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 •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 any resulting economic effects and government interventions, on the Company's business and financial results •ability to attract and retain qualified sales associates, brokers, employees, and distribution partners •deviations in actual experience from pricing and reserving assumptions •ability to continue to develop and implement improvements in information technology systems •interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems •subsidiaries' ability to pay dividends to the Parent Company •inherent limitations to risk management policies and procedures •the level of sales ofAflac Japan products in theJapan Post channel •tax rates applicable to the Company may change •failure to comply with restrictions on policyholder privacy and information security •extensive regulation and changes in law or regulation by governmental authorities •competitive environment and ability to anticipate and respond to market trends •catastrophic events, including, but not limited to, as a result of climate change, epidemics, pandemics (such as the coronavirus COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events •ability to protect the Aflac brand and the Company's reputation •ability to effectively manage key executive succession •changes in accounting standards •level and outcome of litigation •allegations or determinations of worker misclassification inthe United States 66 -------------------------------------------------------------------------------- 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, 2021 and 2020, respectively. Results of operations for interim periods are not necessarily indicative of results for the entire year. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in the Company's annual report on Form 10-K for the year endedDecember 31, 2020 (2020 Annual Report). In this MD&A, amounts may not foot due to rounding. For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. This MD&A is divided into the following sections: Page Executive Summary 68 Results of Operations 72 Investments 86 Hedging Activities 91 Deferred Policy Acquisition Costs 95 Policy Liabilities 95 Benefit Plans 95 Policyholder Protection 95 Off-Balance Sheet Arrangements 95 Liquidity and Capital Resources 96 Critical Accounting Estimates 101 67
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EXECUTIVE SUMMARY
Company Overview
Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the
Company) provide financial protection to more than 50 million people worldwide.
The Company's principal business is supplemental health and life insurance
products with the goal to provide customers the best value in supplemental
insurance products in the United States (U.S. ) and Japan. The Company's
insurance business consists of two reporting segments: Aflac Japan and Aflac
U.S. The Parent Company's primary insurance subsidiaries are Aflac Life
Insurance Japan Ltd. in Japan (Aflac Japan ) and American Family Life Assurance
Company of Columbus (Aflac); Continental American Insurance Company (CAIC),
branded as Aflac Group Insurance (AGI); American Family Life Assurance Company
of New York (Aflac New York); Tier One Insurance Company (TOIC) and Argus Dental
& Vision, Inc. (Argus), which provides a platform for Aflac Dental and Vision in
the U.S. (collectively, Aflac U.S. ).
COVID-19
The impact of the COVID-19 global pandemic on the Company continues to evolve, and its future effects remain uncertain. At the onset of the pandemic in 2020, the majority of the Company's employees inJapan and theU.S. shifted to remote working environments, with returns to office undertaken as warranted by local conditions. BothAflac Japan and AflacU.S. have taken measures to address employee health and safety and increase employees' ability to develop and maintain more flexible working conditions, and operations remained stable throughout the first six months of 2021. The Company also took prompt action at the beginning of the pandemic to strengthen its capital and liquidity position, and continues to monitor its investment portfolios to adjust to market conditions, including the continuing recovery and inflation expectations. BothAflac Japan and AflacU.S. have accelerated investments in digital initiatives to improve productivity, efficiency and customer service over the long term. In the three- and six-month periods endedJune 30, 2021 , sales forAflac Japan , in yen terms, increased 38.4% and 15.7%, respectively, compared to the same periods in 2020, reflecting the launch of a new medical product inJanuary 2021 and favorable comparisons due to pandemic conditions in 2020. In the three-month period endedJune 30, 2021 , sales for AflacU.S. increased 64.1%, compared to the same period in 2020, reflecting increased sales activity as a result of the ongoing economic reopening in theU.S. and favorable comparisons due to pandemic conditions in 2020. In the six-month period endedJune 30, 2021 , AflacU.S. sales increased 6.6%. Pandemic-related claims and associated reserve increases in both Japan and theU.S. have not materially impacted financial results in the first six months of 2021 and were more than offset by a reduction in claims related to non-COVID-19 medical needs. The pandemic's impact on economic conditions have contributed to sales declines, pressuring premium growth rates. This has been partially offset by lower lapse rates in theU.S. The Company has not experienced material realized losses or impairments and credit losses associated with the pandemic. The Company continues to monitor the effects and risks of COVID-19, including its variants, to assess its impact on economic conditions inJapan and theU.S. and on the Company's business, financial condition, results of operations, liquidity and capital position. Those impacts may cause changes to estimates of future earnings, capital deployment, regulatory capital position, segment dividend payout ratios and other measures the Company provided under 2021 Outlook in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the 2020 Annual Report.
The Company's efforts and other developments are outlined below.
•Liquidity and Capital Resources
The Company entered the crisis in a strong capital and liquidity position, having maintained capital ratios inJapan and theU.S. at a level designed to absorb a degree of market volatility. The Company has the ability to adjust cash flow management from other sources of liquidity including reinvestment cash flows and selling investments. The Company remains committed to prudent liquidity and capital management. In terms of repurchases, the Company remains in the market and is being tactical in its approach to repurchasing its stock. The Company believes that this approach will allow it to increase or decrease repurchase activity depending on how the pandemic and market conditions evolve.
The Company is committed to maintaining a strong
The Company regularly evaluates adjustments to its foreign currency-hedging
program in
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hedging cost and settlement risk while maintaining a strong SMR, including
changes in the level of hedging employed with the
•Investment Portfolio
The Company's investment portfolio was well-positioned entering the crisis, and the Company continues to follow its strategy of investing primarily in fixed maturity securities to generate a reliable stream of income. Fundamental credit analysis and de-risking activity in prior periods contributed to the current quality of the Company's investments. Although economic and market conditions have continued to improve, the Company remains cautious about the continued path of the recovery and the potential longer term impacts of the pandemic. In addition, the reopening and supply shortages have triggered price increases which have, among other things, increased inflation expectations and which may ultimately result in an increase in inflation. The Company continues working with certain borrowers to provide temporary relief of terms by providing payment deferrals and other modifications or waivers where the Company believes it improves its overall position. For additional information on these loan modifications, see Note 3 of the Notes to the Consolidated Financial Statements.
•Crisis Management
The Company established command centers inJapan and theU.S. to monitor and communicate pandemic developments to the Company's leadership. The command centers participate in regular updates to the Company's leadership, including government and regulatory actions, operations, employee policies and conditions and distribution status. In addition, updates on cybersecurity are provided, including with respect to the Company's remote workforce. Moreover, the Company's financial leadership group has been meeting more frequently since the onset of the pandemic and has focused on the capital markets, capital and liquidity position, stress testing and any defensive actions that may be necessary.
•Aflac Japan initiatives
Aflac Japan has maintained certain measures implemented at the onset of the pandemic, such as restrictions on travel, working from home, staggered work hours and limitations on the number of personnel attending in-person meetings. As ofJune 30, 2021 ,Aflac Japan had approximately 54% of its workforce working remotely.Aflac Japan continues to evaluate return to the office measures; however, throughout the pandemic,Aflac Japan has evaluated its operational capabilities and anticipates that the remote configuration could remain for an indefinite period of time without materially impacting operations. InJune 2021 , in response to theGovernment of Japan's initiative to accelerate vaccinations,Aflac Japan began offering workplace vaccinations to employees, temporary workers and contractors, including employee co-resident spouses, children and relatives who wish to be vaccinated.Aflac Japan also introduced a special paid leave system for employees who wish to receive a COVID-19 vaccination.Aflac Japan remains focused on generating new business to existing and prospective customers through direct mail and digital methods.Aflac Japan has also accelerated investments in digital and paperless initiatives designed to increase long term productivity, efficiency, customer service and business continuity.
•Aflac
The Parent Company and AflacU.S. continue to maintain certain employee and worksite safety measures that were first implemented at the onset of the pandemic, including restrictions on international travel, as well as protocols to limit in-person meetings applicable toU.S. employees. As ofJune 30, 2021 , over 85% ofU.S. employees were working remotely. While a small number ofU.S. employees remained at or previously returned to one of the Company's worksites, a company-wide effort to returnU.S. based employees of the Parent Company, AflacU.S. and theU.S. asset management subsidiary to the worksite began inJuly 2021 . The return to worksite is a phased approach throughout the rest of 2021 and into 2022, subject to factors including the availability of treatments and vaccines, the return schedule of school systems and the availability of child care, the number of COVID-19 cases and the COVID-19 replication rate in areas of theU.S. where the Company has significant operations. For those employees who are working in one of the Company's worksites, safety protocols have been put in place that align with or exceed those recommended by theCenters for Disease Control and Prevention (CDC ). After the return to worksite, the Parent Company and AflacU.S. expect to adopt a workforce model 69 --------------------------------------------------------------------------------
comprised of a mix of full time office employees, full time remote employees, and employees who will split their time between office and remote work.
AflacU.S. policy sales, enrollment and agent recruiting functions are highly dependent upon face-to-face interaction between independent agents and brokers with prospective and new customers and agents. Throughout the pandemic, opportunities for such interaction have been significantly reduced by reactions to the pandemic, such as social distancing, shelter in place orders and work from home initiatives. Notwithstanding the general improvement of economic conditions to date in 2021, the impact of pandemic conditions on AflacU.S. sales remains subject to uncertainty as the effects of varying levels of vaccination and the emergence of COVID-19 variants continue to develop. AflacU.S. has accelerated investments in digital initiatives designed to improve long term productivity, efficiency and customer service. Further, AflacU.S. is in its third year of the build-out of the Consumer Markets business for the digital direct-to-consumer sale of insurance and sales made through that platform have continued to grow.
