Aflac Inc (AFL) September 2026 Conference Transcript

Good morning, everyone. I'm Ryan Krueger from KBW, and we're going to get started with the next session. It's great to have Max Brodin, the CFO of Aflac, up on stage with me. Also wanted to recognize David Young from Investor Relations and Capital Markets at Aflac in the front row. Unfortunately, Ben Aflac, their new spokesman, was unable to join us for the fireside this year, maybe next year. So, yeah, maybe just to start off.

Let him know of the request.

Sure, it'll be high priority. Yeah, I just want to start with Japan. Certainly, hard to not notice that interest rates are the highest they've been there in 25 years. And you had done some investment repositioning in the second quarter. And I think you had indicated maybe more in the third quarter. So hoping to get some sense of kind of how much more opportunity there could be to do investment repositioning and take advantage of these higher rates.

Yeah, so in Japan, we find ourselves in a situation, obviously, with the yen yield curve being as steep as it is, both in terms of the level of the steepness, but also the absolute levels of yields that we haven't seen for a very, very long period of time. So what we have sort of been looking at for quite some time and we've been able to execute on in the second quarter is a number of repositioning trades. We at Aflac, we hold a pretty significant U.S. dollar portfolio on our Japanese balance sheet. And what that means is that when we then run this through our capital level in Japan and when we run this through our local statutory earnings, it creates pretty significant FX, either gains or losses, depending on where the dollar-yen rate is. And as the yen has weakened pretty substantially, despite obviously what's happened over the last week, that means that we have found ourselves in a pretty significant FX gain position. And that's all well and fine, but this coinciding with the steep yield curve has meant that obviously our JGB portfolio has found itself in pretty significant unrealized loss position. And what we've been able to do is to transact and reposition the dollar portfolio generating loss, sorry, gains, and repositioning the JGB portfolio generating losses. and they kind of more or less offset each other and that means that without leaking anything in terms of taxes out the company we've been able to reposition those two portfolios now yielding higher yields so even though the earnings impact on a local statutory basis is essentially neutral from these transactions it means that going forward the net investment income of the total portfolios will be on an annual run rate basis 50 million dollars higher the other thing is that it reduces risk overall for us as well so in japan you have an impairment test so even if you have purely even even if it's purely driven by rate if you are down 50 on a security you have to impair it for local statutory purposes yeah that and and the local statutory earnings is predominantly the main driver for your ability to then send dividends out of that entity up to the holding company. So for us, if you have significant impairment risk, that also means that down the line there could be impacts to your ability to send dividends. And we have greatly with this reduced our total unrealized loss on the JGB portfolio and therefore also significantly reduced that impairment risk as well. So this was partly an exercise in reducing future risk, but also an exercise in increasing future earnings.

And then, I think it was 5% of your portfolio that you repositioned. Is there an opportunity to do as much as that again? Or any sense of the magnitude of the opportunity that's left?

Yeah. So transacting 5% of a total portfolio in one quarter is a lot. It's a lot. So our team was very, very active executing on this. When you start a process like this, you should expect that you begin with what is the most impactful and what is sort of the easiest to do.

And some of that is behind us and i definitely expect that our investment team will continue to execute on this in a in a good way so there is more to come but um i would uh just keep in mind that five percent is a very very significant number and then the the higher rate environment is also driving more demand for savings oriented products in japan you sell a first sector life product called sumitas which has had good sales growth recently I guess can you talk a little more about what your first sector strategy is at Aflac in Japan you know the risk return profile of the Sumitas product and

