10-Q: Aflac Q2 2025 Earnings Hit by Investment Losses

Aflac Incorporated reported a significant decline in net earnings and total revenues for the second quarter and first half of 2025, primarily driven by substantial net investment losses, despite operational growth in its U.S. segment.

Summary

• Total revenues for Q2 2025 were $4.16 billion, down from $5.138 billion in Q2 2024.
• Net earnings for Q2 2025 were $599 million ($1.11 diluted EPS), down from $1.755 billion ($3.10 diluted EPS) in Q2 2024.
• Total revenues for H1 2025 were $7.558 billion, down from $10.575 billion in H1 2024.
• Net earnings for H1 2025 were $628 million ($1.16 diluted EPS), down from $3.634 billion ($6.35 diluted EPS) in H1 2024.
• Net investment losses were $421 million in Q2 2025 and $1.384 billion in H1 2025, compared to gains of $696 million and $1.647 billion in the respective prior periods.
• Adjusted earnings for Q2 2025 were $957 million ($1.78 diluted EPS), down from $1.035 billion ($1.83 diluted EPS) in Q2 2024.
• Adjusted earnings for H1 2025 were $1.863 billion ($3.43 diluted EPS), down from $1.996 billion ($3.49 diluted EPS) in H1 2024.
• Shareholders' equity increased to $27.2 billion ($50.86 per share) at June 30, 2025, from $26.1 billion ($47.45 per share) at December 31, 2024.
• Repurchased 16.4 million common shares for $1.7 billion in H1 2025.
• Aflac Japan's pretax adjusted earnings decreased by 15.0% in yen terms for Q2 2025 and 12.1% for H1 2025.
• Aflac U.S. pretax adjusted earnings increased by 1.3% for Q2 2025 and 0.9% for H1 2025.
• Aflac U.S. new annualized premium sales increased by 2.7% in Q2 2025 and 3.1% in H1 2025.
• Aflac Japan new annualized premium sales increased by 23.2% in Q2 2025 and 18.7% in H1 2025 (yen basis).
• A cybersecurity incident involving unauthorized network access and data exfiltration occurred on June 12, 2025.

Sentiment

Score: 3

Explanation: The significant decline in net earnings and total revenues, primarily due to substantial net investment losses, indicates a negative financial performance for the period. While operational segments showed some resilience and growth, the overall impact of investment performance and the cybersecurity incident weigh heavily on the results.

Positives

• Aflac U.S. segment showed growth, with net earned premiums increasing by 3.4% in Q2 2025 and 2.6% in H1 2025.
• Aflac U.S. pretax adjusted earnings increased by 1.3% in Q2 2025 and 0.9% in H1 2025.
• Aflac U.S. new annualized premium sales increased, primarily driven by group products.
• Aflac Japan's new annualized premium sales increased significantly (23.2% in Q2 2025 yen basis) due to the new cancer insurance product "Miraito" and "Tsumitasu".
• The company repurchased 16.4 million common shares for $1.7 billion in the first six months of 2025, demonstrating capital return to shareholders.
• Cash dividends per share increased to $0.58 in Q2 2025 from $0.50 in Q2 2024, and the board declared a 16.0% increase for Q3 2025.
• Shareholders' equity increased to $27.2 billion at June 30, 2025, from $26.1 billion at December 31, 2024.
• The company maintains strong capital levels, with Aflac Japan's Solvency Margin Ratio (SMR) remaining high and Aflac U.S.'s combined Risk-based Capital (RBC) ratio remaining high.
• The company promptly initiated cybersecurity incident response protocols and believes it contained the intrusion within hours, with business remaining operational and systems not affected by ransomware.

