Aflac Incorporated: A Deep Dive into the 2024 10-K and Its Investment Potential

Aflac Incorporated has carved out a unique niche in the highly competitive insurance market by positioning itself as a leading provider of supplemental health and life insurance products. With operations in both Japan and the United States, the company has managed to leverage its strong brand and innovative marketing strategies—embodied by its famous Aflac Duck—to build long-term consumer trust. This blog post will explore the key aspects of Aflac’s 2024 10-K filing, analyzing its business model, financial performance, risk factors, and what these mean for potential investors.

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Business Overview: A Dual-Market Approach

Aflac’s business is principally divided between two segments: Aflac Japan and Aflac U.S.

Aflac Japan

Aflac Japan is the core engine of Aflac’s consolidated earnings, boasting a dominant position in the market for supplemental insurance products. The company’s third sector products, notably its cancer and medical insurance, are designed to fill the gap left by Japan's national health insurance system. In addition to its leadership in cancer insurance — a market it pioneered in 1974 — Aflac Japan continues to innovate with new offerings such as Tsumitasu, a savings-oriented life insurance product tailored for the post-retirement market, and products that cater to younger customers. With an extensive distribution network that includes thousands of sales agencies and strategic partnerships with major institutions like Japan Post, Aflac Japan not only serves a large customer base but also adapts to demographic trends such as an aging population and rising healthcare costs.

Aflac U.S.

In the United States, Aflac operates primarily as a supplemental insurer. With products covering accident, disability, critical illness, hospital indemnity, and even dental/vision, the company fills an important gap in the insurance landscape—particularly for individuals who already have primary coverage. Aflac U.S. benefits from a well-established network of independent agents and brokers. Its offerings are often portable and guaranteed renewable, features that are highly valued by consumers in a dynamic labor market. Even though its business model is distinct from that in Japan, the fundamental principles of providing timely cash benefits during a crisis remain the same.

Financial Performance: Steady Growth Amid Changing Conditions

A core highlight from the 2024 10-K filing is Aflac’s strong financial performance. Here are some key figures:

• Net Earnings: The company reported net earnings of $5.4 billion in 2024, up from $4.7 billion in 2023. This improvement was bolstered by robust investment gains, which contributed significantly to overall results.
• Investment Gains: Net investment gains in 2024 reached approximately $1.3 billion, reflecting a well-managed investment portfolio that includes a mix of fixed maturity securities, corporate bonds, and foreign currency hedging instruments. These gains mitigated some of the challenges arising from market volatility and the weaker yen/dollar exchange rate.
• Shareholders’ Equity: The balance sheet improved markedly with shareholders’ equity increasing from $22.0 billion to $26.1 billion over the past year. This improvement underscores the company’s strong capital base and sound financial management practices.
• Adjusted Earnings: Though net earnings stand out, management also provides adjusted earnings figures which strip out non-recurring items and certain external market effects such as currency fluctuations. Adjusted earnings were reported at $4.1 billion, further shedding light on the core performance of the underlying operations.

These numbers collectively suggest that Aflac is not only capable of weathering uncertain market conditions but also of capturing growth opportunities. The balance between premium income and disciplined expense management is reflected in an improved profit margin, even as the company continues to ride the challenges of a dynamic economic climate.

Investment Strategies and Hedging Efforts

A notable aspect of Aflac’s financial strategy is its sophisticated use of hedging to manage the dual challenges of interest rate and foreign currency risks. Given that a significant portion of Aflac Japan’s revenue is generated in Japanese yen and later translated into U.S. dollars for consolidated reporting, the company’s hedging programs are critical.

Foreign Currency Risk Management

The 10-K details several hedging strategies:

• Aflac Japan actively hedges its U.S. dollar-denominated investments back into yen, using an array of foreign currency forwards and options. This helps to cushion the effects of yen fluctuations. For example, while the average yen/dollar exchange rate weakened by approximately 6.9% in 2024, disciplined hedging helped to moderate the overall impact on reported earnings.
• At the corporate level, the Parent Company employs an enterprise hedging program that targets its net investment in Aflac Japan. This multifaceted approach includes both non-derivative and derivative instruments, maintaining a careful balance between reducing currency risk and managing hedge costs.

