Morgan Stanley: Aflac’s Japan business under pressure in the third quarter, U.S. performance steadier; company raises full-year guidance

Why were third-quarter earnings below expectations?

Aflac reported third-quarter earnings per share of $2.43, including $0.71 from assumption adjustments; excluding those, earnings were $1.72, below Morgan Stanley’s forecast of $1.77 and the market consensus of $1.76.
The cybersecurity incident in Japan resulted in additional expenses of $40 million, equivalent to about $0.06 per share, and also affected sales; alternative investment income was $22 million lower than the firm expected, equivalent to about $0.03 per share. Morgan Stanley believes some of the pressure was one-off.

Excluding assumption adjustments, Japan’s adjusted earnings for the third quarter were $743 million, below the market consensus of $766 million and Morgan Stanley’s forecast of $781 million. Japan’s expense ratio was 21.2%, with cybersecurity expenses adding 1.8 percentage points.
Japan sales were 18.8 billion yen, down 4% quarter over quarter and year over year. The cybersecurity incident reduced marketing spending in July and August; the company said sales activity returned to normal from 1 October, and expects sales to return to normal in the fourth quarter.
U.S. business earnings, excluding assumption adjustments, were $355 million, above the market consensus of $350 million and Morgan Stanley’s forecast of $324 million. U.S. sales were $403 million, slightly below both forecasts, but increased 15.5% quarter over quarter and 3.3% year over year.

Aflac raised its guidance for 2026, primarily reflecting a review of insurance assumptions and a higher run rate of net investment income. The company expects Japan’s full-year benefit ratio to be slightly below the prior guidance range of 60%–63%; it had previously expected the ratio to be at the upper end of that range. The U.S. benefit ratio is expected to be below the prior guidance range of 48%–52%.
The company raised its Japan pretax margin guidance from 33%–36% to 35%–38%; the U.S. pretax margin is expected to be above its guidance range of 17%–20%. The improved benefit-ratio outlook was driven mainly by assumption adjustments.
Aflac reallocated $2.3 billion in assets, primarily Japanese government bonds, and expects this to add $30 million to annual pretax net investment income.

At the end of the third quarter, Japan’s economic solvency ratio was 238%, slightly down from 240% in the second quarter, but still above the target range of 170%–230%. The U.S. risk-based capital ratio is estimated to be above 575%, also above its target range of 350%–450%.
The Japan business transferred cancer reserves to a Bermuda reinsurer, with a capital release of $1 billion expected: half is planned to be upstreamed to the holding company between the end of 2026 and the beginning of 2027, while the other half is expected to be released in the fourth quarter of 2027.
Morgan Stanley maintains an Equal-weight rating on Aflac, with a price target of $125. The firm believes the priorities going forward are to stabilize earnings, leverage the U.S. business advantage, and improve the Japan business.