Negatives

• Total revenues significantly decreased by 19.0% in Q2 2025 and 28.5% in H1 2025, primarily due to substantial net investment losses.
• Net earnings plummeted by 65.9% in Q2 2025 and 82.7% in H1 2025, largely driven by net investment losses.
• Net investment losses were $421 million in Q2 2025 and $1.384 billion in H1 2025, a significant reversal from gains in the prior year. These losses included $452 million (Q2) and $1.3 billion (H1) from derivatives and foreign currency, and increased credit loss allowances of $58 million (Q2) and $113 million (H1).
• Aflac Japan's pretax adjusted earnings decreased by 15.0% in yen terms for Q2 2025 and 12.1% for H1 2025, primarily due to lower total adjusted revenue.
• Aflac Japan's net earned premiums decreased in yen terms due to internal cancer reinsurance transactions and limited-pay products reaching premium paid-up status.
• Aflac Japan's adjusted net investment income decreased due to lower floating rate income and the impact of yen strengthening on U.S. dollar investments.
• Aflac Japan's annualized premiums in force decreased by 2.3% in yen terms.
• Aflac U.S. adjusted net investment income decreased due to lower floating rate income.
• Aflac U.S. total benefits and claims increased due to higher incurred claims.
• A cybersecurity incident on June 12, 2025, involved unauthorized network access and exfiltration of sensitive data (claims, health, social security numbers, personal information) relating to a substantial number of individuals in the U.S. business.
• The company incurred costs related to the cybersecurity incident, including response, credit monitoring, identity theft protection, and potential future litigation/investigation expenses.

Risks

• Difficult conditions in global capital markets and the economy, including inflation.
• Defaults and credit downgrades of investments.
• Global fluctuations in interest rates and exposure to significant interest rate risk.
• Concentration of business in Japan.
• Limited availability of acceptable yen-denominated investments.
• Foreign currency fluctuations in the yen/dollar exchange rate.
• Differing interpretations applied to investment valuations.
• Significant valuation judgments in determination of expected credit losses recorded on investments.
• Decreases in financial strength or debt ratings.
• Decline in creditworthiness of other financial institutions.
• Ability to attract and retain qualified sales associates, brokers, employees, and distribution partners.
• Deviations in actual experience from pricing and reserving assumptions.
• Ability to continue to develop and implement improvements in information technology systems and on successful execution of revenue growth and expense management initiatives.
• Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality, integrity or privacy of sensitive data residing on such systems, and uncertainty regarding the impact of the incident involving unauthorized access to the network in June 2025.
• Subsidiaries' ability to pay dividends to the Parent Company.
• Inherent limitations to risk management policies and procedures.
• Operational risks of third-party vendors.
• Tax rates applicable to the Company may change.
• Failure to comply with restrictions on policyholder privacy and information security.
• Extensive regulation and changes in law or regulation by governmental authorities.
• Competitive environment and ability to anticipate and respond to market trends.
• Catastrophic events, including, but not limited to, as a result of climate change, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, major public health issues, terrorism or other acts of violence, and damage incidental to such events.
• Ability to protect the Aflac brand and reputation.
• Ability to effectively manage key executive succession.
• Changes in accounting standards.
• Level and outcome of litigation or regulatory inquiries.
• Allegations or determinations of worker misclassification in the United States.

Future Outlook

The company expects the demand for supplemental "third sector" products in Japan to continue rising due to healthcare system cost pressures. Sales of "first sector" products are anticipated to create long-term opportunities and cross-selling. The company plans to continue managing its unhedged U.S. dollar-denominated investments in Aflac Japan, adjusting based on economic equity surplus and hedge costs. Future cash flows from premiums and investment portfolios are expected to be sufficient to meet benefit and expense needs. Japan's Financial Services Agency (FSA) will introduce an economic value-based solvency regime (ICS), with the initial Economic Solvency Ratio (ESR) report due March 31, 2026. The company is committed to maintaining strong capital levels consistent with current insurance financial strength and credit ratings. Total compensation cost of $44 million related to restricted stock awards and units is expected to be recognized over approximately 1.8 years.

Management Comments

• The company promptly initiated its cybersecurity incident response protocols and believes that it contained the intrusion within hours. Business remains operational and systems were not affected by ransomware.
• The company continues to serve its policyholders as it responds to this incident and can underwrite policies, review claims, and otherwise service customers as usual.
• Based on the information currently available and the investigation to date, the company has not determined that the incident is reasonably likely to have a material impact on its financial condition or results of operations.
• The company remains committed to prudent liquidity and capital management.
• The company believes that its balance of cash and cash equivalents and cash generated by operations will be sufficient to satisfy both its short-term and long-term cash requirements and plans for cash, including material cash requirements from known contractual obligations and returning capital to shareholders through share repurchases and dividends.
• The company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings.