just how much you're willing to grow there you know relative to your more legacy kind of core third sector business yeah I'll take the word legacy out maybe not legacy or yeah our core business it is really our cancer and medical business in in japan and our life insurance and our savings business i would define as more opportunistic and the reason why is because now we're exposing ourselves much more to macro risks that means that there are times where we want to push the gas and there are times that we're going to hit the brakes right now specifically not only i'm coming back to not just the yield level but more importantly is the steepness on the yield curve is making life insurance very very attractive from a savings vehicle standpoint in a way that you have not seen for the last 30 40 years and it's really the steepness that is doing this because most other savings products like for example cds or savings accounts well they price off of the short end of the yield curve and the life insurance products they are priced off of the long end of that yield curve. So that means that the steepness, that is really what defines the relative competitiveness of these products relative to other savings products. So I think from a total demand standpoint, we have a real opportunity in the marketplace right now. And that's not just Affleck, that's the whole industry that is benefiting from this. The other angle to it is that the higher yields means that we can now engineer products with actually very good returns. So right now, I'm seeing new business IRRs that are extremely good for us. We have on top of that also designed over the last couple of years, reinsurance solutions and capacity internally that further reduces those returns. So when I look at the IRRs on a post-reinsurance basis, they're highly, highly attractive. So right now, we do want to grow this business. there will be a time where my answer is completely different and that's what i mean by this being opportunistic the other angle to it is that sumitas also gives us access to a younger clientele that we can grow into and that has very significant strategic value to us because that means that a year or two down the line we can then cross sell our cancer and medical policies into this younger cohort of policyholders. So there's both economic and strategic value to grow our life insurance business right now.

And shifting to the third sector, you grew sales 24% in 2025. A lot of that was driven by the strength of the Murato cancer product.

Now you have a refreshed medical product too, but you're also lapping the tougher comps with with the cancer product how are you thinking about uh sales growth for third sector in the second half of this year and then um just any further thoughts on just your strategy to to grow the third sector business yeah so our uh cancer product moreito is fully through its refreshment cycle uh it has been out in the market for a year and a half at this point that means that it's it's meeting that sort of maturity level so we would expect that from a growth standpoint that will flatten out and from now on we we're sort of looking for that product to sort of grow a little bit but sort of defend the levels it is at as it relates to our medical business so engine palette we refreshed that product it came out late last year and we had the full first half with obviously from a growth rate standpoint very significant growth of that product year over year but in terms of absolute volumes of yen sold it's still at a pretty low level so that's a business that we really need and want to take to that next level historically I think we've done pretty well selling that product through our exclusive agency channel We have not done so well selling through the non-exclusive agency channels. And that's actually a part of the marketplace that has grown a lot in medical over the last 10, 15 years. So I think that's an opportunity for us to strengthen our positioning in that distribution channel with our medical product.

So third-party reinsurance out of Japan is a newer opportunity for Aflac.

You've done one transaction so far with Japan Post. you know what types of liabilities are you pursuing there any early indications on counterparty conversations and you know how how meaningful do you think this business can become for the company so we would not get into a business unless we think it's has the opportunity to become meaningful not just to aflac re but overall to the totality of aflac as an enterprise the liabilities that we are looking for is we have capabilities across the spectrum and that means that we can underwrite we were willing to take on both biometric risk longevity risk and we are willing to take on asset risk as well if i were to define where i think our sweet spot really lies it's really in taking on mortality longevity and spread risk and this may come a little bit as a surprise to you given that if you think about what affleck generally is which is a morbidity company i.e we're very very long morbidity but the fact of the matter is that is what gives us this opportunity so when we co-mingle our reserve and liability risks that we have and you we are very very long morbidity and we add a small level of mortality risk to that balance sheet we add a small level of longevity risk to that balance sheet and a small level of spread risk to that balance sheet we get very significant diversification benefits both through an economic lens but also from a regulatory capital lens and that is significant competitive advantage for us that package with us having a double a rating of our reinsurance entity means that we have some real core competitive advantages relative to some other players in japan and that is something that we're pushing pretty hard on as we continue to have conversations with sedans and your japan benefit ratio has been

trending towards the higher end of the 60 to 63 target for the year can you uh i guess go over a little bit more details why that's happening um what your outlook is going forward and then is Is the general trend of downward movement in the Japan benefit ratio due to favorable claim patterns and mix shifts still something you expect longer term?

