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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 inflation and the continued effects 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 interpretations 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 •major public health issues, including COVID-19 and any resulting or coincidental economic effects, 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 and on successful execution of revenue growth and expense management initiatives •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 75 -------------------------------------------------------------------------------- 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 three-month periods endedMarch 31, 2023 and 2022, 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, 2022 (2022 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 77
Results of Operations 78
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 105
76
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EXECUTIVE SUMMARY
Company Overview
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to millions of policyholders and customers inJapan and theU.S. 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), which provides a platform for Aflac Dental and Vision in theU.S. (collectively, AflacU.S. ).The Parent Company , other operating business units that are not individually reportable, and business activities, including reinsurance activities, not included inAflac Japan or AflacU.S. are included in Corporate and other. In 2022, the Company establishedAflac Re Bermuda Ltd. (Aflac Re), aBermuda domiciled insurer that reinsures certain policies issued by ALIJ. Aflac Re is subject to regulation inBermuda , where theBermuda Monetary Authority (BMA) has broad administrative powers relating to granting and revoking licenses to transact reinsurance business, approval of specific reinsurance transactions, capital requirements and solvency standards, limitations on dividends to shareholders, the nature of and limitations on investments, and the filing of financial statements in accordance with prescribed or permitted accounting practices. Financial results from Aflac Re are included in Corporate and other.
Performance Highlights
Total revenues were$4.8 billion in the first three months of 2023, compared with$5.2 billion in the first three months of 2022. Net earnings were$1.2 billion , or$1.94 per diluted share in the first three months of 2023, compared with$1.0 billion , or$1.60 per diluted share, in the first three months of 2022. Results in the first quarter of 2023 included pretax net investment gains of$123 million , compared with pretax net investment gains of$122 million in the first three months of 2022. Net investment gains in the first three months of 2023 included an increase in credit loss allowances of$30 million ;$99 million of net gains from certain derivative and foreign currency gains or losses;$3 million of net losses on equity securities; and$57 million of net gains from sales and redemptions.
The average yen/dollar exchange rate(1) for the three-month period ended
rate(1) of 116.18 for the same period in 2022.
Adjusted earnings(2) in the first quarter of 2023 were$1.0 billion , or$1.55 per diluted share, compared with$942 million , or$1.44 per diluted share, in the first quarter of 2022. The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by$.07 . Total investments and cash atMarch 31, 2023 were$120.5 billion , compared with$117.4 billion atDecember 31, 2022 . In the first quarter of 2023,Aflac Incorporated repurchased$700 million , or 10.3 million of its common shares. AtMarch 31, 2023 , the Company had 106.3 million remaining shares authorized for repurchase. Shareholders' equity was$19.8 billion , or$32.65 per share, atMarch 31, 2023 , compared with$20.1 billion , or$32.73 per share, atDecember 31, 2022 . Shareholders' equity atMarch 31, 2023 included a cumulative decrease of$4.9 billion from the effect of changes in discount rate assumptions on insurance contracts, driven by the adoption of the new accounting guidance for long-duration insurance contracts, compared with a corresponding cumulative decrease of$2.1 billion atDecember 31, 2022 , and a net unrealized gain on investment securities and derivatives of$1.3 billion , compared with a net unrealized loss of$729 million atDecember 31, 2022 . Shareholders' equity atMarch 31, 2023 also included an unrealized foreign currency translation loss of$3.6 billion , compared with an unrealized foreign currency translation loss of$3.6 billion atDecember 31, 2022 . The annualized return on average shareholders' equity in the first quarter of 2023 was 23.8%. Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was$27.1 billion , or$44.66 per share atMarch 31, 2023 , compared with$26.6 billion , or$43.18 per share, atDecember 31, 2022 . The annualized adjusted return on equity (ROE) excluding foreign currency impact(2) in the first quarter of 2023 was 14.8%.(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. 77 -------------------------------------------------------------------------------- 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:
•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/ 78 -------------------------------------------------------------------------------- income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparableU.S. GAAP financial measure for amortized hedge costs/ income. •Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted inJapan and foreign exchange rates are outside management's control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) intoU.S. dollars. The most comparableU.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively. •Adjusted book value is theU.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on theU.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important as they exclude AOCI, which fluctuates due to market movements that are outside management's control. The most comparableU.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively. •Adjusted return on equity excluding foreign currency impact is adjusted earnings excluding the current period foreign currency impact divided by average shareholders' equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparableU.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders' equity. •U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact onU.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considersU.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency 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. 79 -------------------------------------------------------------------------------- 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
Three Months Ended
2023 2022 2023 2022
Net earnings $ 1,188 $ 1,047 $ 1.94 $ 1.60
Items impacting net earnings:
Adjusted net investment (gains) losses (1) (209) (134) (.34) (.21)
Other and non-recurring (income) loss 0 1 .00 .00
Income tax (benefit) expense on items excluded from
adjusted earning (26) 28 (.04) .04
Adjusted earnings 953 942 1.55 1.44
Current period foreign currency impact (2) 41 N/A .07
N/A
Adjusted earnings excluding current period foreign
currency impact
$ 994 $ 942 $ 1.62 $ 1.44 (1) See reconciliation of net investment (gains) losses to adjusted net investment (gains) losses below. (2) Prior period foreign currency impact reflected as "N/A" to isolate change for current period only. Prior-year amounts have been adjusted for the adoption of accounting guidance onJanuary 1, 2023 related to accounting for long-duration insurance contracts.
