AFLAC INCORPORATED 
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 and its subsidiaries 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:
• the effects of COVID-19, and any resulting economic effects and government
interventions, on the Company's business and financial results
• ability to attract and retain qualified sales associates, brokers,
employees, and distribution partners
• events related to the Japan Post investigation and other matters
• competitive environment and ability to anticipate and respond to market trends
• deviations in actual experience from pricing and reserving assumptions
• ability to continue to develop and implement improvements in information
technology systems
• defaults and credit downgrades of investments
• exposure to significant interest rate risk
• concentration of business in
• limited availability of acceptable yen-denominated investments
• failure to comply with restrictions on policyholder privacy and information
security
• interruption in telecommunication, information technology and otheroperational systems, or a failure to maintain the security, confidentiality
or privacy of sensitive data residing on such systems
• catastrophic events including, but not necessarily limited to, epidemics,
pandemics (such as the coronavirus COVID-19), tornadoes, hurricanes,
earthquakes, tsunamis, war or other military action, terrorism or other
acts of violence, and damage incidental to such events
• difficult conditions in global capital markets and the economy
• ability to protect the Aflac brand and the Company's reputation
• extensive regulation and changes in law or regulation by governmental
authorities
• foreign currency fluctuations in the yen/dollar exchange rate
• tax rates applicable to the Company may change
• decline in creditworthiness of other financial institutions
• significant valuation judgments in determination of amount of impairments
taken on the Company's investments
•
• subsidiaries' ability to pay dividends to the Parent Company
• decreases in the Company's financial strength or debt ratings
• inherent limitations to risk management policies and procedures
• concentration of the Company's investments in any particular single-issuer
or sector
• differing judgments applied to investment valuations
• ability to effectively manage key executive succession
• changes in accounting standards
• level and outcome of litigation
• allegations or determinations of worker misclassification in
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MD&A OVERVIEW
MD&A is intended to inform the reader about matters affecting the financial
condition and results of operations of Aflac Incorporated and its subsidiaries
for the three- and six-month periods ended June 30, 2020 and 2019, 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 ended
December 31, 2019 (2019 Annual Report). In this MD&A, amounts may not foot due
to rounding. For additional information on the Company's performance measures
included in this MD&A, see the Glossary of Selected Terms found directly
following Part II. Other Information.
This MD&A is divided into the following sections:
Page
Executive Summary 69
Results of Operations 75
Investments 87
Deferred Policy Acquisition Costs 95
Policy Liabilities 95
Benefit Plans 95
Policyholder Protection 96
Off-Balance Sheet Arrangements 96
Liquidity and Capital Resources 96
Critical Accounting Estimates 101
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EXECUTIVE SUMMARYCompany Overview
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to more than 50 million people worldwide. The Company's principal business is providing 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) andArgus Dental & Vision, Inc. (Argus), which provides a platform for Aflac Dental and Vision in theU.S. (collectively, AflacU.S. ).
COVID-19
OnMarch 11, 2020 , theWorld Health Organization declared the COVID-19 outbreak a global pandemic. The impact of COVID-19 on the Company continues to evolve, and its future effects remain uncertain. The Company continues to closely monitor the effects and risks of COVID-19 to assess its impact on the Company's business, financial condition, results of operations, liquidity and capital position in a number of ways, and may cause changes to estimates of future earnings, capital deployment, regulatory capital position, segment dividend payout ratios and other guidance the Company provided under 2020 Outlook in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the 2019 Annual Report.
The Company's efforts and other developments are outlined below.
• Liquidity and Capital Resources
The Company entered the crisis in a strong capital and liquidity position, having maintained capital ratios inJapan and theU.S. at a level designed to absorb a degree of market volatility. To further support liquidity and capital resources, the Parent Company, inMarch 2020 , issued four series of senior notes totaling ¥57.0 billion and, inApril 2020 , issued$1 billion in senior notes through public debt offerings under itsU.S. shelf registration statement. Accordingly, as ofJune 30, 2020 the Company held approximately$5.5 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion held to provide a capital buffer and liquidity support at the holding company. Even after these debt offerings, the Company's leverage ratio remains at levels that the Company believes are adequate to maintain current ratings and leave capacity for further debt issuances. The Company has available liquidity in its unsecured revolving credit facilities of$1 billion and ¥100.0 billion, respectively, and currently has no borrowings under either of these facilities. InApril 2020 , Aflac increased its internal limit forFederal Home Loan Bank of Atlanta (FHLB) borrowings to$800 million ,$300 million of which the Company has designated to be used for short-term liquidity needs and subject to qualified collateral availability and other conditions. The Company has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments. The Company remains committed to prudent liquidity and capital management and is taking a tactical approach to capital allocation. In terms of repurchase guidance, the Company remains in the market at reduced levels and is being tactical in its approach to repurchasing its stock. The Company believes that this tactical approach will allow it to increase or decrease repurchase activity depending on how the pandemic and market conditions evolve. The Company is committed to maintaining a strongAflac Japan solvency margin ratio (SMR) and AflacU.S. risk-based capital (RBC) ratios. While the SMR is particularly sensitive to market volatility resulting from widening of credit spreads, both SMR and RBC are sensitive to credit downgrades and defaults. The Company has capital tools available to increase SMR and RBC including the reduction of subsidiary dividends paid to the Parent Company by its insurance subsidiaries and Parent Company capital contributions to insurance subsidiaries sourced through cash on hand, proceeds from debt issuances or by drawing on the revolving credit facilities noted above. For example, the Parent Company made a capital contribution of$150 million to CAIC inMay 2020 . The Company also has a committed reinsurance facility in the amount of ¥110 billion of reserves that could be deployed to support SMR. Additionally,Aflac Japan and AflacU.S. have to date reduced 69 -------------------------------------------------------------------------------- dividends they provide to the Parent Company in 2020 by ¥75 billion and$75 million , respectively, compared to initial 2020 plans. Taking into consideration the strong liquidity position of the Parent Company as well as the continuing development of economic conditions inJapan and theU.S. , the Company currently plans to defer the payment of further subsidiary dividends to the Parent Company until the fourth quarter of 2020. Further dividend delays or reductions may be undertaken as the Company continues to monitor developments. In its AflacU.S. segment, the Company intends to maintain RBC in the 400% range for 2020. As a result of market volatility, the Company has made tactical adjustments to its foreign currency-hedging program inAflac Japan to mitigate hedging cost and settlement risk while maintaining a strong SMR.Aflac Japan maintains a collar program on a portion of its US dollar program to mitigate against more extreme moves in foreign exchange rates and therefore support SMR. In the first quarter of 2020, the Company reduced the size of the collar program by approximately$3 billion to$9 billion and marginally widened the collars. While these adjustments will moderately increase the Company's exposure to SMR volatility, the Company believes that they will also reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the collar program. The Company is evaluating other adjustments, including the possibility of hedging additionalU.S dollar-denominated investments. See the Liquidity and Capital Resources section of this MD&A for additional information regarding other potential sources of liquidity and capital resources.
• Investment Portfolio
The Company's investment portfolio was well-positioned entering the crisis, and the Company continues to follow its strategy of investing primarily in fixed maturity securities to generate a reliable stream of income. Fundamental credit analysis and de-risking activity in prior periods contributed to the current quality of the Company's investments. The Company continued with de-risking activity in the second quarter, reducing positions in the portfolios seen as more vulnerable in the current environment. The Company continues to closely monitor the impact of the crisis on its investments and hedging programs, and on markets globally. Certain investments have been adversely impacted, including investments in issuers that faced an immediate and severe impact such as travel and lodging, leisure, non-emergency medical and energy. These investments continued to experience price declines and downgrades in the second quarter and the Company has agreed to a number of payment deferrals and other modifications with respect to underperforming debt investments. For additional information on these loan modifications, see Note 3 of the Notes to the Consolidated Financial Statements. Markets have stabilized from the extreme volatility seen at the outset of the crisis, although issuers continue to be affected by reduced business activity and consumer demand. Volatility in oil prices and reduction in global energy demand continue to adversely impact issuers in the energy sector. Due to the decline inU.S. interest rates, and limitations on the availability of new investments in certain private asset classes such as middle market loans, commercial mortgages and transitional real estate, net investment income may be adversely impacted over time from lower reinvestment rates for fixed maturity investments and lower interest on floating rate assets. The impact of the crisis during the quarter may not be fully reflected in net investment income because certain investments, such as private limited partnerships, typically report their results to the Company one to three months following the end of the reporting period. Therefore, the reduction in net investment income from these investments in the second quarter reflects to some extent price declines in publicly traded equities during the first quarter. There are a number of factors that impact private limited partnership income, but the Company expects public equity markets to be a favorable driver to this component of net investment income in the third quarter, based on the positive performance of leading equity indices during the second quarter, such as the S&P 500 and Russell 2000. The Company continues to make tactical adjustments to its investment portfolios in response to the crisis, and continues to assess its investment strategy and asset allocation to identify additional tactical adjustments that may be necessary due to the continuing recession.
• Crisis Management
The Company has crisis command centers set up inJapan and theU.S. These command centers are generally utilized for any type of crisis, including natural disasters and cybersecurity events. The command centers participate in regular updates to the Company's leadership regarding Japan andU.S. government and regulatory actions, operations, employee policies and conditions and distribution status. In addition, capital market, central bank and government stimulus updates are provided, as well as updates on cybersecurity, 70 --------------------------------------------------------------------------------
including with respect to the Company's remote workforce. Moreover, the Company's financial leadership group meets more frequently and has focused on the capital markets, capital and liquidity position, stress testing and any defensive actions that may be necessary as the crisis unfolds.
•
InFebruary 2020 ,Aflac Japan began to implement actions such as working from home, staggered work hours, limitations on the number of personnel attending in-person meetings and restrictions on traveling between buildings and floors inAflac Japan worksites. OnApril 7, 2020 , the Japan government declared a state of emergency in seven prefectures includingTokyo andOsaka and requested that companies in these prefectures reduce the number of employees coming into the office by 70% or more. Accordingly,Aflac Japan implemented increasing levels of remote working levels for its work force toward the requested level. OnApril 16, 2020 , the state of emergency was expanded nationwide inJapan , and onMay 25, 2020 , the state of emergency was lifted nationwide. As ofJune 30, 2020 ,Aflac Japan has approximately 50% of its workforce working from home.Aflac Japan is evaluating return to the office measures; however,Aflac Japan anticipates that the remote configuration could remain for an indefinite period of time without materially impacting operations.
