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 (the Parent Company) and its subsidiaries (collectively with the Parent Company, the Company) desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by Company officials in communications with the financial community and contained in documents filed with theSecurities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as the ones listed below or similar words, as well as specific projections of future results, generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements. • expect • anticipate • believe • goal • objective • may • should • estimate • intends • projects • will • assumes • potential • target • outlook
The Company cautions readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results to differ materially from those contemplated by the forward-looking statements:
•difficult conditions in global capital markets and the economy, including those caused by COVID-19 •defaults and credit downgrades of investments •global fluctuations in interest rates and exposure to significant interest rate risk •concentration of business inJapan •limited availability of acceptable yen-denominated investments •foreign currency fluctuations in the yen/dollar exchange rate •differing judgments applied to investment valuations •significant valuation judgments in determination of expected credit losses recorded on the Company's investments •decreases in the Company's financial strength or debt ratings •decline in creditworthiness of other financial institutions •concentration of the Company's investments in any particular single-issuer or sector •the effects of COVID-19 and its variants (both known and emerging), and any resulting economic effects and government interventions, on the Company's business and financial results •the Company's ability to attract and retain qualified sales associates, brokers, employees, and distribution partners •deviations in actual experience from pricing and reserving assumptions •ability to continue to develop and implement improvements in information technology systems •interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems •subsidiaries' ability to pay dividends to the Parent Company •inherent limitations to risk management policies and procedures •operational risks of third party vendors •tax rates applicable to the Company may change •failure to comply with restrictions on policyholder privacy and information security •extensive regulation and changes in law or regulation by governmental authorities •competitive environment and ability to anticipate and respond to market trends •catastrophic events, including, but not limited to, as a result of climate change, epidemics, pandemics (such as COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events •ability to protect the Aflac brand and the Company's reputation •ability to effectively manage key executive succession •changes in accounting standards •level and outcome of litigation •allegations or determinations of worker misclassification inthe United States 68 -------------------------------------------------------------------------------- MD&A OVERVIEW MD&A is intended to inform the reader about matters affecting the financial condition and results of operations ofAflac Incorporated and its subsidiaries for the six-month periods endedJune 30, 2022 and 2021, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in the Company's annual report on Form 10-K for the year endedDecember 31, 2021 (2021 Annual Report). In this MD&A, amounts may not foot due to rounding.
This MD&A is divided into the following sections:
Page
Executive Summary 70
Results of Operations 71
Investments 85
Hedging Activities 89
Deferred Policy Acquisition Costs 93
Policy Liabilities 93
Benefit Plans 94
Policyholder Protection 94
Liquidity and Capital Resources 94
Critical Accounting Estimates 99
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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 supplemental health and life insurance products with the goal to provide customers the best value in supplemental insurance products inthe United States (U.S. ) and Japan. The Company's insurance business consists of two reporting segments:Aflac Japan and AflacU.S. The Parent Company's primary insurance subsidiaries areAflac Life Insurance Japan Ltd. inJapan (Aflac Japan ) andAmerican Family Life Assurance Company of Columbus (Aflac);Continental American Insurance Company (CAIC), branded asAflac Group Insurance (AGI);American Family Life Assurance Company of New York (Aflac New York);Tier One Insurance Company (TOIC) andAflac Benefits Solutions, Inc. (ABS), formerly know asArgus Dental & Vision, Inc. , which provides a platform for Aflac Dental and Vision in theU.S. (collectively, AflacU.S. ). Market Conditions The impact of the Coronavirus Disease 2019 (COVID-19) global pandemic on the Company continues to evolve and the continued path of the global economic recovery remains uncertain given the potential longer term impacts of the pandemic. For example, economic conditions have acted as headwinds to sales in the first six months of 2022, particularly inJapan and most notably in the first quarter with a gradually decreasing impact in the second quarter, pressuring premium growth rates. Further, in theU.S. , supply shortages, upward pressure on wages to attract employees and higher commodity prices have all driven near-term increases in inflation. Central bank and government efforts to control inflation, as well the impacts of theRussia -Ukraine conflict, including volatility in energy prices and additional disruptions in the global supply chain, could lead to slower economic growth inJapan and theU.S. Additionally, continued widening of the differential betweenU.S. and Japan interest rates has contributed to a weakening of the yen, which has the effect of suppressing the Company's current period results in relation to the comparable prior period. In the three- and six-month periods endedJune 30, 2022 , sales forAflac Japan , in yen terms, decreased 6.4% and 10.7%, respectively, compared to the same periods in 2021, reflecting theJanuary 2021 launch of a new medical product and continued weakness in sales recovery, in part constrained by pandemic conditions. In the three- and six-month periods endedJune 30, 2022 , sales for AflacU.S. increased 15.6% and 17.2%, respectively, compared to the same periods in 2021, reflecting continued investment in growth initiatives as well as productivity gains.
Performance Highlights
Total revenues were$5.4 billion in the second quarter of 2022, compared with$5.6 billion in the second quarter of 2021. Net earnings were$1.4 billion , or$2.16 per diluted share in the second quarter of 2022, compared with$1.1 billion , or$1.62 per diluted share, in the second quarter of 2021. Total revenues were$10.7 billion in the first six months of 2022, compared with$11.4 billion in the first six months of 2021. Net earnings were$2.4 billion , or$3.73 per diluted share in the first six months of 2022, compared with$2.4 billion , or$3.49 per diluted share, in the first six months of 2021. Results in the second quarter of 2022 included pretax net investment gains of$564 million , compared with pretax net investment gains of$89 million in the second quarter of 2021. Net investment gains in the second quarter of 2022 included an increase in credit loss allowances of$34 million ;$618 million of net gains from certain derivative and foreign currency gains or losses;$135 million of net losses on equity securities; and$115 million of net gains from sales and redemptions. Results in the first six months of 2022 included pretax net investment gains of$686 million , compared with pretax net investment gains of$396 million in the first six months of 2021. Net investment gains in the first six months of 2022 included an increase in credit loss allowances of$9 million ;$785 million of net gains from certain derivative and foreign currency gains or losses;$291 million of net losses on equity securities; and$201 million of net gains from sales and redemptions. The average yen/dollar exchange rate(1) for the three-month period endedJune 30, 2022 was 129.39, or 15.4% weaker than the average yen/dollar exchange rate(1) of 109.48 for the same period in 2021. The average yen/dollar exchange rate(1) for the six-month period endedJune 30, 2022 was 122.79, or 12.2% weaker than the average yen/dollar exchange rate(1) of 107.79 for the same period in 2021. 70 -------------------------------------------------------------------------------- Adjusted earnings(2) in the second quarter of 2022 were$939 million , or$1.46 per diluted share, compared with$1.1 billion , or$1.59 per diluted share, in the second quarter of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.09 . Adjusted earnings(2) in the first six months of 2022 were$1.9 billion , or$2.88 per diluted share, compared with$2.1 billion , or$3.11 per diluted share, in the first six months of 2021. The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.15 . Total investments and cash atJune 30, 2022 were$121.4 billion , compared with$143.0 billion atDecember 31, 2021 . In the first six months of 2022,Aflac Incorporated repurchased$1.2 billion , or 19.2 million of its common shares. AtJune 30, 2022 , the Company had 36.6 million remaining shares authorized for repurchase. Shareholders' equity was$26.4 billion , or$41.59 per share, atJune 30, 2022 , compared with$33.3 billion , or$50.99 per share, atDecember 31, 2021 . Shareholders' equity atJune 30, 2022 included a net unrealized gain on investment securities and derivatives of$2.9 billion , compared with a net unrealized gain of$9.6 billion atDecember 31, 2021 . Shareholders' equity atJune 30, 2022 also included an unrealized foreign currency translation loss of$3.3 billion , compared with an unrealized foreign currency translation loss of$2.0 billion atDecember 31, 2021 . The annualized return on average shareholders' equity in the second quarter of 2022 was 19.9%. Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value) was$26.9 billion , or$42.45 per share atJune 30, 2022 , compared with$25.9 billion , or$39.65 per share, atDecember 31, 2021 . The annualized adjusted return on equity (ROE) excluding foreign currency impact(2) in the second quarter of 2022 was 14.9%.(1) Yen /U.S. dollar exchange rates are based on the publishedMUFG Bank, Ltd. telegraphic transfer middle rate (TTM). (2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure. RESULTS OF OPERATIONS The Company earns its revenues principally from insurance premiums and investments. The Company's operating expenses primarily consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, commissions and other costs of selling and servicing its products. Profitability for the Company depends principally on its ability to price its insurance products at a level that enables the Company to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, actuarial and policyholder behavior experience on insurance products, and the Company's ability to attract and retain customer assets, generate and maintain favorable investment results, effectively deploy capital and utilize tax capacity, and manage expenses. This document includes references to the Company's financial performance measures which are not calculated in accordance withUnited States generally accepted accounting principles (U.S. GAAP) (non-U.S. GAAP). The financial measures exclude items that the Company believes may obscure the underlying fundamentals and trends in insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with insurance operations. Due to the size ofAflac Japan , where the functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. A significant portion of the Company's business is conducted in yen and never converted into dollars but translated into dollars forU.S. GAAP reporting purposes, which results in foreign currency impact to earnings, cash flows and book value on aU.S. GAAP basis. Management evaluates the Company's financial performance both including and excluding the impact of foreign currency translation to monitor, respectively, cumulative currency impacts and the currency-neutral operating performance over time. The average yen/dollar exchange rate is based on the publishedMUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
