AFL earnings call transcript, November 4, 2026

Good day and welcome to the AFLAC incorporated third quarter 2026 earnings call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press. Star then one on your telephone keypad. To withdraw your question please press star then two. Please note this event is being recorded. I would now like to hand the call to David Young, Senior Vice President, Capital Markets.

Please go ahead.

Good morning and welcome.

Thank you for joining us for AFLAC Incorporated's third quarter 2026 earnings call. This morning, Dan Amos, Chairman and CEO of AFLAC Incorporated will. Provide an overview of our results and operations in Japan and the United States, then Max Broden, Senior Executive Vice President and CFO of AFLAC Incorporated will provide more detail on our third quarter financial results. Including our capital and liquidity. These topics are also addressed in the materials we posted with our earnings release, financial supplement, and quarterly CFO video update on investors.aflac.com. For Q&A today, we are also joined by Virgil Miller, President of AFLAC Incorporated and AFLAC U.S., Fred Simard, Deputy President of AFLAC U.S., Charles Lake, Chairman and Representative. Director, President of AFLAC International. Masatoshi Kuide, President and Representative Director, AFLAC Life Insurance, Japan. Shinsuke Morimoto, Deputy President, AFLAC Life Insurance, Japan. Brad Dislin, Global Chief Investment Officer, President of AFLAC Global Investments. Before we begin, some statements in this teleconference are forward-looking within the meaning of federal security. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are perspective in nature. Actual results could differ materially from those we discussed today. We encourage you to look at our annual report on Form 10-K.

some of the various risk factors that could materially impact our results. As I mentioned earlier, the earnings release with reconciliations of certain non-US GAAP measures and related earnings materials are available. on investors.athlack.com. I'll now hand the call over to Dan. Dan? Thank you, David, and good morning, everyone. We're glad you've joined us. You probably saw our announcement earlier this week about

leadership promotions for AFLAC Japan and AFLAC U.S. that will be effective January 1, 2027. Deputy President of AFLAC Japan, Shinsuke Morimoto. will be promoted to President of AFLAC Japan and Representative Director. Also, Deputy President of AFLAC U.S., Fred Samar, will be promoted to President of AFLAC U.S. Masatoshi Koide, currently President of AFLAC Japan, Representative Director, will assume the role of Chairman of AFLAC Japan and Representative Director. Charles Lake will become Executive Advisor of AFLAC Japan and assume the role of Chairman of AFLAC International. These leadership announcements are the results of long-term and deliberate succession planning process and coordination. overseen by AFLAC incorporated board of directors to ensure we have the right people in the right places at the right time. Virgil and I agree that the strength of the leadership bench is a testament to the strong foundation created by Charles and Koide-san whose leadership has had a tremendous positive impact on AFLAC Japan and across the AFLAC organization. We are excited as each esteemed leader takes on new challenges and opportunities. Now, turning to the results, AFLAC Inc. reported third quarter net earnings per diluted share of $0.61 and adjusted earnings per diluted share of $2.43. as we executed on our strategy of creating long-term value for our shareholders.

Thank you, Dan. For the third quarter of 2026, adjusted earnings per diluted share decreased 1.2% year over year to $2.46 excluding the effect of foreign currency in the quarter. In this quarter, re-measurement gains on reserves from the actuarial assumption unlock, including deferred profit liability, totaled $447 million on a pre-tax basis. Re-measurement gains all included $55 million of experience re-measurement on reserves, which was $2 million below plan, with no impact on earnings per share. The total net impact from the Q3 assumption update increased earnings per share by $0.71. In addition, third quarter results included $40 million or $0.06 per diluted share of cybersecurity expenses and enhancements in Japan. Variable Investment income ran $22 million or $0.03 per diluted share below our long-term return expectations. Adjusted book value per share, excluding foreign currency re-measurement, decreased 6.4%. Adjusted ROE was 17.8% and 23.7% excluding foreign currency re-measurement, a very significant spread to our cost of capital. Overall, we view these results in the quarter. A solid. Starting with our Japan segment, net-earned premiums in yen terms for the quarter declined 2%. AFLIK Japan's underlying earned premiums, which excludes the impact of reinsurance, paid-up policies, and the for-profit liability declined 1.2%, roughly in line with where we expect to be for the full year.