Aflac Japan remains focused on generating new business through direct mail made to existing and prospective customers. In addition,Aflac Japan is promoting digital and web-based sales to groups and preparing to introduce a new system that enables smartphone-based insurance application by allowing the customer and an Aflac operator to see the same screen through their smartphones. Face-to-face sales have been challenged and are having an impact on sales results. During the second quarter,Aflac Japan experienced a sales decline of 58.1% compared to the second quarter of 2019, due to both the effects of the pandemic and the continued effects of the Japan Post investigation. See the Aflac Japan Segment of this MD&A for additional information regarding sales in theJapan Post channel and the strategic alliance with Japan Post.Aflac Japan has also followed the guidance of the FSA in terms of treating customers with care, ensuring ease and timeliness of claims payments and extended coverage for temporary medical facilities and telemedicine in certain circumstances, and waiver of interest on certain policyholder loans.Aflac Japan initially extended a six-month grace period on premium payments, and inJune 2020 , the grace period for premiums due throughSeptember 30, 2020 was extended toApril 30, 2021 . Policyholders are required to file for relief through this extension. OnApril 18, 2020 ,Aflac Japan announced that it will pay certain accidental death and disability benefits in the event of a death directly caused by COVID-19. To assist with the COVID-19 pandemic,Aflac Japan donated ¥500 million to the Japan Medical Associations and to identified municipalities whereAflac Japan has operations.
• Aflac
The Parent Company and AflacU.S. began to implement Company mandates including restrictions on travel and in-person meetings applicable toU.S. employees beginning inFebruary 2020 and required work from home directives across theirU.S. work force inMarch 2020 . As ofJune 30, 2020 , approximately 98% of employees were working remotely, with 100% of employees working remotely in certain areas includingNew York City , including all investment employees based inthe United States . The Company currently anticipates that a return to the worksite forU.S. based employees of the Parent Company and AflacU.S. will be conducted in phases beginning no sooner than early 2021, subject to factors including the availability of treatments and vaccines, the return schedule of school systems and the availability of child care, the number of COVID-19 cases and the COVID-19 replication rate in areas of theU.S. where the Company has significant operations. However, AflacU.S. anticipates that the remote configuration could remain for an indefinite period of time without materially impacting operations.The Parent Company and AflacU.S. continue to maintain employee and worksite safety measures including travel restrictions, building access restrictions and in-person meeting restrictions. AflacU.S. has announced several actions taken for its employees. These include a commitment to cover the costs of COVID-19 testing and extended paid leave in certain circumstances. 71
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Aflac
AflacU.S. policy sales, enrollment and agent recruiting functions are highly dependent upon face-to-face interaction between independent agents and brokers with prospective and new customers and agents. Opportunities for such interaction have been significantly reduced by reactions to the pandemic, such as social distancing, shelter in place orders and work from home initiatives. In addition, licensure of newly recruited agents has been delayed in some states due to the unavailability or difficulty of temporary licenses or online training. Further, despite government stimulus measures, the economic effects of the pandemic on prospective and existing customers is still largely unknown. Similar toAflac Japan , the AflacU.S. sales team is working to adjust its sales approach given the reduction in face-to-face sales. Key elements to this approach include realizing sales at the worksite through an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The AflacU.S. broker sales team is focused on product enhancements due to COVID-19 as well as leveraging technology based solutions to drive enrollment in the second half of 2020. Finally, AflacU.S. is in its second year of the build-out of the Consumer Markets business for the digital direct-to-consumer sale of insurance and sales made through that platform have continued to grow. Face-to-face sales have been challenged and are having an impact on sales results. During the three- and six-periods endedJune 30, 2020 , AflacU.S. experienced a sales decline of 55.6% and 31.2%, respectively, compared to the same respective periods in 2019, reflecting the impacts of the pandemic. The AflacU.S. benefit ratio decreased in the three- and six-month periods endedJune 30, 2020 , as compared to the same periods in 2019, reflecting reduced accidents, wellness medical visits and routine procedures due to shelter-in-place orders and heightened social distancing due to COVID-19. The Company anticipates this decrease to be temporary; however, management continues to evaluate the pandemic as claims activity within this new and unprecedented environment remain highly uncertain. AflacU.S. is encouraging policyholderswho are displaying COVID-19 symptoms to seek treatment and is paying wellness benefits on applicable policies for COVID-19 tests, when completed claims are submitted. AflacU.S. is also providing coverage for treatment in temporary facilities and by telemedicine in certain circumstances. During the first and second quarters, AflacU.S. took steps to comply with COVID-19-related directives issued by state regulatory authorities, including those requiring or requesting premium grace periods. As ofJuly 20, 2020 , premium grace periods remained in effect in 23 states. AflacU.S. anticipates an increase in policy lapses in the third and fourth quarters of 2020 as premium grace periods continue to expire, particularly if government stimulus measures discussed below, or similar measures, are not renewed or initiated. In light of the anticipated combined effects of reduced sales and persistency, AflacU.S. currently expects 2020 earned premium results in the range of flat to a decline of 3% compared with 2019.
To date, the Parent Company has contributed
• Major government initiatives
Government authorities inJapan and theU.S. have implemented several initiatives in response to the COVID-19 pandemic, including actions designed to mitigate the adverse health effects of the virus and those designed to provide broad-based relief and economic support to all aspects of the economy. Given that these measures were recently implemented, it is too early to determine what impacts these initiatives have had or will have on the Company's business, results of operations, financial condition, liquidity, capital position, investment portfolio, workforce, distribution partners and vendors. OnApril 7, 2020 , Prime Minister Abe issued a state of emergency declaration targeting seven prefectures based on the revised Act on Special Measures for Pandemic Influenza and New Infectious Diseases Preparedness and Response. OnApril 16, 2020 , the state of emergency was expanded to all 47 prefectures. The state of emergency was lifted in phases, with 39 prefectures released onMay 14, 2020 , three additional prefectures released onMay 21 , and the state of emergency lifted nationwide onMay 25 . OnJune 19, 2020 , 72 --------------------------------------------------------------------------------
restrictions on intraprefecture travel were lifted.
The Financial Services Agency (FSA) has also requested that financial service providers respond appropriately while continuing their essential operations. This request includes insurance companies, which have been asked to continue essential operations such as benefits and claims payment, including policyholder loans. Moreover, following the expansion of the impact of COVID-19, the FSA requested insurance companies to consider flexible interpretation and application of insurance policy provisions and measures required for products from the standpoint of protecting policyholders. In accordance with the FSA's request,Aflac Life Insurance Japan Ltd. implemented a measure to pay accidental death benefits and accidental serious disability benefits under its accidental death benefit rider, etc. in cases of death or specified serious disabilities from COVID-19. OnApril 20, 2020 , theCabinet of Japan approved ¥117 trillion or more than 20% of GDP in emergency stimulus measures, including various tax measures to address the financial difficulties that businesses are facing. The stimulus package includes measures decided earlier in February and March as emergency COVID-19 response and the "Comprehensive Economic Measures to Create a Future with Security and Growth" formulated inDecember 2019 . The package is divided into measures covering two stages of the COVID-19 outbreak: the "emergency support phase," and the "V-shaped recovery phase." The emergency support phase is described as covering until a noticeable slowdown in the spread of COVID-19 and provides cash benefits of ¥100 thousand per person to Japanese citizens and other measures that focus on improvements to the medical service system. The "V-shaped recovery phase" focuses on a campaign to boost demand after the pandemic abates, as well as to reinforce Japan's economic foundations through measures such as supply-chain reforms and promotion of telework OnMay 27, 2020 , theCabinet of Japan approved a second ¥117 trillion stimulus package. The Diet passed a supplementary budget to fund the package onJune 12, 2020 . The second stimulus package is intended to help small and mid-sized businesses fund leave allowances for furloughed workers and provides rent assistance for business operations.
In the
The Families First Coronavirus Response Act was signed into law onMarch 18, 2020 with the goal of mitigating the financial impact of the COVID-19 on states, territories, the uninsured, the unemployed, workers and individualswho rely on food assistance, such as children and low-income seniors. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was signed into law onMarch 7, 2020 and was designed to provide approximately$2 trillion in financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities. Among other measures, the CARES Act provided for$260 billion in expanded unemployment benefits and$290 billion of direct payments to individuals, and established a$349 billion Paycheck Protection Program (PPP) providing for loans to small businesses, nonprofits, and veteran's organizations with 500 or fewer employees. OnApril 24, 2020 , an additional$320 billion was allocated to the PPP, including$10 billion for administrative costs and$60 billion allocated to small lenders and community banks, and onJuly 4, 2020 , the application deadline for the PPP was extended fromJune 30, 2020 toAugust 8, 2020 . The CARES Act also included a five-year net operating loss (NOL) carryback, payroll tax relief and other significant provisions for businesses. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40 in certain situations. OnApril 7, 2020 , certain regulatory banking agencies, in consultation with theFinancial Accounting Standards Board (FASB), issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Interagency statement) applicable for all entities, which offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are treated as TDRs. The Company has applied GAAP relief under Section 4013 of the CARES Act and the Interagency statement with respect to certain qualifying loan modifications. See Notes 1 and 3 of Notes to the Consolidated Financial Statements for additional details. 73 -------------------------------------------------------------------------------- TheFederal Reserve has also taken various actions in an effort to support the economy and markets in response to heightened volatility and uncertainty. These actions include reducing by 1.5% each the rate that it charges for direct loans to banks, as well as the target for the rate banks charge each other for overnight funds (federal funds rate); initiating quantitative easing with no stated cap on purchases; committing to purchaseU.S. Treasury securities, agency mortgage-backed and agency commercial mortgaged-backed securities; re-establishing the Term Asset-Backed Securities Loan Facility (TALF) originally launched in 2009, through which it will lend to holders of AA-rated asset-backed securities; and establishing facilities to support purchase of corporate bonds from large investment-grade companies.
