclined 5%%
    Statutory regulatory capitalabove 950%%

    Product announcements

    1
    ProductTypeDetails
    Miraito (newest cancer insurance)launch

    Risks & headwinds

    5
    Net investment lossesQ1 FY25

    Significantly impacted GAAP EPS of $0.05.

    Mitigation: Strong net investment income from current portfolio.

    Yen-dollar exchange rate volatilityOngoing

    Every JPY 5 move impacts underlying EPS by roughly $0.07.

    Mitigation: Enterprise hedging program including unhedged U.S. dollar assets, forward contracts, yen-denominated debt, and out-of-the-money put options.

    Lower floating rate incomeQ1 FY25, expected to be a headwind throughout the year.

    Primary driver for Aflac Japan's adjusted NII down 7.6% and Aflac U.S. adjusted NII down 1.9%.

    Mitigation: Repositioning portfolio to capture higher yields, deploying capital to take advantage of wider spreads.

    Distressed property valuations in Commercial Real Estate (CRE)Q1 FY25

    Increased CECL reserves by $2 million (net of charge-offs).

    Mitigation: Foreclosed on 2 loans, adding to real estate owned portfolio to maximize recovery values.

    Japan Post inappropriate data useOngoing

    Certain impact on the cancer insurance sales (not quantified).

    Mitigation: JPC established preventative measures; Aflac's products not directly involved; Japan Post Group started sales of new cancer products.

    What to watch in Q2 FY25

    5

    Japan ESR ratio

    Next quarter
    Currentaround 250%
    TargetStability or improvement, especially considering FX volatility.

    Why it matters

    The ESR ratio is a key measure of capital strength, and its volatility due to FX is a significant concern for investors.

    So that means that at that level, we are no longer having any significant FX volatility🌐 associated with our ESR. And our starting point today is, and I ran these numbers this morning that we estimate that our ESR as of this morning is around 250%.

    Q&A highlights

    6

    Why did the ESR ratio decline in Q1 despite rising Japan rates, and does macro volatility change capital return philosophy or hedging strategy?

    Max Broden explained the ESR drop was due to yen strengthening and high dividends flowing to the holding company, partially offset by higher JGB rates. He affirmed the long-term capital management and hedging philosophy remains unchanged, designed for stability across scenarios, with put options protecting against extreme yen strengthening while allowing upside.

    “So if I look at the moves that we have seen in rates, the moves we've seen in FX, I don't see at this point us making any significant changes to the way we are approaching this or hedging this.”

    asked by Tom Gallagher · answered by Max Broden

    2 min read5 chapters

    Detailed Narrative

    01

    Japan Product Strategy and Sales Momentum

    Aflac Japan reported a 12.6% year-over-year sales increase, significantly boosted by Tsumitas and a 6.3% rise in cancer insurance sales. The company launched its newest cancer insurance, Miraito, on March 17, with positive early results and full channel availability by April 21. This strategy aims to acquire younger customers and cross-sell medical or cancer policies, leveraging Aflac's position as a leading third-sector insurer.

    02

    U.S. Business Growth and Profitability

    Aflac U.S. achieved a 3.5% year-over-year sales increase, driven by momentum in group life, disability, and network dental. The segment maintained strong premium persistency and net earned premiums growth through prudent expense management and a focus on profitable underwriting, resulting in a strong pretax margin of 20.8%. The expense ratio improved by 110 basis points year-over-year, primarily due to platform scale and continuous focus on efficiency.

    03

    Capital Management and Shareholder Returns

    Aflac continues to generate strong capital and cash flows, deploying $900 million to repurchase 8.5 million shares and paying $317 million in dividends in Q1. The company maintains a 42-year track record of dividend growth and aims for a high return on capital with a low cost of capital, returning a total of $1.2 billion to shareholders in the quarter. Unencumbered holding company liquidity stood at $4.3 billion, $2.6 billion above its minimum balance.

    04

    Actuarial Assumptions and Remeasurement Gains

    The company experienced favorable claims utilization in both the U.S. and Japan, leading to remeasurement gains that favorably impacted benefit ratios. In Q1 FY25, remeasurement gains on reserves totaled $41 million, reducing benefits. While smaller in Q1, the most significant remeasurement gains or losses associated with claims patterns are typically recognized in Q3 when actuarial assumptions are annually unlocked.

    05

    FX Hedging Strategy and Macro Sensitivity

    Aflac employs a comprehensive FX hedging program to protect the economic value of Aflac Japan in U.S. dollar terms. This includes holding $25.5 billion of unhedged U.S. dollar assets in Japan's general account, $2.7 billion in forward contracts, $4.4 billion in yen-denominated debt, and $24.2 billion in notional out-of-the-money put options for tail protection against yen strengthening. The strategy is designed for long-term stability despite short-term ESR volatility, with an estimated ESR of 250% as of the call date.

    AI-generated summary of the company’s earnings call. Not investment advice.