Executive Summary / Key Takeaways

• Aflac's core investment thesis rests on its highly profitable supplemental insurance franchises in Japan and the U.S., underpinned by strong brand recognition, extensive distribution networks, and disciplined financial management, including a robust capital return program.
• First quarter 2025 results, while showing a GAAP net loss due to investment fluctuations, demonstrated solid underlying performance with adjusted earnings per diluted share flat year-over-year, highlighting the stability of the core insurance operations.
• Strategic initiatives in Japan, particularly the launch of the Tsumitasu asset formation product targeting younger demographics and the new Miraito cancer insurance, are driving sales momentum and are expected to contribute to future growth and cross-selling opportunities for core third-sector products.
• In the U.S., the focus on profitable growth through stronger underwriting, expense efficiency, and scaling newer business lines like Group Life & Disability and Network Dental is yielding results, with improved persistency and expense ratios offsetting higher benefit ratios in Q1 2025.
• The company maintains a strong capital position (high SMR, ESR, RBC ratios) and ample holding company liquidity ($4.3B), supporting tactical capital deployment ($1.2B returned in Q1 2025 via buybacks and dividends) and providing resilience against market volatility and credit cycles.

A Foundation of Protection: Aflac's Enduring Model

Aflac Incorporated stands as a prominent player in the supplemental health and life insurance industry, primarily serving markets in Japan and the United States. Founded in 1955, the company's strategic trajectory was profoundly shaped by its pioneering entry into Japan, a market it has now served for 50 years and which remains the bedrock of its consolidated earnings and balance sheet. This historical move established Aflac Japan as a leader in the "third sector" – covering areas like cancer and medical insurance – a position it actively defends and seeks to expand. In the U.S., Aflac has built a significant presence through its voluntary benefits offerings and, more recently, has focused on expanding into Group Life & Disability and enhancing its Network Dental and Vision capabilities.

The company's overarching strategy is centered on providing financial protection products that fill gaps left by traditional insurance, delivered through extensive and often differentiated distribution networks. This model aims to generate stable, predictable cash flows and maintain high profitability, balancing the needs of policyholders with shareholder returns.

Aflac operates within a competitive landscape characterized by both large, diversified insurers like MetLife (MET), Prudential Financial (PRU), and Manulife Financial (MFC), and more specialized or digitally-focused players like Globe Life (GL). Aflac's competitive positioning is rooted in its deep market penetration, particularly its established brand and distribution strength in Japan, and its specialized product focus. While larger competitors may offer broader product suites and leverage scale for certain efficiencies (e.g., MetLife's potentially faster claims processing via advanced digital platforms), Aflac distinguishes itself through its focus on niche, high-demand supplemental areas and its direct-to-consumer and broker networks. Aflac's profitability, evidenced by its net margin (TTM 21.03%), generally outpaces that of its larger, more diversified peers (e.g., MetLife TTM 6%, Prudential TTM 4%, Manulife TTM 11%), reflecting its efficient cost structure and premium pricing in specialized segments. However, some competitors like Globe Life demonstrate faster revenue growth (TTM 8-10% vs. AFL TTM 4-6%) and potentially faster policy issuance times through digital-first approaches. Aflac's long-standing dividend track record (44 consecutive years of increases) also serves as a competitive advantage, fostering customer loyalty and appealing to income-focused investors, providing a degree of resilience against competitors focused solely on price.

Technological Underpinnings and Strategic Evolution

Technology plays a crucial role in supporting Aflac's distribution, enhancing customer experience, driving operational efficiency, and enabling new product delivery. While the company does not highlight a single, unique technological differentiator akin to a proprietary manufacturing process, its strategic investments in digital platforms and tools are integral to its competitive stance.

In Japan, the company is leveraging digital and web-based sales capabilities, including a system enabling smart device-based insurance applications and a virtual sales tool for online consultations. These initiatives aim to modernize distribution and meet evolving customer preferences.

In the U.S., significant investment has been directed towards the Network Dental and Vision platform, including technology for portals and enrollment processes. The company has also implemented the PLATS platform for its Group Life & Disability business and a platform for Consumer Markets (Direct-to-Consumer). Management commentary indicates that these platform investments are contributing to improving scale and expense efficiency, although the costs associated with scaling these newer business lines currently increase the overall U.S. expense ratio. The strategic intent behind these technological efforts is clear: to support organic growth, gain efficiencies, improve the customer experience, and develop new markets.