Japan's total benefit ratio came in at 49.2% for the quarter, up 990 basis points. year-over-year, reflecting a larger actuarial assumption unlock in the prior year. We estimate that the impact from reserve remeasurement gains, excluding the unlock, was under-planned by approximately 40 basis points in Q3-2026. Adjusting for both the experience in the quarter and the unlock of future assumptions, we estimate the benefit ratio to be 61.7% in the quarter. We continue to experience favorable trends in cancer. Related to hospitalization and mortality, leading to favorable actual to expected experience. Persistency remains solid and in line with our expectations at 92.9%. We have continued to experience somewhat elevated lapse and reissue activity on recently launched products, as we have expanded coverage options and competitiveness on new products. This activity in the quarter slightly declined, though, helping... ...to improve persistency. Lapses on our first sector savings block remain low and in line with previous periods, despite the increase in yen interest rates. Our expense ratio in Japan was 21.2% for the quarter. Up 140 basis points year-over-year. Third quarter cybersecurity expenses and enhancements increased the expense ratio by approximately 180 basis points. For the quarter... Adjusted net investment income in Yen terms increased 3.7 percent, primarily driven by higher fixed rate income and higher income

on U.S. dollar denominated assets from the weakening Yen. Upset by lower floating rate income and higher expenses. The pre-tax margin for Japan in the quarter was 44.4 percent, down 780 basis points year-over-year, reflecting the very significant action for the aerial assumption unlock in the prior year. A very good result when even adjusting for this unlock. As we previously discussed, AFLAC Japan increased the internal reinsurance target from up to 10% of U.S. GAAP assets to 30% of FSA reserves. This will allow us to continue to reduce risk, improve balance sheet efficiency, and ultimately generate a higher ROE for AFLAC Japan and the group. During the third quarter, we will continue to reduce risk, improve balance sheet efficiency, and ultimately generate a higher ROE for AFLAC Japan and the group. This quarter, AFLAC Japan ceded approximately 500 billion yen of reserves on an FSA basis associated with cancer insurance policies to AFLAC Rebbermuda. We estimate that this transaction will release approximately 1 billion yen. dollars of capital that will, over time, be available for redeployment. Recognizing that the year-to-date benefit ratio is 58.8%, we now expect for 2026 that the benefit ratio in Japan will be slightly below the 60 to 60. 63% range. And we expect the expense ratio to be on the lower end of the 20 to 23% range. As a result, we have raised the 2026 expected pre-tax profit margin range for AFLITE Japan.

to 35% to 38%. Turning to U.S. results, net and premiums were up 3.3%. Premium persistency remained solid at 79.7%, up 70 basis points. Year-over-year. Our total benefit ratio came in at 40.7%, 490 basis points lower than Q3 2025, driven by the unlocking of actuarial. We estimate that the impact from reserve remeasurement gains, excluding the unlock, was above plan by approximately 50 basis points. We estimate that the benefit ratio adjusting for the remeasurement gain from both truing up for the experience in the quarter and unlocking our forward-looking assumptions was 50.2%. Our expense ratio in the U.S. was 37%, down 190 basis points. year-over-year, primarily driven by a one-time early contract termination fee of $21 million in the prior year. As our group life and disability block of business approaches scale and therefore experiences improved profit we are deferring acquisition expenses. This has helped the expense ratio in the quarter by 80 basis points with a more modest impact expected in future periods. Adjusted net investment income in the U.S. was essentially flat, down 0.9% for the quarter. Profitability in the U.S. segment was solid, with a pre-tax margin of 27.7%, a 600 basis points increase primarily due to the Actuarial Assumption Unlock. In the U.S., we expect the benefit ratio for 2026 to be below the 48 to 52% range, and the expense ratio to be in the middle of the 30.

36 to 39% range as we continue to scale network down in group life and disability. At the same time, we expect pre-tax profit margin for 2026 in the U.S. to be above the 17 to 20% range. For the corporate and other segment, total adjusted revenues increased 5% to $360 million. Pre-tax adjusted earnings were $72 million compared to $69 million last year. Primarily driven by $91 million re-measurement gains as a result of unlocking actuarial assumptions and new reinsurance transactions. These earnings results were impacted by higher total adjusted expenses. As well as lower adjusted net investment income from the reduced short term asset balances and lower amortized hedge income. We are pleased with our overall performance of our investment portfolio. Our private credit portfolios are delivering strong risk adjusted net yields, but we continue to boost our loan reserves, reflecting continued pressure on commercial real estate property valuations and long run expectations for middle market loan performance. Our third quarter results include the benefits from the very significant repositioning of our portfolio that began in the second quarter. Again, this quarter, our global investment teams executed another large switch trade. Repositioning $2.3 billion of JDBs in our AFLACJP portfolio to take advantage of what are the highest interest rates in a generation. These switch trades highlight our strong financial position and allow us to manage losses from the

