Aflac Incorporated — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are with FY 2021 unless noted. This is an annual filing, not a standalone fourth-quarter report. Aflac sells supplemental health and life insurance primarily in Japan and the United States. Japan generated 69% of consolidated revenue and represented 80% of assets at year-end.
Financial results and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $19.5 billion | $22.1 billion |
| Net earned premiums | $15.3 billion | $17.6 billion |
| Net investment income | $3.7 billion | $3.8 billion |
| Net earnings; diluted EPS | $4.2 billion; $6.59 | $4.3 billion; $6.39 |
| Adjusted earnings; adjusted diluted EPS (non-GAAP) | $3.4 billion; $5.33 | $4.0 billion; $5.94 |
| Operating cash flow | $3.9 billion | $5.1 billion |
| Investments and cash at year-end | $117.4 billion | $143.0 billion |
| Shareholders’ equity at year-end | $22.4 billion | $33.3 billion |
| Notes payable and lease obligations | $7.4 billion | $8.0 billion |
- Revenue fell 11.8%; net earnings declined 2.9%, while adjusted earnings fell 15.5%. Reported net earnings included a $452 million tax benefit from a change in the U.S. tax accounting functional currency for certain assets. Excluding current-period currency effects, adjusted earnings were $3.6 billion, or $5.67 per diluted share.
- Operating cash flow decreased 23.2%. Cash and cash equivalents were $3.9 billion at year-end. Management said cash, operating cash flows and other liquidity resources should cover expected requirements; the company was in compliance with debt and credit-facility covenants.
- Equity fell substantially, reflecting a shift in investment securities and derivatives from a $9.6 billion net unrealized gain to a $729 million net unrealized loss, plus a $3.6 billion unrealized foreign-currency translation loss. Adjusted book value, excluding AOCI, increased to $26.8 billion from $25.9 billion.
- Net investment gains were $363 million, versus $468 million. FY 2022 included $341 million of equity-security losses and $36 million of increased credit-loss allowances, partly offset by $467 million of gains from sales and redemptions.
Segments and changes from FY 2021
- Aflac Japan: Pretax adjusted earnings were $3.1 billion versus $3.8 billion; in yen, earnings declined 3.1%. Net earned premiums declined 4.2% in yen, primarily as limited-pay policies reached paid-up status and in-force business declined. COVID-related “deemed hospitalization” claims contributed to a higher benefit ratio. New annualized premium sales were flat in yen, with product launches and refreshes offsetting pandemic-related constraints.
- Aflac U.S.: Pretax adjusted earnings were $1.3 billion versus $1.5 billion. Premiums were down 0.8%, while new annualized premium sales rose 16.1% to $1.5 billion. Lower persistency, higher acquisition-cost amortization and increased platform and growth spending weighed on earnings.
- Corporate and other: Pretax adjusted loss narrowed to $223 million from $298 million.
- The average yen/dollar rate was 130.17 in 2022, with the yen 15.7% weaker than in 2021; management said this reduced reported results. Share repurchases were $2.4 billion and cash dividends were $979 million. The annual dividend paid was $1.60 per share; a 5% quarterly increase was announced for 2023.
Outlook, risks and unusual items
- For 2023–2024, management expects Japan net earned premiums to decline at a low-single-digit rate after specified accounting and reinsurance adjustments; it projects a 66%–68% benefit ratio and 20%–22% expense ratio. For the U.S., it expects 3%–5% compound annual net earned premium growth, a 47%–50% benefit ratio and a 37%–40% expense ratio.
- Management’s 2023 priorities include Japan product refreshment and sales, U.S. platform investments and expense management, and strengthening the U.S. career-agent force. It intends to maintain Japan’s solvency margin ratio (SMR) at a minimum of 500% and U.S. combined risk-based capital (RBC) at approximately 400% over time. Actual year-end ratios were 878% and 732%, respectively.
- Major risks include Japan concentration, yen-dollar and interest-rate movements, limited long-dated yen investment availability, investment credit and valuation risk, and potential liquidity or capital effects from hedging and collateral. Japan Post Group cancer-sales recovery remains uncertain; U.S. recruiting, persistency and competitive pressures are also risks.
- The company expects to adopt the long-duration insurance accounting standard (LDTI) effective January 1, 2023. It estimated the transition-related reduction in AOCI at about $2.1 billion after the effects of subsequent rate and currency movements. Adoption is expected to change reported equity, results and disclosures, but management said it would not affect cash flows, regulatory capital or subsidiary dividend capacity.
- In January 2023, Aflac Japan ceded 28% of certain cancer-policy liabilities, approximately $2.1 billion of reserves, to newly established Aflac Re Bermuda, with supporting assets also transferred. The filing describes the reinsurer as newly formed and subject to Bermuda regulation.
- KPMG issued an unqualified opinion on the financial statements and found internal control over financial reporting effective. The company reported routine-course lawsuits and stated it did not expect their outcomes to materially affect its financial position, results or cash flows.
Investor verification priorities
- Review the $452 million tax benefit and distinguish reported earnings from underlying adjusted earnings.
- Assess the effects of yen weakness, hedge settlements and rising hedge costs on earnings, cash and Japan regulatory capital.
- Examine the composition and credit quality of the investment portfolio, including unrealized losses, Japanese government exposure and loan exposures.
- Track Japan policy persistency, Japan Post channel recovery, and whether U.S. sales growth translates into premium and earnings growth.
- Confirm LDTI adoption effects in subsequent filings and monitor the Aflac Re Bermuda transaction and its impact on capital, earnings and risk transfer.