Aflac’s (AFL) Net Earnings Jumped 37.7%, Yet Adjusted Earnings Actually Fell

Aflac's (NYSE:AFL) net earnings surged 37.7% to $825 million in the second quarter, driven by a decrease in investment losses to $153 million from $421 million a year ago. However, adjusted earnings fell 7.7% to $883 million, which paints a different picture. Currency fluctuations play a significant role in these disparities, particularly the Japanese yen, which weakened by 9.3% against the dollar during the quarter.

This weakened the adjusted earnings by $0.05 per share. Conversely, Japan's pretax adjusted margin improved to 34.3% from 32.0%, thanks to a smaller claims impact on premiums. Meanwhile, the US business continued to grow top-line, with net earned premiums rising 2.3% to $1.5 billion and sales up 2.6% to $349 million. Aflac returned $1.3 billion to shareholders in the quarter through buybacks and a $0.61 dividend, marking 43 years of consecutive dividend increases.

However, Japan's profit gains were primarily due to lower claims, not business expansion. Net earned premiums in yen declined 3.7% due to a new reinsurance deal and older limited-pay policies maturing. Premium persistency, the share of policies customers retain, dropped to 92.7% from 93.7%. Japanese adjusted earnings still fell 2.1% after currency adjustments, with new sales decreasing 5.6% in the quarter.

The US segment experienced a 4.6% drop in adjusted earnings to $370 million, with the margin narrowing to 20.9% from 22.5% due to higher claims and benefits. Corporate and Other swung to a $10 million pretax adjusted loss from a $20 million gain the previous year, with interest expense up 21.6% to $62 million. Hedge fund exposure to Aflac fell to 39 from 46 in the latest quarter, indicating indifference rather than conviction among investors.

The stock trades at 15.20 times forward earnings, implying steady profits rather than rapid growth. Despite the conflicting financial reports, Aflac remains a potentially rewarding investment, but skeptics urge caution due to shrinking Japanese premiums, a thinner US margin, and falling adjusted earnings.