ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements included in this section constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon the Company. The Company’s actual results may differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. Certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements can be found in the Risk Factors and Forward-Looking Information sections herein.
MD&A OVERVIEW
The following financial review provides a discussion of the Company’s results of operations and financial condition, as well as a summary of the Company’s critical accounting estimates. This section should be read in conjunction with Part I, Item 1. Business and the audited consolidated financial statements and accompanying notes included in Part II, Item 8. Financial Statements and Supplementary Data of this report. This MD&A is divided into the following sections:
Page
Executive Summary
Industry Trends
Outlook
Results of Operations
Investments
Hedging Activities
Policy Liabilities
Benefit Plans
Policyholder Protection
Liquidity and Capital Resources
Critical Accounting Estimates
The Company has elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented in Item 8. Financial Statements and Supplementary Data. Readers should refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 , filed on February 26, 2025, for reference to discussions of the year ended December 31, 2023, the earliest of the three years presented. Amounts reported in this MD&A may not foot due to rounding.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
Performance Highlights
For the full year of 2025, total revenues were down 9.3% to $17.2 billion, compared with $18.9 billion for the full year of 2024, primarily due to net investment losses of $572 million in 2025 compared with net investment gains of $1.3 billion in 2024. Net earnings were $3.6 billion, or $6.82 per diluted share, for the full year of 2025, compared with $5.4 billion, or $9.63 per diluted share, for the full year of 2024.
Net earnings in 2025 included net investment losses of $572 million, compared with net investment gains of $1.3 billion in 2024. Net investment losses in 2025 included $467 million of net losses from certain derivative and foreign currency gains or losses; an increase in credit loss allowances of $191 million and $6 million of impairments; offset by a $72 million gain from an increase in the fair value of equity securities and $20 million of net gains from sales and redemptions.
The average yen/dollar exchange rate (1) in 2025 was 149.32, or 1.1% stronger than the rate of 150.97 in 2024.
Adjusted earnings (2) for the full year of 2025 were $4.0 billion, or $7.49 per diluted share, compared with $4.1 billion, or $7.21 per diluted share, in 2024. The stronger yen/dollar exchange rate positively impacted adjusted earnings per diluted share by $.04.
In 2025, Aflac Incorporated repurchased $3.5 billion, or 33.0 million of its common shares. At December 31, 2025, the Company had 114.3 million remaining shares authorized for repurchase.
Shareholders’ equity was $29.5 billion, or $56.85 per share, at December 31, 2025, compared with $26.1 billion, or $47.45 per share, at December 31, 2024. Shareholders’ equity at December 31, 2025 included a cumulative increase of $8.0 billion from the effect of changes in discount rate assumptions on insurance reserves, compared with a corresponding cumulative increase of $2.0 billion at December 31, 2024, and a net unrealized loss on investment securities and derivatives of $1.8 billion, compared with a net unrealized gain of $4 million at December 31, 2024. Shareholders’ equity at December 31, 2025 also included an unrealized foreign currency translation loss of $4.8 billion, compared with an unrealized foreign currency translation loss of $5.0 billion at December 31, 2024. The annualized return on average shareholders’ equity in 2025 was 13.1%.
Shareholders’ equity excluding accumulated other comprehensive income (adjusted book value (2) ) was $28.0 billion, or $54.06 per share, at December 31, 2025, compared with $29.1 billion, or $52.87 per share, at December 31, 2024. Adjusted book value excluding foreign currency remeasurement (2) was $22.1 billion, or $42.66 per share, at December 31, 2025, compared with $23.4 billion, or $42.46 per share, at December 31, 2024. The annualized adjusted return on equity excluding foreign currency remeasurement (2) in 2025 was 17.6%.
(1) Yen/dollar exchange rates are based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
(2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure.
Cyber Incident
As previously disclosed, the Company identified an incident involving unauthorized access to a limited number of its systems in the U.S. on June 12, 2025. The Company promptly initiated its cybersecurity incident response protocols and believes it contained the unauthorized access within hours. The Company's systems were not affected by ransomware, and the Company remained able to serve its policyholders and underwrite policies, review claims, and otherwise service customers as usual.
The Company is aware of the exfiltration of certain data including claims information, health information, social security numbers and/or other personal information relating to a substantial number of customers, beneficiaries, employees, agents, and other individuals in the Company’s U.S. business. In December 2025, the Company completed a detailed review of the potentially impacted files and determined that personal information associated with approximately 22.65 million individuals was involved, and began notifying impacted individuals and regulatory authorities as required by applicable laws.
Based on the information currently available, as of the date of this report, the Company does not believe that the incident is reasonably likely to have a material impact on the Company’s financial condition or results of operations. The Company continues to assess the financial impact of the cybersecurity incident, including how much of the financial impact will be covered by insurance. As a result of the cybersecurity incident, the Company has incurred certain costs and may,
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
depending on future developments, incur additional costs, including but not limited to: costs to provide credit monitoring, identity theft protection, and Medical Shield to impacted individuals and maintain a call center related to the provision of such services; incident response costs; expenses arising from potential litigation, governmental investigations, or enforcement actions; expenses related to compliance, finance, and legal advisory services; elevated cybersecurity insurance premiums; and costs incurred in meeting evolving legal and regulatory requirements concerning cybersecurity governance, monitoring, and disclosure. The costs associated with the incident to date, including the cost to investigate and respond to the incident as well as related legal and other professional services, resulted in a slight increase to the Company's expenses and are recorded in the insurance and other expenses line in the consolidated statement of earnings.
INDUSTRY TRENDS
The Company is impacted by financial markets, economic conditions, regulatory oversight and a variety of trends that affect the industries where it competes.
Financial and Economic Environment
The Company’s business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on the Company, in part because the Company has a large investment portfolio and its insurance liabilities and derivatives are sensitive to changing market factors. See Item 1A. Risk Factors for the risk factor entitled, "Difficult conditions in global capital markets and the economy could have a material adverse effect on the Company's investments, capital position, revenue, profitability, and liquidity and harm the Company's business."
Demographics
Aflac Japan Segment
With Japan’s aging population and the rise in healthcare costs, supplemental health care insurance products remain attractive. Additionally, as Japan enters an era of 100-year lifespans, customers' needs for asset formation and retirement coverage, including nursing care, are increasing. Japan’s existing customers and potential customers seek products that are easily understood, affordable and accessible via digital platforms.
Aflac U.S. Segment
Customer demographics continue to shift, generating new opportunities across various consumer groups, including millennials and diverse cultural communities. As customer expectations and preferences change, trends indicate that both existing and potential customers seek affordable options that are easily understood and accessible via digital platforms. Furthermore, the insurance industry continues to be impacted by the financial security requirements and healthcare demands of the aging baby boomer generation.
Regulatory Environment
See Item 1. Business - Aflac Japan Government Regulation and Aflac U.S. Government Regulation for a discussion of regulatory developments that may impact the Company and the associated risks.
Competitive Environment
See Item 1. Business - Aflac Japan Competitive Markets and Aflac U.S. Competitive Markets for a discussion of the competitive environment and the basis on which the Company competes in each of its segments.
2026 OUTLOOK
The Company’s strategy to drive long-term shareholder value is to pursue growth and maintain solid pretax profit margins while exercising tactical capital deployment. The Company's approach to pursue growth is through product development and distribution expansion, along with enhanced efficiency through technological upgrades and operational refinement.
The Company's objectives in 2026 include preserving solid pretax profit margins with increased sales production achieved through the ongoing promotional efforts for products launched in 2025 in Aflac Japan and continued growth initiatives across both its Aflac Japan and Aflac U.S. segments. The Company believes this strategy positions it for future growth
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
and efficiency while defending and leveraging its market-leading position, powerful brand recognition and varied distribution in Japan and the U.S.
In November 2025, the board of directors announced a 5.2% increase in the quarterly cash dividend, effective with the first quarter of 2026. The Company intends to maintain strong capital ratios in Aflac Japan and Aflac U.S. in support of its commitment to shareholder dividends while remaining tactical in its deployment of capital in the form of share repurchases and opportunistic investments. The Company's target range for economic solvency ratio (ESR) is 170% to 230% for Aflac Japan and a target combined RBC range of 350% to 450%, over time, for Aflac U.S., which are consistent with the Company's risk management practices.
Aflac Japan Segment
For 2026, the Company expects Aflac Japan to generate a benefit ratio in the range of 60% to 63% driven by favorable trends in morbidity experience, new product launches featuring lower benefit ratios, and the premium shift over recent years from first sector savings products to third sector cancer and medical products, as well as first sector protection products. The Company expects Aflac Japan to generate an expense ratio in the range of 20% to 23% reflecting continued growth and strategic initiatives. The Company also expects that benefit and expense ratios will continue to experience some level of revenue pressure due to the impact of paid-up policies and internal reinsurance transactions.
Aflac U.S. Segment
For 2026, the Company expects Aflac U.S. to generate a benefit ratio in the range of 48% to 52% driven by growth in life, disability, and dental and vision insurance products, all of which typically carry higher benefit ratios. The Company expects Aflac U.S. to generate an expense ratio in the range of 36% to 39%. However, continued revenue growth associated with these products is expected to decrease expense ratios over time.
Corporate and other
The Company's objectives for Corporate and other in 2026 include achieving solid pretax adjusted earnings, assuming that U.S. interest rates remain stable and excluding the impact of tax credit investments, as tax benefits are recognized in a corresponding lower income tax expense.
For important disclosures applicable to statements made in this 2026 Outlook, please see the statement on Forward-Looking Information at the beginning of Item 1. Business, the Risk Factors identified in Item 1A. and this Item 7. MD&A.
RESULTS OF OPERATIONS
The Company earns its revenues principally from insurance premiums and investments. The Company’s operating expenses primarily consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing its products. Profitability for the Company depends principally on its ability to price its insurance products at a level that enables the Company to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, actuarial and policyholder behavior experience on insurance products, and the Company's ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize tax capacity, and manage expenses.
This document includes references to the Company’s financial performance measures which are not calculated in accordance with United States generally accepted accounting principles (U.S. GAAP) (non-U.S. GAAP). The financial measures exclude items that the Company believes may obscure the underlying fundamentals and trends in insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with insurance operations.