Performance Highlights
Total revenues were$5.4 billion in the second quarter of 2020, compared with$5.5 billion in the second quarter of 2019. Net earnings were$805 million , or$1.12 per diluted share in the second quarter of 2020, compared with$817 million , or$1.09 per diluted share, in the second quarter of 2019. The declines in total revenues and net earnings in the second quarter of 2020 were both driven primarily by an increase in net investment losses. Total revenues were$10.6 billion in the first six months of 2020, compared with$11.2 billion in the first six months of 2019. Net earnings were$1.4 billion , or$1.89 per diluted share in the first six months of 2020, compared with$1.7 billion , or$2.32 per diluted share, in the first six months of 2019. The declines in total revenues and net earnings in the first six months of 2020 were both driven primarily by an increase in net investment losses. Results in the second quarter of 2020 included pretax net investment losses of$170 million , compared with net investment losses of$66 million in the second quarter of 2019. Net investment losses in the second quarter of 2020 included$176 million of credit losses;$27 million of net gains from certain derivative and foreign currency gains or losses;$31 million of net gains on equity securities; and$52 million of net losses from sales and redemptions. Results in the first six months of 2020 included pretax net investment losses of$633 million , compared with net investment gains of$5 million in the first six months of 2019. Net investment losses in the first six months of 2020 included$321 million of credit losses;$135 million of net losses from certain derivative and foreign currency gains or losses;$118 million of net losses on equity securities; and$59 million of net losses from sales and redemptions. The average yen/dollar exchange rate(1) for the three-month period endedJune 30, 2020 was 107.65, or 2.1% stronger than the average yen/dollar exchange rate of 109.94 for the same period in 2019. The average yen/dollar exchange rate(1) for the six-month period endedJune 30, 2020 was 108.25, or 1.7% stronger than the average yen/dollar exchange rate of 110.09 for the same period in 2019. Adjusted earnings(2) in the second quarter of 2020 were$921 million , or$1.28 per diluted share, compared with$846 million , or$1.13 per diluted share, in the second quarter of 2019, driven primarily by favorable AflacU.S. benefit ratios. The stronger yen/dollar exchange rate impacted adjusted earnings per diluted share by$.01 . Adjusted earnings(2) in the first six months of 2020 were$1.8 billion , or$2.49 per diluted share, compared with$1.7 billion , or$2.25 per diluted share, in the first six months of 2019. The stronger yen/dollar exchange rate impacted adjusted earnings per diluted share by$.02 . Total investments and cash at the end ofJune 2020 were$142.2 billion , compared with$136.6 billion atJune 30, 2019 . In the first six months of 2020,Aflac Incorporated repurchased$637 million , or 15.2 million of its common shares. At the end ofJune 2020 , the Company had 21.9 million remaining shares authorized for repurchase. Shareholders' equity was$29.4 billion , or$41.21 per share, atJune 30, 2020 , compared with$28.2 billion , or$38.14 per share, atJune 30, 2019 . Shareholders' equity atJune 30, 2020 included a net unrealized gain on investment securities and derivatives of$8.5 billion , compared with a net unrealized gain of$8.0 billion atJune 30, 2019 . Shareholders' equity atJune 30, 2020 also included an unrealized foreign currency translation loss of$1.5 billion , compared with an unrealized foreign currency translation loss of$1.5 billion atJune 30, 2019 . The annualized return on average shareholders' equity in the second quarter of 2020 was 11.5%. Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was$22.7 billion , or$31.75 per share atJune 30, 2020 , compared with$21.9 billion , or$29.54 per share, atJune 30, 2019 . The annualized adjusted return on equity excluding foreign currency impact(2) in the second quarter of 2020 was 16.3%.(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. 74 -------------------------------------------------------------------------------- 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. Yen-denominated income statement accounts are translated toU.S. dollars using a weighted average Japanese yen/U.S. dollar foreign exchange rate, except realized gains and losses on security transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated toU.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate. The following discussion includes references to the Company's performance measures, adjusted earnings, adjusted earnings per diluted share, and amortized hedge costs/income, which are not calculated in accordance withU.S. generally accepted accounting principles (GAAP) (non-U.S. GAAP). These measures exclude items that the Company believes may obscure the underlying fundamentals and trends in the Company's insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with its insurance operations. The Company's management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of its insurance operations on a consolidated basis, and the Company believes that a presentation of these measures is vitally important to an understanding of its underlying profitability drivers and trends of its insurance business. The Company believes that amortized hedge costs/income, which are a component of adjusted earnings, measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income.
The Company defines the non-
• Adjusted earnings are the profits derived from operations. The most
comparable
adjusted revenues less benefits and adjusted expenses. The adjustments to
both revenues and expenses account for certain items that cannot be
predicted or that are outside management's control. Adjusted revenues are
for amortized hedge costs/income related to foreign currency exposure
management strategies and net interest cash flows from derivatives
associated with certain investment strategies. Adjusted expenses are U.S.
GAAP total acquisition and operating expenses including the impact of
interest cash flows from derivatives associated with notes payable butexcluding 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.
• Adjusted earnings per share (basic or diluted) are adjusted earnings for
the period divided by the weighted average outstanding shares (basic or
diluted) for the period presented. The most comparable
is net earnings per share.
• Amortized hedge costs/income represent costs/income incurred or recognized
as a result of using foreign currency-derivatives to hedge certain foreign
exchange risks in the Company's Japan segment or in the Corporate and
Other segment. These amortized hedge costs/income are estimated at theinception 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.
There is no comparable
costs/income.
• Adjusted earnings excluding current period foreign currency impact are
computed using the average foreign currency exchange rate for thecomparable prior-year period, which eliminates fluctuations driven solely
by foreign currency exchange rate changes. The most comparable U.S. GAAP
measure is net earnings.
• Adjusted earnings per diluted share excluding current period foreign
currency impact are adjusted earnings excluding current period foreign
currency impact divided by the weighted average outstanding diluted shares
for the period presented. The most comparable U.S. GAAP measure is net
earnings per share.
•
impact is determined using the average foreign currency exchange rate for
the comparable prior year period.
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• Adjusted book value is the
shareholders' equity), less AOCI as recorded on the
sheet. The Company considers adjusted book value important as it excludes
AOCI, which fluctuates due to market movements that are outside
management's control.
• Adjusted return on equity (ROE) excluding foreign currency impact is
calculated using adjusted earnings excluding current period foreign
currency impact divided by average shareholders' equity, excluding AOCI.
The most comparable U.S. GAAP financial measure is return on averageequity as determined using net earnings and average total shareholders'
equity.
The following table is a reconciliation of items impacting adjusted earnings and
adjusted earnings per diluted share to the most directly comparable U.S. GAAP
measures of net earnings and net earnings per diluted share, respectively.
Reconciliation of Net Earnings to Adjusted Earnings(1)
In Millions Per Diluted Share In Millions Per Diluted Share
Three Months Ended June 30,
Six Months Ended
2020 2019 2020 2019 2020 2019 2020 2019
Net earnings $ 805 $ 817 $ 1.12 $ 1.09 $ 1,370 $ 1,745 $ 1.89 $ 2.32
Items impacting net
earnings:
Net investment
(gains)
losses
(2),(3),(4),(5) 166 33 .23 .04 614 (70 ) .85 (.09 )
Other and
non-recurring
(income) loss 0 0 .00 .00 15 1 .02 .00
Income tax
(benefit) expense
on items excluded
from adjusted
earnings (50 ) (5 ) (.07 ) (.01 ) (196 ) 18 (.27 ) .02
Adjusted earnings 921 846 1.28 1.13 1,803 1,695 2.49 2.25
Current period
foreign currency
impact (6) (5 ) N/A (.01 ) N/A (14 ) N/A (.02 ) N/A
Adjusted earnings
excluding
current period
foreign currency
impact $ 916 $ 846 $ 1.27 $ 1.13 $ 1,789 $ 1,695 $ 2.47 $ 2.25
(1) Amounts may not foot due to rounding.
(2) Amortized hedge costs of $50 and $62 for the three-month periods and $105
and $124 for the six-month periods ended June 30, 2020 , and 2019, respectively,
related to certain foreign currency exposure management strategies have been
reclassified from net investment gains (losses) and included in adjusted
earnings as a decrease to net investment income. See "Hedge Costs/Income"
discussion below for further information.
(3) Amortized hedge income of $27 and $20 for the three-month periods and $56
and $40 for the six-month periods ended June 30, 2020 and 2019, respectively,
related to certain foreign currency exposure management strategies have been
reclassified from net investment gains (losses) and included in adjusted
earnings as an increase to net investment income. See "Hedge Costs/Income"
discussion below for further information.
(4) Net interest cash flows from derivatives associated with certain investment
strategies of $6 and $(7) for the three-month periods and an immaterial amount
and $(14) for the six-month periods ended June 30, 2020 and 2019, respectively,
have been reclassified from net investment gains (losses) and included in
adjusted earnings as a component of net investment income.
(5) A gain of $14 and $17 for the three-month periods and $30 and $33 for the
six-month periods ended June 30, 2020 and 2019, respectively, related to the
interest rate component of the change in fair value of foreign currency swaps on
notes payable have been reclassified from net investment gains (losses) and
included in adjusted earnings as a component of interest expense.
(6) Prior period foreign currency impact reflected as "N/A" to isolate change
for current period only.
Reconciling Items
Net Investment Gains and 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 growth and 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
76
--------------------------------------------------------------------------------
is independent of the underwriting and administration of the Company's insurance
products. Net investment gains and losses include securities transactions,
credit losses, derivative and foreign currency activities and changes in fair
value of equity securities.
Securities Transactions, Credit Losses and Gains (Losses) on
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. Prior toJanuary 1, 2020 , impairments include other-than-temporary-impairment losses on investment securities as well as changes in loan loss reserves for loan receivables. EffectiveJanuary 1, 2020 , credit losses include losses for held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables.