While specific quantitative metrics on the performance benefits of Aflac's technology (e.g., percentage reduction in processing time or cost savings per policy) are not detailed, the strategic focus on these areas suggests an understanding of the need to keep pace with industry trends. Competitors like MetLife are noted for leveraging digital platforms for faster claims processing, and digital-first insurers like Lemonade (LMND) highlight significantly faster claims speeds via AI. This competitive context underscores the importance of Aflac's ongoing technology investments to maintain efficiency and service levels. The company's efforts to integrate capabilities across platforms for bundling products also point to a strategic use of technology to enhance its market offering and competitive response.

Segment Performance: Pillars of Profitability

Aflac's financial performance is primarily driven by its two core segments: Aflac Japan and Aflac U.S.

Aflac Japan: This segment remains the dominant force, contributing 53% of total adjusted revenues in Q1 2025 and representing 78% of total assets as of March 31, 2025. In Q1 2025, Aflac Japan reported $2,272 million in total adjusted revenues and $722 million in pretax adjusted earnings. While these figures represent a decrease of 8.1% and 10.9% respectively in USD terms (impacted by FX), the performance in local currency (Yen) shows a 5.7% decrease in adjusted revenues and an 8.7% decrease in pretax adjusted earnings. The decline in revenue was primarily due to lower net earned premiums (down 5.0% in Yen) and adjusted net investment income (down 7.6% in Yen). Net earned premiums were impacted by the internal cancer reinsurance transaction established in Q4 2024 and limited-pay products reaching premium paid-up status. Adjusted net investment income faced headwinds from lower floating rate income and fixed-rate yen-denominated income, partially offset by structured private credit returns.

Despite the revenue decline, the segment demonstrated operational resilience. The total benefit ratio improved by 120 basis points to 65.8% in Q1 2025, driven by lower benefits related to reinsurance and favorable assumption updates from Q3 2024, partially offset by the premium decline. Remeasurement gains favorably impacted the benefit ratio by approximately 150 basis points. The expense ratio increased by 160 basis points to 19.6%, primarily due to higher technology expenses. The pretax adjusted profit margin stood at a solid 31.8%. Management highlighted strong sales momentum in Q1 2025, with new annualized premium sales increasing by 12.6% in Yen, driven by significant contributions from the Tsumitasu product and initial sales of the new Miraito cancer insurance. Persistency remained strong at 93.8%. The strategy to use Tsumitasu to attract younger customers and cross-sell third-sector products is seen as vital for future growth, aiming for 2025 sales above 2024 levels.

Aflac U.S.: This segment contributed 40% of total adjusted revenues in Q1 2025. It reported $1,721 million in total adjusted revenues and $358 million in pretax adjusted earnings, representing modest increases of 1.3% and 0.6% respectively year-over-year. Net earned premiums grew by 1.8%, driven by growth initiatives in group life and disability and consumer markets. Adjusted net investment income decreased by 1.9%, primarily due to lower floating rate income.

Operational metrics showed mixed trends. The total benefit ratio increased by 120 basis points to 47.7%, primarily due to higher incurred claims and lower remeasurement gains compared to the prior year (remeasurement gains contributed ~100 basis points favorably in Q1 2025). The expense ratio improved by 110 basis points to 37.6%, reflecting expense efficiency efforts. However, growth initiatives added 50 basis points to the expense ratio, an impact expected to decrease as these businesses scale. The pretax adjusted profit margin was 20.8%. Sales increased by 3.5% year-over-year, driven by group products. Persistency improved by 60 basis points to 79.3%. Management is encouraged by momentum in the group business and network dental, focusing on stabilizing the dental platform and getting agents/brokers back to selling. The strategy emphasizes profitable growth through disciplined underwriting and expense management.

Financial Strength and Capital Management

Aflac maintains a robust financial position, characterized by strong capital ratios and ample liquidity. The company's capital management strategy prioritizes maintaining high capital levels to support policyholder obligations and withstand adverse conditions, while also tactically deploying capital for growth and shareholder returns.