Due to the size of Aflac Japan, where the functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on reported results. In periods when the Japanese yen weakens, translating Japanese yen into U.S. dollars results in fewer U.S. dollars being reported. When the Japanese yen strengthens, translating Japanese yen into U.S. dollars results in more U.S. dollars being reported. Consequently, Japanese yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while Japanese yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. A significant portion of the Company’s business is conducted in Japanese yen and never converted into U.S. dollars but translated into U.S. dollars for U.S. GAAP reporting purposes, which results in foreign currency impact to earnings, cash flows and book
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
value on a U.S. GAAP basis. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts and the currency-neutral operating performance over time. The average yen/dollar exchange rate is based on the published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
The Company defines the non-U.S. GAAP financial measures included in this document as follows:
• Adjusted earnings are adjusted revenues less benefits and adjusted expenses. Adjusted earnings per share (basic or diluted) are the adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The adjustments to both revenues and expenses account for certain items that are outside of management’s control because they tend to be driven by general economic conditions and events or are related to infrequent activities not directly associated with insurance operations. Adjusted revenues are U.S. GAAP total revenues excluding adjusted net investment gains and losses. Adjusted expenses are U.S. GAAP total acquisition and operating expenses including the impact of interest from derivatives associated with notes payable but excluding any non-recurring or other items not associated with the normal course of the Company’s insurance operations and that do not reflect the Company's underlying business performance. Management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of the Company’s insurance operations on a consolidated basis and believes that a presentation of these financial measures is vitally important to an understanding of the underlying profitability drivers and trends of the Company’s insurance business. The most comparable U.S. GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively.
• Adjusted net investment gains and losses are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest income/expense from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses. The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management’s control, while excluding the components that are within management’s control and are accordingly reclassified to net investment income and interest expense. The most comparable U.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses.
• Amortized hedge costs/income represent costs/income incurred or recognized as a result of using foreign currency derivatives to hedge certain foreign currency exchange risks in the Company's Japan segment or in Corporate and other. These amortized hedge costs/income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the contractual term of the derivative. The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparable U.S. GAAP financial measure for amortized hedge costs/income.
• Adjusted earnings excluding current period foreign currency impact are computed using the average foreign exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted in Japan and foreign exchange rates are outside management’s control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) into U.S. dollars. The most comparable U.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively.
• Adjusted book value is the U.S. GAAP book value (representing total shareholders’ equity), less accumulated other comprehensive income as recorded on the U.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
as they exclude accumulated other comprehensive income, which fluctuates due to market movements that are outside management’s control. The most comparable U.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively.
• Adjusted book value excluding foreign currency remeasurement is the U.S. GAAP book value (representing total shareholders’ equity), less accumulated other comprehensive income as recorded on the U.S. GAAP balance sheet and excluding the cumulative (beginning January 1, 2021) foreign currency gains/losses associated with i) foreign currency remeasurement and ii) sales and redemptions of invested assets. Adjusted book value excluding foreign currency remeasurement per common share is adjusted book value excluding foreign currency remeasurement at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value excluding foreign currency remeasurement and adjusted book value excluding foreign currency remeasurement per common share important as they exclude both accumulated other comprehensive income and the cumulative foreign currency remeasurement gains/losses, which fluctuate due to market movements that are outside management's control. The most comparable U.S. GAAP financial measures for adjusted book value excluding foreign currency remeasurement and adjusted book value excluding foreign currency remeasurement per common share are total book value and total book value per common share, respectively.
• Adjusted return on equity is annualized adjusted earnings divided by average shareholders’ equity, excluding accumulated other comprehensive income. Management uses adjusted return on equity to evaluate the financial performance of the Company’s insurance operations on a consolidated basis and believes that a presentation of this financial measure is vitally important to an understanding of the underlying profitability drivers and trends of the Company’s insurance business. The Company considers adjusted return on equity important as it excludes components of accumulated other comprehensive income, which fluctuate due to market movements that are outside management's control. The most comparable U.S. GAAP financial measure for adjusted return on equity is return on equity as determined using annualized net earnings and average total shareholders’ equity.
• Adjusted return on equity excluding foreign currency remeasurement is annualized adjusted earnings divided by average shareholders’ equity, excluding both accumulated other comprehensive income and the cumulative (beginning January 1, 2021) foreign currency gains/losses associated with i) foreign currency remeasurement and ii) sales and redemptions of invested assets. The Company considers adjusted return on equity excluding foreign currency remeasurement important because it excludes both accumulated other comprehensive income and the cumulative foreign currency remeasurement gains/losses, which fluctuate due to market movements that are outside management's control. The most comparable U.S. GAAP financial measure for adjusted return on equity excluding foreign currency remeasurement is return on equity as determined using annualized net earnings and average total shareholders’ equity.
• U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact on U.S. dollar-denominated investment income using the average foreign exchange rate for the comparable prior year period. The Company considers U.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency changes on the Aflac Japan segment results, which are outside management’s control. The most comparable U.S. GAAP financial measure for U.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from the U.S. dollar denominated investments translated to yen.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparable U.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively, for the years ended December 31.
Reconciliation of Net Earnings to Adjusted Earnings
In Millions
Per Diluted Share
Net earnings
Items impacting net earnings:
Adjusted net investment (gains) losses (1)
Other and non-recurring (income) loss
Income tax (benefit) expense on items
excluded from adjusted earnings
Adjusted earnings
Current period foreign currency impact (2)
Adjusted earnings excluding current period
foreign currency impact
(1) See reconciliation of net investment (gains) losses to adjusted net investment (gains) losses below.
(2) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.
Reconciling Items
Net Investment Gains and Losses
The following table is a reconciliation of items impacting adjusted net investment (gains) losses to the most directly comparable U.S. GAAP financial measure of net investment (gains) losses for the years ended December 31.
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment (Gains) Losses
(In millions)
Net investment (gains) losses
Items impacting net investment (gains) losses:
Amortized hedge costs
Amortized hedge income
Net interest income (expense) from derivatives associated with certain
investment strategies
Impact of interest from derivatives associated with notes payable
Adjusted net investment (gains) losses
The Company's investment strategy is to invest primarily in fixed maturity securities to provide a reliable stream of investment income, which is one of the drivers of the Company’s profitability. This investment strategy incorporates asset-liability matching to align the expected cash flows of the portfolio to the needs of the Company's liability structure. The Company does not purchase securities with the intent of generating investment gains or losses. However, investment gains and losses may be realized as a result of changes in the financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of the Company's insurance products.
Net investment gains and losses excluded from adjusted earnings include the following:
• Securities Transactions
• Credit Losses
• Changes in the Fair Value of Equity Securities
• Certain Derivative and Foreign Currency Activities.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Securities Transactions, Credit Losses and Changes in the Fair Value of Equity Securities
Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Credit losses include losses for held-to-maturity securities, available-for-sale securities, loan receivables, loan commitments and reinsurance recoverables. Changes in the fair value of equity securities are the result of gains or losses driven by fluctuations in market prices.
Certain Derivative and Foreign Currency Activities
The Company's derivative activities include:
• foreign currency forwards and options used in hedging foreign currency exchange risk on U.S. dollar-denominated investments held by Aflac Japan, with options used on a standalone basis and/or in a collar strategy;
• foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in Japanese yen and hedge the Company's long-term exposure to a weakening Japanese yen;
• foreign currency swaps used to economically hedge the foreign currency exchange risk associated with certain investments denominated in other foreign currencies held by Aflac Japan;
• cross-currency swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures;
• foreign currency swaps that are associated with variable interest entity (VIE) bond purchase commitments, and investments in special-purpose entities, including VIEs where the Company is the primary beneficiary;
• foreign currency forwards used to economically hedge the foreign currency exchange risk associated with certain investments denominated in other foreign currencies held by Aflac Japan;
• interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments;
• interest rate swaptions (swaptions) used to hedge changes in the fair value associated with interest rate fluctuations for certain U.S. dollar-denominated available-for-sale securities; and
• bond purchase commitments at the inception of investments in consolidated VIEs.
Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting.
The Company also excludes from adjusted earnings the accounting impacts of foreign currency remeasurement associated with changes in the foreign exchange rate.
For additional information regarding net investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Other and Non-recurring Items
The U.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated with U.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings.
In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in the U.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings.
The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In 2025, as part of the U.S. defined benefit plan freeze effective January 1, 2024, the Company purchased a nonparticipating single premium group annuity contract from an external insurer to settle its obligations under the plan and paid to the insurer the related annuity premium. As a result, the Company recognized a settlement charge of $55 million in 2025. The settlement charge was both unusual and non-recurring; therefore, the Company excluded the settlement charge from adjusted earnings.
In 2024, as part of the U.S. defined benefit plan freeze effective January 1, 2024, the Company offered lump sum payments to certain participants. The lump sum payments were distributed in the fourth quarter of 2024 and resulted in a settlement charge of $18 million in 2024 due to the payments being greater than the settlement threshold. The settlement charge was both unusual and non-recurring and unrelated to other recurring benefit costs associated with the plan; therefore, the Company excluded the settlement charge from adjusted earnings.
Foreign Currency Translation
Aflac Japan’s premiums and a significant portion of its investment income are received in Japanese yen, and its claims and most expenses are paid in Japanese yen. Aflac Japan purchases Japanese yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to Japanese yen, to support Japanese yen-denominated policy liabilities. Japanese yen-denominated income statement accounts are translated to U.S. dollars using the weighted average yen/dollar foreign exchange rate for the reporting period, except realized gains and losses on securities transactions which are translated at the foreign exchange rate on the trade date of each transaction. Japanese yen-denominated balance sheet accounts are translated to U.S. dollars using the spot yen/dollar exchange rate at the end of the reporting period.
In recent periods, the Japanese yen has weakened against the U.S. dollar. Although the Company is unable to predict the timing or extent of future movements of the yen/dollar exchange rate, the Company maintains hedging strategies (see the Hedging Activities section of this MD&A) that are intended to mitigate the impacts of Japanese yen fluctuation on the Company’s financial position and results of operations. See the risk factor entitled “The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate” in Part I, Item 1A. Risk Factors for more information.
Income Taxes
The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 19.6% in 2025 and 15.2% in 2024. The combined effective tax rate differs from the U.S. statutory rate primarily due to the impact of tax credits from federal historic rehabilitation and solar investments in partnerships and the exclusion of foreign currency translation gains and losses on certain Aflac Japan U.S. dollar-denominated investments held in the Delaware Statutory Trust. Total income taxes were $887 million in 2025 and $974 million in 2024. Japanese income taxes on Aflac Japan's results account for most of the Company's consolidated income tax expense.
