Max Kristian Broden
Executive Vice President, Chief Finance Officer and Treasurer at Aflac
Thank you, Fred. Let me begin my comments with a review of our Q2 performance, with a focus on our core capital and earnings drivers have developed. For the second quarter, adjusted earnings per share increased 24.2% to $1.59. The slightly weaker yen-dollar exchange rate did not have a significant impact on adjusted earnings per diluted share. This strong performance for the quarter was largely driven by lower claims utilization due to the pandemic, especially in the U.S. In addition, variable investment income ran $112 million above our long-term return expectations. Adjusted book value per share, including foreign currency translation gains and losses, grew 20.5%. And the adjusted ROE, excluding foreign currency impact, was a strong 17%, which is a significant spread to our cost of capital.
Starting with our Japan segment, total earned premium for the quarter declined 3.8%, reflecting the impact of first sector policies reaching paid-up status, while earned premium for our third sector products was down 2.3% due to recent low sales volumes. Japan's total benefit ratio came in at 66.9% for the quarter, down 290 basis points year-over-year. And the third sector benefit ratio was 56.5%, down 305 basis points year-over-year. We experienced a slightly higher-than-normal IBNR release in our third sector block as experience continues to come in favorable relative to initial reserving. This quarter, the IBNR release was primarily due to pandemic conditions, constraining utilization since second quarter of 2020 and year-to-date. Although claims activity have begun to rebound, it remains below longer-term normalized levels. Auto claim reporting lags require up to a year to mature the data.
And now with more than a year's worth of pandemic data, our estimates are more refined, which has led to increased IBNR releases. Persistency was down 10 basis points, yet remained strong at 94.7%. Our adjusted expense ratio in Japan was 20.8%, up 80 basis points year-over-year. We continue our technology-related investments to convert Aflac Japan to a paperless company, which also includes higher system maintenance expenses. Additional telework expenses also added to the higher expense ratio in the quarter. Adjusted net investment income increased 27.4% in yen terms, primarily driven by favorable returns on our growing alternatives portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed rate portfolio. The pretax margin for Japan in the quarter was 26.5%, up 450 basis points year-over-year, which was a very favorable result for the quarter.
This quarter's strong financial results leads us to expect the full year benefit ratio for Japan to be at the lower end of the 3-year guidance range of 68.5% to 71% given at Fab. And the pretax margin to be at the higher end of the 20.5% to 22.5% range. Turning to U.S. results, net earned premium was down 3.4% due to weaker sales results. Persistency improved 180 basis points to 80.1%. 63 basis points of the elevated persistency in both the second quarter of this year and the prior year can be explained by emergency orders. So there was no net impact for the quarter year-over-year. 80 basis points of improved persistency in the quarter is attributed to lower sales, as first year lapse rates are roughly twice total in-force lapse rates. Another 30 basis points of improved persistency is due to conservation efforts, and the remainder largely comes from improved experience.
Our total benefit ratio came in lower than expected at 43.5% or 80 basis points lower than Q2 2020, which, itself, was heavily impacted by the initial pandemic. Lower claims utilization impact our estimates for incurred claims as data matures over the course of the year. As our data matures, we increased our reliance on raw data, and with a year of pandemic data behind us, we reduced our IBNR to reflect the lower utilization. This quarter, IBNR releases amounted to 5.6 percentage points impact on the benefit ratio, which leads to an underlying benefit ratio, excluding IBNR releases, of 49.1%. We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders. For the full year, we now expect our benefit ratio to be in the range of 45% to 48% versus our original guidance of 48% to 51%.
Our expense ratio in the U.S. was 36.9%, up 160 basis points year-over-year but with a lot of moving parts. Weaker sales performance negatively impacts revenue, however, the impact to our expense ratio is offset by lower DAC and commission expense. Higher advertising spend increased the expense ratio by 60 basis points. Our continued buildout of growth initiatives, group life and disability, network dental and vision and direct to consumer contributed to a 170 basis point increase to the ratio. These strategic growth investments are largely offset by our efforts to lower core operating expenses as we strive towards being the low-cost producer in the voluntary benefits space. Net-net, despite a lot of moving parts, Q2 expenses are tracking according to plan. In the quarter, we also incurred $5.5 million of integration and transition expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the U.S. was up 9.9%, mainly driven by favorable variable investment income in the quarter. Profitability in the U.S. segment was very strong with a pretax margin of 25.4%, with a low benefit ratio as the core driver. With the first half now in the books, we are increasing our pretax margin expectation for the full year. Initial expectations were for us to be towards the low end of 16% to 19%. We now expect to end up slightly above the range indicated at fab. In our Corporate segment, we recorded a pretax loss of $76 million, as adjusted net investment income was $45 million lower than last year due to low interest rates at the short end of the yield curve and amortization of certain tax credit investments, which amounted to $30 million this quarter held at the corporate level. Under U.S. GAAP, we recognized a negative impact to corporate NII, but this is offset by a lower effective tax rate for the enterprise.
This results in a level of reported volatility to our Corporate segment, but the economic returns on these investments are above our cost of equity capital. To date, these investments are performing well and in line with expectations. Our capital position remains strong, and we ended the quarter with an SMR above 900% in Japan and an RBC of approximately 600% in Aflac Columbus. Unencumbered holding company liquidity stood at $4.4 billion, which was $2 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments. Leverage, which includes our sustainability bond, remains at a comfortable 22.8%, in the middle of our leverage corridor of 20% to 25%. In the quarter, we repurchased $500 million of our own stock and paid dividends of $223 million, offering good relative IRR on these capital deployments. We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital to drive the strong risk-adjusted ROE, with a meaningful spread to our cost of capital. With that, I'll hand it over to David to begin the Q&A.