The Company defines the non-
•Adjusted earnings are adjusted revenues less benefits and adjusted expenses. Adjusted earnings per share (basic or diluted) are the adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management's control. Adjusted revenues areU.S. GAAP total 71 -------------------------------------------------------------------------------- revenues excluding adjusted net investment gains and losses. Adjusted expenses areU.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company's insurance operations and that do not reflect the Company's underlying business performance. Management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of the Company's insurance operations on a consolidated basis and believes that a presentation of these financial measures is vitally important to an understanding of the underlying profitability drivers and trends of the Company's insurance business. The most comparableU.S. GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively. •Adjusted net investment gains and losses are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest cash flows from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses. The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management's control, while excluding the components that are within management's control and are accordingly reclassified to net investment income and interest expense. The most comparableU.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses. •Amortized hedge costs/income represent costs/income incurred or recognized as a result of using foreign currency derivatives to hedge certain foreign exchange risks in the Company's Japan segment or in Corporate and other. These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the term of the hedge. The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparableU.S. GAAP financial measure for amortized hedge costs/ income. •Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted inJapan and foreign exchange rates are outside management's control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) intoU.S. dollars. The most comparableU.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively. •Adjusted book value is theU.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on theU.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important as they exclude AOCI, which fluctuates due to market movements that are outside management's control. The most comparableU.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively. •Adjusted return on equity excluding foreign currency impact is adjusted earnings excluding the current period foreign currency impact divided by average shareholders' equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparableU.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders' equity. •U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact onU.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considersU.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency 72 --------------------------------------------------------------------------------
changes on the Aflac Japan segment results, which are outside management's
control. The most comparable
The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparableU.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively. Reconciliation of Net Earnings to Adjusted Earnings
In Millions Per Diluted Share In Millions Per Diluted Share
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021 2022 2021 2022 2021
Net earnings $ 1,388 $ 1,105 $ 2.16 $ 1.62 $ 2,420 $ 2,398 $ 3.73 $ 3.49
Items impacting net earnings:
Adjusted net investment (gains)
losses (1) (567) (85) (.88) (.12) (701) (388) (1.08) (.57)
Other and non-recurring (income)
loss 0 53 .00 .08 0 59 .00 .09
Income tax (benefit) expense on
items excluded from adjusted
earnings 119 7 .19 .01 147 69 .23 .10
Adjusted earnings 939 1,080 1.46 1.59 1,866 2,138 2.88 3.11
Current period foreign currency
impact (2) 57 N/A .09 N/A 94 N/A .15 N/A
Adjusted earnings excluding
current period foreign currency
impact $ 996 $ 1,080 $ 1.55 $ 1.59 $ 1,960 $ 2,138 $ 3.02 $ 3.11
(1) See reconciliation of net investment (gains) losses to adjusted net
investment (gains) losses below.
(2) Prior period foreign currency impact reflected as "N/A" to isolate change
for current period only.
Reconciling Items
Net Investment Gains and Losses
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment
(Gains) Losses
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2022 2021 2022 2021
Net investment (gains) losses $ (564) $ (89) $ (686) $ (396)
Items impacting net investment (gains) losses:
Amortized hedge costs (30) (17) (55) (36)
Amortized hedge income 14 16 25 33
Net interest cash flows from derivatives
associated
with certain investment strategies (1) (9) (10) (17)
Interest rate component of the change in fair
value
of foreign currency swaps on notes payable 12 14 25 27
Adjusted net investment (gains) losses $ (567) $
(85)
The Company's investment strategy is to invest primarily in fixed maturity
securities to provide a reliable stream of investment income, which is one of
the drivers of the Company's profitability. This investment strategy
incorporates asset-liability matching (ALM) to align the expected cash flows of
the portfolio to the needs of the Company's liability structure. The Company
does not purchase securities with the intent of generating investment gains or
losses. However, investment gains and losses may be realized as a result of
changes in the financial markets and the creditworthiness of specific issuers,
tax planning strategies, and/or general portfolio management and rebalancing.
The realization of investment gains and losses is independent of the
underwriting and administration of the Company's insurance products.
73
--------------------------------------------------------------------------------Net investment gains and losses excluded from adjusted earnings include the following:
•Securities Transactions •Credit Losses •Changes in the Fair Value ofEquity Securities •Certain Derivative and Foreign Currency Activities.
Securities Transactions, Credit Losses and Changes in the Fair Value of
Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Credit losses include losses for held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables. Changes in the fair value of equity securities are the result of gains or losses driven by fluctuations in market prices.
Certain Derivative and Foreign Currency Activities
The Company's derivative activities include:
•foreign currency forwards and options used in hedging foreign exchange risk onU.S. dollar-denominated investments inAflac Japan's portfolio, with options used on a standalone basis and/or in a collar strategy;
•foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long term exposure to a weakening yen;
•cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures;
•foreign currency swaps that are associated with variable interest entity (VIE) bond purchase commitments, and investments in special-purpose entities, including VIEs where the Company is the primary beneficiary;
•interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments;
•interest rate swaptions used to hedge changes in the fair value associated with
interest rate fluctuations for certain
•bond purchase commitments at the inception of investments in consolidated VIEs.
Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of remeasurement associated with changes in the foreign currency exchange rate. For additional information regarding net investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Other and Non-recurring Items
TheU.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated withU.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings. In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in theU.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings. 74 -------------------------------------------------------------------------------- The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations. InMay 2021 , the Parent Company used a portion of the net proceeds from itsApril 2021 issuance of various series of senior notes to redeem$700 million of its 3.625% senior notes dueJune 2023 . The pretax expense due to the early redemption of these notes was$48 million . Other items excluded from adjusted earnings include integration costs related to the Company's acquisition ofZurich North America's U.S. Corporate Life and Pensions business; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These integration costs are excluded from adjusted earnings for one year following the acquisition and amounted to$5 million and$12 million for the three- and six-month periods endedJune 30, 2021 , respectively.
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 18.4% for the three-month period endedJune 30, 2022 , compared with 19.5% for the same period in 2021. The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 18.7% for the six-month period endedJune 30, 2022 , compared with 19.4% for the same period in 2021. The combined effective tax rate differs from theU.S. statutory rate primarily due to solar, historic and foreign tax credits. For additional information, see the Critical Accounting Estimates - Income Taxes section of Item 7. MD&A in the 2021 Annual Report. The Company expects that its effective tax rate for future periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in theU.S. and in foreign jurisdictions. See the risk factor entitled "Tax rates applicable to the Company may change" in Item 1A. Risk Factors of the 2021 Annual Report for more information.
