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AFLAC INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Edgar Glimpses
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements.Aflac Incorporated (the Parent Company) and its subsidiaries (collectively with the Parent Company, the Company) desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by Company officials in communications with the financial community and contained in documents filed with theSecurities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as the ones listed below or similar words, as well as specific projections of future results, generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements. • expect • anticipate • believe • goal • objective • may • should • estimate • intends • projects • will • assumes • potential • target • outlook
The Company cautions readers that the following factors, in addition to other
factors mentioned from time to time, could cause actual results to differ
materially from those contemplated by the forward-looking statements:
•difficult conditions in global capital markets and the economy, including those caused by COVID-19 •defaults and credit downgrades of investments •exposure to significant interest rate risk •concentration of business inJapan •limited availability of acceptable yen-denominated investments •foreign currency fluctuations in the yen/dollar exchange rate •differing judgments applied to investment valuations •significant valuation judgments in determination of expected credit losses recorded on the Company's investments •decreases in the Company's financial strength or debt ratings •decline in creditworthiness of other financial institutions •concentration of the Company's investments in any particular single-issuer or sector •the effects of COVID-19 and its variants (both known and emerging), and any resulting economic effects and government interventions, on the Company's business and financial results •ability to attract and retain qualified sales associates, brokers, employees, and distribution partners •deviations in actual experience from pricing and reserving assumptions •ability to continue to develop and implement improvements in information technology systems •interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems •subsidiaries' ability to pay dividends to the Parent Company •inherent limitations to risk management policies and procedures •the level of sales ofAflac Japan products in theJapan Post channel •tax rates applicable to the Company may change •failure to comply with restrictions on policyholder privacy and information security •extensive regulation and changes in law or regulation by governmental authorities •competitive environment and ability to anticipate and respond to market trends •catastrophic events, including, but not limited to, as a result of climate change, epidemics, pandemics (such as the coronavirus COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events •ability to protect the Aflac brand and the Company's reputation •ability to effectively manage key executive succession •changes in accounting standards •level and outcome of litigation •allegations or determinations of worker misclassification inthe United States 70 -------------------------------------------------------------------------------- MD&A OVERVIEW MD&A is intended to inform the reader about matters affecting the financial condition and results of operations ofAflac Incorporated and its subsidiaries for the nine-month periods endedSeptember 30, 2021 and 2020, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in the Company's annual report on Form 10-K for the year endedDecember 31, 2020 (2020 Annual Report). In this MD&A, amounts may not foot due to rounding. For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. This MD&A is divided into the following sections: Page Executive Summary 72 Results of Operations 76 Investments 91 Hedging Activities 96 Deferred Policy Acquisition Costs 100 Policy Liabilities 100 Benefit Plans 100 Policyholder Protection 100 Off-Balance Sheet Arrangements 100 Liquidity and Capital Resources 101 Critical Accounting Estimates 106 71
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EXECUTIVE SUMMARY
Company Overview
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the
Company) provide financial protection to more than 50 million people worldwide.
The Company's principal business is supplemental health and life insurance
products with the goal to provide customers the best value in supplemental
insurance products in the United States (U.S. ) and Japan. The Company's
insurance business consists of two reporting segments: Aflac Japan and Aflac
U.S. The Parent Company's primary insurance subsidiaries are Aflac Life
Insurance Japan Ltd. in Japan (Aflac Japan ) and American Family Life Assurance
Company of Columbus (Aflac); Continental American Insurance Company (CAIC),
branded as Aflac Group Insurance (AGI); American Family Life Assurance Company
of New York (Aflac New York); Tier One Insurance Company (TOIC) and Argus Dental
& Vision, Inc. (Argus), which provides a platform for Aflac Dental and Vision in
the U.S. (collectively, Aflac U.S. ).
COVID-19
The impact of the COVID-19 global pandemic on the Company continues to evolve, and its future effects remain uncertain. At the onset of the pandemic in 2020, the majority of the Company's employees inJapan and theU.S. shifted to remote working environments, with returns to office undertaken as warranted by local conditions. BothAflac Japan and AflacU.S. have taken measures to address employee health and safety and increase employees' ability to develop and maintain more flexible working conditions, and operations remained stable throughout the first nine months of 2021. The Company also took prompt action at the beginning of the pandemic to strengthen its capital and liquidity position, and continues to monitor its investment portfolios to adjust to market conditions, including the continuing recovery and inflation expectations. BothAflac Japan and AflacU.S. have accelerated investments in digital initiatives to improve productivity, efficiency and customer service over the long term. In the three-month period endedSeptember 30, 2021 , sales forAflac Japan , in yen terms, were essentially flat, compared to the same period in 2020.Aflac Japan sales in the nine-month period endedSeptember 30, 2021 increased 10.3%, compared to the same period in 2020, reflecting the launch of a new medical product inJanuary 2021 and favorable comparisons due to pandemic conditions in 2020. In the three- and nine-month periods endedSeptember 30, 2021 , sales for AflacU.S. increased 35.0% and 15.5%, respectively, compared to the same periods in 2020, reflecting increased sales activity as a result of the ongoing economic reopening in theU.S. and favorable comparisons due to pandemic conditions in 2020. Pandemic-related claims and associated reserve increases in both Japan and theU.S. have not materially impacted financial results in the first nine months of 2021 and were more than offset by a reduction in claims related to non-COVID-19 medical needs. The pandemic's impact on economic conditions have contributed to sales declines, pressuring premium growth rates. This has been partially offset by lower lapse rates in theU.S. The Company has not experienced material realized losses or impairments and credit losses associated with the pandemic. The Company continues to monitor the effects and risks of COVID-19, including its variants, to assess its impact on economic conditions inJapan and theU.S. and on the Company's business, financial condition, results of operations, liquidity and capital position. Those impacts may cause changes to estimates of future earnings, capital deployment, regulatory capital position, segment dividend payout ratios and other measures the Company provided under 2021 Outlook in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the 2020 Annual Report.
The Company's efforts and other developments are outlined below.
•Liquidity and Capital Resources
The Company entered the crisis in a strong capital and liquidity position, having maintained capital ratios inJapan and theU.S. at a level designed to absorb a degree of market volatility. The Company has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments. The Company remains committed to prudent liquidity and capital management. In terms of repurchases, the Company remains in the market and is being tactical in its approach to repurchasing its stock. The Company believes that this approach will allow it to increase or decrease repurchase activity depending on how the pandemic and market conditions evolve.
The Company is committed to maintaining a strong
ratio (SMR) and Aflac
72 --------------------------------------------------------------------------------
The Company regularly evaluates adjustments to its foreign currency-hedging
program in
maintaining a strong SMR, including changes in the level of hedging employed
with the
Resources section of this MD&A for additional information regarding other
potential sources of liquidity and capital resources.
•Investment Portfolio
The Company's investment portfolio was well-positioned entering the crisis, and the Company continues to follow its strategy of investing primarily in fixed maturity securities to generate a reliable stream of income. Fundamental credit analysis and de-risking activity in prior periods contributed to the current quality of the Company's investments. Economic and market conditions have continued to improve throughout most of 2021. The continued path of the recovery remains uncertain given the potential longer term impacts of the pandemic. This includes structural changes in employment patterns which are impacting multiple sectors of the economy and contributing to disruptions in the global supply chain, triggering price increases across several areas of the broader economy. Supply shortages, upward pressure on wages to attract employees and higher commodity prices have all driven near-term increases in inflation. It remains unclear whether the current elevated levels of inflation are transitory or more lasting, making the ultimate impact on the global economy and markets uncertain, with resulting uncertainty as to the impact on the Company's investments.
•Crisis Management
The Company established command centers inJapan and theU.S. to monitor and communicate pandemic developments to the Company's leadership. The command centers participate in regular updates to the Company's leadership, including government and regulatory actions, operations, employee policies and conditions and distribution status. In addition, updates on cybersecurity are provided, including with respect to the Company's remote workforce. Moreover, the Company's financial leadership group has been meeting more frequently since the onset of the pandemic and has focused on the capital markets, capital and liquidity position, stress testing and any defensive actions that may be necessary.
•Aflac Japan initiatives
Aflac Japan has maintained certain measures implemented at the onset of the pandemic, such as restrictions on travel, working from home, staggered work hours and limitations on the number of personnel attending in-person meetings. As ofSeptember 30, 2021 ,Aflac Japan had approximately 57% of its workforce working remotely.Aflac Japan continues to evaluate return to the office measures; however, throughout the pandemic,Aflac Japan has evaluated its operational capabilities and anticipates that the remote configuration could remain for an indefinite period of time without materially impacting operations. InJune 2021 , in response to theGovernment of Japan's initiative to accelerate vaccinations,Aflac Japan began offering workplace vaccinations to employees, temporary workers and contractors, including employee co-resident spouses, children and relatives who wish to be vaccinated.Aflac Japan also introduced a special paid leave system for employees who wish to receive a COVID-19 vaccination.Aflac Japan remains focused on generating new business to existing and prospective customers through direct mail and digital methods.Aflac Japan has also accelerated investments in digital and paperless initiatives designed to increase long term productivity, efficiency, customer service and business continuity.