For additional information, see Note 10 of the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates - Income Taxes section of this MD&A. The effective tax rate continues to be subject to future tax law changes both in the U.S. and in foreign jurisdictions. See the risk factor entitled "Tax rates applicable to the Company may change" in Part I, Item 1A. Risk Factors for additional information.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Book Value to Adjusted Book Value
(Excluding Foreign Currency Remeasurement)
The following table is a reconciliation of items impacting adjusted book value excluding foreign currency remeasurement and adjusted book value excluding foreign currency remeasurement per common share to the most directly comparable U.S. GAAP financial measures of book value and book value per common share, respectively, for the years ended December 31.
(In millions, except for share and per-share amounts)
U.S. GAAP book value
Items impacting U.S. GAAP book value:
Unrealized foreign currency translation gains (losses)
Unrealized gains (losses) on securities and derivatives
Effect of changes in discount rate assumptions
Pension liability adjustment
Total accumulated other comprehensive income
Adjusted book value
Foreign currency remeasurement gains (losses)
Adjusted book value excluding foreign currency remeasurement
Number of shares outstanding at end of period
U.S. GAAP book value per common share
Items impacting U.S. GAAP book value per common share:
Unrealized foreign currency translation gains (losses) per common share
Unrealized gains (losses) on securities and derivatives per common share
Effect of changes in discount rate assumptions per common share
Pension liability adjustment per common share
Total accumulated other comprehensive income per common share
Adjusted book value per common share
Foreign currency remeasurement gains (losses) per common share
Adjusted book value excluding foreign currency remeasurement per
common share
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Return on Equity to Adjusted Return on Equity
(Excluding Foreign Currency Remeasurement)
The following table is a reconciliation of items impacting adjusted return on equity excluding foreign currency remeasurement to the most directly comparable U.S. GAAP financial measure of return on equity for the years ended December 31.
U.S. GAAP return on equity - net earnings (1)
Impact of excluding unrealized foreign currency translation gains (losses)
Impact of excluding unrealized gains (losses) on securities and derivatives
Impact of excluding effect of changes in discount rate assumptions
Impact of excluding pension liability adjustment
Impact of excluding accumulated other comprehensive income
U.S. GAAP return on equity less accumulated other comprehensive income
Differences between adjusted earnings and net earnings (2)
Adjusted return on equity - reported
Impact of excluding gains (losses) associated with foreign currency remeasurement (3)
Adjusted return on equity excluding foreign currency remeasurement
(1) U.S. GAAP return on equity is calculated by dividing net earnings (annualized) by average shareholders' equity.
(2) See separate reconciliation of net earnings to adjusted earnings above.
(3) Impact of gains/losses associated with foreign currency remeasurement is calculated by excluding the cumulative (beginning January 1, 2021) foreign currency gains/losses associated with i) foreign currency remeasurement and ii) sales and redemptions of invested assets. The impact is the difference of adjusted return on equity - reported compared with adjusted return on equity, excluding from shareholders' equity, gains/losses associated with foreign currency remeasurement.
RESULTS OF OPERATIONS BY SEGMENT
U.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items and segment assets. The Company's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan is the principal contributor to consolidated earnings. In addition, the Parent Company, other business units that are not individually reportable, reinsurance activities, including internal reinsurance activity with Aflac Re, and other business activities not included in Aflac Japan or Aflac U.S., as well as intercompany eliminations, are included in Corporate and other. See Item 1. Business for a summary of each segment's products and distribution channels.
Consistent with U.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company's U.S. GAAP measure of segment performance. The Company believes that a presentation of this measure is vitally important to an understanding of the underlying profitability drivers and trends of its business. Additional performance measures used to evaluate the financial condition and performance of the Company's segments are listed below.
• Operating Ratios
• New Annualized Premium Sales
• New Money Yield
• Return on Average Invested Assets
• Portfolio Book Yield
• Average Weekly Producer
• Premium Persistency
For additional information on the Company’s performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part IV. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidated U.S. GAAP results and additional information.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Adjusted Earnings
Changes in Aflac Japan's pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac Japan for the years ended December 31.
Aflac Japan Summary of Operating Results
In Dollars
In Yen
(In millions of dollars and billions of yen)
Net earned premiums (1)
Net investment income: (2)
Yen-denominated investment income
U.S. dollar-denominated investment income
Net investment income
Amortized hedge costs
Adjusted net investment income
Other income (loss)
Total adjusted revenues
Benefits and claims:
Benefits and claims, excluding reserve remeasurement
Reserve remeasurement (gains) losses
Total benefits and claims, net
Adjusted expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total adjusted expenses
Total benefits and adjusted expenses
Pretax adjusted earnings
Weighted-average yen/dollar exchange rate
Percentage change over previous period:
Net earned premiums
Adjusted net investment income
Total adjusted revenues
Total benefits and claims, net
Total adjusted expenses
Pretax adjusted earnings
(1) Includes a gain (loss) of $(52) and $(81) in 2025 and 2024, respectively, related to remeasurement of the deferred profit liability for limited-payment contracts.
(2) Net interest income/expense from derivatives associated with certain investment strategies of $(228) and $(305) in 2025 and 2024, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
In 2025, operating results in Japanese yen terms compared to the previous year were as follows:
• Net earned premiums decreased primarily due to approximately ¥21 billion related to the internal cancer reinsurance transaction with Aflac Re established in the fourth quarter of 2024 and approximately ¥15 billion from limited-pay products reaching premium paid-up status. Net earned premiums also reflect a remeasurement loss of approximately ¥8 billion related to assumption updates of the deferred profit liability for limited-payment contracts in the third quarter of 2025, compared to a remeasurement loss of approximately ¥11 billion in the third quarter of 2024.
• Adjusted net investment income decreased primarily due to lower floating rate income from U.S. dollar-denominated investments.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
• Total adjusted revenues decreased primarily due to the decreases in net earned premiums and adjusted net investment income.
• Total benefits and claims decreased primarily due to ¥68 billion of reserve remeasurement gains related to assumption updates in the third quarter of 2025, compared to reserve remeasurement gains of approximately ¥50 billion in the third quarter of 2024, as well as the internal cancer reinsurance transaction with Aflac Re established in the fourth quarter of 2024.
• Total adjusted expenses increased primarily due to higher technology and sales-related expenses, partially offset by the impact of the internal cancer reinsurance transaction with Aflac Re established in the fourth quarter of 2024 and an increase in the capitalization of deferred policy acquisition costs resulting from higher sales.
• Pretax adjusted earnings decreased primarily due to the decrease in total adjusted revenues, partially offset by the decrease in total benefits and claims.
Annualized premiums in force at December 31, 2025 were ¥1.18 trillion, compared with ¥1.21 trillion at December 31, 2024. The decrease in annualized premiums in force in Japanese yen of 2.5% in 2025 and 3.0% in 2024 was driven primarily by limited-pay products reaching premium paid-up status. Annualized premiums in force, translated into U.S. dollars at respective year-end foreign exchange rates, were $7.5 billion at December 31, 2025, compared with $7.6 billion at December 31, 2024.
As of December 31, 2025, Aflac Japan exceeded 22 million individual policies in force in Japan, with approximately 14 million cancer policies in force in Japan.
Aflac Japan's investment portfolios include U.S. dollar-denominated securities and reverse dual-currency securities (Japanese yen-denominated fixed maturity securities with dollar coupon payments). In years when the Japanese yen strengthens in relation to the dollar, translating Aflac Japan's U.S. dollar-denominated investment income into Japanese yen lowers growth rates for net investment income, total adjusted revenues and pretax adjusted earnings in Japanese yen terms. In years when the Japanese yen weakens, translating U.S. dollar-denominated investment income into Japanese yen magnifies growth rates for net investment income, total adjusted revenues and pretax adjusted earnings in Japanese yen terms.
The following table illustrates the effect of translating Aflac Japan's U.S. dollar-denominated investment income and related items into Japanese yen by comparing certain segment results with those that would have been reported had foreign exchange rates remained unchanged from the prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated investment income were determined using the average foreign exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above.
Aflac Japan Percentage Changes Over Prior Year
(Japanese Yen Operating Results)
For the Years Ended December 31,
Including Foreign
Currency Changes
Excluding Foreign
Currency Changes
Adjusted net investment income
Total adjusted revenues
Pretax adjusted earnings
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table presents a summary of operating ratios in Japanese yen terms for Aflac Japan for the years ended December 31 followed by a discussion of the significant drivers of changes in operating ratios in Japanese yen compared to the previous year.
Ratios to total adjusted revenues:
Total benefits and claims, net
Adjusted expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total adjusted expenses
Pretax adjusted earnings
Ratios to total premiums:
Total benefits and claims, net
Adjusted expenses:
Amortization of deferred policy acquisition costs
• In 2025, the total benefits and claims to total premiums ratio decreased primarily due to lower benefits resulting from assumption updates in the third quarter of 2025.
• The total adjusted expense ratio increased in 2025 primarily due to a year-over-year decrease in total adjusted revenues and an increase in total adjusted expenses.
• In total, the pretax adjusted profit margin increased in 2025 primarily due to the lower benefit ratio.
The following table presents Aflac Japan's premium persistency on a 12-month rolling basis as of December 31.
Premium persistency
Aflac Japan Sales
The following table presents Aflac Japan's new annualized premium sales for the years ended December 31.
In Dollars
In Yen
(In millions of dollars and billions of yen)
New annualized premium sales
Increase (decrease) over prior period
In 2025, the increase in new annualized premium sales on a Japanese yen basis was driven primarily by continued strong sales of the new cancer insurance product, Miraito , as well as sales of Tsumitasu.
The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the years ended December 31.
Cancer
Medical and other health
Life insurance:
Traditional life (1)
WAYS
Child endowment
Other
Total
(1) Includes term life, whole life and Tsumitasu
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and other products. With continued cost pressure on Japan’s health care system, the Company expects the need for third sector products will continue to rise in the future and that the cancer and medical insurance products Aflac Japan provides will continue to be an important part of its product portfolio. Additionally, the Company believes that sales of first sector products, including Tsumitasu , WAYS and Child Endowment, position Aflac Japan for potential future long-term sales opportunities by marketing these products to a younger demographic as well as potential cross-selling opportunities of Aflac Japan's third sector products.
The following table details the contributions to Aflac Japan's new annualized premium sales by agency type for the years ended December 31.