Foreign Currency Translation
Aflac Japan's premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen.Aflac Japan purchases yen-denominated assets andU.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated toU.S. dollars using the weighted average Japanese yen/U.S. dollar foreign exchange rate for the reporting period, except realized gains and losses on securities transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated toU.S. dollars using the spot Japanese yen/U.S. dollar foreign exchange rate at the end of the reporting period. RESULTS OF OPERATIONS BY SEGMENTU.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. The Company's insurance business consists of two segments:Aflac Japan and AflacU.S. Aflac Japan is the principal contributor to consolidated earnings. In addition, the Parent Company, other business units that are not individually reportable, and business activities, including reinsurance retrocession activities, not included inAflac Japan or AflacU.S. are included in Corporate and other. See Item 1. Business in the 2021 Annual Report for a summary of each segment's products and distribution channels.
Consistent with
•Operating Ratios
•New Annualized Premium Sales
•New Money Yield
•Return on Average Invested Assets
•Average Weekly Producer
75
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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
consolidated U.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) 2022 2021 2022 2021 Net earned premiums$ 2,419
264 315 563 643
U.S. dollar -denominated investment income 489 493 895 890
Net investment income 752 808 1,458 1,533
Amortized hedge costs related to certain foreign currency exposure management strategies
30 17 55 36
Adjusted net investment income 723 792 1,402 1,497
Other income (loss) 9 10 18 22
Total adjusted revenues 3,151 3,789 6,563 7,630
Benefits and claims, net 1,630 1,998 3,457 4,134
Adjusted expenses:
Amortization of deferred policy acquisition costs 137 169 291 341
Insurance commissions 142 179 302 366
Insurance and other expenses 381 438 791 898
Total adjusted expenses 660 786 1,384 1,605
Total benefits and adjusted expenses 2,290 2,785 4,841 5,739
Pretax adjusted earnings $ 860
129.39 109.48 122.79 107.79
In Dollars In Yen
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
Percentage change over June 30, June 30, June 30, June 30,
previous period: 2022 2021 2022 2021 2022 2021 2022 2021
Net earned premiums (19.0) % (5.4) % (15.8) % (3.1) % (4.2) % (3.8) % (4.3) % (3.7) %
Adjusted net investment income (8.7) 25.1 (6.3) 17.3 8.4 27.4 7.3 17.0
Total adjusted revenues (16.8) (.4) (14.0) .3 (1.6) 1.4 (2.0) (.2)
Pretax adjusted earnings (14.3) 19.7 (8.9) 11.6 1.6 22.0 4.0 11.3
(1) Net interest cash flows from derivatives associated with certain investment
strategies of $(2) and $(9) for the three-month periods and $(12) and $(17) for
the six-month periods ended June 30, 2022 and 2021, respectively, have been
reclassified from net investment gains (losses) and included in adjusted
earnings as a component of net investment income.
In the three- and six-month periods ended June 30, 2022 , Aflac Japan's net
earned premiums decreased, in yen terms, mainly due to limited-pay products
reaching premium paid-up status and constrained sales from the impact of
pandemic conditions. In yen terms, adjusted net investment income increased in
the three- and six-month periods ended June 30, 2022 , primarily due to higher
floating rate income as well as the impact of a weaker yen on U.S.
dollar-denominated investment income. The increase in pretax adjusted earnings
in yen for the three- and six-month periods ended June 30, 2022 was primarily
due to higher reserve releases and adjusted net investment income.
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Annualized premiums in force decreased 4.3% to ¥1.33 trillion as of June 30,
2022 , compared with ¥1.39 trillion as of June 30, 2021 . The decrease in
annualized premiums in force in yen was driven primarily by limited-pay products
reaching premium paid-up status and lower sales during the COVID-19 pandemic.
Annualized premiums in force, translated into dollars at respective period-end
exchange rates, were $9.7 billion at June 30, 2022 , compared with $12.6 billion
at June 30, 2021 .
Aflac Japan's investment portfolios include U.S. dollar-denominated securities
and reverse-dual currency securities (yen-denominated debt securities with
dollar coupon payments). In years when the yen strengthens in relation to the
dollar, translating Aflac Japan's U.S. dollar-denominated investment income into
yen lowers growth rates for net investment income, total adjusted revenues, and
pretax adjusted earnings in yen terms. In years when the yen weakens,
translating U.S. dollar-denominated investment income into yen magnifies growth
rates for net investment income, total adjusted revenues, and pretax adjusted
earnings in yen terms.
The following table illustrates the effect of translating Aflac Japan's U.S.
dollar-denominated investment income and related items into yen by comparing
certain segment results with those that would have been reported had foreign
currency exchange rates remained unchanged from the comparable period in the
prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated
investment income were determined using the average foreign currency exchange
rate for the comparable prior year period. See non-U.S. GAAP financial measures
defined above.
Aflac Japan Percentage Changes Over Previous Period
(Yen Operating Results)
For the Periods Ended June 30,
Including Foreign Excluding Foreign
Currency Changes Currency Changes
Three Months Six Months Three Months Six Months
2022 2021 2022 2021 2022 2021 2022 2021
Adjusted net investment
income 8.4 % 27.4 % 7.3 % 17.0 % (2.9) % 26.2 % (1.4) 17.2 %
Total adjusted revenues (1.6) 1.4 (2.0) (.2) (3.9) 1.2 (3.7) (.2)
Pretax adjusted earnings 1.6 22.0 4.0 11.3 (7.0) 21.1 (2.7) 11.4
The following table presents a summary of operating ratios in yen terms for
Aflac Japan .
Three Months Ended Six Months Ended
June 30, June 30,
Ratios to total adjusted revenues: 2022 2021 2022 2021
Benefits and claims, net 51.7 % 52.7 % 52.6 % 54.2 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 4.3 4.5 4.4 4.5
Insurance commissions 4.5 4.7 4.6 4.8
Insurance and other expenses 12.1 11.6 12.1 11.8
Total adjusted expenses 20.9 20.8 21.1 21.0
Pretax adjusted earnings 27.4 26.5 26.3 24.8
Ratios to total premiums:
Benefits and claims, net 67.4 % 66.9 % 67.2 % 67.6 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 5.7 5.7 5.7 5.6
In the three-month period ended June 30, 2022 , the benefit ratio to total
premiums increased, compared with the same period in the prior year, as third
sector benefits were higher due substantially to an increase in medical
hospitalization claims for at-home sickness benefits related to COVID-19,
partially offset by the continued change in the mix of first and third sector
business. In the six-month period ended June 30, 2022 , the benefit ratio to
total premiums decreased, compared with the same period in the prior year. This
is primarily due to the continued change in the mix of first and third sector
business and lower benefits in Aflac Japan's third sector business. In the
three- and six-month periods ended June 30, 2022 , the adjusted expense ratio
increased slightly, compared with the same periods in the prior year, reflecting
the decrease in total adjusted revenues and an offsetting decrease in total
adjusted expenses. In total, the pretax adjusted
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profit margin increased in the three- and six-month periods ended June 30, 2022
primarily due to lower benefit ratios for the full six-month period and higher
adjusted net investment income.
