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AFLAC INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
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 •global fluctuations in interest rates and 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 •the Company's 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 •operational risks of third party vendors •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 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 74 -------------------------------------------------------------------------------- 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, 2022 and 2021, 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, 2021 (2021 Annual Report). In this MD&A, amounts may not foot due to rounding.
This MD&A is divided into the following sections:
Page
Executive Summary 76
Results of Operations 77
Investments 92
Hedging Activities 96
Deferred Policy Acquisition Costs 99
Policy Liabilities 100
Benefit Plans 100
Policyholder Protection 100
Liquidity and Capital Resources 100
Critical Accounting Estimates 106
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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 inthe United States (U.S. ) and Japan. The Company's insurance business consists of two reporting segments:Aflac Japan and AflacU.S. The Parent Company's primary insurance subsidiaries areAflac Life Insurance Japan Ltd. inJapan (Aflac Japan ) andAmerican Family Life Assurance Company of Columbus (Aflac);Continental American Insurance Company (CAIC), branded asAflac Group Insurance (AGI);American Family Life Assurance Company of New York (Aflac New York);Tier One Insurance Company (TOIC) andAflac Benefits Solutions, Inc. (ABS), formerly known asArgus Dental & Vision, Inc. , which provides a platform for Aflac Dental and Vision in theU.S. (collectively, AflacU.S. ). Market Conditions The impact of the Coronavirus Disease 2019 (COVID-19) global pandemic on the Company continues to evolve and the continued path of the global economic recovery remains uncertain given the potential longer term impacts of the pandemic. For example, economic conditions have acted as headwinds to sales in the first nine months of 2022, particularly inJapan and most notably in the first quarter with a gradually decreasing impact in the second and third quarters, pressuring net earned premiums. Further, in theU.S. , supply shortages, upward pressure on wages to attract employees and higher commodity prices have all driven near-term increases in inflation. Central bank and government efforts to control inflation, as well the impacts of theRussia -Ukraine conflict, including volatility in energy prices and additional disruptions in the global supply chain, have led to slower economic growth inJapan and theU.S. Additionally, continued widening of the differential betweenU.S. and Japan interest rates has contributed to a weakening of the yen, which has the effect of suppressing the Company's current period results in relation to the comparable prior period. In the three-month period endedSeptember 30, 2022 , sales forAflac Japan in yen terms increased 10.2%, compared to the same period in 2021, reflecting theAugust 2022 launch of a new cancer insurance product. In the nine-month period endedSeptember 30, 2022 , sales forAflac Japan in yen terms decreased 4.1%, compared to the same period in 2021, reflecting theJanuary 2021 launch of a new medical insurance product and continued weakness in sales recovery, in part constrained by pandemic conditions. In the three- and nine-month periods endedSeptember 30, 2022 , sales for AflacU.S. increased 11.8% and 15.2%, respectively, compared to the same periods in 2021, reflecting continued improvement from investment in growth initiatives as well as productivity gains.
Performance Highlights
Total revenues were$4.8 billion in the third quarter of 2022, compared with$5.2 billion in the third quarter of 2021. Net earnings were$1.6 billion , or$2.53 per diluted share in the third quarter of 2022, compared with$888 million , or$1.32 per diluted share, in the third quarter of 2021, reflecting an income tax benefit of$695 million from a release of deferred taxes in the third quarter of 2022. Total revenues were$15.5 billion in the first nine months of 2022, compared with$16.7 billion in the first nine months of 2021. Net earnings were$4.0 billion , or$6.25 per diluted share in the first nine months of 2022, compared with$3.3 billion , or$4.82 per diluted share, in the first nine months of 2021, reflecting an income tax benefit of$695 million from a release of deferred taxes in the third quarter of 2022. Results in the third quarter of 2022 included pretax net investment gains of$199 million , compared with pretax net investment losses of$171 million in the third quarter of 2021. Net investment gains in the third quarter of 2022 included an increase in credit loss allowances of$11 million ;$173 million of net gains from certain derivative and foreign currency gains or losses;$22 million of net losses on equity securities; and$59 million of net gains from sales and redemptions. Results in the first nine months of 2022 included pretax net investment gains of$885 million , compared with pretax net investment gains of$224 million in the first nine months of 2021. Net investment gains in the first nine months of 2022 included an increase in credit loss allowances of$20 million ;$958 million of net gains from certain derivative and foreign currency gains or losses;$313 million of net losses on equity securities; and$260 million of net gains from sales and redemptions.
The average yen/dollar exchange rate(1) for the three-month period ended
exchange rate(1) of 110.11 for the same period in 2021. The average yen/dollar
76 -------------------------------------------------------------------------------- exchange rate(1) for the nine-month period endedSeptember 30, 2022 was 126.65, or 14.3% weaker than the average yen/dollar exchange rate(1) of 108.58 for the same period in 2021. Adjusted earnings(2) in the third quarter of 2022 were$725 million , or$1.15 per diluted share, compared with$1.0 billion , or$1.53 per diluted share, in the third quarter of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.08 . Adjusted earnings(2) in the first nine months of 2022 were$2.6 billion , or$4.03 per diluted share, compared with$3.2 billion , or$4.65 per diluted share, in the first nine months of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.23 . Total investments and cash atSeptember 30, 2022 were$114.5 billion , compared with$143.0 billion atDecember 31, 2021 . In the first nine months of 2022,Aflac Incorporated repurchased$1.8 billion , or 30.2 million of its common shares. AtSeptember 30, 2022 , the Company had 25.6 million remaining shares authorized for repurchase. Shareholders' equity was$24.2 billion , or$38.71 per share, atSeptember 30, 2022 , compared with$33.3 billion , or$50.99 per share, atDecember 31, 2021 . Shareholders' equity atSeptember 30, 2022 included a net unrealized gain on investment securities and derivatives of$1.1 billion , compared with a net unrealized gain of$9.6 billion atDecember 31, 2021 . Shareholders' equity atSeptember 30, 2022 also included an unrealized foreign currency translation loss of$4.5 billion , compared with an unrealized foreign currency translation loss of$2.0 billion atDecember 31, 2021 . The annualized return on average shareholders' equity in the third quarter of 2022 was 25.3%. Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was$27.7 billion , or$44.34 per share atSeptember 30, 2022 , compared with$25.9 billion , or$39.65 per share, atDecember 31, 2021 . The annualized adjusted return on equity (ROE) excluding foreign currency impact(2) in the third quarter of 2022 was 11.4%.(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 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:
77 -------------------------------------------------------------------------------- •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 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 Corporate and other. These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the 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. 78 -------------------------------------------------------------------------------- •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 changes on the Aflac Japan segment results, which are outside management's control. The most comparableU.S. GAAP financial measure forU.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from theU.S. dollar denominated 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
In Millions Per Diluted Share In Millions Per Diluted Share
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Net earnings $ 1,596 $ 888 $ 2.53 $ 1.32 $ 4,016 $ 3,286 $ 6.25 $ 4.82
Items impacting net earnings:
Adjusted net investment (gains)
losses (1) (222) 172 (.35) .26 (923) (216) (1.44) (.32)
Other and non-recurring (income)
loss (1) 8 .00 .01 (1) 67 .00 .10
Income tax (benefit) expense on
items excluded from adjusted
earnings (2) (648) (37) (1.03) (.06) (501) 32 (.78) .05
Adjusted earnings 725 1,031 1.15 1.53 2,591 3,169 4.03 4.65
Current period foreign currency
impact (3) 53 N/A .08 N/A 147 N/A .23 N/A
Adjusted earnings excluding
current period foreign currency
impact $ 778 $ 1,031 $ 1.23 $ 1.53 $ 2,738 $ 3,169 $ 4.26 $ 4.65
(1) See reconciliation of net investment (gains) losses to adjusted net
investment (gains) losses below.
