Detailed narrative
Investment Portfolio Repositioning
Aflac actively repositioned $4.8 billion of its investment portfolio in Q2 FY26, primarily in Aflac Japan but also touching U.S. and Bermuda. This strategic move involved harvesting foreign currency gains from the dollar portfolio to offset losses on older bonds, including JGBs.
The initiative aims to improve net investment income by over $50 million annually on a run-rate basis, while also managing taxes, liquidity, and asset-liability management with limited capital impact.
Japan First Sector Strategy
Aflac Japan's first sector product, Tsumitasu, is playing a strategic role in expanding the customer base, particularly among younger generations seeking asset accumulation in yen. While Aflac remains primarily third-sector oriented, Tsumitasu contributes to concurrent sales of cancer and medical insurance, exceeding an initial target of 25% for cross-selling.
The first sector in-force currently represents less than 20% of the total in-force, providing diversification benefits without significantly increasing overall risk.
U.S. Group Business Momentum
Aflac U.S. is experiencing strong momentum in its group business, with Group Life Absence Disability and Dental & Vision products showing significant growth. Group Life Absence Disability and Dental & Vision sales were up 7.1% in Q2, with earned premiums for these group products increasing by 13%.
The Dental and Vision property alone saw a 47% increase in Q2, heavily driven by the agency force, and is effectively driving voluntary benefits sales alongside it, with $1.07 of voluntary benefits sold for every dollar of Dental and Vision.
Japan Benefit Ratio Dynamics
The Aflac Japan benefit ratio for the first half of FY26 was higher than expected, leading to a revised full-year expectation at the high end of the 60% to 63% range. This is primarily attributed to a shift in the mix of lapsing policies, with fewer older policies (which have significant reserve builds) lapsing and more recently issued policies (with lower reserve builds) lapsing.
This mix impact, driven by product launches like Miraito, is expected to normalize📎 as newer products mature, supporting the full-year guidance.
Reinsurance Capacity Expansion
Aflac has internally expanded its ceding limit for Japanese business to Bermuda from 10% of U.S. GAAP assets to 30% of FSA reserves. This move, shared with external constituents, aims to reduce risk, improve balance sheet efficiency, and generate higher ROE for Aflac Japan and the group.
While future transactions will be lumpy and not quarterly, management views this as a significant long-term opportunity to leverage competitive advantages and improve the company's risk and return profile.
Inflation and Expense Management in Japan
Despite inflationary pressures in Japan, with inflation running close to 3%, Aflac Japan successfully managed its expense ratio down by 40 basis points year-over-year to 20.2% in Q2. This strong performance is attributed to effective expense management, even as the revenue base is slightly shrinking.
The company expects the long-term expense ratio range to remain 20% to 23%, with current performance at the lower end of this range.