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) 2022 2021 2022 2021 2022 2021 2022 2021
New annualized premium sales
$ 256 ¥ 12.7 ¥ 13.6 ¥ 24.7 ¥ 27.6 Increase (decrease) over prior period (20.9) % 36.5 % (21.6) % 16.5 % (6.4) % 38.4 % (10.7) % 15.7 %
The following table details the contributions to
Three Months Six Months
2022 2021 2022 2021
Cancer 53.4 % 48.9 % 53.2 % 47.1 %
Medical 29.9 39.7 30.6 41.5
Income support 2.2 .6 1.6 .6
Ordinary life:
WAYS .8 .8 .8 .7
Child endowment .2 .4 .3 .3
Other ordinary life (1) 9.2 8.9 9.1 8.9
Other 4.3 .7 4.4 .9
Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes term and whole life
The foundation ofAflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products.Aflac Japan has been focusing more on promotion of cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings products. With continued cost pressure on Japan's health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance productsAflac Japan provides will continue to be an important part of its product portfolio. Sales of protection-type first sector and third sector products on a yen basis decreased 6.3% in the second quarter of 2022, compared with the second quarter of 2021, reflecting theJanuary 2021 launch of a new medical product and continued weakness in sales recovery, in part constrained by pandemic conditions. Sales ofAflac Japan cancer products in theJapan Post Group channel experienced a material decline beginning inAugust 2019 .Japan Post Group resumed proactive sales of cancer insurance policies inApril 2021 andAflac Japan continues to strengthen the strategic alliance. InApril 2022 , approximately 10,000 employees ofJapan Post Co. were transferred to Japan Post Insurance.Japan Post Group has informedAflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products andAflac Japan cancer products but will not include sales of other financial products. The Company expects continued collaboration to further position both companies for long-term growth and a gradual improvement ofJapan Post Group cancer insurance sales in the intermediate term. For example, in 2021 and the first six months of 2022,Aflac Japan observed an increase in the number of proposals to potential customers in theJapan Post Group channel, and theJapan Post Group continues to conduct a nationwide campaign to improve certain sales process practices. For additional information, see the risk factor entitled "Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in theU.S. and sales associates and other distribution partners inJapan ," in Item 1A. Risk Factors in the 2021 Annual Report. In response to the COVID-19 pandemic,Aflac Japan continues to promote digital and web-based sales to groups and use of its system that enables smart device-based insurance application by allowing the customer and anAflac Japan operator 78 --------------------------------------------------------------------------------
to see the same screen through their smart devices. Further,
The following table details the contributions to
2022 2021
Independent corporate and individual 48.4 % 51.1 %
Affiliated corporate (1) 48.1 44.0
Bank 3.5 4.9
Total 100.0 % 100.0 %
(1)
During the three-month period endedJune 30, 2022 ,Aflac Japan recruited 12 new sales agencies. AtJune 30, 2022 ,Aflac Japan was represented by approximately 7,600 sales agencies, with approximately 110,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due toAflac Japan's focus on supporting agencies with strong management frameworks, high productivity and more producing agents.
At
Aflac Japan Investments
The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates onU.S. dollar-denominated investment income, and other factors. As part of the Company's portfolio management and asset allocation process,Aflac Japan invests in yen andU.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and public equity securities.Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including alternative investments in limited partnerships or similar investment vehicles.Aflac Japan has been investing in both publicly-traded and privately originatedU.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of theU.S. dollar investments. 79 --------------------------------------------------------------------------------
The following table details the investment purchases for
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2022 2021 2022 2021
Yen-denominated:
Fixed maturity securities:
Japan government and agencies $ 0 $ 0 $ 0 $ 1,181
Private placements 465 98 772 311
Other fixed maturity securities 20 29 37 136
Equity securities 185 5 276 122
Other investments 1 4 4 6
Total yen-denominated $ 671 $ 136 $ 1,089 $ 1,756
U.S. dollar -denominated:
Fixed maturity securities:Other fixed maturity securities$ 249 $ 396 $ 334$ 1,001 Infrastructure debt 114 0 114 0 Collateralized loan obligations 431 36 498 153 Equity securities 22 8 22 8
Commercial mortgage and other loans:
Transitional real estate loans 778 638 1,285 699
Commercial mortgage loans 0 17 0 17
Middle market loans 363 484 674 1,266
Other investments 135 91 183 147
Total U.S. dollar-denominated $ 2,092 $ 1,670 $ 3,110 $ 3,291
Total Aflac Japan purchases $ 2,763 $ 1,806 $ 4,199 $ 5,047 See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for more information regarding loans and loan receivables.
The following table presents the results ofAflac Japan's investment yields for the periods endedJune 30 . Three Months Six Months 2022 2021 2022 2021 Total purchases for the period (in millions) (1)$ 2,627 $ 1,711 $ 4,012 $ 4,894 New money yield (1), (2) 3.59 %
4.05 % 3.69 % 3.18 % Return on average invested assets (3)
2.97 2.83 2.75 2.65
Portfolio book yield, including
2.74 % 2.61 % 2.74 % 2.61 %
(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, 2022 was primarily due to higher allocations to lower yielding yen-dominated asset classes. The increase in the Aflac Japan new money yield in the six-month period endedJune 30, 2022 was primarily due to increases inU.S. interest rates. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments and Hedging Activities sections of this MD&A for additional information on the Company's investments and hedging strategies. 80 --------------------------------------------------------------------------------
AFLAC
Aflac
Changes in AflacU.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for AflacU.S. Aflac U.S. Summary of Operating Results Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 2022 2021 Net earned premiums$ 1,394 $ 1,408 $ 2,807 $ 2,830 Adjusted net investment income (1) 193 189 377 366 Other income 41 30 83 58 Total adjusted revenues 1,628 1,627 3,267 3,254 Benefits and claims 633 613 1,255 1,169 Adjusted expenses: Amortization of deferred policy acquisition costs 131 111 299 250 Insurance commissions 137 136 277 275 Insurance and other expenses 378 354 762 701 Total adjusted expenses 645 601 1,337 1,226 Total benefits and adjusted expenses 1,278 1,213 2,593 2,396 Pretax adjusted earnings$ 349 $ 413 $ 674 $ 859 Percentage change over previous period: Net earned premiums (1.0) % (3.4) (.8) % (3.8) % Adjusted net investment income 2.1 9.9 3.0 5.2 Total adjusted revenues .1 (1.8) .4 (2.7) Pretax adjusted earnings (15.5) (3.1) (21.5) 14.2 (1) Net interest cash flows from derivatives associated with certain investment strategies of$1 for the three-month period and$2 for the six-month period endedJune 30, 2022 , 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, 2022 , net earned premiums for AflacU.S. decreased primarily due to lower persistency. Adjusted net investment income increased in the three- and six-month periods endedJune 30, 2022 , primarily impacted by higher variable net investment income. Other income increased in the three- and six-month periods endedJune 30, 2022 due to an increase in fee income. The decrease in pretax adjusted earnings in the three- and six-month periods endedJune 30, 2022 , was driven by higher incurred benefits and elevated adjusted expenses reflecting, in part, platform and growth investments.
Annualized premiums in force decreased 1.0% to
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The following table presents a summary of operating ratios for Aflac
Three Months Ended Six Months Ended
June 30, June 30,
Ratios to total adjusted revenues: 2022 2021 2022 2021
Benefits and claims 38.9 % 37.7 % 38.4 % 35.9 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 8.0 6.8 9.2 7.7
Insurance commissions 8.4 8.4 8.5 8.5
Insurance and other expenses 23.2 21.8 23.3 21.5
Total adjusted expenses 39.6 36.9 40.9 37.7
Pretax adjusted earnings 21.4 25.4 20.6 26.4
Ratios to total premiums:
Benefits and claims 45.4 % 43.5 % 44.7 % 41.3 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 9.4 7.9 10.7 8.8
For the three- and six-month periods ended June 30, 2022 , the benefit ratio to
total premiums increased compared with the same periods in 2021, reflecting
higher incurred claims, partially offset by reserve releases related to lower
persistency. The adjusted expense ratio increased in the three- and six-month
periods ended June 30, 2022 , when compared with the same periods in 2021,
primarily due to higher DAC amortization associated with lower persistency and
planned spending reflecting ongoing investments in the U.S. platform. The pretax
adjusted profit margin decreased in the three- and six-month periods ended
June 30, 2022 , compared with the same periods in 2021, primarily due to the
higher adjusted expense and benefit ratios.
Aflac
The following table presents Aflac'sU.S. new annualized premium sales for the periods endedJune 30 . Three Months Six Months (In millions) 2022 2021 2022 2021 New annualized premium sales$ 305 $ 264 $ 604 $ 515 Increase (decrease) over prior period 15.6 % 64.1 %
17.2 % 6.6 %
New annualized premium sales for accident insurance, the leading AflacU.S. product category, increased 4.6%; disability sales increased 28.8%; critical care insurance sales (including cancer insurance) increased 13.1%; hospital indemnity insurance sales increased 4.9%; and dental/vision sales increased 36.1% in the second quarter of 2022, compared with the second quarter of 2021. The increase in sales for AflacU.S. in the second quarter of 2022 reflects continued investment in growth initiatives as well as productivity gains. For the full year of 2022, AflacU.S. expects this trend of increasing sales to continue. The following table details the contributions to Aflac'sU.S. new annualized premium sales by major insurance product category for the periods endedJune 30 . Three Months Six Months 2022 2021 2022 2021 Accident 24.6 % 27.2 % 24.9 % 26.7 % Disability 25.2 22.7 24.2 22.9 Critical care(1) 20.6 21.0 20.9 21.8 Hospital indemnity 14.9 16.4 15.8 16.6 Dental/vision 6.4 5.4 6.0 5.0 Life 8.3 7.3 8.2 7.0 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
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In the second quarter of 2022, the Aflac U.S. sales force included an average of
approximately 6,100 U.S. agents, including brokers, who were actively producing
business on a weekly basis. The Company believes that this average weekly
producer equivalent metric allows sales management to monitor progress and
needs, as well as serve as a leading indicator of future production capacity.
