Aflac Incorporated (AFL) Earnings

Management highlights

### Overall Financial Results - Reported net earnings per diluted share of $1.63, and adjusted earnings per diluted share of $1.75 for Q2 2026; adjusted EPS increased 1.1% year-over-year excluding foreign currency impacts. - Returned $1.3 billion to shareholders in Q2 2026 via share repurchases and dividends, and $2.6 billion in the first half of 2026; extended the 43-year streak of consecutive annual dividend increases remains a top 2026 priority. - Ended the quarter with strong capital positions: estimated regulatory ESR of 226% (240% including USP), combined RBC slightly above 600%, adjusted leverage of 21.8% within the 20-25% target range, and $3.3 billion in unencumbered liquidity ($2.3 billion above the $1 billion minimum requirement). ### Japan Segment Operational Highlights - Refreshed Sumitas (first sector savings life insurance) and December 2025-launched Onshin Pallet (medical insurance) delivered strong year-over-year sales growth; Sumitas helps expand reach to younger customers and drives cross-sales of third sector cancer and medical products, with concurrent sales exceeding the initial 25% target. - Updated the internal reinsurance limit for Japan from 10% of U.S. GAAP assets to 30% of FSA reserves, aligned with Japanese FSA expectations, to support further risk reduction, improve balance sheet efficiency, and boost ROE. - Global investments team repositioned $4.8 billion of the consolidated portfolio via switch trades to capture higher yields, improve asset quality, strengthen asset-liability management, and boost annualized run-rate net investment income by over $50 million with minimal capital impact; impairments on invested assets were well within expectations in Q2. ### U.S. Segment Operational Highlights - Maintained strong underwriting discipline and prudent expense management; group business, especially group voluntary products and network dental and vision, continues to deliver strong momentum: group product sales were up 7.1% year-over-year, and network dental and vision sales grew 47% in Q2, with strong cross-sales of voluntary supplemental benefits.

Guidance

- Full year 2026 Japan sales are still expected to exceed 2025 full year sales; hitting the 80 billion yen full year sales target remains a possibility, after delayed direct mail campaigns in Q1 are now back on track. - Full year 2026 Japan benefit ratio (excluding Q3 annual actuarial assumption review) is now expected to land at the high end of the prior 60% to 63% guidance range, due to a shift in lapsation mix toward newer lower-reserve policies that reduce reserve release benefits. - 2026 U.S. net earned premium growth is now expected to land just below the prior 3% to 6% guidance range, though the 2025-2027 CAGR for net earned premium remains expected to fall within the 3% to 6% range. - U.S. full year 2026 sales are expected to exceed 2025, with stronger growth in the second half, heavily weighted to a strong fourth quarter due to normal seasonality. - Japan long-term expense ratio is expected to remain within the 20% to 23% range, and current near-term results are tracking toward the lower end of this range despite inflationary pressures. - Lapse and reissue activity for the recently launched Meraito cancer product is expected to normalize as the product matures past its first full year on the market, leading to stabilized persistency rates.

Segment performance

1. Japan Segment: Q2 2026 sales were 11 billion yen, a 5.6% year-over-year decline (comparing against a very strong Q2 2025 following the Morito Cancer Insurance launch), though first half 2026 sales were up 7% year-over-year. Net earned premiums declined 3.7% year-over-year; underlying earned premiums (excluding reinsurance, paid-up policies, and deferred profit liability) declined 1.4% year-over-year. Total benefit ratio for the quarter was 64%, down 250 basis points year-over-year. Premium persistency was 92.7%, in line with expectations. Expense ratio was 20.2%, down 40 basis points year-over-year. Adjusted net investment income in yen terms declined 2.9% year-over-year. Pre-tax margin was 34.3%, up 230 basis points year-over-year. This segment contributes approximately 60-65% of the firm's overall in-force business, with third sector products (cancer, medical) making up over 80% of total in-force. 2. U.S. Segment: Q2 2026 sales increased 2.6% year-over-year. Net earned premiums increased 2.3% year-over-year. Premium persistency was 79.4%, up 20 basis points year-over-year. Total benefit ratio was 49.5%, 220 basis points higher than Q2 2025, driven by higher incurred group disability claims relative to the prior year's favorable results. Expense ratio was 36.1%, down 20 basis points year-over-year. Adjusted net investment income was up 0.5% year-over-year, essentially flat. Pre-tax margin was 20.9%, a 160 basis point decrease year-over-year. This segment contributes approximately 35-40% of the firm's overall business, with group voluntary, dental, and vision products driving growth. 3. Corporate and Other: Reported a pre-tax adjusted loss of $10 million, compared to a $20 million gain in Q2 2025. The loss was driven by lower short-term adjusted net investment income, reduced hedge benefits, and higher interest expense from runoff closed blocks, partially offset by higher fixed rate income.