•Aflac
The Parent Company and AflacU.S. continue to maintain certain employee and worksite safety measures that were first implemented at the onset of the pandemic, as well as protocols to limit in-person meetings applicable toU.S. employees. As ofSeptember 30, 2021 , over 80% ofU.S. employees were working remotely. The Company's return to worksite forU.S. based employees is expected to be a phased approach that begins in the first quarter of 2022, subject to factors including vaccination rates, the return schedule of school systems and the availability of child care, the number of COVID-19 cases and the COVID-19 replication rate, the emergence of new variants and hospital capacity in areas of theU.S. where the Company has significant operations. For those employees who are working in one of the Company's worksites, safety protocols have been put in place that align with or exceed those recommended by theCenters for Disease Control and Prevention (CDC ). After the return to worksite, the Parent Company and AflacU.S. expect to adopt a workforce model comprised of a mix of full time 73 --------------------------------------------------------------------------------
office employees, full time remote employees, and employees who will split their
time between office and remote work.
taken for its employees. These include a commitment to cover the costs of
COVID-19 testing and extended paid leave in certain circumstances.
AflacU.S. policy sales, enrollment and agent recruiting functions are highly dependent upon face-to-face interaction between independent agents and brokers with prospective and new customers and agents. Throughout the pandemic, opportunities for such interaction have been significantly reduced by reactions to the pandemic, such as social distancing, shelter in place orders and work from home initiatives. Notwithstanding the general improvement of economic conditions to date in 2021, the impact of pandemic conditions on AflacU.S. sales remains subject to uncertainty as the effects of varying levels of vaccination and the emergence of COVID-19 variants continue to develop. AflacU.S. has accelerated investments in digital initiatives designed to improve long term productivity, efficiency and customer service. Further, AflacU.S. is in its third year of the build-out of the Consumer Markets business for the digital direct-to-consumer sale of insurance and sales made through that platform have continued to grow.
•Major government initiatives
Government authorities inJapan and theU.S. have implemented several initiatives in response to the COVID-19 pandemic, including actions designed to mitigate the adverse health effects of the virus and those designed to provide broad-based relief and economic support to all aspects of the economy. InJanuary 2021 , in response to the spread of COVID-19, theGovernment of Japan issued a state of emergency declaration covering 11 prefectures, includingTokyo andOsaka . The declaration was lifted in stages in areas where improvements in infection rates and lower healthcare system utilization were observed, and it was lifted in all areas onMarch 21, 2021 . OnApril 23, 2021 , due to the continued spread of COVID-19, theGovernment of Japan issued a state of emergency declaration covering four prefectures, includingTokyo andOsaka , fromApril 25, 2021 untilMay 11, 2021 . This declaration was expanded to ten prefectures and extended untilJune 20, 2021 , due to the emergence of COVID-19 variants and the continued increase in infections and impacts on the healthcare system. OnJune 20, 2021 , the declaration was lifted in nine prefectures, includingTokyo andOsaka , and extended only inOkinawa untilJuly 11 . OnJuly 8, 2021 , due to a rise in COVID-19 infections, theGovernment of Japan issued a new state of emergency declaration forTokyo for the period fromJuly 12, 2021 toAugust 22, 2021 . The state of emergency declaration forOkinawa was also further extended toAugust 22, 2021 . Subsequently, theGovernment of Japan further extended the state of emergency declaration to 19 prefectures, and extended the emergency declaration period untilSeptember 30, 2021 . OnSeptember 30, 2021 , the state of emergency declaration was fully lifted by theGovernment of Japan . In addition to the restrictions imposed by these emergency declarations, certain local governments continue to request a reduction of the onsite workforce and restraint from non-urgent traveling. TheFinancial Services Agency (FSA) has requested that financial service providers inJapan respond appropriately while continuing their essential operations. This request includes insurance companies, which have been asked to continue essential operations such as benefits and claims payment, including policyholder loans. Moreover, following the expansion of the impact of COVID-19, the FSA requested insurance companies to consider flexible interpretation and application of insurance policy provisions and measures required for products from the standpoint of protecting policyholders. In accordance with the FSA's request,Aflac Life Insurance Japan Ltd. implemented a measure to pay accidental death benefits and accidental serious disability benefits under its accidental death benefit rider in cases of death or specified serious disabilities from COVID-19. Throughout the pandemic,Aflac Japan has also followed the guidance of the FSA in terms of treating customers with care, ensuring ease and timeliness of claims payments and extended coverage for temporary medical facilities and telemedicine in certain circumstances, and waiver of interest on certain policyholder loans. InJanuary 2021 , the grace period on premium payments was extended toJuly 31, 2021 for the policyholders who live in areas under the state of emergency and inFebruary 2021 , the scope was expanded to all regions inJapan . Furthermore, in response to the state of emergency declaration inApril 2021 , inMay 2021 , inJuly 2021 andAugust 2021 , the grace period on premium payments was extended to October, 31, 2021,November 30, 2021 ,January 31, 2022 andFebruary 28, 2022 , respectively.Aflac Japan will continue to provide flexibility for policyholders who live in areas under the state of emergency, including extending the payment grace period for a maximum of six months from the state of emergency declaration. Policyholders are required to file for relief through this extension. 74 -------------------------------------------------------------------------------- During 2021, in response to fluctuations in COVID-19 infection rates and the declaration of a state of emergency by theGovernment of Japan ,Aflac Japan has responded to requests of theGovernment of Japan and local governments while also giving priority to customer service quality and business continuity. In theU.S. , initial statewide shelter in place or stay at home orders were lifted although restrictions such as social distancing, mask or vaccination requirements exist in some localities. ASeptember 9, 2021 executive order and relatedSeptember 24, 2021 guidance issued by theBiden Administration will require COVID-19 vaccination of certain federal contractor employees, except in certain limited circumstances, as well as masking and social distancing measures applicable to such employees and workplace visitors.The Company is reviewing the order and guidance to determine their potential impact on the Company's operations. Throughout the pandemic, AflacU.S. has taken steps to comply with COVID-19-related directives issued by state regulatory authorities, including those requiring or requesting premium grace periods. As ofSeptember 30, 2021 , premium grace periods remained in effect in three states andPuerto Rico . AflacU.S. experienced some increase in policy lapses in the first nine months of 2021 in certain states where premium grace periods expired. If the premium grace periods continue to expire throughout 2021, AflacU.S. would expect an increase in lapse rates, and a decrease in corresponding persistency rates.
The
providing broad-based relief and economic support to all aspects of the economy.