•Major government initiatives
Government authorities inJapan and theU.S. have implemented several initiatives in response to the COVID-19 pandemic, including actions designed to mitigate the adverse health effects of the virus and those designed to provide broad-based relief and economic support to all aspects of the economy. InJanuary 2021 , in response to the spread of COVID-19, theGovernment of Japan issued a state of emergency declaration covering 11 prefectures, includingTokyo andOsaka . The declaration was lifted in stages in areas where improvements in infection rates and lower healthcare system utilization were observed, and it was lifted in all areas onMarch 21, 2021 . OnApril 23, 2021 , due to the continued spread of COVID-19, theGovernment of Japan issued a state of emergency declaration covering four prefectures, includingTokyo andOsaka , fromApril 25, 2021 untilMay 11, 2021 . This declaration was expanded to ten prefectures and extended untilJune 20, 2021 , due to the emergence of COVID-19 variants and the continued increase in infections and impacts on the healthcare system. OnJune 20, 2021 , the declaration was lifted in nine prefectures, includingTokyo andOsaka , and extended only inOkinawa untilJuly 11 . OnJuly 8, 2021 , due to a rise in COVID-19 infections, theGovernment of Japan issued a new state of emergency declaration forTokyo for the period fromJuly 12, 2021 toAugust 22, 2021 . The state of emergency declaration forOkinawa was also further extended toAugust 22, 2021 . In addition to the restrictions imposed by these emergency declarations, certain local governments continue to request a reduction of the onsite workforce and restraint from non-urgent traveling. TheFinancial Services Agency (FSA) has requested that financial service providers inJapan respond appropriately while continuing their essential operations. This request includes insurance companies, which have been asked to continue essential operations such as benefits and claims payment, including policyholder loans. Moreover, following the expansion of the impact of COVID-19, the FSA requested insurance companies to consider flexible interpretation and application of insurance policy provisions and measures required for products from the standpoint of protecting policyholders. In accordance with the FSA's request,Aflac Life Insurance Japan Ltd. implemented a measure to pay accidental death benefits and accidental serious disability benefits under its accidental death benefit rider in cases of death or specified serious disabilities from COVID-19. Throughout the pandemic,Aflac Japan has also followed the guidance of the FSA in terms of treating customers with care, ensuring ease and timeliness of claims payments and extended coverage for temporary medical facilities and telemedicine in certain circumstances, and waiver of interest on certain policyholder loans. InJanuary 2021 , the grace period on premium payments was extended toJuly 31, 2021 for the policyholders who live in areas under the state of emergency and inFebruary 2021 , the scope was expanded to all regions inJapan . Furthermore, in response to the state of emergency declaration inApril 2021 , inMay 2021 andJuly 2021 , the grace period on premium payments was extended to October, 31, 2021,November 30, 2021 andJanuary 31, 2022 , respectively.Aflac Japan will continue to provide flexibility for policyholders who live in areas under the state of emergency, including extending the payment grace period for a maximum of six months from the state of emergency declaration. Policyholders are required to file for relief through this extension. During 2021, in response to fluctuations in COVID-19 infection rates and the declaration of a state of emergency by theGovernment of Japan ,Aflac Japan has responded to requests of theGovernment of Japan and local governments while also giving priority to customer service quality and business continuity. 70 --------------------------------------------------------------------------------
In the
Throughout the pandemic, AflacU.S. has taken steps to comply with COVID-19-related directives issued by state regulatory authorities, including those requiring or requesting premium grace periods. As ofJune 30, 2021 , premium grace periods remained in effect in six states,Puerto Rico and theDistrict of Columbia . AflacU.S. experienced some increase in policy lapses in the first six months of 2021 in certain states where premium grace periods expired. If the premium grace periods continue to expire throughout 2021, AflacU.S. would expect an increase in lapse rates, and a decrease in corresponding persistency rates.
The
The American Rescue Plan (ARP) Act of 2021 was signed into law inMarch 2021 and was designed to provide approximately$1.9 trillion in financial stimulus in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities. Among other measures, the ARP Act provides funding for vaccines and testing; for states, tribal and local governments; and for small businesses. The ARP Act also expands eligibility for the Paycheck Protection Program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted inMarch 2020 . Performance Highlights Total revenues were$5.6 billion in the second quarter of 2021, compared with$5.4 billion in the second quarter of 2020. Net earnings were$1.1 billion , or$1.62 per diluted share in the second quarter of 2021, compared with$805 million , or$1.12 per diluted share, in the second quarter of 2020, driven by higher net investment gains. Total revenues were$11.4 billion in the first six months of 2021, compared with$10.6 billion in the first six months of 2020. Net earnings were$2.4 billion , or$3.49 per diluted share in the first six months of 2021, compared with$1.4 billion , or$1.89 per diluted share, in the first six months of 2020, driven by higher net investment gains. Results in the second quarter of 2021 included pretax net investment gains of$89 million , compared with net investment losses of$170 million in the second quarter of 2020. Net investment gains in the second quarter of 2021 included a decrease in credit loss allowances of$12 million ;$99 million of net losses from certain derivative and foreign currency gains or losses;$170 million of net gains on equity securities; and$6 million of net gains from sales and redemptions. Results in the first six months of 2021 included pretax net investment gains of$396 million , compared with net investment losses of$633 million in the first six months of 2020. Net investment gains in the first six months of 2021 included a decrease in credit loss allowances of$34 million ;$265 million of net gains from certain derivative and foreign currency gains or losses;$102 million of net gains on equity securities; and$5 million of net losses from sales and redemptions. The average yen/dollar exchange rate(1) for the three-month period endedJune 30, 2021 was 109.48, or 1.7% weaker than the average yen/dollar exchange rate(1) of 107.65 for the same period in 2020. The average yen/dollar exchange rate(1) for the six-month period endedJune 30, 2021 was 107.79, or .4% stronger than the average yen/dollar exchange rate(1) of 108.25 for the same period in 2020. Adjusted earnings(2) in the second quarter of 2021 were$1.1 billion , or$1.59 per diluted share, compared with$921 million , or$1.28 per diluted share, in the second quarter of 2020, driven by lower-than-expected benefit ratios and higher net investment income, primarily inJapan . The weaker yen/dollar exchange rate impacted adjusted earnings per diluted share by$.01 . Adjusted earnings(2) in the first six months of 2021 were$2.1 billion , or$3.11 per diluted share, compared with$1.8 billion , or$2.49 per diluted share, in the first six months of 2020. The stronger yen/dollar exchange rate impacted adjusted earnings per diluted share by$(.01) . Total investments and cash atJune 30, 2021 were$146.7 billion , compared with$142.2 billion atJune 30, 2020 . In the first six months of 2021,Aflac Incorporated repurchased$1.2 billion , or 22.6 million of its common shares. AtJune 30, 2021 , the Company had 76.5 million remaining shares authorized for repurchase.
Shareholders' equity was
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at June 30, 2021 also included an unrealized foreign currency translation loss
of $1.7 billion , compared with an unrealized foreign currency translation loss
of $1.5 billion at June 30, 2020 . The annualized return on average shareholders'
equity in the second quarter of 2021 was 13.4%.
Shareholders' equity excluding accumulated other comprehensive income (AOCI)(2)
(adjusted book value) was $25.7 billion , or $38.27 per share at June 30, 2021 ,
compared with $22.7 billion , or $31.75 per share, at June 30, 2020 . The
annualized adjusted return on equity (ROE) excluding foreign currency impact(2)
in the second quarter of 2021 was 17.0%.
(1) Yen /U.S. dollar exchange rates are based on the published MUFG 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 with United 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 of Aflac 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 for U.S. GAAP reporting
purposes, which results in foreign currency impact to earnings, cash flows and
book value on a U.S. GAAP basis. Management evaluates the Company's financial
performance both including and excluding the impact of foreign currency
translation to monitor, respectively, cumulative currency impacts on book value
and the currency-neutral operating performance over time. The average yen/dollar
exchange rate is based on the published MUFG 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 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 72 -------------------------------------------------------------------------------- derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses. The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management's control, while excluding the components that are within management's control and are accordingly reclassified to net investment income and interest expense. The most comparableU.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses. •Amortized hedge costs/income represent costs/income incurred or recognized as a result of using foreign currency derivatives to hedge certain foreign exchange risks in the Company's Japan segment or in the Corporate and Other segment. These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the term of the hedge. The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparableU.S. GAAP financial measure for amortized hedge costs/ income. •Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted inJapan and foreign exchange rates are outside management's control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) intoU.S. dollars. The most comparableU.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively. •Adjusted book value is theU.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on theU.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important as they exclude AOCI, which fluctuates due to market movements that are outside management's control. The most comparableU.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively. •Adjusted return on equity excluding foreign currency impact is adjusted earnings excluding the current period foreign currency impact divided by average shareholders' equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparableU.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders' equity. •U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact onU.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considersU.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency changes on the Aflac Japan segment results, which are outside management's control. The most comparableU.S. GAAP financial measure forU.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from theU.S. dollar denominated investments translated to yen. 73 -------------------------------------------------------------------------------- The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparableU.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively. Reconciliation of Net Earnings to Adjusted Earnings(1)
In Millions Per Diluted Share In Millions Per Diluted Share
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020 2021 2020 2021 2020
Net earnings $ 1,105 $ 805 $ 1.62 $ 1.12 $ 2,398 $ 1,370 $ 3.49 $ 1.89
Items impacting net earnings:
Adjusted net investment (gains)
losses (2) (85) 166 (.12) .23 (388) 614 (.57) .85
Other and non-recurring (income)
loss 53 0 .08 .00 59 15 .09 .02
Income tax (benefit) expense on
items excluded from adjusted
earnings 7 (50) .01 (.07) 69 (196) .10 (.27)
Adjusted earnings 1,080 921 1.59 1.28 2,138 1,803 3.11 2.49
Current period foreign currency
impact (3) 6 N/A .01 N/A (7) N/A (.01) N/A
Adjusted earnings excluding
current period foreign currency
impact $ 1,086 $ 921 $ 1.59 $ 1.28 $ 2,131 $ 1,803 $ 3.10 $ 2.49
(1) Amounts may not foot due to rounding.
