AFLAC INC quarterly report, Q1 FY2021

Aflac Incorporated — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Aflac sells supplemental health and life insurance in the U.S. and Japan. Japan generated 70% of consolidated revenue in the quarter and represented 83% of assets at quarter-end. Dollar amounts below are in millions unless stated otherwise.

Financial results and position

Metric	Q1 2021	Q1 2020 / comparison
Total revenue	$5,869	$5,162
Net premiums	$4,593	$4,681
Net investment income	$925	$904
Net investment gains (losses)	$307	$(463)
Earnings before income taxes	$1,603	$720
Net earnings; diluted EPS	$1,293; $1.87	$566; $0.78
Adjusted earnings; adjusted diluted EPS	$1,058; $1.53	$882; $1.21
Operating cash flow	$1,366	$1,414

GAAP earnings benefited substantially from the swing in investment gains and losses. Adjusted earnings, a non-GAAP measure intended to reflect insurance operations, increased 20%; adjusted diluted EPS increased 26%.

Segment profitability: Aflac Japan pretax adjusted earnings were $887, up from $855, with a pretax adjusted margin of 23.1% versus 22.5%. Aflac U.S. reported $445, up from $326, with a margin of 27.3% versus 19.3%.
Claims: Claims incurred for prior years were $320 lower than previously estimated, including $101 in Japan and $219 in the U.S. The filing attributes favorable experience in part to reduced healthcare utilization during the pandemic and, in the U.S., refinements to COVID and non-COVID claims estimates.
Balance sheet at March 31: Assets were $158.2 billion, liabilities $126.1 billion and shareholders’ equity $32.1 billion. Cash and cash equivalents were $5.0 billion; total investments and cash were $143.3 billion.
Debt and liquidity: Notes payable and lease obligations totaled $8.1 billion, up from $7.9 billion at year-end. The company reported covenant compliance and no borrowings on its listed external credit facilities. Its stated parent-company minimum cash target is approximately $2.0 billion.
Capital returns: Aflac repurchased $650 million of stock (13.4 million shares) and paid $219 million of cash dividends. The quarterly dividend was $0.33 per share, up from $0.28 in Q1 2020. The board declared another $0.33 dividend for Q2.

Material changes and operating trends

Revenue increased 14%, principally because investment results swung from a $463 million loss to a $307 million gain; net premiums declined about 2%.
Reported comprehensive income was a loss of $834 million, despite net earnings of $1.293 billion, largely reflecting $2.127 billion of after-tax other comprehensive losses, including unrealized fixed-maturity losses and foreign-currency translation losses.
Aflac U.S. new annualized premium sales fell 22.1% to $251 million amid pandemic-related restrictions on face-to-face selling. Japan sales were ¥14.0 billion, approximately flat year over year in yen.
Japan net premiums declined 3.6% in yen; annualized premiums in force fell 4.4% in yen to ¥1.41 trillion. The stronger average yen increased translated results in dollars.
Cash used for investing narrowed to $969 million from $1.716 billion. Cash used for financing was $470 million; the quarter-end cash balance decreased by $151 million.

Outlook, commentary and risks

Management said COVID-19’s future effects remain uncertain. It cited lower claims utilization as favorable to current results, while pandemic-related sales constraints pressure premium growth. Management gave no clear quantified full-year earnings or sales guidance in the filing text; it said it would continue monitoring pandemic effects on benefit ratios and margins.
The company expects an effective tax rate of approximately 20% in future periods, subject to tax-law changes.
In March, Aflac issued $400 million of 1.125% senior sustainability notes due 2026. After quarter-end, it issued ¥82.0 billion of senior notes in five series due 2031–2051.
Key exposures include the concentration of business and assets in Japan, yen/dollar movements, interest rates, credit quality and investment valuations. Japan government securities represented an exposure exceeding 10% of equity. Aflac also reported $8.35 billion of below-investment-grade investments at fair value, including middle-market loans.
Management said unrealized fixed-maturity losses were primarily associated with market interest rates, foreign exchange rates and credit spreads; it did not intend to sell the affected securities and did not consider forced sale before cost recovery more likely than not. The available-for-sale credit-loss allowance was $27 million.
The COVID-19 pandemic, market volatility, credit downgrades/defaults, changes in claims and policyholder behavior, Japan Post-related matters, regulation, litigation, cybersecurity and the availability of yen-denominated investments are among the disclosed risks. Ordinary-course litigation was not expected to have a material adverse effect, according to management.
The long-duration insurance accounting standard is scheduled to apply to Aflac beginning in 2023. The company expects a significant impact on financial position, results, systems and disclosures, and does not expect to early-adopt.

Important facts for investors to verify

How much of the earnings and EPS increase reflects recurring insurance performance versus the investment-gain swing; review the company’s adjusted-earnings reconciliation and derivative/FX results.
Whether favorable claims development and reduced healthcare utilization persist, and how claims estimates change as pandemic conditions normalize.
Whether U.S. and Japan sales recover, including the effects of face-to-face distribution constraints, Japan Post channel activity and premiums reaching paid-up status.
How unrealized investment marks, credit quality and interest-rate or currency movements affect equity, statutory capital and Japan’s solvency margin ratio.
Whether liquidity, capital returns and debt issuance remain consistent with management’s stated capital and liquidity objectives.