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    Aflac Inc (AFL)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$82.55January 1, 2024
    Final Price$85.19April 1, 2024
    Price Change$2.64
    % Change+3.20%

    What went well

    • Strong U.S. profitability with a pretax margin of 21%, driven by higher net earned premiums (up 3.3%) and improved persistency (increased 80 basis points to 78.7%).
    • Japan sales expected to exceed 2023 results, through strategies such as recruiting and training 600 new sales agents, launching new products, and leveraging alliances like Japan Post to increase cancer insurance sales.
    • Disciplined expense management leading to improved expense ratios in both Japan and the U.S.; Japan's expense ratio is tracking towards the outlook of 19% to 21%, and the U.S. expense ratio has decreased due to platforms improving scale and lower acquisition expenses. ,

    What went wrong

    • U.S. sales were weaker than expected in the first quarter, with management noting that sales were "a little bit softer" and emphasizing a focus on "stronger underwriting discipline," which could negatively impact sales growth.
    • Third sector sales in Japan turned negative this quarter, and while initiatives are in place to improve sales, achieving significant growth may be challenging.
    • Persistency in Japan has declined, with the rate decreasing by 50 basis points year-over-year to 93.4%, due to an aging policyholder base and structural shifts in product cycles, leading to higher lapses and surrenders, which may pressure future revenues.

    Q&A Summary

    1. Japan Sales Decline
      Q: How will third sector Japan sales trend in 2024?
      A: Management expects Japan's third sector sales to recover and exceed 2023 results, despite negative sales this quarter. Initiatives include enhancing the sales force by recruiting approximately 600 new agents and promoting products through channels like Japan Post.

    2. Industry vs. Aflac-specific Issues in Japan
      Q: Are Japan sales issues industry-wide or Aflac-specific?
      A: Aflac attributes the challenges to a highly competitive market, especially in medical products. The company avoids underwriting products with irrational pricing, focusing on profitable business. Cancer insurance sales remain strong through existing channels and Japan Post.

    3. Weaker Persistency in Japan
      Q: What's causing weaker persistency in Japan?
      A: The decline is mainly due to an aging in-force block with higher lapses and mortality. New sales are lower than lapsation, leading to natural decreases in persistency.

    4. Underwriting Discipline in U.S.
      Q: What's changed with underwriting discipline in U.S.?
      A: Aflac is emphasizing underwriting discipline in the group voluntary benefits business to ensure long-term profitability amid fierce competition. This strategy focuses on attracting profitable business that persists, improving overall margins.

    5. Capital Ratios and Shareholder Returns
      Q: Can you explain capital ratios and shareholder returns?
      A: Aflac's capital ratios are strong, with holding company liquidity at $3.7 billion, about $2 billion above the minimum. Capital deployment decisions prioritize satisfying subsidiary capital needs and achieving the best returns for shareholders.

    6. Hedging Costs and Yen Intervention
      Q: Impact of Japan's yen intervention on hedging costs?
      A: While volatility can affect option pricing, current short-term yen volatility is low, so hedging costs remain stable. Aflac's hedging program is performing well, protecting the economic value of Aflac Japan.

    7. Claims Trends and Remeasurement Gains
      Q: Are favorable Japan claims trends sustainable?
      A: Favorable hospitalization trends in Japan have continued, leading to remeasurement gains. If these trends persist, future gains are possible, but current reserving does not assume continued improvement.

    8. Agent Recruiting in U.S.
      Q: How is agent recruiting in the U.S. going?
      A: Recruiting for commission roles is challenging in the current environment, but Aflac is adopting new strategies to meet targets. Despite a strong Q1 2023 comparison, management expects to rebound and grow the producer base.

    9. Transitional Real Estate Portfolio Risks
      Q: Are there concerns in the transitional real estate portfolio?
      A: The foreclosure watchlist is stable at about $1.2 billion, with half in active workout proceedings. Early signs of market improvement are noted, and disciplined underwriting has maintained solid loan-to-value ratios.

    10. Japan Expense Sustainability
      Q: Are lower Japan expenses sustainable?
      A: Favorable expenses this quarter were due to seasonality and timing. For the full year, Aflac is tracking toward an expense ratio outlook of 19% to 21%.

    11. Sales Channels in Japan
      Q: Is Aflac behind in nonexclusive agency sales in Japan?
      A: Aflac's exclusive agencies account for 70% of sales, while large nonexclusive agencies contribute 5%. While competitors focus more on nonexclusive channels, Aflac believes in the strength of its exclusive agencies and plans to grow sales across all channels.

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