Aflac Incorporated — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019; balance-sheet figures are compared with December 31, 2019. Aflac sells supplemental health and life insurance through Aflac Japan and Aflac U.S. Japan represented 67% of first-quarter 2020 revenue, including investment gains and losses.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $5.162 billion | $5.657 billion; down 8.7% |
| Net premiums | $4.681 billion | $4.691 billion; down 0.2% |
| Net investment income | $904 million | $878 million |
| Net investment gains (losses) | $(463) million | $71 million |
| Earnings before tax | $720 million | $1.242 billion |
| Net earnings | $566 million | $928 million; down 39.0% |
| Diluted EPS | $0.78 | $1.23 |
| Adjusted earnings (non-GAAP) | $882 million; $1.21 per diluted share | $849 million; $1.12 per diluted share |
| Operating cash flow | $1.414 billion | $1.544 billion |
| Cash and cash equivalents | $4.148 billion at March 31 | $4.896 billion at December 31, 2019 |
| Shareholders’ equity | $26.402 billion | $28.959 billion at December 31, 2019 |
| Notes payable and lease obligations | $6.758 billion | $6.569 billion at December 31, 2019 |
Net earnings equaled approximately 11.0% of revenue, versus 16.4% a year earlier. Pretax adjusted earnings were $1.183 billion, up from $1.139 billion; approximately 21.1% of adjusted revenue, versus 20.6%. The reported net loss on investments included $145 million of credit losses, $162 million of derivative and foreign-currency losses, $149 million of equity-security losses, and $7 million of losses on sales and redemptions.
Other comprehensive loss was $3.275 billion after tax, mainly reflecting a $4.605 billion pretax decline in unrealized fixed-maturity-security values. Total comprehensive loss was $2.709 billion. These market-value movements reduced equity, while the company reported positive net earnings.
Segments and material changes
- Aflac Japan: Pretax adjusted earnings rose to $855 million from $834 million. Adjusted revenue was essentially flat at $3.803 billion. New annualized premium sales fell 25.4% in yen, to ¥14.0 billion; first-quarter sales were already affected by the Japan Post investigation and, later in the quarter, COVID-19.
- Aflac U.S.: Pretax adjusted earnings edged up to $326 million from $323 million. New annualized premium sales fell 5.2%, to $323 million. Adjusted expenses increased, contributing to a lower pretax adjusted margin of 19.3%, versus 19.7%.
- Claims and benefits: Net benefits and claims were $2.939 billion, down from $2.967 billion. Favorable prior-year claims development was $136 million, including approximately $91 million in Japan.
- Cash, investment and capital allocation: Investing cash outflow increased to $1.716 billion from $1.291 billion, while financing cash outflow was $446 million. The company repurchased approximately 10.0 million shares for $449 million and paid $195 million in cash dividends. The quarterly dividend was $0.28 per share, compared with $0.27 a year earlier.
Outlook, risks and unusual items
- Management said COVID-19’s effects were evolving and could materially affect sales, claims, investment values and income, liquidity, capital, and policy persistency. It did not provide a clear revised full-year earnings outlook in this filing and cautioned that prior guidance could change.
- April sales were estimated down 65% in Japan and 55% in the U.S. from April 2019. Management anticipated sharp second-quarter sales declines; face-to-face distribution constraints and Japan Post-related disruption were key factors.
- COVID-19-related claims were relatively minor through March 31, but increased claims and call-center activity emerged in April. Management was preparing for a possible high-stress claims scenario in the second and third quarters. Aflac U.S. also anticipated increased policy lapses as premium grace periods expired.
- Management cited market stress in travel and lodging, leisure, non-emergency medical and energy investments, lower interest rates, possible credit downgrades and defaults, and potentially weaker returns on new investments. Investment results from limited partnerships may lag reporting periods; management expected those results to reflect first-quarter market declines in Q2 and potentially later periods.
- To support liquidity, the parent issued ¥57.0 billion of senior notes in March and $1.0 billion of 3.60% senior notes in April. As of April 24, the parent reported approximately $5 billion in liquidity and capital for stress conditions, including a $2 billion target minimum at the holding company. Unsecured revolving facilities of $1 billion and ¥100 billion were undrawn at quarter-end. The company also raised its internal FHLB borrowing limit to $800 million, subject to collateral and other conditions.
- Management anticipated lower subsidiary dividends to preserve insurance-company capital, including planned reductions of ¥75 billion from Japan and $75 million from the U.S. versus initial 2020 plans. It intended to maintain Aflac U.S. RBC in the 400% range and said repurchases would continue at reduced, adjustable levels. These are management statements, not assurances of outcomes.
- Adoption of expected-credit-loss accounting reduced opening retained earnings by $56 million, net of tax; adoption-related reclassification of $6.9 billion of securities generated an $848 million after-tax unrealized gain in opening AOCI. A $15 million debt-extinguishment expense was recorded in Q1.
- The company reported compliance with debt covenants and no material off-balance-sheet guarantees or standby repurchase obligations. It stated that pending ordinary-course litigation was not expected to materially harm its financial position, results or cash flows. The filing notes that actual litigation outcomes remain uncertain.
Important facts for investors to verify
- How subsequent COVID-19 claims, policy lapses, premium collections and sales trends compare with management’s April estimates.
- Whether investment credit losses, downgrades, defaults and delayed limited-partnership valuations materially affect later-quarter earnings, equity or capital.
- Actual liquidity and insurance capital ratios, subsidiary dividend reductions, FHLB borrowing capacity and use of the April debt proceeds.
- The duration and financial effect of Japan Post channel disruption, and the recovery of Aflac Japan sales through other distribution channels.
- Whether revised earnings or capital guidance is issued; this filing does not provide a clear updated full-year target.