Reconciling Items
Net Investment Gains and Losses
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment
(Gains) Losses
Three Months
Ended March 31,
(In millions) 2023 2022
Net investment (gains) losses $ (123) $ (122)
Items impacting net investment (gains) losses:
Amortized hedge costs (58) (26)
Amortized hedge income 29 11
Net interest cash flows from derivatives associated
with certain investment strategies (69) (9)
Interest rate component of the change in fair value
of foreign currency swaps on notes payable 12 13 Adjusted net investment (gains) losses
The Company's investment strategy is to invest primarily in fixed maturity securities to provide a reliable stream of investment income, which is one of the drivers of the Company's profitability. This investment strategy incorporates asset-liability matching (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 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. 80 --------------------------------------------------------------------------------
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 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. 81 --------------------------------------------------------------------------------
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 11.5% for the three-month period endedMarch 31, 2023 , compared with 19.1% for the same period in 2022. The combined effective tax rate differs from theU.S. statutory rate primarily due to historic and solar tax credits and the exclusion of foreign currency translation gains and losses held in theDelaware Statutory Trust . For additional information, see the Critical Accounting Estimates - Income Taxes section of Item 7. MD&A in the 2022 Annual Report. The Company expects that its effective tax rate on adjusted earnings 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 2022 Annual Report for more information.
Foreign Currency Translation
Aflac Japan's premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen.Aflac Japan purchases yen-denominated assets andU.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated toU.S. dollars using 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 activities, not included inAflac Japan or AflacU.S. are included in Corporate and other. See Item 1. Business in the 2022 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 •Premium Persistency For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part 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 March 31, (In millions) 2023 2022 Net earned premiums$ 2,170 $ 2,625 Net investment income:(1) Yen -denominated investment income 263299 U.S. dollar -denominated investment income 407 406 Net investment income 669 705
Amortized hedge costs related to certain foreign currency exposure management
strategies
(58) 26
Adjusted net investment income 611 680
Other income (loss) 9 9
Total adjusted revenues 2,790 3,314
Benefits and claims:
Benefits and claims, excluding reserve remeasurement 1,466 1,793
Reserve remeasurement (gains) losses (13) (14)
Total benefits and claims, net 1,453 1,779
Adjusted expenses:
Amortization of deferred policy acquisition costs 85 94
Insurance commissions 138 161
Insurance and other expenses 326 409
Total adjusted expenses 549 664
Total benefits and adjusted expenses 2,002 2,443
Pretax adjusted earnings $ 788 $ 870
Weighted-average yen/dollar exchange rate 132.30 116.18
In Dollars In Yen
Three Months Ended
Percentage change over March 31, Three Months Ended March 31,
previous period: 2023 2022 2023 2022
Net earned premiums (17.3) % (11.5) % (5.9) % (2.8) %
Adjusted net investment income (10.1) (3.6) 2.4 5.9
Total adjusted revenues (15.8) (10.0) (4.1) (1.2)
Pretax adjusted earnings (9.4) (5.0) 3.2 4.7
(1) Net interest cash flows from derivatives associated with certain investment
strategies of $(62) and $(10) for the three-month periods ended March 31, 2023
and 2022, respectively, have been reclassified from net investment gains
(losses) and included in adjusted earnings as a component of net investment
income.
Prior-year amounts have been adjusted for the adoption of accounting guidance on
January 1, 2023 related to accounting for long-duration insurance contracts.
In the three-month period ended March 31, 2023 , Aflac Japan's net earned
premiums decreased, in yen terms, mainly due to limited-pay products reaching
premium paid-up status and the implementation of the Aflac Re global reinsurance
strategy. Adjusted net investment income, in yen terms, increased in the
three-month period ended March 31, 2023 , primarily due to the impact of foreign
exchange on U.S. dollar-denominated investments offset by higher hedge costs.
The increase in pretax adjusted earnings in yen for the three-month period ended
March 31, 2023 was primarily due to a decrease in total benefits and adjusted
expenses.
Annualized premiums in force decreased 4.8% to ¥1.28 trillion as of
2023
annualized premiums in force in yen was driven primarily by limited-pay products
83 -------------------------------------------------------------------------------- reaching premium paid-up status and lower sales. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were$9.6 billion atMarch 31, 2023 , compared with$11.0 billion atMarch 31, 2022 . As ofMarch 31, 2023 ,Aflac Japan exceeded 23 million individual policies in force inJapan , with more than 14 million cancer policies in force inJapan .Aflac Japan's investment portfolios includeU.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). In years when the yen strengthens in relation to the dollar, translatingAflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. In years when the yen weakens, translatingU.S. dollar-denominated investment income into yen magnifies growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. The following table illustrates the effect of translatingAflac Japan's U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had foreign currency exchange rates remained unchanged from the comparable period in the prior year. Amounts excluding foreign currency impact onU.S. dollar-denominated investment income were determined using the average foreign currency exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above. Aflac Japan Percentage Changes Over Previous Period (Yen Operating Results) For the Periods Ended March 31, Including Foreign Excluding Foreign Currency Changes Currency Changes Three Months Three Months 2023 2022 2023 2022 Adjusted net investment income 2.4 % 5.9 % (5.9) % .3 % Total adjusted revenues (4.1) (1.2) (5.8) (2.3) Pretax adjusted earnings 3.2 4.7 (3.0) .5
Prior-year amounts have been adjusted for the adoption of accounting guidance on
The following table presents a summary of operating ratios in yen terms for
Three Months Ended March 31,
Ratios to total adjusted revenues: 2023 2022
Total benefits and claims, net 52.1 % 53.7 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 3.1 2.8
Insurance commissions 4.9 4.8
Insurance and other expenses 11.7 12.4
Total adjusted expenses 19.7 20.0
Pretax adjusted earnings 28.2 26.2
Ratios to total premiums:
Total benefits and claims, net 67.0 % 67.9 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 3.9 3.6
Prior-year amounts have been adjusted for the adoption of accounting guidance on
In the three-month period endedMarch 31, 2023 , the total benefits and claims ratio to total premiums decreased, compared with the same period in the prior year, primarily due to a decrease in the third sector benefit ratio due to favorable experience and the continued change in the mix of first and third sector business. In the three-month period endedMarch 31, 2023 , the total adjusted expense ratio decreased slightly, compared with the same period in the prior year, reflecting the decrease in total adjusted revenues and an offsetting decrease in total adjusted expenses due to expense control efforts as well as the reinsurance transaction with Aflac Re. In total, the pretax adjusted profit margin 84 --------------------------------------------------------------------------------
increased in the three-month period ended
lower benefit ratio and a lower expense ratio and an offsetting decrease in
total adjusted revenues.