Yeah. So I would generally divide our benefit ratio and here we're talking about Japan for a second. It's a combination of the claims incidence rates that are coming in and it's a function of what we're seeing on the back book. and in our case lapsation of the back book has a pretty significant impact on our benefit ratio from a quarter to quarter basis when we look at claims trends they're actually coming in in line with our expectations so in the first half we have seen a reported u.s gap benefit ratio a little bit higher than what we expected it is not driven by incidence trends is not driven by the severity trends in terms of claims. It's really driven by what's happening on the back book in terms of lapsation. Total lapsation is actually in line with our expectations but what we have experienced is a little bit higher lapsation of younger policies and a little bit lower lapsation of older policies. Why does this matter? Well if you have a young policy that means that and keep in mind that we are selling regular premium products that means that the reserve builds up over time so there's a relatively small reserve that has been built up on for example a five-year-old policy that is now lapsing through our results when that is lapsing and it runs through the results that full reserve gets released and if you have a relatively small reserve being released through the benefit ratio it pushes the benefit ratio only down just a little bit. If you have an old policy that's been on the books for 20, 25, 30 years, there's a very significant reserve that has been built up. That full reserve gets released through the results, pushing down that benefit ratio quite significantly. So that mixed impact between old and younger policies being lapsed is really the key component to it. Now, the thing is that when you actually go in and you look at has there been a significant shift in the number of old policies being lapsed not really and part of reason is that the policy per reserve is actually very very sorry the reserve per policy is very very high so it doesn't take that many policies to not lapse to actually have an impact on our benefit ratio so that's been a little bit of an impact in over the first half We would expect this to normalize in the second half of the year and going forward. That's why we do expect that for the full year that our benefit ratio in Japan will still remain at the upper end of our target range of 60 to 63 percent.

Got it. I guess there have been some encouraging recent developments in cancer treatment with the Moderna mRNA vaccine, and there's the revolution pancreatic cancer drug. I mean, I know it's early, of course, but how are you thinking about the potential impacts of those types of advancements if they continue to be successful over the longer term?