Aflac U.S. believes that during 2021 and continuing into 2022, constraints in
the labor market have limited its recruiting of new sales agents, and that
limitations on face-to-face sales opportunities during the COVID-19 pandemic
suppressed the development of newly recruited agents into business producers and
the productivity of veteran agents and brokers. Aflac U.S. believes that the
above factors have acted as a headwind to sales and to growth in the number of
average weekly producers. Aflac U.S. remains focused on mitigating and reversing
these trends as the U.S. economy continues to recover from the pandemic.
In response to the COVID-19 pandemic, Aflac U.S. remains focused on supporting
its agency channel, most of which are small businesses, by offering financial
support and an extended value proposition. The Aflac U.S. sales team has pivoted
to accommodate preferred enrollment conditions which include realizing sales at
the worksite through in-person enrollment, an enrollment call center, video
enrollment through co-browsing and self-enrollment. The traditional agent sales
team is also using virtual recruiting and training through video conferencing in
order to maintain or increase the recruiting pipeline. The Aflac U.S. broker
sales team is focused on product enhancements due to COVID-19 as well as
leveraging technology based solutions to drive enrollment.
Aflac
The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, and other factors.
As part of the Company's portfolio management and asset allocation process, AflacU.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. AflacU.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.
The following table details the investment purchases for Aflac
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Fixed maturity securities:
Other fixed maturity securities $ 107 $ 130
Infrastructure debt 10 0 19 0
Collateralized loan obligations 199 18 199 30
Equity securities 11 113 19 113
Other investments:
Transitional real estate loans 78 113
185 137
Commercial mortgage loans 0 129 0 163
Middle market loans 61 41 227 100
Limited partnerships 16 10 21 16
Total Aflac U.S. Purchases $ 482 $ 554 See Note 3 of the Notes to the Consolidated Financial Statements and Notes 1 and 3 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for more information regarding loans and loans receivables.
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The following table presents the results of Aflac's U.S. investment yields for
the periods ended June 30 .
Three Months Six Months
2022 2021 2022 2021
Total purchases for period (in millions) (1) $ 466 $ 544 $ 988 $ 919
New money yield (1), (2) 4.10 % 3.63 % 4.37 % 3.47 %
Return on average invested assets (3) 4.79 4.94 4.79 4.83
Portfolio book yield, end of period (1) 5.01 % 5.07 % 5.01 % 5.07 %
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses and external management fees (3) Net of investment expenses, year-to-date number reflected on a quarterly average basis
The increase in the Aflac
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily
affected by investment income. The following table presents a summary of results
for Corporate and other.
Corporate and Other Summary of Operating Results
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2022 2021 2022 2021
Net earned premiums $ 36 $ 45 $ 77 $ 93
Net investment income (loss) (1) (9) (13) (5) 3
Amortized hedge income related to certain foreign
currency management strategies 14 16 25 33
Adjusted net investment income 5 3 20 36
Other income 0 2 18 5
Total adjusted revenues 42 50 116 133
Benefits and claims, net 34 41 73 84
Adjusted expenses:
Interest expense 40 43 80 87
Other adjusted expenses 44 42 84 65
Total adjusted expenses 84 85 164 152
Total benefits and adjusted expenses 117 126 237 236
Pretax adjusted earnings $ (75) $ (76) $ (120) $ (102)
(1) The change in value of federal historic rehabilitation and solar investments
in partnerships of $31 and $30 for the three-month periods and $42 and $30 for
the six-month periods ended June 30, 2022 , and 2021, respectively, is included
as a reduction to net investment income. Tax credits on these investments of $28
and $12 for the three-month periods and $44 and $25 for the six-month periods
ended June 30, 2022 , and 2021, respectively, have been recorded as an income tax
benefit in the consolidated statement of earnings. See Note 3 of the Notes to
the Consolidated Financial Statements for additional information on these
investments.
In the three- and six-month periods ended June 30, 2022 , total adjusted revenues
decreased compared to the same periods in 2021. Pretax adjusted earnings
decreased in the six-month period ended June 30, 2022 when compared to the same
period in 2021. These results reflect higher adjusted net investment income from
higher interest rates offset by lower amortized hedge income and the impact of
federal tax credit investments discussed below. These results also reflect the
impact of foreign currency on total net earned premiums and the corresponding
benefits.
The Parent Company invests in partnerships that specialize in rehabilitating
historic structures or the installation of solar equipment in order to receive
federal historic rehabilitation and solar tax credits. These investments are
classified as limited partnerships and included in other investments in the
consolidated balance sheet. The change in value of each
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--------------------------------------------------------------------------------investment is recorded as a reduction to net investment income. Tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings.
INVESTMENTS
The Company's investment strategy utilizes disciplined asset and liability
management while seeking long-term risk-adjusted investment returns and the
delivery of stable income within regulatory and capital objectives, and
preserving shareholder value. In attempting to optimally balance these
objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified
portfolio of yen-denominated investment assets, U.S. dollar-denominated
investment portfolio hedged back to yen and a portfolio of unhedged U.S.
dollar-denominated assets. As part of the Company's portfolio management and
asset allocation process, Aflac U.S. invests in fixed maturity investments and
growth assets, including public equity securities and alternative investments in
limited partnerships. Aflac U.S. invests in both publicly traded and privately
originated investment-grade and below-investment-grade fixed maturity securities
and loans. Additionally, in November 2021 , the Company became a signatory to the
Principles for Responsible Investment , a global framework for incorporating
environmental, social and governance (ESG) considerations into investment and
ownership decisions.
For additional information concerning the Company's investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial Statements.
The following tables detail investments by segment.
Investment Securities by Segment
June 30, 2022
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 64,877 $ 12,678 $ 1,876 $ 79,431
Held to maturity, fixed maturity
securities,
at amortized cost (1) 18,507 0 0 18,507
Equity securities 624 101 424 1,149
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,951 1,108 147 6,206
Commercial mortgage loans (1) 1,199 656 13 1,868
Middle market loans (1) 4,520 459 0 4,979
Other investments:
Policy loans 182 22 0 204
Short-term investments (2) 488 263 944 1,695
Limited partnerships 1,809 200 164 2,173
Other 0 30 0 30
Total investments 97,157 15,517 3,568 116,242
Cash and cash equivalents 1,545 540 3,088 5,173
Total investments and cash $ 98,702 $ 16,057 $ 6,656 $ 121,415
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
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December 31, 2021
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 81,793 $ 14,910 $ 1,993 $ 98,696
Held to maturity, fixed maturity
securities,
at amortized cost (1) 22,000 0 0 22,000
Equity securities 714 226 663 1,603
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,226 1,020 45 5,291
Commercial mortgage loans (1) 1,217 669 8 1,894
Middle market loans (1) 4,297 304 0 4,601
Other investments:
Policy loans 216 20 0 236
Short-term investments (2) 590 302 834 1,726
Limited partnerships 1,534 169 155 1,858
Other 0 22 0 22
Total investments 116,587 17,642 3,698 137,927
Cash and cash equivalents 2,053 681 2,317 5,051
Total investments and cash $ 118,640 $ 18,323 $ 6,015 $ 142,978
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
The ratings of the Company's securities referenced in the table below are based
on the ratings designations provided by major rating organizations such as
Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on
the Company's internal analysis of such securities. When the ratings issued by
the rating agencies differ, the Company utilizes the second lowest rating when
three or more rating agency ratings are available or the lowest rating when only
two rating agency ratings are available.