The following table presentsAflac Japan's premium persistency on a 12-month rolling basis as ofMarch 31 . 2023 2022 Premium persistency 93.9 % 94.3 % Aflac Japan Sales The following table presentsAflac Japan's new annualized premium sales for the periods endedMarch 31 . In Dollars In Yen Three Months Three Months (In millions of dollars and billions of yen) 2023 2022 2023 2022 New annualized premium sales$ 100 $ 103 ¥ 13.2 ¥ 11.9 Increase (decrease) over prior period (3.2) % (22.4) % 10.8 % (14.8) % In 2023, the new annualized premium sales on a yen basis increased, compared with 2022, due primarily to sales ofAflac Japan's new cancer insurance product and updated first sector products, all of which were launched in the second half of 2022. Further, these products were launched at Dai-ichi Life and other financial institutions inJanuary 2023 .
The following table details the contributions to
premium sales by major insurance product for the periods ended
Three Months
2023 2022
Cancer 59.9 % 53.0 %
Medical and other health:
Medical 20.8 31.4
Income support .6 1.1
Life insurance:
Traditional life (1) 7.3 9.0
WAYS 8.9 .7
Child endowment .6 .3
Other 1.9 4.5
Total 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, income support, and nursing care insurance 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. Moreover, inNovember 2022 ,Aflac Japan refreshed its first sector savings-type products WAYS and Child Endowment and began to actively promote sales of these products after having curtailed sales of both products beginning in 2013. The refreshment of these first sector products positionAflac Japan for potential future long-term sales opportunities by marketing these products to a younger demographic as well as potential cross-selling opportunities ofAflac Japan's third sector products. Sales ofAflac Japan cancer insurance 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 2023 , Japan Post Group began sellingAflac Japan's new cancer insurance product that was launched inAugust 2022 . 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 2022 Annual Report. 85 --------------------------------------------------------------------------------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.
The following table details the contributions to
premium sales by agency type for the three-month periods ended
2023 2022
Independent corporate and individual 50.9 % 48.9 %
Affiliated corporate (1) 45.4 46.5
Bank 3.7 4.6
Total 100.0 % 100.0 %
(1)
During the three-month period endedMarch 31, 2023 ,Aflac Japan recruited 4 new sales agencies. AtMarch 31, 2023 ,Aflac Japan was represented by approximately 7,300 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
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 March 31,
(In millions) 2023 2022
Yen-denominated:
Fixed maturity securities:
Japan government and agencies $ 151 $ 0
Private placements 273 307
Other fixed maturity securities 77 17
Equity securities 123 91
Other investments 6 3
Total yen-denominated $ 630 $ 418
U.S. dollar -denominated:
Fixed maturity securities:
Other fixed maturity securities$ 376 $ 85 Collateralized loan obligations 0 67
Commercial mortgage and other loans:
Transitional real estate loans 53 507
Middle market loans 150 311
Other investments 137 48
Total U.S. dollar-denominated $ 716 $ 1,018
Total Aflac Japan purchases $ 1,346 $ 1,436
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 2022 Annual Report for more information regarding
loans and loan receivables.
The following table presents the results of
the periods ended
Three Months
2023 2022
Total purchases for the period (in millions) (1) $ 1,203 $ 1,385
New money yield (1),(2) 5.18 % 3.90 %
Return on average invested assets (3) 2.57 2.54
Portfolio book yield, including
of period (1),(2)
3.13 % 2.62 % (1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs (3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis The increase in the Aflac Japan new money yield in the three-month period endedMarch 31, 2023 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.
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. 87 -------------------------------------------------------------------------------- Aflac U.S. Summary of Operating Results Three Months Ended March 31, (In millions) 2023 2022 Net earned premiums$ 1,428 $ 1,413 Adjusted net investment income (1) 197 184 Other income 35 42 Total adjusted revenues 1,660 1,639 Benefits and claims: Benefits and claims, excluding reserve remeasurement 691 686 Reserve remeasurement (gains) losses (40) (20) Total benefits and claims 651 666 Adjusted expenses: Amortization of deferred policy acquisition costs 119 114 Insurance commissions 142 140 Insurance and other expenses 395 387 Total adjusted expenses 657 640 Total benefits and adjusted expenses 1,308 1,306 Pretax adjusted earnings$ 352 $ 333 Percentage change over previous period: Net earned premiums 1.1 % (.6) % Adjusted net investment income 7.1 4.5 Total adjusted revenues 1.3 .7 Pretax adjusted earnings 5.7 .6 (1) Net interest cash flows from derivatives associated with certain investment strategies of$(7) and$1 for the three-month periods endedMarch 31, 2023 and 2022, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. Prior-year amounts have been adjusted for the adoption of accounting guidance onJanuary 1, 2023 related to accounting for long-duration insurance contracts. In the three-month period endedMarch 31, 2023 , net earned premiums for AflacU.S. increased primarily driven by continued investments in growth initiatives. Adjusted net investment income increased in the three-month period endedMarch 31, 2023 primarily due to higher floating rate income due to higher volumes and rates. The increase in pretax adjusted earnings in the three-month period endedMarch 31, 2023 was driven primarily by lower benefits and higher revenues, partially offset by higher expenses.
