Aflac's Q3 2025 Earnings Call: Key Contradictions on U.S. Sales, ESR, Reserves, Interest Rates, and Japan Market Spark Investor Concerns

Business Commentary:

• Earnings and Profitability Growth:
• Aflac Incorporated reported an adjusted earnings per diluted share increase of 15.3% year over year to $2.49, with no impact from FX in the quarter.
  

• The growth was driven by remeasurement gains on reserves, variable investment income meeting long-term return expectations, and a solid spread to their cost of capital.

• Japan Segment Performance:

• Net earned premiums in Japan declined by 4%, while underlying earned premiums (excluding certain factors) declined by 1.2%.

• This was attributed to favorable underwriting experience due to long-term experience trends and solid persistency at 93.3%, despite some impact from refreshed product introductions.

• U.S. Segment Growth:

• Net earned premiums in the U.S. increased by 2.5%, with persistency rising to 79%, and an expense ratio of 38.9%.

• Growth was driven by strategic initiatives like cloud migration and the offset of a one-time early contract termination fee, although higher advertising spend contributed to the expense ratio increase.

• Strong Capital Position and Financial Flexibility:

• Aflac's leverage was 22%, within its target range of 20% to 25%, with capital ratios such as SMR above 900% and estimated regulatory ESR above 250%.
• The company enhanced liquidity by $2 billion, maintaining unencumbered holding company liquidity at $4.5 billion, reflecting its strong capital position and flexibility for capital deployment.
  

Contradiction Point 1

U.S. Sales Performance and Strategy

It highlights differing perspectives on the reasons behind weaker U.S. sales and the strategic focus for improving growth, which are crucial for investor expectations and business strategy.

How do you view ESR using a non-FSA-compliant adjusted metric? - Suneet Laxman L. Kamath (Jefferies)

2025Q3: We're focused on long-term value, and growth is expected to pick up in the second half, driven by strong fourth-quarter bookings. - Virgil Raynard Miller(CRO)

What's causing U.S. sales to be below expectations recently? - Jamminder Singh Bhullar (JPMorgan)

2025Q2: We're focusing on long-term value, and growth is expected to pick up in the second half, driven by strong fourth-quarter bookings. - Virgil Raynard Miller(CRO)

Contradiction Point 2

ESR Management and Internal Model Approval

It highlights differing perspectives on the ESR management strategy and the timeline for internal model approval, which are crucial for understanding the company's regulatory and risk management approach.

Can you explain the U.S. business's adjusted net investment income and pretax margin? - Suneet Laxman L. Kamath (Jefferies)

2025Q3: We use the regulatory ESR model with USP, giving a 30-point uplift, which we expect to be approved by March 31, 2026. - Max Kristian Broden(CFO)

What are your thoughts on ESR using an adjusted metric not aligned with FSA formulas? - Suneet Laxman L. Kamath (Jefferies)

2025Q2: We use the regulatory ESR model with USP, giving a 30-point uplift, which we expect to be approved by March 31, 2026. - Max Kristian Broden(CFO)

Contradiction Point 3

Reserve Remeasurement Gains and Their Impact on Benefit Ratio

It involves the reported impact of reserve remeasurement gains on the benefit ratio, which is a key financial indicator for insurance companies, affecting investor perceptions of financial health and risk management.

Can you discuss Aflac Japan's performance and the impact of reserve remeasurement gains on the benefit ratio? - Financial Executive

2025Q3: Reserve remeasurement gains positively impacted the benefit ratio by 26.6 percentage points. - Financial Executive/CFO, Aflac Incorporated

How should we view the waterfall/decay of remeasurement gains and when are they primarily concentrated? - John Barnidge (Piper Sandler)

2025Q1: The majority of remeasurement gains and losses occur in Q3 when actuarial assumptions are unlocked. - Max Broden(CFO)

Contradiction Point 4

Impact of Interest Rates on U.S. Net Investment Income

It involves the expected impact of interest rates on net investment income in the U.S. market, which is crucial for understanding financial performance and forecasting.

Could you clarify the U.S. business performance regarding adjusted net investment income and pre-tax margin? - Questioner's Name (Company Name)

2025Q3: Adjusted net investment income in the U.S. increased by 1.9% driven by higher variable investment income. - Financial Executive/CFO, Aflac Incorporated

Can you explain how hedge benefits impact earnings? - Joel Hurwitz (Dowling & Partners)

2024Q4: We have a floating rate book sensitive to SOFR, with a decline in rates impacting net investment income in 2025. - Max Broden(CFO)

Contradiction Point 5

Japan Insurance Market Competition and Sales Performance

It reflects differing views on the competitive dynamics and sales performance within the Japanese insurance market, impacting investor expectations regarding market share and growth potential.

Can you clarify the U.S. business performance, specifically the adjusted net investment income and pretax margin? - Financial Executive

2025Q3: Sales in these areas are cyclical, with new products contributing to growth. - Daniel Amos(CEO)

What is the sales impact of the new cancer product launch in Japan? - Jack Matten (BMO Capital Markets)

2025Q1: Aflac maintains the leading market share in cancer and medical insurance, benefiting from strong brand recognition and a comprehensive product line. - Koichiro Yoshizumi