Certain statements included in this section constitute forward-looking statements within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on management's current expectations and beliefs concerning future developments and their potential effects upon the Company. The Company's actual results may differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. Certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements can be found in the "Risk Factors" and "Forward-Looking Statements" sections herein. MD&A OVERVIEW The following financial review provides a discussion of the Company's results of operations and financial condition, as well as a summary of the Company's critical accounting estimates. This section should be read in conjunction with Part I - Item 1. Business and the audited consolidated financial statements and accompanying notes included in Part II - Item 8. Financial Statements and Supplementary Data of this report. This MD&A is divided into the following sections: Page Executive Summary 33 Industry Trends 33 Outlook 34 Results of Operations 35 Investments 49 Hedging Activities 53 Policy Liabilities 56 Benefit Plans 57 Policyholder Protection 57 Liquidity and Capital Resources 57 Critical Accounting Estimates 64 The Company elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented in Item 8. Financial Statements and Supplementary Data. Readers should refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed onFebruary 23, 2022 , for reference to discussion of the year endedDecember 31, 2020 , the earliest of the three years presented. Amounts reported in this MD&A may not foot due to rounding. 32
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
EXECUTIVE SUMMARY
Market Conditions
The impact of the COVID-19 global pandemic on the Company continues to evolve
and the continued path of the global economic recovery remains uncertain given
the potential longer-term impacts that have resulted from or are coincidental
with the pandemic. For example, economic conditions have acted as headwinds to
sales and earned premiums in 2022. Further, continued widening of the
differential between U.S. and Japan interest rates has contributed to a
weakening of the yen, which has the effect of suppressing the Company's current
period results in relation to the comparable prior period. For additional
information see the Result of Operations by Segment section of this MD&A.
Performance Highlights
For the full year of 2022, total revenues were down 11.8% to$19.5 billion , compared with$22.1 billion for the full year of 2021. Net earnings were$4.2 billion , or$6.59 per diluted share, for the full year of 2022, compared with$4.3 billion , or$6.39 per diluted share, for the full year of 2021, reflecting an income tax benefit of$452 million from the release of a deferred tax liability. Results for 2022 included pretax net investment gains of$363 million , compared with net investment gains of$468 million in 2021. Net investment gains in 2022 included an increase in credit loss allowances of$36 million ;$273 million of net gains from certain derivative and foreign currency gains or losses;$341 million of net losses on equity securities; and$467 million of net gains from sales and redemptions.
The average yen/dollar exchange rate(1) in 2022 was 130.17, or 15.7% weaker than
the rate of 109.79 in 2021.
Adjusted earnings(2) for the full year of 2022 were$3.4 billion , or$5.33 per diluted share, compared with$4.0 billion , or$5.94 per diluted share, in 2021. The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by$.34 . Total investments and cash atDecember 31, 2022 were$117.4 billion , compared with$143.0 billion atDecember 31, 2021 . The decline in the portfolio was principally driven by the weaker yen and higher interest rates. In 2022,Aflac Incorporated repurchased$2.4 billion , or 39.2 million of its common shares. AtDecember 31, 2022 , the Company had 116.6 million remaining shares authorized for repurchase. Shareholders' equity was$22.4 billion , or$36.35 per share, atDecember 31, 2022 , compared with$33.3 billion , or$50.99 per share, atDecember 31, 2021 . Shareholders' equity atDecember 31, 2022 included a net unrealized loss on investment securities and derivatives of$729 million , compared with a net unrealized gain of$9.6 billion atDecember 31, 2021 . Shareholders' equity atDecember 31, 2022 also included an unrealized foreign currency translation loss of$3.6 billion , compared with an unrealized foreign currency translation loss of$2.0 billion atDecember 31, 2021 . The annualized return on average shareholders' equity in 2022 was 15.1%. Shareholders' equity excluding accumulated other comprehensive income (AOCI) (adjusted book value)(2) was$26.8 billion , or$43.51 per share atDecember 31, 2022 , compared with$25.9 billion , or$39.65 per share, atDecember 31, 2021 . The annualized adjusted return on equity excluding foreign currency impact(2) in 2022 was 13.7%.(1) Yen /U.S. dollar exchange rates are based on the publishedMUFG Bank, Ltd. telegraphic transfer middle rate (TTM). (2) See the Results of Operations section of this MD&A for a definition of this non-U.S. GAAP financial measure. INDUSTRY TRENDS
The Company is impacted by financial markets, economic conditions, regulatory
oversight and a variety of trends that affect the industries where it competes.
