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    AFL
    Earnings call· Jun 2025(Q2 FY25)

    AFLAC Q2 FY25 earnings call AFL

    Aug 5, 2025 Source

    Executive summary

    Aflac Q2 FY25 — Solid Results Despite NII Headwinds

    Aflac delivered solid Q2 FY25 results, characterized by strong capital management, increased holding company liquidity, and robust persistency in both Japan and U.S. segments. While adjusted EPS saw a slight decline and net investment income faced headwinds from lower floating rates, the company actively managed its investment portfolio and capital deployment, including significant share repurchases and debt prefunding. The update was a monologue, providing a detailed financial overview without Q&A.

    Highlights

    6

    • Adjusted book value per share, excluding foreign currency remeasurement, increased 5.2%.

    • Adjusted ROE was 13.7% (16.4% ex-FX), an acceptable spread to cost of capital.

    • Japan persistency remained solid at 93.7%, up 40 basis points year-over-year.

    • U.S. net earned premium was up 3.4% and persistency increased 50 basis points to 79.2%.

    • Repurchased $829 million of stock and paid $312 million in dividends in Q2.

    • Unencumbered holding company liquidity increased to $5.1 billion, $3.4 billion above minimum balance.

    Concerns

    6

    • Adjusted EPS decreased 2.7% year-over-year to $1.78.

    • Japan net earned premiums declined 4.8%.

    • Japan expense ratio increased 280 basis points year-over-year to 20.6% due to technology expenses.

    • Japan adjusted net investment income in yen terms was down 10.5%.

    • U.S. adjusted net investment income was down 5%.

    • Increased CECL reserves by $33 million for commercial real estate due to distressed valuations.

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Japan
    Net earned premiums declined, but persistency remained solid. Expense ratio increased due to technology investments. Adjusted NII decreased due to lower floating rates and FX impact.
    Underlying earned premiums: -1.1%Total benefit ratio: 66.5% (down 40 bps YoY)Third sector benefit ratio: 57.4% (down 40 bps YoY)Remeasurement gains impact on benefit ratio: 83 bps favorablePersistency: 93.7% (up 40 bps YoY)Expense ratio: 20.6% (up 280 bps YoY)Adjusted net investment income (yen terms): -10.5% YoY
    		—-4.8%—32% pretax margin
    U.S.
    Net earned premium and persistency increased. Benefit ratio rose due to business mix. Expense ratio improved due to scale and efficiency, despite impact from growth initiatives.
    Persistency: 79.2% (up 50 bps YoY)Total benefit ratio: 47.3% (up 60 bps YoY)Remeasurement gains impact on benefit ratio: 160 bps favorableExpense ratio: 36.3% (down 60 bps YoY)Growth initiatives impact on expense ratio: +70 bpsAdjusted net investment income: -5% YoY
    		—+3.4%—22.5% pretax margin
    Corporate
    Recorded a pretax gain, with higher adjusted net investment income driven by lower tax credit volume and higher asset balances.
    Adjusted net investment income: $37 million higher YoYTax credit investments impact on NII: -$8 millionNet impact to bottom line from tax credits: +$1 million
    		———$20 million pretax gain

    Operational metrics

    15
    Adjusted earnings per diluted share
    $1.78-2.7% YoY
    Q2 FY25
    Variable investment income
    $35 millionbelow long-term expectations
    Q2 FY25
    Make-whole call income
    $35 million
    Q2 FY25
    Unencumbered holding company liquidity
    $5.1 billion$3.4 billion above minimum balance
    Q2 FY25

    Increased by debt issuance and Aflac Japan dividend.

    Debt raised
    JPY 150 billion
    Q2 FY25

    To prefund 2026 maturities and create liquidity.

    Leverage ratio
    22.5%
    Q2 FY25

    65% of debt held in yen, impacted by yen-dollar exchange rate as part of enterprise hedging program.

    CECL reserves increase (Commercial Real Estate)
    $33 million
    Q2 FY25

    Due to distressed property valuations.

    CECL reserves decrease (Middle Market Loans)
    $23 million
    Q2 FY25

    Portfolio of first lien senior secured middle market loans continued to perform well.

    Valuation allowance on mortgage loans
    $7 million
    Q2 FY25

    Recorded as an unrealized loss for U.S. statutory.

    Japan FSA net realized gain (transitional real estate loans)
    JPY 17 million
    Q2 FY25

    No security impairments in Q2 on Japan FSA basis.

    U.S. dollar assets in Japan general account
    $27.1 billion
    Q2 FY25

    Part of foreign currency exposure management.

    Forward contracts notional balance
    $1.9 billion
    Q2 FY25

    Part of foreign currency exposure management.

    Yen-denominated debt
    $5.7 billion
    Q2 FY25

    Part of foreign currency exposure management.

    Out-of-the-money put options notional
    $25 billion
    Q2 FY25

    Provides tail protection against large yen appreciation.

    Growth initiatives impact on US expense ratio
    expected to decrease
    future

    Currently increased total expense ratio by 70 basis points for the quarter.

