Aflac Incorporated Q3 2025 Earnings Call - Strong profitability driven by actuarial assumption unlock and strategic initiatives
Summary
Aflac Incorporated reported a robust Q3 2025 with adjusted EPS up 15.3% year-over-year to $2.49, buoyed by significant remeasurement gains on reserves adding $0.76 to EPS. The company’s Japan segment showed a 4% decline in net earned premiums but benefited from a nearly 10-point year-over-year improvement in the total benefit ratio, helped by favorable underwriting trends and reserve adjustments. Meanwhile, the U.S. segment saw 2.5% premium growth and a 200 basis point benefit ratio improvement, despite a one-time $21 million expense from early contract termination associated with cloud migration. Capital remains rock solid with repurchases and dividends well supported by strong regulatory ratios and healthy liquidity. Management’s outlook underscores prudent cost control amidst scaling new businesses and expects sustained strong pretax margins both in Japan and the U.S.
Key Takeaways
- Adjusted EPS increased 15.3% to $2.49, with no foreign exchange impact.
- Remeasurement gains on reserves totaled $580 million, boosting EPS by $0.76.
- Japan net earned premiums declined 4%, underlying premiums down 1.2%, reflecting long-term premium pressures.
- Japan’s total benefit ratio improved to 39.3%, down nearly 10 percentage points year-over-year due to favorable underwriting and reserve unlocks.
- U.S. net earned premium rose 2.5% with a 200 basis point reduction in benefit ratio aided by reserve remeasurement gains.
- A one-time $21 million early contract termination fee was recorded in the U.S. due to cloud migration but is expected to improve future efficiencies.
- Adjusted book value per share increased 6.3%, and adjusted ROE excluding FX was a strong 19.1%.
- Capital position remains strong with SMR over 900%, RBC above 600%, and liquidity $2.7 billion above minimum target.
- Company repurchased $1 billion of stock and paid $309 million in dividends in Q3, demonstrating capital return discipline.
- 2025 guidance expects Japan benefit ratio at 58-60% and U.S. benefit ratio at lower end of 48-52%, with continued focus on scaling growth initiatives and cost management.
Full Transcript
Financial Executive/CFO, Aflac Incorporated: Thank you for joining me as I provide a financial update on Aflac Incorporated’s results. For the 2025, adjusted earnings per diluted share increased 15.3% year over year to $2.49 with no impact from FX in the quarter. In this quarter, remeasurement gains on reserves totaled $580,000,000 reducing benefits and also increasing the deferred profit liability in earned premium line by $55,000,000 The total net impact from the Q3 assumption update increased EPS by $0.76 Variable investment income ran in line with our long term return expectations. In our U. S.
Business, as part of our strategic technology plan, as we optimize efficiencies and migrate to the cloud, we terminated a services contract early, which led us to book a one time termination fee of $21,000,000 in the quarter. Adjusted book value per share, excluding foreign currency remeasurement, increased 6.3%. The adjusted ROE was 19.122.1% excluding foreign currency remeasurement, a solid spread to our cost of capital. Overall, we view these results in the quarter as very good. Starting with our Japan segment.
Net earned premiums for the quarter declined 4%. Aflac Japan’s underlying earned premiums, which excludes the impact of deferred profit liability, paid up policies and reinsurance declined 1.2%. We believe this metric better provides insight into our long term premium trends. Japan’s total benefit ratio came in at 39.3% for the quarter, down nearly 10 percentage points year over year. The third sector benefit ratio was 27.8% for the quarter, down approximately 14 percentage points year over year.
We estimate the impact from reserve remeasurement gains to be 26.6 percentage points favorable to the benefit ratio in Q3 twenty twenty five. Long term experience trends, as they relate to treatments of cancer and hospitalization, continue to be in place, leading to continued favorable underwriting experience. Persistency remained solid year over year and in line with our expectations at 93.3%. With refreshed product introductions, we generally see an uptick in lapse and reissue activity, causing reported lapsation to increase. We did experience this uptick with our recently launched cancer product, but overall lapsation remains within our expectations.
Our expense ratio in Japan was 19.8% for the quarter, down 20 basis points year over year, driven primarily by an increase in expense capitalization rates resulting from higher sales. For the quarter, adjusted net investment income in yen terms was relatively flat at 98,000,000,000 yen The pretax margin for Japan in the quarter was 52.2%, up seven fifty basis points year over year, notably driven by the unlock of actuarial assumptions. But even adjusting for that, a very good result. Turning to U. S.