The American Rescue Plan (ARP) Act of 2021 was signed into law inMarch 2021 and was designed to provide approximately$1.9 trillion in financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities. Among other measures, the ARP Act provides funding for vaccines and testing; for states, tribal and local governments; and for small businesses. The ARP Act also expands eligibility for the Paycheck Protection Program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted inMarch 2020 . Performance Highlights Total revenues were$5.2 billion in the third quarter of 2021, compared with$5.7 billion in the third quarter of 2020. Net earnings were$888 million , or$1.32 per diluted share in the third quarter of 2021, compared with$2.5 billion , or$3.44 per diluted share, in the third quarter of 2020. Net earnings in the third quarter of 2020 reflects a$1.4 billion benefit primarily from the release of valuation allowances on deferred foreign tax credits, which were allowed due toU.S. tax regulations released inSeptember 2020 . Total revenues were$16.7 billion in the first nine months of 2021, compared with$16.2 billion in the first nine months of 2020. Net earnings were$3.3 billion , or$4.82 per diluted share in the first nine months of 2021, compared with$3.8 billion , or$5.31 per diluted share, in the first nine months of 2020. Net earnings in the first nine months of 2020 reflects a$1.4 billion benefit primarily from the release of valuation allowances on deferred foreign tax credits, which were allowed due toU.S. tax regulations released inSeptember 2020 . Results in the third quarter of 2021 included pretax net investment losses of$171 million , compared with pretax net investment gains of$108 million in the third quarter of 2020. Net investment losses in the third quarter of 2021 included a decrease in credit loss allowances of$1 million ;$39 million of net losses from certain derivative and foreign currency gains or losses;$119 million of net losses on equity securities; and$14 million of net losses from sales and redemptions. Results in the first nine months of 2021 included pretax net investment gains of$224 million , compared with pretax net investment losses of$525 million in the first nine months of 2020. Net investment gains in the first nine months of 2021 included a decrease in credit loss allowances of$35 million ;$226 million of net gains from certain derivative and foreign currency gains or losses;$17 million of net losses on equity securities; and$20 million of net losses from sales and redemptions. The average yen/dollar exchange rate(1) for the three-month period endedSeptember 30, 2021 was 110.11, or 3.5% weaker than the average yen/dollar exchange rate(1) of 106.23 for the same period in 2020. The average yen/dollar exchange rate(1) for the nine-month period endedSeptember 30, 2021 was 108.58, or .9% weaker than the average yen/dollar exchange rate(1) of 107.63 for the same period in 2020. 75 -------------------------------------------------------------------------------- Adjusted earnings(2) in the third quarter of 2021 were$1.0 billion , or$1.53 per diluted share, compared with$994 million , or$1.39 per diluted share, in the third quarter of 2020. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.02 . Adjusted earnings(2) in the first nine months of 2021 were$3.2 billion , or$4.65 per diluted share, compared with$2.8 billion , or$3.88 per diluted share, in the first nine months of 2020. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.01 . Total investments and cash atSeptember 30, 2021 were$146.0 billion , compared with$146.1 billion atSeptember 30, 2020 . In the first nine months of 2021,Aflac Incorporated repurchased$1.7 billion , or 32.2 million of its common shares. AtSeptember 30, 2021 , the Company had 67.0 million remaining shares authorized for repurchase. Shareholders' equity was$33.6 billion , or$50.62 per share, atSeptember 30, 2021 , compared with$32.5 billion , or$46.16 per share, atSeptember 30, 2020 . Shareholders' equity atSeptember 30, 2021 included a net unrealized gain on investment securities and derivatives of$9.7 billion , compared with a net unrealized gain of$9.5 billion atSeptember 30, 2020 . Shareholders' equity atSeptember 30, 2021 also included an unrealized foreign currency translation loss of$1.8 billion , compared with an unrealized foreign currency translation loss of$1.3 billion atSeptember 30, 2020 . The annualized return on average shareholders' equity in the third quarter of 2021 was 10.6%. Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was$25.9 billion , or$39.06 per share atSeptember 30, 2021 , compared with$24.6 billion , or$34.91 per share, atSeptember 30, 2020 . The annualized adjusted return on equity (ROE) excluding foreign currency impact(2) in the third quarter of 2021 was 16.2%.(1) Yen /U.S. dollar exchange rates are based on the publishedMUFG 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. 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 withUnited 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 ofAflac 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 yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while 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 yen and never converted into dollars but translated into dollars forU.S. GAAP reporting purposes, which results in foreign currency impact to earnings, cash flows and book value on aU.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 on book value and the currency-neutral operating performance over time. The average yen/dollar exchange rate is based on the publishedMUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
The Company defines the non-
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 cannot be predicted or that are outside management's control. Adjusted revenues areU.S. GAAP total 76 -------------------------------------------------------------------------------- revenues excluding adjusted net investment gains and losses. Adjusted expenses areU.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring 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 comparableU.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 cash flows 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 cash flows 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 comparableU.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 exchange risks in the Company's Japan segment or in the Corporate and Other segment. 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 term of the hedge. 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 comparableU.S. GAAP financial measure for amortized hedge costs/ income. •Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency 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 inJapan 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) intoU.S. dollars. The most comparableU.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 theU.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on theU.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 as they exclude AOCI, which fluctuates due to market movements that are outside management's control. The most comparableU.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 return on equity excluding foreign currency impact is adjusted earnings excluding the current period foreign currency impact divided by average shareholders' equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparableU.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders' equity. •U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact onU.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considersU.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency 77 --------------------------------------------------------------------------------
changes on the Aflac Japan segment results, which are outside management's
control. The most comparable
dollar-denominated investment income excluding foreign currency impact is the
corresponding net investment income amount from the
investments translated to yen.
The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparableU.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively. Reconciliation of Net Earnings to Adjusted Earnings(1)
In Millions Per Diluted Share In Millions Per Diluted Share
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Net earnings $ 888 $ 2,456 $ 1.32 $ 3.44 $ 3,286 $ 3,826 $ 4.82 $ 5.31
Items impacting net earnings:
Adjusted net investment (gains)
losses (2) 172 (117) .26 (.16) (216) 497 (.32) .69
Other and non-recurring (income)
loss 8 1 .01 .00 67 16 .10 .02
Income tax (benefit) expense on
items excluded from adjusted
earnings (37) 72 (.06) .10 32 (125) .05 (.17)
Tax valuation allowance
release (3) 0 (1,418) .00 (1.99) 0 (1,418) .00 (1.97)
Adjusted earnings 1,031 994 1.53 1.39 3,169 2,797 4.65 3.88
Current period foreign currency
impact (4) 14 N/A .02 N/A 8 N/A .01 N/A
Adjusted earnings excluding
current period foreign currency
impact $ 1,045 $ 994 $ 1.56 $ 1.39 $ 3,177 $ 2,797 $ 4.66 $ 3.88
(1) Amounts may not foot due to rounding.
(2) See reconciliation of net investment (gains) losses to adjusted net
investment (gains) losses below
(3) One-time tax benefit recognized in the third quarter of 2020 representing
the release of valuation allowances on deferred foreign tax credits due to new
tax regulations.
(4) Prior period foreign currency impact reflected as "N/A" to isolate change
for current period only.
Reconciling Items
Net Investment Gains and Losses
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment
(Gains) Losses(1)
Three Months Ended Nine Months Ended September
September 30, 30,
(In millions) 2021 2020 2021 2020
Net investment (gains) losses $ 171 $ (108) $ (224) $ 525
Items impacting net investment (gains) losses:
Amortized hedge costs (20) (51) (55) (155)
Amortized hedge income 13 22 45 78
Net interest cash flows from derivatives
associated
with certain investment strategies (6) 7 (23) 7
Interest rate component of the change in fair
value
of foreign currency swaps on notes payable 14 13 41 43
Adjusted net investment (gains) losses $ 172 $
(117)
(1) Amounts may not foot due to rounding.
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 (ALM) 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
78
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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.
Securities Transactions, Credit Losses and Changes in the Fair Value of
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 fixed maturity securities, available-for-sale fixed maturity 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 exchange risk onU.S. dollar-denominated investments inAflac Japan's portfolio, 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 yen and hedge the Company's
long term exposure to a weakening yen
•cross-currency interest rate swaps, also referred to as foreign currency swaps,
associated with certain senior notes and subordinated debentures
•foreign currency swaps that are associated with VIE bond purchase commitments, and investments in special-purpose entities, including VIEs where the Company is the primary beneficiary
•interest rate swaps used to economically hedge interest rate fluctuations in
certain variable-rate investments
•interest rate swaptions used to hedge changes in the fair value associated with
interest rate fluctuations for certain
available-for-sale fixed-maturity securities
•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 remeasurement associated with changes in the foreign currency 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
TheU.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 withU.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings. 79 -------------------------------------------------------------------------------- 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 theU.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. Other items excluded from adjusted earnings included integration costs related to the Company's acquisition ofZurich North America's U.S. Corporate Life and Pensions business; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These integration costs amounted to$8 million and$20 million for the three- and nine-month periods endedSeptember 30, 2021 , respectively. 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. InMay 2021 , the Parent Company used a portion of the net proceeds from itsApril 2021 issuance of various series of senior notes to redeem$700 million of the its 3.625% senior notes dueJune 2023 . The pretax expense due to the early redemption of these notes was$48 million . InJanuary 2020 , the Parent Company used the net proceeds from senior notes issued inDecember 2019 to redeem$350 million of its 4.00% senior notes dueFebruary 2022 . The pretax expense due to the early redemption of these notes was$15 million .
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 20.2% for the three-month period endedSeptember 30, 2021 , compared with (112.9)% for the same period in 2020. The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 19.7% for the nine-month period endedSeptember 30, 2021 , compared with (30.0)% for the same period in 2020. In 2021, the combined effective tax rate differs from theU.S. statutory rate primarily due to new tax regulations released in the third quarter of 2020 and historic and solar tax credits. In 2020, the combined effective tax rate differs from theU.S. statutory rate primarily due to the release of certain valuation allowances established on the Company's deferred foreign tax credit benefits. The release of these valuation allowances was a result of the issuance of Final and Proposed Regulations issued by theU.S. Treasury and Internal Revenue Service onSeptember 29, 2020 , and resulted in a one-time income tax benefit of$1.4 billion in the third quarter of 2020. For additional information, see Note 10 of the Notes to the Consolidated Financial Statements and the Critical Accounting Estimates - Income Taxes section of the MD&A in the 2020 Annual Report. The Company expects that its effective tax rate for future periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in theU.S. and in foreign jurisdictions. See risk factor entitled "Tax rates applicable to the Company may change" in the 2020 Annual Report for more information.