Certain Derivative and Foreign Currency Gains (Losses)
The Company's derivative activities include:
• foreign currency forwards and options used in hedging foreign exchange
risk on
• foreign currency forwards and options used to economically hedge certain
portions of forecasted cash flows denominated in yen and hedge the
Company's long term exposure to a weakening yen
• cross-currency interest rate swaps, also referred to as foreign currency
swaps, associated with certain senior notes and subordinated debentures
• foreign currency swaps that are associated with VIE bond purchase
commitments, and investments in special-purpose entities, including VIEs
where the Company is the primary beneficiary
• interest rate swaps used to economically hedge interest rate fluctuations
in certain variable-rate investments
• interest rate swaptions used to hedge changes in the fair value associated
with interest rate fluctuations for certain
available-for-sale fixed-maturity securities.
• bond purchase commitments at the inception of investments in consolidated VIEs
Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of remeasurement associated with changes in the foreign currency exchange rate. Amortized hedge costs/ income related to certain foreign currency exposure management strategies (see Amortized Hedge Cost/Income section below), and net interest cash flows from derivatives associated with certain investment strategies and notes payable are reclassified from net investment gains (losses) and included in adjusted earnings. Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs and income have fluctuated in recent periods due to changes in the previously mentioned factors. For additional information regarding foreign currency hedging, refer to Hedging Activities in the Investments section of this MD&A. 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 77 --------------------------------------------------------------------------------
than in the
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 24.8% for the three-month period endedJune 30, 2020 , compared with 26.3% for the same period in 2019.The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 23.4% for the six-month period endedJune 30, 2020 , compared with 25.8% for the same period in 2019. This combined effective tax rate differs from theU.S. statutory rate primarily due to foreign earnings taxed at different rates. For further information, see Critical Accounting Estimates - Income Taxes section of the MD&A in the 2019 Annual Report.
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. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. The Company translatesAflac Japan's yen-denominated income statement into dollars using the average exchange rate for the reporting period, and the Company translates its yen-denominated balance sheet using the exchange rate at the end of the period. Due to the size ofAflac Japan , whose functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's 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. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts on book value and the currency-neutral operating performance over time. 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. Aflac's insurance business consists of two segments:Aflac Japan and AflacU.S. Aflac Japan is the principal contributor to consolidated earnings. Businesses that are not individually reportable, such as the Parent Company, and asset management subsidiaries and other business activities, including reinsurance retrocession activities, are included in the Corporate and other segment. See the Item 1. Business section of the 2019 Annual Report for a summary of each segment's products and distribution channels. During the second quarter,Aflac Japan sales for protection-type first sector and third sector products decreased 59.6% and total sales decreased 58.8%, on a yen basis, primarily due to continued effects of the COVID-19 pandemic and secondarily, from the continued effects from the Japan Post investigation. Sales from AflacU.S. were down 55.6% in the second quarter due to social distancing efforts, which eliminated face-to-face sales opportunities beginning inmid-March 2020 . The respectiveAflac Japan and AflacU.S. platforms and distribution partners continue to work to adapt to the new environment. The Company continues to monitor the effects of COVID-19 on its operating results and has taken several steps to mobilize its resources to ensure adequate liquidity, a strong capital position, business continuity and employee safety during this pandemic. See the Executive Summary subsection of this MD&A for additional information.
Consistent with
• operating ratios • expense ratio
• new annualized premium sales
• new money yield
• return on average invested assets
78
--------------------------------------------------------------------------------• average weekly producer
For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidatedU.S. GAAP results and additional information. 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 Six Months Ended June 30, June 30, (In millions) 2020 2019 2020 2019 Net premium income$ 3,158 $ 3,172 $ 6,308 $ 6,352 Net investment income:(1) Yen -denominated investment income 319 311 641628 U.S. dollar -denominated investment income 364 360 740 715 Net investment income 683 671 1,381 1,343 Amortized hedge costs related to certain foreign currency exposure management strategies 50 62 105 124 Adjusted net investment income 633 609 1,276 1,219 Other income (loss) 12 11 22 22 Total adjusted revenues 3,803 3,792 7,606 7,593 Benefits and claims, net 2,205 2,185 4,391 4,384 Adjusted expenses: Amortization of deferred policy acquisition costs 155 177 328 359 Insurance commissions 184 179 369 362 Insurance and other expenses 420 420 824 822 Total adjusted expenses 759 776 1,521 1,543 Total benefits and adjusted expenses 2,964 2,961
5,912 5,927
Pretax adjusted earnings $ 839 $ 831 $ 1,694 $ 1,666
Weighted-average yen/dollar exchange rate 107.65 109.94 108.25 110.09
In Dollars In Yen
Percentage change over Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30,
previous period: 2020 2019 2020 2019 2020 2019 2020 2019
Net premium income (.4 )% (1.7 )% (.7 )% (2.1 )% (2.5 )% (.9 )% (2.3 )% (.9 )%
Adjusted net investment
income 3.9 .5 4.7 2.1 2.0 .8 3.0 3.1
Total adjusted revenues .3 (1.4 ) .2 (1.5 ) (1.8 ) (.7 ) (1.4 ) (.3 ) Pretax adjusted earnings 1.0 (.6 ) 1.7 .7 (1.2 ) (.1 ) .0 1.9 (1) Net interest cash flows from derivatives associated with certain investment strategies of$6 and$(7) for the three-month periods and an immaterial amount and$(14) for the six-month periods endedJune 30, 2020 and 2019, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income. In the three- and six-month periods endedJune 30, 2020 ,Aflac Japan's net premium income decreased, in yen terms, primarily due to an anticipated decrease in first sector premiums as savings products reached premium paid-up status. Adjusted net investment income increased primarily due to higher income fromU.S. dollar denominated assets and lower hedge costs. 79 -------------------------------------------------------------------------------- Annualized premiums in force decreased 3.4% to ¥1.46 trillion as ofJune 30, 2020 , compared with ¥1.51 trillion as ofJune 30, 2019 . The decrease in annualized premiums in force in yen was driven primarily by limited-pay products reaching paid up status. Annualized premiums in force, translated into dollars at respective period-end exchange rates, were$13.5 billion atJune 30, 2020 , compared with$13.9 billion a year ago.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 June 30, Including Foreign Excluding Foreign Currency Changes Currency Changes Three Months Six Months Three Months Six Months 2020 2019 2020 2019 2020 2019 2020 2019 Adjusted net investment income 2.0 % .8 % 3.0 % 3.1 % 3.3 % .4 % 4.0 2.3 % Total adjusted revenues (1.8 ) (.7 ) (1.4 ) (.3 ) (1.6 ) (.7 ) (1.3 ) (.4 ) Pretax adjusted earnings (1.2 ) (.1 ) .0 1.9 (.3 )
(.4 ) .7 1.3
The following table presents a summary of operating ratios in yen terms forAflac Japan . Three Months Ended Six Months Ended June 30, June 30, Ratios to total adjusted revenues: 2020 2019 2020 2019 Benefits and claims, net 58.0 % 57.7 % 57.8 % 57.7 % Adjusted expenses: Amortization of deferred policy acquisition costs 4.1 4.7 4.3 4.7 Insurance commissions 4.8 4.7 4.9 4.8 Insurance and other expenses 11.0 11.0 10.8 10.8 Total adjusted expenses 20.0 20.5 20.0 20.3 Pretax adjusted earnings 22.0 21.9 22.2 21.9 Ratios to total premiums: Benefits and claims, net 69.8 % 68.9 % 69.6 % 69.0 % Adjusted expenses: Amortization of deferred policy acquisition costs 4.9 5.6 5.2 5.7 In the three- and six-month periods endedJune 30, 2020 , the benefit ratio increased, compared with the same periods in the prior year. This is primarily due to higher persistency, resulting in an increase in future policy benefit reserves, offset by the continued change in mix of first and third sector business as first sector products become paid-up. In the three- and six-month periods endedJune 30, 2020 , the adjusted expense ratio decreased mainly due to lower DAC amortization and sales promotion expenses, partially offset by the decrease in total revenue. In total, the pretax adjusted profit margin increased in the three- and six-month periods endedJune 30, 2020 . For the full year of 2020, the Company is monitoring the situation with respect to COVID-19, and potential impacts on the pretax adjusted profit margin and benefit ratio. 80 --------------------------------------------------------------------------------Aflac Japan Sales The following table presentsAflac Japan's new annualized premium sales for the periods endedJune 30 . In Dollars In Yen Three Months Six Months Three Months Six Months (In millions of dollars and billions of yen) 2020 2019 2020 2019 2020 2019 2020 2019 New annualized premium sales$ 91 $ 218 $ 220 $ 388 ¥ 9.8 ¥ 23.9 ¥ 23.8 ¥ 42.7 Increase (decrease) over prior period (58.1 )% (17.9 )% (43.3 )% (12.4 )%
(58.8 )% (17.6 )% (44.1 )% (11.4 )%
The following table details the contributions to
Three Months Six Months
2020 2019 2020 2019
Cancer 54.7 % 65.3 % 55.1 % 62.6 %
Medical 32.5 26.5 32.4 28.0
Income support .9 1.0 1.1 1.2
Ordinary life:
WAYS .8 .4 .7 .5
Child endowment .4 .2 .4 .2Other ordinary life (1) 10.0 6.1 9.6 6.9 Other
.7 .5 .7 .6
Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes term and whole life
The foundation of Aflac Japan's product portfolio has been, and continues to be,
third sector products, which include cancer, medical and income support
insurance products. Aflac Japan has been focusing more on promotion of cancer
and medical insurance products in this low-interest-rate environment. These
products are less interest-rate sensitive and more profitable compared to first
sector savings products. With continued cost pressure on Japan's health care
system, the Company expects the need for third sector products will continue to
rise in the future and that the medical and cancer insurance products Aflac
Japan provides will continue to be an important part of its product portfolio.
Sales of protection-type first sector and third sector products on a yen basis
decreased 59.6% in the second quarter of 2020, compared with the same respective
period in 2019. The decline in sales primarily reflects the impact of the
COVID-19 pandemic and reduced sales of cancer insurance through the Japan Post
channel.
Sales of Aflac Japan cancer products in the Japan Post Group channel experienced
a material decline beginning in August 2019 which has continued into 2020. For
additional information, see the risk factor entitled "Events related to the
ongoing Japan Post investigation and other matters regarding sales of Japan Post
Insurance products could negatively impact the Company's sales and results of
operations," in Part II, Item 1A. of the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2020 . Aflac Japan experienced a sharp drop-off in
total sales in the second quarter due to the effects of the COVID-19 pandemic
and continuing effects of the Japan Post investigation. See the Executive
Summary section entitled "COVID-19" of this MD&A for additional information.