(2) See reconciliation of net investment (gains) losses to adjusted net
investment (gains) losses below
(3) Prior period foreign currency impact reflected as "N/A" to isolate change
for current period only.
Reconciling Items
Net Investment Gains and Losses
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment
(Gains) Losses(1)
Three Months Ended June
30, Six Months Ended June 30,
(In millions) 2021 2020 2021 2020
Net investment (gains) losses $ (89) $ 170 $ (396) $ 633
Items impacting net investment (gains) losses:
Amortized hedge costs (17) (50) (36) (105)
Amortized hedge income 16 27 33 56
Net interest cash flows from derivatives
associated
with certain investment strategies (9) 6 (17) 0
Interest rate component of the change in fair
value
of foreign currency swaps on notes payable 14 14 27 30
Adjusted net investment (gains) losses $ (85) $ 166 (1) Amounts may not foot due to rounding.
The Company's investment strategy is to invest primarily in fixed maturity
securities to provide a reliable stream of investment income, which is one of
the drivers of the Company's growth and profitability. This investment strategy
incorporates asset-liability matching (ALM) to align the expected cash flows of
the portfolio to the needs of the Company's liability structure. The Company
does not purchase securities with the intent of generating investment gains or
losses. However, investment gains and losses may be realized as a result of
changes in the financial markets and the creditworthiness of specific issuers,
tax planning strategies, and/or general portfolio management and rebalancing.
The realization of investment gains and losses is independent of the
underwriting and administration of the Company's insurance products. Net
investment gains and losses excluded from adjusted earnings include the
following:
•Securities Transactions
•Credit Losses
74-------------------------------------------------------------------------------- •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 on
•foreign currency forwards and options used to economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long term exposure to a weakening yen
•cross-currency interest rate swaps, also referred to as foreign currency swaps, associated with certain senior notes and subordinated debentures
•foreign currency swaps that are associated with VIE bond purchase commitments, and investments in special-purpose entities, including VIEs where the Company is the primary beneficiary
•interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments
•interest rate swaptions used to hedge changes in the fair value associated with
interest rate fluctuations for certain
•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. Other items excluded from adjusted earnings included integration costs related to the Company's acquisition ofZurich North America's U.S. Corporate Life and Pensions business; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These integration costs amounted to$5 million and$12 million for the three- and six-month periods endedJune 30, 2021 , respectively. 75 --------------------------------------------------------------------------------
Income Taxes
The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 19.5% for the three-month period endedJune 30, 2021 , compared with 24.8% for the same period in 2020. The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 19.4% for the six-month period endedJune 30, 2021 , compared with 23.4% for the same period in 2020. The reduction in the effective tax rate for the three- and six-month periods endedJune 30, 2021 was driven by new tax regulations released in the third quarter of 2020 and historic and solar tax credits. The combined effective tax rate differs from theU.S. statutory rate primarily due to foreign earnings taxed at different rates. For additional information, see Critical Accounting Estimates - Income Taxes section of the MD&A in the 2020 Annual Report. The Company expects that its effective tax rate for future periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in theU.S. and in foreign jurisdictions. See risk factor entitled "Tax rates applicable to the Company may change" in the 2020 Annual Report for more information.
Foreign Currency Translation
Aflac Japan's premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen.Aflac Japan purchases yen-denominated assets andU.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated toU.S. dollars using a weighted average Japanese yen/U.S. dollar foreign exchange rate, except realized gains and losses on security transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated toU.S. dollars using a spot Japanese yen/U.S. dollar foreign exchange rate. RESULTS OF OPERATIONS BY SEGMENTU.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. The Company's insurance business consists of two segments:Aflac Japan and AflacU.S. Aflac Japan is the principal contributor to consolidated earnings. Businesses that are not individually reportable, such as the Parent Company, asset management subsidiaries and other business activities, including reinsurance retrocession activities, are included in the Corporate and other segment. See the Item 1. Business section of the 2020 Annual Report for a summary of each segment's products and distribution channels.
Consistent with
•Operating Ratios •New Annualized Premium Sales •New Money Yield •Return on Average Invested Assets •Average Weekly Producer For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part II. Other Information. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidatedU.S. GAAP results and additional information. 76 -------------------------------------------------------------------------------- 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) 2021 2020 2021 2020 Net premium income$ 2,987
315 319 643 641
U.S. dollar -denominated investment income 493 364 890 740
Net investment income 808 683 1,533 1,381
Amortized hedge costs related to certain foreign currency exposure
management strategies 17 50 36 105
Adjusted net investment income 792 633 1,497 1,276
Other income (loss) 10 12 22 22
Total adjusted revenues 3,789 3,803 7,630 7,606
Benefits and claims, net 1,998 2,205 4,134 4,391
Adjusted expenses:
Amortization of deferred policy acquisition costs 169 155 341 328
Insurance commissions 179 184 366 369
Insurance and other expenses 438 420 898 824
Total adjusted expenses 786 759 1,605 1,521
Total benefits and adjusted expenses 2,785 2,964 5,739 5,912
Pretax adjusted earnings $ 1,004
109.48 107.65 107.79 108.25
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: 2021 2020 2021 2020 2021 2020 2021 2020
Net premium income (5.4) % (.4) % (3.1) % (.7) % (3.8) % (2.5) % (3.7) % (2.3) %
Adjusted net investment
income 25.1 3.9 17.3 4.7 27.4 2.0 17.0 3.0
Total adjusted revenues (.4) .3 .3 .2 1.4 (1.8) (.2) (1.4)
Pretax adjusted earnings 19.7 1.0 11.6 1.7 22.0 (1.2) 11.3 .0
(1) Net interest cash flows from derivatives associated with certain investment
strategies of $(9) and $6 for the three-month periods and $(17) and an
immaterial amount for the six-month periods ended June 30, 2021 and 2020,
respectively, have been reclassified from net investment gains (losses) and
included in adjusted earnings as a component of net investment income.
In the three- and six-month periods ended June 30, 2021 , Aflac Japan's net
premium income decreased, in yen terms, due to an anticipated decrease in first
sector premiums as savings products reached premium paid-up status and
constrained sales during the COVID-19 pandemic. Adjusted net investment income
increased in the three- and six-month periods ended June 30, 2021 , primarily due
to higher alternative and floating rate income and lower hedge costs.
Annualized premiums in force decreased 4.5% to ¥1.39 trillion as of June 30,
2021 , compared with ¥1.46 trillion as of June 30, 2020 . The decrease in
annualized premiums in force in yen was driven primarily by limited-pay products
reaching paid up status and lower sales during the COVID-19 pandemic. Annualized
premiums in force, translated into dollars at respective period-end exchange
rates, were $12.6 billion at June 30, 2021 , compared with $13.5 billion at
June 30, 2020 .
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Aflac Japan's investment portfolios include U.S. dollar-denominated securities
and reverse-dual currency securities (yen-denominated debt securities with
dollar coupon payments). In years when the yen strengthens in relation to the
dollar, translating Aflac Japan's U.S. dollar-denominated investment income into
yen lowers growth rates for net investment income, total adjusted revenues, and
pretax adjusted earnings in yen terms. In years when the yen weakens,
translating U.S. dollar-denominated investment income into yen magnifies growth
rates for net investment income, total adjusted revenues, and pretax adjusted
earnings in yen terms.
The following table illustrates the effect of translating Aflac Japan's U.S.
dollar-denominated investment income and related items into yen by comparing
certain segment results with those that would have been reported had foreign
currency exchange rates remained unchanged from the comparable period in the
prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated
investment income were determined using the average foreign currency exchange
rate for the comparable prior year period. See non-U.S. GAAP financial measures
defined above.
