Aflac Incorporated (AFL) Earnings Call Transcript & Summary

Hello, and thank you for joining me as I provide a financial update on Aflac Inc.'s results for the second quarter of 2023. For the second quarter, adjusted earnings per diluted share increased 7.5% year-over-year to $1.58, with a $0.04 negative impact from FX in the quarter. We benefited from low benefit ratios both in Japan and the U.S. as claims utilization remained below our long-term expectations, leading to remeasurement gains of $54 million. This is the second quarter reported under the new accounting regime, LDTI, under which we periodically will unlock assumptions and remeasure reserves, leading to these gains and losses. In this quarter, we did not unlock any assumptions, but we anticipate doing so in Q3 as part of our annual process. Variable investment income ran $29 million or $0.04 per share below our long-term return expectations. Adjusted book value per share, including foreign currency translation gains and losses, increased 7.4%. And the adjusted ROE was 13.9% and or 14.3%, excluding the impact of foreign currency, a significant spread to our cost of capital. Overall, we view these results as solid. Starting with our Japan segment. Net earned premium for the quarter declined 6.2%, with a greater-than-normal paid-up impact. The impact from our January 1 reinsurance transaction was a negative 2.6%. Lapses were somewhat elevated, but within our expectations, leading to a slightly greater-than-expected decline in earned premium. Adjusting for all these factors, we estimate that the earned premium decline in the quarter to be 1.8%. Japan's total benefit ratio came in at 65.7% for the quarter, down 210 basis points year-over-year. And the third sector benefit ratio was 56.2%, down approximately 230 basis points year-over-year. We continue to experience favorable actual to expected on a well-priced, large and mature in-force block. We estimate the impact from remeasurement gains to be 100 basis points favorable to the benefit ratio in Q2. Long-term experience trends as it relates to treatment of cancer and hospitalization continues to be in place, leading to continued favorable underwriting experience. Persistency remains solid with a rate of 93.8%, but was down 50 basis points year-over-year. With product refreshments, we tend to experience some elevation in lapses as customers update and refresh their coverage, which was the case with the recently-refreshed cancer and first sector products. Our expense ratio in Japan was 19.5%, down 40 basis points year-over-year, driven primarily by good expense control and, to some extent, by the reinsurance transaction. Despite lower absolute expenses, the lower revenue base means that holding our expense ratio flat is becoming increasingly challenging with a shrinking in force. Adjusted net investment income in yen terms was down 6.4% as lower returns on our alternatives portfolio, higher hedge costs and the transfer of assets associated with reinsurance were only partially offset by higher yields and the impact of the stronger dollar. The pretax margin for Japan in the quarter was 30.4%, up 180 basis points year-over-year, a very good result for the quarter. Turning to the U.S. results. Net earned premium was up 2.2%. Persistency increased approximately 10 basis points year-over-year to 78.2%. This is a function of poor persistency quarters falling out of the metric and stabilization across numerous product categories, especially group voluntary benefits. Our total benefit ratio came in lower than expected at 45.3%, a full 190 basis points lower than Q2 2022. We estimate that remeasurement gains impacted the benefit ratio by 210 basis points in the quarter. Claims utilization remains subdued. And as we incorporate more recent experience into our reserve models, we have released some IBNR. For the full year, we now estimate a benefit ratio slightly below our outlook range of 47% to 50%. Our expense ratio in the U.S. was 39%, up 50 basis points year-over-year. The elevated expense ratio continues to be impacted by the high lapse environment, but the pressures are subsiding as we expect the expense ratio to improve from these levels. Our growth initiatives, group life and disability, network dental, vision and direct-to-consumer increased our total expense ratio by 260 basis points. We would expect this impact to decrease over time as these businesses grow to scale and improve their profitability. For the full year, we now expect our expense ratio to come in slightly above our outlook range of 37% to 40%. Adjusted net investment income in the U.S. was up 5.2%, mainly driven by higher yields on both our fixed and floating rate portfolios, somewhat offset by unfavorable variable investment income in the quarter. Profitability in the U.S. segment was solid, with a pretax margin of 22.2%, driven primarily by the abnormally low benefit ratio. In our corporate segment, we recorded a pretax loss of $52 million, which is somewhat smaller than a year ago, primarily due to our internal reinsurance transaction. Adjusted net investment income was $47 million higher than last year despite an increased volume of tax credit investments being recognized. Higher rates began to earn in, and amortized hedge income increased. These tax credit investments impacted the corporate net investment income line for U.S. GAAP purposes negatively by $53 million, with an associated credit to the tax line. The net impact of our bottom line was a positive $6.8 million in the quarter. To date, these investments are performing well and in line with expectations. We're continuing to build out our reinsurance platform and are pleased with the outcome and performance. Our capital position remains strong, and we ended the quarter with an SMR around 900% in Japan. And our combined RBC, while not finalized, we estimate to be greater than 650%. Unencumbered holding company liquidity stood at $3.5 billion, $1.8 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. We hold $250 million in reserves under CECL and experienced 0 associated charge-offs in the quarter. Total GAAP impairments totaled $3 million. U.S. debt impairments were $3 million. And Japan FSA impairments, JPY 170 million or roughly $1.1 million. This is well within our expectations and with limited impact to both earnings and capital. Leverage remains at a comfortable 19.4%, just below our leverage corridor of 20% to 25%. The decline in the quarter is primarily driven by the weakening yen. As we hold approximately 2/3 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 $700 million of our own stock and paid dividends of $252 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 for your time and attention. I look forward to discussing our results in further detail on tomorrow's earnings call.