Annualized premiums in force increased 1.4% to
compared with
88 --------------------------------------------------------------------------------
The following table presents a summary of operating ratios for Aflac
Three Months Ended March 31,
Ratios to total adjusted revenues: 2023 2022
Total benefits and claims 39.2 % 40.7 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 7.2 7.0
Insurance commissions 8.6 8.5
Insurance and other expenses 23.8 23.5
Total adjusted expenses 39.6 39.0
Pretax adjusted earnings 21.2 20.3
Ratios to total premiums:
Total benefits and claims 45.6 % 47.1 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 8.3 8.1
Prior-year amounts have been adjusted for the adoption of accounting guidance on
For the three-month period endedMarch 31, 2023 , the total benefits and claims ratio to total premiums decreased compared with the same period in 2022, reflecting assumption updates in the third quarter of 2022 and reserve remeasurement gains related to experience. The total adjusted expense ratio increased in the three-month period endedMarch 31, 2023 , when compared with the same period in 2022, primarily due to higher planned spending, reflecting ongoing investments in theU.S. platform and higher DAC amortization associated with lower persistency. The pretax adjusted profit margin increased in the three-month period endedMarch 31, 2023 , compared with the same period in 2022, primarily due to the lower benefit ratio. The following table presents premium persistency for AflacU.S. on a 12-month rolling basis as ofMarch 31 . 2023 2022 Premium persistency 77.9 % 78.7 % Aflac U.S. Sales The following table presents Aflac'sU.S. new annualized premium sales for the periods endedMarch 31 . Three Months (In millions) 2023 2022 New annualized premium sales$ 315 $ 299 Increase (decrease) over prior period 5.3
% 19.0 %
New annualized premium sales for accident insurance decreased 1.8%; disability sales increased 13.8%; critical care insurance sales (including cancer insurance) increased 1.8%; hospital indemnity insurance sales increased .2%; dental/vision sales increased 22.7%; and life sales increased 10.3% in the first quarter of 2023, compared with the first quarter of 2022. The increase in sales for AflacU.S. in the first quarter of 2023 reflects continued improvement from investment in growth initiatives as well as productivity gains. 89 -------------------------------------------------------------------------------- The following table details the contributions to Aflac'sU.S. new annualized premium sales by major insurance product category for the periods endedMarch 31 . Three Months 2023 2022 Accident 23.5 % 25.3 % Disability 25.2 23.3 Critical care(1) 20.5 21.2 Hospital indemnity 15.9 16.7 Dental/vision 6.6 5.6 Life 8.3 7.9 Total 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
In the first quarter of 2023, the AflacU.S. sales force included an average of approximately 6,100U.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.
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
(In millions) 2023 2022
Fixed maturity securities:
Other fixed maturity securities $ 209 $ 232
Infrastructure debt 0 9
Equity securities 0 9
Commercial mortgage and other loans:
Transitional real estate loans 14 107
Middle market loans 19 166
Other investments 15 5
Total Aflac U.S. Purchases $ 257 $ 528
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 2022 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
2023 2022
Total purchases for period (in millions) (1) $ 242 $ 523
New money yield (1),(2) 7.01 % 4.60 %
Return on average invested assets (3) 4.74 4.61
Portfolio book yield, end of period (1),(2)
5.46 % 4.95 %
(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-month period endedMarch 31, 2023 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 March 31, (In millions) 2023 2022 Net earned premiums$ 91 $ 41 Net investment income (loss) (1) 7 4
Amortized hedge income related to certain foreign currency management
strategies
29 11 Adjusted net investment income 36 15 Other income 2 18 Total adjusted revenues 129 74 Total benefits and claims, net 46 37 Adjusted expenses: Interest expense 33 40 Other adjusted expenses 57 40 Total adjusted expenses 90 80 Total benefits and adjusted expenses 136 116 Pretax adjusted earnings
(1) The change in value of federal historic rehabilitation and solar investments in partnerships of$51 and$12 for the three-month periods endedMarch 31, 2023 , and 2022, respectively, is included as a reduction to net investment income. Tax credits on these investments of$52 and$16 for the three-month periods endedMarch 31, 2023 , and 2022, 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. Prior-year amounts have been adjusted for the adoption of accounting guidance onJanuary 1, 2023 related to accounting for long-duration insurance contracts. In the three-month period endedMarch 31, 2023 , total adjusted revenues increased compared to the same period in 2022 primarily due to higher total premiums associated with the Aflac Re global reinsurance strategy and an increase in adjusted net investment income. Total adjusted expenses increased compared to the same period in 2022 primarily due to expenses associated with the Aflac Re global reinsurance strategy. These results also reflect the impact of foreign currency on total net earned premiums and the corresponding benefits. Pretax adjusted earnings increased in the three-month period endedMarch 31, 2023 when compared to the same period in 2022 reflecting the increase in total adjusted revenue, partially offset by higher other adjusted expenses, net benefits and claims.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 91 --------------------------------------------------------------------------------