Independent corporate and individual
Affiliated corporate (1)
Bank
Total
(1) Includes Japan Post Group, Dai-ichi Life and Daido Life
In 2025, Aflac Japan recruited 236 new sales agencies. At December 31, 2025, Aflac Japan was represented by approximately 6,300 sales agencies, with approximately 112,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due to Aflac Japan's focus on supporting agencies with strong management frameworks, high productivity and more producing agents.
At December 31, 2025, Aflac Japan had agreements to sell its products at 358 banks, approximately 90% of the total number of banks in Japan.
Strategic Alliance with Japan Post Holdings
On May 10, 2024, the Parent Company reported that the shares owned by the J&A Alliance Trust (Trust) represented, in aggregate, 20% of the voting power of the Parent Company's common stock. The Shareholders Agreement, entered into on February 28, 2019, by the Parent Company, Japan Post Holdings Co., Ltd., J&A Alliance Holdings Corporation, solely in its capacity as trustee of the Trust and General Incorporated Association J&A Alliance, provides voting restrictions that require the Trust to vote (i) all shares representing voting rights in excess of 20% of the voting rights in the Parent Company and (ii) all of its shares in connection with a change in control transaction, in each case, in a manner proportionally equal to votes of shares not beneficially owned by the Trust. Japan Post Holdings Co., Ltd. does not have a board seat on the Parent Company’s board of directors and does not have rights to control, manage or intervene in the management of the Parent Company. According to a Form 13F filed by Japan Post Holdings with the SEC on January 27, 2026, Japan Post Holdings owned 52.3 million Aflac Incorporated common shares as of December 31, 2025.
As previously reported, on December 19, 2018, the Parent Company and Aflac Japan entered into a Basic Agreement with Japan Post Holdings Co., Ltd., a Japanese corporation (Japan Post Holdings). Pursuant to the terms of the Basic Agreement, among other items, Japan Post Holdings and Aflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives. On May 1, 2023, the Parent Company filed a registration statement on Form S-3 that registered the sale of its common stock from time to time by J&A Alliance Holdings Corporation in its capacity as trustee of the Trust. The filing was made pursuant to a contractual requirement contained in the Shareholders Agreement. The Trust has agreed not to own more than the greater of 10% of the Parent Company’s outstanding shares or such shares representing 22.5% of the voting rights in the Parent Company.
The foregoing is subject to and qualified in its entirety by reference to the full text of the Basic Agreement, a copy of which is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 19, 2018, and the Shareholders Agreement, a copy of which is attached as Exhibit 10.50 to the Company’s Quarterly Report on Form 10-Q filed April 26, 2019, the terms of which exhibits are incorporated herein by reference.
Aflac Japan Investments
The level of investment income in Japanese yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates on U.S. dollar-denominated investment income and other factors.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
As part of the Company's portfolio management and asset allocation process, Aflac Japan primarily invests in Japanese yen- and U.S. dollar-denominated investments. Aflac Japan's Japanese yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and equity securities. Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments, loan receivables, and growth assets, including alternative investments in limited partnerships or similar investment vehicles. Aflac Japan invests in both publicly traded and privately originated U.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency derivatives to economically hedge the foreign currency exchange risk on the fair value of a portion of the U.S. dollar-denominated investments.
The following table details the investment purchases for Aflac Japan for the years ended December 31.
(In millions)
Yen-denominated:
Fixed maturity securities:
Japan government and agencies
Private placements
Other fixed maturity securities
Equity securities
Commercial mortgage and other loans:
Other loans
Other investments
Total yen-denominated
U.S. dollar-denominated:
Fixed maturity securities:
Other fixed maturity securities
Infrastructure debt
Collateralized loan obligations
Equity securities
Commercial mortgage and other loans:
Transitional real estate loans
Middle market loans
Other loans
Other investments
Total U.S. dollar-denominated
Other currencies:
Fixed maturity securities:
Infrastructure debt
Private placements
Other fixed maturity securities
Commercial mortgage and other loans:
Other loans
Other investments
Total other currencies
Total Aflac Japan purchases
See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 1 and 3 of the Notes to the Consolidated Financial Statements for additional information regarding loans and loan receivables.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Funds available for investment include cash flows from operations, investment income and funds generated from maturities, redemptions, securities lending and other securities transactions. Securities lending is also used from time to time to accelerate the availability of funds for investment. Purchases of securities from period to period are determined based on multiple objectives including appropriate portfolio diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk factors while adhering to the Company's investment policy guidelines.
The following table presents the results of Aflac Japan's investment yields for the years ended and as of December 31
Total purchases for the period (in millions) (1)
New money yield (1),(2)
Return on average invested assets (3)
Portfolio book yield, including U.S. dollar-denominated investments,
end of period (1),(2)
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses, external management fees and amortized hedge costs
(3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis
The decrease in the Aflac Japan new money yield in 2025 was primarily due to higher allocations to lower yielding asset classes. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments and Hedging Activities sections of this MD&A for additional information on the Company's investments and hedging strategies.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Adjusted Earnings
Changes in Aflac U.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for Aflac U.S. for the years ended December 31.
Aflac U.S. Summary of Operating Results
(In millions)
Net earned premiums
Adjusted net investment income (1)
Other income
Total adjusted revenues
Benefits and claims:
Benefits and claims, excluding reserve remeasurement
Reserve remeasurement (gains) losses
Total benefits and claims, net
Adjusted expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total adjusted expenses
Total benefits and adjusted expenses
Pretax adjusted earnings
Percentage change over previous period:
Net earned premiums
Adjusted net investment income
Total adjusted revenues
Total benefits and claims, net
Total adjusted expenses
Pretax adjusted earnings
(1) Net interest income/expense from derivatives associated with certain investment strategies of $(24) and $(36) in 2025 and 2024, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
In 2025, operating results compared to the previous year were as follows:
• Net earned premiums increased primarily due to improved sales.
• Adjusted net investment income decreased primarily due to lower floating rate income.
• Total adjusted revenues increased primarily due to the increase in net earned premiums, partially offset by the decrease in adjusted net investment income.
• Total benefits and claims increased primarily due to higher incurred claims, partially offset by $60 million of reserve remeasurement gains related to assumption updates in the third quarter of 2025, compared to reserve remeasurement gains of $11 million in the third quarter of 2024.
• Total adjusted expenses increased primarily due to a one-time technology-related expense and higher variable expenses associated with the growth in net earned premiums.
• Pretax adjusted earnings were essentially flat.
Annualized premiums in force increased 4.9% in 2025 and 3.6% in 2024. Annualized premiums in force at December 31, 2025 were $6.7 billion, compared with $6.4 billion at December 31, 2024.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31 followed by a discussion of the significant drivers of changes in operating ratios compared to the previous year.
Ratios to total adjusted revenues:
Total benefits and claims
Adjusted expenses:
Amortization of deferred policy acquisition costs
Insurance commissions
Insurance and other expenses
Total adjusted expenses
Pretax adjusted earnings
Ratios to total premiums:
Total benefits and claims
Adjusted expenses:
Amortization of deferred policy acquisition costs
• In 2025, the total benefits and claims to total premiums ratio increased primarily due to higher incurred claims.
• The total adjusted expense ratio decreased slightly in 2025 primarily due to a year-over-year increase in total adjusted revenues.
• In total, the pretax adjusted profit margin decreased in 2025 primarily due to the higher benefit ratio.
The following table presents premium persistency for Aflac U.S. on a 12-month rolling basis as of December 31.
Premium persistency
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.
(In millions)
New annualized premium sales
Increase (decrease) over prior period
The increase in new annualized premium sales for Aflac U.S. in 2025 was primarily driven by sales of group products.
The following table details the contributions to Aflac's U.S. new annualized premium sales by major insurance product category for the years ended December 31.
Accident
Disability
Critical care (1)
Hospital indemnity
Dental/vision
Life
Total
(1) Includes cancer, critical illness and hospital intensive care products
In 2025, the Aflac U.S. sales force included an average of approximately 5,300 U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aflac U.S. Investments
The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments and other factors.
As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity securities, loan receivables and growth assets, including equity securities and alternative investments in limited partnerships. Aflac U.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.
The following table details the investment purchases for Aflac U.S. for the years ended December 31.
(In millions)
U.S. dollar-denominated:
Fixed maturity securities:
Other fixed maturity securities
Infrastructure debt
Collateralized loan obligations
Equity securities
Commercial mortgage and other loans:
Transitional real estate loans
Commercial mortgage loans
Middle market loans
Other loans
Other investments:
Limited partnerships
Other
Total U.S. dollar-denominated
Other currencies:
Other investments
Total other currencies
Total Aflac U.S. purchases
Funds available for investment include cash flows from operations, investment income and funds generated from maturities, redemptions, and other securities transactions. Purchases of securities from period to period are determined based on multiple objectives, including appropriate portfolio diversification, the relative value of a potential investment and availability of investment opportunities, liquidity, credit and other risk factors while adhering to the Company's investment policy guidelines.
The following table presents the results of Aflac's U.S. investment yields for the years ended and as of December 31.
Total purchases for period (in millions) (1)
New money yield (1),(2)
Return on average invested assets (3)
Portfolio book yield, end of period (1),(2)
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships
(2) Reported on a gross yield basis; excludes investment expenses and external management fees
(3) Net of investment expenses, year-to-date number reflected on a quarterly average basis
The decrease in the Aflac U.S. new money yield in 2025 was primarily due to lower short-term rates on floating rate assets. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily affected by internal reinsurance activity and net investment income. The following table presents a summary of operating results for Corporate and other for the years ended December 31.
Corporate and Other Summary of Operating Results
(In millions)
Net earned premiums
Net investment income (loss) (1)
Amortized hedge income
Adjusted net investment income
Other income
Total adjusted revenues
Benefits and claims:
Benefits and claims, excluding reserve remeasurement
Reserve remeasurement (gains) losses
Total benefits and claims, net
Adjusted expenses:
Interest expense
Other adjusted expenses
Total adjusted expenses
Total benefits and adjusted expenses
Pretax adjusted earnings
Percentage change over previous period:
Net earned premiums
Adjusted net investment income
Total adjusted revenues
Total benefits and claims, net
Total adjusted expenses
Pretax adjusted earnings
(1) The change in value of federal historic rehabilitation and solar investments in partnerships of $65 and $165 in 2025 and 2024, respectively, is included as a reduction to net investment income. Tax credits on these investments of $69 and $164 in 2025 and 2024, respectively, have been reported as an income tax benefit in the consolidated statements of earnings. See Note 1 of the Notes to the Consolidated Financial Statements for additional information on these investments.