Aflac Japan Percentage Changes Over Previous Period
(Yen Operating Results)
For the Periods Ended June 30,
Including Foreign Excluding Foreign
Currency Changes Currency Changes
Three Months Six Months Three Months Six Months
2021 2020 2021 2020 2021 2020 2021 2020
Adjusted net investment
income 27.4 % 2.0 % 17.0 % 3.0 % 26.2 % 3.3 % 17.2 4.0 %
Total adjusted revenues 1.4 (1.8) (.2) (1.4) 1.2 (1.6) (.2) (1.3)
Pretax adjusted earnings 22.0 (1.2) 11.3 .0 21.1 (.3) 11.4 .7
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: 2021 2020 2021 2020
Benefits and claims, net 52.7 % 58.0 % 54.2 % 57.8 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 4.5 4.1 4.5 4.3
Insurance commissions 4.7 4.8 4.8 4.9
Insurance and other expenses 11.6 11.0 11.8 10.8
Total adjusted expenses 20.8 20.0 21.0 20.0
Pretax adjusted earnings 26.5 22.0 24.8 22.2
Ratios to total premiums:
Benefits and claims, net 66.9 % 69.8 % 67.6 % 69.6 %
Adjusted expenses:
Amortization of deferred policy acquisition
costs 5.7 4.9 5.6 5.2
In the three- and six-month periods ended June 30, 2021 , the benefit ratio
decreased, compared with the same periods in the prior year. This is primarily
due to the continued change in mix of first and third sector business, favorable
third sector claim experience, and higher surrenders in Aflac Japan's medical
products. In the three- and six-month periods ended June 30, 2021 , the adjusted
expense ratio increased due to an increase in expenses, mainly due to increased
outsourcing expenses related primarily to enhancement of business continuity
infrastructure in times of crises such as the COVID-19 pandemic situation,
paperless and digital experience and an increase in DAC amortization caused by
higher surrenders in Aflac Japan's medical products. In total, the pretax
adjusted profit margin increased in the three- and six-month periods ended
June 30, 2021 . For the full year of 2021, the Company will continue to monitor
the situation with respect to COVID-19, and potential impacts on the pretax
adjusted profit margin and benefit ratio.
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Aflac Japan Sales
The following table presents Aflac Japan's new annualized premium sales for the
periods ended June 30 .
In Dollars In Yen
Three Months Six Months Three Months Six Months
(In millions of dollars and
billions of yen) 2021 2020 2021 2020 2021 2020 2021 2020
New annualized premium sales
36.5 % (58.1) % 16.5 % (43.3) % 38.4 % (58.8) % 15.7 % (44.1) %
The following table details the contributions to
Three Months Six Months
2021 2020 2021 2020
Cancer 48.9 % 54.7 % 47.1 % 55.1 %
Medical 39.7 32.5 41.5 32.4
Income support .6 .9 .6 1.1
Ordinary life:
WAYS .8 .8 .7 .7
Child endowment .4 .4 .3 .4
Other ordinary life (1) 8.9 10.0 8.9 9.6
Other .7 .7 .9 .7
Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes term and whole life
The foundation ofAflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical and income support insurance products.Aflac Japan has been focusing more on promotion of cancer and medical insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings products. With continued cost pressure on Japan's health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance productsAflac Japan provides will continue to be an important part of its product portfolio. Sales of protection-type first sector and third sector products on a yen basis increased 38.6% in the second quarter of 2021, compared with the same period in 2020, primarily due to the launch of a new medical product inJanuary 2021 and favorable comparisons as a result of pandemic conditions in 2020. Sales ofAflac Japan cancer products in theJapan Post Group channel experienced a material decline beginning inAugust 2019 which has continued into the first six months of 2021. OnMarch 24, 2021 ,Japan Post Group announced that it planned to begin resuming proactive sales of financial products onApril 1, 2021 , which the Company believes will lead to gradual improvement of cancer insurance sales in the second half of the year. For additional information, see the risk factor entitled "Events related to the ongoing Japan Post investigation and other matters regarding sales of Japan Post Insurance products could negatively impact the Company's sales and results of operations," in Item 1A. Risk Factors in the 2020 Annual Report. Beginning in the second quarter of 2020 and continuing into 2021,Aflac Japan experienced a sharp drop-off in total sales, as compared to pre-pandemic levels, due to the ongoing effects of the COVID-19 pandemic. In response to the COVID-19 pandemic,Aflac Japan continues to promote digital and web-based sales to groups and use of its system that enables smart device-based insurance application by allowing the customer and anAflac Japan operator to see the same screen through their smart devices. Further,Aflac Japan continues to utilize its virtual sales tool that enables online consultations and policy applications to be completed entirely online. 79 --------------------------------------------------------------------------------
The following table details the contributions to
2021 2020
Independent corporate and individual 51.1 % 53.8 %
Affiliated corporate (1) 44.0 42.8
Bank 4.9 3.4
Total 100.0 % 100.0 %
(1) Includes Japan Post
During the three-month period ended June 30, 2021 , Aflac Japan recruited 22 new
sales agencies. At June 30, 2021 , Aflac Japan was represented by more than 8,300
sales agencies, with more than 113,000 licensed sales associates employed by
those agencies. The number of sales agencies has declined in recent years due to
Aflac Japan's focus on supporting agencies with strong management frameworks,
high productivity and more producing agents.
At
As previously reported, onDecember 19, 2018 , the Parent Company andAflac Japan entered into a Basic Agreement with Japan Post Holdings Co., Ltd., a Japanese corporation (Japan Post Holdings). Pursuant to the terms of the Basic Agreement, among other items, Japan Post Holdings andAflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives, including leveraging digital technology in various processes and cooperation in new product development to promote customer-centric business management. InJune 2021 , the Parent Company andAflac Japan , Japan Post Holdings,Japan Post Co., Ltd. and Japan Post Insurance Co., Ltd. agreed to pursue several specific initiatives toward building a "'Co-creation Platform' to support customers and local communities," consistent withJapan Post Group's medium-term management plan announced inMay 2021 . The initiatives are directed at, among other items, the promotion ofAflac Japan cancer insurance, digital transformation within theJapan Post Group , and certain diversity efforts.
Aflac Japan Investments
The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates onU.S. dollar-denominated investment income, and other factors. As part of the Company's portfolio management and asset allocation process,Aflac Japan invests in yen andU.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and public equity securities.Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including alternative investments in limited partnerships or similar investment vehicles.Aflac Japan has been investing in both publicly-traded and privately originatedU.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of theU.S. dollar investments. 80 --------------------------------------------------------------------------------
The following table details the investment purchases for
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2021 2020 2021 2020
Yen-denominated:
Fixed maturity securities:
Japan government and agencies $ 0 $ 0 $ 1,181 $ 736
Private placements 98 23 311 113
Other fixed maturity securities 29 194 136 271
Equity securities 5 139 122 142
Other investments 4 0 6 0
Total yen-denominated $ 136 $ 356 $ 1,756 $ 1,262
U.S. dollar -denominated:
Fixed maturity securities:Other fixed maturity securities$ 396 $ 390 $ 1,001 $ 917 Infrastructure debt 0 20 0 55 Collateralized loan obligations 36 0 153 0 Equity securities 8 0 8 0
Commercial mortgage and other loans:
Transitional real estate loans 638 97 699 465
Commercial mortgage loans 17 0 17 12
Middle market loans 484 240 1,266 1,427
Other investments 91 48 147 98
Total dollar-denominated $ 1,670 $ 795 $ 3,291 $ 2,974
Total Aflac Japan purchases $ 1,806 $ 1,151 $ 5,047 $ 4,236 See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for more information regarding loans and loan receivables.
The following table presents the results ofAflac Japan's investment yields for the periods endedJune 30 . Three Months Six Months 2021 2020 2021 2020 Total purchases for the period (in millions) (1)$ 1,711 $ 1,103 $ 4,894 $ 4,138 New money yield (1), (2) 4.05 %
3.41 % 3.18 % 3.86 % Return on average invested assets (3)
2.83 2.28 2.65 2.32
Portfolio book yield, including
2.61 % 2.63 % 2.61 % 2.63 %
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs (3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis The increase in the Aflac Japan new money yield in the three-month period endedJune 30, 2021 was primarily due to higher allocations to floating rate asset classes. The decrease in the Aflac Japan new money yield in the six-month period endedJune 30, 2021 was primarily due to higher allocations to lower yielding yen-denominated asset classes. See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments section of this MD&A for additional information on the Company's investments and hedging strategies. 81 -------------------------------------------------------------------------------- AFLACU.S. SEGMENT AflacU.S. Pretax Adjusted Earnings Changes in AflacU.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for AflacU.S. Aflac U.S. Summary of Operating Results Three Months Ended Six Months Ended June 30, June 30, (In millions) 2021 2020 2021 2020 Net premium income$ 1,408 $ 1,458 $ 2,830 $ 2,941 Adjusted net investment income 189 172 366 348 Other income 30 26 58 54 Total adjusted revenues 1,627 1,656 3,254 3,343 Benefits and claims 613 646 1,169 1,359 Adjusted expenses: Amortization of deferred policy acquisition costs 111 134 250 293 Insurance commissions 136 148 275 299 Insurance and other expenses 354 302 701 640 Total adjusted expenses 601 584 1,226 1,232 Total benefits and adjusted expenses 1,213 1,230 2,396 2,591 Pretax adjusted earnings$ 413 $ 426 $ 859 $ 752 Percentage change over previous period: Net premium income (3.4) % (.1) (3.8) % .7 % Adjusted net investment income 9.9 (4.4) 5.2 (2.5) Total adjusted revenues (1.8) .9 (2.7) 1.9 Pretax adjusted earnings (3.1) 26.0 14.2 13.8 In the three- and six-month periods endedJune 30, 2021 , net premium income for AflacU.S. decreased primarily due to constrained sales as a result of the COVID-19 pandemic. Total adjusted revenues decreased in the three- and six-month periods endedJune 30, 2021 , mainly due to the decline in net premium income from reduced sales activity, partially offset by the increase in adjusted net investment income from higher variable net investment income. Pretax adjusted earnings decreased in the three-month period endedJune 30, 2021 , primarily driven by lower net premium income and higher adjusted expenses despite lower benefits. Pretax adjusted earnings increased in the six-month period endedJune 30, 2021 , driven primarily by the lower-than-expected benefit ratios due to lower incurred claims related to pandemic conditions.