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 ofAflac Japan a diversified portfolio of yen-denominated investment assets,U.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedgedU.S. dollar-denominated assets. 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. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans. The Company is also a signatory to thePrinciples 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
March 31, 2023
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 61,628 $ 12,661 $ 3,810 $ 78,099
Held to maturity, fixed maturity
securities,
at amortized cost (1) 18,936 0 0 18,936
Equity securities 655 51 381 1,087
Commercial mortgage and other loans:
Transitional real estate loans (1) 5,277 1,158 200 6,635
Commercial mortgage loans (1) 1,134 624 0 1,758
Middle market loans (1) 4,474 461 0 4,935
Other investments:
Policy loans 189 25 0 214
Short-term investments (2) 1,334 172 1,055 2,561
Limited partnerships 2,034 222 176 2,432
Other 0 34 0 34
Investment in affiliate (3) 0 119 (119) 0
Total investments 95,661 15,527 5,503 116,691
Cash and cash equivalents 1,517 701 1,591 3,809
Total investments and cash $ 97,178 $ 16,228 $ 7,094 $ 120,500
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re is
eliminated in Corporate and other
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December 31, 2022
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 61,615 $ 12,231 $ 1,895 $ 75,741
Held to maturity, fixed maturity
securities,
at amortized cost (1) 19,056 0 0 19,056
Equity securities 650 51 390 1,091
Commercial mortgage and other loans:
Transitional real estate loans (1) 5,133 1,140 182 6,455
Commercial mortgage loans (1) 1,269 729 15 2,013
Middle market loans (1) 4,557 471 0 5,028
Other investments:
Policy loans 190 24 0 214
Short-term investments (2) 319 184 1,029 1,532
Limited partnerships 1,900 208 182 2,290
Other 0 34 0 34
Investment in affiliate (3) 0 195 (195) 0
Total investments 94,689 15,267 3,498 113,454
Cash and cash equivalents 1,601 720 1,622 3,943
Total investments and cash $ 96,290 $ 15,987 $ 5,120 $ 117,397
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re is
eliminated in Corporate and other
The 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
March 31, 2023 December 31, 2022
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.7 % 1.6 % 1.6 % 1.5 %
AA 5.3 5.4 5.2 5.3
A 67.9 68.0 68.0 68.1
BBB 23.0 22.8 23.0 22.9
BB or lower 2.1 2.2 2.2 2.2
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of March 31, 2023 , the Company's direct and indirect exposure to securities
in its investment portfolio that were guaranteed by third parties was immaterial
both individually and in the aggregate.
93
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The following table presents the 10 largest unrealized loss positions in the
Company's portfolio as of
Credit Amortized
Fair
(In millions) Rating Cost Value Unrealized Loss KLM Royal Dutch Airlines B$ 136 $ 103 $ (33) GLP Pte Ltd. BBB 112 80 (32) Autostrade Per Litalia Spa BBB 148 116 (32) Prologis LP A 171 141 (30) JP Morgan Chase and Co. A 200 171 (29) Banco de Chile A 150 122 (28) Investcorp Capital Limited BB 327 306 (21) Credit Suisse Group AG BBB 75 55 (20) Grand City Properties SA BBB 56 37 (19) Urban Renaissance Agency A 183 164 (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
March 31, 2023
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 327 $ 327 $ 306 $ (21)
Pemex Project Funding Master Trust 225 225 228 3
Commerzbank 187 145 205 60
Telecom Italia SpA 150 150 183 33
KLM Royal Dutch Airlines 150 136 103 (33)
Apache Corporation 138 110 130 20
Howmet Aerospace Inc. 100 70 101 31
IKB Deutsche Industriebank AG 97 48 77 29
Generalitat de Catalunya 60 25 60 35
National Gas Co. Trinidad & Tobago 52 50 46 (4)
Other Issuers 63 64 51 (13)
Subtotal (2) 1,549 1,350 1,490 140
High yield corporate bonds 736 622 668 46
Middle market loans 4,642 4,454 4,456 2
Grand Total $ 6,927 $ 6,426 $ 6,614 $ 188
(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.
94
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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.
March 31, 2023
Gross
Gross Unrealized Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 43,595 $ 4,082 $ (1,084) $ 46,593 46.3 %
Municipalities 2,593 261 (97) 2,757 2.8
Mortgage- and asset-backed securities 2,545 99 (77) 2,567 2.7
Public utilities 7,495 671 (191) 7,975 7.9
Electric 6,074 551 (134) 6,489 6.4
Natural Gas 844 69 (32) 882 .9
Other 577 51 (25) 604 .6
Sovereign and supranational 1,118 134 (14) 1,238 1.2
Banks/financial institutions 9,279 653 (512) 9,420 9.8
Banking 5,571 455 (295) 5,732 5.9
Insurance 1,716 143 (67) 1,791 1.8
Other 1,992 55 (150) 1,897 2.1
Other corporate 27,617 2,655 (1,107) 29,165 29.3
Basic Industry 2,444 307 (83) 2,669 2.6
Capital Goods 3,275 231 (147) 3,359 3.5
Communications 2,906 375 (66) 3,214 3.1
Consumer Cyclical 2,136 219 (50) 2,305 2.3
Consumer Non-Cyclical 6,148 522 (240) 6,429 6.5
Energy 2,556 359 (60) 2,855 2.7
Other 1,343 95 (113) 1,325 1.4
Technology 3,701 185 (171) 3,716 3.9
Transportation 3,108 362 (177) 3,293 3.3
Total fixed maturity securities $ 94,242$ 8,555 $ (3,082) $ 99,715
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.