Results. Net earned premium was up 2.5%. Persistency increased 10 basis points year over year to 79%. Our total benefit ratio came in at 45.6%, 200 basis points lower than Q3 twenty twenty four, driven by the unlock. We estimate that the reserve remeasurement gains impacted the benefit ratio by four eighty basis points in the quarter, largely driven by the assumption unlock and claims remaining below our previous long term expectations.
Our expense ratio in The U. S. Was 38.9%, up 90 basis points year over year, primarily driven by the onetime early contract termination fee of $21,000,000 that I referred to earlier and the timing of advertising spend. Even though we incurred a onetime fee as part of our overall strategy, we anticipate reduced costs and improved efficiency, which will offset the termination fee over the next few years. Our growth initiatives, Group Life and Disability, Network, Dental and Vision and Direct to Consumer had no impact to our total expense ratio in the quarter.
This is in line with our expectations as these businesses continue to scale. Adjusted net investment income in The U. S. Was up 1.9% for the quarter, primarily driven by higher variable investment income compared to a year ago. Profitability in The U.
S. Segment was very strong with a pretax margin of 21.7%, a 90 basis points increase compared with a strong quarter a year ago. In Corporate and Other, we recorded pretax adjusted earnings of $69,000,000 Adjusted net investment income was $66,000,000 higher than last year due to a combination of lower volume of tax credit investments and higher asset balances, which included the impact of the internal reinsurance transaction in Q4 twenty twenty four. Our tax credit investments impacted the net investment income line for U. S.
GAAP purposes negatively by $6,000,000 in the quarter with an associated credit to the tax line. The net impact to our bottom line was a positive $2,000,000 in the quarter. Higher total adjusted revenues were offset by higher total benefits and adjusted expenses of $64,000,000 driven primarily by internal reinsurance activity, higher costs pertaining to business operations and higher interest expense. We continue to be pleased with the performance of our investment portfolio. During the quarter, we increased our CECL reserves associated with our commercial real estate portfolio by $28,000,000 net of charge offs, reflecting continued distressed property values.
We did not foreclose on any properties in the period. Our portfolio of first lien senior secured middle market loans continues to perform well with increased CECL reserves of $7,000,000 in the quarter net of charge offs. For U. S. Statutory, we recorded a $7,000,000 valuation allowance on mortgage loans as an unrealized loss during the quarter.
On a Japan FSA basis, there were securities impairments of JPY $476,000,000 in Q3. And we booked a net realized loss of JPY 189,000,000 related to transitional real estate loans. This is well within our expectations and has limited impact on regulatory earnings and capital. During the quarter, we also enhanced our liquidity and capital flexibility by $2,000,000,000 with the creation of two off balance sheet pre capitalized trusts that issued securities commonly referred as PCAPS. Unencumbered holding company liquidity stood at $4,500,000,000 which was $2,700,000,000 above our minimum balance.
Our leverage was 22% for the quarter, which is within our target range of 20% to 25%. As we hold approximately 64% of our debt in yen, this leverage ratio is impacted by moves in the yen dollar exchange rate. This is intentional and part of our enterprise hedging program protecting the economic value of Aflac Japan in U. S. Dollar terms.
Our capital position remains strong. We ended the quarter with an SMR above 900% and an estimated regulatory ESR with the Undertaking Specific Parameter, or USP, above 250%. While not finalized, we estimate our combined RBC to be greater than 600%. These are strong capital ratios, which we actively monitor, stress and manage to withstand credit cycles as well as external shocks. Given the strength of our capital and liquidity, we repurchased $1,000,000,000 of our own stock and paid dividends of $3.00 $9,000,000 in Q3, 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. For 2025, we now expect that the benefit ratio in Japan will be in the 58 to 60% range. And we continue to expect the expense ratio to be at the lower end of the 20 to 23% range as we pursue various growth and strategic initiatives. As a result, we expect the Aflac Japan’s pretax profit margin to be in the 35 to 38% range. In The U.
S, we continue to expect the benefit ratio for 2025 to be at the lower end of the 48% to 52% range and the expense ratio to be in the mid- to upper end of the 36% to 39% range as we continue to scale new business lines. At the same time, we expect pretax profit margin for 2025 in The U. S. To be at the upper end of the 17% to 20% range. Thank you, and I look forward to discussing our results in further detail on tomorrow’s earnings call.