(2) Primarily reflects release of $695 million in deferred taxes in the third
quarter of 2022.
(3) 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
Three Months Ended Nine Months Ended September
September 30, 30,
(In millions) 2022 2021 2022 2021
Net investment (gains) losses $ (199) $ 171 $ (885) $ (224)
Items impacting net investment (gains) losses:
Amortized hedge costs (28) (20) (84) (55)
Amortized hedge income 19 13 44 45
Net interest cash flows from derivatives
associated
with certain investment strategies (26) (6) (36) (23)
Interest rate component of the change in fair
value
of foreign currency swaps on notes payable 13 14 38 41
Adjusted net investment (gains) losses $ (222) $ 172
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 gains and losses may be realized as a result of
changes in the financial markets and the creditworthiness of specific
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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 ofEquity 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 variable interest entity (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; and
•bond purchase commitments at the inception of investments in consolidated VIEs.
Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of 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. 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 80 -------------------------------------------------------------------------------- regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings. The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations. 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 its 3.625% senior notes dueJune 2023 . The pretax expense due to the early redemption of these notes was$48 million . Other items excluded from adjusted earnings include 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 are excluded from adjusted earnings for one year following the acquisition and amounted to$8 million and$20 million for the three- and nine-month periods endedSeptember 30, 2021 , respectively.
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was (44.7)% for the three-month period endedSeptember 30, 2022 , compared with 20.2% for the same period in 2021. The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 1.6% for the nine-month period endedSeptember 30, 2022 , compared with 19.7% for the same period in 2021. The combined effective tax rate differs from theU.S. statutory rate primarily due to the impact of the tax accounting method change discussed below, as well as solar, historic and foreign tax credits. For additional information, see the Critical Accounting Estimates - Income Taxes section of Item 7. MD&A in the 2021 Annual Report.Aflac Japan holds certainU.S. dollar-denominated assets in aDelaware Statutory Trust (DST). These assets are mostly comprised of variousU.S. dollar-denominated commercial mortgage loans. The functional currency of the DST forU.S. tax purposes was historically the Japanese yen. In the third quarter of 2022, the Company requested a change in tax accounting method through the Internal Revenue Service's automatic consent procedures to change its functional currency on the DST forU.S. tax purposes to theU.S. dollar (USD). Based on the volatility of foreign exchange rates between the Japanese yen and USD, the Company's management determined that this tax accounting method better positions the Company forU.S. tax purposes. As a result, foreign currency translation gains or losses on assets held in the DST will no longer be recognized forU.S. tax purposes. The Company historically recorded a deferred tax liability for foreign currency translation gains on the DST assets, which was released in the third quarter of 2022 as a result of the functional currency change. The release of the deferred tax liability resulted in the Company recognizing an income tax benefit of$695 million ($1.10 per basic and diluted share, respectively) in the third quarter of 2022. The Company has determined that the change in tax accounting method will impact its combined effective tax rate in future periods as a function of changes in the foreign exchange rate between the Japanese yen and USD. InAugust 2022 , the Inflation Reduction Act of 2022 (IRA) was signed intoU.S. law. EffectiveJanuary 1, 2023 , the law will impose a 15% alternative minimum corporate tax rate and imposes a 1% excise tax on the Company's repurchases of its common stock. The Company does not anticipate any impacts from the new corporate minimum tax rate since its current tax rate is above the 15% minimum rate. Further, the Company expects the charges associated with the excise tax to be recognized in equity consistent with other costs related to treasury stock. 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 the risk factor entitled "Tax rates applicable to the Company may change" in Item 1A. Risk Factors of the 2021 Annual Report for more information. 81 --------------------------------------------------------------------------------
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 the weighted average Japanese yen/U.S. dollar foreign exchange rate for the reporting period, except realized gains and losses on securities 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 the spot Japanese yen/U.S. dollar foreign exchange rate at the end of the reporting period. 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. In addition, the Parent Company, other business units that are not individually reportable, and business activities, including reinsurance retrocession activities, not included inAflac Japan or AflacU.S. are included in Corporate and other. See Item 1. Business in the 2021 Annual Report for a summary of each segment's products and distribution channels.