95
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The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
March 31, 2023 December 31, 2022
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 76,825 $ 81,310 $ 77,176 $ 79,090
Equity securities 866 866 882 882
Total publicly issued 77,691 82,176 78,058 79,972
Privately issued securities: (2)
Fixed maturity securities (3) 17,417 18,405 17,349 17,861
Equity securities 221 221 209 209
Total privately issued 17,638 18,626 17,558 18,070
Total investment securities $ 95,329 $ 100,802 $ 95,616 $ 98,042
(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)
March 31, December 31,
(Amortized cost, in millions) 2023 2022
Privately issued reverse-dual currency securities $ 4,028 $ 4,049
Publicly issued collateral structured as reverse-dual
currency securities
1,374 1,383 Total reverse-dual currency securities$ 5,402 $ 5,432 Reverse-dual currency securities as a percentage of total investment securities 5.7 % 5.7 %
(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 2022 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.
96
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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 endedMarch 31 . See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. Three Months 2023 2022Aflac Japan : FX Forwards
FX forward (sell USD, buy yen) notional at end of period (in
billions) (1)
$3.7 $4.5 Weighted average remaining tenor (in months) (2) 9.8 9.9 Amortized hedge income (cost) for period (in millions)$(39) $(13) FX Options FX option notional at the end of period (in billions) (1)$13.5 $13.5 Weighted average remaining tenor (in months) (2) 7.4 6.6 Amortized hedge income (cost) for period (in millions)$(19) $(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 Weighted average remaining tenor (in months) (2) 10.4 10.9 Amortized hedge income (cost) for period (in millions)$31 $12 FX Options FX option notional at the end of period (in billions) (1)$2.2 $1.9 Weighted average remaining tenor (in months) (2) 7.4 7.6 Amortized hedge income (cost) for period (in millions)$(2) $(1) (1) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (2) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors. 97 --------------------------------------------------------------------------------
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan solvency margin ratio (SMR) calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . March 31, December 31, 2023 2022 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost (1) Value
Available-for-sale securities:
Fixed maturity securities$ 12,817 $ 14,176 $ 14,321 $ 15,191 Equity securities 33 33 33 33
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 5,277 5,207 5,133 5,088 Commercial mortgage and other loans 1,134 1,013 1,269 1,129 Middle market loans (floating rate) 4,474 4,468 4,557 4,545 Other investments 2,033 2,033 1,899 1,899 Total U.S. Dollar Program 25,768 26,930 27,212 27,885
Available-for-sale securities:
Fixed maturity securities - economically converted
to yen
2,236 2,928 2,209 2,795 TotalU.S. dollar-denominated investments in Aflac Japan$ 28,004 $
29,858
(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 ofMarch 31, 2023 , 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.
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 March 31, (In millions) 2023 2022 Net cash inflows (outflows)$ (579) $ (619)
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$11.1 billion as ofMarch 31, 2023 , with hedging instruments comprised of$3.9 billion of yen-denominated debt and$7.2 billion of foreign currency forwards and options, compared with$11.6 billion as ofDecember 31, 2022 , with hedging instruments comprised of$4.0 billion of yen-denominated debt and$7.6 billion of foreign currency forwards and options. 98 -------------------------------------------------------------------------------- The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment inAflac Japan , the hedge is deemed to be effective, and the currency exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. The Company's net investment hedge was effective during the three-month periods endedMarch 31, 2023 and 2022, 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. As part of the Company's internal reinsurance platform, Aflac Re enters into foreign currency forwards with the Parent Company to economically manage the currency mismatch between Aflac Re's assets, which are mostly denominated inU.S. dollars, and liabilities, which are mostly denominated in yen, in order to support and optimize BMA capital requirements. For additional information on the Company's internal reinsurance platform, see Note 8 of the Notes to the Consolidated Financial Statements and the Liquidity and Capital Resources section of this MD&A.
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 2022 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.
March 31,
(In millions) 2023 December 31, 2022 % Change
Aflac Japan $ 5,776 $ 5,776 .0 % (1)
Aflac U.S. 3,491 3,463 .8
Total $ 9,267 $ 9,239 .3 %
(1) Aflac Japan's deferred policy acquisition costs increased .6% in yen during
the three months ended March 31, 2023 .
Prior-year amounts have been adjusted for the adoption of accounting guidance on
January 1, 2023 related to accounting for long-duration insurance contracts.
See Note 6 of the Notes to the Consolidated Financial Statements for additional
information on the Company's deferred policy acquisition costs.
99
--------------------------------------------------------------------------------
POLICY LIABILITIES
The following table presents policy liabilities by segment.
March 31,
(In millions) 2023 December 31, 2022 % Change
Aflac Japan $ 88,944 $ 86,088 3.3 % (1)
Aflac U.S. 11,542 11,187 3.2
Corporate and other 1,874 302 100.0
Intercompany eliminations(2) (2,427) (667) 100.0
Total $ 99,933 $ 96,910 3.1 %
(1) Aflac Japan's policy liabilities increased 4.0% in yen during the three
months ended March 31, 2023 .
(2) Elimination entry necessary due to the internal reinsurance transaction with
Aflac Re and to recapture of a portion of policy liabilities ceded externally as
a result of the reinsurance retrocession transaction. See Note 8 of the Notes to
the Consolidated Financial Statements.