In 2025, operating results compared to the previous year were as follows:
• Net earned premiums and total benefits and claims increased primarily due to higher internal reinsurance activity resulting from the transaction established in the fourth quarter of 2024. The increase in total benefits and claims was partially offset by $31 million of reserve remeasurement gains related to assumption updates in the third quarter of 2025, compared to reserve remeasurement gains of $20 million in the third quarter of 2024.
• Adjusted net investment income increased primarily due to $100 million from a lower volume of federal historic rehabilitation and solar tax credit investments, with offsetting tax benefits recognized as a corresponding lower income tax expense, and higher Aflac Re investment income of $46 million from a higher volume of assets as part of the reinsurance agreement established in the fourth quarter of 2024.
• Total adjusted revenues increased primarily due to the increases in adjusted net investment income and net earned premiums.
• Total adjusted expenses increased primarily due to $61 million from higher costs pertaining to business operations, including costs related to the ongoing response to the cybersecurity incident and legal and other professional services related thereto, higher interest expense of $54 million, and $35 million associated with internal reinsurance activity.
• Pretax adjusted earnings increased primarily due to the increase in total adjusted revenues, partially offset by the increases in total adjusted expenses and total benefits and claims.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Parent Company invests in partnerships that specialize in rehabilitating historic structures or the installation of solar equipment in order to receive federal historic rehabilitation and solar tax credits. These investments are classified as limited partnerships and included in other investments in the consolidated balance sheets. The change in value of each investment is reported as a reduction to net investment income. Tax credits generated by these investments are reported as an income tax benefit in the consolidated statements of earnings.
INVESTMENTS
The Company’s investment strategy utilizes disciplined asset and liability management while seeking long-term risk-adjusted investment returns and the delivery of stable income within regulatory and capital objectives, and preserving shareholder value.
In attempting to optimally balance these objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified portfolio of Japanese yen-denominated investment assets, a U.S. dollar-denominated investment portfolio hedged back to Japanese yen and a portfolio of unhedged U.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity securities and growth assets, including equity securities and alternative investments in limited partnerships. Aflac U.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans.
For additional information concerning the Company's investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial Statements.
The following tables detail investments by segment as of December 31.
Investment Securities by Segment
(In millions)
Aflac Japan
Aflac U.S.
Corporate and Other
Total
Fixed maturity securities available-for-sale, at
fair value
Fixed maturity securities held-to-maturity, at
amortized cost (1)
Equity securities
Commercial mortgage and other loans: (1)
Transitional real estate loans
Commercial mortgage loans
Middle market loans
Other loans
Other investments:
Policy loans
Short-term investments (2)
Limited partnerships
Real estate owned
Other
Investment in affiliate (3)
Total investments
Cash and cash equivalents
Total investments and cash
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re is eliminated in Corporate and other.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In millions)
Aflac Japan
Aflac U.S.
Corporate and Other
Total
Fixed maturity securities available-for-sale, at
fair value
Fixed maturity securities held-to-maturity, at
amortized cost (1)
Equity securities
Commercial mortgage and other loans: (1)
Transitional real estate loans
Commercial mortgage loans
Middle market loans
Other loans
Other investments:
Policy loans
Short-term investments (2)
Limited partnerships
Real estate owned
Other
Investment in affiliate (3)
Total investments
Cash and cash equivalents
Total investments and cash
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re is eliminated in Corporate and other.
The Company has invested in a variety of commercial mortgage loans (CMLs) and other loans including transitional real estate loans (TREs). The Company's TRE and CML investments are collateralized by commercial real estate, including some office properties. The Company considers these investments to be well diversified by geography and among property types. Further, the Company believes that the portfolio is generally well positioned with exposures concentrated in high quality underlying properties with institutional investors who are experienced in managing their assets during periods of market volatility.
While generally resilient, the Company's investments in TREs and CMLs have been affected by conditions in the commercial real estate market, with a greater impact on mortgages secured by office properties. The Company invested in certain TREs and CMLs that are currently in default of interest or maturity payments. The Company works with the affected borrowers to resolve specific situations through loan continuance with potential modifications, through loan sales, or through the process of foreclosure or deed in lieu of foreclosure. Since the third quarter of 2023, the Company has taken possession, through foreclosure or deed in lieu of foreclosure, of certain commercial real estate properties, which secured defaulted loans. Properties acquired by the Company through foreclosure and deed in lieu of foreclosure are reported as real estate owned (REO) in other investments in the Company's consolidated balance sheets.
In 2025, the Company completed foreclosure or deed in lieu of foreclosure on TREs collateralized with commercial real estate properties with an amortized cost of $257 million. As a result of the amortized cost of the TREs exceeding the estimated fair value of the collateral upon consummating the foreclosures or deed in lieu of foreclosure transactions, the Company recognized a net loss of $10 million in net investment gains (losses) for the year ended December 31, 2025.
In 2024, the Company completed foreclosure or deed in lieu of foreclosure on TREs collateralized with commercial real estate properties with an amortized cost of $502 million. As a result of the amortized cost of the TREs exceeding the estimated fair value of the collateral upon consummating the foreclosures or deed in lieu of foreclosure transactions, the Company recognized a net loss of $34 million in net investment gains (losses) for the year ended December 31, 2024.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company utilizes third-party asset managers to source, underwrite and manage each loan, as well as any resulting REO. The Company closely monitors the activities of these managers. In the event that a loan workout is necessary, the Company believes these external managers have the experience and resources to manage the process to maximize recovery.
The Company also monitors its commercial mortgage and other loan investments internally on an ongoing basis, including a review of loans' credit quality indicators and payment status as current, past due, restructured or under foreclosure. See Note 3 of the Notes to the Consolidated Financial Statements for further information concerning credit quality indicators, information on loans that are on nonaccrual status, and REO obtained through foreclosure or deed in lieu of foreclosure. See also Part I, Item 1A. Risk Factors for a discussion of risk factors associated with the Company's investments.
The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major rating organizations such as Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on the Company's internal analysis of such securities. When the ratings issued by the rating agencies differ, the Company utilizes the second lowest rating when three or more rating agency ratings are available or the lowest rating when only two rating agency ratings are available.
The distributions of fixed maturity securities the Company owns, by credit rating, as of December 31 were as follows:
Composition of Fixed Maturity Securities by Credit Rating
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
AAA
BBB
BB or lower
Total
As of December 31, 2025, the Company's direct and indirect exposure to securities in its investment portfolio that were guaranteed by third parties was immaterial both individually and in the aggregate.
The following table presents the 10 largest unrealized loss positions in the Company's portfolio as of December 31, 2025.
(In millions)
Credit
Rating
Amortized
Cost
Fair
Value
Unrealized Loss
Japan National Government
Urban Renaissance Agency
KLM Royal Dutch Airlines
JP Morgan Chase and Co.
Lubrizol Corporation
Mitsubishi Estate Co Ltd.
Tokyo Gas Co Ltd
Prologis LP
West Japan Railway Company
Japan Expressway Holding and Debt
Generally, declines in fair values can be a result of changes in interest rates, yen/dollar exchange rate, and changes in net spreads driven by a broad market move or a change in the issuer's underlying credit quality. The Company believes these issuers have the ability to continue making timely payments of principal and interest. See the Unrealized Investment Gains and Losses section in Note 3 of the Notes to the Consolidated Financial Statements for further discussions of unrealized losses related to the Company's investments.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Below-Investment-Grade Securities
The Company's portfolio of below-investment-grade securities includes fixed maturity securities purchased while the issuer was rated investment grade plus other loans and bonds invested in as part of an allocation to that segment of the market. The following is the Company's below-investment-grade exposure as of December 31.
Below-Investment-Grade Investments
(In millions)
Par
Value
Amortized
Cost (1)
Fair
Value
Unrealized
Gain
(Loss)
Investcorp Capital Limited
Hella KG Hueck and Co.
KLM Royal Dutch Airlines
Telecom Italia SpA
IKB Deutsche Industriebank AG
Amarok Parent LLC
CPI Property Group SA
Tralka Spa (Chadwick)
Hawaiian Electric Industries Inc.
Other Issuers
Subtotal (2)
High yield corporate bonds
Middle market loans
Grand Total
(1) Net of allowance for credit losses
(2) Securities initially purchased as investment grade, but have subsequently been downgraded to below investment grade
The Company maintains an allocation to higher yielding corporate bonds within the Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but the Company also purchased several that were rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance the Company's yield on invested assets and further diversify credit risk. All investments in this program must have a minimum rating at purchase of low BB using the Company's above described rating methodology and are managed by the Company's internal credit portfolio management team.
The Company invests in middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The objectives of this program include enhancing the yield on invested assets, achieving further diversification of credit risk, and mitigating the risk of rising interest rates and hedge costs through the acquisition of floating rate assets.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fixed Maturity Securities by Sector
The Company maintains diversification in investments by sector to avoid concentrations to any one sector, thus managing exposure risk. The following table shows the distribution of fixed maturities by sector classification as of December 31.
(In millions)
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Total
Government and agencies
Municipalities
Mortgage- and asset-backed securities
Public utilities
Electric
Natural Gas
Other
Sovereign and supranational
Banks/financial institutions
Banking
Insurance
Other
Other corporate
Basic Industry
Capital Goods
Communications
Consumer Cyclical
Consumer Non-Cyclical
Energy
Other
Technology
Transportation
Total fixed maturity securities
(1) Net of allowance for credit losses
Securities by Type of Issuance
The Company has investments in both publicly and privately issued securities. The Company's ability to sell either type of security is a function of overall market liquidity which is impacted by, among other things, the amount of outstanding securities of a particular issuer or issuance, trading history of the issue or issuer, overall market conditions, and idiosyncratic events affecting the specific issue or issuer.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table details investment securities by type of issuance as of December 31.
Investment Securities by Type of Issuance
(In millions)
Amortized
Cost (1)
Fair
Value
Amortized
Cost (1)
Fair
Value
Publicly issued securities:
Fixed maturity securities
Equity securities
Total publicly issued
Privately issued securities: (2)
Fixed maturity securities (3)
Equity securities
Total privately issued
Total investment securities
(1) Net of allowance for credit losses
(2) Primarily consists of securities owned by Aflac Japan
(3) Excludes Rule 144A securities
The following table details the Company's reverse dual-currency securities as of December 31.