Medical advancements for treatment of cancer is very important from a societal standpoint and it's also been very good to us. The way our products are designed is that we pay benefits for a specific trigger or a specific treatment. We don't pay for the treatment. What that means is that if you have more use of new treatments coming in it generally has meant historically that you have less use of some of the benefits that we have written 20-25 years ago on our enforce block so what's happened then is that we actually have seen that very favorable claims experience of those older policies being written when there's been new medical advancements or new treatments coming out what it also means is that it increases demand on the front end to our new policies as we incorporate coverage for these new treatments as well and that is what's triggering some of this lapse and reissue activity that we we talk about pretty much every quarter that policy holders are refreshing their coverage as well so generally speaking we view this as positive drivers both short-term and potentially even long-term for our business on expenses in japan a couple sorry i do want to mention one more thing as it relates to when we get more personalized treatments and personalized vaccines obviously the cost of that is likely to be quite high the way our products are designed we do cover vaccines but it's a very limited benefits so generally speaking I give you one example that we would have a treatment benefit that may be two to three hundred dollars and it doesn't matter if the vaccine treatment is five hundred dollars or if the vaccine treatment is hundred fifty thousand dollars we're gonna pay the same amount on that so that means that even though the severity or the cost of the treatment is very very high it doesn't necessarily hit the severity claims cost for us thanks i had a question on japan expenses a couple years ago you had guided to somewhat higher expense ratio going forward as you were making strategic investments in the business you know it has ticked up some but it has still also been trending towards the lower end of of the target that you have provided can you unpack that a little bit you know and i assume there's some maybe efficiency actions that are also going on that have kept it lower there has been um and there's also been good work by uh well maybe i do hope that our japan colleagues are listening into this and that they should have some credit for a good expense management because it is it is tough to run a business when you have revenue decline and when you continuously have to cut expenses it's a difficult environment to operate in yeah but they've been successful in managing that um over time the other angle to that have also helped is that we've been driving higher net investment income in japan relative to the overall income statement so your proportion of revenues coming from net investment income has increased as yields have increased and that obviously helps your reported expense ratio so even though we've done some improvements in terms of absolute expense management that you've had a further benefit pushing the benefit ratio lower by higher net investment income driven by higher yields as well so some of that has been given to us but it's also been good execution long term i do think the the right level for our business is in that 20 to 23 range okay then broader question just on ai and and how it how is aflac going about using ai to um you know across the company and what do you actually think it's gonna to ultimately result in as a benefit for the company so obviously we we are deploying use cases across the board in many different areas right now um there is a little bit of a shotgun approach uh you have to have that at this point in time uh we know that some of these use cases will work out really well and some of them will fail yeah and it's important that we get those use cases because we don't know exactly what's going to work and what's not going to work. So it's important to try many different areas but make sure that we fail fast where it's not working. Fundamentally, I absolutely believe that we will achieve significant operational efficiency driven by AI. There's no doubt about that. I am not convinced that it will lead to expense efficiency though and that it will ultimately lead to lower expense ratios for us. When you go back and you look at technology advancements in the past you have seen significant improvements but turns out these fantastic technology companies they want to charge for the products as well. So it sort of comes through in in the shape and form of higher IT expenses overall so we are not baking on or planning necessarily that we will drive or get significant expense efficiency driven by ai if we get that that'd be fantastic and that would be upside for us but we are not assuming that that that will happen and that sort of will bail us out if it's one area where i think we and to some extent the industry could have some pretty good results over the next couple of years it's really on the policy administration platform side so we and the industry generally sit on legacy systems and what ai technology is really giving you the opportunity is migration off of those systems onto either in-house built solutions or other platforms is going to be a lot less risky a lot cheaper and a lot quicker and when you add those three up it's it makes it very very attractive so I think when I look at our business today and from what I've seen in terms of AI use cases that we are deploying that is probably the area that I think we're going to we in the near term over the next couple of years probably going to see the most impact.

Since I asked about AI, there have started to be some questions from investors about just exposure in the investment portfolio to data centers and hyperscalers. Do you have any update there on Aflac?

So we hold, if I combine data centers and hyperscalers, they represent about 1% of our investment portfolio. And this is on average single a rated um the we as the way we think about this is that we have more exposure towards what i would call traditional cloud computing and less so to uh data centers in very remote areas that are for single use only yeah that's something that is uh we we are somewhat concerned about because we don't know necessarily where all these new technology advancements will go we don't know necessarily what our energy need is 5 10 15 20 years from now and to build that in an area that you don't know if you're going to use it or not that we find to be um maybe a little bit risky And so you do need to get a pretty significant credit spreads on these type of deals right now. And obviously there's dramatic supply coming on to the market. And generally, I would say that in there are some areas where the risk reward is good from a from a credit standpoint, but there's certainly plenty of areas where it does not look so attractive to us. Moving over to the U.S. business can you give an update on the progress building your newer product lines traditional group uh dental vision direct to consumer and um you know are those close to reaching scale at this point um we we are getting there we are not there yet and we still need some time and and if you ask me what what what is what what is some time well it's probably in the two to three year time frame and that we need and when it comes to group life and disability we have a good platform we have good solutions and we're happy with how that is progressing and that business is running in line with our expectations both in terms of and what we see in the marketplace how we price new business but also how our back book has performed and on dental and vision obviously we are behind on our original plan but as we continue to grow that we see very good traction especially as relates in the small case market and so that is predominantly driven by our our aflac sales force that is doing very well a little bit weaker on the broker channel as that is a much more competitive area. On the direct-to-consumer side, continues to gain traction. Profitability is good on that channel, but we need to sort of push that a little bit harder. We would like to see a little bit more growth come through, but there's also a more direct trade-off between growth and profitability in that channel. So as you push for growth, you immediately then eat up a higher acquisition expenses that sort of impacts your your profitability so it's a you need to be a little bit careful how hard you push in that channel.

