8-K: Aflac Reports Mixed Q3 Results Amidst Yen Volatility, Appoints New President

Aflac Incorporated announced its third quarter results, marked by a net loss due to foreign exchange impacts, while also appointing Virgil R. Miller as the new company President effective January 1, 2025.

Summary

• Aflac reported a net loss of $93 million for the third quarter of 2024, or a loss of $0.17 per diluted share, compared to a net income of $1.6 billion, or $2.64 per diluted share, in the same quarter of 2023.
• The primary driver for the loss was a 12.9% strengthening of the yen, leading to increased foreign exchange-related losses.
• Net investment losses were $1.4 billion, or $2.51 per diluted share, compared to net investment gains of $423 million, or $0.71 per diluted share, a year ago.
• Adjusted earnings for the quarter were $1.2 billion, a 10.6% increase year-over-year, with adjusted earnings per diluted share increasing 17.4% to $2.16.
• Total revenues decreased to $2.9 billion from $5.0 billion in the third quarter of 2023.
• Aflac Japan's net earned premiums decreased by 10.5% in yen terms, while pretax adjusted earnings increased by 25.5% due to lower benefits and expenses.
• Aflac U.S. saw a 2.8% increase in net earned premiums, but pretax adjusted earnings decreased by 26.8% due to higher benefits.
• The company deployed $500 million in capital to repurchase 4.9 million common shares during the quarter.
• A fourth quarter dividend of $0.50 per share was declared, payable on December 2, 2024.
• For the first nine months of 2024, total revenues were down 9.4% to $13.5 billion, and net earnings were $3.5 billion, or $6.23 per diluted share.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While adjusted earnings show growth, the net loss and significant impact of foreign exchange create concern. The company's strong capital position and dividend record are positives, but the overall results are mixed.

Positives

• Adjusted earnings per diluted share increased by 17.4% year-over-year.
• Aflac Japan's pretax adjusted earnings increased by 25.5% in yen terms.
• Aflac U.S. net earned premiums increased by 2.8%.
• The company continues to generate strong capital and cash flows.
• Aflac has increased its dividend for 42 consecutive years.
• The company repurchased $500 million in shares during the quarter.
• Aflac Japan's new annualized premium sales increased by 12.3%.

Negatives

• Aflac reported a net loss of $93 million for the third quarter of 2024.
• Total revenues decreased to $2.9 billion from $5.0 billion in the third quarter of 2023.
• Net investment losses were $1.4 billion, compared to net investment gains of $423 million a year ago.
• Aflac Japan's net earned premiums decreased by 10.5% in yen terms.
• Aflac U.S. pretax adjusted earnings decreased by 26.8% due to higher benefits.
• The annualized return on average shareholders equity in the third quarter was (1.5)%.
• Shareholders equity at the end of the third quarter included an unrealized foreign currency translation loss of $4.1 billion.

Risks

• The company is exposed to significant foreign currency fluctuations, particularly with the Japanese yen.
• Difficult conditions in global capital markets and the economy, including inflation, could impact results.
• Defaults and credit downgrades of investments pose a risk to the company's financial stability.
• The company faces risks related to its ability to attract and retain qualified sales associates, brokers, employees, and distribution partners.
• Deviations in actual experience from pricing and reserving assumptions could impact profitability.
• Catastrophic events, including climate change, epidemics, pandemics, and other acts of violence, could negatively affect the company.
• The company is subject to extensive regulation and changes in law or regulation by governmental authorities.

Future Outlook

Aflac is focused on generating profitable growth in the U.S. and Japan with new products and distribution strategies, and believes this strategy will continue to create long-term value for shareholders. The company expects the full year benefit ratio for Japan to be in the range of 62% to 63% and the pretax margin to be in the range of 35% to 36%. For the U.S., the company expects full year net earned premiums to be towards the lower end of the guidance range of 3% to 5% and the benefit ratio to be towards the higher end of the guidance range of 45% to 47%. The company expects the expense ratio for the U.S. to remain within the guidance range of 38% to 40% for the full year.

Management Comments

• Daniel P. Amos, Chairman and CEO, stated that Aflac delivered very solid adjusted earnings for the quarter and the first nine months.
• Mr. Amos mentioned the focus on third sector products in Japan and introducing these policies to new and younger customers.
• Mr. Amos noted the 5.5% sales growth in the U.S. for the quarter and the focus on more profitable growth.
• Mr. Amos highlighted the company's commitment to prudent liquidity and capital management.
• Mr. Amos expressed pleasure that 2024 marks 42 consecutive years of dividend increases.
• Max Brodn, CFO, stated that adjusted earnings per diluted share increased 17.4% year over year to $2.16, with a $0.03 negative impact from FX in the quarter.
• Mr. Brodn mentioned that the pretax margin for Japan in the quarter was 44.7%, up 11.9 percentage points year over year.
• Mr. Brodn noted that the total benefit ratio for the U.S. came in at 47.6%, 11.7 percentage points higher than Q3 2023.
• Mr. Brodn stated that the company's capital position remains strong, with an SMR above 1,100%.

Industry Context

Aflac's results reflect the challenges faced by insurance companies with significant international operations, particularly in the face of currency fluctuations. The company's focus on new products and distribution strategies aligns with broader industry trends aimed at reaching new customer segments and driving growth. The emphasis on expense management and maintaining strong capital ratios is also consistent with industry best practices.

Comparison to Industry Standards

• Aflac's adjusted earnings per share growth of 17.4% is strong compared to some of its peers in the insurance sector, but the net loss due to foreign exchange impacts is a concern.
• The company's focus on supplemental health insurance products in the U.S. and cancer and medical insurance in Japan positions it well in these specific markets, but it faces competition from other providers.
• Aflac's persistency rates in both Japan and the U.S. are generally in line with industry averages, indicating a stable customer base.
• The company's capital ratios, with an SMR above 1,100% and a combined RBC estimated to be greater than 650%, are robust compared to regulatory requirements and industry benchmarks.
• The company's adjusted return on equity of 16.7% is a good result, but the negative impact of foreign exchange on net earnings highlights the volatility of international operations.
• Compared to companies like Prudential Financial and MetLife, Aflac's exposure to the Japanese market makes it more susceptible to yen fluctuations, which can significantly impact reported results.

Management Changes

Stakeholder Impact

• Shareholders will be impacted by the net loss, but the continued dividend payments and share repurchases are positive.
• Employees may be affected by the company's focus on expense management.
• Customers will continue to receive financial protection through Aflac's insurance products.
• Suppliers and creditors will be impacted by the company's financial performance and capital management decisions.

Next Steps

• The company intends to continue its balanced approach of investing in growth and driving long-term operating efficiencies.
• Aflac plans to execute another tranche of reinsurance with similar structure and economics in yen terms to its October 2023 transaction in the fourth quarter.
• The company will continue to monitor, stress, and manage its capital ratios to withstand credit cycles and external shocks.
• Aflac will continue to be flexible and tactical in how it manages the balance sheet and deploys capital.

Key Dates

Keywords

Aflac, insurance, financial results, earnings, Japan, United States, foreign exchange, premiums, investment income, dividends, share repurchase, Virgil R. Miller