Independent corporate agencies and individual agencies contributed 53.8% of
total new annualized premium sales for Aflac Japan in the second quarter of
2020, compared with 39.2% for the same period in 2019. Affiliated corporate
agencies, which include Japan Post, contributed 42.8% of total new annualized
premium sales in the second quarter of 2020, compared with 57.8% in the second
quarter of 2019. Japan Post offers Aflac's cancer insurance products in more
than 20,000 postal outlets. Notwithstanding the recent reduction in sales of
Aflac Japan's cancer products in the Japan Post channel, the Company believes
this alliance with Japan Post has and will benefit its cancer insurance sales
over the long term. During the three-month period ended June 30, 2020 , Aflac
Japan recruited 5 new sales agencies. At June 30, 2020 , Aflac Japan was
represented by more than 8,700 sales agencies, with more than 109,000 licensed
sales associates employed by those agencies.
At June 30, 2020 , Aflac Japan had agreements to sell its products at 364 banks,
approximately 90% of the total number of banks in Japan . Bank channel sales
accounted for 3.4% of new annualized premium sales for Aflac Japan in the second
quarter of 2020, compared with 3.0% in the second quarter of 2019.
81
--------------------------------------------------------------------------------OnDecember 19, 2018 , the Parent Company andAflac Japan entered into a Basic Agreement with Japan Post Holdings a Japanese corporation. Pursuant to the terms of the Basic Agreement, Japan Post Holdings agreed to form a capital relationship with the Parent Company, and Japan Post Holdings andAflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives, including leveraging digital technology in various processes, cooperation in new product development to promote customer-centric business management, cooperation in domestic and/or overseas business expansion and joint investment in third party entities and cooperation regarding asset management. OnFebruary 28, 2019 , the Parent Company entered a Shareholders Agreement with Japan Post Holdings,J&A Alliance Holdings Corporation , aDelaware corporation, solely in its capacity as trustee ofJ&A Alliance Trust , aNew York voting trust (Trust), andGeneral Incorporated Association J&A Alliance , a Japanese general incorporated association. Pursuant to the Shareholders Agreement, Japan Post Holdings agreed to cause the Trust to use commercially reasonable efforts to acquire, through open market or private block purchases inthe United States , beneficial ownership of approximately 7% of the Common Stock in connection with the Basic Agreement. According to a Schedule 13G/A filed by Japan Post Holdings with theSEC onJanuary 8, 2020 , the Trust had beneficially acquired 6.47% of the outstanding Common Shares as ofDecember 31, 2019 . Japan Post Holdings is the sole beneficiary of the Trust. According to a press release by Japan Post Holdings onFebruary 14, 2020 , the Trust had completed the planned beneficial acquisition of approximately 7% of the outstanding Common Shares as ofFebruary 13, 2020 . OnMay 1, 2020 , the Parent Company filed a registration statement on Form S-3 that registered the sale of its common stock from time to time byJ&A Alliance Holdings Corporation in its capacity as trustee of the Trust. The filing was made strictly pursuant to a contractual requirement contained in the Shareholders Agreement. Notwithstanding the contractual commitment and filing of the Form S-3, the Trust continues to be subject to a lockup period for a period expiring four years after the Trust acquired 7% of the Parent Company's outstanding shares, under the terms of the Shareholders Agreement. The Trust has agreed not to own more than 10% of the Parent Company's outstanding shares for a period expiring four years after the Trust acquired 7% of such shares, five years after it acquires 5% of such shares, or ten years after the Trust begins acquiring the Parent Company's stock. After expiration of such period, the Trust has agreed not to own more than the greater of 10% of the Parent Company's outstanding shares or such shares representing 22.5% of the voting rights in the Parent Company. In light of the fact that the shares acquired by the Trust, like allAflac Incorporated common shares, will be eligible for 10-for-1 voting rights after being held for 48 consecutive months, the Shareholders Agreement further provides for voting restrictions that effectively limit the trustee's voting rights to no more than 20% of the voting rights in the Parent Company and further restrict the trustee's voting rights with respect to certain change in control transactions. Japan Post Holdings will not have a Board seat on the Parent Company's Board of Directors and will not have rights to control, manage or intervene in the management of the Parent Company. As ofDecember 31, 2019 , all regulatory approvals expressly set forth in the Shareholders Agreement have been obtained. The Shareholders Agreement requires the parties to use reasonable best efforts to cooperate in connection with any ongoing regulatory matters related to or arising from the Trust's acquisition or ownership or control of the shares of Company Common Stock, including any applications or filings in connection with a direct or indirect acquisition of control of or merger with an insurer by the Company or its affiliates. The foregoing is subject to and qualified in its entirety by reference to the full text of the Shareholders Agreement, a copy of which is attached as Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q filedApril 26, 2019 , and the terms of which exhibit are incorporated herein by reference.
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 and public and private fixed maturity securities.Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including public equity securities and 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- 82 -------------------------------------------------------------------------------- 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.
The following table details the investment purchases for
Three Months Ended June
30, Six Months Ended June 30,
(In millions) 2020 2019 2020 2019
Yen-denominated:
Fixed maturity securities:Japan government and agencies$ 0 $ 0 $ 736$ 583 Private placements 23 469 113 893 Other fixed maturity securities 194 107 271 356 Equity securities 139 12 142 121 Total yen-denominated$ 356 $ 588 $ 1,262 $ 1,953 U.S. dollar -denominated:
Fixed maturity securities:
Other fixed maturity securities
917 $ 1,522
Infrastructure debt 20 10 55 10
Equity securities 0 2 0 29Commercial mortgage and other loans:
Transitional real estate loans 97 347 465 670
Commercial mortgage loans 0 38 12 38
Middle market loans 240 313 1,427 688
Other investments 48 32 98 73
Total dollar-denominated $ 795 $ 1,596 $ 2,974 $ 3,030
Total Aflac Japan purchases $ 1,151 $ 2,184 $ 4,236 $ 4,983 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 2019 Annual Report for more information regarding loans and loan receivables.
The following table presents the results ofAflac Japan's investment yields for the periods endedJune 30 . Three Months Six Months 2020 2019 2020 2019 Total purchases for the period (in millions) (1)$ 1,103 $ 2,152 $ 4,138 $ 4,910 New money yield (1), (2) 3.41 % 3.77 % 3.86 % 3.50 % Return on average invested assets (3) 2.28 2.28 2.32 2.31 Portfolio book yield, includingU.S. dollar-denominated investments, end of period (1) 2.63 % 2.59 %
2.63 % 2.59 %
(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 decrease in the Aflac Japan new money yield in the three-month period endedJune 30, 2020 was primarily due to lowerU.S. interest rates. The increase in the Aflac Japan new money yield in the six-month period endedJune 30, 2020 was primarily due to increased allocations to higher yielding floating rate asset classes. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments and hedging strategies. 83 -------------------------------------------------------------------------------- AFLACU.S. SEGMENT AflacU.S. Pretax Adjusted Earnings Changes in AflacU.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for AflacU.S. Aflac U.S. Summary of Operating Results Three Months Ended Six Months Ended June 30, June 30, (In millions) 2020 2019 2020 2019 Net premium income$ 1,458 $ 1,459 $ 2,941 $ 2,920 Net investment income 172 180 348 357 Other income 26 2 54 4 Total adjusted revenues 1,656 1,641 3,343 3,281 Benefits and claims 646 732 1,359 1,452 Adjusted expenses: Amortization of deferred policy acquisition costs 134 131 293 290 Insurance commissions 148 150 299 299 Insurance and other expenses 302 290 640 579 Total adjusted expenses 584 571 1,232 1,168 Total benefits and adjusted expenses 1,230 1,303
2,591 2,620
Pretax adjusted earnings $ 426 $ 338 $ 752 $ 661
Percentage change over previous period:
Net premium income (.1 ) % 2.3 % .7 % 2.3 %
Net investment income (4.4 ) (1.1 ) (2.5 ) .0
Total adjusted revenues .9 1.9 1.9 2.1
Pretax adjusted earnings 26.0 (.6 ) 13.8 (2.4 )
Annualized premiums in force decreased 1.7% to $6.1 billion at June 30, 2020 ,
compared with $6.2 billion at June 30, 2019 . Net investment income decreased
primarily due to the lower interest rate environment and ongoing capital
management activity.
The following table presents a summary of operating ratios for Aflac U.S.
Three Months Ended Six Months Ended
June 30, June 30,
Ratios to total adjusted revenues: 2020 2019 2020 2019
Benefits and claims 39.0 % 44.6 % 40.7 % 44.3 %
Adjusted expenses:
Amortization of deferred policy
acquisition costs 8.1 8.0 8.8 8.8
Insurance commissions 8.9 9.1 8.9 9.1
Insurance and other expenses 18.2 17.7 19.1 17.7
Total adjusted expenses 35.3 34.8 36.9 35.6
Pretax adjusted earnings 25.7 20.6 22.5 20.1
Ratios to total premiums:
Benefits and claims 44.3 % 50.2 % 46.2 % 49.7 %
Adjusted expenses:
Amortization of deferred policy
acquisition costs 9.2 9.0 10.0 9.9
For the three- and six-month periods ended June 30, 2020 , the benefit ratio
decreased compared with the same periods in 2019, reflecting reduced accidents,
wellness medical visits and routine procedures due to shelter-in-place orders
and heightened social distancing due to COVID-19. The adjusted expense ratio
increased in the three- and six-month periods ended June 30, 2020 , when compared
with the same periods in 2019, primarily due to anticipated spending increases
reflecting ongoing investments in the U.S. platform, distribution, and customer
experience, and TPA related expenses from
84
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the acquisition of Argus, as well as lower unit cost capitalization reflecting a
second quarter decline in sales and lower general administrative expense due to
lower sales, travel and claims activity. The pretax adjusted profit margin
increased in the three- and six-month periods, when compared with the same
periods in 2019, due to lower benefit ratios, offset somewhat by higher expense
ratios. For the full year of 2020, the Company is monitoring the situation with
respect to COVID-19, and potential impacts on the pretax adjusted profit margin
and benefit ratio.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the
periods ended June 30 .