Foreign Currency Translation
Aflac Japan's premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen.Aflac Japan purchases yen-denominated assets andU.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated toU.S. dollars using a weighted average Japanese yen/U.S. dollar foreign exchange rate, except realized gains and losses on security transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated toU.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate. RESULTS OF OPERATIONS BY SEGMENTU.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 AflacU.S. Aflac Japan is the principal contributor to consolidated earnings. Businesses that are not individually reportable, such as the Parent Company, asset management subsidiaries and other business activities, including reinsurance retrocession activities, are included in the Corporate and other segment. See the Item 1. Business section of the 2020 Annual Report for a summary of each segment's products and distribution channels. 80 --------------------------------------------------------------------------------
Consistent with
earnings is the Company's
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 •Average Weekly Producer For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidatedU.S. GAAP results and additional information. 81 -------------------------------------------------------------------------------- AFLAC JAPAN SEGMENT Aflac Japan Pretax Adjusted Earnings Changes inAflac 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 forAflac Japan . Aflac Japan Summary of Operating Results Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2021 2020 2021 2020 Net premium income$ 2,934
Net investment income:
Yen
317 331 960972 U.S. dollar -denominated investment income 465 383 1,355 1,122 Net investment income 783 714 2,315 2,094
Amortized hedge costs related to certain foreign currency
exposure
management strategies 20 51 55 155
Adjusted net investment income 763 663 2,260 1,939
Other income (loss) 10 11 32 32
Total adjusted revenues 3,707 3,842 11,337 11,447
Benefits and claims, net 1,938 2,259 6,072 6,651
Adjusted expenses:
Amortization of deferred policy acquisition costs 154 151 496 479
Insurance commissions 175 185 541 553
Insurance and other expenses 462 500 1,360 1,323
Total adjusted expenses 792 835 2,397 2,355
Total benefits and adjusted expenses 2,731 3,094 8,469 9,006
Pretax adjusted earnings $ 976
Weighted-average yen/dollar exchange rate
110.11 106.23 108.58 107.63
In Dollars In Yen
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
Percentage change over September 30, September 30, September 30, September 30,
previous period: 2021 2020 2021 2020 2021 2020 2021 2020
Net premium income (7.4) % (2.3) % (4.5) % (1.2) % (4.0) % (3.3) % (3.8) % (2.6) %
Adjusted net investment
income 15.1 .6 16.6 3.2 19.7 (.2) 17.9 1.9 Total adjusted revenues (3.5) (1.8) (1.0) (.5) .1 (2.8) (.1) (1.9) Pretax adjusted earnings 30.7 (10.9) 17.4 (2.5) 35.8 (11.6) 18.7 (3.8) (1) Net interest cash flows from derivatives associated with certain investment strategies of$(7) and$6 for the three-month periods and$(24) and$5 for the nine-month periods endedSeptember 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. In the three- and nine-month periods endedSeptember 30, 2021 ,Aflac Japan's net premium income decreased, in yen terms, due to an anticipated decrease in first sector premiums as savings products reached premium paid-up status and constrained sales during the COVID-19 pandemic. Adjusted net investment income increased in the three- and nine-month periods endedSeptember 30, 2021 , primarily due to higher alternative and floating rate income and lower hedge costs. Annualized premiums in force decreased 4.6% to ¥1.38 trillion as ofSeptember 30, 2021 , compared with ¥1.44 trillion as ofSeptember 30, 2020 . The decrease in annualized premiums in force in yen was driven primarily by limited-pay products reaching paid up status and lower sales during the COVID-19 pandemic. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were$12.3 billion atSeptember 30, 2021 , compared with$13.6 billion atSeptember 30, 2020 . 82 --------------------------------------------------------------------------------Aflac Japan's investment portfolios includeU.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). In years when the yen strengthens in relation to the dollar, translatingAflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. In years when the yen weakens, translatingU.S. dollar-denominated investment income into yen magnifies growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. The following table illustrates the effect of translatingAflac Japan's U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had foreign currency exchange rates remained unchanged from the comparable period in the prior year. Amounts excluding foreign currency impact onU.S. dollar-denominated investment income were determined using the average foreign currency exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above. Aflac Japan Percentage Changes Over Previous Period (Yen Operating Results) For the Periods Ended September 30, Including Foreign Excluding Foreign Currency Changes Currency Changes Three Months Nine Months Three Months Nine Months 2021 2020 2021 2020 2021 2020 2021 2020 Adjusted net investment income 19.7 % (.2) % 17.9 % 1.9 % 17.2 % .4 % 17.2 2.8 % Total adjusted revenues .1 (2.8) (.1) (1.9) (.3) (2.7) (.2) (1.8) Pretax adjusted earnings 35.8 (11.6) 18.7 (3.8) 33.7 (11.1) 18.2 (3.2) The following table presents a summary of operating ratios in yen terms forAflac Japan . Three Months Ended Nine Months Ended September 30, September 30, Ratios to total adjusted revenues: 2021 2020 2021 2020 Benefits and claims, net 52.3 % 58.8 % 53.5 % 58.1 % Adjusted expenses: Amortization of deferred policy acquisition costs 4.2 3.9 4.4 4.2 Insurance commissions 4.7 4.8 4.8 4.8 Insurance and other expenses 12.5 13.0 12.0 11.5 Total adjusted expenses 21.4 21.7 21.2 20.6 Pretax adjusted earnings 26.3 19.4 25.3 21.3 Ratios to total premiums: Benefits and claims, net 66.1 % 71.3 % 67.1 % 70.2 % Adjusted expenses: Amortization of deferred policy acquisition costs 5.3 4.8 5.5 5.1 In the three- and nine-month periods endedSeptember 30, 2021 , the benefit ratio decreased, compared with the same periods in the prior year. This is primarily due to the continued change in mix of first and third sector business, favorable third sector claim experience, and higher surrenders inAflac Japan's third sector business. In the three-month period endedSeptember 30, 2021 , the adjusted expense ratio decreased mainly due to a decrease in loss adjustment expenses, compared to the same period in the prior year. In the nine-month period endedSeptember 30, 2021 , the adjusted expense ratio increased mainly due to an increase in outsourcing expenses related to enhancement of business continuity infrastructure in times of crisis such as the COVID-19 pandemic situation. In total, the pretax adjusted profit margin increased in the three- and nine-month periods endedSeptember 30, 2021 primarily due to lower benefit ratios. For the full year of 2021, the Company will continue to monitor the situation with respect to COVID-19, and potential impacts on the pretax adjusted profit margin and benefit ratio. 83 --------------------------------------------------------------------------------Aflac Japan Sales The following table presentsAflac Japan's new annualized premium sales for the periods endedSeptember 30 . In Dollars In Yen Three Months Nine Months Three Months Nine Months (In millions of dollars and billions of yen) 2021 2020 2021 2020 2021 2020 2021 2020 New annualized premium sales$ 114 $ 119 $ 371
Increase (decrease) over prior
period
(3.8) % (31.0) % 9.4 % (39.5) % .0 % (32.0) % 10.3 % (40.4) % The following table details the contributions toAflac Japan's new annualized premium sales by major insurance product for the periods endedSeptember 30 . Three Months Nine Months 2021 2020 2021 2020 Cancer 49.9 % 55.7 % 48.0 % 55.3 % Medical 36.3 32.0 39.9 32.3 Income support .5 .9 .6 1.0 Ordinary life: WAYS .7 .8 .7 .7 Child endowment .3 .4 .3 .4 Other ordinary life (1) 9.0 9.6 9.1 9.6 Other 3.3 .6 1.4 .7 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes term and whole life
The foundation ofAflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products.Aflac Japan has been focusing more on promotion of cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings 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 medical and cancer insurance productsAflac Japan provides will continue to be an important part of its product portfolio.
Sales of protection-type first sector and third sector products on a yen basis
were essentially flat in the third quarter of 2021, compared with the same
period in 2020.
Sales ofAflac Japan cancer products in theJapan Post Group channel experienced a material decline beginning inAugust 2019 which has continued in 2021. Japan Post Group began resuming proactive sales of cancer insurance policies onApril 1, 2021 andAflac Japan continues to strengthen the strategic alliance. The Company expects continued collaboration to further position both companies for long-term growth and a gradual improvement ofJapan Post Group cancer insurance sales in the intermediate term. For additional information, see the risk factor entitled "Events related to the ongoing Japan Post investigation and other matters regarding sales of Japan Post Insurance products could negatively impact the Company's sales and results of operations," in Item 1A. Risk Factors in the 2020 Annual Report. Beginning in the second quarter of 2020 and continuing into 2021,Aflac Japan experienced a sharp drop-off in total sales, as compared to pre-pandemic levels, due to the ongoing effects of the COVID-19 pandemic. In response to the COVID-19 pandemic,Aflac Japan continues to promote digital and web-based sales to groups and use of its system that enables smart device-based insurance application by allowing the customer and anAflac Japan operator to see the same screen through their smart devices. Further,Aflac Japan continues to utilize its virtual sales tool that enables online consultations and policy applications to be completed entirely online. 84 --------------------------------------------------------------------------------
The following table details the contributions to
premium sales by agency type for the three-month periods ended
2021 2020
Independent corporate and individual 49.9 % 51.7 %
Affiliated corporate (1) 43.8 41.4
Bank 6.3 6.9
Total 100.0 % 100.0 %
(1) Includes Japan Post
During the three-month period ended September 30, 2021 , Aflac Japan recruited 13
new sales agencies. At September 30, 2021 , Aflac Japan was represented by
approximately 8,200 sales agencies, with more than 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
banks, approximately 90% of the total number of banks in
As previously reported, onDecember 19, 2018 , the Parent Company andAflac 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 andAflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives, including leveraging digital technology in various processes and cooperation in new product development to promote customer-centric business management. InJune 2021 , the Parent Company andAflac Japan , Japan Post Holdings,Japan Post Co., Ltd. and Japan Post Insurance Co., Ltd. agreed to pursue several specific initiatives toward building a "'Co-creation Platform' to support customers and local communities," consistent withJapan Post Group's medium-term management plan announced inMay 2021 . The initiatives are directed at, among other items, the promotion ofAflac Japan cancer insurance, digital transformation within theJapan Post Group , and certain diversity efforts.