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. 82 --------------------------------------------------------------------------------
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) 2022 2021 2022 2021 Net earned premiums$ 2,241
Net investment income:
Yen
335 317 898960 U.S. dollar -denominated investment income 357 465 1,251 1,355 Net investment income 692 783 2,149 2,315
Amortized hedge costs related to certain foreign currency
exposure management strategies
28 20 84 55
Adjusted net investment income 663 763 2,066 2,260
Other income (loss) 9 10 26 32
Total adjusted revenues 2,913 3,707 9,476 11,337
Benefits and claims, net 1,676 1,938 5,133 6,072
Adjusted expenses:
Amortization of deferred policy acquisition costs 124 154 415 496
Insurance commissions 132 175 435 541
Insurance and other expenses 350 462 1,142 1,360
Total adjusted expenses 607 792 1,991 2,397
Total benefits and adjusted expenses 2,283 2,731 7,125 8,469
Pretax adjusted earnings $ 630
Weighted-average yen/dollar exchange rate
137.08 110.11 126.65 108.58
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: 2022 2021 2022 2021 2022 2021 2022 2021
Net earned premiums (23.6) % (7.4) % (18.4) % (4.5) % (4.1) % (4.0) % (4.2) % (3.8) %
Adjusted net investment income (13.1) 15.1 (8.6) 16.6 9.8 19.7 8.1 17.9
Total adjusted revenues (21.4) (3.5) (16.4) (1.0) (1.2) .1 (1.7) (.1)
Pretax adjusted earnings (35.5) 30.7 (18.0) 17.4 (19.2) 35.8 (4.0) 18.7
(1) Net interest cash flows from derivatives associated with certain investment
strategies of $(25) and $(7) for the three-month periods and $(37) and $(24) for
the nine-month periods ended September 30, 2022 and 2021, 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 ended September 30, 2022 , Aflac Japan's net
earned premiums decreased, in yen terms, mainly due to limited-pay products
reaching premium paid-up status and constrained sales from the impact of
pandemic conditions. In yen terms, adjusted net investment income increased in
the three- and nine-month periods ended September 30, 2022 , primarily due to the
impact of a weaker yen on U.S. dollar-denominated investment income, a make
whole of a security, and higher floating rate income. The decrease in pretax
adjusted earnings in yen for the three- and nine-month periods ended
September 30, 2022 was primarily due to the increase in the benefit ratio
resulting from a wider scope of "deemed hospitalization" that was in effect
through most of the third quarter.
Annualized premiums in force decreased 4.3% to ¥1.32 trillion as of
September 30, 2022 , compared with ¥1.38 trillion as of September 30, 2021 . The
decrease in annualized premiums in force in yen was driven primarily by
limited-pay products reaching premium 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 $9.1 billion at September 30, 2022 ,
compared with $12.3 billion at September 30, 2021 .
83
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Aflac Japan's investment portfolios include U.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, translating Aflac 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,
translating U.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 translating Aflac 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 on U.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
2022 2021 2022 2021 2022 2021 2022 2021
Adjusted net investment
income 9.8 % 19.7 % 8.1 % 17.9 % (2.0) % 17.2 % (1.6) % 17.2 %
Total adjusted revenues (1.2) .1 (1.7) (.1) (3.6) (.3) (3.7) (.2)
Pretax adjusted earnings (19.2) 35.8 (4.0) 18.7 (27.9) 33.7 (11.4) 18.2
The following table presents a summary of operating ratios in yen terms for
Aflac Japan .
Three Months Ended Nine Months Ended
September 30, September 30,
Ratios to total adjusted revenues: 2022 2021 2022 2021
Benefits and claims, net 57.6 % 52.3 % 54.3 % 53.5 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 4.3 4.2 4.4 4.4
Insurance commissions 4.5 4.7 4.6 4.8
Insurance and other expenses 12.0 12.5 12.0 12.0
Total adjusted expenses 20.8 21.4 21.0 21.2
Pretax adjusted earnings 21.6 26.3 24.7 25.3
Ratios to total premiums:
Benefits and claims, net 75.0 % 66.1 % 69.8 % 67.1 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 5.5 5.3 5.6 5.5
In the three- and nine-month period ended September 30, 2022 , the benefit ratio
to total premiums increased, compared with the same periods in the prior year,
primarily due to a decrease in total premiums and higher third sector benefits
due substantially to an increase in medical hospitalization claims as a result
of a wider scope of "deemed hospitalization" related to COVID-19, partially
offset by the continued change in the mix of first and third sector business. In
the three- and nine-month periods ended September 30, 2022 , the adjusted expense
ratio decreased slightly, compared with the same periods in the prior year,
reflecting the decrease in total adjusted revenues and an offsetting decrease in
total adjusted expenses. In total, the pretax adjusted profit margin decreased
in the three- and nine-month periods ended September 30, 2022 primarily due to
lower total adjusted revenues and higher benefit ratios partially offset by
lower expense ratios.
84
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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) 2022 2021 2022 2021 2022 2021 2022 2021 New annualized premium sales$ 100 $ 114 $ 301 $ 371 ¥ 13.9 ¥ 12.6 ¥ 38.5 ¥ 40.2 Increase (decrease) over prior period (12.0) % (3.8) % (18.9) % 9.4 % 10.2 % .0 % (4.1) % 10.3 % 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 2022 2021 2022 2021 Cancer 60.1 % 49.9 % 55.7 % 48.0 % Medical 26.4 36.3 29.1 39.9 Income support 1.2 .5 1.5 .6 Ordinary life: WAYS .6 .7 .7 .7 Child endowment .2 .3 .2 .3 Other ordinary life (1) 7.7 9.0 8.6 9.1 Other 3.8 3.3 4.2 1.4 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 increased 10.5% in the third quarter of 2022, compared with the third quarter of 2021, reflecting theAugust 2022 launch of a new cancer insurance product through the agency channel. Sales ofAflac Japan cancer products in theJapan Post Group channel experienced a material decline beginning inAugust 2019 .Japan Post Group resumed proactive sales of cancer insurance policies inApril 2021 andAflac Japan continues to strengthen the strategic alliance. InApril 2022 , approximately 10,000 employees ofJapan Post Co. were transferred to Japan Post Insurance.Japan Post Group has informedAflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products andAflac Japan cancer products but will not include sales of other financial products. 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 example, in 2021 and the first nine months of 2022,Aflac Japan observed an increase in the number of proposals to potential customers in theJapan Post Group channel, and theJapan Post Group continues to conduct a nationwide campaign to improve certain sales process practices. For additional information, see the risk factor entitled "Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in theU.S. and sales associates and other distribution partners inJapan ," in Item 1A. Risk Factors in the 2021 Annual Report. 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. 85 --------------------------------------------------------------------------------
The following table details the contributions to
premium sales by agency type for the three-month periods ended
2022 2021
Independent corporate and individual 49.3 % 49.9 %
Affiliated corporate (1) 46.2 43.8
Bank 4.5 6.3
Total 100.0 % 100.0 %
(1)
During the three-month period endedSeptember 30, 2022 ,Aflac Japan recruited 12 new sales agencies. AtSeptember 30, 2022 ,Aflac Japan was represented by approximately 7,500 sales agencies, with approximately 110,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due toAflac 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
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. 86 --------------------------------------------------------------------------------
The following table details the investment purchases for
Three Months Ended September Nine Months Ended September
30, 30,
(In millions) 2022 2021 2022 2021
Yen-denominated:
Fixed maturity securities:
Japan government and agencies $ 0 $ 0 $ 0 $ 1,181
Private placements 70 146 842 456
Other fixed maturity securities 29 25 66 161
Equity securities 82 75 358 197
Other investments 9 3 13 8
Total yen-denominated $ 190 $ 249 $ 1,279 $ 2,003
U.S. dollar -denominated:
Fixed maturity securities:
Other fixed maturity securities$ 86 $ 363 $ 420 $ 1,362 Infrastructure debt 182 0 296 0 Collateralized loan obligations 0 40 498 194 Equity securities 0 0 22 8
Commercial mortgage and other loans:
Transitional real estate loans 255 390 1,540 1,089
Commercial mortgage loans 0 0 0 17
Middle market loans 333 496 1,007 1,762
Other investments 100 94 283 241
Total U.S. dollar-denominated $ 956 $ 1,383 $ 4,066 $ 4,673
Total Aflac Japan purchases $ 1,146 $ 1,632 $ 5,345 $ 6,676
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 2021 Annual Report for more information regarding
loans and loan receivables.