Annualized premiums in force decreased 1.5% to
82
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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: 2021 2020 2021 2020
Benefits and claims 37.7 % 39.0 % 35.9 % 40.7 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 6.8 8.1 7.7 8.8
Insurance commissions 8.4 8.9 8.5 8.9
Insurance and other expenses 21.8 18.2 21.5 19.1
Total adjusted expenses 36.9 35.3 37.7 36.9
Pretax adjusted earnings 25.4 25.7 26.4 22.5
Ratios to total premiums:
Benefits and claims 43.5 % 44.3 % 41.3 % 46.2 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 7.9 9.2 8.8 10.0
For the three- and six-month periods ended June 30, 2021 , the benefit ratio
decreased compared with the same period in 2020, reflecting reduced estimates of
both COVID-19-related and non-COVID-19-related incurred claims since the advent
of the pandemic. The adjusted expense ratio increased in the three- and
six-month periods ended June 30, 2021 , when compared with the same periods in
2020, primarily due to the decline in total adjusted revenues, partially offset
by lower acquisition costs and lower DAC amortization, due to the decline in
sales and impacted by higher persistency. The pretax adjusted profit margin
increased in the six-month period ended June 30, 2021 , as compared with the same
period in 2020, primarily due to lower benefit ratios. For the full year of
2021, the Company will continue to monitor the situation with respect to
COVID-19, and potential impacts on the pretax adjusted profit margin and benefit
ratio.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the
periods ended June 30 .
Three Months Six Months
(In millions) 2021 2020 2021 2020
New annualized premium sales $ 264 $ 161 $ 515 $ 484
Increase (decrease) over prior period 64.1 % (55.6) % 6.6 % (31.2) %
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 2021 2020 2021 2020 Accident 27.2 % 25.7 % 26.7 % 26.7 % Disability 22.7 23.9 22.9 23.0 Critical care(1) 21.0 20.6 21.8 21.0 Hospital indemnity 16.4 17.1 16.6 17.0 Dental/vision 5.4 4.1 5.0 4.3 Life 7.3 8.6 7.0 8.0 Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Includes cancer, critical illness, and hospital intensive care products
New annualized premium sales for accident insurance, the leading AflacU.S. product category, increased 73.4%; disability sales increased 55.4%; critical care insurance sales (including cancer insurance) increased 67.7%; and hospital indemnity insurance sales increased 57.0% in the second quarter of 2021, compared with the same period in 2020. The increase in sales for AflacU.S. in the second quarter of 2021 is primarily attributable to increased sales activity as a result of the ongoing economic reopening in theU.S. and favorable comparisons due to pandemic conditions in 2020. See the Executive Summary section entitled COVID-19 of this MD&A for additional information. 83 -------------------------------------------------------------------------------- In the second quarter of 2021, the AflacU.S. sales force included an average of approximately 5,900U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity. AflacU.S. believes that limitations on face-to-face sales opportunities during the COVID-19 pandemic have tended to suppress the development of newly recruited agents into business producers and the productivity of veteran agents and brokers, which since the onset of the pandemic has resulted in fewer average weekly producers and has acted as a headwind to AflacU.S. sales. While gains were made in recruiting during the second quarter of 2021 compared with the second quarter of 2020, most notably among recruited brokers, AflacU.S. remains focused on mitigating and reversing this trend as theU.S. economy continues to recover from the pandemic. In response to the COVID-19 pandemic, AflacU.S. remains focused on supporting its agency channel, most of which are small businesses, by offering financial support and an extended value proposition. The AflacU.S. sales team has pivoted to accommodate preferred enrollment conditions which include realizing sales at the worksite through in-person enrollment, an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The AflacU.S. broker sales team is focused on product enhancements due to COVID-19 as well as leveraging technology based solutions to drive enrollment.
Aflac
The level of investment income is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, and other factors.
As part of the Company's portfolio management and asset allocation process, AflacU.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. AflacU.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.
The following table details the investment purchases for Aflac
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2021 2020 2021 2020
Fixed maturity securities:
Other fixed maturity securities $ 130 $ 85 $ 376 $ 267
Infrastructure debt 0 4 0 20
Collateralized loan obligations 18 11 30 11
Equity securities 113 1 113 5
Commercial mortgage and other loans:
Transitional real estate loans 113 7 137 45 Commercial mortgage loans 129 10 163 37 Middle market loans 41 5 100 43 Other investments 10 5 16 11
Total Aflac U.S. Purchases $ 554 $ 128 $ 935 $ 439 See Note 3 of the Notes to the Consolidated Financial Statements and Notes 1 and 3 of the Notes to the Consolidated Financial Statements in the 2020 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
2021 2020 2021 2020
Total purchases for period (in millions) (1) $ 544 $ 123 $ 919 $ 428
New money yield (1), (2) 3.63 % 3.04 % 3.47 % 3.54 %
Return on average invested assets (3) 4.94 4.81 4.83 4.91
Portfolio book yield, end of period (1) 5.07 % 5.30 % 5.07 % 5.30 %
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses and external management fees (3) Net of investment expenses, year-to-date number reflected on a quarterly average basis The increase in the AflacU.S. new money yield for the three-month period endedJune 30, 2021 was primarily due to higher allocations to floating rate asset classes. The decrease in the AflacU.S. new money yield for the six-month period endedJune 30, 2021 was primarily due to lower yields in fixed rate asset classes. See Notes 3 and 5 of the Notes to the Consolidated Financial Statements and the Analysis of Financial Condition section of this MD&A for additional information on the Company's investments.
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily
affected by investment income. The following table presents a summary of results
for Corporate and other.
Corporate and Other Summary of Operating Results
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2021 2020 2021 2020
Premium income $ 45 $ 49 $ 93 $ 97
Net investment income (loss) (1) (13) 21 3 45
Amortized hedge income related to certain foreign
currency
management strategies 16 27 33 56
Adjusted net investment income 3 48 36 101
Other income 2 3 5 6
Total adjusted revenues 50 100 133 204
Benefits and claims, net 41 47 84 87
Adjusted expenses:
Interest expense 43 43 87 76
Other adjusted expenses 42 40 65 69
Total adjusted expenses 85 83 152 145
Total benefits and adjusted expenses 126 130 236 232
Pretax adjusted earnings $ (76) $ (30) $ (102) $ (28)
(1) Amortization of federal historic rehabilitation and solar investments in
partnerships of $30 for the three- and six-month periods ended June 30, 2021 , is
included as a reduction to net investment income. Offsetting tax credits on
these investments of $12 and $25 for the three- and six-month periods ended
June 30, 2021 , respectively, have been recorded as an income tax benefit in the
consolidated statement of earnings. See Note 3 of the Notes to the Consolidated
Financial Statements for additional information on these investments.
In the three- and six-month periods ended June 30, 2021 , the decrease in total
adjusted revenues was primarily driven by a decline in adjusted net investment
income as a result of the amortization for federal historic rehabilitation and
solar investments in partnerships discussed below, as well as lower amortized
hedge income. The decrease in pretax adjusted earnings in the three-month period
ended June 30, 2021 , was primarily driven by lower adjusted net investment
income. The decrease in pretax adjusted earnings for the six-month period ended
June 30, 2021 , was primarily driven by lower adjusted net investment income and
higher interest expense associated with debt issuances.
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The Parent Company invests in partnerships that specialize in rehabilitating
historic structures or the installation of solar equipment in order to receive
federal historic rehabilitation and solar tax credits. These investments are
classified as limited partnerships and included in other investments in the
consolidated balance sheet. The change in value of each investment is recorded
as a reduction to net investment income. Offsetting tax credits generated by
these investments are recorded as an income tax benefit in the consolidated
statement of earnings. Beginning in 2020, net investment income also includes
the Company's portion of earnings from its strategic equity investment in an
asset management company.
INVESTMENTS
The Company's investment strategy utilizes disciplined asset and liability
management while seeking long-term risk-adjusted investment returns and the
delivery of stable income within regulatory and capital objectives, and
preserving shareholder value. In attempting to optimally balance these
objectives, the Company seeks to maintain on behalf of Aflac Japan a diversified
portfolio of yen-denominated investment assets, U.S. dollar-denominated
investment portfolio hedged back to yen and a portfolio of unhedged U.S.
dollar-denominated assets. As part of the Company's portfolio management and
asset allocation process, Aflac U.S. invests in fixed maturity investments and
growth assets, including public equity securities and alternative investments in
limited partnerships. Aflac U.S. invests in both publicly traded and privately
originated investment-grade and below-investment-grade fixed maturity securities
and loans.
For additional information concerning the Company's investments, see Notes 3, 4, and 5 of the Notes to the Consolidated Financial Statements.
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--------------------------------------------------------------------------------The following tables detail investments by segment.
