Aflac Inc (AFL) Q1 2024 Earnings Call Transcript Highlights: Strong Performance Amidst Market ...

• Net Earnings Per Diluted Share: $3.25 for the quarter.

• Adjusted Earnings Per Diluted Share: Increased 7.1% year-over-year to $1.66.

• Pretax Profit Margins: Japan segment at 32.8%, U.S. segment at 21%.

• Net Earned Premium Growth: U.S. segment grew by 3.3%.

• Persistency Rate: U.S. segment improved by 80 basis points year-over-year to 78.7%.

• Total Benefit Ratio: U.S. segment at 46.5%, up 90 basis points from Q1 2023.

• Expense Ratio: U.S. segment decreased by 90 basis points year-over-year to 38.7%.

• Adjusted Net Investment Income: U.S. segment up 4.6% mainly due to higher yields.

• Dividend: Increased first quarter 2024 dividend by 19% to $0.50.

• Share Repurchases: $750 million in the first quarter.

• Capital and Liquidity: Unencumbered holding company liquidity at $3.7 billion.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Adjusted earnings per diluted share increased by 7.1% year-over-year to $1.66, reflecting solid financial performance.

• Net earned premium in the U.S. grew by 3.3%, indicating a positive trend in revenue generation from premiums.

• Persistency rate improved by 80 basis points in the U.S., suggesting enhanced customer retention and policy renewals.

• Aflac Japan's pretax margin increased significantly by 460 basis points year-over-year to 32.8%, demonstrating strong profitability.

• The company continues to maintain strong capital ratios, ensuring financial stability and resilience.

Negative Points

• Net earned premiums in Japan declined by 6%, influenced by negative impacts from paid-up policies and internal reinsurance transactions.

• Sales in the U.S. were weaker than expected for the quarter, although long-term guidance remains unchanged.

• Third sector sales in Japan experienced a downturn this quarter, raising concerns about competitive pressures and market dynamics.

• The total benefit ratio in the U.S. increased by 90 basis points compared to Q1 2023, driven by product mix and lower remeasurement gains.

• Persistency in Japan decreased by 50 basis points year-over-year, indicating potential challenges in customer retention.

Q & A Highlights

Q: Starting with U.S. sales, which were weaker than expected in the quarter, but you did reaffirm the longer-term guidance for sales in that business. Can you give us a sense of how you expect sales in the U.S. to trend from here? A: (Virgil Raynard Miller - President of Aflac U.S.) In Q1, U.S. sales were softer due to timing elements in our life, absence, and disability business, and challenges in our dental and vision business. We are optimizing our platform and expect stronger performance in the second half of the year. We continue to focus on strong underwriting discipline to ensure long-term profitability, which supports our improved persistency and profit margins.

Q: Shifting to sales in Japan. The third sector sales went negative this quarter. Could you provide more color on how you expect the third sector sales to trend over the course of 2024? A: (Daniel Paul Amos - CEO) We expect to achieve our full-year objectives. We plan to enhance sales by increasing the number of sales associates, promoting sales through Japan Post, and differentiating our services like the Yorisou Cancer Consultation Support. We also plan to launch a new asset formation product targeting young customers, which should help in boosting sales.

Q: Can you discuss the disciplined underwriting approach mentioned, especially given that Aflac's products typically have high margins? A: (Virgil Raynard Miller - President of Aflac U.S.) Our focus on disciplined underwriting, particularly in the U.S. group voluntary benefit business, is to ensure we bring on profitable business that persists over time. This approach helps us manage acquisition costs effectively and improve overall business profitability.

Q: Regarding the weaker persistency in Japan, can you elaborate on what you're seeing there from a product standpoint? A: (Max Kristian Broden - CFO) The main reasons for lower persistency include an aging block of in-force, which naturally leads to higher lapses and mortality. Additionally, shorter product cycles in recent years have led to higher structural lapses and reissues.

Q: What impact does the Japanese government's intervention to support the yen have on the cost of your hedging program? A: (Max Kristian Broden - CFO) Volatility can affect the pricing of options, but the level of the yen has less impact on the cost of our hedging program. Our hedging strategy is designed to protect the economic value of Aflac Japan, and we use multiple levers to manage currency exposure effectively.

Q: Could you provide an update on the transitional real estate portfolio, particularly regarding foreclosures and the overall watchlist? A: (Bradley Eugene Dyslin - Global CIO) Our commercial real estate watchlist is stable at about $1.2 billion, with half in active workout proceedings. We continue to see signs of market improvement and are prepared to manage these assets through the cycle to maximize recoveries.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.