Prior-year amounts have been adjusted for the adoption of accounting guidance on
January 1, 2023 related to accounting for long-duration insurance contracts.
See Note 7 of the Notes to the Consolidated Financial Statements for additional
information on the Company's policy liabilities.
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 2022 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 for the three-month period endedMarch 31, 2023 .Aflac Japan recognized an expense for LIPPC assessments of ¥.9 billion for the three-month period endedMarch 31, 2022 .
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 three-month periods endedMarch 31, 2023 and 2022 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 100 --------------------------------------------------------------------------------
•capital support for hedging activity
•a constantly evolving business and economic environment
•a balanced approach to capital allocation and shareholder deployment.
The governance framework supporting liquidity, capital and leverage includes
global senior management and board committees that review and approve all
significant capital related decisions.
The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which have minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$1.8 billion to provide a capital buffer and liquidity support at the holding company. The Company remains committed to prudent liquidity and capital management. AtMarch 31, 2023 , the Company held$3.8 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$1.8 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
three-month periods ended
Liquidity Provided by Subsidiaries to Parent Company (In millions) 2023 2022
Management fees paid by subsidiaries
Dividends declared or paid by subsidiaries 780 514
The following table details
totals above, for the three-month periods ended
Aflac Japan Remittances (In millions of dollars and billions of yen) 2023
2022
(in dollars)
505 339Aflac Japan dividends declared or paid to Parent Company (in yen) ¥ 67.3 ¥ 41.1 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 2022 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 ofMarch 31, 2023 , the Parent Company and Aflac had four lines of credit with third parties and twelve intercompany lines of credit. The Company was in compliance with all of the covenants of its notes payable and lines of credit atMarch 31, 2023 . For additional information, see Note 9 of the Notes to the Consolidated Financial Statements. 101 -------------------------------------------------------------------------------- As part of enterprise-wide capital management and optimization, the Company also utilizes the newly-created intercompany reinsurance platform to execute internal reinsurance transactions with Aflac Re. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements. 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 ofMarch 31, 2023 , 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 2022 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 2022 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 2022 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
three-month periods ended
(In millions) 2023 2022 Operating activities$ 708 $ 1,260 Investing activities 105 (1,210) Financing activities (933) (737)
Exchange effect on cash and cash equivalents (14) (89)
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
102
--------------------------------------------------------------------------------
sale to improve the duration matching of assets and liabilities, improve future
investment yields, and/or re-balance its portfolio. As a result, dispositions
before maturity can vary significantly from year to year.
As part of its overall corporate strategy, the Company has committed $400
million to Aflac Ventures, LLC (Aflac Ventures ), as opportunities emerge. Aflac
Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures )
which is reported in 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 three months of 2023, Aflac U.S.
borrowed and repaid $37 million under this program. As of March 31, 2023 , Aflac
U.S. had outstanding borrowings of $591 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.
Cash returned to shareholders through treasury stock purchases and dividends was$948 million during the three-month period endedMarch 31, 2023 , compared with$750 million during the three-month period endedMarch 31, 2022 .
The following tables present a summary of treasury stock activity during the
three-month periods ended
Treasury Stock Purchased (In millions of dollars and thousands of shares) 2023 2022 Treasury stock purchases$ 700 $ 500 Number of shares purchased: Share repurchase program 10,348 8,007 Other 347 343 Total shares purchased 10,695 8,350 Treasury Stock Issued
(In millions of dollars and thousands of shares) 2023 2022
Stock issued from treasury:
Cash financing$ 2 $ 9 Noncash financing 18 17 Total stock issued from treasury$ 20 $ 26 Number of shares issued 458 526
As of
Company's common stock was available for purchase under share repurchase
authorizations by its board of directors.
Cash dividends paid to shareholders were$.42 per share in the first quarter of 2023, compared with$.40 per share in the first quarter of 2022. The following table presents the dividend activity for the three-month periods endedMarch 31 . (In millions) 2023 2022 Dividends paid in cash$ 248 $ 250
Dividends through issuance of treasury shares 9 9
Total dividends to shareholders
$ 257 $ 259 103 -------------------------------------------------------------------------------- InApril 2023 , the board of directors declared the second quarter cash dividend of$.42 per share, an increase of 5.0% compared with the same period in 2022. The dividend is payable onJune 1, 2023 to shareholders of record at the close of business onMay 17, 2023 . 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 and 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'sFinancial Services Agency (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, subject to market conditions, the Company expects that it could take action to enter into derivatives on unhedgedU.S. dollar-denominated investments with foreign currency options or forwards or execute additional internal reinsurance transactions with Aflac Re. See Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information. The Company has already undertaken various measures to mitigate the sensitivity ofAflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. ForU.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of itsU.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements in the 2022 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively. As ofMarch 31, 2023 ,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. The FSA is considering the introduction of an economic value-based solvency regime based on the Insurance Capital Standards (ICS) for insurance companies inJapan . The FSA continues to conduct field testing with insurance companies inJapan for the purpose of investigating the impact of the introduction of such regulations. Final specifications are expected to be decided in 2024, and a new capital regime to replace the current solvency regime is expected to be introduced in 2025.
Aflac
A life insurance company's statutory capital and surplus is determined according to rules prescribed by theNational Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different fromU.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC's 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 104 --------------------------------------------------------------------------------
interest rate risk by weighing the types and mixtures of risks inherent in the
insurer's operations. As of
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 2023 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 Chief Information Security Officer, are responsible for the operation of the global information security program and communicate 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 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.