Investment Securities by Segment
June 30, 2021
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 85,243 $ 15,036 $ 2,005 $ 102,284
Held to maturity, fixed maturity
securities,
at amortized cost (1) 22,891 0 0 22,891
Equity securities 729 180 566 1,475
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,329 886 0 5,215
Commercial mortgage loans (1) 1,268 582 5 1,855
Middle market loans (1) 3,977 285 0 4,262
Other investments:
Policy loans 224 19 0 243
Short-term investments (2) 579 240 848 1,667
Limited partnerships 1,105 122 102 1,329
Other 0 19 0 19
Total investments 120,345 17,369 3,526 141,240
Cash and cash equivalents 2,025 815 2,629 5,469
Total investments and cash $ 122,370 $ 18,184 $ 6,155 $ 146,709
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
December 31, 2020
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 88,757 $ 15,133 $ 1,992 $ 105,882
Held to maturity, fixed maturity
securities,
at amortized cost (1) 24,464 0 0 24,464
Equity securities 674 66 543 1,283
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,331 900 0 5,231
Commercial mortgage loans (1) 1,268 420 0 1,688
Middle market loans (1) 3,365 270 0 3,635
Other investments:
Policy loans 242 18 0 260
Short-term investments (2) 449 242 448 1,139
Limited partnerships 828 91 85 1,004
Other 0 26 0 26
Total investments 124,378 17,166 3,068 144,612
Cash and cash equivalents 2,001 785 2,355 5,141
Total investments and cash $ 126,379 $ 17,951 $ 5,423 $ 149,753
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
The ratings of the Company's securities referenced in the table below are based
on the ratings designations provided by major rating organizations such as
Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on
the Company's internal analysis of such securities. When the ratings issued by
the rating agencies differ, the Company utilizes
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The distributions of fixed maturity securities the Company owns, by credit rating, were as follows:
Composition of Fixed Maturity Securities by Credit Rating
June 30, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.0 % 0.9 % 1.0 % .9 %
AA 5.0 % 5.1 % 4.5 4.6
A 68.6 % 68.4 % 69.3 69.5
BBB 22.2 % 22.4 % 21.9 21.9
BB or lower 3.2 % 3.2 % 3.3 3.1
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of June 30, 2021 , the Company's direct and indirect exposure to securities in
its investment portfolio that were guaranteed by third parties was immaterial
both individually and in the aggregate.
The following table presents the 10 largest unrealized loss positions in the
Company's portfolio as of
Credit Amortized Fair
(In millions) Rating Cost Value Unrealized Loss
Transocean Inc. CCC $ 49 $ 35 $ (14)
KLM Royal Dutch Airlines B 147 135 (12)
Grenke Finance PLC BBB 63 55 (8)
Intesa Sanpaolo Spa BBB 141 134 (7)
Nippon Prologis REIT Inc. A 90 84 (6)
Kommunal Landspensjonskasse (KLP) BBB 136 131 (5)
Alphabet Inc. AA 175 170 (5)
National Football League A 145 141 (4)
Lloyds Banking Group PLC A 208 204 (4)
Mitsui Fudosan Co. Ltd. A 94 91 (3)
Generally, declines in fair values can be a result of changes in interest rates,
yen/dollar exchange rate, and changes in net spreads driven by a broad market
move or a change in the issuer's underlying credit quality. The Company believes
these issuers have the ability to continue making timely payments of principal
and interest. See the Unrealized Investment Gains and Losses section in Note 3
of the Notes to the Consolidated Financial Statements for further discussions of
unrealized losses related to financial institutions and other corporate
investments.
The Company's portfolio of below-investment-grade securities includes debt securities purchased while the issuer was rated investment grade plus other loans and bonds purchased as part of an allocation to that segment of the market. The following is the Company's below-investment-grade exposure.
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Below-Investment-Grade Investments
June 30, 2021
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited $ 385 $ 384 $ 402 $ 18
Commerzbank 362 250 420 170
Pemex Project Funding Master Trust 271 271 278 7
Autostrade Per Litalia Spa 181 179 212 33
KLM Royal Dutch Airlines 181 147 135 (12)
Telecom Italia SpA 181 181 241 60
Barclays Bank PLC 181 122 202 80
Apache Corporation 138 124 159 35
Ovintiv Inc. 134 132 173 41
IKB Deutsche Industriebank AG 118 53 110 57
Other Issuers 806 718 884 166
Subtotal (2) 2,938 2,561 3,216 655
Senior secured bank loans 120 124 118 (6)
High yield corporate bonds 798 782 830 48
Middle market loans 4,116 4,002 4,036 34
Grand Total $ 7,972 $ 7,469 $ 8,200 $ 731
(1) Net of allowance for credit losses
(2) Securities initially purchased as investment grade, but have subsequently
been downgraded to below investment grade
The Company invests in senior secured bank loans and middle market loans
primarily to
The Company maintains an allocation to higher yielding corporate bonds within the Aflac Japan and AflacU.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but the Company also purchased several that were rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance the Company's yield on invested assets and further diversify credit risk. All investments in this program must have a minimum rating at purchase of low BB using the Company's above described rating methodology and are managed by the Company's internal credit portfolio management team. 89 --------------------------------------------------------------------------------
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, 2021
Gross
Unrealized Gross Unrealized % of
(In millions) Amortized Cost (1) Gains Losses Fair Value Total
Government and agencies $ 54,067 $ 8,617 $ (78) $ 62,606 48.6 %
Municipalities 2,799 635 (7) 3,427 2.5
Mortgage- and asset-backed securities 1,236 49 (1) 1,285 1.1
Public utilities 8,531 1,927 (6) 10,451 7.7
Electric 6,906 1,584 (4) 8,485 6.2
Natural Gas 298 56 0 354 .3
Other 583 129 0 711 .5
Utility/Energy 744 158 (2) 901 .7
Sovereign and Supranational 1,641 298 0 1,939 1.5
Banks/financial institutions 10,313 1,657 (67) 11,903 9.3
Banking 6,111 1,091 (24) 7,180 5.5
Insurance 1,917 388 (22) 2,282 1.7
Other 2,285 178 (21) 2,441 2.1
Other corporate 32,766 6,151 (90) 38,827 29.3
Basic Industry 3,154 712 (10) 3,855 2.8
Capital Goods 3,367 571 (7) 3,931 3.0
Communications 3,463 770 (12) 4,220 3.1
Consumer Cyclical 2,699 533 (2) 3,229 2.4
Consumer Non-Cyclical 7,028 1,238 (15) 8,253 6.2
Energy 3,744 750 4 4,498 3.4
Other 1,506 217 (5) 1,717 1.4
Technology 4,197 512 (22) 4,688 3.8
Transportation 3,608 848 (21) 4,436 3.2
Total fixed maturity securities $ 111,353 $ 19,334 $ (249) $ 130,438 100.0 %
(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, 2021 December 31, 2020
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 91,868 $ 106,856 $ 95,545 $ 111,479
Equity securities 899 899 740 740
Total publicly issued 92,767 107,755 96,285 112,219
Privately issued securities: (2)
Fixed maturity securities (3) 19,485 23,582 20,511 24,802
Equity securities 576 576 543 543
Total privately issued 20,061 24,158 21,054 25,345
Total investment securities $ 112,828 $ 131,913 $ 117,339 $ 137,564 (1) Net of allowance for credit losses
(2) Primarily consists of securities owned by
The following table details the Company's reverse-dual currency securities.
Reverse-Dual Currency Securities(1)
June 30, December 31,
(Amortized cost, in millions) 2021 2020
Privately issued reverse-dual currency securities $ 4,968 $ 5,300 Publicly issued collateral structured as reverse-dual currency securities
1,661 1,775
Total reverse-dual currency securities $ 6,629 $ 7,075
Reverse-dual currency securities as a percentage of total
investment
securities 5.9 % 6.0 %
(1) Principal payments in yen and interest payments in dollars
Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds.Aflac Japan's investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing the Company to improve asset/liability matching and overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of the Company's notes. HEDGING ACTIVITIES The Company uses derivative contracts to hedge foreign currency exchange rate risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See item "7A. Quantitative and Qualitative Disclosures About Market Risk" in the 2020 Annual Report for more information about market risk and the Company's use of derivatives.
Derivatives are designed to reduce risk on an economic basis while minimizing the impact on financial results. The Company's derivatives programs vary depending on the type of risk being hedged. See Note 4 of the Notes to the Consolidated Financial Statements for:
•A description of the Company's derivatives, hedging strategies and underlying
risk exposure.
•Information about the notional amount and fair market value of the Company's
derivatives.
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•The unrealized and realized gains and losses impact on adjusted earnings of
derivatives in cash flow, fair value, net investments in foreign operations, or
non-qualifying hedging relationships.
Foreign Currency Exchange Rate Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure
to foreign currency exchange rate risk:
•Aflac Japan hedges U.S. dollar-denominated investments back to yen (see Aflac
Japan's U.S. Dollar-Denominated Hedge Program below).
•Aflac Japan maintains certain unhedged
•The Parent Company designates yen-denominated liabilities (notes payable and
loans) as non-derivative hedging instruments and designates certain foreign
currency forwards and options as derivative hedges of the Company's net
investment in
•The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs. (see Enterprise Corporate Hedging Program below).