lower yielding assets and improve our run rate stable net investment income. This quarter's activity improves future NII by over $30 million. Years to date, our approach to actively managing their portfolio has added over $80 million. of annual NII and strengthen the overall quality of our consolidated portfolio by reducing the risk of future FSA impairments and improving our ALM in a very tax efficient way. We will continue pursuing opportunities that improve the overall health and performance of the portfolio. For U.S. statutory, we recorded $6 million of impairments on invested assets. And a $6 million valuation allowance on our mortgage loans as an unrealized loss during the quarter. On an FSA basis, securities impairments' reversals led to a net realized gain of 15.2 billion yen. In the third quarter. And we booked an additional valuation allowance of 5.2 billion yen related to transitional real estate loans. This is well within our expectations and has a limited impact on regulatory earnings and- and capital. AFLAC Inc. unencumbered liquidity stood at $2.7 billion, which was $1.7 billion above our minimum balance of $1 billion at the end of the quarter. The leverage was 22.6% for the quarter, which is within our target range of 20 to 25%. As we hold approximately 64% of our debt in Yen, this leverage ratio is impacted by moves. In the Yen-dollar exchange rate, this is intentional and part of our enterprise hedging program, protecting the economic value of AFLACJPAN in U.S. dollar terms.

Our capital position remains strong. We ended the quarter with an S&P. Estimated regulatory ESR of 225%. If including the undertaking specific parameter, or USP, this would add 13 points to the regulatory ratio and result in an ESR with USP. of 238%. We estimate our combined RBC to be slightly above 575%. These are strong capital ratios, which we actively monitor, stress, and manage to withstand both market volatility and credit cycles, as well as external shocks. Given the strength of our capital and liquidity, we repurchased $804 million of our own stock and paid dividends of $305 million in Q3, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in the way we manage the balance sheet and deploy capital in order to drive strong... risk-adjusted ROE with a meaningful spread to our cost of capital.

Thank you, and now I'll turn the call over to David.

Thank you, Max.

Before we begin our Q&A, we ask that you please limit yourself to one initial question and a related... follow-up. You may then rejoin the queue to ask additional questions. Our operator for today's call will now give you instructions on how to rejoin the queue and then announce our first question.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster.

Hey, good morning.

You talked about the $1 billion that you freed up via the reinsurance transaction. Could you talk a little bit more... ...about how much runway that is there to continue with Bermuda reinsurance? Thanks.

Thank you for the question, Wilma. So, post this transaction, we have... ...seeded roughly 15% of our total FSA reserves from AFLAC Japan to AFLAC Bermuda. And as we put in the last quarter, we communicated that we have a change. The way we approach this, from evaluating this on a U.S. GAAP basis to evaluating this on an FSA-reserving basis. And with us now standing at about 15% and we have an internal... ...risk limit that we have set at 30%, that means that we have a very meaningful runway to continue to execute further reinsurance transactions between AFLAC Japan and AFLAC Green Bermuda to further improve... ...the risk composition of AFLAC Japan and also enhance the overall capital position and liquidity and ultimately improving the ROE of the total growth.

Okay, thank you. And I think AFLAC as a whole has a ton of excess capital in different forms. So maybe you could talk about some of the deployment opportunities, where you think you can grow. I know you've talked a little bit more about having some appetite for third party reinsurance acquiring blocks. You know, are there opportunities there? What are some of the other opportunities to grow? Thanks. So I think that overall for us, obviously the best new business return opportunities that we have is to write another policy in our operations in the U.S. and Japan. That is generally where we see the best IRRs for our capital and that's where we are pushing our capital to go. So that's number one. In terms of external reinsurance, we see this as over time as a significant opportunity for us. Where we can leverage our balance sheet. We can also leverage the strengths that we have. Having a balance sheet that is very long morbidity. And when we then write life. An annuity business and we get very significant diversification benefits. So we find ourselves in a very interesting opportunity to capitalize on this strength. That being said. In terms of capital consumption, we would expect a relatively limited capital consumption for this. And in fact, the reinsurance operations is very profitable as is. It's very cash capital generative as. So this strategy, I don't think that it will materially shift the way we manage capital overall in terms of providing capital to all of our insurance operations as well as conduct capital.

through dividends and buybacks. Thank you.

The next question comes from Tom Gallagher of Evercore ISI.

The next question comes from Tracy.

The next question comes from Tracy Bingui of Wolf Research. Please go ahead.

Sinczen or Morgan Stanley, please go ahead.

The next question comes from Joseph Mularo of Jefferies. Please go ahead.

This concludes our question and answer session. I'd like to turn the call over to David Young for any closing remarks.

Thank you Andrea and thank you. all for joining us today. Just want to remind you that we will be hosting our financial analyst briefing at the New York Stock Exchange on December 3rd. And if you would like to attend, please reach out to investor and rating agency relations. We look forward to seeing you or talking.

Thank you for attending today's presentation and you may now disconnect.