The following table presents the results of
the periods ended
Three Months Nine Months
2022 2021 2022 2021
Total purchases for the period (in millions) (1) $ 1,037 $ 1,535 $ 5,049 $ 6,427
New money yield (1), (2) 5.73 %
3.99 % 4.16 % 3.38 %
Return on average invested assets (3)
2.87 2.72 2.79 2.68
Portfolio book yield, including
investments, end of period (1)
2.91 %
2.60 % 2.91 % 2.60 %
(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- and nine-month periods endedSeptember 30, 2022 was primarily due to increases inU.S. interest rates. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments and Hedging Activities sections of this MD&A for additional information on the Company's investments and hedging strategies. 87 --------------------------------------------------------------------------------
AFLAC
Aflac
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) 2022 2021 2022 2021 Net earned premiums$ 1,375 $ 1,393 $ 4,182 $ 4,223 Adjusted net investment income (1) 185 191 563 557 Other income 38 32 120 90 Total adjusted revenues 1,598 1,616 4,865 4,870 Benefits and claims 621 628 1,876 1,798 Adjusted expenses: Amortization of deferred policy acquisition costs 144 123 443 373 Insurance commissions 135 136 411 411 Insurance and other expenses 390 370 1,152 1,071 Total adjusted expenses 668 629 2,006 1,855 Total benefits and adjusted expenses 1,289 1,257 3,882 3,653 Pretax adjusted earnings$ 309 $ 358 $ 984 $ 1,217 Percentage change over previous period: Net earned premiums (1.3) % (1.0) % (1.0) % (2.9) % Adjusted net investment income (3.1) 9.1 1.1 6.5 Total adjusted revenues (1.1) .6 (.1) (1.6) Pretax adjusted earnings (13.7) 8.8 (19.1) 12.5 (1) Net interest cash flows from derivatives associated with certain investment strategies of$(1) and$1 for the three-month periods and$1 and$1 for the nine-month periods endedSeptember 30, 2022 and 2021, 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, 2022 , net earned premiums for AflacU.S. decreased primarily due to lower persistency. Adjusted net investment income decreased in the three-month period endedSeptember 30, 2022 due to lower variable net investment income, offset by higher floating rate income and increased in the nine-month period endedSeptember 30, 2022 , primarily due to higher floating rate income due to higher volumes and rates. Other income increased in the three- and nine-month periods endedSeptember 30, 2022 due to an increase in fee income. The decrease in pretax adjusted earnings in the three- and nine-month periods endedSeptember 30, 2022 was driven primarily by higher DAC amortization associated with lower persistency and planned spending reflecting, in part, platform and growth investments.
Annualized premiums in force were
respectively.
88 --------------------------------------------------------------------------------
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: 2022 2021 2022 2021
Benefits and claims 38.9 % 38.9 % 38.6 % 36.9 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 9.0 7.6 9.1 7.7
Insurance commissions 8.4 8.4 8.4 8.4
Insurance and other expenses 24.4 22.9 23.7 22.0
Total adjusted expenses 41.8 38.9 41.2 38.1
Pretax adjusted earnings 19.3 22.2 20.2 25.0
Ratios to total premiums:
Benefits and claims 45.2 % 45.1 % 44.9 % 42.6 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 10.5 8.8 10.6 8.8
For the three-month period ended September 30, 2022 , the benefit ratio to total
premiums increased slightly compared with the same period in 2021. For the
nine-month period ended September 30, 2022 , the benefit ratio to total premiums
increased compared with the same period in 2021, reflecting higher incurred
claims, partially offset by reserve releases related to lower persistency. The
adjusted expense ratio increased in the three- and nine-month periods ended
September 30, 2022 , when compared with the same periods in 2021, primarily due
to higher DAC amortization associated with lower persistency and planned
spending reflecting ongoing investments in the U.S. platform. The pretax
adjusted profit margin decreased in the three- and nine-month periods ended
September 30, 2022 , compared with the same periods in 2021, primarily due to the
higher adjusted expense and benefit ratios.
Aflac
The following table presents Aflac's
periods ended
Three Months Nine Months
(In millions) 2022 2021 2022 2021
New annualized premium sales $ 334 $ 299 $ 938 $ 814
Increase (decrease) over prior period 11.8 % 35.0 %
15.2 % 15.5 %
New annualized premium sales for accident insurance decreased .9%; disability sales increased 23.0%; critical care insurance sales (including cancer insurance) increased 6.3%; hospital indemnity insurance sales increased 4.6%; and dental/vision sales increased 42.7% in the third quarter of 2022, compared with the third quarter of 2021. The increase in sales for AflacU.S. in the third quarter of 2022 reflects continued improvement from investment in growth initiatives as well as productivity gains. For the full year of 2022, AflacU.S. expects this trend of increasing sales to continue. 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 2022 2021 2022 2021 Accident 22.6 % 25.5 % 24.1 % 26.3 % Disability 28.9 26.2 25.9 24.1 Critical care(1) 18.1 19.1 19.9 20.8 Hospital indemnity 14.1 15.1 15.2 16.0 Dental/vision 6.3 4.9 6.1 5.0 Life 10.0 9.2 8.8 7.8 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
89 -------------------------------------------------------------------------------- In the third quarter of 2022, the AflacU.S. sales force included an average of approximately 6,000U.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 2021 and continuing into 2022, constraints in the labor market have limited its recruiting of new sales agents, and that 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. AflacU.S. believes that the above factors have acted as a headwind to sales and to growth in the number of average weekly producers. 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) 2022 2021 2022 2021
Fixed maturity securities:
Other fixed maturity securities $ 138 $ 141 $ 477 $ 517
Infrastructure debt 104 30 123 30
Collateralized loan obligations 0 22 199 52
Equity securities 4 91 23 203
Other investments:
Transitional real estate loans 125 109 310 245
Commercial mortgage loans 0 0 0 163
Middle market loans 56 37 262 138
Limited partnerships 11 10 32 27
Total Aflac U.S. Purchases $ 438 $ 440 $ 1,426 $ 1,375
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 2021 Annual
Report for more information regarding loans and loans receivables.