Three Months Six Months
(In millions) 2020 2019 2020 2019
New annualized premium sales
$ 702 Increase (decrease) over prior period (55.6 ) % (2.0 ) % (31.2 ) %
(.3 ) %
The following table details the contributions to Aflac's
Three Months Six Months
2020 2019 2020 2019
Accident 25.7 % 28.7 % 26.7 % 28.7 %
Short-term disability 23.9 23.8 23.0 23.7
Critical care(1) 20.6 19.9 21.0 20.4 Hospital indemnity 17.1 16.0 17.0 15.6 Dental/vision 4.1 5.2 4.3 5.1 Life 8.6 6.4 8.0 6.5 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
New annualized premium sales for accident insurance, the leading AflacU.S. product category, decreased 60.3%; short-term disability sales decreased 55.4%; critical care insurance sales (including cancer insurance) decreased 54.0%; and hospital indemnity insurance sales decreased 52.5% in the second quarter of 2020, compared with the same period in 2019. Primarily, the decline is sales for AflacU.S. is attributable COVID-19 social distancing efforts, which limited face-to-face sales opportunities beginning inmid-March 2020 . See the Executive Summary section entitled "COVID-19" of this MD&A for additional information. In the second quarter of 2020, the AflacU.S. sales force included an average of approximately 4,300U.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. InMarch 2020 , the Company, through its insurance subsidiaries Aflac and AflacNew York , entered into an agreement to acquireZurich North America's U.S. Corporate Life and Pensions business, which consists of group life, disability and absence management products. Aflac and Aflac New York will reinsure on an indemnity basisZurich North America's U.S. in-force group life and disability policies with annualized earned premium in the anticipated range of$115 million . Aflac will also acquire assets needed to support the group life and disability business, along with an absence management platform. Subject to regulatory approvals and customary closing conditions, this transaction is expected to close in the second half of 2020.
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. 85
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The following table details the investment purchases for Aflac
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 2020 2019
Fixed maturity securities:
Other fixed maturity securities
267
Infrastructure debt 4 14 20 74 Collateralized loan obligations 11 0 11 0 Equity securities 1 11 5 27
Commercial mortgage and other loans:
Transitional real estate loans 7 94 45 142 Commercial mortgage loans 10 44 37 69 Middle market loans 5 27 43 56 Other investments 5 4 11 8
Total Aflac U.S. Purchases $ 128 $ 473 $
439
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 2019 Annual Report for more information regarding loans and loans receivables.
The following table presents the results of Aflac's
Three Months Six Months
2020 2019 2020 2019
Total purchases for period (in millions) (1) $ 123 $ 469 $ 428 $ 1,242
New money yield (1), (2) 3.04 % 4.45 % 3.54 % 4.47 %
Return on average invested assets (3) 4.81 5.05 4.91 5.07 Portfolio book yield, end of period (1) 5.30 % 5.43 % 5.30 % 5.43 %
(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 decrease in the AflacU.S. new money yield for the three- and six-month periods endedJune 30, 2020 was primarily due to lowerU.S. interest rates. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on the Company's investments.
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily
affected by investment income. The following table presents a summary of results
for Corporate and other.
86
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Corporate and Other Summary of Operating Results
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2020 2019 2020 2019
Premium income $ 49 $ 50 $ 97 $ 100
Net investment income 21 20 45 42
Amortized hedge income related to certain
foreign currency management strategies 27 20 56 40
Adjusted net investment income 48 40 101 82
Other income 3 5 6 8
Total adjusted revenues 100 95 204 190
Benefits and claims, net 47 48 87 95
Adjusted expenses:
Interest expense 43 33 76 66
Other adjusted expenses 40 40 69 74
Total adjusted expenses 83 73 145 140
Total benefits and adjusted expenses 130 121 232 235
Pretax adjusted earnings $ (30 ) $ (26 ) $ (28 ) $ (45 )
Adjusted net investment income benefited from the Company's enterprise corporate
hedging program in the three- and six-month periods ended June 30, 2020 and
2019, respectively. Beginning in 2020, net investment income also includes the
Company's portion of earnings from its strategic equity investment in an asset
management company. See the Hedging Activities subsection of this MD&A for
further information on the enterprise corporate hedging program.
INVESTMENTS
The Company's investment strategy utilizes disciplined asset and liability
management while seeking long-term risk-adjusted investment returns and the
delivery of stable income within regulatory and capital objectives, and
preserving shareholder value. In attempting to optimally balance these
objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified
portfolio of yen-denominated investment assets, U.S. dollar-denominated
investment portfolio hedged back to yen and a portfolio of unhedged U.S.
dollar-denominated assets. As part of the Company's portfolio management and
asset allocation process, Aflac U.S. invests in fixed maturity investments and
growth assets, including public equity securities and alternative investments in
limited partnerships. Aflac U.S. invests in both publicly traded and privately
originated investment-grade and below-investment-grade fixed maturity securities
and loans.
87--------------------------------------------------------------------------------
The following tables detail investments by segment.
Investment Securities by Segment
June 30, 2020
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed
maturity securities,
at fair value $ 83,819 $ 14,250 $ 1,890 $ 99,959
Held to maturity, fixed
maturity securities,
at amortized cost (1) 23,509 0 0 23,509
Equity securities 603 63 83 749
Commercial mortgage and other
loans:
Transitional real estate loans
(1) 4,716 911 0 5,627
Commercial mortgage loans (1) 1,275 423 0 1,698
Middle market loans (1) 3,126 266 0 3,392
Other investments:
Policy loans 247 16 0 263
Short-term investments (2) 177 101 486 763
Limited partnerships 591 66 61 718
Other 0 27 0 27
Total investments 118,063 16,123 2,520 136,705
Cash and cash equivalents 1,693 808 3,027 5,528
Total investments and
cash $ 119,756 $ 16,931 $
5,547
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
December 31, 2019
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed
maturity securities,
at fair value $ 75,780 $ 13,703 $ 1,779 $ 91,262
Held to maturity, fixed
maturity securities,
at amortized cost 30,085 0 0 30,085
Equity securities 657 67 78 802
Commercial mortgage and other
loans:
Transitional real estate loans 4,507 943 0 5,450
Commercial mortgage loans 1,308 399 0 1,707
Middle market loans 2,141 271 0 2,412
Other investments:
Policy loans 234 16 0 250
Short-term investments (1) 386 242 1 629
Limited partnerships 496 55 17 568
Other 0 30 0 30
Total investments 115,594 15,726 1,875 133,195
Cash and cash equivalents 1,674 417 2,805 4,896
Total investments and
cash $ 117,268 $ 16,143 $ 4,680 $ 138,091 (1) Includes securities lending collateral
The ratings of the Company's securities referenced in the table below are based on the ratings designations provided by major rating organizations such as Moody's,Standard & Poor's and Fitch or, if not rated, are determined based on the Company's internal analysis of such securities. When the ratings issued by the rating agencies differ, the Company utilizes 88 --------------------------------------------------------------------------------
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
June 30, 2020 December 31, 2019
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.2 % 1.1 % 1.1 % 1.0 %
AA 4.2 4.4 4.3 4.4
A 69.0 70.1 68.6 69.8
BBB 22.4 21.6 23.1 22.1
BB or lower 3.2 2.8 2.9 2.7
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of June 30, 2020 , 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.
The following table presents the 10 largest unrealized loss positions in the
Company's portfolio as of
Credit Amortized Fair Unrealized
(In millions) Rating Cost Value Loss
Investcorp Capital Limited BB $ 393 $ 348 $ (45 )
AXA BBB 300 259 (41 )
KLM Royal Dutch Airlines B 142 109 (33 )
Banco de Chile A 186 155 (31 )
Commonwealth Bank of Australia AA 195 174 (21 )
PEMEX Project Funding Master Trust BB 278 258 (20 )
Lloyds Banking Group PLC A 213 194 (19 )
Autostrade Per Litalia Spa BB 185 169 (16 )
Downer Group Finance Pty LTD BBB 93 78 (15 )
GLP Pte Ltd. BBB 139 125 (14 )
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.
89
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Below-Investment-Grade Investments
June 30, 2020
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 393 $ 393 $ 348 $ (45 )
Commerzbank 371 247 370 123
Pemex Project Funding Master Trust 278 278 258 (20 )
KLM Royal Dutch Airlines 186 142 109 (33 )
Autostrade Per Litalia Spa 186 185 169 (16 )
Telecom Italia SpA 186 186 230 44
Barclays Bank PLC 186 119 137 18
Apache Corporation 138 127 126 (1 )
IKB Deutsche Industriebank AG 121 53 78 25
Republic of South Africa 93 93 94 1
Other Issuers 828 684 702 18
Subtotal (2) 2,966 2,507 2,621 114
Senior secured bank loans 275 290 257 (33 )
High yield corporate bonds 706 712 699 (13 )
Middle market loans 3,559 3,392 3,388 (4 )
Grand Total $ 7,506 $ 6,901 $ 6,965 $ 64
(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 senior secured bank loans and middle market loans
primarily to
The Company maintains an allocation to higher yielding corporate bonds within the Aflac Japan and AflacU.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. 90 --------------------------------------------------------------------------------
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.
June 30, 2020
Gross Unrealized Gross Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 54,841 $ 9,722 $ (45 ) $ 64,517 49.1 %
Municipalities 2,477 504 (9 ) 2,973 2.2
Mortgage- and asset-backed
securities 509 38 (1 ) 547 .5
Public utilities 8,475 1,556 (31 ) 10,001 7.6
Electric 6,603 1,224 (20 ) 7,808 5.9
Natural Gas 396 52 (7 ) 441 .4
Other 717 147 0 863 .6
Utility/Energy 759 133 (4 ) 889 .7
Sovereign and Supranational 1,824 257 (12 ) 2,069 1.6
Banks/financial institutions 10,288 1,250 (323 ) 11,214 9.3
Banking 6,213 737 (159 ) 6,791 5.6
Insurance 1,967 381 (74 ) 2,274 1.8
Other 2,108 132 (90 ) 2,149 1.9
Other corporate 33,234 5,148 (450 ) 37,931 29.7
Basic Industry 3,316 546 (19 ) 3,843 3.0
Capital Goods 3,353 510 (16 ) 3,846 3.0
Communications 4,021 786 (32 ) 4,776 3.6
Consumer Cyclical 3,085 466 (29 ) 3,522 2.8
Consumer Non-Cyclical 6,692 1,171 (34 ) 7,828 6.0
Energy 4,138 506 (167 ) 4,477 3.7
Other 1,493 138 (41 ) 1,590 1.3
Technology 3,291 349 (32 ) 3,608 2.9
Transportation 3,845 676 (80 ) 4,441 3.4
Total fixed maturity
securities $ 111,648 $ 18,475 $ (871 ) $ 129,252 100.0 %
(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.
