Aflac Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Aflac sells supplemental health and life insurance primarily in the U.S. and Japan; Japan contributed 72% of nine-month revenue, including investment gains and losses.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $4.82 billion | $5.24 billion | $15.49 billion | $16.67 billion |
| Net earnings | $1.60 billion | $888 million | $4.02 billion | $3.29 billion |
| Diluted EPS | $2.53 | $1.32 | $6.25 | $4.82 |
| Pretax adjusted earnings | $880 million | $1.29 billion | $3.16 billion | $3.94 billion |
| Adjusted EPS | $1.15 | $1.53 | $4.03 | $4.65 |
| Operating cash flow | Not separately stated for the quarter | $2.85 billion | $4.18 billion |
- Q3 revenue fell about 8% year over year; nine-month revenue fell about 7%. Net earned premiums declined to $3.65 billion in Q3 and $11.68 billion year to date, with Japan premium pressure and yen translation contributing.
- GAAP earnings benefited from a $695 million tax benefit in Q3 from releasing a deferred tax liability after changing the U.S. tax functional currency for certain assets. Excluding specified items, adjusted earnings declined in both reported periods.
- Q3 pretax adjusted earnings were $630 million for Aflac Japan (versus $976 million) and $309 million for Aflac U.S. (versus $358 million). Nine-month figures were $2.35 billion and $984 million, respectively.
- Adjusted pretax margin for Japan was 21.6% in Q3 and 24.7% for nine months, versus 26.3% and 25.3%. For the U.S., it was 19.3% and 20.2%, versus 22.2% and 25.0%.
- Net investment gains were $199 million in Q3 versus a $171 million loss, and $885 million for nine months versus $224 million of gains. Nine-month gains included $958 million from certain derivatives and foreign currency activities, partly offset by $313 million of equity-security losses.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $4.71 billion; total investments and cash were $114.53 billion, down from $142.98 billion at year-end 2021. Total assets were $128.10 billion.
- Shareholders’ equity was $24.15 billion, down from $33.25 billion at year-end. The decline included substantial unrealized investment and foreign-currency translation losses; nine-month other comprehensive loss was $10.90 billion.
- Notes payable and lease obligations totaled $7.52 billion. The company reported covenant compliance and no defaults. It issued ¥73.0 billion of senior notes and renewed a ¥107.0 billion term-loan facility; proceeds supported redemption of $750 million of senior notes. A further $450 million redemption occurred in October.
- Management’s minimum parent-company cash target is approximately $2.0 billion; reported cash was $4.7 billion. The company said operating cash flows and available liquidity sources should meet short- and long-term requirements.
- Nine-month financing included $1.80 billion of share repurchases and $740 million of cash dividends. The quarterly dividend was $0.40 per share. The board declared another $0.40 dividend for Q4.
Changes, outlook and key risks
- The yen weakened substantially: the average yen/dollar rate was 19.7% weaker year over year in Q3 and 14.3% weaker for nine months. Management said this reduced translated results. Adjusted EPS excluding current-period currency impact was $1.23 for Q3 and $4.26 for nine months.
- Japan sales increased 10.2% in yen in Q3, reflecting a new cancer product, but decreased 4.1% for the first nine months. U.S. new annualized premium sales rose 11.8% in Q3 and 15.2% for nine months; management expected the U.S. sales trend to continue for full-year 2022.
- Management cited pandemic-related sales headwinds, inflation, slower growth, supply-chain disruption and the Russia-Ukraine conflict. Japan’s wider COVID-19 “deemed hospitalization” coverage increased medical claims, while lower healthcare utilization and favorable prior-year claims development partly supported results. Favorable prior-year claims development totaled $512 million for nine months.
- The company expects an effective tax rate of approximately 20% in future periods, subject to tax-law changes and currency movements. It does not provide a clear full-year earnings forecast in this filing.
- Long-duration insurance accounting changes (LDTI) are scheduled for adoption January 1, 2023. The estimated transition impact is a decrease in AOCI of approximately $18.6 billion and retained earnings of approximately $0.3 billion; the company expects prior comparative periods to be restated.
- Other risks include interest-rate, credit, equity and yen exposure; investment valuation and credit-loss estimates; dependence on Japan; sales-force and distribution constraints; and regulatory, technology, cybersecurity and litigation risks. Management did not expect pending litigation to materially affect financial position, results or cash flows.
- The Inflation Reduction Act introduces a 1% excise tax on share repurchases beginning in 2023. The company expects no impact from the 15% corporate minimum tax based on its current tax rate.
Investor verification priorities
- Separate the $695 million tax benefit and investment gains from underlying adjusted operating performance.
- Assess whether Japan premium trends, claims experience and sales recovery persist, including the effects of deemed-hospitalization claims and paid-up policies.
- Track yen movements, hedging costs and the resulting effects on earnings, equity, liquidity and Japan’s solvency margin ratio.
- Review the scale and timing of LDTI transition adjustments, restated results and implementation controls.
- Monitor portfolio unrealized losses, credit quality, loan commitments and the company’s ability to sustain dividends and repurchases amid market volatility.