90 --------------------------------------------------------------------------------
The following table presents the results of Aflac's
the periods ended
Three Months Nine Months
2022 2021 2022 2021
Total purchases for period (in millions) (1) $ 427 $ 430 $ 1,394 $ 1,348
New money yield (1), (2) 6.24 % 3.87 % 4.90 % 3.59 %
Return on average invested assets (3) 4.57 4.88 4.74 4.84
Portfolio book yield, end of period (1) 5.21 %
5.04 % 5.21 % 5.04 %
(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 in the three- and nine-month periods endedSeptember 30, 2022 was primarily due to increases inU.S. interest rates. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments.
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) 2022 2021 2022 2021
Net earned premiums $ 35 $ 45 $ 112 $ 138
Net investment income (loss) (1) 16 11 11 14
Amortized hedge income related to certain foreign
currency management strategies 19 13 44 45
Adjusted net investment income 35 24 55 59
Other income 3 3 22 8
Total adjusted revenues 73 72 189 205
Benefits and claims, net 43 42 116 126
Adjusted expenses:
Interest expense 44 39 123 126
Other adjusted expenses 45 32 129 97
Total adjusted expenses 89 71 252 223
Total benefits and adjusted expenses 132 113 368 349
Pretax adjusted earnings $ (59) $ (41) $ (179) $ (144)
(1) The change in value of federal historic rehabilitation and solar investments
in partnerships of $19 and $5 for the three-month periods and $61 and $35 for
the nine-month periods ended September 30, 2022 , and 2021, respectively, is
included as a reduction to net investment income. Tax credits on these
investments of $19 and $10 for the three-month periods and $63 and $35 for the
nine-month periods ended September 30, 2022 , and 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-month period ended September 30, 2022 , total adjusted revenues
increased slightly, compared to the same period in 2021, primarily due to higher
adjusted net investment income from higher interest rates and an increase in
amortized hedge income, partially offset by the impact of federal tax credit
investments and a reduction in net earned premiums as a result of significant
yen weakening. In the nine-month period ended September 30, 2022 , total adjusted
revenues decreased compared to the same period in 2021, reflecting a reduction
in net earned premiums, lower adjusted net investment income from lower
amortized hedge income and the impact of federal tax credit investments. These
results also reflect the impact of foreign currency on total net earned premiums
and the corresponding benefits. Pretax adjusted earnings decreased in the three-
and nine-month periods ended September 30, 2022 when compared to the same
periods in 2021.
91
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The Parent Company invests in partnerships that specialize in rehabilitating
historic structures or the installation of solar equipment in order to receive
federal historic rehabilitation and solar tax credits. These investments are
classified as limited partnerships and included in other investments in the
consolidated balance sheet. The change in value of each investment is recorded
as a reduction to net investment income. Tax credits generated by these
investments are recorded as an income tax benefit in the consolidated statement
of earnings.
INVESTMENTS
The Company's investment strategy utilizes disciplined asset and liability
management while seeking long-term risk-adjusted investment returns and the
delivery of stable income within regulatory and capital objectives, and
preserving shareholder value. In attempting to optimally balance these
objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified
portfolio of 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. Additionally, in November 2021 , the Company became a signatory to the
Principles for Responsible Investment , a global framework for incorporating
environmental, social and governance (ESG) considerations into investment and
ownership decisions.
For additional information concerning the Company's investments, see Notes 3, 4,
and 5 of the Notes to the Consolidated Financial Statements.
The following tables detail investments by segment.
Investment Securities by Segment
September 30, 2022
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 59,894 $ 11,909 $ 1,840 $ 73,643
Held to maturity, fixed maturity
securities,
at amortized cost (1) 17,466 0 0 17,466
Equity securities 584 63 417 1,064
Commercial mortgage and other loans:
Transitional real estate loans (1) 5,090 1,176 181 6,447
Commercial mortgage loans (1) 1,278 724 15 2,017
Middle market loans (1) 4,537 458 0 4,995
Other investments:
Policy loans 172 23 0 195
Short-term investments (2) 694 187 935 1,816
Limited partnerships 1,804 199 142 2,145
Other 0 30 0 30
Total investments 91,519 14,769 3,530 109,818
Cash and cash equivalents 1,488 492 2,730 4,710
Total investments and cash $ 93,007 $ 15,261 $ 6,260 $ 114,528
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
92
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December 31, 2021
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 81,793 $ 14,910 $ 1,993 $ 98,696
Held to maturity, fixed maturity
securities,
at amortized cost (1) 22,000 0 0 22,000
Equity securities 714 226 663 1,603
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,226 1,020 45 5,291
Commercial mortgage loans (1) 1,217 669 8 1,894
Middle market loans (1) 4,297 304 0 4,601
Other investments:
Policy loans 216 20 0 236
Short-term investments (2) 590 302 834 1,726
Limited partnerships 1,534 169 155 1,858
Other 0 22 0 22
Total investments 116,587 17,642 3,698 137,927
Cash and cash equivalents 2,053 681 2,317 5,051
Total investments and cash $ 118,640 $ 18,323 $ 6,015 $ 142,978
(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 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 of Fixed Maturity Securities by Credit Rating
September 30, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.6 % 1.5 % 1.0 % .9 %
AA 5.4 5.6 5.1 5.2
A 67.6 67.7 68.9 68.5
BBB 23.0 22.8 22.5 22.8
BB or lower 2.4 2.4 2.5 2.6
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.
93 --------------------------------------------------------------------------------
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 JP Morgan Chase and Co. A$ 197 $ 160 $ (37) Investcorp Capital Limited BB 305 273 (32) Autostrade Per Litalia Spa BB 137 106 (31) KLM Royal Dutch Airlines B 122 93 (29) Banco de Chile A 138 112 (26) Oracle Corp BBB 173 148 (25) Prologis LP A 159 136 (23) AXA BBB 235 215 (20) Morgan Stanley A 124 104 (20) GLP Pte Ltd. BBB 104 85 (19) 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.