Financial and Economic Environment
The Company's business and results of operations are materially affected by
conditions in the global capital markets and the economy generally. Stressed
conditions, volatility and disruptions in global capital markets, particular
markets, or financial asset classes can have an adverse effect on the Company,
in part because the Company has a large investment portfolio and its insurance
liabilities and derivatives are sensitive to changing market factors. See Item
1A. Risk Factors for the risk factor entitled, "Difficult conditions in global
capital markets and the economy, including those caused by
33
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
COVID-19, could have a material adverse effect on the Company's investments,
capital position, revenue, profitability, and liquidity and harm the Company's
business."
Demographics
Aflac Japan Segment
With Japan's aging population and the rise in healthcare costs, supplemental
health care insurance products remain attractive. However, due to the aging
population and decline in birthrate, new opportunities for customer demographics
are not as readily available. Japan's existing customers and potential customers
seek products that are easily understood, cost-effective and can be accessed
through technology-enabled devices.
Aflac
Customer demographics continue to evolve and new opportunities present themselves in different customer segments such as the millennial and multicultural markets. Customer expectations and preferences are changing. Trends indicate existing customers and potential customers seek cost-effective solutions that are easily understood and can be accessed through technology-enabled devices. Additionally, income protection and the health needs of retiring baby boomers are continuing to shape the insurance industry.
Regulatory Environment
See Item 1. Business – Aflac Japan Government Regulation and Aflac
Government Regulation for a discussion of regulatory developments that may
impact the Company and the associated risks.
Competitive Environment
See Item 1. Business – Aflac Japan Competitive Markets and Aflac
Competitive Markets for a discussion of the competitive environment and the
basis on which the Company competes in each of its segments.
2023 OUTLOOK
The Company’s strategy to drive long-term shareholder value is to pursue growth
through product development and distribution expansion and to achieve
efficiencies by modernizing its technology and streamlining its operations.
The Company's objectives in 2023 are to maintain strong pre-tax margins with increased sales production through product refreshment in itsAflac Japan segment and to begin realizing benefits from its buy to build initiatives and other platform investments, manage expenses and strengthen the number of career agents for AflacU.S. The Company believes that its strategy of positioning itself for future growth and efficiency while defending and leveraging its market-leading position, powerful brand recognition and diverse distribution inJapan and theU.S. will provide support toward these objectives. The Company announced a 5.0% increase in the first quarter 2023 dividend compared to the prior quarter, and it intends to maintain strong capital ratios inAflac Japan and AflacU.S. in support of its commitment to shareholder dividends while remaining tactical in its deployment of capital in the form of share repurchases and opportunistic investments. The Company intends to maintain a minimum SMR of 500% forAflac Japan and a target combined RBC over time of approximately 400% for AflacU.S. , consistent with the Company's risk management practices. Aflac Japan Segment ForAflac Japan , the Company anticipates that the shift in premiums over the last several years from first sector savings products to third sector cancer and medical products and first sector protection products, will continue to result in moderately lower benefit ratios in the Aflac Japan segment. The Company expects that benefit and expense ratios will continue to experience some level of revenue pressure due to the impact of paid up policies and reduced sales compared to years prior to the COVID-19 pandemic. For the 2023 through 2024 period, the Company expects a decline inAflac Japan net earned premiums in the low single digit range after adjusting for the impact of deferred profit liability reclassification and an expected new internal reinsurance program, with a benefit ratio in the range of 66% to 68% and an expense ratio in the range of 20% to 22%. 34
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Aflac
For AflacU.S. , the Company expects benefit ratios to normalize in 2023 and for expense ratios to decline over the next five years as the Company begins to realize the benefits from investments intoU.S. platforms, continues to scale its acquisitions, and focuses on earned premium growth. For the 2023 through 2024 period, the Company expects AflacU.S. net earned premium growth of 3% to 5% on a compound annual growth rate basis, with a benefit ratio in the range of 47% to 50% and an expense ratio in the range of 37% to 40%.