The distributions of fixed maturity securities the Company owns, by credit rating, were as follows:
Composition of Fixed Maturity Securities by Credit Rating
June 30, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.5 % 1.5 % 1.0 % .9 %
AA 5.4 5.5 5.1 5.2
A 67.8 67.7 68.9 68.5
BBB 23.0 23.0 22.5 22.8
BB or lower 2.3 2.3 2.5 2.6
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of June 30, 2022 , 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.
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The following table presents the 10 largest unrealized loss positions in the
Company's portfolio as of
Credit Amortized Fair
(In millions) Rating Cost Value Unrealized Loss Investcorp Capital Limited BB$ 320 $ 273 $ (47) JP Morgan Chase and Co. A 206 180 (26) Prologis LP A 167 143 (24) Banco de Chile A 146 123 (23) KLM Royal Dutch Airlines B 127 105 (22) Oracle Corp BBB 180 161 (19) BASF A 73 55 (18) Danske Bank A/S BBB 121 104 (17) AXA A 247 230 (17) Citigroup Inc BBB 172 158 (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.
Below-Investment-Grade Investments
June 30, 2022
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 321 $ 320 $ 273 $ (47)
Pemex Project Funding Master Trust 219 219 220 1
Commerzbank 183 137 199 62
KLM Royal Dutch Airlines 146 127 105 (22)
Telecom Italia SpA 146 146 165 19
Autostrade Per Litalia Spa 146 145 131 (14)
Apache Corporation 138 108 130 22
Howmet Aerospace Inc. 100 68 94 26
IKB Deutsche Industriebank AG 95 45 75 30
Generalitat de Catalunya 59 23 60 37
Other Issuers 184 176 163 (13)
Subtotal (2) 1,737 1,514 1,615 101
High yield corporate bonds 804 667 707 40
Middle market loans 4,688 4,525 4,541 16
Grand Total $ 7,229 $ 6,706 $ 6,863 $ 157
(1) Net of allowance for credit losses
(2) Securities initially purchased as investment grade, but have subsequently
been downgraded to below investment grade
The Company invests in middle market loans primarily to U.S. corporate
borrowers, most of which have below-investment-grade ratings. The objectives of
this program include enhancing the yield on invested assets, achieving further
diversification of credit risk, and mitigating the risk of rising interest rates
and hedge costs through the acquisition of floating rate assets.
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The Company maintains an allocation to higher yielding corporate bonds within
the Aflac Japan and Aflac U.S. portfolios. Most of these securities were rated
below-investment-grade at the time of purchase, but the Company also purchased
several that were rated investment grade which, because of market pricing, offer
yields commensurate with below-investment-grade risk profiles. The objective of
this allocation was to enhance the Company's yield on invested assets and
further diversify credit risk. All investments in this program must have a
minimum rating at purchase of low BB using the Company's above described rating
methodology and are managed by the Company's internal credit portfolio
management team.
The Company maintains diversification in investments by sector to avoid concentrations to any one sector, thus managing exposure risk. The following table shows the distribution of fixed maturities by sector classification.
June 30, 2022
Gross Gross
Unrealized Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 42,836 $ 4,637 $ (908) $ 46,565 46.0 %
Municipalities 2,557 337 (80) 2,814 2.7
Mortgage- and asset-backed securities 1,915 96 (59) 1,952 2.1
Public utilities 7,348 795 (143) 8,000 7.9
Electric 5,966 653 (101) 6,518 6.4
Natural Gas 242 35 (8) 269 .3
Other 554 52 (17) 589 .6
Utility/Energy 586 55 (17) 624 .6
Sovereign and Supranational 1,267 174 (14) 1,427 1.4
Banks/financial institutions 9,172 858 (405) 9,625 9.8
Banking 5,422 570 (217) 5,775 5.8
Insurance 1,757 200 (53) 1,904 1.9
Other 1,993 88 (135) 1,946 2.1
Other corporate 27,958 3,454 (832) 30,580 30.1
Basic Industry 2,448 348 (72) 2,724 2.6
Capital Goods 3,172 314 (114) 3,371 3.4
Communications 2,830 425 (47) 3,208 3.0
Consumer Cyclical 2,371 365 (40) 2,696 2.5
Consumer Non-Cyclical 6,224 697 (197) 6,723 6.8
Energy 2,749 446 (49) 3,147 3.0
Other 1,312 132 (59) 1,385 1.4
Technology 3,722 290 (141) 3,871 4.0
Transportation 3,130 437 (113) 3,455 3.4
Total fixed maturity securities $ 93,053 $ 10,351 $ (2,441) $ 100,963 100.0 %
(1) Net of allowance for credit losses
Securities by Type of Issuance
The Company has investments in both publicly and privately issued securities.
The Company's ability to sell either type of security is a function of overall
market liquidity which is impacted by, among other things, the amount of
outstanding securities of a particular issuer or issuance, trading history of
the issue or issuer, overall market conditions, and idiosyncratic events
affecting the specific issue or issuer.
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--------------------------------------------------------------------------------The following table details investment securities by type of issuance.
Investment Securities by Type of Issuance
June 30, 2022 December 31, 2021
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 76,506 $ 82,917 $ 88,552 $ 103,034
Equity securities 948 948 950 950
Total publicly issued 77,454 83,865 89,502 103,984
Privately issued securities: (2)
Fixed maturity securities (3) 16,547 18,046 18,817 22,531
Equity securities 201 201 653 653
Total privately issued 16,748 18,247 19,470 23,184
Total investment securities $ 94,202 $ 102,112 $ 108,972 $ 127,168 (1) Net of allowance for credit losses
(2) Primarily consists of securities owned by
The following table details the Company's reverse-dual currency securities.
Reverse-Dual Currency Securities(1)
June 30, December 31,
(Amortized cost, in millions) 2022 2021
Privately issued reverse-dual currency securities $ 4,033 $ 4,784 Publicly issued collateral structured as reverse-dual currency securities
1,343 1,596
Total reverse-dual currency securities $ 5,376 $ 6,380
Reverse-dual currency securities as a percentage of total
investment
securities 5.7 % 5.9 %
(1) Principal payments in yen and interest payments in dollars
Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds.Aflac Japan's investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing the Company to improve asset/liability matching and overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of the Company's notes. HEDGING ACTIVITIES The Company uses derivative contracts to hedge foreign currency exchange rate risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the 2021 Annual Report for more information about market risk and the Company's use of derivatives.
Derivatives are designed to reduce risk on an economic basis while minimizing the impact on financial results. The Company's derivatives programs vary depending on the type of risk being hedged. See Note 4 of the Notes to the Consolidated Financial Statements for:
•A description of the Company's derivatives, hedging strategies and underlying
risk exposure.
•Information about the notional amount and fair market value of the Company's
derivatives.
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•The unrealized and realized gains and losses impact on adjusted earnings of
derivatives in cash flow, fair value, net investments in foreign operations, or
non-qualifying hedging relationships.
Foreign Currency Exchange Rate Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure to foreign currency exchange rate risk:
•Aflac Japan hedges
•Aflac Japan maintains certain unhedged
•The Parent Company designates yen-denominated liabilities (notes payable and
loans) as non-derivative hedging instruments and designates certain foreign
currency forwards and options as derivative hedges of the Company's net
investment in
•The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs. (see Enterprise Corporate Hedging Program below). The following table presents metrics related toAflac Japan's U.S. dollar-denominated hedge program and the Parent Company's enterprise corporate hedging program, including associated amortized hedge costs/income, for the periods endedJune 30 . See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. 90
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Three Months Six Months
2022 2021 2022 2021
Aflac Japan :
FX ForwardsFX forward (sell USD, buy yen) notional at end of period (in billions) (1)
$4.5 $6.4 $4.5 $6.4 Weighted average remaining tenor (in months) (2) 6.8 6.6 6.8 6.6 Amortized hedge income (cost) for period (in millions)$(13) $(13) $(26) $(29)
FX Options FX option notional at the end of period (in billions) (1)
$13.5 $8.0 $13.5 $8.0 Weighted average remaining tenor (in months) (2) 4.9 3.9 4.9 3.9 Amortized hedge income (cost) for period (in millions)$(17) $(4) $(29) $(7) Corporate and Other (Parent Company): FX Forwards
FX forward (buy USD, sell yen) notional at end of period (in billions) (1)
$5.0 $5.0 $5.0 $5.0 Weighted average remaining tenor (in months) (2) 13.0 12.6 13.0 12.6 Amortized hedge income (cost) for period (in millions)$15 $17 $27 $35
FX Options FX option notional at the end of period (in billions) (1)
$2.0 $2.0 $2.0 $2.0 Weighted average remaining tenor (in months) (2) 7.9 7.2 7.9 7.2 Amortized hedge income (cost) for period (in millions)$(1) $(1) $(2) $(2) (1) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (2) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors.