Below-Investment-Grade Investments
September 30, 2022
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 306 $ 305 $ 273 $ (32)
Pemex Project Funding Master Trust 207 207 208 1
Commerzbank 173 131 183 52
KLM Royal Dutch Airlines 138 122 93 (29)
Telecom Italia SpA 138 138 163 25
Autostrade Per Litalia Spa 138 137 106 (31)
Apache Corporation 138 104 126 22
Howmet Aerospace Inc. 100 64 90 26
IKB Deutsche Industriebank AG 90 43 69 26
Generalitat de Catalunya 55 22 55 33
Other Issuers 193 187 165 (22)
Subtotal (2) 1,676 1,460 1,531 71
High yield corporate bonds 785 620 675 55
Middle market loans 4,710 4,555 4,558 3
Grand Total $ 7,171 $ 6,635 $ 6,764 $ 129
(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.
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The Company maintains an allocation to higher yielding corporate bonds within
the Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated
below-investment-grade at the time of purchase, but the Company also purchased
several that were rated investment grade which, because of market pricing, offer
yields commensurate with below-investment-grade risk profiles. The objective of
this allocation was to enhance the Company's yield on invested assets and
further diversify credit risk. All investments in this program must have a
minimum rating at purchase of low BB using the Company's above described rating
methodology and are managed by the Company's internal credit portfolio
management team.
The Company 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, 2022
Gross
Gross Unrealized Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 40,260 $ 4,041 $ (1,166) $ 43,135 45.4 %
Municipalities 2,463 279 (145) 2,597 2.8
Mortgage- and asset-backed securities 1,963 128 (82) 2,009 2.2
Public utilities 7,037 622 (268) 7,391 8.0
Electric 5,718 511 (191) 6,039 6.5
Natural Gas 229 33 (10) 251 .3
Other 532 40 (42) 529 .6
Utility/Energy 558 38 (25) 572 .6
Sovereign and Supranational 1,206 147 (14) 1,339 1.3
Banks/financial institutions 8,815 712 (496) 9,031 10.0
Banking 5,196 489 (290) 5,395 5.9
Insurance 1,702 147 (70) 1,780 1.9
Other 1,917 76 (136) 1,856 2.2
Other corporate 26,757 2,852 (1,383) 28,226 30.3
Basic Industry 2,358 296 (107) 2,546 2.7
Capital Goods 3,147 269 (195) 3,222 3.6
Communications 2,711 346 (90) 2,967 3.1
Consumer Cyclical 2,174 243 (68) 2,349 2.5
Consumer Non-Cyclical 5,988 582 (322) 6,247 6.7
Energy 2,550 379 (91) 2,838 2.9
Other 1,263 108 (88) 1,284 1.4
Technology 3,573 237 (233) 3,578 4.0
Transportation 2,993 392 (189) 3,195 3.4
Total fixed maturity securities $ 88,501$ 8,781 $ (3,554) $ 93,728
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, 2022 December 31, 2021
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 72,693 $ 76,937 $ 88,552 $ 103,034
Equity securities 854 854 950 950
Total publicly issued 73,547 77,791 89,502 103,984
Privately issued securities: (2)
Fixed maturity securities (3) 15,808 16,791 18,817 22,531
Equity securities 210 210 653 653
Total privately issued 16,018 17,001 19,470 23,184
Total investment securities $ 89,565 $ 94,792 $ 108,972 $ 127,168
(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) 2022 2021
Privately issued reverse-dual currency securities $ 3,707 $ 4,784
Publicly issued collateral structured as reverse-dual
currency securities
1,267 1,596 Total reverse-dual currency securities$ 4,974 $ 6,380 Reverse-dual currency securities as a percentage of total investment securities 5.6 % 5.9 %
(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 2021 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
Japan's
•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). The following table presents metrics related toAflac Japan's U.S. dollar-denominated hedge program and the Parent Company's enterprise corporate hedging program, including associated amortized hedge costs/income, for the periods endedSeptember 30 . See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. Three Months Nine Months 2022 2021 2022 2021Aflac Japan : FX Forwards
FX forward (sell USD, buy yen) notional at end of
period (in billions) (1)
$4.1 $6.4 $4.1 $6.4 Weighted average remaining tenor (in months) (2) 3.7 3.7 3.7 3.7 Amortized hedge income (cost) for period (in millions)$(10) $(13) $(36) $(42)
FX Options
FX option notional at the end of period (in billions)
(1)
$13.5 $8.0 $13.5 $8.0 Weighted average remaining tenor (in months) (2) 3.2 3.6 3.2 3.6 Amortized hedge income (cost) for period (in millions)$(18) $(7) $(48) $(13) Corporate and Other (Parent Company): FX Forwards
FX forward (buy USD, sell yen) notional at end of
period (in billions) (1)
$5.0 $5.0 $5.0 $5.0 Weighted average remaining tenor (in months) (2) 11.9 12.2 11.9 12.2 Amortized hedge income (cost) for period (in millions)$20 $14 $46 $49
FX Options
FX option notional at the end of period (in billions)
(1)
$1.7 $2.0 $1.7 $2.0 Weighted average remaining tenor (in months) (2) 6.1 7.2 6.1 7.2 Amortized hedge income (cost) for period (in millions)$(1) $(1) $(2) $(4) (1) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (2) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors. 97 --------------------------------------------------------------------------------
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan solvency margin ratio (SMR) calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . September 30, December 31, 2022 2021 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost (1) Value
Available-for-sale securities:
Fixed maturity securities$ 13,845 $ 15,780 $ 17,615 $ 20,478 Equity securities 40 40 24 24
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 5,090 5,044 4,226 4,293 Commercial mortgage and other loans 1,278 1,140 1,217 1,265 Middle market loans (floating rate) 4,536 4,533 4,297 4,352 Other investments 1,805 1,805 1,534 1,534 Total U.S. Dollar Program 26,594 28,342 28,913 31,946
Available-for-sale securities:
Fixed maturity securities - economically converted
to yen
2,015 2,689 2,236 3,328 TotalU.S. dollar-denominated investments in Aflac Japan$ 28,609 $
31,031
(1) Net of allowance for credit losses
TheU.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. The Company uses one-sided foreign currency put options to mitigate the settlement risk onU.S. dollar-denominated assets related to extreme foreign currency rate changes. From time to time,Aflac Japan also maintains a collar program on a portion of itsU.S. Dollar Program to mitigate against more extreme moves in foreign exchange and therefore support SMR. As ofSeptember 30, 2022 , there were no collars inAflac Japan , and none of the Company's foreign currency options hedgingAflac Japan's U.S. dollar-denominated assets were in-the-money. In 2021, the Company moved to a strategy that contains one-sided put options, fewer foreign currency forwards and no collars. The Company believes that the new strategy will reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. 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.