Reverse Dual-Currency Securities (1)
(Amortized cost, in millions)
Privately issued reverse dual-currency securities
Publicly issued collateral structured as reverse dual-currency securities
Total reverse dual-currency securities
Reverse dual-currency securities as a percentage of total investment
securities
(1) Principal payments in Japanese yen and interest payments in U.S. dollars
Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds. Aflac Japan’s investments in Japanese yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing the Company to improve asset/liability matching and overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of the Company's notes.
HEDGING ACTIVITIES
The Company uses derivative contracts to hedge foreign currency exchange risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional information about market risk and the Company’s use of derivatives.
See Note 4 of the Notes to the Consolidated Financial Statements for:
• A description of the Company's derivatives, hedging strategies and underlying risk exposure.
• Information about the notional amount and fair market value of the Company's derivatives.
• Impact on earnings and other comprehensive income (loss) from various qualifying and non-qualifying hedging relationships.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Foreign Currency Exchange Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure to foreign currency exchange risk:
• Aflac Japan hedges U.S. dollar-denominated investments back to Japanese yen (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).
• Aflac Japan maintains certain unhedged U.S. dollar-denominated securities, which serve as an economic currency hedge of a portion of the Company's investment in Aflac Japan, while utilizing foreign currency options to mitigate against significant movements in the yen/dollar exchange rate (see Aflac Japan’s U.S. Dollar-Denominated Hedge Program below).
• Aflac Japan economically hedges the foreign currency exchange risk on certain of its investments that are denominated in other foreign currencies.
• The Parent Company designates Japanese yen-denominated liabilities (notes payable and loans) as non-derivative hedging instruments and designates certain foreign currency forwards and options as derivative hedges of the Company’s net investment in Aflac Japan ( see Enterprise Corporate Hedging Program below) .
• The Parent Company enters into forward and option contracts to protect the value of Aflac Japan in U.S. dollar terms by hedging foreign currency exchange risk related to dividend payments by Aflac Japan and reduce enterprise-wide hedge costs ( see Enterprise Corporate Hedging Program below ).
The following table presents metrics related to the Company's Foreign Currency Exchange Risk Hedge Program, including associated amortized hedge costs/income, for the years ended December 31. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.
Aflac Japan:
FX Forwards
FX forward notional at end of period (in billions) (1)
Amortized hedge income (cost) for period (in millions)
FX Options
FX option notional at the end of period (in billions) (1)
Amortized hedge income (cost) for period (in millions)
Corporate and other (Parent Company):
FX Forwards
FX forward notional at end of period (in billions) (1)
Amortized hedge income (cost) for period (in millions)
FX Options
FX option notional at the end of period (in billions) (1)
Amortized hedge income (cost) for period (in millions)
(1) Notional is reported net of any offsetting positions within Aflac Japan or the Parent Company, respectively.
Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in both U.S. and Japan interest rates, and the cross-currency basis. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors.
Aflac Japan’s U.S. Dollar-Denominated Hedge Program (U.S. Dollar Program)
Aflac Japan buys U.S. dollar-denominated investments, typically corporate bonds, and hedges them back to Japanese yen with foreign currency forwards and options to hedge foreign currency exchange risk. This economically creates Japanese yen assets that match Japanese yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan SMR calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes the U.S. dollar-denominated investments held by Aflac Japan as of December 31.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In millions)
Amortized
Cost (1)
Fair
Value
Amortized
Cost (1)
Fair
Value
Available-for-sale securities:
Fixed maturity securities
Equity securities
Commercial mortgage and other loans:
Transitional real estate loans (floating rate)
Commercial mortgage loans
Middle market loans (floating rate)
Other loans
Other investments
Total U.S. Dollar Program
Available-for-sale securities:
Fixed maturity securities - economically converted to yen
Total U.S. dollar-denominated investments in Aflac Japan
(1) Net of allowance for credit losses
The U.S. Dollar Program includes all U.S. dollar-denominated investments held by Aflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to Japanese yen as a result of a derivative in the consolidated VIE. The Company uses foreign currency forwards to hedge foreign currency exchange risk on certain U.S. dollar-denominated investments held by Aflac Japan and one-sided foreign currency put options to mitigate the risk of a decline in the value of U.S. dollar-denominated assets (in Japanese yen terms) related to extreme foreign exchange rate changes. From time to time, Aflac Japan also maintains a collar program on a portion of its U.S. Dollar Program to mitigate against more extreme moves in foreign exchange rates and therefore support SMR. As of December 31, 2025, none of the Company's foreign currency options hedging Aflac Japan's U.S. dollar-denominated assets were in-the-money.
Foreign currency derivatives used for hedging are periodically settled, which results in cash receipt or payment at inception, maturity or early termination. The following table presents the settlements associated with the Company's foreign currency derivatives used for hedging Aflac Japan’s U.S. dollar-denominated investments for the years ended December 31.
(In millions)
Net cash inflows (outflows)
In addition to the U.S. dollar Program, Aflac Japan utilizes foreign currency forwards to economically hedge the foreign currency exchange risk on certain of its variable-rate investments denominated in other foreign currencies. As of December 31, 2025, the Company had foreign currency forwards on other foreign currency-denominated investments with a fair value of $135 million.
Aflac Japan also utilizes foreign currency swaps to economically hedge the foreign currency exchange risk on certain of its fixed maturity securities denominated in other foreign currencies. As of December 31, 2025, the Company had foreign currency swaps on other foreign currency-denominated investments with a fair value of $48 million.
Enterprise Corporate Hedging Program
The Company has designated certain Japanese yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment in Aflac Japan. The Company's consolidated Japanese yen-denominated net asset position was partially hedged at $6.8 billion as of December 31, 2025, with hedging instruments comprised of $5.0 billion of Japanese yen-denominated debt and $1.8 billion of foreign currency forwards, compared with $5.9 billion as of December 31, 2024, with hedging instruments comprised of $4.1 billion of Japanese yen-denominated debt and $1.8 billion of foreign currency forwards.
The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment in Aflac Japan, the hedge is deemed to be effective, and the foreign currency exchange effect on the
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Japanese yen-denominated liabilities and the change in estimated fair value of the derivatives are included in unrealized foreign currency translation gains (losses) in the consolidated statements of comprehensive income (loss). The Company's net investment hedge was effective during the years ended December 31, 2025 and 2024, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements.
In order to economically mitigate risks associated with the enterprise-wide exposure to the Japanese yen and the level and volatility of hedge costs, the Parent Company enters into foreign currency forward and option contracts. By buying U.S. dollars and selling Japanese yen, the Parent Company is effectively lowering its overall economic exposure to the Japanese yen. In addition to reducing Japanese yen exposure from dividend payments by Aflac Japan to the Parent Company, this strategy also reduces enterprise-wide hedge costs. This activity is reported in Corporate and other. The Company continually evaluates the program’s efficacy.
As part of the Company’s internal reinsurance platform, Aflac Re enters into foreign currency forwards with the Parent Company, and may enter into such forwards with third parties, to economically manage the currency mismatch between Aflac Re's assets, which are mostly denominated in U.S. dollars, and liabilities, which are mostly denominated in Japanese yen, in order to support and optimize BMA capital requirements. For additional information on the Company's internal reinsurance platform, see Note 8 of the Notes to the Consolidated Financial Statements and the Liquidity and Capital Resources section of this MD&A.
For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A. Quantitative and Qualitative Disclosures about Market Risk, and Item 1A. specifically to the Risk Factors titled “The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate“ and “Lack of availability of acceptable Japanese yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity."
Interest Rate Risk Hedge Program
Aflac Japan and Aflac U.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with its U.S. dollar-denominated investments held by Aflac Japan, from time to time the Company utilizes interest rate swaptions.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on the Company's hedging activities.
POLICY LIABILITIES
The following table presents policy liabilities by segment and in total for the years ended December 31.
(In millions)
Japan segment:
Future policy benefits
Other policy liabilities
Total Japan policy liabilities
U.S. segment:
Future policy benefits
Other policy liabilities
Total U.S. policy liabilities
Consolidated:
Future policy benefits
Other policy liabilities
Total consolidated policy liabilities (1)
(1) The sum of the Japan and U.S. segments exceeds the total due to reinsurance and retrocession activity.
See Note 7 of the Notes to the Consolidated Financial Statements for additional information on the Company's policy liabilities.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
BENEFIT PLANS
Aflac Japan and Aflac U.S. have various benefit plans. For additional information on the Company's Japanese and U.S. plans, see Note 13 of the Notes to the Consolidated Financial Statements.
POLICYHOLDER PROTECTION
Policyholder Protection Corporation
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of the Life Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. In March 2022, Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC through March 2027. In March 2022, the LIPPC reached the required balance for the total life industry of ¥400 billion as specified by its Articles of Incorporation. As a result, additional contributions are not expected to be required unless the balance is reduced due to payments made by the LIPPC to the policyholders of insolvent insurers. Accordingly, Aflac Japan did not recognize an expense for LIPPC assessments for the years ended December 31, 2025 and 2024.
Guaranty Fund Assessments
Under U.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. See Note 15 of the Notes to the Consolidated Financial Statements for additional information on guaranty fund assessments. Guaranty fund assessments for the years ended December 31, 2025 and 2024 were immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to a strategy of utilizing debt in managing the Company's capital structure and cost of capital. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including:
• business investment and growth needs
• strategic growth objectives
• financial flexibility and obligations
• capital support for hedging activity
• a constantly evolving business and economic environment
• a balanced approach to capital allocation and deployment to shareholders
The governance framework supporting liquidity, capital, and leverage includes global senior management and board committees that review and approve all significant capital related decisions.
The Company remains committed to prudent liquidity and capital management. To provide a capital buffer and liquidity support at the holding company, the target minimum amount for the Parent Company is approximately $1.0 billion.
Aflac Japan and Aflac U.S. generate cash flows from their operations and provide the primary sources of liquidity to the Parent Company through management fees and dividends, with Aflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock, interest on its outstanding indebtedness and operating expenses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the amounts provided to the Parent Company for the years ended December 31.
Liquidity Provided by Subsidiaries to Parent Company
(In millions)
Management fees paid by subsidiaries
Dividends declared or paid by subsidiaries
The following table details Aflac Japan remittances, which are included in the totals above, for the years ended December 31.
Aflac Japan Remittances
(In millions of dollars and billions of yen)
Aflac Japan management fees paid to Parent Company
Aflac Japan dividends declared or paid to Parent Company (in U.S. dollars)
Aflac Japan dividends declared or paid to Parent Company (in yen)
The Company maintains liquidity at the Parent Company for risk management purposes and to support certain derivative activity. Further, the Company plans to continue to maintain a population of unhedged U.S. dollar-denominated investments held by Aflac Japan and to consider whether the amount of such investments should be increased or decreased relative to the Company’s view of economic equity surplus in Aflac Japan in light of potentially rising hedge costs and other factors. See the Hedging Activities subsection of this MD&A for additional information.
