Aflac Incorporated — Q2 2023 Form 10-Q
Business context and period. Aflac sells supplemental health and life insurance in the United States and Japan through Aflac U.S. and Aflac Japan. This unaudited filing covers the three and six months ended June 30, 2023, compared with the same 2022 periods; balance-sheet comparisons are with December 31, 2022. Aflac Japan represented 64% of six-month 2023 revenue, including investment gains.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $5.172 billion | $5.315 billion | $9.972 billion | $10.488 billion |
| Net earnings | $1.634 billion | $1.394 billion | $2.822 billion | $2.441 billion |
| Diluted EPS | $2.71 | $2.17 | $4.64 | $3.77 |
| Pretax adjusted earnings | $1.139 billion | $1.141 billion | $2.273 billion | $2.301 billion |
| Adjusted earnings | $954 million | $945 million | $1.907 billion | $1.887 billion |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1.087 billion | $1.770 billion |
- Q2 revenue declined about 3% year over year; six-month revenue declined about 5%. Net earnings rose about 17% and 16%, respectively. Lower income taxes and fewer weighted-average shares helped reported EPS; the effective tax rate was 10.4% for Q2 and 10.9% for the six-month period, versus 18.4% and 18.7% in 2022.
- Net earned premiums fell to $3.573 billion in Q2 and $7.262 billion for six months, down from $3.764 billion and $7.844 billion. Net investment income increased to $999 million and $1.942 billion, respectively. Reported net investment gains were $555 million in Q2 and $678 million for six months; they include substantial derivative and foreign-currency effects and are excluded from adjusted earnings.
- Adjusted earnings were nearly flat year over year, while adjusted earnings per diluted share rose to $1.58 from $1.47 in Q2 and to $3.13 from $2.91 for six months. A weaker yen reduced adjusted EPS by $0.04 in Q2 and $0.11 for six months.
- Segment pretax adjusted earnings: Aflac Japan $822 million in Q2 and $1.610 billion for six months, down 6% and 8% in dollars; Aflac U.S. $369 million and $721 million, up 8% and 7%. Japan’s yen-based earnings were approximately flat in Q2 and up 2% for six months.
- Q2 pretax adjusted profit margins were 30.4% for Aflac Japan and 22.2% for Aflac U.S., compared with 28.6% and 21.1% a year earlier. Aflac U.S. benefit ratios improved, while its expense ratio rose amid planned investment in growth initiatives.
- Six-month operating cash flow fell to $1.087 billion from $1.770 billion. Investing activities provided $1.733 billion and financing activities used $1.944 billion. Cash and cash equivalents were $4.720 billion at June 30, up from $3.943 billion at year-end.
- Total investments and cash were $116.463 billion; total assets were $130.626 billion and shareholders’ equity was $20.439 billion. Notes payable and lease obligations totaled $7.087 billion, down from $7.442 billion at year-end. Shareholders’ equity included $7.338 billion of accumulated other comprehensive loss, reflecting foreign-currency and insurance discount-rate effects, partly offset by unrealized investment gains.
- Cash dividends were $0.42 per share in Q2. Aflac repurchased $1.4 billion of stock in the first six months; 95.8 million shares remained authorized for repurchase. The board declared a Q3 dividend of $0.42 per share.
Material changes, outlook and risks
- Business trends: Japan premiums and adjusted investment income declined, reflecting limited-pay policies reaching paid-up status, internal reinsurance, lower variable investment income and higher hedge costs. Yen weakness also reduced dollar-reported results. Japan new annualized premium sales rose 27% in yen in Q2, led by newer cancer and first-sector products. U.S. premiums and sales increased, supported by growth initiatives.
- Guidance: For full-year 2023, management expects the Aflac U.S. benefit ratio to be slightly below its 47%–50% outlook range and the expense ratio slightly above its 37%–40% range. Management expects the effective tax rate on adjusted earnings in future periods to be approximately 20%. The filing does not provide a consolidated full-year earnings or EPS forecast.
- Liquidity and capital: Management targets at least $1.8 billion of parent-company cash and reported $4.7 billion of consolidated cash. It believes cash and operating cash flows are sufficient for planned needs, including shareholder returns. Japan and U.S. statutory capital positions were described as strong; specific RBC and solvency-margin ratios are not provided in this filing text.
- Investments and credit: Management cited gradual strain in U.S. commercial real estate valuations, particularly office properties, and some loans in default or workout. At June 30, $655 million of commercial real estate and middle-market loans were on nonaccrual status; $470 million was at least 90 days past due. A $21 million allowance was established for certain transitional real estate loans. Management said unrealized fixed-income losses primarily reflected market movements and reported no credit-loss allowance on available-for-sale securities in unrealized-loss positions.
- Other significant items: Adoption of long-duration insurance contract accounting (LDTI) on January 1, 2023 reduced transition-date AOCI by approximately $18.6 billion and retained earnings by approximately $0.3 billion; comparative periods were adjusted. Q2 included a $49 million pension curtailment gain and an approximately $11 million intangible-asset impairment, both excluded from adjusted earnings.
- Contingencies and regulation: Aflac is involved in routine litigation and regulatory inquiries; management does not expect pending matters to materially harm financial position, results or cash flows. Proposed U.S. regulations concerning limited-duration and fixed-indemnity coverage could materially affect Aflac U.S. sales if adopted in their proposed form. Japan’s new economic-value solvency regime is expected in 2025, with final specifications anticipated in 2024.
- Accounting and estimation risks: Policy liabilities, investment valuations, deferred acquisition costs and taxes depend on actuarial and market assumptions. The filing highlights sensitivity to interest rates, credit, currency movements, claims and policyholder behavior. The company also identifies Japan concentration, yen investment availability, cybersecurity, regulation and sales-force retention among its risks.
Important facts for investors to verify
- Reconcile reported net earnings and EPS growth with nearly flat adjusted earnings, lower taxes, share repurchases and investment gains.
- Track Japan premium trends, paid-up policies, yen movements, hedge costs and sales persistency; confirm whether newer product launches sustain sales growth.
- Monitor U.S. expense-ratio progress, lapses and claims experience against management’s 2023 outlook.
- Review commercial real estate delinquencies, nonaccruals, collateral values, allowances and loan commitments as market conditions evolve.
- Assess the effects of interest rates, foreign exchange and LDTI discount-rate remeasurement on AOCI, equity and statutory capital.
- Follow the proposed U.S. insurance regulations and Japan’s evolving solvency framework, as well as the company’s liquidity, capital returns and debt obligations.