AFLAC INC quarterly report, Q3 FY2023

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Aflac Incorporated — Q3 2023 Form 10-Q

Business context and period. Aflac sells supplemental health and life insurance in Japan and the United States. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods unless noted. Japan contributed 63% of nine-month 2023 revenue including investment gains. Aflac adopted long-duration insurance accounting (LDTI) effective January 1, 2023; prior periods were adjusted where applicable.

Financial performance and position

  • Q3 revenue and earnings: Revenue was $4.95 billion, up from $4.70 billion. Net earnings were $1.57 billion, down from $1.78 billion; diluted EPS was $2.64 versus $2.82. Pretax earnings rose to $1.81 billion from $1.33 billion, while income taxes were $236 million versus a $452 million tax benefit in Q3 2022. The prior-year tax benefit included a $695 million release tied to a U.S. tax functional-currency change.
  • Nine-month results: Revenue was $14.92 billion versus $15.19 billion; net earnings were $4.39 billion versus $4.22 billion, and diluted EPS was $7.28 versus $6.57. Reported revenue and earnings include investment gains and losses.
  • Adjusted earnings (non-GAAP): Q3 adjusted earnings were $1.10 billion, or $1.84 per diluted share, versus $910 million, or $1.44. Nine-month adjusted earnings were $3.00 billion, or $4.97 per diluted share, versus $2.80 billion, or $4.35. Yen weakness reduced adjusted EPS by $0.06 in Q3 and $0.17 year to date.
  • Investment income and gains: Net investment income was $1.00 billion in Q3 and $2.95 billion for nine months, compared with $920 million and $2.76 billion. Net investment gains were $423 million and $1.10 billion, respectively; these included substantial derivative and foreign-currency results and are excluded from adjusted earnings under the company’s definition.
  • Segments: Q3 pretax adjusted earnings were $869 million for Japan (up from $817 million) and $478 million for the U.S. (up from $345 million). Nine-month figures were $2.48 billion for Japan (down from $2.56 billion) and $1.20 billion for the U.S. (up from $1.02 billion). Q3 adjusted profit margins were 32.8% in Japan and 28.8% in the U.S., compared with 29.3% and 21.6% a year earlier.
  • Cash flow and capital returns: Nine-month operating cash flow was $2.36 billion, down from $2.85 billion. Investing activities provided $2.23 billion versus using $847 million; financing activities used $2.94 billion. Cash and equivalents rose to $5.50 billion from $3.94 billion at year-end 2022. The company repurchased $2.1 billion of stock and paid $730 million in cash dividends during the nine months.
  • Balance sheet and debt: At September 30, total assets were $125.1 billion, total liabilities $102.4 billion, and shareholders’ equity $22.7 billion. Notes payable and lease obligations were $7.0 billion, down from $7.4 billion at year-end. The company reported $5.5 billion in cash, including its $1.8 billion target minimum for parent-company liquidity, and no borrowings under listed credit facilities. It reported compliance with debt and credit-line covenants.
  • Investment portfolio and credit: Investments and cash totaled $111.3 billion, down from $117.4 billion at year-end. Available-for-sale fixed maturities had $4.42 billion of gross unrealized losses; management attributed these primarily to market rates, currency and spreads, and stated it did not intend, nor expect to be required, to sell before recovery. Japan government securities were a significant concentration, with $38.5 billion fair value.

Changes, outlook and material items

  • Japan premiums declined, largely due to limited-pay policies reaching paid-up status, the January internal reinsurance transaction and yen translation. Japan new annualized premium sales rose 12.4% in yen in Q3, while annualized premiums in force fell 4.4% year over year. Japan’s Q3 yen-denominated adjusted earnings benefited from lower claims and expenses; management cited favorable morbidity and termination assumption updates and expense controls.
  • U.S. premiums and new sales grew. U.S. new annualized premium sales rose 7.5% in Q3; annualized premiums in force increased 2.9% year over year. Management attributed earnings growth mainly to higher adjusted revenue and lower claims, partly offset by platform investment and higher expenses. A $31 million software-development-cost write-off affected Q3 U.S. expenses.
  • U.S. outlook: For full-year 2023, management expected the benefit ratio to be below its 47%–50% outlook range and the expense ratio slightly above its 37%–40% range. It expects the expense ratio to improve over time as newer U.S. businesses scale. The company expects an approximately 20% effective tax rate on adjusted earnings for future periods.
  • Dividends: The board declared a Q4 2023 dividend of $0.42 per share. In November, it announced a 19% increase to $0.50 per share beginning Q1 2024.
  • Real estate credit: The company took ownership through foreclosure or deed in lieu of properties securing TRE loans with $142 million amortized cost, recognizing a $53 million loss. It identified another $546 million of TRE loans for potential foreclosure or deed in lieu and reported a $35 million allowance on $481 million of loans with collateral value below amortized cost. Management noted gradual valuation strain in U.S. commercial real estate, particularly offices.
  • Regulatory and reinsurance developments: A proposed U.S. federal rule could restrict benefit designs and alter tax treatment for hospital indemnity and other fixed-indemnity products. Aflac opposed the proposal; final timing and content are uncertain. Separately, October 2023 regulatory approval preceded a planned Q4 internal reinsurance transaction transferring 30% of certain Japan cancer-policy liabilities to Aflac Re; the company said it would have no consolidated financial-statement impact except foreign-currency accounting.
  • Other notable items: A U.S. pension-plan amendment produced a $49 million Q2 curtailment gain; an $11 million intangible-asset impairment related to exiting a third-party administration business. Both were excluded from adjusted earnings. LDTI adoption reduced opening 2021 AOCI by approximately $18.6 billion and retained earnings by approximately $0.3 billion; this was an accounting transition, not a current-period cash outflow.

Investor verification priorities

  • Reconcile reported earnings with adjusted earnings, especially the effects of investment gains, derivative and currency activity, and the prior-year $695 million tax benefit.
  • Review Japan premium trends, paid-up policy effects, persistency, currency sensitivity and the performance of newer products and distribution channels.
  • Track U.S. benefit and expense ratios, the trajectory of platform spending, and the proposed fixed-indemnity rule’s eventual scope and impact.
  • Monitor TRE delinquencies, foreclosures, collateral values and allowance adequacy, including office exposure and the additional loans identified for potential foreclosure.
  • Assess the effects of interest rates, yen movements and unrealized investment losses on statutory capital, liquidity, hedging costs and the ability to remit subsidiary dividends.
  • Verify the execution and capital implications of the planned Aflac Re transaction, as well as the announced 2024 dividend increase and ongoing share repurchases.