As of
dollar-denominated portfolio was
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) 2022 2021 2022 2021 Net cash inflows (outflows)$ (78) $ (14) $ (720) $ 88 98
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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, 2022 , with hedging instruments comprised of$3.6 billion of yen-denominated debt and$6.7 billion of foreign currency forwards and options, compared with$10.2 billion as ofDecember 31, 2021 , with hedging instruments comprised of$3.3 billion of yen-denominated debt and$6.9 billion of foreign currency forwards and options. 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 nine-month periods endedSeptember 30, 2022 and 2021, 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 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. This activity is reported in Corporate and Other. The Company continually evaluates the program's efficacy.
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 Factors 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 2021 Annual Report.
See Note 4 of the Notes to the Consolidated Financial Statements for additional
information on the Company's hedging activities.
DEFERRED POLICY ACQUISITION COSTS
The following table presents deferred policy acquisition costs by segment.
September 30,
(In millions) 2022 December 31, 2021 % Change
Aflac Japan $ 4,931 $ 6,233 (20.9) % (1)
Aflac U.S. 3,224 3,292 (2.1)
Total $ 8,155 $ 9,525 (14.4) %
(1)
the nine months ended
See Note 6 of the Notes to the Consolidated Financial Statements in the 2021
Annual Report for additional information on the Company's deferred policy
acquisition costs.
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POLICY LIABILITIES
The following table presents policy liabilities by segment.
September 30,
(In millions) 2022 December 31, 2021 % Change
Aflac Japan $ 74,822 $ 93,613 (20.1) % (1)
Aflac U.S. 12,062 11,916 1.2
Other 236 276 (14.5)
Intercompany eliminations(2) (580) (733) (20.9)
Total $ 86,540 $ 105,072 (17.6) %
(1) Aflac Japan's policy liabilities increased .6% in yen during the nine months
ended September 30, 2022 .
(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 2021 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. InMarch 2022 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2027 . InMarch 2022 , the LIPPC reached the required balance for the total life industry of ¥400 billion as specified by its Articles of Incorporation. As a result, additional contributions are not expected to be required unless the balance is reduced due to payments made by the LIPPC to the policyholders of insolvent insurers. Accordingly,Aflac Japan did not recognize an expense for LIPPC assessments in the third quarter of 2022.Aflac Japan recognized an expense of ¥.9 billion and ¥1.8 billion for the nine-month periods endedSeptember 30, 2022 and 2021 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, 2022 and 2021 were immaterial. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to 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. 100 --------------------------------------------------------------------------------
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 in 2021, unallocated proceeds of which contribute to total cash but are not intended to support holding company liquidity. The Company remains committed to prudent liquidity and capital management. AtSeptember 30, 2022 , the Company held$4.7 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion .Aflac Japan and AflacU.S. generate cash flows from their operations and 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, interest on its outstanding indebtedness and operating expenses.
The following table presents the amounts provided to the Parent Company for the
nine-month periods ended
Liquidity Provided by Subsidiaries to Parent Company (In millions) 2022 2021
Management fees paid by subsidiaries
Dividends declared or paid by subsidiaries 1,923 2,016
The following table details
totals above, for the nine-month periods ended
Aflac Japan Remittances (In millions of dollars and billions of yen) 2022 2021
(in dollars)
1,623 1,776Aflac Japan dividends declared or paid to Parent Company (in yen) ¥ 216.9 ¥ 195.6 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 portfolio of unhedgedU.S. dollar-denominated investments at Aflac Japan and to consider whether the amount of such investments should be increased or decreased relative to the Company's view of economic equity surplus inAflac Japan in light of potentially rising hedge costs and other factors. See the Hedging Activity subsection of this MD&A for more information. The Company believes that its balance of cash and cash equivalents and cash generated by operations will be sufficient to satisfy both its short-term and long-term cash requirements and plans for cash, including material cash requirements from known contractual obligations and returning capital to shareholders through share repurchases and dividends. For additional information, see the Liquidity and Capital Resources section of Item 7. MD&A in the 2021 Annual Report. In addition to cash and cash equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. 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, 2022 , the Parent Company and Aflac had four lines of credit with third parties and ten intercompany lines of credit. The Company was in compliance with all of the covenants of its notes payable and lines of credit atSeptember 30, 2022 . For additional information, see Note 8 of the Notes to the Consolidated Financial Statements. 101 -------------------------------------------------------------------------------- The Company's consolidated financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. As ofSeptember 30, 2022 , the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. The Company has not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 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 2021 Annual Report for more information on the Company's securities lending and derivative activities. See Note 15 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for information on material unconditional purchase obligations that are not recorded on the Company's balance sheet. With the exception of disclosed activities in those referenced footnotes and the Risk Factors in the 2021 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 consistently generates positive cash flows from operations, and has
the ability to adjust cash flow management from other sources of liquidity
including reinvestment cash flows and selling investments in order to meet
short-term cash needs.
The Company translates cash flows 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 ended
(In millions) 2022 2021 Operating activities$ 2,846 $ 4,181 Investing activities (847) (1,171) Financing activities (2,256) (1,897)
Exchange effect on cash and cash equivalents (84) (46)
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 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.
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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 Corporate and other. The central mission of Aflac Global
Ventures is to support the organic growth and business development needs of
Aflac Japan and Aflac U.S. with an emphasis on digital applications designed to
improve the customer experience, gain efficiencies, and develop new markets in
an effort to enhance and defend long-term shareholder value. Investments are
included in equity securities or 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 2022, Aflac U.S.
borrowed and repaid $426 million under this program. As of September 30, 2022 ,
Aflac U.S. had outstanding borrowings of $592 million reported in its balance
sheet.
See Note 3 of the Notes to the Consolidated Financial Statements for details on
certain investment commitments.
Financing Activities
Cash flows from financing activities consist primarily of share repurchases,
dividends to shareholders and from time to time debt issuances and redemptions.