Corporate and other
The Company expects Corporate and other results to reflect stable net investment
income in 2023 compared to 2022, assuming that
stable.
For important disclosures applicable to statements made in this 2023 Outlook,
please see the statement on Forward-Looking Information at the beginning of Item
1. Business, the Risk Factors identified in Item 1A. and this Item 7. MD&A.
RESULTS OF OPERATIONS
The Company earns its revenues principally from insurance premiums and
investments. The Company's operating expenses primarily consist of insurance
benefits provided and reserves established for anticipated future insurance
benefits, general business expenses, commissions and other costs of selling and
servicing its products. Profitability for the Company depends principally on its
ability to price its insurance products at a level that enables the Company to
earn a margin over the costs associated with providing benefits and
administering those products. Profitability also depends on, among other items,
actuarial and policyholder behavior experience on insurance products, and the
Company's ability to attract and retain customer assets, generate and maintain
favorable investment results, effectively deploy capital and utilize tax
capacity, and manage expenses.
This document includes references to the Company's financial performance
measures which are not calculated in accordance with United States generally
accepted accounting principles (U.S. GAAP) (non-U.S. GAAP). The financial
measures exclude items that the Company believes may obscure the underlying
fundamentals and trends in insurance operations because they tend to be driven
by general economic conditions and events or related to infrequent activities
not directly associated with insurance operations.
Due to the size of Aflac Japan , where the functional currency is the Japanese
yen, fluctuations in the yen/dollar exchange rate can have a significant effect
on reported results. In periods when the yen weakens, translating yen into
dollars results in fewer dollars being reported. When the yen strengthens,
translating yen into dollars results in more dollars being reported.
Consequently, yen weakening has the effect of suppressing current period results
in relation to the comparable prior period, while yen strengthening has the
effect of magnifying current period results in relation to the comparable prior
period. A significant portion of the Company's business is conducted in yen and
never converted into dollars but translated into dollars for U.S. GAAP reporting
purposes, which results in foreign currency impact to earnings, cash flows and
book value on a U.S. GAAP basis. Management evaluates the Company's financial
performance both including and excluding the impact of foreign currency
translation to monitor, respectively, cumulative currency impacts and the
currency-neutral operating performance over time. The average yen/dollar
exchange rate is based on the published MUFG Bank, Ltd. telegraphic transfer
middle rate (TTM).
The Company defines the non-
document as follows:
•Adjusted earnings are adjusted revenues less benefits and adjusted expenses. Adjusted earnings per share (basic or diluted) are the adjusted earnings for the period divided by the weighted average outstanding shares (basic or diluted) for the period presented. The adjustments to both revenues and expenses account for certain items that cannot be predicted or that are outside management's control. Adjusted revenues areU.S. GAAP total revenues excluding adjusted net investment gains and losses. Adjusted expenses areU.S. GAAP total acquisition and operating expenses including the impact of interest cash flows from derivatives associated with notes payable but excluding any nonrecurring or other items not associated with the normal course of the Company's insurance operations and that do not reflect the Company's underlying business performance. Management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance of the Company's insurance operations on a consolidated basis and believes that a presentation of these financial measures is vitally important to an understanding of the underlying profitability drivers and trends of the Company's insurance business. The most comparableU.S. GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively. 35
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
•Adjusted net investment gains and losses are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest cash flows from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses. The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management's control, while excluding the components that are within management's control and are accordingly reclassified to net investment income and interest expense. The most comparableU.