The Company believes that its balance of cash and cash equivalents and cash generated by operations will be sufficient to satisfy both its short-term and long-term cash requirements and plans for cash, including material cash requirements from known contractual obligations and returning capital to shareholders through share repurchases and dividends.
In addition to cash and cash equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. In September 2024, the Parent Company filed a shelf registration statement with the SEC that allows the Company to issue an indefinite amount of debt securities, in one or more series, from time to time until September 2027. The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. The Company was in compliance with all of the covenants of its notes payable and lines of credit at December 31, 2025.
In August 2025, the Parent Company expanded its sources of liquidity by entering into two separate facility agreements, as follows:
1. A 10-year facility agreement with a Delaware trust (2035 Trust) that provides the Parent Company with the right to issue and sell to the 2035 Trust from time to time up to $1.0 billion of senior notes due August 2035.
2. A 30-year facility agreement with a Delaware trust (2055 Trust) that provides the Parent Company the right to issue and sell to the 2055 Trust from time to time up to $1.0 billion of senior notes due August 2055.
As of December 31, 2025, the Parent Company had no senior note issuances under these facility agreements.
For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.
As part of enterprise-wide capital management and optimization, the Company also utilizes the intercompany reinsurance platform to execute internal reinsurance transactions with Aflac Re. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the estimated payments of the Company's material cash requirements from known contractual obligations as of December 31, 2025. The Company translated its Japanese yen-denominated obligations using the December 31, 2025 foreign exchange rate. Actual future payments as reported in U.S. dollars will fluctuate with changes in the yen/dollar exchange rate.
(In millions)
Total
Liability (1)
Total
Payments
Short-term Payments
Long-term Payments
Future policy benefits liability (Note 7) (2)
Other policyholders' funds (Note 7) (3)
Long-term debt – principal (Note 9)
Long-term debt – interest (Note 9)
Cash collateral on loaned securities (Note 3)
Operating service agreements (Note 15)
Operating lease obligations (Note 9)
Finance lease obligations (Note 9)
Total contractual obligations
(1) Liability amounts are those reported on the consolidated balance sheet as of December 31, 2025.
(2) The estimated payments reflect future estimated cash payments to be made to policyholders and others for future policy benefits and certain related expenses using assumptions aligned with the Company's experience on policy persistency, mortality, morbidity and other assumptions. These cash outflows are undiscounted with respect to interest, and future premium payments received from policyholders are not included. Therefore, the sum of the cash outflows exceeds the corresponding liability amount. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates.
(3) These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows exceeds the corresponding liability amount.
For additional information on the Company's major contractual obligations, see the applicable Note in the Notes to the Consolidated Financial Statements as indicated in the line items in the table above.
The Company's consolidated financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. As of December 31, 2025, the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. The Company has not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for additional information on the Company's securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes and the Risk Factors entitled, "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable Japanese yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity," the Company is not aware of any trend, demand, commitment, event or uncertainty that would reasonably result in its liquidity increasing or decreasing by a material amount.
Consolidated Cash Flows
The Company consistently generates positive cash flows from operations, and has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments in order to meet short-term cash needs.
The Company translates cash flows for Aflac Japan's yen-denominated items into U.S. dollars using weighted-average foreign exchange rates. In years when the Japanese yen weakens, translating Japanese yen into U.S. dollars causes fewer U.S. dollars to be reported. When the Japanese yen strengthens, translating Japanese yen into U.S. dollars causes more U.S. dollars to be reported.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following table summarizes consolidated cash flows by activity for the years ended December 31.
(In millions)
Operating activities
Investing activities
Financing activities
Exchange effect on cash and cash equivalents
Net change in cash and cash equivalents
Operating Activities
The principal cash inflows for the Company's insurance activities come from insurance premiums and investment income. The principal cash outflows are the result of policy claims, operating expenses, income tax, as well as interest expense. As a result of policyholder aging, claims payments are expected to gradually increase over the life of a policy. Therefore, future policy benefit reserves are accumulated in the early years of a policy and are designed to help fund future claims payments.
The Company expects its future cash flows from premiums and investment portfolios to be sufficient to meet its cash needs for benefits and expenses. Consolidated cash flow from operations decreased 5.6% in 2025, compared with 2024.
Investing Activities
The Company's investment objectives provide for liquidity primarily through the purchase of publicly traded investment-grade fixed maturity securities. Prudent portfolio management dictates that the Company attempts to match the duration of its assets with the duration of its liabilities. Currently, when the Company's fixed maturity securities mature, the proceeds may be reinvested at a yield below that required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the long-term nature of the Company's business and its strong cash flows provide the Company with the ability to minimize the effect of mismatched durations and/or yields identified by various asset adequacy analyses. From time to time or when market opportunities arise, the Company disposes of selected fixed maturity securities that are available-for-sale to improve the duration matching of assets and liabilities, improve future investment yields, and/or rebalance its portfolio. As a result, dispositions before maturity can vary significantly from year to year.
As part of its overall corporate strategy, the Company has committed up to $400 million to Aflac Ventures, LLC (Aflac Ventures), as opportunities emerge. As of December 31, 2025, of the $400 million committed, approximately $297 million has been deployed. Aflac Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures) which is reported in Corporate and other. The central mission of Aflac Global Ventures is to support the organic growth and business development needs of Aflac Japan and Aflac U.S. with an emphasis on digital applications designed to improve the customer experience, gain efficiencies, and develop new markets in an effort to enhance and defend long-term shareholder value. Investments are included in equity securities or other investments in the consolidated balance sheets.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac U.S. obtains low-cost investment funding from FHLB supported by acceptable forms of collateral pledged by Aflac U.S. In 2025, Aflac U.S. borrowed and repaid $777 million under this program. As of December 31, 2025, Aflac U.S. had outstanding borrowings of $334 million reported in its balance sheet.
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
Financing Activities
Cash flows from financing activities consist primarily of share repurchases, dividends to shareholders and, from time to time, debt issuances and redemptions.
See Note 9 of the Notes to the Consolidated Financial Statements for information on debt issuances and redemptions.
Cash returned to shareholders through treasury stock purchases and dividends was $4.7 billion in 2025, compared with $3.9 billion in 2024.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following tables present a summary of treasury stock activity during the years ended December 31.
Treasury Stock Purchased
(In millions of dollars and thousands of shares)
Treasury stock purchases
Number of shares purchased:
Share repurchase program
Other
Total shares purchased
Treasury Stock Issued
(In millions of dollars and thousands of shares)
Stock issued from treasury:
Cash financing
Noncash financing
Total stock issued from treasury
Number of shares issued
In August 2025, the Company's board of directors authorized the purchase of an additional 100 million shares of its common stock. As of December 31, 2025, a remaining balance of 114.3 million shares of the Company's common stock were available for purchase under share repurchase authorizations by its board of directors. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.
Cash dividends paid to shareholders in 2025 of $2.32 per share increased 16.0% over 2024. The following table presents the dividend activity for the years ended December 31.
Dividends Paid to Shareholders
(In millions)
Dividends paid in cash
Dividends through issuance of treasury shares
Total dividends to shareholders
In November 2025, the board of directors announced a 5.2% increase in the quarterly cash dividend, effective with the first quarter of 2026. The first quarter 2026 cash dividend of $.61 per share is payable on March 2, 2026, to shareholders of record at the close of business on February 18, 2026.
Regulatory Restrictions
Aflac Japan
Aflac Japan is required to meet certain financial criteria as governed by the Companies Act of Japan in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at Aflac Japan is defined as total equity excluding common stock and capital reserves but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR. Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes; therefore, the Company continues to evaluate alternatives for reducing this sensitivity, including the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event of a rapid change in market risk conditions causing SMR to decline, or in the event of reduced liquidity, the Company has a senior unsecured revolving credit facility in the amount of ¥100 billion as a contingency plan. See Note 9 of the Notes to the Consolidated Financial Statements for additional information. Additionally, subject to market conditions, the Company expects that it could take action to enter into derivatives on unhedged U.S. dollar-denominated investments with foreign currency options or forwards or execute additional reinsurance transactions.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company has already undertaken various measures to mitigate the sensitivity of Aflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be reclassified as available-for-sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. For U.S. GAAP, PRM investments are categorized as available-for-sale. The Company also uses foreign currency derivatives to hedge a portion of its U.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively.
Aflac Japan's SMR remains high and reflects a strong capital and surplus position. As of December 31, 2025, Aflac Japan's SMR was 995%, compared with 1,221% at December 31, 2024. The Company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings.
The FSA will implement an economic value-based solvency regime based on the ICS for insurance companies in Japan. The initial report on the ESR will be issued as of March 31, 2026, which is Aflac Japan's 2025 fiscal year-end. As of December 31, 2025, Aflac Japan estimated the ESR to be above the Company's target range of 170% to 230%.
Aflac U.S.
A life insurance company’s statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company’s state of domicile. Statutory accounting rules are different from U.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC’s RBC formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer’s operations.
The combined RBC ratio for Aflac U.S. as of December 31, 2025 was estimated to be 570%, compared with 677% as of December 31, 2024. The Company calculates its combined RBC ratio to include all U.S. regulated life insurance entities as if a single combined U.S. RBC entity net of intercompany items related to capital resources and risk.
Aflac, CAIC and TOIC are domiciled in Nebraska and are subject to its regulations. The NDOI imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. Under Nebraska insurance law, prior approval of the NDOI is required for dividend distributions that exceed the greater of the net income from operations, which excludes net investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2026 in excess of $664 million would be considered extraordinary and require such approval. Similar laws apply in New York, the domiciliary jurisdiction of Aflac New York.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Corporate and Other
Aflac Re is licensed by the BMA as a long-term insurer and is subject to the Bermuda Insurance Act of 1978 (Bermuda Insurance Act). Aflac Re is required to file annual and quarterly returns for its Bermuda Solvency Capital Requirement (BSCR) which utilizes an Economic Balance Sheet (EBS) framework to determine Aflac Re’s Enhanced Capital Requirement (ECR). Aflac Re is also subject to a Minimum Margin of Solvency (MSM) related to its statutory financial statements. The MSM is equal to the greater of $8,000,000; 2% of the first $500,000,000 of assets under management plus 1.5% of the amount by which assets exceed $500,000,000; or 25% of ECR.