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan solvency margin ratio (SMR) calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . 91 --------------------------------------------------------------------------------
June 30, December 31,
2022 2021
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) ValueAvailable-for-sale securities:
Fixed maturity securities (excluding bank loans)
Equity securities 40 40 24 24
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 4,951 4,931 4,226 4,293 Commercial mortgage and other loans 1,198 1,111 1,217 1,265 Middle market loans (floating rate) 4,520 4,532 4,297 4,352 Other investments 1,808 1,808 1,534 1,534 Total U.S. Dollar Program 27,286 29,399 28,913 31,946
Available-for-sale securities:
Fixed maturity securities - economically converted to yen
2,137 2,915 2,236 3,328
Total U.S. dollar-denominated investments in
Aflac Japan $ 29,423 $
32,314
(1) Net of allowance for credit losses
TheU.S. Dollar Program includes allU.S. dollar-denominated investments inAflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE. The Company uses one-sided foreign currency put options to mitigate the settlement risk onU.S. dollar-denominated assets related to extreme foreign currency rate changes. From time to time,Aflac Japan also maintains a collar program on a portion of itsU.S. Dollar Program to mitigate against more extreme moves in foreign exchange and therefore support SMR. As ofJune 30, 2022 , there were no collars inAflac Japan , and none of the Company's foreign currency options hedgingAflac Japan's U.S. dollar-denominated assets were in-the-money. In 2021, the Company moved to a strategy that contains one-sided put options, fewer foreign currency forwards and no collars. The Company believes that the new strategy will reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the options program. The Company is continually evaluating other adjustments, including the possibility of changing the level of hedging employed with theU.S. dollar-denominated investments.
As of
Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The following table presents the settlements associated with the Company's currency derivatives used for hedgingAflac Japan's U.S. dollar-denominated investments. Three Months Ended Six Months Ended June 30, June 30, (In millions) 2022 2021 2022 2021 Net cash inflows (outflows)$ (23) $ (6) $ (642) $ 102
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$9.8 billion as ofJune 30, 2022 , with hedging instruments comprised of$2.8 billion of yen-denominated debt and$7.0 billion of foreign currency forwards and options, compared with$10.2 billion as ofDecember 31, 2021 , with hedging instruments comprised of$3.3 billion of yen-denominated debt and$6.9 billion of foreign currency forwards and options. 92 -------------------------------------------------------------------------------- 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, 2022 and 2021, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements. In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buyingU.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, whileAflac Japan's U.S. dollar exposure remains reduced as a result ofAflac Japan's U.S. Dollar Program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. This activity is reported in Corporate and Other. The Company continually evaluates the program's efficacy.
Interest Rate Risk Hedge Program
Aflac Japan and AflacU.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with itsU.S. dollar-denominated investments held byAflac Japan , from time to time the Company utilizes interest rate swaptions. For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, and Item 1A, specifically to the Risk Factors titled "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity" in the 2021 Annual Report.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on the Company's hedging activities.
DEFERRED POLICY ACQUISITION COSTSThe following table presents deferred policy acquisition costs by segment.
June 30,
(In millions) 2022 December 31, 2021 % Change
Aflac Japan $ 5,220 $ 6,233 (16.3) % (1)
Aflac U.S. 3,238 3,292 (1.6)
Total $ 8,458 $ 9,525 (11.2) %
(1)
See Note 6 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for additional information on the Company's deferred policy acquisition costs.
POLICY LIABILITIESThe following table presents policy liabilities by segment.
June 30,
(In millions) 2022 December 31, 2021 % Change
Aflac Japan $ 78,946 $ 93,613 (15.7) % (1)
Aflac U.S. 12,043 11,916 1.1
Other 247 276 (10.5)
Intercompany eliminations(2) (618) (733) (15.7)
Total $ 90,618 $ 105,072 (13.8) %
(1) Aflac Japan's policy liabilities increased .2% in yen during the six months
ended June 30, 2022 .
(2) Elimination entry necessary due to recapture of a portion of policy
liabilities ceded externally, as a result of the reinsurance retrocession
transaction as described in Note 7 of the Notes to the Consolidated Financial
Statements.
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BENEFIT PLANS
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. InMarch 2022 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2027 . InMarch 2022 , the LIPPC reached the required balance for the total life industry of ¥400 billion as specified by its Articles of Incorporation. As a result, additional contributions are not expected to be required unless the balance is reduced due to payments made by the LIPPC to the policyholders of insolvent insurers. Accordingly,Aflac Japan did not recognize an expense for LIPPC assessments in the second quarter of 2022.Aflac Japan recognized an expense of ¥.9 billion for both of the six-month periods endedJune 30, 2022 and 2021 for LIPPC assessments.
Guaranty Fund Assessments
UnderU.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. Guaranty fund assessments for the six-month periods endedJune 30, 2022 and 2021 were immaterial. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to an investment strategy of using debt to increase the potential ROE. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including: •business investment and growth needs •strategic growth objectives •financial flexibility and obligations •capital support for hedging activity •a constantly evolving business and economic environment •a balanced approach to capital allocation and shareholder deployment.
The governance framework supporting liquidity, capital and leverage includes global senior management and board committees that review and approve all significant capital related decisions.
The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$2.0 billion to provide a capital buffer and liquidity support at the holding company. This amount excludes$400 million of proceeds from the issuance of senior sustainability notes in 2021, unallocated proceeds of which contribute to total cash but are not intended to support holding company liquidity. The Company remains committed to prudent liquidity and capital management. AtJune 30, 2022 , the Company held$5.2 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion .Aflac Japan and AflacU.S. generate cash flows from their operations and provide the primary sources of liquidity to the Parent Company through management fees and dividends, withAflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock, interest on its outstanding indebtedness and operating expenses. 94 --------------------------------------------------------------------------------
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) 2022 2021
Management fees paid by subsidiaries
The following table details
Aflac Japan Remittances
(In millions of dollars and billions of yen) 2022 2021
1,353 1,402
Aflac Japan dividends declared or paid to Parent Company
(in yen) ¥ 178.4 ¥ 154.5
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 unhedged U.S.
dollar-denominated investments at Aflac Japan and to consider whether the amount
of such investments should be increased or decreased relative to the Company's
view of economic equity surplus in Aflac Japan in light of potentially rising
hedge costs and other factors. See the Hedging Activity subsection of this MD&A
for more information.
The Company believes that its balance of cash and cash equivalents and cash
generated by operations will be sufficient to satisfy both its short-term and
long-term cash requirements and plans for cash, including material cash
requirements from known contractual obligations and returning capital to
shareholders through share repurchases and dividends. For additional
information, see the Liquidity and Capital Resources section of Item 7. MD&A in
the 2021 Annual Report.
In addition to cash and cash equivalents, the Company also maintains credit
facilities, both intercompany and with external partners, and a number of other
available tools to support liquidity needs on a global basis. In September 2021 ,
the Parent Company filed a shelf registration statement with the SEC that allows
the Company to issue an indefinite amount of debt securities, in one or more
series, from time to time until September 2024 . The Company believes outside
sources for additional debt and equity capital, if needed, will continue to be
available. Additionally, as of June 30, 2022 , the Parent Company and Aflac had
four lines of credit with third parties and ten intercompany lines of credit.
The Company was in compliance with all of the covenants of its notes payable and
lines of credit at June 30, 2022 . For additional information, see Note 8 of the
Notes to the Consolidated Financial Statements.
