Zacks Small Cap Institutional Research



| Aflac Inc. |(AFL – NYSE) |$45.41 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: 1Q18 Earnings Results

Previous Ed.: 4Q17 Earnings Update, Mar 26, 2018

Flash Update

On Apr 25, 2018, Aflac reported first-quarter 2018 results. The company reported earnings of $1.05 per share surpassed which the Zacks Consensus Estimate by 8.25% and increased 25% year over year. Results buoyed on overall favorable pretax margins and a lower effective tax rate as a result of tax reform.

A stronger yen/dollar exchange rate aided earnings per share by 3 cents in the first quarter.

Total revenues for the first quarter increased 2.9% year over year to $5.5 billion but missed the Zacks Consensus Estimate by 0.5%.

Strong Quarterly Segment Results

Aflac Japan

Total revenues increased 2.7% year over year to $3.9 billion, led by a 5.6% increase in net investment income and a 2.2% rise in premium income. Pretax operating earnings increased 6.4% to $818 million.

Net investment income gained from an increase in investment yield on U.S. dollar investments.

In Japan, third sector (cancer and medical) sales were down 10.4% in yen terms. This was due to the cessation of new cancer sales ahead of the introduction of a new cancer product in April, which was launched after branch conversion.

Aflac U.S.

Total revenues increased 2.2% year over year to $1.6 billion, led by a 2.7% increase in premium income to $1.4 billion and 0.6% higher annualized premium sales. Net investment income decreased 1.7% to $175 million, due to the drawdown of excess capital in the United States.

The pretax operating earnings for the U.S. segment was $337 million, up 8.7%.

Share Repurchase Update

In the first quarter of 2018, the company purchased 6.6 million shares worth $296 million.

At the end of March, the company had 91.4 million shares available for purchase under its share repurchase authorization.

Solid Financial Position

Total investments and cash as of Mar 31, 2018 were $132.7 billion, up 10% year over year.

At the end of the first quarter of 2018, total assets were $147.4 billion, up 10.3% year over year.

Shareholders' equity was $24.3 billion, as of Mar 31, 2018, up 19.7 year over year.

In the first quarter, the annualized return on average shareholders' equity excluding the impact of foreign currency was 15.5%, up 30 basis points year over year.

2018 Guidance Reiterated

The company reiterated (split-adjusted) 2018 EPS guidance of $3.72-3.88 assuming the average exchange rate in 2017 of 112.16 yen to the dollar. It also guided second-quarter earnings in the range of 91 cents to $1.05 per share.

For 2018, the company anticipates that in its Japan business, third sector earned premium will continue its steady growth in the 2% to 3% range, reflecting Aflac's stable sales and high persistency.

Coming to its U.S. segment, for the full year, Aflac anticipates growth in earned premium within 2% to 3% and new annualized premium sales growth within 3% to 5%, with production skewed toward the fourth quarter.

The company expects to buy back shares worth $1.1-$1.4 billion in 2018.

Aflac also expects to increase overall investment in the U.S. segment by nearly $250 million over three to five years.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON AFL

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Aflac Incorporated is a supplemental health insurer in Japan and the U.S. that provides insurance coverage to more than 50 million people. In Japan, it provides cancer and other supplemental medical coverages. In the U.S., it underwrites voluntary insurance products such as accident/disability and cancer coverage at the worksite.

Almost 27% of the firms in the Digest group covering the stock had a positive outlook on Aflac, while 64% rendered a neutral stance and again 9% of the firms rated the stock negatively. 9 out of the 11 firms, covering the stock, provided target prices ranging from $42.00 (2% downside from the current price) to $53.00 (20% upside from the current price).

Neutral or equivalent outlook (64%; 7/11 firms): The firms note that Aflac’s top line remains sufficiently exposed to a challenging operating environment, primarily in Japan. The persistent low interest rate environment has compelled the company to lower sales of first-sector (life insurance) products in Japan.

However, the restriction on sale of first-sector products which carries higher premium is further expected to suppress top-line growth in the region. The company intends to further improve its product portfolio with new, value-added coverage that complement its third-sector portfolio in Japan and reflect the needs of the aging population. However, the firms are cautious that the company faces challenges in Japan with a weak macro environment including low interest rates.

These firms also note that hedge costs have continued to increase recently with market volatility and speculation on DOJ and Federal Reserve actions. The cost of hedging can vary wildly based on interest rate differentials between the United States and Japan, the types and duration of derivatives used, and the amounts that are actually hedged.

Management expects sales to decline in the high single-digits during the first half of 2018 as new product introductions are pushed into the second half following the conversion of the Japan branch into a subsidiary. However, a cautious firm believes that sales might recover quickly in the latter half of the year and the division will experience low-single digit premium growth. The conversion of Aflac Japan is expected to be completed at the beginning of the new Japanese fiscal year, i.e., in early April.

According to firm with neutral outlook, management has chosen to increase its unhedged dollar portfolio

with respect to the dollar-denominated investment portfolio to balance long-term currency exposure with improved yields. Aflac will be funding a $2 billion floating rate first mortgage loan portfolio on middle market commercial properties.