Under the EBS framework, Aflac Re is required to value assets equal to U.S. GAAP fair values, and insurance reserves are valued using technical provisions which consist of a best estimate liability plus a risk margin. The best estimate liability can be calculated by applying the standard approach or, with regulatory approval, the scenario-based approach. The standard approach uses discount rates for insurance reserves as prescribed by the BMA. The scenario-based approach uses a discount rate based on the yield of eligible assets owned by the insurer as determined using a series of prescribed stress scenarios. At December 31, 2025 and 2024, Aflac Re was in compliance with the ECR and MSM requirements.
Under the Bermuda Insurance Act, Aflac Re is prohibited from paying dividends in an amount that exceeds 25% of the prior year's statutory capital and surplus without an affidavit stating that Aflac Re will continue to meet its solvency margin. Further, Aflac Re may not reduce its total statutory capital by 15% or more without prior regulatory approval. Additionally, Aflac Re is not permitted to pay any dividends that would cause Aflac Re to fail to meet its minimum capital requirements.
Other
For information regarding commitments and contingent liabilities, see Note 15 of the Notes to the Consolidated Financial Statements.
Additional Information
Investors should note that the Company announces material financial information in its SEC filings, press releases and public conference calls. In accordance with SEC guidance, the Company may also use the Investor Relations section of the Company's website (http://investors.aflac.com) to communicate with investors about the Company. It is possible that the financial and other information the Company posts there could be deemed to be material information. The information on the Company's website is not part of this document. Further, the Company's references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP. These principles are established primarily by the FASB. In this MD&A, references to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that the Company deems to be most critical to an understanding of its results of operations and financial condition are those related to the valuation of investments and derivatives, deferred policy acquisition costs (DAC), liabilities for future policy benefits (LFPB), and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management’s analyses and judgments. Calculations of DAC and the LFPB require the use of estimates based on actuarial valuation techniques. The application of these critical accounting estimates determines the values at which 92% of the Company's assets and 74% of its liabilities are reported as of December 31, 2025, and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Valuation of Investments, Including Derivatives
The Company's investments, primarily consisting of fixed maturity and equity securities, include both publicly issued and privately issued securities. For publicly issued securities, the Company determines the fair values from quoted market prices readily available from public exchange markets and price quotes and valuations from third-party pricing vendors. For the majority of privately issued securities and derivatives associated with VIEs within the Company's investment portfolio, the Company utilizes valuation models developed by a third-party pricing vendor to determine fair values. These models and associated processes and controls are executed by Company personnel. For the remaining privately issued securities, the Company uses non-binding price quotes from outside brokers and fair values provided by its external managers. The Company's valuation model for private placements explicitly incorporates currency basis swap adjustments (market observable data) to assumed interest rate curves where appropriate.
The Company estimates the fair values of its securities on a monthly basis. The Company monitors the estimated fair values obtained from its pricing vendors, external managers, and brokers for consistency from month to month, while considering current market conditions. The Company also periodically discusses with its pricing brokers and vendors the pricing techniques they use to monitor the consistency of their approach and to periodically assess the appropriateness of the valuation level assigned to the values obtained from them. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the provider. Additionally, the Company may compare the inputs to relevant market indices and other performance measurements. Based on management's analysis, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data and information. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, foreign currency volatility, and interest rate volatility.
The Company estimates an allowance for credit losses on investments measured at amortized cost including held-to-maturity securities, loan receivables and certain loan commitments on a quarterly basis. For collateral dependent financial assets, including loans where foreclosure is probable, the allowance for credit losses is based on the fair value of the underlying collateral. For the Company’s available-for-sale securities, the Company evaluates an estimate for credit losses only when the fair value of the available-for-sale security is below its amortized cost basis.
The Company’s approach to estimating an allowance for credit losses is complex and incorporates significant judgments. In addition to a security, an asset class, or issuer-specific credit fundamentals, it considers past events, current economic conditions and forecasts of future economic conditions. The Company's estimates are revised as conditions change and new information becomes available.
For additional information, see the tabular disclosure entitled "Sensitivity of Fair Values of Financial Instruments to Interest Rate Change" in Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Notes 1, 3, 4 and 5 of the Notes to the Consolidated Financial Statements.
Deferred Policy Acquisition Costs and Future Policy Benefits
Substantially all of the supplemental health and life insurance policies the Company issues are classified as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period. However, the Company may adjust premiums for supplemental health policies issued in the U.S. within prescribed guidelines and with the approval of state insurance regulatory authorities.
Insurance premiums for most of the Company's health and life insurance policies are recognized as earned premiums over the premium-paying periods of the contracts when due from policyholders. When earned premiums are reported, the related amounts of benefits and expenses are charged against such revenues. This association is accomplished by means of annual increases or decreases to the LFPB and the deferral and subsequent amortization of policy acquisition costs.
Premiums from the Company's products with limited-pay features are collected over a significantly shorter period than the contract term (i.e., the period during which benefits are provided). Premiums for these products are recognized as earned premiums over the premium-paying periods when due from policyholders. Any gross premium in excess of the net premium is deferred and reported as a deferred profit liability, a component of the LFPB, which is subsequently amortized in net earned premiums such that profits are recognized in a constant relationship with insurance in force. Benefits are recorded as an expense when they are incurred and LFPB is recorded when premiums are recognized using the net premium method.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Deferred Policy Acquisition Costs
Amortization of DAC is computed using the same contract groupings (also referred to as cohorts) and mortality and termination assumptions that are used in computing the LFPB. These assumptions are reviewed and updated at least annually. The effects of changes in assumptions are recognized prospectively over the remaining contract term as a revision of the future amortization pattern, while current period amortization is calculated based on the actual experience during the quarter. For additional information, see Notes 1 and 6 of the Notes to the Consolidated Financial Statements.
Future Policy Benefits
The Company's LFPB is determined in accordance with applicable guidelines as defined under U.S. GAAP and Actuarial Standards of Practice and represent claims that are expected to occur in the future and incurred claims. Incurred claims represent claims in the process of payment as well as an estimate of those claims that have been incurred but have not yet been reported to the Company. LFPB is determined using the net level premium method. The LFPB is calculated using assumptions and estimates including, (1) cash flow assumptions (mortality, morbidity, and termination, also referred to as lapses), (2) expense assumptions, and (3) discount rates. The assumptions and estimates that the Company uses depend on its judgment regarding the likelihood of future events and are inherently uncertain.
Cash flow assumptions are established at policy inception and are evaluated each quarter to determine if an update is needed. Actual experience is reflected in the calculation of future policy benefits each quarter, and changes in the liability due to actual experience are included in reserve remeasurement (gains) losses in the consolidated statements of earnings.
To facilitate a more detailed review of cash flow assumptions, experience studies are performed annually during the third quarter. Changes in cash flow assumptions are the result of applying the updated best estimate assumptions as of the beginning of the reporting period and are included as a cumulative catch-up adjustment in reserve remeasurement (gains) losses in the consolidated statements of earnings.
Expense assumptions are established at policy inception, determined for each issue-year cohort as a percentage of paid claims. These expense assumptions are locked in and remain unchanged over the term of the insurance policy.
Discount rates used to calculate net premiums are locked in at policy inception and represent the basis to recognize interest expense accreted on insurance reserves included in benefits and claims, excluding reserve remeasurement in the consolidated statements of earnings. These l ocked-in discount rates are determined separately for each issue-year cohort as a single discount rate that reflects the duration characteristics of the corresponding insurance contracts and will remain unchanged after the calendar year of issue.
Discount rates used to measure the carrying value of the LFPB in the consolidated balance sheets are updated each reporting period, and the differences between the liability balances calculated using the locked-in discount rates and the updated discount rates is included in the effect of changes in discount rate assumptions in accumulated other comprehensive income (loss).
The Company's discount rate methodology involves constructing a current discount rate curve separately for discounting cash flows used to calculate the Japan and U.S. LFPB. This methodology is designed to prioritize observable inputs based on market data available in the local debt markets where the respective policies were issued in the currency in which the policies are denominated. For the discount rates applicable to tenors for which the single-A debt market is not liquid or there is little or no observable market data, the Company uses various estimation techniques consistent with the fair value guidance in ASC 820 - Fair Value Measurement, which include, but are not limited to: (i) for tenors where there is less observable market data and/or the observable market data is available for similar instruments, estimating tenor-specific single-A credit spreads and applying them to risk-free government rates; (ii) for tenors where there is very limited or no observable single-A or similar market data, interpolation and extrapolation techniques.
If interest rates decreased by 100 basis points, the Company's LFPB balance as of December 31, 2025 would increase by $7.4 billion, assuming all other factors remain constant. Likewise, if interest rates increased by 100 basis points, the Company's LFPB balance as of December 31, 2025 would decrease by $5.9 billion, assuming all other factors remain constant.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
If morbidity assumptions decreased by 100 basis points, the Company's LFPB balance as of December 31, 2025 would decrease by $299 million, assuming all other factors remain constant. Likewise, if morbidity assumptions increased by 100 basis points, the Company's LFPB balance as of December 31, 2025 would increase by $303 million, assuming all other factors remain constant.
For additional information on future policy benefits, see Notes 1 and 7 of the Notes to the Consolidated Financial Statements.
Income Taxes
Income tax provisions are generally based on pretax earnings reported for financial statement purposes, which differ from those amounts used in preparing the Company's income tax returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the Company expects the temporary differences to reverse. The evaluation of a tax position in accordance with U.S. GAAP is a two-step process. Under the first step, the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination by taxing authorities. The second step is measurement, whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. The determination of a valuation allowance for deferred tax assets requires management to make certain judgments and assumptions.
In evaluating the ability to recover deferred tax assets, the Company's management considers all available evidence, including taxable income in open carry back years, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income exclusive of reversing temporary differences and carryforwards, future taxable temporary difference reversals, and prudent and feasible tax planning strategies. In the event the Company determines it is not more likely than not that it will be able to realize all or part of its deferred tax assets in the future, a valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Future economic conditions and market volatility, including increases in interest rates or widening credit spreads, can adversely impact the Company’s tax planning strategies and in particular the Company’s ability to utilize tax benefits on previously recognized capital losses. The Company's judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions.
An increase or decrease in the Company's effective tax rate by one percentage point would have resulted in an increase or decrease in the Company's 2025 income tax expense of $50 million.
For additional information on income taxes, see Note 10 of the Notes to the Consolidated Financial Statements.
New Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