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides capital relief. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan . June 30, December 31, 2021 2020 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost (1) Value
Available-for-sale securities:
Fixed maturity securities (excluding bank loans)
Fixed maturity securities - bank loans (floating rate) 172 164 319 283 Equity securities 24 24 20 20
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 4,330 4,324 4,331 4,298 Commercial mortgage loans 1,268 1,338 1,268 1,365 Middle market loans (floating rate) 3,977 4,016 3,365 3,377 Other investments 1,105 1,105 828 828 Total U.S. Dollar Program 29,148 31,742 29,380 31,279
Available-for-sale securities:
Fixed maturity securities - economically converted to yen
2,109 3,170 2,085 3,094
Total U.S. dollar-denominated investments in
Aflac Japan $ 31,257 $
34,912
(1) Net of allowance for credit losses
U.S. Dollar Program includes allU.S. dollar-denominated investments inAflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE.Aflac Japan maintains a collar program on a portion of its US dollar program to mitigate against more extreme moves in foreign exchange and therefore support SMR. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the collar program. The Company is continually evaluating other adjustments, including the possibility of changing the level of hedging employed with theU.S dollar-denominated investments. 92 -------------------------------------------------------------------------------- As ofJune 30, 2021 ,Aflac Japan had$6.4 billion outstanding notional amounts of foreign currency forwards and$8.0 billion outstanding notional amounts of foreign currency options, of which none were in-the-money, hedging itsU.S. dollar-denominated investments. The fair value ofAflac Japan's unhedgedU.S. dollar-denominated portfolio was$15.2 billion (excluding certainU.S. dollar-denominated assets shown in the table above as a result of consolidation that have been economically converted to yen using derivatives). Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The Company had net cash outflows of$6 million and net cash inflows of$1 million for the three-month periods and net cash inflows of$102 million and net cash outflows of$32 million for the six-month periods endedJune 30, 2021 and 2020, respectively, associated with the currency derivatives used for hedgingAflac Japan's U.S. dollar-denominated investments.
Enterprise Corporate Hedging Program
The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment inAflac Japan . The Company's consolidated yen-denominated net asset position was partially hedged at$10.4 billion as ofJune 30, 2021 , compared with$9.9 billion as ofDecember 31, 2020 . The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment inAflac Japan , the hedge is deemed to be effective, and the currency exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. The Company's net investment hedge was effective during the six-month periods endedJune 30, 2021 and 2020, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements. In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buyingU.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, whileAflac Japan's U.S dollar exposure remains reduced as a result ofAflac Japan's U.S. dollar-denominated hedge program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. The portion of the enterprise-wide amortized hedge income contributed by this strategy was$16 million and$27 million for the three-month periods and$33 million and$56 million for the six-month periods endedJune 30, 2021 and 2020, respectively. This activity is reported in Corporate and Other. As this program evolves, the Company will continue to evaluate the program's efficacy. See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income.
The following table presents metrics related to
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Hedge Cost/Income Metrics(1)
Three Months Six Months
2021 2020 2021 2020
Aflac Japan :
FX ForwardsFX forward (sell USD, buy yen) notional at end of period (in billions)(2)
$6.4 $9.1 $6.4 $9.1 Weighted average remaining tenor (in months)(3) 6.6 8.1 6.6 8.1 Amortized hedge income (cost) for period (in millions)$(13) $(48) $(29) $(101)
FX Options FX option notional at the end of period (in billions) (2)
$8.0 8.9$8.0 8.9 Weighted average remaining tenor (in months) (3) 3.9 1.2 3.9 1.2 Amortized hedge income (cost) for period (in millions)$(4) $(2) $(7) $(4) Corporate and Other (Parent Company): FX Forwards
FX forward (buy USD, sell yen) notional at end of period (in billions)(2)
$5.0 $5.0 $5.0 $5.0 Weighted average remaining tenor (in months)(3) 12.6 12.1 12.6 12.1 Amortized hedge income (cost) for period (in millions)$17 $28 $35 $58
FX Options FX option notional at the end of period (in billions) (2)
$2.0 $2.7 $2.0 $2.7 Weighted average remaining tenor (in months) (3) 7.2 5.6 7.2 5.6 Amortized hedge income (cost) for period (in millions)$(1) $(1) $(2) $(2) (1) See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. (2) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (3) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs and income have fluctuated in recent periods due to changes in the previously mentioned factors.
Interest Rate Risk Hedge Program
Aflac Japan and AflacU.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. Additionally, to manage interest rate risk associated with itsU.S. dollar-denominated investments held byAflac Japan , from time to time the Company utilizes interest rate swaptions. For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, and Item 1A, specifically to the Risk Factor titled "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity" in the 2020 Annual Report.
See Note 4 of the Notes to the Consolidated Financial Statements for additional information on the Company's hedging activities.
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DEFERRED POLICY ACQUISITION COSTS
The following table presents deferred policy acquisition costs by segment.
(In millions)
December 31, 2020 % Change
Aflac Japan $ 6,501 $ 6,991 (7.0) % (1)
Aflac U.S. 3,309 3,450 (4.1)
Total $ 9,810 $ 10,441 (6.0) %
(1)
See Note 6 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for additional information on the Company's deferred policy acquisition costs.
POLICY LIABILITIES
The following table presents policy liabilities by segment.
(In millions) June 30, 2021 December 31, 2020 % Change
Aflac Japan $ 96,940 $ 103,128 (6.0) % (1)
Aflac U.S. 11,837 11,810 .2
Other 280 274 2.2
Intercompany eliminations(2) (771) (821) (6.1)
Total $ 108,286 $ 114,391 (5.3) %
(1) Aflac Japan's policy liabilities increased .4% in yen during the six months
ended June 30, 2021 .
(2) Elimination entry necessary due to recapture of a portion of policy
liabilities ceded externally, as a result of the reinsurance retrocession
transaction as described in Note 7 of the Notes to the Consolidated Financial
Statements.
BENEFIT PLANS
POLICYHOLDER PROTECTIONThe Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of theLife Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. InNovember 2016 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2022 . EffectiveApril 2014 , the annual LIPPC contribution amount for the total life industry was lowered from ¥40 billion to ¥33 billion.Aflac Japan recognized an expense of ¥.9 billion and ¥1.0 billion for the six-month periods endedJune 30, 2021 and 2020, respectively, for LIPPC assessments.
Guaranty Fund Assessments
UnderU.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. Guaranty fund assessments for the six-month periods endedJune 30, 2021 and 2020, were immaterial. OFF-BALANCE SHEET ARRANGEMENTS
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
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As of June 30, 2021 , the Company had no material letters of credit, standby
letters of credit, guarantees or standby repurchase obligations. See Note 15 of
the Notes to the Consolidated Financial Statements in the 2020 Annual Report for
information on material unconditional purchase obligations that are not recorded
on the Company's balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability to generate sufficient cash resources to meet
the payment obligations of the Company. Capital refers to the long-term
financial resources available to support the operations of the businesses, fund
business growth and provide for an ability to withstand adverse circumstances.
Financial leverage (leverage) refers to an investment strategy of using debt to
increase the potential ROE. The Company targets and actively manages liquidity,
capital and leverage in the context of a number of considerations, including:
•business investment and growth needs
•strategic growth objectives
•financial flexibility and obligations
•capital support for hedging activity
•a constantly evolving business and economic environment
•a balanced approach to capital allocation and shareholder deployment.
The governance framework supporting liquidity, capital and leverage includes global senior management and board committees that review and approve all significant capital related decisions.
The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$2.0 billion to provide a capital buffer and liquidity support at the holding company. This amount excludes$400 million of proceeds from the issuance of senior sustainability notes discussed below, which proceeds contribute to the capital buffer but are not intended to support holding company liquidity. Amid the COVID-19 pandemic, the Company remains committed to prudent liquidity and capital management. AtJune 30, 2021 , the Company held$5.5 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$2.0 billion . For additional information on the Company's liquidity and capital resources in response to COVID-19, see the Executive Summary section of this MD&A.Aflac Japan and AflacU.S. provide the primary sources of liquidity to the Parent Company through management fees and dividends, withAflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock and interest on its outstanding indebtedness and operating expenses. The following table presents the amounts provided to the Parent Company for the six-month periods endedJune 30 . Liquidity Provided by Subsidiaries to Parent Company (In millions) 2021 2020
Dividends declared or paid by subsidiaries
64 68
The following table details
Aflac Japan Remittances
(In millions of dollars and billions of yen) 2021 2020
1,402 667
Aflac Japan dividends declared or paid to Parent Company
(in yen) ¥ 154.5 ¥ 72.8
The Company intends to maintain higher than historical levels of liquidity and
capital at the Parent Company for stress conditions and with the goals of
addressing the Company's hedge costs and related potential need for collateral
and mitigating against long-term weakening of the Japanese yen. Further, the
Company plans to continue to maintain a portfolio of unhedged U.S. dollar based
investments at Aflac Japan and to consider whether the amount of such
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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.
In addition to cash and equivalents, the Company also maintains credit
facilities, both intercompany and with external partners, and a number of other
available tools to support liquidity needs on a global basis. In September 2018 ,
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 2021 . The Company believes outside
sources for additional debt and equity capital, if needed, will continue to be
available. Additionally, as of June 30, 2021 , the Parent Company and Aflac had
four lines of credit with third parties as well as nine intercompany lines of
credit. For additional information, see Note 8 of the Notes to the Consolidated
Financial Statements.
The Company's consolidated financial statements convey its financing
arrangements during the periods presented. The Company has not engaged in
material intra-period short-term financings during the periods presented that
are not otherwise reported in its balance sheet or disclosed therein. The
Company was in compliance with all of the covenants of its notes payable and
lines of credit at June 30, 2021 . The Company has not entered into transactions
involving the transfer of financial assets with an obligation to repurchase
financial assets that have been accounted for as a sale under applicable
accounting standards, including securities lending transactions. See Notes 3 and
4 of the Notes to the Consolidated Financial Statements and Notes 1, 3, and 4 of
the Notes to the Consolidated Financial Statements in the 2020 Annual Report for
more information on the Company's securities lending and derivative activities.