    Industry KPIs

    8
    MetricValueDetails
    Capital returns$829 million (repurchases), $312 million (dividends)USD
    ROE operating ROE13.7%%
    Book value per share—%
    Net investment income—%
    Retention persistency93.7% (Japan), 79.2% (U.S.)%
    Net premiums written earned—%
    Statutory regulatory capitalSMR > 900%, ESR > 240%, combined RBC > 600%%
    Prior year reserve development$37 millionUSD

    Deals & partnerships

    1
    Debt marketRaised debt of JPY 150 billion (over $1 billion) to prefund 2026 maturities and create liquidity and capital flexibility at the parent company.JPY 150 billion

    This debt issuance, combined with a significant dividend from Aflac Japan, contributed to increased liquidity.

    Risks & headwinds

    6
    Variable investment income below long-term expectationsQ2 FY25

    $35 million below expectations

    Mitigation: Offset by $35 million make-whole call income.

    Increased Japan expense ratioQ2 FY25

    Up 280 basis points year-over-year to 20.6%

    Mitigation: Driven primarily by an increase in technology expenses, implying investment for future efficiency.

    Decline in Japan adjusted net investment incomeQ2 FY25

    Down 10.5% in yen terms

    Mitigation: Primarily driven by lower floating rate income, impact of foreign currency on U.S. dollar investments, and lower variable investment income, somewhat offset by higher call income and higher returns on U.S. dollar fixed rate portfolios.

    Decline in U.S. adjusted net investment incomeQ2 FY25

    Down 5% for the quarter

    Mitigation: Primarily driven by lower floating rate income.

    Increased CECL reserves for commercial real estateQ2 FY25

    Increased by $33 million net of charge-offs

    Mitigation: Property values remain at distressed valuations; foreclosed on 3 loans to maximize recovery values.

    Valuation allowance on mortgage loansQ2 FY25

    $7 million unrealized loss

    What to watch in Q3 FY25

    1

    Growth initiatives impact on US expense ratio

    Next quarter / future
    CurrentIncreased total expense ratio by 70 basis points
    TargetExpected to decrease as we approach scale

    Why it matters

    Indicates progress towards efficiency and profitability for new growth areas in the U.S. segment.

    This is in line with our expectations, and we would expect this impact to decrease as we continue to approach scale.

    3 min read6 chapters

    Detailed Narrative

    01

    Overall Financial Performance

    Adjusted earnings per diluted share decreased 2.7% year-over-year to $1.78, with a $0.04 positive impact from FX. Adjusted book value per share, excluding foreign currency remeasurement, increased 5.2%. The adjusted ROE was 13.7% (16.4% excluding foreign currency remeasurement), which is an acceptable spread to the cost of capital. Remeasurement gains on reserves totaled $37 million, reducing benefits, while variable investment income ran $35 million below long-term expectations, offset by $35 million from a make-whole call.

    02

    Japan Segment Performance

    Net earned premiums for the Japan segment declined 4.8%, with underlying earned premiums down 1.1%. The total benefit ratio was 66.5% (down 40 basis points year-over-year), and the third sector benefit ratio was 57.4% (down 40 basis points year-over-year), favorably impacted by 83 basis points from remeasurement gains. Persistency remained solid at 93.7%, up 40 basis points year-over-year. The expense ratio increased 280 basis points year-over-year to 20.6%, primarily due to technology expenses. Adjusted net investment income in yen terms decreased 10.5%, leading to a pretax margin of 32%, down 330 basis points year-over-year.

    03

    U.S. Segment Performance

    Net earned premium in the U.S. segment was up 3.4%, and persistency increased 50 basis points year-over-year to 79.2%. The total benefit ratio came in at 47.3%, 60 basis points higher than Q2 2024, driven by business mix, with remeasurement gains favorably impacting it by 160 basis points. The expense ratio improved 60 basis points year-over-year to 36.3%, driven by platform scale and efficiency, despite growth initiatives adding 70 basis points. Adjusted net investment income was down 5% for the quarter, and the pretax margin was 22.5%, a 20 basis points decline compared to a strong prior year quarter.

    04

    Capital Management and Liquidity

    The company raised JPY 150 billion (slightly over $1 billion) in debt to prefund 2026 maturities and enhance parent company liquidity. This debt issuance, combined with a significant dividend from Aflac Japan, increased unencumbered holding company liquidity to $5.1 billion, which is $3.4 billion above the minimum balance. Capital position remains strong, with an SMR above 900% and an estimated regulatory ESR above 240%. The combined RBC is estimated to be greater than 600%.

    05

    Capital Deployment and Shareholder Returns

    Aflac repurchased $829 million of its own stock and paid dividends of $312 million in Q2. The company emphasized its flexible and tactical approach to managing the balance sheet and deploying capital to drive strong risk-adjusted ROE with a meaningful spread to its cost of capital.

    06

    Investment Portfolio and Credit Quality

    CECL reserves associated with the commercial real estate portfolio increased by $33 million net of charge-offs due to distressed valuations, while reserves for middle market loans decreased by $23 million. A $7 million valuation allowance on mortgage loans was recorded as an unrealized loss for U.S. statutory. The leverage ratio was 22.5%, within the target range of 20% to 25%. The company manages foreign currency exposure with $27.1 billion of U.S. dollar assets in Japan's general account, $1.9 billion notional in forward contracts, $5.7 billion of yen-denominated debt, and $25 billion notional in out-of-the-money put options.

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