Aflac Japan Investments
The level of investment income in 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 onU.S. dollar-denominated investment income, and other factors. As part of the Company's portfolio management and asset allocation process,Aflac Japan invests in yen andU.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and public equity securities.Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including alternative investments in limited partnerships or similar investment vehicles.Aflac Japan has been investing in both publicly-traded and privately originatedU.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of theU.S. dollar investments. 85 --------------------------------------------------------------------------------
The following table details the investment purchases for
Three Months Ended September Nine Months Ended September
30, 30,
(In millions) 2021 2020 2021 2020
Yen-denominated:
Fixed maturity securities:
Japan government and agencies$ 0 $ 94 $ 1,181 $ 830 Private placements 146 154 456 267 Other fixed maturity securities 25 45 161 316 Equity securities 75 121 197 263 Other investments 3 0 8 0 Total yen-denominated$ 249 $ 414 $ 2,003 $ 1,676 U.S. dollar -denominated: Fixed maturity securities:
Other fixed maturity securities$ 363 $ 314 $ 1,362 $ 1,231 Infrastructure debt 0 0 0 55 Collateralized loan obligations 40 99 194 99 Equity securities 0 0 8 0
Commercial mortgage and other loans:
Transitional real estate loans 390 152 1,089 617
Commercial mortgage loans 0 0 17 12
Middle market loans 496 238 1,762 1,665
Other investments 94 60 241 158
Total dollar-denominated $ 1,383 $ 863 $ 4,673 $ 3,837
Total Aflac Japan purchases $ 1,632 $ 1,277 $ 6,676 $ 5,513
See the Investments section of this MD&A for further discussion of these
investment programs, and see Notes 3 and 4 of the Notes to the Consolidated
Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated
Financial Statements in the 2020 Annual Report for more information regarding
loans and loan receivables.
The following table presents the results of
the periods ended
Three Months Nine Months
2021 2020 2021 2020
Total purchases for the period (in millions) (1) $ 1,535 $ 1,217 $ 6,427 $ 5,355
New money yield (1), (2) 3.99 %
3.14 % 3.38 % 3.73 %
Return on average invested assets (3)
2.72 2.35 2.68 2.33
Portfolio book yield, including
investments, end of period (1)
2.60 %
2.62 % 2.60 % 2.62 %
(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 increase in the Aflac Japan new money yield in the three-month period endedSeptember 30, 2021 was primarily due to higher allocation to floating rate asset classes. The decrease in the Aflac Japan new money yield in the nine-month period endedSeptember 30, 2021 was primarily due to lower yields on floating rate asset classes. See Notes 3, 4 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 and hedging strategies. 86 -------------------------------------------------------------------------------- AFLACU.S. SEGMENT AflacU.S. Pretax Adjusted Earnings Changes in AflacU.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 AflacU.S. Aflac U.S. Summary of Operating Results Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2021 2020 2021 2020 Net premium income$ 1,393 $ 1,407 $ 4,223 $ 4,348 Adjusted net investment income (1) 191 175 557 523 Other income 32 24 90 78 Total adjusted revenues 1,616 1,606 4,870 4,949 Benefits and claims 628 679 1,798 2,038 Adjusted expenses: Amortization of deferred policy acquisition costs 123 141 373 435 Insurance commissions 136 140 411 439 Insurance and other expenses 370 316 1,071 955 Total adjusted expenses 629 597 1,855 1,829 Total benefits and adjusted expenses 1,257 1,277 3,653 3,867 Pretax adjusted earnings$ 358 $ 329 $ 1,217 $ 1,082 Percentage change over previous period: Net premium income (1.0) % (2.6) (2.9) % (.4) % Adjusted net investment income 9.1 (4.4) 6.5 (3.1) Total adjusted revenues .6 (1.5) (1.6) .8 Pretax adjusted earnings 8.8 (1.8) 12.5 8.6 (1) Net interest cash flows from derivatives associated with certain investment strategies of$1 for both three-month periods and$1 and$2 for the nine-month periods endedSeptember 30, 2021 and 2020, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. In the three- and nine-month periods endedSeptember 30, 2021 , net premium income for AflacU.S. decreased primarily due to constrained sales as a result of the COVID-19 pandemic. Total adjusted revenues increased in the three-month period endedSeptember 30, 2021 , mainly due to the increase in adjusted net investment income from higher variable net investment income. Total adjusted revenues decreased in the nine-month period endedSeptember 30, 2021 , mainly due to the decline in net premium income from reduced sales activity, partially offset by the increase in adjusted net investment income from higher variable net investment income. Pretax adjusted earnings increased in the three- and nine-month periods endedSeptember 30, 2021 , driven primarily by the lower-than-expected benefit ratios due to lower incurred claims related to pandemic conditions.
Annualized premiums in force decreased .7% to
2021
87 --------------------------------------------------------------------------------
The following table presents a summary of operating ratios for Aflac
Three Months Ended Nine Months Ended
September 30, September 30,
Ratios to total adjusted revenues: 2021 2020 2021 2020
Benefits and claims 38.9 % 42.3 % 36.9 % 41.2 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 7.6 8.8 7.7 8.8
Insurance commissions 8.4 8.7 8.4 8.9
Insurance and other expenses 22.9 19.7 22.0 19.3
Total adjusted expenses 38.9 37.2 38.1 37.0
Pretax adjusted earnings 22.2 20.5 25.0 21.9
Ratios to total premiums:
Benefits and claims 45.1 % 48.3 % 42.6 % 46.9 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 8.8 10.0 8.8 10.0
For the three- and nine-month periods ended September 30, 2021 , the benefit
ratio decreased compared with the same periods in 2020, reflecting reduced
estimates of both COVID-19-related and non-COVID-19-related incurred claims
since the advent of the pandemic. The adjusted expense ratio increased in the
three- and nine-month periods ended September 30, 2021 , when compared with the
same periods in 2020, primarily due to planned spending on buy-to-build
investments, offset slightly by lower DAC amortization related to elevated
persistency. The pretax adjusted profit margin increased in the three- and
nine-month periods ended September 30, 2021 , compared with the same periods in
2020, primarily due to lower benefit ratios. For the full year of 2021, the
Company will continue to monitor the situation with respect to COVID-19, and
potential impacts on the pretax adjusted profit margin and benefit ratio.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the
periods ended September 30 .
Three Months Nine Months
(In millions) 2021 2020 2021 2020
New annualized premium sales $ 299 $ 221 $ 814 $ 705
Increase (decrease) over prior period 35.0 % (35.7) %
15.5 % (32.7) %
The following table details the contributions to Aflac'sU.S. new annualized premium sales by major insurance product category for the periods endedSeptember 30 . Three Months Nine Months 2021 2020 2021 2020 Accident 25.5 % 26.4 % 26.3 % 26.6 % Disability 26.2 24.2 24.1 23.3 Critical care(1) 19.1 20.5 20.8 20.8 Hospital indemnity 15.1 16.8 16.0 16.9 Dental/vision 4.9 5.0 5.0 4.5 Life 9.2 7.1 7.8 7.9 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
New annualized premium sales for accident insurance, the leading AflacU.S. product category, increased 30.6%; disability sales increased 41.7%; critical care insurance sales (including cancer insurance) increased 25.4%; and hospital indemnity insurance sales increased 20.9% in the third quarter of 2021, compared with the same period in 2020. The increase in sales for AflacU.S. in the third quarter of 2021 is primarily attributable to increased sales activity as a result of the ongoing economic reopening in theU.S. and favorable comparisons due to pandemic conditions in 2020. See the Executive Summary section entitled COVID-19 of this MD&A for additional information. 88 -------------------------------------------------------------------------------- In the third quarter of 2021, the AflacU.S. sales force included an average of approximately 5,900U.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. AflacU.S. believes that during the third quarter, constraints in the labor market have limited its recruiting of new sales agents, and that during the second and third quarters of 2021 limitations on face-to-face sales opportunities during the COVID-19 pandemic suppressed the development of newly recruited agents into business producers and the productivity of veteran agents and brokers. While gains were made in recruiting during the second and third quarter of 2021 compared with the same time in 2020, most notably among recruited brokers, AflacU.S. believes that the above factors have acted as a headwind to sales and to growth in the number of average weekly producers during 2021. AflacU.S. remains focused on mitigating and reversing these trends as theU.S. economy continues to recover from the pandemic. In response to the COVID-19 pandemic, AflacU.S. remains focused on supporting its agency channel, most of which are small businesses, by offering financial support and an extended value proposition. The AflacU.S. sales team has pivoted to accommodate preferred enrollment conditions which include realizing sales at the worksite through in-person enrollment, an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The AflacU.S. broker sales team is focused on product enhancements due to COVID-19 as well as leveraging technology based solutions to drive enrollment.
