Aflac Inc

NYSE:AFL

Earnings Call Analysis

Aflac's Q2 2024 Solid Performance

Aflac reported a 15.8% increase in adjusted earnings per share to $1.83, driven by remeasurement gains and favorable variable investment income. In Japan, net earned premiums fell 5.7% mainly due to internal reinsurance impacts. However, Japan's pretax margin rose significantly by 490 basis points to 35.3%. In the U.S., net earned premiums increased by 2.1%, with persistency also improving. The U.S. recorded a 22.7% pretax margin and experienced a rebound in claims utilization. Overall, Aflac displayed robust financial health with strong capital ratios and liquidity, repurchasing $800 million in stock and paying $283 million in dividends.

Financial Performance Overview

Aflac Incorporated reported a solid second quarter of 2024 with key financial metrics showing improvement. Adjusted earnings per diluted share grew by 15.8% year-over-year to $1.83, despite a $0.07 negative impact from foreign exchange fluctuations. Adjusted book value per share increased by 9.4%, while the adjusted return on equity (ROE) was 14.3%, indicating efficient use of capital.

Japan Segment Performance

The Japan segment saw net earned premiums decline by 5.7%, driven by various factors including an internal reinsurance transaction and impacts from paid-up policies. Despite a 2.4% decline in policies in force, the expense ratio improved to 17.8%, down 170 basis points from the previous year. The segment's benefit ratio increased to 66.9%, partly due to treatment trends for cancer and hospitalization, with a persistency rate of 93.3%. Adjusted net investment income in yen terms rose by 28.4%, primarily due to favorable foreign exchange impacts and higher returns on the alternatives portfolio.

United States Segment Performance

In the U.S., net earned premiums increased by 2.1%, with persistency improving by 50 basis points to 78.7%. The total benefit ratio went up by 140 basis points year-over-year to 46.7%, influenced by product mix and lower remeasurement gains. Claims utilization normalized post-pandemic, aligning with long-term expectations. The expense ratio dropped by 210 basis points to 36.9%, due to improved scale and expense management. Growth initiatives in group life and disability, network dental and vision, and direct-to-consumer contributed to an increase in the total expense ratio, which is expected to decrease as these businesses mature.

Investment Income and Loan Portfolio

Adjusted net investment income in the U.S. rose by 7.4%, thanks to higher yields from alternatives and fixed-rate portfolios. The U.S. segment posted a solid pretax margin of 22.7%. Despite the distressed market conditions, the company's commercial real estate loan portfolio, currently valued at $1 billion, remains resilient with CECL reserves increased by $14 million to cover potential losses. The firm managed six loan foreclosures, bringing nine properties into real estate ownership, asserting confidence in managing these assets through the market cycle.

Corporate Performance and Capital Management

The corporate segment reported a pretax gain of $23 million, with adjusted net investment income up by $39 million year-over-year. The company's reinsurance platform continues to perform well. Aflac's strong capital position is evidenced by an SMR above 1,100% in Japan and an estimated RBC ratio exceeding 650% in the U.S. Liquidity remains robust with unencumbered holding company liquidity at $4.1 billion. The firm's leverage ratio is at 19.5%, below the target corridor, and strategic share repurchases and dividend payments align with their objective to deliver strong risk-adjusted returns.

Earnings Call Transcript 2024-Q2

[Max Broden, executive]

Thank you for joining me as I provide a financial update on Aflac Incorporated's results for the second quarter of 2024. For the quarter, adjusted earnings per diluted share increased 15.8% year-over-year to $1.83 with a $0.07 negative impact from FX in the quarter. In this quarter, remeasurement gains on reserves totaled $51 million and variable investment income went $1 million above our long-term return expectations. We also received a make-whole payment adding approximately $20 million or $0.03 per share to our adjusted earnings.

Adjusted book value per share, including foreign currency translation gains and losses, increased 9.4%, and the adjusted ROE was 14.3%, an acceptable spread to our cost of capital. Overall, we view these results in the quarter as solid.

Starting with our Japan segment. Net earned premiums for the quarter declined 5.7%. This decline reflects a JPY 7.4 billion negative impact from an internal reinsurance transaction executed in the fourth quarter of 2023 and JPY 4.8 billion negative impact from paid-up policies. In addition, there's a JPY 1.2 billion positive impact from deferred profit liability. Lapses were somewhat elevated but within our expectations. At the same time, policies in force declined 2.4%.

