01—Abstract
Summary
Summary of the 8-K filed July 31, 2024. Cited figures are marked; the original filing is the authoritative source.
Aflac reported Q2 2024 results on July 31, 2024, with net earnings of $1.8 billiona ($3.10 per diluted share), up 14.4% from $2.71 a year earlier, helped by $696 million of net investment gains, largely from derivatives and FX activity.
Adjusted earnings, the company's preferred underlying measure, rose 8.5% to $1.0 billionb, and adjusted EPS grew 15.8% to $1.83. Excluding a $0.07 currency headwind from the weaker yen, adjusted EPS would have increased 19.6% to $1.89. Total revenues slipped 0.7% to $5.1 billion, reflecting a 6.9% decline in net earned premiums that was largely driven by Japan's prior-year reinsurance transaction and paid-up policies.
Segment performance was strong. Aflac Japan's pretax adjusted earnings rose 5.1% in dollar terms (18.6% in yen), with a pretax margin of 35.3%, while Aflac U.S. grew pretax adjusted earnings 3.8% to $383 millionc with a 22.7% margin. U.S. sales rose 2.0% and Japan's total new sales rose 4.5% in yen, which management described as putting the Japan business back on track for the year.
Shareholder returns remained robust: the company repurchased a record $800 milliond of stock (9.3 million shares), declared a $0.50 quarterly dividend, and reported 41 consecutive years of dividend growth. Adjusted book value per share rose 12.1% to $52.26, and adjusted ROE was 14.3% (14.8% excluding FX impact). The main watch items are the sharp decline in Japan's net earned premiums, which fell 5.7% in yen, the rise in the U.S. expense ratio tied to growth initiatives, and commercial real estate loan stress, with a $1.0 billion watchlist and $14 million of additional CECL reserves.
Adjusted leverage of 19.5% sat just below management's 20-25% target corridor. Overall, the quarter reflected solid operating earnings growth, strong capital deployment, and a balanced but FX-sensitive profile.
02—Key points
Key Highlights
- Net earnings of $1.8 billion, or $3.10 per diluted share, up 14.4% year over year; included $696 million of net investment gains ($1.23 per diluted share, after tax).
- Adjusted EPS rose 15.8% to $1.83 (19.6% to $1.89 excluding the $0.07 FX headwind), with adjusted earnings up 8.5% to $1.0 billion.
- Aflac Japan pretax adjusted earnings up 5.1% in dollars (18.6% in yen) to $864 million, with a 35.3% pretax margin versus 30.4% a year ago; the segment included a $20 million make-whole call gain ($0.03 per share).
- Aflac U.S. pretax adjusted earnings up 3.8% to $383 million, with net earned premiums up 2.1% and persistency improving to 78.7%; U.S. sales rose 2.0% to $331 million.
- Record $800 million share repurchase in Q2 (9.3 million shares), with 59.2 million shares remaining under authorization; $0.50 quarterly dividend declared, extending 41 consecutive years of growth.
- Adjusted book value per share rose 12.1% to $52.26; adjusted ROE was 14.3% (14.8% excluding FX), and adjusted leverage of 19.5% sat just below the 20-25% target corridor.
- Watch items include a 5.7% decline in Japan net earned premiums in yen, a 6.9% dollar decline in total net earned premiums, and $1.0 billion on the commercial real estate watchlist with $14 million of added CECL reserves.
03—Questions
Frequently Asked Questions
Why did reported net earnings grow faster than adjusted earnings?
Net earnings include net investment gains of $696 million in the quarter, primarily $649 million from derivatives and FX activity, compared with $555 million a year earlier. Adjusted earnings exclude these investment gains and losses, so the 7.4% increase in net earnings versus the 8.5% increase in adjusted earnings reflects the difference in how the one-time gains and losses are treated. Management emphasizes adjusted earnings as the better measure of underlying insurance profitability.
How much did the weaker yen hurt results this quarter?
The average yen/dollar rate was 155.70 in Q2 2024, 11.7% weaker than in Q2 2023. That reduced adjusted EPS by $0.07 in the quarter and $0.14 for the first half. Excluding the currency impact, adjusted EPS would have grown 19.6% in Q2 rather than 15.8%.
Is the decline in Japan premiums a cause for concern?
Japan's net earned premiums fell 5.7% in yen this quarter, mainly because of a reinsurance transaction executed in Q4 2023 (about ¥7.4 billion impact) and policies reaching paid-up status (about ¥4.8 billion). Management noted that policies in force fell 2.4%, persistency was 93.3%, and sales rose 4.5% in yen, which suggests the decline is largely structural and transactional rather than a loss of demand.
What are the main risks flagged in the commercial real estate portfolio?
The commercial real estate loan watchlist stands at $1.0 billion, with less than $300 million in process of foreclosure. Aflac increased CECL reserves on these loans by $14 million net of charge-offs, completed six loan foreclosures, and moved nine properties into real estate owned. Management believes current distressed valuations do not reflect the intrinsic value of the portfolio, and its first-lien middle market loan portfolio continued to perform within expectations.
How strong is Aflac's capital position after the buybacks?
Capital remained strong. Japan's solvency margin ratio was above 1,100%, and the estimated combined RBC ratio was above 650%. Unencumbered holding company liquidity was $4.1 billion, $2.3 billion above the minimum balance. Adjusted leverage of 19.5% was slightly below the 20-25% corridor, and management said the leverage will fluctuate with the yen because about 60% of debt is denominated in yen, a deliberate part of the enterprise hedging program.
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