Aflac
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, AflacU.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. AflacU.S. has been investing 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
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Fixed maturity securities:
Other fixed maturity securities$ 141 $ 166 $ 517 $ 434 Infrastructure debt 30 0 30 20 Collateralized loan obligations 22 56 52 67 Equity securities 91 0 203 5
Commercial mortgage and other loans:
Transitional real estate loans 109 43 245 88
Commercial mortgage loans 0 0 163 37
Middle market loans 37 20 138 63
Other investments 10 7 27 18
Total Aflac U.S. Purchases $ 440 $ 292 $ 1,375 $ 732
See Note 3 of the Notes to the Consolidated Financial Statements and Notes 1 and
3 of the Notes to the Consolidated Financial Statements in the 2020 Annual
Report for more information regarding loans and loans receivables.
89 --------------------------------------------------------------------------------
The following table presents the results of Aflac's
the periods ended
Three Months Nine Months
2021 2020 2021 2020
Total purchases for period (in millions) (1) $ 430 $ 285 $ 1,348 $ 714
New money yield (1), (2) 3.87 % 2.80 % 3.59 % 3.24 %
Return on average invested assets (3) 4.88 4.75 4.84 4.86
Portfolio book yield, end of period (1) 5.04 % 5.26
% 5.04 % 5.26 %
(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 increase in the AflacU.S. new money yield for the three- and nine-month periods endedSeptember 30, 2021 was primarily due to higher yields on floating rate asset classes. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on the Company's investments.
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily
affected by investment income. The following table presents a summary of results
for Corporate and other.
Corporate and Other Summary of Operating Results
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 2021 2020 2021 2020
Premium income $ 45 $ 49 $ 138 $ 146
Net investment income (loss) (1) 11 14 14 59
Amortized hedge income related to certain foreign
currency
management strategies 13 22 45 78
Adjusted net investment income 24 36 59 137
Other income 3 2 8 9
Total adjusted revenues 72 87 205 292
Benefits and claims, net 42 47 126 134
Adjusted expenses:
Interest expense 39 44 126 120
Other adjusted expenses 32 35 97 107
Total adjusted expenses 71 79 223 227
Total benefits and adjusted expenses 113 126 349 361
Pretax adjusted earnings $ (41) $ (39) $ (144) $ (69)
(1) The change in value of federal historic rehabilitation and solar investments
in partnerships of $5 and $35 for the three- and nine-month periods ended
September 30, 2021 , respectively, is included as a reduction to net investment
income. Offsetting tax credits on these investments of $10 and $35 for the
three- and nine-month periods ended September 30, 2021 , respectively, have been
recorded as an income tax benefit in the consolidated statement of earnings. See
Note 3 of the Notes to the Consolidated Financial Statements for additional
information on these investments.
In the three- and nine-month periods ended September 30, 2021 , the decrease in
total adjusted revenues was primarily driven by a decline in adjusted net
investment income as a result of the change in value of federal historic
rehabilitation and solar investments in partnerships discussed below, as well as
lower amortized hedge income. The decrease in pretax adjusted earnings in the
three-month period ended September 30, 2021 , was primarily driven by lower
adjusted net investment income. The decrease in pretax adjusted earnings for the
nine-month period ended September 30, 2021 , was primarily driven by lower
adjusted net investment income and higher interest expense associated with debt
issuances.
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
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limited partnerships and included in other investments in the consolidated
balance sheet. The change in value of each investment is recorded as a reduction
to net investment income. Offsetting tax credits generated by these investments
are recorded as an income tax benefit in the consolidated statement of earnings.
Beginning in 2020, net investment income also includes the Company's portion of
earnings from its strategic equity investment in an asset management company.
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 yen-denominated investment assets, U.S. dollar-denominated
investment portfolio hedged back to 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 investments and
growth assets, including public 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.
91 --------------------------------------------------------------------------------
The following tables detail investments by segment.
Investment Securities by Segment
September 30, 2021
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 83,894 $ 14,835 $ 1,993 $ 100,722
Held to maturity, fixed maturity
securities,
at amortized cost (1) 22,613 0 0 22,613
Equity securities 731 273 457 1,461
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,186 960 6 5,152
Commercial mortgage loans (1) 1,251 588 5 1,844
Middle market loans (1) 4,107 285 0 4,392
Other investments:
Policy loans 222 19 0 241
Short-term investments (2) 593 322 918 1,833
Limited partnerships 1,264 139 116 1,519
Other 0 19 0 19
Total investments 118,861 17,440 3,495 139,796
Cash and cash equivalents 2,785 1,039 2,384 6,208
Total investments and cash $ 121,646 $ 18,479 $ 5,879 $ 146,004
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
December 31, 2020
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 88,757 $ 15,133 $ 1,992 $ 105,882
Held to maturity, fixed maturity
securities,
at amortized cost (1) 24,464 0 0 24,464
Equity securities 674 66 543 1,283
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,331 900 0 5,231
Commercial mortgage loans (1) 1,268 420 0 1,688
Middle market loans (1) 3,365 270 0 3,635
Other investments:
Policy loans 242 18 0 260
Short-term investments (2) 449 242 448 1,139
Limited partnerships 828 91 85 1,004
Other 0 26 0 26
Total investments 124,378 17,166 3,068 144,612
Cash and cash equivalents 2,001 785 2,355 5,141
Total investments and cash $ 126,379 $ 17,951 $ 5,423 $ 149,753
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
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
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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, were as follows:
Composition ofFixed Maturity Securities by Credit RatingSeptember 30, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.0 % 0.9 % 1.0 % .9 %
AA 5.0 5.1 4.5 4.6
A 69.4 69.2 69.3 69.5
BBB 21.9 22.1 21.9 21.9
BB or lower 2.7 2.7 3.3 3.1
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of
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
Credit Amortized
Fair
(In millions) Rating Cost Value Unrealized Loss KLM Royal Dutch Airlines B$ 148 $ 135 $ (13) Intesa Sanpaolo Spa BBB 139 132 (7) Kommunal Landspensjonskasse (KLP) BBB 134 128 (6) Nippon Prologis REIT Inc. A 89 84 (5) Alphabet Inc. AA 173 168 (5) Grenke Finance PLC BBB 63 59 (4) Lloyds Banking Group PLC A 206 202 (4) Commonwealth of the Bahamas BB 43 39 (4) Heathrow Funding Ltd. BBB 89 86 (3) Mitsui Fudosan Co. Ltd. A 93 90 (3) 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 financial institutions and other corporate investments.
The Company's portfolio of below-investment-grade securities includes debt
securities purchased while the issuer was rated investment grade plus other
loans and bonds purchased as part of an allocation to that segment of the
market. The following is the Company's below-investment-grade exposure.
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Below-Investment-Grade Investments
September 30, 2021
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 381 $ 380 $ 388 $ 8
Commerzbank 357 249 412 163
Pemex Project Funding Master Trust 268 268 276 8
Autostrade Per Litalia Spa 179 177 210 33
KLM Royal Dutch Airlines 179 148 135 (13)
Telecom Italia SpA 179 179 236 57
Apache Corporation 138 123 169 46
Ovintiv Inc. 119 114 161 47
IKB Deutsche Industriebank AG 116 53 108 55
Arconic Inc. 100 83 125 42
Other Issuers 415 370 471 101
Subtotal (2) 2,431 2,144 2,691 547
High yield corporate bonds 805 787 843 56
Middle market loans 4,215 4,088 4,154 66
Grand Total $ 7,451 $ 7,019 $ 7,688 $ 669
(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 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.
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.
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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.
September 30, 2021
Gross
Unrealized Gross Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 53,377 $ 8,453 $ (62) $ 61,767 48.6 %
Municipalities 2,787 608 (6) 3,390 2.5
Mortgage- and asset-backed securities 1,242 51 (1) 1,292 1.1
Public utilities 8,515 1,862 (7) 10,372 7.9
Electric 6,892 1,543 (4) 8,431 6.3
Natural Gas 294 51 0 346 .3
Other 607 126 (1) 732 .6
Utility/Energy 722 142 (2) 863 .7
Sovereign and Supranational 1,534 279 (4) 1,809 1.4
Banks/financial institutions 10,230 1,579 (66) 11,742 9.3
Banking 6,039 1,031 (23) 7,046 5.5
Insurance 1,917 373 (24) 2,266 1.7
Other 2,274 175 (19) 2,430 2.1
Other corporate 32,156 6,032 (89) 38,098 29.2
Basic Industry 3,146 684 (9) 3,820 2.9
Capital Goods 3,410 560 (8) 3,962 3.1
Communications 3,324 771 (3) 4,091 3.0
Consumer Cyclical 2,661 504 (2) 3,164 2.4
Consumer Non-Cyclical 6,929 1,218 (12) 8,135 6.3
Energy 3,410 762 (16) 4,156 3.1
Other 1,499 209 (4) 1,704 1.4
Technology 4,217 494 (16) 4,695 3.8
Transportation 3,560 830 (19) 4,371 3.2
Total fixed maturity securities $ 109,841$ 18,864 $ (235) $ 128,470
100.0 %
(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.
