Aflac Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Aflac sells supplemental health and life insurance primarily in the U.S. and Japan. Japan generated 69% of nine-month 2021 revenue and represented 82% of assets at quarter-end. Figures are U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $5.24B | $5.67B | $16.67B | $16.23B |
| Net earnings (GAAP) | $888M | $2.46B | $3.29B | $3.83B |
| Diluted EPS (GAAP) | $1.32 | $3.44 | $4.82 | $5.31 |
| Adjusted earnings (non-GAAP) | $1.03B | $994M | $3.17B | $2.80B |
| Adjusted diluted EPS (non-GAAP) | $1.53 | $1.39 | $4.65 | $3.88 |
Q3 GAAP revenue fell 7.6%, while nine-month revenue rose 2.7%. Net premiums declined 5.4% in Q3 and 4.0% year to date; net investment income increased 10.6% and 9.0%, respectively. GAAP earnings comparisons are heavily affected by a $1.4B one-time tax benefit recorded in Q3 2020. Excluding specified items, adjusted earnings increased year over year in both periods. Q3 net investment losses were $171M, versus $108M of gains a year earlier; nine-month net investment gains were $224M, versus $525M of losses.
Segment results: Nine-month pretax adjusted earnings rose to $2.87B in Aflac Japan from $2.44B, and to $1.22B in Aflac U.S. from $1.08B. Japan’s nine-month adjusted revenue was down 1.0%; lower premiums were more than offset in earnings by higher adjusted investment income and lower claims. U.S. adjusted revenue was down 1.6%, but adjusted earnings rose 12.5%, principally on lower claims. Nine-month pretax adjusted margins were 25.3% in Japan and 25.0% in the U.S., compared with 21.3% and 21.9%, respectively, in 2020.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $4.18B, down from $4.60B. Investing activities used $1.17B, compared with $3.51B; financing activities used $1.90B, compared with $431M.
- Cash and cash equivalents were $6.21B at September 30, versus $5.14B at December 31, 2020. Total investments and cash were $146.0B, down from $149.8B.
- Total assets were $160.6B; total liabilities were $127.0B; shareholders’ equity was $33.6B, broadly unchanged from year-end. Equity included $9.7B of net unrealized investment gains and a $1.8B foreign-currency translation loss.
- Notes payable and lease obligations totaled $8.07B, compared with $7.90B at year-end. The company issued $400M of sustainability notes and ¥82.0B of yen-denominated notes, and redeemed $700M of senior notes, incurring a $48M early-extinguishment expense. It reported compliance with debt covenants and no outstanding amounts on its principal listed credit facilities.
- Returned $2.3B to shareholders in the first nine months through $1.68B of share repurchases and $647M of cash dividends. The quarterly dividend was $0.33 per share; in October the board declared another $0.33 dividend, 17.9% above the prior-year quarter.
Outlook, commentary and risks
- Management said COVID-19 effects remain uncertain. Lower utilization of medical services contributed to favorable claims experience in both markets; management will continue monitoring pandemic effects on claims, sales, liquidity and capital. U.S. sales improved with reopening, while Japan’s nine-month sales growth reflected a new medical product and comparison with pandemic-affected 2020.
- Management expects an effective tax rate of approximately 20% in future periods, subject to tax-law changes. No specific earnings or revenue forecast for 2021 is stated in the provided filing text.
- The company expects adoption of long-duration insurance accounting standard ASU 2018-12 in 2023 to significantly affect financial position, earnings and disclosures. Its current estimate is an $18B–$20B decrease in AOCI at transition, primarily from updating policy-liability discount rates; the estimate remains subject to assumptions and market inputs.
- Key stated exposures include yen/dollar movements, interest rates, investment credit and valuation risk, Japan business concentration, availability of suitable yen assets, policyholder claims and persistency, COVID-19 and variants, and cybersecurity/operational disruption. The company also disclosed $1.9B of commitments to alternative limited-partnership investments and approximately $1.7B of commitments to fund middle-market loans.
- Management said pending ordinary-course litigation is not expected to have a material adverse effect. The committed reinsurance facility had not been used as of quarter-end and was effective through December 31, 2021, subject to its terms.
Most important facts for investors to verify
- Separate GAAP results from adjusted results; in particular, account for the $1.4B tax benefit that inflated Q3 2020 GAAP earnings.
- Track whether favorable claims experience persists as healthcare utilization and pandemic conditions change, and whether premium growth recovers.
- Assess sensitivity to yen exchange rates, investment yields, credit performance and market valuations, given Japan’s share of revenue and assets.
- Monitor the final assumptions, implementation readiness and actual equity effects of the expected 2023 insurance-accounting transition.
- Review capital deployment, including share repurchases, dividends, debt maturities and the effect of investment and lending commitments on liquidity.