Why did Aflac's Q4 2023 net earnings rise while adjusted earnings fell?

Reported net earnings rose 36.7% to $268M, but that comparison is distorted by Q4 2022, which included a large net investment loss of $521M. Adjusted earnings exclude net investment gains and losses, and those were far larger in the prior-year quarter, so adjusted earnings (down 10.4% to $732M) provide the cleaner view of underlying operating performance.

What is the impact of the reinsurance novation transaction?

The novation of a reinsurance treaty with a third party, ceded back to Aflac at year end, produced a $151M pretax loss ($119M post-tax, $0.20 per diluted share) recorded in Corporate and Other. Management characterizes it as a non-economic U.S. GAAP recapture with favorable long-term economics, returning well above the company's cost of capital.

What should investors expect for 2024?

Management guided Aflac Japan to a 66-68% benefit ratio, 19-21% expense ratio, and 29-31% pretax profit ratio, with underlying net earned premiums down 1.5-2.5%. For Aflac U.S., guidance is net earned premiums growth of 3-5%, a 45-47% benefit ratio, and a 19-21% pretax profit ratio. Sales targets are ¥67-73 billion in Japan by end-2026 and over $1.8 billion in the U.S. by end-2025.

Is the dividend and capital return program at risk?

Management reiterated a 19% increase to a $0.50 Q1 2024 dividend and emphasized capital strength: Japan's solvency margin ratio exceeded 1,100%, the combined RBC ratio was estimated above 650%, and holding company liquidity was $2.8B, $1.0B above the minimum. Leverage of 19.7% sits just below the 20-25% target corridor, though it fluctuates with the yen because about two-thirds of debt is yen-denominated.

What are the main risks highlighted in the filing?

Key risks include the commercial real estate watchlist of roughly $1.2B (about $500M in active foreclosure proceedings, with a $26M CECL reserve increase in Q4), yen/dollar volatility that drives large derivative and FX losses, and reliance on remeasurement gains that boosted Q4 benefit ratios by about 130 basis points in Japan and 290 basis points in the U.S. Japan's underlying premium decline and elevated lapses are also watch items.

AFL 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed January 31, 2024. Cited figures are marked; the original filing is the authoritative source.

Aflac reported Q4 2023 net earnings of $268 million^a ($0.46 per diluted share), down sharply from prior-year results on a per-share basis, but this decline was driven largely by investment losses and a one-time reinsurance novation charge.

Adjusted earnings, the company's preferred operating measure, fell 10.4% to $732 million^b ($1.25 per diluted share, down 4.6%). Net investment losses of $511 million were driven mainly by derivative and FX losses of $580 million tied to yen movements, and a $151 million pretax loss on a reinsurance treaty novation weighed on Corporate and Other. Full-year 2023 adjusted EPS rose 9.9% to $6.23 (13.4% excluding a $0.19 currency drag), and full-year net earnings were $4.7 billion ($7.78 per diluted share).

Segment performance was mixed. Aflac Japan's pretax adjusted earnings grew 9.7%^c in yen terms, with the pretax margin expanding to 30.4% from 26.7%, though net earned premiums fell 8.5% on paid-up policies and reinsurance transactions. Aflac U.S. showed stronger top-line momentum, with net earned premiums up 1.1% and quarterly sales up 2.6%, but its pretax adjusted earnings fell 10.9% as expenses rose and its expense ratio climbed to 43.4%.

Management reiterated a 19% increase in the first-quarter 2024 dividend to $0.50^d per share, extending 41 consecutive years of dividend increases, and repurchased $700 million of stock in the quarter ($2.8 billion for the full year). For 2024, management guided Aflac Japan toward a 66-68% benefit ratio, a 19-21% expense ratio, and a 29-31% pretax profit ratio, with underlying Japan net earned premiums expected to decline 1.5% to 2.5%.

For Aflac U.S., guidance calls for net earned premiums growth of 3% to 5%, a benefit ratio of 45-47%, and a pretax profit ratio of 19-21%. Key watch items include the sustainability of remeasurement gains that flattered recent benefit ratios, the commercial real estate watchlist (about $1.2 billion, with roughly $500 million in active foreclosure), leverage of 19.7% just below the 20-25% corridor, and yen/dollar sensitivity.

02—Key points

Key Highlights

Q4 2023 net earnings of $268M ($0.46/diluted share) vs. $196M ($0.31) a year ago, but adjusted EPS fell 4.6% to $1.25 (adjusted earnings down 10.4% to $732M).
Q4 included a $151M pretax ($119M post-tax, $0.20/share) loss from novating a reinsurance treaty ceded back to the company; management describes its economics as very favorable.
Net investment losses of $511M in Q4 were driven by $580M of derivative and FX losses largely from exchange-rate changes.
Full-year 2023 adjusted EPS rose 9.9% to $6.23 (13.4% ex-FX) and net earnings rose 5.5% to $4.7B ($7.78/diluted share).
Aflac Japan pretax margin expanded to 30.4% in Q4 (from 26.7%) and pretax adjusted earnings rose 9.7% in yen terms, though net earned premiums fell 8.5%.
Aflac U.S. net earned premiums grew 1.1% and sales rose 2.6% in Q4, but pretax adjusted earnings fell 10.9% as the expense ratio rose to 43.4%.
Board declared a Q1 2024 dividend of $0.50 (up 19%), 41 consecutive years of dividend increases; $2.8B of shares repurchased in 2023, with 77.7M shares remaining under authorization.

03—Questions

Frequently Asked Questions

Why did Aflac's Q4 2023 net earnings rise while adjusted earnings fell?
Reported net earnings rose 36.7% to $268M, but that comparison is distorted by Q4 2022, which included a large net investment loss of $521M. Adjusted earnings exclude net investment gains and losses, and those were far larger in the prior-year quarter, so adjusted earnings (down 10.4% to $732M) provide the cleaner view of underlying operating performance.
What is the impact of the reinsurance novation transaction?
The novation of a reinsurance treaty with a third party, ceded back to Aflac at year end, produced a $151M pretax loss ($119M post-tax, $0.20 per diluted share) recorded in Corporate and Other. Management characterizes it as a non-economic U.S. GAAP recapture with favorable long-term economics, returning well above the company's cost of capital.
What should investors expect for 2024?
Management guided Aflac Japan to a 66-68% benefit ratio, 19-21% expense ratio, and 29-31% pretax profit ratio, with underlying net earned premiums down 1.5-2.5%. For Aflac U.S., guidance is net earned premiums growth of 3-5%, a 45-47% benefit ratio, and a 19-21% pretax profit ratio. Sales targets are ¥67-73 billion in Japan by end-2026 and over $1.8 billion in the U.S. by end-2025.
Is the dividend and capital return program at risk?
Management reiterated a 19% increase to a $0.50 Q1 2024 dividend and emphasized capital strength: Japan's solvency margin ratio exceeded 1,100%, the combined RBC ratio was estimated above 650%, and holding company liquidity was $2.8B, $1.0B above the minimum. Leverage of 19.7% sits just below the 20-25% target corridor, though it fluctuates with the yen because about two-thirds of debt is yen-denominated.
What are the main risks highlighted in the filing?
Key risks include the commercial real estate watchlist of roughly $1.2B (about $500M in active foreclosure proceedings, with a $26M CECL reserve increase in Q4), yen/dollar volatility that drives large derivative and FX losses, and reliance on remeasurement gains that boosted Q4 benefit ratios by about 130 basis points in Japan and 290 basis points in the U.S. Japan's underlying premium decline and elevated lapses are also watch items.

04—Continue

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