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The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
September 30, 2021 December 31, 2020
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 90,630 $ 105,427 $ 95,545 $ 111,479
Equity securities 1,018 1,018 740 740
Total publicly issued 91,648 106,445 96,285 112,219
Privately issued securities: (2)
Fixed maturity securities (3) 19,211 23,043 20,511 24,802
Equity securities 443 443 543 543
Total privately issued 19,654 23,486 21,054 25,345
Total investment securities $ 111,302 $ 129,931 $ 117,339 $ 137,564
(1) Net of allowance for credit losses
(2) Primarily consists of securities owned by
The following table details the Company's reverse-dual currency securities.
Reverse-Dual Currency Securities(1)
September 30, December 31,
(Amortized cost, in millions) 2021 2020
Privately issued reverse-dual currency securities $ 4,913 $ 5,300
Publicly issued collateral structured as reverse-dual
currency securities
1,641 1,775 Total reverse-dual currency securities$ 6,554 $ 7,075 Reverse-dual currency securities as a percentage of total investment securities 5.9 % 6.0 %
(1) Principal payments in yen and interest payments in 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 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 rate 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" in the 2020 Annual Report for more information about market risk and the Company's use of derivatives.
Derivatives are designed to reduce risk on an economic basis while minimizing
the impact on financial results. The Company's derivatives programs vary
depending on the type of risk being hedged. 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.
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•The unrealized and realized gains and losses impact on adjusted earnings of
derivatives in cash flow, fair value, net investments in foreign operations, or
non-qualifying hedging relationships.
Foreign Currency Exchange Rate Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure
to foreign currency exchange rate risk:
•Aflac Japan hedges U.S. dollar-denominated investments back to yen (see Aflac
Japan's U.S. Dollar-Denominated Hedge Program below).
•Aflac Japan maintains certain unhedged
which serve as an economic currency hedge of a portion of the Company's
investment in
Program below).
•The Parent Company designates 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
•The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs. (see Enterprise Corporate Hedging Program below).
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides capital relief. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . September 30, December 31, 2021 2020 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost (1) Value
Available-for-sale securities:
Fixed maturity securities (excluding bank loans)
Fixed maturity securities - bank loans (floating rate) 0 0 319 283 Equity securities 24 24 20 20
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 4,187 4,236 4,331 4,298 Commercial mortgage loans 1,250 1,315 1,268 1,365 Middle market loans (floating rate) 4,106 4,171 3,365 3,377 Other investments 1,264 1,264 828 828 Total U.S. Dollar Program 28,717 31,454 29,380 31,279
Available-for-sale securities:
Fixed maturity securities - economically converted
to yen
2,227 3,294 2,085 3,094 TotalU.S. dollar-denominated investments in Aflac Japan$ 30,944 $
34,748
(1) Net of allowance for credit losses
U.S. Dollar Program includes allU.S. dollar-denominated investments inAflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE.Aflac Japan maintains an options program (collars and one sided options) on a portion of its US dollar program to mitigate against more extreme moves in foreign exchange and therefore support SMR. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the options program. The Company is continually evaluating other adjustments, including the possibility of changing the level of hedging employed with theU.S dollar-denominated investments. 97 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 ,Aflac Japan had$6.4 billion outstanding notional amounts of foreign currency forwards and$8.0 billion outstanding notional amounts of foreign currency options, of which none were in-the-money, hedging itsU.S. dollar-denominated investments. The fair value ofAflac Japan's unhedgedU.S. dollar-denominated portfolio was$15.1 billion (excluding certainU.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives). Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The following table presents the settlements associated with the Company's currency derivatives used for hedgingAflac Japan's U.S. dollar-denominated investments. Three Months Ended Nine Months Ended September 30, September 30, (In millions) 2021 2020 2021 2020 Net cash inflows (outflows)$ (14) $ (2) $ 88 $ (34)
Enterprise Corporate Hedging Program
The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment inAflac Japan . The Company's consolidated yen-denominated net asset position was partially hedged at$10.3 billion as ofSeptember 30, 2021 , compared with$9.9 billion as ofDecember 31, 2020 . 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 inAflac Japan , the hedge is deemed to be effective, and the currency exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. The Company's net investment hedge was effective during the three- and nine-month periods endedSeptember 30, 2021 and 2020, 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 yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buyingU.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, whileAflac Japan's U.S dollar exposure remains reduced as a result ofAflac Japan's U.S. dollar-denominated hedge program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. The portion of the enterprise-wide amortized hedge income contributed by this strategy was$13 million and$22 million for the three-month periods and$45 million and$78 million for the nine-month periods endedSeptember 30, 2021 and 2020, respectively. This activity is reported in Corporate and Other. As this program evolves, the Company will continue to evaluate the program's efficacy. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.
The following table presents metrics related to
costs and the Parent Company amortized hedge income for the periods ended
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Hedge Cost/Income Metrics(1)
Three Months Nine Months
2021 2020 2021 2020
Aflac Japan :
FX Forwards
FX forward (sell USD, buy yen) notional at end of
period (in billions)(2)
$6.4 $9.2 $6.4 $9.2 Weighted average remaining tenor (in months)(3) 3.7 10.3 3.7 10.3 Amortized hedge income (cost) for period (in millions)$(13) $(49) $(42) $(150)
FX Options
FX option notional at the end of period (in billions)
(2)
$8.0 $9.0 $8.0 $9.0 Weighted average remaining tenor (in months) (3) 3.6 1.2 3.6 1.2 Amortized hedge income (cost) for period (in millions)$(7) $(2) $(13) $(5) Corporate and Other (Parent Company): FX Forwards
FX forward (buy USD, sell yen) notional at end of
period (in billions)(2)
$5.0 $5.0 $5.0 $5.0 Weighted average remaining tenor (in months)(3) 12.2 12.5 12.2 12.5 Amortized hedge income (cost) for period (in millions)$14 $24 $49 $81
FX Options
FX option notional at the end of period (in billions)
(2)
$2.0 $2.1 $2.0 $2.1 Weighted average remaining tenor (in months) (3) 7.2 6.8 7.2 6.8 Amortized hedge income (cost) for period (in millions)$(1) $(2) $(4) $(3) (1) See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. (2) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (3) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs and income have fluctuated in recent periods due to changes in the previously mentioned factors.
Interest Rate Risk Hedge Program
Aflac Japan and AflacU.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with itsU.S. dollar-denominated investments held byAflac Japan , from time to time the Company utilizes interest rate swaptions. For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, and Item 1A, specifically to the Risk Factor titled "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity" in the 2020 Annual Report.
See Note 4 of the Notes to the Consolidated Financial Statements for additional
information on the Company's hedging activities.
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DEFERRED POLICY ACQUISITION COSTS
The following table presents deferred policy acquisition costs by segment.
(In millions)
December 31, 2020 % Change Aflac Japan$ 6,418 $ 6,991 (8.2) % (1) Aflac U.S. 3,296 3,450 (4.5) Total$ 9,714 $ 10,441 (7.0) %
(1)
the nine months ended
See Note 6 of the Notes to the Consolidated Financial Statements in the 2020
Annual Report for additional information on the Company's deferred policy
acquisition costs.
POLICY LIABILITIES
The following table presents policy liabilities by segment.
(In millions)
September 30, 2021 December 31, 2020 % Change Aflac Japan$ 96,039 $ 103,128 (6.9) % (1) Aflac U.S. 11,882 11,810 .6 Other 280 274 2.2 Intercompany eliminations(2) (758) (821) (7.7) Total$ 107,443 $ 114,391 (6.1) % (1)Aflac Japan's policy liabilities increased .7% in yen during the nine months endedSeptember 30, 2021 . (2) Elimination entry necessary due to recapture of a portion of policy liabilities ceded externally, as a result of the reinsurance retrocession transaction as described in Note 7 of the Notes to the Consolidated Financial Statements. BENEFIT PLANS
information on the Company's Japanese and
accompanying Notes to the Consolidated Financial Statements and Note 14 of the
Notes to the Consolidated Financial Statements in the 2020 Annual Report.
POLICYHOLDER PROTECTION
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of theLife Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. InNovember 2016 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2022 . EffectiveApril 2014 , the annual LIPPC contribution amount for the total life industry was lowered from ¥40 billion to ¥33 billion.Aflac Japan recognized an expense of ¥1.8 billion and ¥1.9 billion for the nine-month periods endedSeptember 30, 2021 and 2020, respectively, for LIPPC assessments.
Guaranty Fund Assessments
UnderU.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. Guaranty fund assessments for the nine-month periods endedSeptember 30, 2021 and 2020 were immaterial. OFF-BALANCE SHEET ARRANGEMENTS
See Note 3 of the Notes to the Consolidated Financial Statements for details on
certain investment commitments.
100 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for information on material unconditional purchase obligations that are not recorded on the Company's balance sheet. 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 an investment strategy of using debt to increase the potential ROE. 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 shareholder deployment.