Risks & headwinds

- The ongoing uncertain Middle East conflict poses downside risks to Japan's economy and upside risks to inflation, particularly through elevated crude oil prices that could increase operating expense pressures. - First sector savings products carry different risk profiles than the firm's core third sector business, including mortality, spread, and longevity risk; while small current exposure provides diversification benefits, outsized growth would increase overall portfolio risk. - Higher yen interest rates could potentially increase lapse and surrender activity for first sector products; while only a minor uptick from very low levels has been observed to date, this risk is actively monitored. - Foreign exchange rate volatility between the yen and U.S. dollar can impact the firm's leverage ratio, realized foreign currency gains for portfolio repositioning, and regulatory capital ratios, though the firm's long-term hedging program is structured to mitigate material impacts. - Portfolio repositioning to capture higher yields is complex, requiring balance across tax, liquidity, and asset-liability management objectives that can limit the volume of activity achievable in any given period. - M&A opportunities carry inherent risk, as assets available for purchase are often for sale for underlying fundamental reasons that can erode expected returns, requiring strict underwriting discipline.

Analyst Q&A

• Q: What was the rationale and scope of the $4.8 billion Q2 portfolio repositioning, and how much more repositioning opportunity exists in the current higher rate environment? /

  A: Management repositioned roughly 5% of the total consolidated portfolio (most activity in Aflac Japan, with smaller adjustments in the U.S. and Bermuda). The trade harvested existing foreign currency gains on dollar assets to offset losses from selling older lower-yielding bonds in both yen and dollar portfolios. The repositioning met multiple objectives: boosting net investment income, improving asset quality, reducing future impairment risk, and strengthening asset-liability management. Management notes there is substantial remaining opportunity in the current higher rate environment, and active work is ongoing to capture additional gains.

• Q: Is there a fixed upper limit to how much first sector sales can grow in Japan, given Aflac's historical focus on third sector protection products? /

  A: Aflac has no specific fixed percentage or sales limit for first sector business. The only constraint is maintaining strong risk-adjusted returns; current first sector products are delivering attractive returns, so the firm is happy to grow this line. First sector business currently makes up less than 20% of total Japan in-force, and adding this exposure provides diversification benefits at current sizes. Sumitas, Aflac's leading first sector product, is strategically valuable because it attracts younger new customers and drives strong cross-sales of core third sector cancer and medical insurance, which remains Aflac Japan's primary focus.

• Q: Will Aflac continue to pursue only small M&A deals, or would management consider a larger transformative deal, particularly to accelerate growth in the U.S. market? /

  A: Management continuously evaluates all M&A opportunities, regardless of size, but is highly disciplined about capital allocation, as most available assets are for sale for fundamental reasons that create risk. The firm prioritizes opportunities that align well with existing distribution or add complementary new product lines. There is no ideological barrier to larger deals, but any transaction must meet strict return on capital and risk requirements to be approved.

• Q: Have rising inflation and higher interest rates in Japan led to higher lapse or surrender rates for Aflac Japan policies? /

  A: Management has not observed any significant overall increase in lapse activity tied to inflation or higher rates to date. The small uptick in lapses year-over-year is entirely driven by increased lapse and reissue activity for recently launched products like Meraito cancer insurance, as customers switch from older products to new more competitive offerings, not to macroeconomic conditions. First sector products, which are most sensitive to rate changes, have only seen a very minor uptick from historically very low levels, with no material spikes observed. As Meraito matures past its first year, lapse activity is expected to normalize.

• Q: How much capital could be freed up by expanding Japan reinsurance capacity to 30% of FSA reserves, and how should investors estimate this impact? /

  A: The amount of capital freed up depends on multiple factors including the type of business reinsured, the age of the seeded blocks, and current interest rate levels, so no fixed rule of thumb exists. Reserve differences between FSA and economic accounting are largest for medical business, smaller for cancer business, and smallest for first sector business. Investors can reference the 2021 FAB presentation for historical reserve difference data across Aflac's business blocks, which provides a reasonable ballpark estimate that remains relevant today given minimal change to overall business mix.