Aflac 3rd Quarter 2026 Earnings Call - AFLAC INC

Financial Performance:

• Third quarter 2026 adjusted earnings per diluted share were $2.43 (or $2.46 excluding FX impact), down 1.2% year-over-year.
• Net earnings per diluted share were $0.61, heavily impacted by non-recurring items.
• Japan segment: Net premiums in yen declined 2%; underlying earned premiums fell 1.2%; total benefit ratio was 49.2% (40 bps below plan excluding assumption unlock); pre-tax profit margin was 44.4%.
• U.S. segment: Net earned premiums increased 3.3%; benefit ratio was 40.7% (490 bps lower YoY due to assumption unlock); expense ratio was 37%; pre-tax profit margin was 27.7%.
• Corporate/Other: Adjusted revenues rose 5% to $360 million; adjusted earnings were $72 million, driven by $91 million in re-measurement gains.
• Adjusted ROE was 17.8% (23.7% excluding FX); adjusted leverage was 22.6%, within the 20–25% target range.
• Unencumbered liquidity stood at $2.7 billion, $1.7 billion above the $1 billion minimum threshold.
• Capital deployment included $804 million in share repurchases and $305 million in dividends in Q3.

Guidance and Future Outlook:

• Japan 2026 benefit ratio expected slightly below the 60–63% range; expense ratio on the lower end of 20–23%; pre-tax margin raised to 35–38%.
• U.S. 2026 benefit ratio expected below 48–52%; expense ratio in the middle of 36–39%; pre-tax margin expected above 17–20%.
• Japan sales outlook: Expects 2026 sales to exceed 2025 levels; first nine months up 3% despite Q3 challenges.
• U.S. sales: Group business (life, AD&D, dental) showing strong momentum; dental/vision up 67% in Q3.
• Outlook for Q4: U.S. expects higher activity due to the seasonal peak and an additional week of productivity in the quarter.
• Long-term: Expectations to continue growing third-sector savings in Japan given attractive IRRs, while balancing capital intensity.

Business Segments and Product Lines:

• Japan: Sumitatsu sales grew YoY and sequentially; Anshin Pallet (medical insurance) increased sales; Morito Cancer Insurance sales remained strong despite tough comparisons; First-sector savings block shrinking as it runs off faster than new Sumitatsu additions.
• U.S.: Group Life, Disability, and Network Dental showing momentum; Dental/Vision platform grew 67% and achieved 90% cross-sell rate with voluntary benefits; Individual platform declined 1.5%.
• Reinsurance: Aflac Japan ceded ~500 billion yen of FSA reserves to Aflac Bermuda, releasing ~$1 billion in capital; internal reinsurance target raised to 30% of FSA reserves.
• Investments: Executed switch trades repositioning $2.3 billion of JGBs to higher-yielding assets, improving future net investment income (NII) by over $30 million; U.S. recorded $6 million in impairments on invested assets.
• New Product: Anshin Pallet launched in December 2025 continues to drive medical insurance sales.

Market and Competitive Landscape:

• Rising healthcare costs in Japan and the U.S. are driving demand for supplemental insurance solutions.
• Japan: High yen interest rates and favorable mortality trends (specifically non-cancer mortality) are benefiting in-force blocks; company maintains strong position in the "third sector" (individual cancer/medical insurance).
• U.S.: Competitors facing behavioral health claim pressure in group disability; Aflac views this as an opportunity to gain market share given their small exposure and strong underwriting discipline.
• Distribution: Diverse channels (agencies, alliances, banks) remain a core competitive advantage; leveraging cross-selling between dental/vision and voluntary benefits.

Risks and Challenges:

• Cybersecurity: Q3 results included $40 million ($0.06/share) in cybersecurity expenses and enhancements in Japan; temporary suspension of outbound sales calls during the incident, but operations resumed by October.
• Asset Valuation: Commercial real estate property valuation pressure and middle-market loan performance concerns necessitated increased loan reserves in private credit portfolios.
• Interest Rate Sensitivity: First-sector savings block remains sensitive to interest rate fluctuations, though the company is well-positioned to react faster than peers.
• Foreign Exchange: Leverage ratio is impacted by USD/JPY movements; ~64% of debt is denominated in yen as part of an enterprise hedging program.
• Actuarial Assumptions: Benefit ratios are influenced by large actuarial assumption unlocks (re-measurement gains/losses) which may not recur at the same magnitude.

Management Commentary and Tone:

• Leadership transitions effective Jan 1, 2027: Shinsuke Morimoto and Fred Simard promoted to President of Japan and U.S. respectively; Dan Amos congratulated the incoming leadership.
• Tone is confident and strategic, emphasizing "profitable growth," strong capital management, and the resilience of the dual-market model.
• Management highlighted the "foundation" built by retiring executives and the strength of the succession plan.
• CFO Max Brodin expressed satisfaction with the repositioning of the investment portfolio and the capital release from reinsurance.

Analyst Questions and Answers:

• Bermuda Reinsurance Runway: Confirmed 15% of Japan FSA reserves currently ceded (up from 10% prior to transaction); runway exists up to the 30% internal limit. Future transactions may not be linear due to fixed operational costs per deal.
• Capital Deployment: Best returns seen in organic growth (writing new policies in US/Japan); third-party reinsurance and acquisition blocks viewed as significant long-term opportunities with limited capital consumption.
• US Group Disability: Management noted small exposure to behavioral health claims; loss ratios are improving, and they view peer pressure as a growth opportunity rather than a reason to pause.
• Japan Sales Mix: First-sector business is capital-intensive and macro-sensitive; however, current high interest rates and reinsurance structures make it attractive for growth.
• Assumption Unlock Impact: Expected to lower Japan benefit ratios by 70 bps and U.S. by 60 bps for in-force business going forward.
• Cybersecurity Impact: Sales operations fully resumed in September/October; sales expected to recover to normal levels.

Other Key Points:

• Aflac US dental/vision cross-sell ratio reached 90 cents of every dollar sold alongside voluntary benefits.
• Group Life and Disability earned premiums grew 17% and 29% respectively in the quarter.
• The 2026 milestone of 44 consecutive years of dividend increases was reiterated.
• A financial analyst briefing is scheduled for December 3rd at the NYSE.
• Private credit portfolios continue to deliver strong risk-adjusted yields despite higher loan reserves.