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses. •Amortized hedge costs/income represent costs/income incurred or recognized as a result of using foreign currency derivatives to hedge certain foreign exchange risks in the Company's Japan segment or in Corporate and other. These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the term of the hedge. The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income. There is no comparableU.S. GAAP financial measure for amortized hedge costs/ income. •Adjusted earnings excluding current period foreign currency impact are computed using the average foreign currency exchange rate for the comparable prior-year period, which eliminates fluctuations driven solely by foreign currency exchange rate changes. Adjusted earnings per diluted share excluding current period foreign currency impact is adjusted earnings excluding current period foreign currency impact divided by the weighted average outstanding diluted shares for the period presented. The Company considers adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact important because a significant portion of the Company's business is conducted inJapan and foreign exchange rates are outside management's control; therefore, the Company believes it is important to understand the impact of translating foreign currency (primarily Japanese yen) intoU.S. dollars. The most comparableU.S. GAAP financial measures for adjusted earnings excluding current period foreign currency impact and adjusted earnings per diluted share excluding current period foreign currency impact are net earnings and net earnings per share, respectively. •Adjusted book value is theU.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on theU.S. GAAP balance sheet. Adjusted book value per common share is adjusted book value at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value and adjusted book value per common share important as they exclude AOCI, which fluctuates due to market movements that are outside management's control. The most comparableU.S. GAAP financial measures for adjusted book value and adjusted book value per common share are total book value and total book value per common share, respectively. •Adjusted return on equity excluding foreign currency impact is adjusted earnings excluding the current period foreign currency impact divided by average shareholders' equity, excluding AOCI. The Company considers adjusted return on equity excluding foreign currency impact important as it excludes changes in foreign currency and components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparableU.S. GAAP financial measure for adjusted return on equity excluding foreign currency impact is ROE as determined using net earnings and average total shareholders' equity. •U.S. dollar-denominated investment income excluding foreign currency impact represents amounts excluding foreign currency impact onU.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considersU.S. dollar-denominated investment income excluding foreign currency impact important as it eliminates the impact of foreign currency changes on the Aflac Japan segment results, which are outside management's control. The most comparableU.S. GAAP financial measure forU.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from theU.S. dollar denominated investments translated to yen. 36 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparableU.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively, for the years endedDecember 31 . Reconciliation of Net Earnings to Adjusted Earnings
In Millions Per Diluted Share
2022 2021 2022 2021
Net earnings $ 4,201 $ 4,325 $ 6.59 $ 6.39
Items impacting net earnings:
Adjusted net investment (gains) losses (1) (447) (462) (.70) (.68)
Other and non-recurring (income) loss (1) 73 .00 .11
Income tax (benefit) expense on items
excluded from adjusted earnings (2) (357) 83 (.56) .12 Adjusted earnings 3,397 4,019 5.33 5.94 Current period foreign currency impact (3) 215 N/A .34 N/A
Adjusted earnings excluding current period
foreign currency impact$ 3,613 $ 4,019 $ 5.67 $ 5.94 (1) See reconciliation of net investment (gains) losses to adjusted net investment (gains) losses below. (2) Includes release of$452 in deferred taxes in 2022. (3) Prior period foreign currency impact reflected as "N/A" to isolate change for current period only. Reconciling Items
Net Investment Gains and Losses
Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment
(Gains) Losses
(In millions) 2022 2021
Net investment (gains) losses $ (363) $ (468)
Items impacting net investment (gains) losses:
Amortized hedge costs (112) (76)
Amortized hedge income 68 57
Net interest cash flows from derivatives associated with certain
investment strategies
(90) (30)
Interest rate component of the change in fair value of foreign
currency swaps on
notes payable 50 55 Adjusted net investment (gains) losses $
(447)
The Company's investment strategy is to invest primarily in fixed maturity securities to provide a reliable stream of investment income, which is one of the drivers of the Company's profitability. This investment strategy incorporates asset-liability matching (ALM) to align the expected cash flows of the portfolio to the needs of the Company's liability structure. The Company does not purchase securities with the intent of generating investment gains or losses. However, investment gains and losses may be realized as a result of changes in the financial markets and the creditworthiness of specific issuers, tax planning strategies, and/or general portfolio management and rebalancing. The realization of investment gains and losses is independent of the underwriting and administration of the Company's insurance products.
