Aflac Incorporated — Q1 2023 Form 10-Q
Business context and reporting period. Aflac sells supplemental health and life insurance in the U.S. and Japan through Aflac U.S. and Aflac Japan. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Aflac Japan represented 62% of consolidated revenue.
Financial performance and position
- Revenue and earnings: Total revenue was $4.80 billion, down 7.2% from $5.17 billion. Net earned premiums fell to $3.69 billion from $4.08 billion, while net investment income increased to $943 million from $903 million. Net earnings rose 13.5% to $1.19 billion; diluted EPS was $1.94 versus $1.60. The effective tax rate was 11.5%, versus 19.1%.
- Adjusted results: Adjusted earnings, a non-GAAP measure, were $953 million, or $1.55 per diluted share, versus $942 million, or $1.44. Excluding current-period currency impact, adjusted earnings were $994 million, or $1.62 per diluted share. Pretax adjusted earnings were $1.13 billion versus $1.16 billion.
- Segments: Aflac Japan pretax adjusted earnings were $788 million, down from $870 million in dollars but up 3.2% in yen. Aflac U.S. pretax adjusted earnings rose to $352 million from $333 million. Japan’s reported results were affected by the weaker yen; the average yen/dollar rate was 132.30 versus 116.18.
- Margins and claims: GAAP earnings before tax were $1.34 billion, or about 28% of revenue, compared with $1.29 billion, or about 25%. Aflac Japan’s pretax adjusted margin increased to 28.2% from 26.2%; Aflac U.S.’s increased to 21.2% from 20.3%. Management cited favorable claims experience and lower benefit ratios.
- Cash flow: Operating cash flow was $708 million, down from $1.26 billion. Investing activities provided $105 million, compared with $1.21 billion used; financing activities used $933 million. Cash and cash equivalents ended the quarter at $3.81 billion, versus $3.94 billion at year-end.
- Balance sheet and liquidity: Total assets were $134.97 billion and shareholders’ equity $19.78 billion at March 31, versus $131.74 billion and $20.14 billion at year-end. Total investments and cash were $120.5 billion. Notes payable and lease obligations were $7.42 billion, slightly below $7.44 billion. The company reported $3.8 billion in cash, including its $1.8 billion target minimum at the parent, and said cash and operating flows should meet expected requirements. It reported compliance with debt and credit-line covenants and no outstanding amounts on listed credit lines.
- Capital returns: The company repurchased $700 million of shares (10.3 million shares) and paid $248 million in cash dividends. The quarterly dividend was $0.42 per share. The board declared the same dividend for Q2 2023, payable June 1.
Material changes and notable items
- Revenue declined mainly with lower Japan premiums: Japan net earned premiums were $2.17 billion versus $2.63 billion. Management attributed the yen-denominated decline partly to limited-pay policies reaching paid-up status and the Aflac Re strategy. Aflac U.S. premiums increased modestly to $1.43 billion.
- New annualized premium sales increased 10.8% in yen in Japan and 5.3% in the U.S. Japan’s annualized premiums in force declined 4.8% in yen; U.S. annualized premiums in force increased 1.4%. Rolling 12-month premium persistency was 93.9% in Japan and 77.9% in the U.S.
- Aflac adopted LDTI accounting guidance on January 1, 2023, with comparative periods adjusted. Transition-date adoption reduced AOCI by approximately $18.6 billion and retained earnings by approximately $0.3 billion. Q1 2023 OCI was a loss of $849 million, including a $2.8 billion after-tax reduction from updated discount-rate assumptions, partly offset by improved unrealized fixed-maturity gains. These accounting and market-driven items materially affect reported equity and comprehensive income.
- In January, Aflac Japan ceded 28% of certain cancer-policy liabilities—approximately $2.1 billion of reserves—to affiliated Aflac Re; about $1.9 billion of assets were transferred as preliminary consideration, with final settlement expected in Q2. A separate external transaction ceded 1.5% of the same liabilities. Management said the affiliated transaction has no consolidated financial-statement impact other than foreign-currency accounting.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or revenue guidance. Management expects an effective tax rate on adjusted earnings of approximately 20% in future periods.
- Key disclosed risks include yen/dollar movements and Japan concentration; interest-rate, credit-spread and investment valuation risks; credit downgrades or defaults; claims and policyholder behavior differing from actuarial assumptions; availability of suitable yen investments; regulation and capital requirements; competition and distribution capacity; cybersecurity and operational/vendor disruptions; and litigation.
- Management said unrealized fixed-maturity losses were primarily related to market rates, currency and credit spreads, not issuer-specific credit concerns; it did not intend, and did not expect to be required, to sell those securities before recovery of amortized cost. Aflac reported $3.1 billion of gross unrealized losses on available-for-sale securities at quarter-end, alongside $5.9 billion of gross unrealized gains.
- Commercial real estate and lending exposures warrant monitoring: the loan portfolio included $6.7 billion of transitional real estate loans, and the company identified $521 million of such loans in anticipation of potential foreclosure or deed-in-lieu transactions. A $10 million allowance was established for loans whose collateral value was below amortized cost. Litigation and regulatory inquiries were described as ordinary-course matters; management did not expect a material adverse effect.
Important facts for investors to verify
- How much of the premium and earnings trend reflects underlying business changes versus yen translation, paid-up policies and reinsurance?
- How LDTI, discount-rate changes and other OCI movements affect reported equity, reserves and comparability with prior periods.
- Claims experience, persistency and sales trends in both segments, particularly Japan’s declining premiums in force and U.S. persistency.
- Credit performance and collateral values in transitional real estate and middle-market loans, and changes in credit-loss allowances.
- Liquidity, subsidiary dividend capacity and capital sensitivity to yen movements, interest rates and Japan’s evolving solvency regime.
- Whether the expected approximately 20% adjusted-earnings tax rate and the declared $0.42 dividend remain consistent with future results and capital needs.