The Company's consolidated financial statements convey its financing
arrangements during the periods presented. The Company has not engaged in
material intra-period short-term financings during the periods presented that
are not otherwise reported in its balance sheet or disclosed therein. As of
June 30, 2022 , the Company had no material letters of credit, standby letters of
credit, guarantees or standby repurchase obligations. The Company has not
entered into transactions involving the transfer of financial assets with an
obligation to repurchase financial assets that have been accounted for as a sale
under applicable accounting standards, including securities lending
transactions. See Notes 3 and 4 of the Notes to the Consolidated Financial
Statements and Notes 1, 3, and 4 of the Notes to the Consolidated Financial
Statements in the 2021 Annual Report for more information on the Company's
securities lending and derivative activities. See Note 15 of the Notes to the
Consolidated Financial Statements in the 2021 Annual Report for information on
material unconditional purchase obligations that are not recorded on the
Company's balance sheet. With the exception of disclosed activities in those
referenced footnotes and the Risk Factors in the 2021 Annual Report entitled,
"The Company is exposed to foreign currency fluctuations in the yen/dollar
exchange rate" and "Lack of availability of acceptable yen-denominated
investments could adversely affect the Company's results of operations,
financial position or liquidity," the Company is not aware of any trend, demand,
commitment, event or uncertainty that would reasonably result in its liquidity
increasing or decreasing by a material amount.
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Consolidated Cash FlowsThe Company consistently generates positive cash flows from operations, and has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments in order to meet short-term cash needs.
The Company translates cash flows forAflac Japan's yen-denominated items intoU.S. dollars using weighted-average exchange rates. In periods when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported.
The following table summarizes consolidated cash flows by activity for the
six-month periods ended
(In millions) 2022 2021 Operating activities$ 1,770 $ 2,328 Investing activities 83 (839) Financing activities (1,644) (1,141)
Exchange effect on cash and cash equivalents (87) (20)
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 Corporate and other. The central mission of Aflac Global
Ventures is to support the organic growth and business development needs of
Aflac Japan and Aflac U.S. with an emphasis on digital applications designed to
improve the customer experience, gain efficiencies, and develop new markets in
an effort to enhance and defend long-term shareholder value. Investments are
included in equity securities or the other investments line in the consolidated
balance sheets.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac
U.S. obtains low-cost funding from FHLB supported by acceptable forms of
collateral pledged by Aflac U.S. In the first six months of 2022, Aflac U.S.
borrowed and repaid $279 million under this program. As of June 30, 2022 , Aflac
U.S. had outstanding borrowings of $603 million reported in its balance sheet.
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
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Financing ActivitiesCash flows from financing activities consist primarily of share repurchases, dividends to shareholders and from time to time debt issuances and redemptions.
Cash returned to shareholders through treasury stock purchases and dividends was$1.6 billion during the six-month period endedJune 30, 2022 , compared with$1.6 billion during the six-month period endedJune 30, 2021 .
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) 2022 2021
Treasury stock purchases $ 1,150 $ 1,150
Number of shares purchased:
Share repurchase program 19,192 22,614
Other 351 381
Total shares purchased 19,543 22,995
Treasury Stock Issued
(In millions of dollars and thousands of shares) 2022 2021 Stock issued from treasury:
Cash financing$ 10 $ 13 Noncash financing 33 28 Total stock issued from treasury$ 43 $ 41 Number of shares issued 805 1,157 As ofJune 30, 2022 , a remaining balance of 36.6 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. Cash dividends paid to shareholders were$.40 per share in the second quarter of 2022, compared with$.33 per share in the second quarter of 2021. The following table presents the dividend activity for the six-month periods endedJune 30 . (In millions) 2022 2021 Dividends paid in cash$ 498 $ 430
Dividends through issuance of treasury shares 19 16 Total dividends to shareholders
$ 517 $ 446 InJuly 2022 , the board of directors declared the third quarter cash dividend of$.40 per share, an increase of 21.2% compared with the same period in 2021. The dividend is payable onSeptember 1, 2022 to shareholders of record at the close of business onAugust 24, 2022 . Regulatory Restrictions
Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts inJapan ) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR.Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company continues to evaluate alternatives for reducing this sensitivity, including the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event 97 -------------------------------------------------------------------------------- of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥120 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedgedU.S. dollar-denominated investments with foreign currency options or forwards. See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for additional information. The Company has already undertaken various measures to mitigate the sensitivity ofAflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. ForU.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of itsU.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements in the 2021 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively. As ofJune 30, 2022 ,Aflac Japan's SMR remains high and reflects a strong capital and surplus position. The Company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings. AflacU.S. A life insurance company's statutory capital and surplus is determined according to rules prescribed by theNational Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different fromU.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC's Risk-based capital (RBC) formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer's operations. As ofJune 30, 2022 , Aflac's RBC ratio remains high and reflects a strong capital and surplus position. Aflac, CAIC and TOIC are domiciled inNebraska and are subject to its regulations. The maximum amount of dividends that can be paid to the Parent Company by Aflac, CAIC and TOIC without prior approval ofNebraska's director of insurance is the greater of the net income from operations, which excludes net investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2022 in excess of$1.1 billion would be considered extraordinary and require such approval. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. Privacy and Cybersecurity Governance The Company's Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company's information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company's information security program to theAudit and Risk Committee . The Company's senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and communicates quarterly with theAudit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and 98 --------------------------------------------------------------------------------
communicating with the
OtherFor information regarding commitments and contingent liabilities, see Note 12 of the Notes to the Consolidated Financial Statements.
Additional Information
Investors should note that the Company announces material financial information
in its SEC filings, press releases and public conference calls. In accordance
with SEC guidance, the Company may also use the Investor Relations section of
the Company's website (http://investors.aflac.com) to communicate with investors
about the Company. It is possible that the financial and other information the
Company posts there could be deemed to be material information. The information
on the Company's website is not part of this document. Further, the Company's
references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP.
These principles are established primarily by the Financial Accounting Standards
Board (FASB). In this MD&A, references to U.S. GAAP issued by the FASB are
derived from the FASB Accounting Standards Codification™ (ASC). The preparation
of financial statements in conformity with U.S. GAAP requires the Company to
make estimates based on currently available information when recording
transactions resulting from business operations. The estimates that the Company
deems to be most critical to an understanding of its results of operations and
financial condition are those related to the valuation of investments and
derivatives, DAC, liabilities for future policy benefits and unpaid policy
claims, and income taxes. The preparation and evaluation of these critical
accounting estimates involve the use of various assumptions developed from
management's analyses and judgments. The application of these critical
accounting estimates determines the values at which 92% of the Company's assets
and 78% of its liabilities are reported as of June 30, 2022 , and thus has a
direct effect on net earnings and shareholders' equity. Subsequent experience or
use of other assumptions could produce significantly different results.
There have been no changes in the items the Company has identified as critical
accounting estimates during the six months ended June 30, 2022 . For additional
information, see the Critical Accounting Estimates section of Item 7. MD&A
included in the 2021 Annual Report.
Future Adoption of Accounting Standard for Long-Duration Insurance Contracts
As previously reported, inAugust 2018 , the FASB issued Accounting Standards Update 2018-12, "Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts" (the ASU). The update significantly changes how insurers account for long-duration contracts, amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company. In the near term, the expected impact on the Company's key financial ratios is limited. Generally, including the impact of periodic assumption updates for the year endedDecember 31, 2021 , and adjusting for the effects of the COVID-19 pandemic on the Company's financial results for the year endedDecember 31, 2021 , benefit ratios are expected to be slightly higher forAflac Japan and slightly lower for AflacU.S. , while expense ratios are expected to be modestly lower due to amortizing deferred acquisition costs at a slower rate. This results in a slightly higher pretax profit margin forAflac Japan and a modestly higher pretax profit margin for AflacU.S. For additional information on the ASU, see the Future Adoption of Accounting Standard for Long-Duration Insurance Contracts section of Item 7. MD&A in the 2021 Annual Report; see also Note 1 of the Notes to the Consolidated Financial Statements. New Accounting Pronouncements For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements. 99
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