Along with the tax reform benefit and operating cash flows, a cautious firm expects $2.1 billion to $2.4 billion of capital to be deployed in 2019.

Positive or equivalent outlook (27%; 3/11 firms): These firms view favorably the company’s organizational restructuring, pursuant to the conversion of its Aflac Japan branch into a subsidiary of Aflac. The conversion has enhanced Aflac's flexibility by de-stacking the branch and converting it to an indirect subsidiary of Aflac and providing greater legal and regulatory transparency. The branch conversion resulted in an accounting-related reduction of Aflac Japan's solvency margin ratio (SMR) of approximately 100 points. While this conversion resulted in a significant amount of capital being removed from Aflac's U.S. subsidiary, it also led to a substantial reduction of risk. It also improved cash flows and capital management within the organizational structure.

These firms believe that Aflac continues to benefit from favorable trends in the U.S. and business mix changes in Japan, which are driving the higher pre-tax margins.

These firms expect Aflac to capitalize on its dominant position in the U.S. market and strong franchise in Japan, together with high policy persistency for higher returns. The company is also expected to reap the benefits of return from scale. The firms believe that the company has a decent business mix that will neutralize the effect of declining interest rates.

These firms believe that Aflac continues to benefit from favorable trends in the U.S. and business mix changes in Japan, which are driving the higher pre-tax margins. With the recovering U.S. market, these firms expect the company to exploit the scarcely-invaded supplemental health market.

Negative or equivalent outlook (9%; 1/11 firms)

Mar 26, 2018

Overview [Note: Only highlighted material has been changed.]

Key positive and negative factors as identified by the firms are as follows:

|Key Positive Arguments |Key Negative Arguments |

| | |

|Aflac is one of the strongest franchises, with a solid track record of |The company’s exposure to low interest rate in Japan has affected its |

|delivering earnings growth targets. |earnings. |

|Third-sector sales should continue to boost sales given the inclusion of |The company’s is faced with high hedging costs due to intense market |

|new traditional products. |volatility. |

|Active share repurchase program and high returns on capital through |Aflac operates in numerous markets and consequently, faces competition |

|increased dividend. |from a wide range of insurers, financial advisors, banks, broker/dealers, |

| |and asset managers. Some of these companies have more competitive pricing,|

| |better claims-paying ratings or greater financial resources that could |

| |hinder Aflac’s market share. |

Georgia-based Aflac is a general business holding and management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its principal business is supplemental health and life insurance, which is marketed and administered primarily through its subsidiary – American Family Life Assurance Company of Columbus (Aflac). Aflac operates in the United States (Aflac U.S.) and has a branch in Japan (Aflac Japan). Aflac Japan sells cancer plans, care plans and general medical expense plans. Aflac U.S. sells cancer plans and various types of health insurance, including accident and disability, fixed-benefit dental, personal sickness and hospital indemnity and short-term disability plans.

For more information on the company, please visit its website .

Note: Aflac’s fiscal year references coincide with the calendar year.

Mar 26, 2018

Long-Term Growth [Note: Only highlighted material has been changed.]

Aflac’s strong brand name franchise and solid business model have enabled it to grow earnings considerably faster than other life and health insurers, while generating return on equities (ROE) that are higher than average. Its diverse and productive distribution, product innovation, and customized, high-quality service sets it apart in the market.

Despite a steady decline in the sales growth rate since 2002, Aflac continues to grow in terms of earnings. One strong source of earnings growth is margin expansion in the company’s Japanese operations, which accounts of about 80% of the total earnings, driven by continued improvement in benefit ratios. Some firms also believe that capital deployment, risk hedging strategies and stabilization in the portfolio yield should drive EPS growth.

The bullish firms believe that the long-term outlook for the company is positive for the U.S. market, from improving economic conditions, wider market presence of supplemental products and industry-wide penetration of the same.

Over the long term, the firms view Aflac's position in the Japanese market to be strong, largely due to its broad and diverse distribution base, better pricing, high policy persistency and superior scale, which should help it sustain more returns in Japan. The company’s huge number of in-force medical policies and cancer riders should also benefit from favorable claims experience and lower hospitalization costs as the Japanese government tries to manage healthcare spending. Overall, the firms view Aflac to be rewarding in the long run with superior franchise, greater scale, and high policy persistency in Japan. The firms also believe that due to its leadership position in the domestic supplemental products market in the U. S. the company has significant long-term growth potential.

With the tax reform, Aflac anticipates generating nearly $250 million of stable incremental capital annually. In addition, there will be $250 million of further investments in the U.S. platform over the next three to five years, especially in the course of technology and digital business, training programs and employee benefits.

Mar 26, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

|Rating Distribution |

|Positive |27% |

|Neutral |64%↑ |

|Negative |9%↓ |

|Avg. Target Price |$45.94↓ |

|Digest High |$53.00↓ |

|Digest Low |$42.00↓ |

|No. of Analysts with Target Price |9/11 |

Risks to the target price include worsening European credit defaults, poor economic conditions in the U.S., currency exchange-related problems, increasing cancer-related claims, increasing benefit ratio, disparity in asset-liability and investment yields.

