Aflac Incorporated — Q2 2022 Form 10-Q
Business and period: Aflac sells supplemental health and life insurance in the U.S. and Japan through Aflac U.S. and Aflac Japan. This unaudited filing covers the quarter and six months ended June 30, 2022; interim results are not necessarily indicative of full-year results. Amounts below are U.S. dollars unless noted.
Financial performance
- Q2: Revenue was $5.40 billion, down 3% from $5.56 billion. Net earnings rose to $1.39 billion from $1.11 billion; diluted EPS was $2.16 versus $1.62. Pretax net investment gains were $564 million versus $89 million.
- First six months: Revenue was $10.67 billion versus $11.43 billion. Net earnings were $2.42 billion versus $2.40 billion; diluted EPS was $3.73 versus $3.49. Pretax net investment gains were $686 million versus $396 million.
- Adjusted results (non-GAAP): Q2 adjusted earnings were $939 million, or $1.46 per diluted share, versus $1.08 billion, or $1.59. First-half adjusted earnings were $1.87 billion, or $2.88 per diluted share, versus $2.14 billion, or $3.11. Management estimates yen weakness reduced adjusted EPS by $0.09 in Q2 and $0.15 in the first half; adjusted EPS excluding current-period currency impact was $1.55 and $3.02, respectively.
- Segments: Q2 pretax adjusted earnings were $860 million for Japan, down from $1.00 billion, and $349 million for the U.S., down from $413 million. Japan’s pretax adjusted margin improved to 27.4% from 26.5%; the U.S. margin declined to 21.4% from 25.4%. In yen terms, Japan pretax adjusted earnings increased 1.6% in Q2, while reported dollar results were depressed by yen depreciation.
- Cash flow: First-half operating cash flow was $1.77 billion, down from $2.33 billion. Investing activities provided $83 million versus using $839 million; financing activities used $1.64 billion versus $1.14 billion. Cash and cash equivalents increased $122 million to $5.17 billion.
- Balance sheet and capital: At June 30, total assets were $135.6 billion, investments and cash $121.4 billion, total liabilities $109.2 billion, and shareholders’ equity $26.4 billion. Notes payable and lease obligations were $7.42 billion, including leases. Equity fell from $33.3 billion at year-end, reflecting large unrealized investment and foreign-currency losses in other comprehensive income. AFS fixed-maturity securities’ net unrealized gain included in equity declined to $2.93 billion from $9.60 billion.
- Shareholder returns: The company repurchased $1.15 billion of shares in the first half and paid $498 million in cash dividends. Q2 dividends were $0.40 per share; the board declared another $0.40 per share for Q3.
Changes, outlook and risks
- Premium revenue and reported Japan results were pressured by yen depreciation and lower Japan sales. Japan sales declined 6.4% in yen in Q2 and 10.7% in the first half; management cited limited-pay policies reaching paid-up status and sales recovery constrained by pandemic conditions. U.S. sales increased 15.6% in Q2 and 17.2% in the first half. Management expects the U.S. sales growth trend to continue for full-year 2022.
- Q2 and first-half GAAP earnings benefited from investment gains, including foreign-currency and derivative activity. These gains are excluded from adjusted earnings and are market-sensitive. First-half equity-security losses were $291 million; the filing also reports sizable unrealized fixed-income losses in OCI amid market changes.
- Favorable prior-year claims development totaled $365 million in the first half, including $220 million in Japan and $145 million in the U.S. Lower healthcare utilization contributed to favorable experience, although Japan saw increased COVID-related hospitalization claims, including at-home sickness benefits. Sustainability of favorable claims experience is uncertain.
- Management cited pandemic-related sales headwinds, U.S. wage and commodity inflation, supply constraints, possible slower growth related to inflation-control measures and the Russia-Ukraine conflict, and a widening U.S.–Japan interest-rate differential that weakened the yen. Japan represents a significant concentration of business and assets.
- The company expects an approximately 20% effective tax rate in future periods, subject to tax-law changes. It expects to adopt the long-duration insurance accounting standard on January 1, 2023, without early adoption. Estimated transition effects are an $18–$19 billion decrease in AOCI and an approximately $0.3 billion decrease in retained earnings; estimates remain subject to change, and 2021–2022 comparative periods will be restated.
- Management said cash, operating cash generation and available credit are expected to meet short- and long-term needs. The company held $5.2 billion in cash, including a $2.0 billion target minimum at the parent company, and reported compliance with debt and credit-facility covenants. It described pending litigation as ordinary-course and not expected to have a material adverse effect. The filing reports no material guaranty-fund assessments in the first half.
Key facts for investors to verify
- Separate recurring insurance performance from volatile investment, derivative, foreign-exchange and GAAP-to-adjusted earnings effects.
- Track yen movements, Japan premium and sales trends, Japan Post Group distribution recovery, and the contrasting U.S. sales growth and weaker U.S. adjusted margins.
- Assess whether favorable claims development persists and monitor COVID-related claims and reserve-estimate changes.
- Review portfolio valuation, interest-rate and credit exposure, including unrealized losses, below-investment-grade holdings, and commercial and middle-market loan commitments.
- Monitor the assumptions and implementation of the 2023 insurance-accounting transition and its estimated effects on equity and reported results.