As of March 31, 2025, unencumbered holding company liquidity stood at $4.3 billion, significantly above the target minimum balance of $1.8 billion. This provides a substantial buffer for stress conditions, hedge costs, and potential collateral needs. The company's capital ratios, including Aflac Japan's SMR (above 950% in Q1 2025) and estimated ESR (above 250% in Q1 2025), and Aflac U.S.'s combined RBC (estimated greater than 600% in Q1 2025), remain strong and well above regulatory requirements.

Capital deployment in Q1 2025 included $1.2 billion returned to shareholders through $900 million in share repurchases (8.5 million shares) and $306 million in dividends paid. The company had 38.8 million shares remaining under its repurchase authorization as of March 31, 2025. Management views organic growth as the primary area for capital deployment due to its attractive IRRs, followed by dividends and opportunistic buybacks.

The establishment of the internal reinsurance platform with Aflac Re Bermuda is a key strategic initiative aimed at optimizing capital, improving balance sheet efficiency, enhancing return on equity, and managing risk, particularly related to FX exposure. This platform is expected to continue playing a role in capital management.

The investment portfolio, primarily composed of fixed maturity securities, is managed with a focus on asset-liability matching and generating stable investment income. While the portfolio is exposed to market risks like interest rate fluctuations and credit risk, particularly in commercial real estate, the company employs detailed analysis, workout strategies, and utilizes third-party managers to mitigate these risks. The increase in CECL reserves for commercial real estate and middle market loans in Q1 2025 reflects ongoing management through the distressed market, with a strategy to maximize recovery values, including through foreclosure where necessary.

Risks and Outlook

Aflac's operations are subject to several key risks. Fluctuations in the yen-dollar exchange rate significantly impact reported U.S. GAAP results, although the company's enterprise hedging program aims to protect the economic value of the Japan business in U.S. dollar terms. Interest rate changes affect investment income, hedging costs, and the valuation of liabilities and derivatives. Credit risk, particularly within the commercial real estate portfolio, remains a focus area, requiring diligent monitoring and management. Competition in both Japan and U.S. markets necessitates continuous product innovation, distribution effectiveness, and expense management. Operational risks, including the successful implementation and scaling of technology platforms (like the U.S. dental platform), are also critical to execution.

Looking ahead, management provides specific guidance for 2025, reflecting anticipated trends and strategic execution. For Aflac Japan, the benefit ratio is expected towards the higher end of the 64-66% range, while the expense ratio is anticipated at the lower end of the 20-23% range. This is projected to result in a pretax profit margin at the lower end of the 30-33% range, primarily influenced by expected lower net investment income due to floating rate headwinds. Over the 2025-2027 forecast period, the Japan benefit ratio is expected to decline, and the pretax margin is anticipated to move towards the higher end of its range as the business mix shifts towards lower benefit ratio products and scale benefits accrue. Japan sales are expected to be above 2024 levels, driven by new product momentum.

For Aflac U.S., the benefit ratio is expected at the lower end of the 48-52% range, with the expense ratio at the upper end of the 36-39% range as new business lines scale. This is expected to yield a pretax profit margin at the upper end of the 17-20% range. Management expects consistency in U.S. business performance and anticipates hitting their sales plan for the dental business this year.

Conclusion

Aflac's investment thesis is grounded in the resilience and profitability of its core supplemental insurance operations in Japan and the U.S. While macro factors like FX volatility and interest rate fluctuations can impact reported results and investment income, the company's disciplined financial management, robust capital position, and proactive risk mitigation strategies provide a stable foundation.

Strategic initiatives, particularly the new product launches and focus on acquiring younger customers in Japan and scaling newer business lines in the U.S., are key drivers for future growth and are expected to enhance the long-term business mix and profitability. The company's established distribution networks and ongoing investments in technology are critical enablers of these strategies, although execution risks related to platform scaling and efficiency gains warrant monitoring.

Aflac's ability to maintain strong market positions, generate consistent cash flows, and return capital to shareholders, coupled with its strategic evolution to adapt to changing demographics and market dynamics, positions it to continue delivering value. Investors should focus on the execution of growth initiatives, the trajectory of net investment income in the current rate environment, and the company's continued ability to manage credit and currency risks effectively.