I think there's a sales side another initiative has been improving persistency in the U.S. Can you give an update on on that and how that's going?

Yeah we're happy with how that is progressing and we've been able to improve it at by a couple of you know we almost been improving by 20 30 basis points per year over the last couple of years so that that's progressing well and the real kicker for us is really when we at greater scale and can bundle multiple products and i think the real area and opportunity for us is on the group side and as we get to fully building out those capabilities and getting to scale in the group business and we get that bundling happening and that's really when we're gonna see the next kicker and then when you put it all together you have a three to six percent premium growth target in the US over the next few years how are things tracking towards that so obviously we mentioned on the second quarter earnings call that for this year we would expect to be slightly below that three percent level as some of our higher growth areas become a bigger proportion of our total in force and a greater proportion therefore of earned premium the mix impact as they continue to grow and they become bigger that naturally pushes us up into that range so that's why we feel comfortable about us on a kegger basis for the years 25 through 27 and we should still be in that three to six percent range but gradually we would expect that overall earned premium should continue to accelerate throughout that period at the low end in the beginning of the period and at the higher end in the at the end of the period and then on the u.s expense ratio you it's been you know trending lower as you've been getting closer to scale in some of the newer businesses but is do you still see more more room for improvement there as you reach further scale in the next few years yeah i do we have as i mentioned a number of businesses that are not at scale today so they're running with expense overruns as they get to scale that will bring a tailwind for us as relates to pushing that expense ratio lower and it's also the fact that we are growing in businesses with a lower expense ratio structurally as well so that combination of growing in low expense ratio businesses and the mixed impact should over time continue to further push that expense ratio lower now at the same time that also means that our benefit ratio will see the same impact right because we're growing in high benefit ratio businesses so that will have a little bit of an impact pushing that benefit ratio higher but net net that means that we should be able to defend our pre-tax margin in that 17 the 20% range.

As one more on the benefit ratio, you mentioned the mixed shift impact, but if we step back from the mixed shift component, how have claims been coming in relative to your expectations there?

We generally see actual to expected very much in line with our expectations. There's nothing really that has stood out this year. Last year, we had a little bit higher claims especially on on our accident and our hospital product and that turned out to be a blip and we we have this year it's looking better and very much in line with our expectations so nothing specifically to to sort of call out on the client side I want to get your your current views on on M&A Aflac you know has never been a company that has really done large M&A transactions.

But I think when we look at the company, you do have a lot of characteristics where it would at least theoretically make sense, you know, strong capital position, low leverage, high valuation, multiple and lower growth. So it seems like a company where it could make sense, but I know it's not something you've really done much of. So what are your current views now?

Yeah, if you if you go by the MBA textbook, I would say that we absolutely should make him make acquisitions because we have those all those characteristics the thing is that you always have to keep in mind that we find ourselves we are very very strong in what I would call a pretty narrow niche business and when you are in this very narrow niche at very significant scale it means that we don't necessarily for most of the the business that we do we don't need more and from a strategic standpoint we have all of that we have the products that we need and there are some gaps in terms of capabilities but this is predominantly more on the technology in the platform side rather than something more sort of bigger like distribution or product gaps so what that means is that the hurdle rate for us to do any sort of larger M&A is actually quite significant it also means that the very second that we are looking at something and most of the things that that you know trust me bankers are aware of that they do the same analysis that you just made right so yes we we do get approached and we get pitched a lot of different opportunities But the problem is that a lot of it is outside of our core business. When we step outside of our core business, that introduces to me a lot more risk. Because now you're into products that you don't necessarily know or are used to underwrite. You also step into a business that your current management team may not have the capabilities or knowledge how to manage. So the risk associated with that type of acquisition, is very very different especially for a company that does not have the track record and the history of doing so and i would argue do not necessarily have that type of of acquisitions in its dna there are certainly companies that have that and there are experts in doing so and that's part of what those companies are but that is not us and that's why it means that both from a strategic standpoint it becomes difficult to find what those right targets are and it also means that the financial hurdle rate for us may be higher than what it may be for somebody else despite us having obviously significant financial firepower I guess one follow-up would be so it so it sounds like if there was you know maybe you would consider something if it were right in your niche but you'd have a pretty high hurdle rate to do it because of the execution risk yeah and they would have to advance the ball strategically for us as well if it if it's something that is purely financial it rarely works and if it's something that would advance the ball strategically and make the value of afflux significantly higher well of course we would look at something like that got it then another new development from last quarter was you