Interest Rate Risk

Given the sizable portfolios in both Aflac Japan and Aflac U.S., managing interest rate risk is crucial. The company makes use of interest rate swaps, and in some cases swaptions, to hedge against potential increases in variable rate exposures. These instruments help stabilize investment income and ensure that the impact of market rate changes does not unduly affect the pricing of insurance products or the reserves set aside to cover policy benefits.

Key Risks and Uncertainties

No investment is without risk, and Aflac’s 10-K is transparent about several key risks that could have an impact on its performance:

• Global Economic Conditions: Aflac’s operations are sensitive to the state of global capital markets. Challenges such as inflation, interest rate volatility, credit spread movements, and economic downturns could potentially affect the company’s investment portfolio and, by extension, its overall earnings.
• Currency Fluctuations: With a significant portion of its business and asset base in Japan, the weakening or strengthening of the yen versus the U.S. dollar is an ongoing challenge. Although hedging strategies are in place, sudden or severe currency movements can impact reported results and capital positions.
• Regulatory Environment: Both Aflac Japan and Aflac U.S. operate in highly regulated environments. In Japan, stringent solvency requirements and periodic regulatory reviews by the Financial Services Agency are critical, while in the U.S., state insurance regulations and the oversight of bodies like the NAIC and SEC influence operations. Changes in legislation or regulatory interpretations could lead to additional compliance costs or limitations on certain business practices.
• Competitive Pressure: The insurance industry is fiercely competitive, with many established players and new entrants looking to capture market share. Aflac competes on several fronts including product design, pricing, brand strength, and service quality. A failure to keep pace with evolving customer demands—such as digital sales and easy-to-understand insurance products—could erode its competitive edge.

Capital Deployment and Shareholder Returns

Aflac demonstrates its commitment to shareholder value through proactive capital management. In fiscal 2024, the company repurchased approximately $2.8 billion in common shares, reflecting confidence in its financial strength and future prospects. Additionally, robust dividend payments and an increase in the quarterly cash dividend (a 16% increase effective in early 2025) underscore the company’s commitment to returning capital to shareholders.

The strong performance metrics and careful capital deployment have culminated in an impressive annualized return on average shareholders’ equity of 22.6% in 2024. Even after adjusting for foreign currency translation effects, the adjusted return on equity remains solid, reinforcing the company’s operational efficiency and financial resilience.

Strategic Outlook for 2025 and Beyond

Looking ahead, Aflac’s strategy focuses on maintaining strong profit margins, expanding premium growth, and furthering product innovation in both the Japanese and U.S. markets. For Aflac Japan, the emphasis remains on third sector products while gradually moving into first sector coverage to capture a demographically broader and younger customer base. In the U.S., opportunities lie in deepening market penetration through digital transformation and bolstering the performance of group voluntary benefit lines.

The company’s forward-looking statements underscore its commitment to preserving high levels of liquidity and capital, ensuring that it remains well-prepared to meet any market stresses. As part of this strategy, ongoing improvements in technology, distribution, and operational efficiency are expected to drive future growth and profitability.

Final Thoughts: Investment Potential

In conclusion, Aflac’s 10-K paints the picture of a resilient company with a diversified business model, strong earnings performance, and a robust approach to risk management. The increase in net earnings to $5.4 billion, coupled with a significant rebound in investment gains and an expanding equity base, reinforces Aflac’s status as a financially strong insurer. While risks from global market volatility, regulatory challenges, and currency fluctuations remain, the company’s strategic initiatives and disciplined capital management offer a balanced and promising outlook.

Investors looking for exposure to a mature, well-capitalized insurance company with a dual-market footprint may find Aflac to be an attractive proposition. With a calculated investment score of 7.5 out of 10, Aflac presents solid long-term potential, albeit with certain risks that must be carefully considered. The company’s innovative product development, strong brand identity, and proactive risk management are key strengths that position it for continued success in the evolving global financial landscape.

Ultimately, while no investment is without risk, Aflac’s combination of healthy profitability, strategic flexibility, and a focus on sustainable growth suggests that it is well-equipped to navigate future challenges, making it a worthy consideration for a diversified investment portfolio.