91
--------------------------------------------------------------------------------The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
June 30, 2020 December 31, 2019
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost Value
Publicly issued securities:
Fixed maturity securities $ 91,701 $ 107,052 $ 89,625 $ 105,557
Equity securities 658 658 717 717
Total publicly issued 92,359 107,710 90,342 106,274
Privately issued securities: (2)
Fixed maturity securities (3) 19,947 22,200 19,831 23,299
Equity securities 91 91 85 85
Total privately issued 20,038 22,291 19,916 23,384
Total investment securities
(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)June 30 ,December 31 , (Amortized cost, in millions) 2020
2019
Privately issued reverse-dual currency securities$ 5,084
1,706 1,678
Total reverse-dual currency securities$ 6,790 $ 6,671 Reverse-dual currency securities as a percentage of total investment securities 6.0 % 6.1 %
(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 2019 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.
• 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.
92-------------------------------------------------------------------------------- Foreign Currency Exchange Rate Risk Hedge ProgramThe Company has deployed the following hedging strategies to mitigate exposure to foreign currency exchange rate risk: •Aflac Japan hedgesU.S. dollar-denominated investments back to yen (seeAflac Japan's U.S. Dollar-Denominated Hedge Program below).
•
which serve as an economic currency hedge of a portion of the Company's
investment in Aflac Japan (see Aflac Japan's U.S. Dollar-Denominated Hedge
Program below).
•
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
Program below).
•
a dual objective of hedging foreign currency exchange rate risk related to
dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide
hedge costs. (see Enterprise Corporate Hedging Program below).
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides capital relief. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . June 30, December 31, 2020 2019 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost Value Available-for-sale securities: Fixed maturity securities (excluding bank loans)$ 18,439 $ 20,506
Fixed maturity securities - bank loans (floating rate) 377 337 677 649 Equity securities 18 18 19 19
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 4,716 4,573
4,507 4,543
Commercial mortgage loans 1,275 1,350
1,308 1,319
Middle market loans (floating rate) 3,126 3,126 2,141 2,153 Other investments 591 591 496 496 Total U.S. Dollar Program 28,542 30,501 27,160 28,721 Available-for-sale securities: Fixed maturity securities - economically converted to yen 1,750 2,671
1,700 2,608
TotalU.S. dollar-denominated investments in Aflac Japan$ 30,292 $ 33,172
(1) Net of allowance for credit losses
U.S. Dollar Program includes allU.S. dollar-denominated investments inAflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE.Aflac Japan maintains a collar program on a portion of its US dollar program to mitigate against more extreme moves in foreign exchange and therefore support SMR. In the first quarter of 2020, the Company reduced the size of the collar program by approximately$3 billion as certain collars expired and were not replaced. While these adjustments will moderately increase the Company's exposure to SMR volatility, the Company believes that they will also reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the collar program. The Company is evaluating other adjustments, including the possibility of hedging additionalU.S dollar-denominated investments. 93 -------------------------------------------------------------------------------- As ofJune 30, 2020 ,Aflac Japan had$9.1 billion outstanding notional amounts of foreign currency forwards and$17.8 billion outstanding notional amounts of foreign currency options, of which none were in-the-money, hedging itsU.S. dollar-denominated investments. The fair value ofAflac Japan's unhedgedU.S. dollar-denominated portfolio was$21.4 billion (excluding certainU.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives). Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The Company had net cash inflows of$1 million and net cash outflows of$11 million for the three-month periods and net cash outflows of$32 million and$23 million for the six-month periods endedJune 30, 2020 and 2019, respectively, associated with the currency derivatives used for hedgingAflac Japan's U.S. dollar-denominated investments.
Enterprise Corporate Hedging Program
The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment inAflac Japan . The Company's consolidated yen-denominated net asset position was partially hedged at$10.5 billion as ofJune 30, 2020 , compared with$9.1 billion as ofDecember 31, 2019 . 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 six-month periods endedJune 30, 2020 and 2019, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements. In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buyingU.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, whileAflac Japan's U.S dollar exposure remains reduced as a result ofAflac Japan's U.S. dollar-denominated hedge program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. The portion of the enterprise-wide amortized hedge income contributed by this strategy was$27 million and$20 million for the three-month periods and$56 million and$40 million for the six-month periods endedJune 30, 2020 and 2019, respectively. This activity is reported in Corporate and Other. As this program evolves, the Company will continue to evaluate the program's efficacy. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. The following table presents metrics related toAflac Japan amortized hedge costs and the Parent Company amortized hedge income for the periods endedJune 30 . Aflac Japan Hedge Cost/Income Metrics(1) Three Months Six Months 2020 2019 2020 2019Aflac Japan : FX forward (sell USD, buy yen) notional at end of period (in billions)(2)$9.1 $9.1
Weighted average remaining tenor (in months)(3) 8.1 11.2 8.1 11.2
Amortized hedge income (cost) for period (in millions)$(50) (62)$(105) $(124) Parent Company: FX forward (buy USD, sell yen) notional at end of period (in billions)(2)$5.0 $3.0
Weighted average remaining tenor (in months)(3) 12.1 10.6 12.1 10.6
Amortized hedge income (cost) for period (in millions)$27 $20
(1) See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. (2) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (3) Tenor based on period reporting date to settlement date 94 --------------------------------------------------------------------------------
Interest Rate Risk Hedge Program
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 the Risk Factor sections 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 2019 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.
(In millions) June 30, 2020 December 31, 2019 % Change
Aflac Japan $ 6,726 $ 6,584 2.2 % (1)
Aflac U.S. 3,495 3,544 (1.4 )
Total $ 10,222 $ 10,128 .9 %
(1)
See Note 6 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report for additional information on the Company's deferred policy acquisition costs.
POLICY LIABILITIES
The following table presents policy liabilities by segment.
(In millions) June 30, 2020 December 31, 2019 % Change
Aflac Japan $ 98,171 $ 95,793 2.5 % (1)
Aflac U.S. 11,474 11,295 1.6
Other 251 223 12.6
Intercompany eliminations(2) (793 ) (757 ) 4.8
Total $ 109,103 $ 106,554 2.4 %
(1) Aflac Japan's policy liabilities increased .8% in yen during the six months
ended June 30, 2020 .
(2) Elimination entry necessary due to recapture of a portion of policy
liabilities ceded externally, as a result of the reinsurance retrocession
transaction as described in Note 7 of the Notes to the Consolidated Financial
Statements.
BENEFIT PLANS
95
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POLICYHOLDER PROTECTIONThe Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of theLife Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. InNovember 2016 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2022 . EffectiveApril 2014 , the annual LIPPC contribution amount for the total life industry was lowered from ¥40 billion to ¥33 billion.Aflac Japan recognized an expense of ¥1.0 billion and ¥.9 billion for the six-month periods endedJune 30, 2020 and 2019, respectively, for LIPPC assessments.
Guaranty Fund Assessments
UnderU.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. Guaranty fund assessments for the six-month periods endedJune 30, 2020 and 2019, were immaterial. OFF-BALANCE SHEET ARRANGEMENTS
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
As ofJune 30, 2020 , the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. See Note 15 of the Notes to the Consolidated Financial Statements in the 2019 Annual Report for information on material unconditional purchase obligations that are not recorded on the Company's balance sheet. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to an investment strategy of using debt to increase the potential return on equity. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including:
• business investment and growth needs
• strategic growth objectives
• financial flexibility and obligations
• capital support for hedging activity
• a constantly evolving business and economic environment
• a balanced approach to capital allocation and shareholder deployment.
The governance framework supporting liquidity, capital and leverage includes global senior management and board committees that review and approve all significant capital related decisions.
The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$2.0 billion to provide a capital buffer and liquidity support at the holding company. Amid the COVID-19 pandemic, the Company remains committed to prudent liquidity and capital management. AtJune 30, 2020 , the Company held$5.5 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion . For additional information on the Company's liquidity and capital resources in response to COVID-19, see the Executive Summary section of this MD&A.Aflac Japan and AflacU.S. provide the primary sources of liquidity to the Parent Company through management fees and dividends. For 2020, the Parent Company anticipates a reduction in the dividends it receives fromAflac Japan and AflacU.S. to maintain a strong capital position for its insurance subsidiaries during the COVID-19 pandemic. For additional information on the impact to subsidiary dividends paid to the Parent Company as a result of COVID-19, see the Executive Summary section of this MD&A. 96 --------------------------------------------------------------------------------
The following table presents the amounts provided to the Parent Company for the
six-month periods ended
Liquidity Provided by Subsidiaries to Parent Company
(In millions) 2020 2019
Dividends declared or paid by subsidiaries
The following table details
Aflac Japan Remittances
(In millions of dollars and billions of yen) 2020 2019
Aflac Japan management fees paid to Parent Company$ 38 $ 60 Expenses allocated to Aflac Japan (in dollars) 0
3
1,362
¥ 147.6
The Company intends to maintain higher than historical levels of liquidity and capital at the Parent Company for stress conditions and with the goals of addressing the Company's hedge costs and related potential need for collateral and mitigating against long-term weakening of the Japanese yen. Further, the Company plans to continue to maintain a portfolio of unhedgedU.S. dollar based investments at Aflac Japan and 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 in this MD&A for more information. In addition to cash and equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. InSeptember 2018 , 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 2021 . The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. Additionally, as ofJune 30, 2020 , the Parent Company and Aflac had four lines of credit with third parties as well as seven intercompany lines of credit. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The Company's consolidated financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. The Company was in compliance with all of the covenants of its notes payable and lines of credit atJune 30, 2020 . 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 2019 Annual Report for more information on the Company's securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes and the Risk Factors in the 2019 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 does not have a known trend, demand, commitment, event or uncertainty that would reasonably result in its liquidity increasing or decreasing by a material amount. Consolidated Cash Flows The Company translates cash flows forAflac Japan's yen-denominated items intoU.S. dollars using weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The following table summarizes consolidated cash flows by activity for the six-month periods endedJune 30 . 97 -------------------------------------------------------------------------------- (In millions) 2020 2019 Operating activities$ 2,601 $ 2,357 Investing activities (2,120 ) (2,727 ) Financing activities 152 (978 )
Exchange effect on cash and cash equivalents (1 ) 30
Net change in cash and cash equivalents
Operating Activities
The principal cash inflows for the Company's insurance activities come from
insurance premiums and investment income. The principal cash outflows are the
result of policy claims, operating expenses, income tax, as well as interest
expense. As a result of policyholder aging, claims payments are expected to
gradually increase over the life of a policy. Therefore, future policy benefit
reserves are accumulated in the early years of a policy and are designed to help
fund future claims payments.