you announced a new framework for the internal reinsurance limit from Japan to your internal reinsurance company in Bermuda. Can you give a little more color on how did you come up with that amount with the FSA? And then should we expect kind of the same type of gradual timing in terms of moving up towards that target like you've been doing in the last five years?

Or would you ever consider accelerating it to an extent yeah we we like to do things on a gradual basis and we initially started with a 10% limit and that was sort of that was a meaningful number but it gave us something to hold on to something that we could use to communicate to all our different stakeholders we since then come back and we looked at what is sort of more a more realistic or a reasonable counterparty risk exposure between AFLAC Japan and AFLAC ReBermuda give it a size of the balance sheet there both from a Japan standpoint and an AFLAC ReBermuda standpoint and that's sort of how we landed at this 30% we also think that it fits the bill in the sense of it being a meaningful number but it may not necessarily be obviously the endgame as well so we don't feel that we have pushed the limit to the extreme by any means and but it's still it's a reasonable number given where these companies are at this point in time if aflac re was a much bigger company which we would expect over time that would help that counterparty assessment it's also the fact that since we introduced this in early july the jfsa came out with a communication where they are now strongly recommending that collateral trusts are part of every reinsurance transaction when you are seeding business well what does a collateral trust do well it sort of increases the say the or reduces the risk overall in the transaction and it significantly reduces that counterparty risk exposure in theory that means that you over time could have a greater capacity. So these are some of the things that we sort of will evaluate over time, but we just introduced this new limit and we feel like we have significant runway for the next couple of years.

And there's a couple on capital.

So one is, do you still view the underlying free cash flow generation of the company in the two and a half to three billion dollar range, but then we should view capital that's freed up through the Bermuda internal transactions as an incremental upside to that number yeah that is the way to think about it and it's a good way to sort of think about these sort of different building blocks and because the total number will be very volatile over time and but there's an underlying number and then what we can do and both in terms of internal reinsurance transactions freeing up capital will come on top of that I would also recognize that we are currently operating with capital levels in all our legal entities above our target operating ranges so our ESR is operating above our target operating range our RBC is operating above a target operating range and our BSCR is operating above our target operating range that also gives us opportunity to do further management actions in order to sort of right-size those capital levels over time there is no reason why any of these companies should be above that target operating range for an extended period of time if if that was the case we should not have defined those target operating ranges in the first place if we didn't think that they were actually appropriate so over time we would expect that we will be inside of those ranges and possibly in the middle of those yeah and then the last piece to it is that we operate obviously with low debt leverage as well we're at the low end of our leverage corridor and i would argue that we have an overall risk profile uh that is very low primarily design driven by the low risk of the underwriting risk that we take on through product design that we have and that means that in theory we should be able to over time take on a higher debt leverage than what we have today so over you know across the board I think there's there's certainly more to do for David and his team and to continue to drive further efficiencies excellent well I think that's a good place to wrap it up thank you very much Max and the AFLAC team for attending Thank you. Thank you sir. Very good.