Industry Context

The Japanese health care system faces continued cost pressure, driving the need for supplemental "third sector" products. The U.S. insurance market shows growth in group products. Global capital markets and interest rate fluctuations significantly impact investment income and net investment gains/losses for insurance companies. The cybersecurity landscape presents ongoing threats, requiring robust incident response and potentially incurring significant costs for data breaches. Regulatory changes, such as Japan's upcoming economic value-based solvency regime (ICS), influence capital management strategies for insurers.

Comparison to Industry Standards

• Aflac Japan's discount rate curve for policy liabilities utilizes liquid market indices tracking publicly traded yen-denominated single-A corporate debt for the initial 10-year tenor, and extrapolates beyond 30 years following the Smith-Wilson method, anchored by an ultimate forward rate consistent with the International Association of Insurance Supervisors (IAIS) Insurance Capital Standards (ICS).
• Aflac U.S.'s discount rate curve for policy liabilities uses data from a liquid fixed-income market index tracking single-A U.S. corporate debt for cash flow duration within 30 years, extrapolating beyond that tenor following the Smith-Wilson method to the same ultimate forward rate as Japan, based on the assumption of long-term global economic convergence.
• Aflac Japan's Solvency Margin Ratio (SMR) is high, reflecting a strong capital and surplus position, aligning with regulatory standards set by Japan's Financial Services Agency (FSA).
• Aflac U.S.'s combined Risk-based Capital (RBC) ratio remains high, reflecting a strong capital and surplus position, in line with National Association of Insurance Commissioners (NAIC) guidelines.

Corporate Governance

Legal Proceedings

• The company is a defendant in various lawsuits and receives regulatory inquiries considered to be in the normal course of business.
• A cybersecurity incident on June 12, 2025, involved unauthorized network access and data exfiltration, potentially leading to litigation, governmental investigations, or enforcement actions. The company is still validating the extent and nature of files involved and believes the potential loss cannot be reasonably estimated at this time.

Related Party Transactions

• Internal reinsurance activities with Aflac Re Bermuda Ltd. (Aflac Re), a Bermuda domiciled insurer that reinsures certain policies issued by Aflac Japan.
• Intercompany credit agreements with subsidiaries including Aflac, Aflac New York, Continental American Insurance Company (CAIC), Tier One Insurance Company (TOIC), Aflac GI Holdings LLC, Aflac Re, Aflac Asset Management LLC, and Aflac Global Ventures LLC.

Stakeholder Impact

• Shareholders: Impacted by significantly lower net earnings, but also benefited from increased dividends and share repurchases. Shareholders' equity increased.
• Policyholders/Customers: Continued service despite the cybersecurity incident, but sensitive data (claims, health, social security numbers, personal information) was exfiltrated, potentially requiring credit monitoring and identity theft protection.
• Employees/Agents: Sensitive personal information was exfiltrated during the cybersecurity incident.
• Creditors: The company issued new senior notes and maintains compliance with debt covenants, indicating continued access to capital markets.

Next Steps

• Continue to serve policyholders and respond to the cybersecurity incident.
• Ongoing investigation into the full impact of the cybersecurity incident, including financial implications and insurance coverage.
• Monitor and manage potential future costs related to the cybersecurity incident, including credit monitoring, identity theft protection, litigation, governmental investigations, and elevated cybersecurity insurance premiums.
• Annual review of assumptions for policy liabilities during the third quarter.
• Initial report on the Economic Solvency Ratio (ESR) for Aflac Japan's 2025 fiscal year-end (March 31, 2026).
• Continual evaluation of hedging programs' efficacy.
• Consider increasing or decreasing unhedged U.S. dollar-denominated investments at Aflac Japan based on economic equity surplus and rising hedge costs.

Key Dates

Recommendation

While Aflac's operational segments, particularly Aflac U.S. and Aflac Japan's new sales, show resilience and growth, the significant decline in net earnings and total revenues due to substantial net investment losses is a major concern. The recent cybersecurity incident, though contained, introduces additional uncertainty regarding potential costs and reputational impact. Given the mixed financial performance and the ongoing assessment of the cyber incident's full implications, a 'hold' recommendation is prudent. Investors should monitor the company's investment portfolio performance and the resolution of the cybersecurity incident for clearer future direction.

Keywords

Aflac, Insurance, Supplemental Health, Life Insurance, Japan, United States, SEC Filing, 10-Q, Financial Results, Earnings, Investment Income, Premiums, Cybersecurity, Risk Management, Capital Allocation, Share Repurchase, Dividends, Corporate Governance