InSeptember 2022 , the Parent Company issued four series of senior notes totaling ¥73.0 billion through a public debt offering under itsU.S. shelf registration statement. The first series, which totaled ¥33.4 billion, bears interest at a fixed rate of 1.075% per annum, payable semi-annually, and will mature inSeptember 2029 . The second series, which totaled ¥21.1 billion, bears interest at a fixed rate of 1.320% per annum, payable semi-annually, and will mature inDecember 2032 . The third series, which totaled ¥6.5 billion, bears interest at a fixed rate of 1.594% per annum, payable semi-annually, and will mature inSeptember 2037 . The fourth series, which totaled ¥12.0 billion, bears interest at a fixed rate of 2.144% per annum, payable semi-annually, and will mature inSeptember 2052 . These notes are redeemable at the Parent Company's option 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. In addition, the notes maturing inSeptember 2029 ,December 2032 andSeptember 2037 are redeemable at the Parent Company's option, in whole or in part from time to time, on or afterJune 14, 2029 ,June 14, 2032 andMarch 14, 2037 , respectively, at a redemption price equal to the aggregate principal amount of the applicable series to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption. InAugust 2022 , the Parent Company renewed a senior term loan facility with a commitment amount totaling ¥107.0 billion. The first tranche of the facility, which totaled ¥11.7 billion, bears interest at a rate per annum equal to theTokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2027 . The applicable margin ranges between .225% and .625%, depending on the Parent Company's debt ratings as of the date of determination. The second tranche, which totaled ¥25.3 billion, bears interest at a rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2029 . The applicable margin ranges between .325% and .725%, depending on the Parent Company's debt ratings as of the date of determination. The third tranche, which totaled ¥70.0 billion, bears interest at a rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2032 . The applicable margin ranges between .475% and 1.025%, depending on the Parent Company's debt ratings as of the date of determination. InSeptember 2022 , the Parent Company used a portion of the net proceeds from itsSeptember 2022 issuance of various series of senior notes and theAugust 2022 senior term loan facility to redeem$750 million of its 3.625% senior notes dueNovember 2024 .
See Note 8 of the Notes to the Consolidated Financial Statements for further
information on the debt activity discussed above.
Cash returned to shareholders through treasury stock purchases and dividends was$2.5 billion during the nine-month period endedSeptember 30, 2022 , compared with$2.3 billion during the nine-month period endedSeptember 30, 2021 .
The following tables present a summary of treasury stock activity during the
nine-month periods ended
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Treasury Stock Purchased
(In millions of dollars and thousands of shares) 2022 2021
Treasury stock purchases $ 1,801 $ 1,676
Number of shares purchased:
Share repurchase program 30,249 32,186
Other 354 419
Total shares purchased 30,603 32,605
Treasury Stock Issued
(In millions of dollars and thousands of shares) 2022 2021
Stock issued from treasury:
Cash financing$ 15 $ 13 Noncash financing 45 43 Total stock issued from treasury$ 60 $ 56 Number of shares issued 1,109 1,424
As of
Company's common stock was available for purchase under share repurchase
authorizations by its board of directors.
In
law will impose a 1% excise tax on the Company's repurchases of its common
stock.
Cash dividends paid to shareholders were$.40 per share in the third quarter of 2022, compared with$.33 per share in the third quarter of 2021. The following table presents the dividend activity for the nine-month periods endedSeptember 30 . (In millions) 2022 2021 Dividends paid in cash$ 740 $ 647
Dividends through issuance of treasury shares 28 23
Total dividends to shareholders
$ 768 $ 670 InOctober 2022 , the board of directors declared the fourth quarter cash dividend of$.40 per share, an increase of 21.2% compared with the same period in 2021. The dividend is payable onDecember 1, 2022 to shareholders of record at the close of business onNovember 16, 2022 . 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. 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 104 -------------------------------------------------------------------------------- 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 2021 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively. As ofSeptember 30, 2022 ,Aflac Japan's SMR remains high and reflects a strong capital and surplus position. The Company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings. AflacU.S. 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 Risk-based capital (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, 2022 , 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 2022 in excess of$1.1 billion 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. Other
For information regarding commitments and contingent liabilities, see Note 13 of
the Notes to the Consolidated Financial Statements.
105
--------------------------------------------------------------------------------
Additional Information
Investors should note that the Company announces material financial information
in its SEC filings, press releases and public conference calls. In accordance
with SEC guidance, the Company may also use the Investor Relations section of
the Company's website (http://investors.aflac.com) to communicate with investors
about the Company. It is possible that the financial and other information the
Company posts there could be deemed to be material information. The information
on the Company's website is not part of this document. Further, the Company's
references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP.
These principles are established primarily by the Financial Accounting Standards
Board (FASB). In this MD&A, references to U.S. GAAP issued by the FASB are
derived from the FASB Accounting Standards Codification™ (ASC). The preparation
of financial statements in conformity with U.S. GAAP requires the Company to
make estimates based on currently available information when recording
transactions resulting from business operations. The estimates that the Company
deems to be most critical to an understanding of its results of operations and
financial condition are those related to the valuation of investments and
derivatives, 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 92% of the Company's assets
and 78% of its liabilities are reported as of September 30, 2022 , 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 ended September 30, 2022 . For
additional information, see the Critical Accounting Estimates section of Item 7.
MD&A included in the 2021 Annual Report.
Future Adoption of Accounting Standard for Long-Duration Insurance Contracts
As previously reported, inAugust 2018 , the FASB issued Accounting Standards Update 2018-12, "Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts" (the ASU). The update significantly changes how insurers account for long-duration contracts, amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company.
The following table presents the expected impacts from the adoption of ASU
2018-12 to the Company's previously reported operating ratios.
Year ended December 31, 2021
As As
Previously Adjusted
Reported
Aflac Japan: (1)
Ratios to total premiums:
Benefits and claims, net 67.0 % 67.9 %
Ratios to total adjusted revenues:
Total adjusted expenses 21.6 20.5
Aflac U.S.:
Ratios to total premiums:
Benefits and claims, net 43.6 % 47.0 %
Ratios to total adjusted revenues:
Total adjusted expenses 39.5
38.4
(1) Includes the impact of the deferred profit liability reclassification
discussed in Note 1 of the Notes to the Consolidated Financial Statements.
For the year endedDecember 31, 2021 , as restated under the new ASU, benefit ratios are higher forAflac Japan and AflacU.S. , while expense ratios are modestly lower due to amortizing deferred acquisition costs at a slower rate. This 106 -------------------------------------------------------------------------------- results in a slightly higher pretax profit margin forAflac Japan and a modestly lower pretax profit margin for AflacU.S. The pre-adoption and restated ratios presented above reflect the deferred profit liability reclassification discussed in Note 1 of the Notes to the Consolidated Financial Statements. Prior to adoption of the ASU, pandemic-related low claim experience is recognized in earnings in the reporting period when low claims are experienced, whereas under the new ASU, this pandemic-related low claim experience is recognized in line with experience-related remeasurement and potentially through annual assumptions updates, i.e., partially during the reporting period with the remainder recognized over the remaining expected life of each cohort. For additional information on the ASU, see the Future Adoption of Accounting Standard for Long-Duration Insurance Contracts section of Item 7. MD&A in the 2021 Annual Report; see also Note 1 of the Notes to the Consolidated Financial Statements. New Accounting Pronouncements For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
NMI HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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