The Company expects its future cash flows from premiums and investment portfolios to be sufficient to meet its cash needs for benefits and expenses.
Investing Activities
The Company's investment objectives provide for liquidity primarily through the
purchase of publicly traded investment-grade debt securities. Prudent portfolio
management dictates that the Company attempts to match the duration of its
assets with the duration of its liabilities. Currently, when the Company's fixed
maturity securities mature, the proceeds may be reinvested at a yield below that
required for the accretion of policy benefit liabilities on policies issued in
earlier years. However, the long-term nature of the Company's business and its
strong cash flows provide the Company with the ability to minimize the effect of
mismatched durations and/or yields identified by various asset adequacy
analyses. From time to time or when market opportunities arise, the Company
disposes of selected fixed maturity securities that are available for sale to
improve the duration matching of assets and liabilities, improve future
investment yields, and/or re-balance its portfolio. As a result, dispositions
before maturity can vary significantly from year to year.
As part of its overall corporate strategy, the Company has committed $400
million to Aflac Ventures, LLC (Aflac Ventures ), as opportunities emerge. Aflac
Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures )
which is reported in the Corporate and Other segment. The central mission of
Aflac Global Ventures is to support the organic growth and business development
needs of Aflac Japan and Aflac U.S. with emphasis on digital applications
designed to improve the customer experience, gain efficiencies, and develop new
markets in an effort to enhance and defend long-term shareholder value.
Investments are included in equity securities or the other investments line in
the consolidated balance sheets.
As part of an arrangement with FHLB, Aflac U.S. obtains low-cost funding from
FHLB supported by acceptable forms of collateral pledged by Aflac U.S. In the
first six months of 2020, Aflac U.S. borrowed and repaid $177 million under this
program. As of June 30, 2020 , Aflac U.S. had outstanding borrowings of $337
million reported in its balance sheet. To further support liquidity and capital
resources amid the pandemic, in April 2020 , Aflac U.S. increased its internal
limit for borrowings under this program to $800 million , $300 million of which
the Company has designated to be used for short-term liquidity needs only and
subject to qualified collateral availability and other conditions.
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
Financing Activities
Consolidated cash provided by financing activities was $152 million in the first
six months of 2020, compared with consolidated cash used by financing activities
of $978 million for the same period of 2019.
In April 2020 , the Parent Company issued $1.0 billion of senior notes through a
U.S. public debt offering. The notes bear interest at a fixed rate of 3.60% per
annum, payable semi-annually, and will mature in April 2030 . These notes are
redeemable at the Parent Company's option in whole at any time or in part from
time to time at a redemption price equal to the greater of: (i) the aggregate
principal amount of the notes to be redeemed or (ii) the amount equal to the sum
of the present values of the remaining scheduled payments for principal of and
interest on the notes to be redeemed, not including any portion of the payments
of interest accrued as of such redemption date, discounted to such redemption
date on a semiannual basis at the yield to maturity for a U.S. Treasury security
with a maturity comparable to the remaining term of the notes, plus 45
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--------------------------------------------------------------------------------basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
InMarch 2020 , the Parent Company issued four series of senior notes totaling ¥57.0 billion through a public debt offering under itsU.S. shelf registration statement. The first series, which totaled ¥12.4 billion, bears interest at a fixed rate of .300% per annum, payable semiannually and will mature inSeptember 2025 . The second series, which totaled ¥13.3 billion, bears interest at a fixed rate of .550% per annum, payable semi-annually, and will mature inMarch 2030 . The third series, which totaled ¥20.7 billion, bears interest at a fixed rate of .750% per annum, payable semiannually and will mature inMarch 2032 . The fourth series, which totaled ¥10.6 billion, bears interest at a fixed rate of .830% per annum, payable semi-annually, and will mature inMarch 2035 . These notes may only be redeemed before maturity, in whole but not in part, upon the occurrence of certain changes affectingU.S. taxation, as specified in the indenture governing the terms of the issuance.
In
See Note 8 of the Notes to the Consolidated Financial Statements for further information on the debt issuances discussed above.
The Company was in compliance with all of the covenants of its notes payable and
lines of credit at
Cash returned to shareholders through treasury stock purchases and dividends was$1.0 billion during the six-month period endedJune 30, 2020 , compared with$1.2 billion during the six-month period endedJune 30, 2019 .
The following tables present a summary of treasury stock activity during the
six-month periods ended
Treasury Stock Purchased
(In millions of dollars and thousands of shares) 2020 2019
Treasury stock purchases $ 637 $ 847
Number of shares purchased:
Share repurchase program 15,193 17,179
Other 521 574
Total shares purchased 15,714 17,753
Treasury Stock Issued
(In millions of dollars and thousands of shares) 2020 2019 Stock issued from treasury:
Cash financing$ 21 $ 26 Noncash financing 28 27 Total stock issued from treasury$ 49 $ 53 Number of shares issued 1,403 1,428 During the first six months of 2020, the Company repurchased 15.2 million shares of its common stock for$637 million as part of its share repurchase program. As ofJune 30, 2020 , a remaining balance of 21.9 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. For information on the impact of COVID-19 on the Company's share repurchase program, see the Executive Summary section of this MD&A. Cash dividends paid to shareholders were$.28 per share in the second quarter of 2020, compared with$.27 per share in the second quarter of 2019. The following table presents the dividend activity for the six-month periods endedJune 30 . (In millions) 2020 2019 Dividends paid in cash$ 388 $ 389
Dividends through issuance of treasury shares 14 14 Total dividends to shareholders
$ 402 $ 403 99 -------------------------------------------------------------------------------- InJuly 2020 , the board of directors declared the second quarter cash dividend of$.28 per share, an increase of 3.7% compared with the same period in 2019. The dividend is payable onSeptember 1, 2020 to shareholders of record at the close of business onAugust 19, 2020 . Regulatory Restrictions Aflac, CAIC and TOIC are domiciled inNebraska and are subject to its regulations. Subsequent to the Japan branch conversion to a subsidiary,Aflac Japan is domiciled inJapan and subject to local regulations. 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. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. Aflac's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC's RBC formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer's operations. As ofJune 30, 2020 , Aflac's RBC ratio remains high and reflects a strong capital and surplus position. 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 2020 in excess of$864 million would be considered extraordinary and require such approval. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. In addition to limitations and restrictions imposed byU.S. insurance regulators, the Japan subsidiary is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts inJapan ) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR.Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company continues to evaluate alternatives for reducing this sensitivity, including the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥110 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedgedU.S. dollar-denominated investments with foreign currency options or forwards. (See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for additional information.) The Company has already undertaken various measures to mitigate the sensitivity ofAflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting 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 2019 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively.)
As of
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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 the Audit and Risk
Committee . The Company's senior officers, including its Global Security and
Chief Information Security Officer, are responsible for the operation of the
global information security program and regularly communicate with the Audit and
Risk Committee on the program, including with respect to the state of the
program, compliance with applicable regulations, current and evolving threats,
and recommendations for changes in the information security program. The global
information security program also includes a cybersecurity incident response
plan that is designed to provide a management framework across Company functions
for a coordinated assessment and response to potential security incidents. This
framework establishes a protocol to report certain incidents to the Global
Security and Chief Information Security Officer and other senior officers, with
the goal of timely assessing such incidents, determining applicable disclosure
requirements and communicating with the Audit and Risk Committee . The incident
response plan directs the executive officers to report certain incidents
immediately and directly to the Lead Non-Management Director.
OtherFor 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 its SEC filings, press releases and public conference calls. In accordance
with SEC guidance, the Company may also use the Investor Relations section of
the Company's website (http://investors.aflac.com) to communicate with investors
about the Company. It is possible that the financial and other information the
Company posts there could be deemed to be material information. The information
on the Company's website is not part of this document. Further, the Company's
references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP.
These principles are established primarily by the FASB. In this MD&A, references
to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards
Codification™ (ASC). The preparation of financial statements in conformity with
U.S. GAAP requires the Company to make estimates based on currently available
information when recording transactions resulting from business operations. The
estimates that the Company deems to be most critical to an understanding of
Aflac's results of operations and financial condition are those related to the
valuation of investments and derivatives, DAC, liabilities for future policy
benefits and unpaid policy claims, and income taxes. The preparation and
evaluation of these critical accounting estimates involve the use of various
assumptions developed from management's analyses and judgments. The application
of these critical accounting estimates determines the values at which 94% of the
Company's assets and 81% of its liabilities are reported as of June 30, 2020 ,
and thus has a direct effect on net earnings and shareholders' equity.
Subsequent experience or use of other assumptions could produce significantly
different results.
There have been no changes in the items the Company has identified as critical
accounting estimates during the six months ended June 30, 2020 , with the
exception of the recognition of lifetime credit losses required in accordance
with the adoption of ASC 326 - Financial Instruments - Credit Losses. See Note 3
of the Notes to the Consolidated Financial Statements for further information on
the Company's current expected credit loss estimation methodology. For
additional information, see the Critical Accounting Estimates section of MD&A
included in the 2019 Annual Report.
New Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on the
Company's financial position or results of operations, see Note 1 of the Notes
to the Consolidated Financial Statements.
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