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's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$2.0 billion to provide a capital buffer and liquidity support at the holding company. This amount excludes$400 million of proceeds from the issuance of senior sustainability notes discussed below, which proceeds contribute to the capital buffer but are not intended to support holding company liquidity. Amid the COVID-19 pandemic, the Company remains committed to prudent liquidity and capital management. AtSeptember 30, 2021 , the Company held$6.2 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion . For additional information on the Company's liquidity and capital resources in response to COVID-19, see the Executive Summary section of this MD&A.Aflac Japan and AflacU.S. provide the primary sources of liquidity to the Parent Company through management fees and dividends, withAflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The following table presents the amounts provided to the Parent Company for the nine-month periods endedSeptember 30 . Liquidity Provided by Subsidiaries to Parent Company (In millions) 2021 2020
Dividends declared or paid by subsidiaries
Management fees paid by subsidiaries
96 100
The following table details
ended
Aflac Japan Remittances (In millions of dollars and billions of yen) 2021 2020
(in dollars)
1,776 667Aflac Japan dividends declared or paid to Parent Company (in yen) ¥ 195.6 ¥ 72.8 The Company intends to maintain higher than historical levels of liquidity and capital at the Parent Company for stress conditions and with the goals of addressing the Company's hedge costs and related potential need for collateral and mitigating against long-term weakening of the Japanese yen. Further, the Company plans to continue to maintain a 101 --------------------------------------------------------------------------------
portfolio of unhedged
consider whether the amount of such investments should be increased or decreased
relative to the Company's view of economic equity surplus in
light of potentially rising hedge costs and other factors. See the Hedging
Activity subsection of this MD&A for more information.
In addition to cash and 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. InSeptember 2021 , the Parent Company filed a shelf registration statement with theSEC that allows the Company to issue an indefinite amount of debt securities, in one or more series, from time to time untilSeptember 2024 . The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. Additionally, as ofSeptember 30, 2021 , the Parent Company and Aflac had four lines of credit with third parties as well as ten intercompany lines of credit. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements. 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. The Company was in compliance with all of the covenants of its notes payable and lines of credit atSeptember 30, 2021 . 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 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for more information on the Company's securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes and the Risk Factors in the 2020 Annual Report entitled, "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable 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 translates cash flows forAflac Japan's yen-denominated items intoU.S. dollars using weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The following table summarizes consolidated cash flows by activity for the nine-month periods endedSeptember 30 . (In millions) 2021 2020 Operating activities$ 4,181 $ 4,601 Investing activities (1,171) (3,511) Financing activities (1,897) (431) Exchange effect on cash and cash equivalents (46) 8
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.
Investing Activities
The Company's investment objectives provide for liquidity primarily through the
purchase of publicly traded investment-grade debt 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
102
--------------------------------------------------------------------------------
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 re-balance 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 $400
million to Aflac Ventures, LLC (Aflac Ventures ), as opportunities emerge. Aflac
Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures )
which is reported in the Corporate and Other segment. 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 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 the other investments line in
the consolidated balance sheets.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac
U.S. obtains low-cost funding from FHLB supported by acceptable forms of
collateral pledged by Aflac U.S. In the first nine months of 2021, Aflac U.S.
borrowed and repaid $78 million under this program. As of September 30, 2021 ,
Aflac U.S. had outstanding borrowings of $320 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
Consolidated cash used by financing activities was
nine months of 2021, compared with consolidated cash used by financing
activities of
InApril 2021 , the Parent Company issued five series of senior notes totaling ¥82.0 billion through a public debt offering under its then existingU.S. shelf registration statement. The first series, which totaled ¥30.0 billion, bears interest at a fixed rate of .633% per annum, payable semi-annually, and will mature inApril 2031 . The second series, which totaled ¥12.0 billion, bears interest at a fixed rate of .844% per annum, payable semi-annually, and will mature inApril 2033 . The third series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.039% per annum, payable semi-annually, and will mature inApril 2036 . The fourth series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.264% per annum, payable semi-annually, and will mature inApril 2041 . The fifth series, which totaled ¥20.0 billion, bears interest at a fixed rate of 1.560% per annum, payable semi-annually, and will mature inApril 2051 . The notes are redeemable at the Parent Company's option (i) at any time, in whole but not in part, upon the occurrence of certain changes affectingU.S. taxation, as specified in the indenture governing the terms of the issuance or (ii) on or after the date that is six months prior to the stated maturity date of the series, in whole or in part, at a redemption price equal to the aggregate principal amount to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption.
In
of the Parent Company's 3.625% senior notes due
InMarch 2021 , the Parent Company issued$400 million of senior sustainability notes through aU.S. public debt offering. The notes bear interest at a fixed rate of 1.125% per annum, payable semi-annually, and will mature inMarch 2026 . The Company intends, but is not contractually committed, to allocate an amount at least equivalent to the net proceeds from this issuance exclusively to existing or future investments in, or financing of, assets, businesses or projects that meet the eligibility criteria of the Company's sustainability bond framework described in the offering documentation in connection with such notes. These notes are redeemable at the Parent Company's option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the yield to maturity for aU.S. Treasury security with a maturity comparable to the remaining term of the notes, plus 10 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
See Note 8 of the Notes to the Consolidated Financial Statements for further
information on the debt issuance discussed above.
The Company was in compliance with all of the covenants of its notes payable and
lines of credit at
103 -------------------------------------------------------------------------------- Cash returned to shareholders through treasury stock purchases and dividends was$2.3 billion during the nine-month period endedSeptember 30, 2021 , compared with$1.6 billion during the nine-month period endedSeptember 30, 2020 .
The following tables present a summary of treasury stock activity during the
nine-month periods ended
Treasury Stock Purchased (In millions of dollars and thousands of shares) 2021 2020 Treasury stock purchases$ 1,676 $ 1,037 Number of shares purchased: Share repurchase program 32,186 26,108 Other 419 541 Total shares purchased 32,605 26,649 Treasury Stock Issued
(In millions of dollars and thousands of shares) 2021 2020
Stock issued from treasury:
Cash financing$ 13 $ 27 Noncash financing 43 40 Total stock issued from treasury$ 56 $ 67 Number of shares issued 1,424 1,884 During the first nine months of 2021, the Company repurchased 32.2 million shares of its common stock for$1.7 billion as part of its share repurchase program. As ofSeptember 30, 2021 , a remaining balance of 67.0 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. For information on the impact of COVID-19 on the Company's share repurchase program, see the Executive Summary section of this MD&A. Cash dividends paid to shareholders were$.33 per share in the third quarter of 2021, compared with$.28 per share in the third quarter of 2020. The following table presents the dividend activity for the nine-month periods endedSeptember 30 . (In millions) 2021 2020 Dividends paid in cash$ 647 $ 580
Dividends through issuance of treasury shares 23 22
Total dividends to shareholders
$ 670 $ 602 InOctober 2021 , the board of directors declared the fourth quarter cash dividend of$.33 per share, an increase of 17.9% compared with the same period in 2020. The dividend is payable onDecember 1, 2021 to shareholders of record at the close of business onNovember 17, 2021 . Regulatory Restrictions
Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts inJapan ) 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, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥120 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedgedU.S. 104 --------------------------------------------------------------------------------
dollar-denominated investments with foreign currency options or forwards. See
Notes 7 and 8 of the Notes to the Consolidated Financial Statements for
additional information.
The Company has already undertaken various measures to mitigate the sensitivity ofAflac 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 re-classified 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. ForU.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of itsU.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively. As ofSeptember 30, 2021 ,Aflac Japan's SMR remains high and reflects a strong capital and surplus position. The Company is committed to maintaining strong capital levels throughout the pandemic, consistent with maintaining current insurance financial strength and credit ratings. For additional information see the Executive Summary COVID-19 section of this MD&A.
Aflac
A life insurance company's statutory capital and surplus is determined according to rules prescribed by theNational Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different fromU.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. As ofSeptember 30, 2021 , Aflac's RBC ratio remains high and reflects a strong capital and surplus position. Aflac, CAIC and TOIC are domiciled inNebraska and are subject to its regulations. The maximum amount of dividends that can be paid to the Parent Company by Aflac, CAIC and TOIC without prior approval ofNebraska's director of insurance is 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 2021 in excess of$872 million would be considered extraordinary and require such approval. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. Privacy and Cybersecurity Governance The Company's Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company's information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company's information security program to theAudit and Risk Committee . The Company's senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and communicates quarterly with theAudit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and communicating with theAudit and Risk Committee . The incident response plan directs the executive officers to report certain incidents immediately and directly to the Lead Non-Management Director. 105 -------------------------------------------------------------------------------- Other
For information regarding commitments and contingent liabilities, see Note 12 of
the Notes to the Consolidated Financial Statements.
Additional Information Investors should note that the Company announces material financial information in itsSEC filings, press releases and public conference calls. In accordance withSEC 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 withU.S. GAAP. These principles are established primarily by the FASB. In this MD&A, references toU.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity withU.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 Aflac's results of operations and financial condition are those related to the valuation of investments and derivatives, DAC, liabilities for future policy benefits and unpaid policy claims, 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. The application of these critical accounting estimates determines the values at which 93% of the Company's assets and 80% of its liabilities are reported as ofSeptember 30, 2021 , and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results. There have been no changes in the items the Company has identified as critical accounting estimates during the nine months endedSeptember 30, 2021 . For additional information, see the Critical Accounting Estimates section of MD&A included in the 2020 Annual Report.
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.
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