Recent Events [Note: Only highlighted material has been changed.]

On Feb 13, 2018, Aflac announced that its board of directors has declared a two-for-one stock split of the company's common stock in the form of a 100% stock dividend payable on Mar 16, 2018 to shareholders on record as of the close of business on Mar 2, 2018.

On Jan 31, 2018, Aflac’s fourth-quarter 2017 earnings of $1.60 per share surpassed the Zacks Consensus Estimate by 3.2% and increased 11.1% year over year. The upside was backed by solid performance of its U.S. segment.

For 2017, operating earnings came at $6.81 per share. The figure not only beat the Zacks Consensus Estimate of $6.76 but also improved 4.8% year over year, excluding the negative impact of 10 cents per share from a weaker yen.

Share Repurchase Update

In the fourth quarter of 2017, the company purchased 3.9 million shares worth $331 million.

In 2017, it bought back 17.8 million of its common shares worth $1.35 billion.

At the end of 2017, the company had 49 million worth board approved share repurchase authorization remaining.

Dividend Update

Aflac’s board of directors announced a 15.6% hike in the quarterly cash dividend. The increased dividend of 52 cents per share will be paid on Mar 1, 2018, to shareholders on record as of Feb 21, 2018.

Financial Update

Total investments and cash as of Dec 31, 2017 were $123.6 billion, up 6.3% from the end of 2016.

At the end of 2017, total assets were $137.2 billion, up 5.7% from the 2016 year-end.

Shareholders' equity was $24.4 billion, as of Dec 31, 2017, up 19% from year-end 2016.

In the fourth quarter, the annualized return on average shareholders' equity excluding the impact of foreign currency was 13.3%, down 10 basis points (bps) year over year.

Guidance

The company expects to buy back shares worth $1.1-$1.4 billion in 2018.

Aflac also expects to increase overall investment in the U.S. segment by nearly $250 million over three to five years.

Revenues [Note: Only highlighted material has been changed.]

Total revenues for the fourth quarter declined 10% year over year to $5.4 billion and missed the Zacks Consensus Estimate by 0.3%.

Segment Details

Aflac Japan

Total revenues declined 5.9% year over year to $3.7 billion.

.

Premium income, net of reinsurance agreements, decreased 6.7% year over year to $3.1 billion. The downside happened as growth in third sector premium was more than offset by an expected reduction in first sector premium.

Net investment income, net of amortized hedge costs, decreased 1.1% to $559 million due to the foreign currency impact of U.S. dollar-denominated investments.

Guidance

In 2018, the company expects third sector earned premium of its Japan segment to continue its steady growth in the 2% to 3% range. This reflects Aflac's stable sales and high persistency in Japan.

Aflac U.S.

Total revenues increased 2.1% year over year to $1.6 billion.

The company’s U.S. segment reported a 2.2% year-over-year increase in premium income to $1.4 billion. Net investment income increased 2.8% to $182 million.

Guidance

In 2018, Aflac anticipates growth in earned premium to lie within 2% to 3% and new annualized premium sales growth to range within 3% to 5%.

Margins and Operating Income [Note: Only highlighted material has been changed.]

Net earnings were $5.95 in the fourth quarter compared with $1.84 in the year-ago quarter. The upside was primarily backed by an estimated $1.7 billion or $4.30 per share benefit from the recent U.S. tax reform.

Japan

Pretax operating earnings increased 5.1% to $747 million.

Aflac U.S.

The pretax operating earnings for the U.S. segment was $288 million, up 9.9% due to a lower year-over-year expense ratio. 

Earnings per Share [Note: Only highlighted material has been changed.]

Aflac’s fourth-quarter 2017 earnings of $1.60 per share surpassed the Zacks Consensus Estimate by 3.2% and increased 11.1% year over year. The upside was backed by solid performance of its U.S. segment.

For 2017, operating earnings came at $6.81 per share. The figure not only beat the Zacks Consensus Estimate of $6.76 but also improved 4.8% year over year, excluding the negative impact of 10 cents per share from a weaker yen.

Guidance

The company expects to generate earnings per share for 2018 within $7.45 to $7.75.

Outlook

A cautious firm raised 2018 operating EPS estimate to reflect a lower effective tax rate.

A bullish firm also upped projection for 2018 and 2019 EPS to reflect a lower tax rate.

Another cautious firm increased its 2018 EPS estimate to reflect a stronger yen.

A firm with positive outlook raised estimates for 2018 EPS expecting an increase in U.S. expense ratio due to accelerated investment initiatives post tax reform.

|Research Analyst |Sapna Bagaria |

|Copy Editor | |

|Content Ed. |Sapna Bagaria |

|Lead Analyst |Sapna Bagaria |

|QCA |Tanuka De |

| of brokers reported/Total brokers | |

|Reason for Update |1Q18 Flash |

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Zacks Investment Research Page 8

April 25, 2018

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