With the exception of disclosed activities in those referenced footnotes and the
Risk Factors in the 2020 Annual Report entitled, "The Company is exposed to
foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of
availability of acceptable yen-denominated investments could adversely affect
the Company's results of operations, financial position or liquidity," the
Company is not aware of any trend, demand, commitment, event or uncertainty that
would reasonably result in its liquidity increasing or decreasing by a material
amount.
Consolidated Cash Flows
The Company translates cash flows for Aflac Japan's yen-denominated items into
U.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 June 30 .
(In millions) 2021 2020
Operating activities $ 2,328 $ 2,601
Investing activities (839) (2,120)
Financing activities (1,141) 152
Exchange effect on cash and cash equivalents (20) (1)
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
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time or when market opportunities arise, the Company disposes of selected fixed
maturity securities that are available for sale to improve the duration matching
of assets and liabilities, improve future investment yields, and/or re-balance
its portfolio. As a result, dispositions before maturity can vary significantly
from year to year.
As part of its overall corporate strategy, the Company has committed $400
million to Aflac Ventures, LLC (Aflac Ventures ), as opportunities emerge. Aflac
Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global Ventures )
which is reported in the Corporate and Other segment. The central mission of
Aflac Global Ventures is to support the organic growth and business development
needs of Aflac Japan and Aflac U.S. with emphasis on digital applications
designed to improve the customer experience, gain efficiencies, and develop new
markets in an effort to enhance and defend long-term shareholder value.
Investments are included in equity securities or the other investments line in
the consolidated balance sheets.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac
U.S. obtains low-cost funding from FHLB supported by acceptable forms of
collateral pledged by Aflac U.S. In the first six months of 2021, Aflac U.S.
borrowed and repaid $51 million under this program. As of June 30, 2021 , Aflac
U.S. had outstanding borrowings of $317 million reported in its balance sheet.
See Note 3 of the Notes to the Consolidated Financial Statements for details on certain investment commitments.
Financing Activities
Consolidated cash used by financing activities was $1.1 billion in the first six
months of 2021, compared with consolidated cash provided by financing activities
of $152 million for the same period of 2020.
In April 2021 , the Parent Company issued five series of senior notes totaling
¥82.0 billion through a public debt offering under its U.S. shelf registration
statement. The first series, which totaled ¥30.0 billion, bears interest at a
fixed rate of .633% per annum, payable semi-annually, and will mature in April
2031 . The second series, which totaled ¥12.0 billion, bears interest at a fixed
rate of .844% per annum, payable semi-annually, and will mature in April 2033 .
The third series, which totaled ¥10.0 billion, bears interest at a fixed rate of
1.039% per annum, payable semi-annually, and will mature in April 2036 . The
fourth series, which totaled ¥10.0 billion, bears interest at a fixed rate of
1.264% per annum, payable semi-annually, and will mature in April 2041 . The
fifth series, which totaled ¥20.0 billion, bears interest at a fixed rate of
1.560% per annum, payable semi-annually, and will mature in April 2051 . The
notes are redeemable at the Parent Company's option (i) at any time, in whole
but not in part, upon the occurrence of certain changes affecting U.S. taxation,
as specified in the indenture governing the terms of the issuance or (ii) on or
after the date that is six months prior to the stated maturity date of the
series, in whole or in part, at a redemption price equal to the aggregate
principal amount to be redeemed plus accrued and unpaid interest on the
principal amount to be redeemed to, but excluding, the date of redemption.
In
InMarch 2021 , the Parent Company issued$400 million of senior sustainability notes through aU.S. public debt offering. The notes bear interest at a fixed rate of 1.125% per annum, payable semi-annually, and will mature inMarch 2026 . The Company intends, but is not contractually committed, to allocate an amount at least equivalent to the net proceeds from this issuance exclusively to existing or future investments in, or financing of, assets, businesses or projects that meet the eligibility criteria of the Company's sustainability bond framework described in the offering documentation in connection with such notes. These notes are redeemable at the Parent Company's option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the yield to maturity for aU.S. Treasury security with a maturity comparable to the remaining term of the notes, plus 10 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
See Note 8 of the Notes to the Consolidated Financial Statements for further information on the debt issuance discussed above.
The Company was in compliance with all of the covenants of its notes payable and
lines of credit at
98
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Cash returned to shareholders through treasury stock purchases and dividends was
$1.6 billion during the six-month period ended June 30, 2021 , compared with $1.0
billion during the six-month period ended June 30, 2020 .
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) 2021 2020
Treasury stock purchases $ 1,150 $ 637
Number of shares purchased:
Share repurchase program 22,614 15,193
Other 381 521
Total shares purchased 22,995 15,714
Treasury Stock Issued
(In millions of dollars and thousands of shares) 2021 2020 Stock issued from treasury:
Cash financing$ 13 $ 21 Noncash financing 28 28 Total stock issued from treasury$ 41 $ 49 Number of shares issued 1,157 1,403 During the first six months of 2021, the Company repurchased 22.6 million shares of its common stock for$1.2 billion as part of its share repurchase program. As ofJune 30, 2021 , a remaining balance of 76.5 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. For information on the impact of COVID-19 on the Company's share repurchase program, see the Executive Summary section of this MD&A. Cash dividends paid to shareholders were$.33 per share in the second quarter of 2021, compared with$.28 per share in the second quarter of 2020. The following table presents the dividend activity for the six-month periods endedJune 30 . (In millions) 2021 2020 Dividends paid in cash$ 430 $ 388
Dividends through issuance of treasury shares 16 14 Total dividends to shareholders
$ 446 $ 402 InJuly 2021 , the board of directors declared the third quarter cash dividend of$.33 per share, an increase of 17.9% compared with the same period in 2020. The dividend is payable onSeptember 1, 2021 to shareholders of record at the close of business onAugust 18, 2021 . Regulatory Restrictions
Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts inJapan ) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR.Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company continues to evaluate alternatives for reducing this sensitivity, including the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥120 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedgedU.S. 99 --------------------------------------------------------------------------------
dollar-denominated investments with foreign currency options or forwards. See Notes 7 and 8 of the Notes to the Consolidated Financial Statements for additional information.
The Company has already undertaken various measures to mitigate the sensitivity ofAflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. ForU.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of itsU.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements in the 2020 Annual Report for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively. As ofJune 30, 2021 ,Aflac Japan's SMR remains high and reflects a strong capital and surplus position. The Company is committed to maintaining strong capital levels throughout the pandemic, consistent with maintaining current insurance financial strength and credit ratings. For additional information see the Executive Summary COVID-19 section of this MD&A.
Aflac
A life insurance company's statutory capital and surplus is determined according to rules prescribed by theNational Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different fromU.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC's RBC formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer's operations. As ofJune 30, 2021 , Aflac's RBC ratio remains high and reflects a strong capital and surplus position. Aflac, CAIC and TOIC are domiciled inNebraska and are subject to its regulations. The maximum amount of dividends that can be paid to the Parent Company by Aflac, CAIC and TOIC without prior approval ofNebraska's director of insurance is the greater of the net income from operations, which excludes net investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2021 in excess of$872 million would be considered extraordinary and require such approval. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. Privacy and Cybersecurity Governance The Company's Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company's information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company's information security program to theAudit and Risk Committee . The Company's senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and communicates quarterly with theAudit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and communicating with theAudit and Risk Committee . The incident response plan directs the executive officers to report certain incidents immediately and directly to the Lead Non-Management Director. 100 -------------------------------------------------------------------------------- Other
For information regarding commitments and contingent liabilities, see Note 12 of the Notes to the Consolidated Financial Statements.
Additional Information
Investors should note that the Company announces material financial information
in its SEC filings, press releases and public conference calls. In accordance
with SEC guidance, the Company may also use the Investor Relations section of
the Company's website (http://investors.aflac.com) to communicate with investors
about the Company. It is possible that the financial and other information the
Company posts there could be deemed to be material information. The information
on the Company's website is not part of this document. Further, the Company's
references to website URLs are intended to be inactive textual references only.
CRITICAL ACCOUNTING ESTIMATES
The Company prepares its financial statements in accordance with U.S. GAAP.
These principles are established primarily by the FASB. In this MD&A, references
to U.S. GAAP issued by the FASB are derived from the FASB Accounting Standards
Codification™ (ASC). The preparation of financial statements in conformity with
U.S. GAAP requires the Company to make estimates based on currently available
information when recording transactions resulting from business operations. The
estimates that the Company deems to be most critical to an understanding of
Aflac's results of operations and financial condition are those related to the
valuation of investments and derivatives, DAC, liabilities for future policy
benefits and unpaid policy claims, and income taxes. The preparation and
evaluation of these critical accounting estimates involve the use of various
assumptions developed from management's analyses and judgments. The application
of these critical accounting estimates determines the values at which 94% of the
Company's assets and 80% of its liabilities are reported as of June 30, 2021 ,
and thus has a direct effect on net earnings and shareholders' equity.
Subsequent experience or use of other assumptions could produce significantly
different results.
There have been no changes in the items the Company has identified as critical
accounting estimates during the six months ended June 30, 2021 . For additional
information, see the Critical Accounting Estimates section of MD&A included in
the 2020 Annual Report.
New Accounting Pronouncements
For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
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