Additional Information Investors should note that the Company announces material financial information in itsSEC filings, press releases and public conference calls. In accordance withSEC guidance, the Company may also use the Investor Relations section of the Company's website (http://investors.aflac.com) to communicate with investors about the Company. It is possible that the financial and other information the Company posts there could be deemed to be material information. The information on the Company's website is not part of this document. Further, the Company's references to website URLs are intended to be inactive textual references only. CRITICAL ACCOUNTING ESTIMATES The Company prepares its financial statements in accordance withU.S. GAAP. These principles are established primarily by theFinancial Accounting Standards Board (FASB). In this MD&A, references toU.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity withU.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that the Company deems to be most critical to an understanding of its results of operations and financial condition are those related to the valuation of investments and derivatives, DAC, liabilities for future policy benefits, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. Calculations of DAC and the liability for future policy benefits require the use of estimates based on actuarial valuation techniques. The application of these critical accounting estimates determines the values at which 93% of the Company's assets and 80% of its liabilities are reported as ofMarch 31, 2023 , and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results. OnJanuary 1, 2023 , the Company adopted Accounting Standards Update (ASU) 2018-12, Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The update significantly changes how insurers account for long-duration contracts and amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company related to liabilities for future policy benefits and DAC. As part of this adoption, 105 -------------------------------------------------------------------------------- the Company measures together all payments under an insurance contract including future expected claims and unpaid policy claims and related expenses, as an integrated reserve. This resulted in unpaid policy claims on long-duration insurance contracts and accrued claim adjustment expenses that were presented separately in the Company's consolidated balance sheet pre-adoption to now be presented as part of liabilities for future policy benefits.
For additional information, see Note 1 of the Notes to the Consolidated
Financial Statements in this document and in the 2022 Annual Report.
Deferred Policy Acquisition Costs
Amortization of DAC is computed using the same contract groupings (also referred to as cohorts) and mortality and termination assumptions that are used in computing the liability for future policy benefits, and these assumptions are reviewed and updated at least annually. The effects of changes in assumptions are recognized prospectively over the remaining contract term as a revision of future amortization pattern, while current period amortization is calculated based on the actual experience during the quarter. For additional information, see Note 6 of the Notes to the Consolidated Financial Statements.
Future Policy Benefits
The Company's liabilities for future policy benefits are determined in accordance with applicable guidelines as defined underU.S. GAAP and Actuarial Standards of Practice and represent claims that are expected to occur in the future and already incurred claims (which represent claims that have been incurred and are in the process of payment as well as an estimate of those claims that have been incurred but have not yet been reported to the Company) and are measured using the net level premium method. Future policy benefits are calculated using assumptions and estimates including mortality, morbidity, termination (also referred to as lapses), expense, and discount rates. The assumptions and estimates that the Company uses depend on its judgment regarding the likelihood of future events and are inherently uncertain. Cash flow assumptions (mortality, morbidity, and termination) are established at policy inception and are evaluated each quarter to determine if an update is needed. To facilitate a more detailed review of cash flow assumptions, experience studies are performed annually during the third quarter. Changes in cash flow assumptions are recognized in reserve remeasurement (gains) losses in the consolidated statement of earnings. Expense assumptions are established at policy inception and are not updated. Actual experience is reflected in the calculation of future policy benefits each quarter, and changes in the liability due to actual experience are recognized in reserve remeasurement (gains) losses in the consolidated statement of earnings. Discount rates used to calculate net premiums are locked in at policy inception and represent the basis to recognize interest expense in the consolidated statement of earnings. Discount rates used to measure the carrying value of liability for future policy benefits in the consolidated balance sheet are updated each reporting period, and the differences between the liability balances calculated using the locked-in discount rates and the updated discount rates are recognized in other comprehensive income (loss) (OCI). The discount rate methodology is designed to prioritize observable inputs based on market data available in the local debt markets where the respective policies were issued in the currency in which the policies are denominated. For the discount rates applicable to tenors for which the single-A debt market is not liquid or there is little or no observable market data, the Company uses various estimation techniques consistent with the fair value guidance in ASC 820, which include, but are not limited to: (i) for tenors where there is less observable market data and/or the observable market data is available for similar instruments, estimating tenor-specific single-A credit spreads and applying them to risk-free government rates? (ii) for tenors where there is very limited or no observable single-A or similar market data, interpolation and extrapolation techniques. Upon adoption, if interest rates increased by 100 basis points the Company's FPB balance as ofDecember 31, 2022 , would decrease by$13.3 billion , and if interest rates decreased by 100 basis points the Company's FPB balance as ofDecember 31, 2022 would increase by$10.4 billion .
See Note 7 of the Notes to the Consolidated Financial Statements for details of
future policy benefits activity.
There have been no other changes in the items the Company has identified as
critical accounting estimates during the three-month period ended
2023
of Item 7. MD&A included in the 2022 Annual Report.
106 --------------------------------------------------------------------------------
New Accounting Pronouncements
OnJanuary 1, 2023 , the Company adopted LDTI employing a modified retrospective transition method, which requires the amended guidance be applied as of the beginning of the earliest period presented beginning on theJanuary 1, 2021 transition date (Transition Date). The Transition Date impact from adoption resulted in a decrease in AOCI of approximately$18.6 billion and a decrease in retained earnings of approximately$0.3 billion . 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.
Q1 2023 Investor Presentation
TETRA TECHNOLOGIES, INC. ANNOUNCES FIRST QUARTER 2023 REVENUE OF $146 MILLION AND EPS OF $0.05 AND PROVIDES SECOND QUARTER GUIDANCE
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