Aflac Incorporated — Q2 2021 Form 10-Q
Business context and reporting period. Aflac sells supplemental health and life insurance primarily in the United States and Japan. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Aflac Japan generated 69% of consolidated revenue in the first half of 2021.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Total revenue | $5.564bn | $5.407bn | $11.433bn | $10.569bn |
| Net premiums | $4.441bn | $4.664bn | $9.034bn | $9.346bn |
| Net investment income | $993m | $870m | $1.918bn | $1.774bn |
| Net investment gains (losses) | $89m | $(170)m | $396m | $(633)m |
| Net earnings | $1.105bn | $805m | $2.398bn | $1.370bn |
| Diluted EPS | $1.62 | $1.12 | $3.49 | $1.89 |
| Operating cash flow | Not separately presented for quarter | $2.328bn | $2.601bn |
GAAP net margin was approximately 19.9% in Q2 and 21.0% for H1, versus 14.9% and 13.0%, respectively, in 2020. The earnings improvement reflected, in substantial part, the swing in investment gains and losses. Non-GAAP adjusted earnings were $1.080bn ($1.59 diluted EPS) in Q2 and $2.138bn ($3.11 diluted EPS) for H1, compared with $921m ($1.28) and $1.803bn ($2.49), respectively. Adjusted earnings exclude specified investment and other items; they are not GAAP measures.
Segments and operating trends. Q2 pretax adjusted earnings were $1.004bn for Aflac Japan, up from $839m, and $413m for Aflac U.S., down from $426m. H1 figures were $1.891bn and $859m, respectively, versus $1.694bn and $752m. Lower-than-expected claims supported results in both markets. Japan also benefited from higher investment income and lower hedge costs; U.S. Q2 results were pressured by lower premiums and higher expenses. H1 benefit ratios improved to 54.2% from 57.8% in Japan and 35.9% from 40.7% in the U.S.
Margins, balance sheet and liquidity. Consolidated pretax adjusted margin was approximately 24.5% in Q2 and 24.0% for H1, compared with 22.2% and 21.7% in 2020. At June 30, total assets were $161.5bn, shareholders’ equity $33.7bn, cash and cash equivalents $5.5bn, and notes payable and lease obligations $8.1bn. Total policy liabilities were $108.3bn. Assets declined from $165.1bn and equity was broadly stable versus year-end 2020. H1 operating cash flow was $2.328bn; cash increased by $328m to $5.469bn. The company reported compliance with debt and credit-line covenants and no outstanding borrowings on its listed external revolving credit facilities.
Material changes and capital allocation
- Net premiums declined 4.8% in Q2 and 3.3% in H1 year over year, while net investment income increased 14.1% and 8.1%, respectively.
- Investment gains swung to gains from losses year over year. Q2 2021 gains included $170m of equity-security gains, partly offset by $99m of losses from certain derivatives and foreign currency activities. H1 gains included $265m of gains from certain derivative and currency activities.
- H1 cash used in financing was $1.141bn, compared with $152m provided in H1 2020. The company repurchased 22.6m shares for $1.15bn and paid $430m in cash dividends. The quarterly dividend was $0.33 per share, versus $0.28 a year earlier.
- Debt financing included $400m of 1.125% sustainability notes issued in March and ¥82bn of senior notes issued in April. Aflac used part of the proceeds to redeem $700m of 3.625% notes in May; the filing records a $48m early-extinguishment expense.
Outlook, commentary and risks
The filing provides no specific numerical full-year earnings guidance. Management expected an effective tax rate of approximately 20% for future periods and said it would continue to monitor COVID-19 effects on claims, margins, sales and capital deployment. Management described the company as entering the pandemic with strong capital and liquidity, and intended to maintain higher-than-historical parent-company liquidity and capital buffers. Parent-company cash was $5.5bn against a stated minimum target of approximately $2.0bn.
- COVID-19 effects remain uncertain, including variants, economic conditions, claims utilization and face-to-face sales activity. Lower healthcare utilization contributed to favorable claims experience; pandemic conditions also constrained premium growth and sales.
- Japan Post channel cancer sales had declined materially since 2019; Japan Post Group announced a resumption of proactive financial-product sales in April 2021, which Aflac expected could support gradual improvement.
- Key exposures include yen/dollar movements, interest rates, investment credit and valuation risk, concentration in Japan, and the availability of suitable yen-denominated investments. Japan government securities were a significant single-issuer exposure.
- Management said pending ordinary-course litigation was not expected to materially adversely affect financial position, results or cash flows. Reinsurance does not release Aflac from its obligations to policyholders if a reinsurer fails. Investment commitments include approximately $2.1bn for middle-market loans and $1.0bn for transitional real estate loans, subject to underwriting and availability.
- The company expects adoption of the long-duration insurance accounting standard, effective for it after December 15, 2022, to significantly affect financial position, results and disclosures; it does not expect early adoption.
Important facts for investors to verify
- How much of earnings growth reflects recurring insurance and investment income versus volatile investment gains, and how adjusted earnings reconcile to GAAP.
- Whether favorable claims experience persists as healthcare utilization and pandemic conditions change, particularly in Japan and the U.S.
- The effects of yen movements, hedge costs and investment yields on reported earnings, Aflac Japan’s solvency margin and parent liquidity.
- Investment portfolio credit quality, valuation assumptions, concentration exposures and the performance of below-investment-grade loans and securities.
- Capital deployment, including continued repurchases and dividends alongside debt issuance, and progress in implementing the new insurance accounting standard.