Japan's total benefit ratio came in at 66.9% for the quarter, up 120 basis points year-over-year, and the third sector benefit ratio was 57.8%, up approximately 160 basis points year-over-year. We estimate the impact from remeasurement gains to be 140 basis points favorable to the benefit ratio in Q2 2024.

Long-term experience trends, as it relates to treatment of cancer and hospitalization, continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid with a rate of 93.3%, which was down 50 basis points year-over-year. This change in persistency is in line with our expectations.

Our expense ratio in Japan was 17.8%, down 170 basis points year-over-year, driven primarily by the expense allowance from reinsurance transactions and continued disciplined expense management. Adjusted net investment income in yen terms was up 28.4%, mainly by favorable impact from FX on U.S. dollar investments in yen terms, lower hedge costs, higher return on our alternatives portfolio compared to the second quarter of 2023 and call income. The pretax margin for Japan in the quarter was 35.3%, up 490 basis points year-over-year, a very good result.

Turning to U.S. results. Net earned premium was up 2.1%. Persistency increased 50 basis points year-over-year to 78.7%. We are encouraged by early signs from our persistency efforts, and we'll remain focused on driving profitable growth.

Our total benefit ratio came in at 46.7%, 140 basis points higher than Q2 of 2023, driven by product mix and lower remeasurement gains than a year ago. We estimate that the remeasurement gains impacted the benefit ratio by 170 basis points in the quarter.

Claims utilization has rebounded from depressed levels during the pandemic and are now more in line with our long-term expectations. Our expense ratio in the U.S. was 36.9%, down 210 basis points year-over-year, primarily driven by platforms improving scale and strong expense management. We tend to benefit from seasonality in the first half and would expect expenses in the second half to increase.

Our growth initiatives, group life and disability, network dental and vision and direct-to-consumer, increased our total expense ratio by 230 basis points. This is in line with our expectations, and we would expect this impact to decrease going forward as these businesses grow to scale and improve their profitability.

Adjusted net investment income in the U.S. was up 7.4%, mainly driven by higher yields on both our alternatives and fixed rate portfolios. Profitability in the U.S. segment was solid with a pretax margin of 22.7%, also a very good result. Our total commercial real estate loan watch list stands at $1 billion, with less than $300 million in process of foreclosure currently. As a result of these current low valuation marks, we increased our CECL reserves associated with these loans by $14 million in this quarter, net of charge-offs.

We had 6 loan foreclosures and moved 9 properties into real estate owned. We continue to believe that the current distressed market does not reflect the true intrinsic value of our portfolio, which is why we are confident in our ability to take ownership of these assets, manage them through this cycle and maximize our recoveries.

Our portfolio of first lien senior secured middle market loans continue to perform well, with losses below our expectations for this point in the cycle. In our corporate segment, we recorded a pretax gain of $23 million. Adjusted net investment income was $39 million higher than last year due to lower volume of tax credit investments at Aflac Inc. and higher volume of investable assets at Aflac Re. These tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $30 million, with an associated credit to the tax line. The net impact to our bottom line was a positive $4 million in the quarter. To date, these investments are performing well and in line with expectations.

We are continuing to build out our reinsurance platform, and I'm pleased with the outcome and performance. Our capital position remains strong, and we ended the quarter with an SMR above 1,100% in Japan. And our combined RBC, while not finalized, we estimate to be greater than 650%.

Unencumbered holding company liquidity stood at $4.1 billion, $2.3 billion above our minimum balance. These are strong capital ratios, which we actively monitor, stress and manage to withstand credit cycles as well as external shocks. U.S. statutory impairments were a release of $7 million and Japan FSA impairments were JPY 10.4 billion or roughly $67 million in Q2. This is well within our expectations and with limited impact to both earnings and capital.

Adjusted leverage is 19.5% and below our leverage corridor of 20% to 25%. As we hold approximately 60% of our debt denominated in yen, our leverage will fluctuate with movements in the yen-dollar rate. This is intentional and part of our enterprise hedging program protecting the economic value of Aflac Japan in U.S. dollar terms.

We repurchased $800 million of our own stock and paid dividends of $283 million in Q2, 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.

Thank you. And I look forward to discussing our results in further detail on tomorrow's earnings call.