Net investment gains and losses excluded from adjusted earnings include the
following:
•Securities Transactions •Credit Losses •Changes in the Fair Value ofEquity Securities •Certain Derivative and Foreign Currency Activities. 37 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Securities Transactions, Credit Losses and Changes in the Fair Value ofEquity Securities Securities transactions include gains and losses from sales and redemptions of investments where the amount received is different from the amortized cost of the investment. Credit losses include losses for held-to-maturity fixed maturity securities, available-for-sale fixed maturity securities, loan receivables, loan commitments and reinsurance recoverables. Changes in the fair value of equity securities are the result of gains or losses driven by fluctuations in market prices.
Certain Derivative and Foreign Currency Activities
The Company’s derivative activities include:
•foreign currency forwards and options used in hedging foreign exchange risk onU.S. dollar-denominated investments inAflac Japan's portfolio, with options used on a standalone basis and/or in a collar strategy;
•foreign currency forwards and options used to economically hedge certain
portions of forecasted cash flows denominated in yen and hedge the Company’s
long term exposure to a weakening yen;
•cross-currency interest rate swaps, also referred to as foreign currency swaps,
associated with certain senior notes and subordinated debentures;
•foreign currency swaps that are associated with variable interest entity (VIE)
bond purchase commitments, and investments in special-purpose entities,
including VIEs where the Company is the primary beneficiary;
•interest rate swaps used to economically hedge interest rate fluctuations in
certain variable-rate investments;
•interest rate swaptions used to hedge changes in the fair value associated with
interest rate fluctuations for certain
available-for-sale fixed-maturity securities; and
•bond purchase commitments at the inception of investments in consolidated VIEs.
Gains and losses are recognized as a result of valuing these derivatives, net of the effects of hedge accounting. The Company also excludes from adjusted earnings the accounting impacts of remeasurement associated with changes in the foreign currency exchange rate. For additional information regarding net investment gains and losses, including details of reported amounts for the periods presented, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Other and Non-recurring Items
TheU.S. insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. The system can result in periodic charges to the Company as a result of insolvencies/bankruptcies that occur with other companies in the life insurance industry. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These charges neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance, but result from external situations not controlled by the Company. The Company excludes any charges associated withU.S. guaranty fund assessments and the corresponding tax benefit or expense from adjusted earnings. In Japan, the government also requires the insurance industry to contribute to a policyholder protection corporation that provides funds for the policyholders of insolvent insurers; however, these costs are calculated and administered differently than in theU.S. In Japan, these costs are not directly related to specific insolvencies or bankruptcies, but are rather a regular operational cost for an insurance company. Based on this structure, the Company does not remove the Japan policyholder protection expenses from adjusted earnings. The Company considers the costs associated with the early redemption of its debt to be unrelated to the underlying fundamentals and trends in its insurance operations. Additionally, these costs are driven by changes in interest rates subsequent to the issuance of the debt, and the Company considers these interest rate changes to represent economic conditions not directly associated with its insurance operations. InMay 2021 , the Parent Company used a portion of the net proceeds from itsApril 2021 issuance of various series of senior notes to redeem$700 million of its 3.625% senior notes dueJune 2023 . The pretax expense due to the early redemption of these notes was$48 million . 38 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Other items excluded from adjusted earnings included integration costs related to the Company's acquisition ofZurich North America's U.S. Corporate Life and Pensions business; these costs primarily consist of expenditures for legal, accounting, consulting, integration of systems and processes and other similar services. These integration costs are excluded from adjusted earnings for one year following the acquisition and amounted to$26 million for the year endedDecember 31, 2021 . Income Taxes The Company's combinedU.S. and Japanese effective income tax rate on pretax earnings was 8.8% in 2022 and 18.7% in 2021. In 2022, the combined effective tax rate differs from theU.S. statutory rate primarily due to the impact of the tax accounting method change discussed below, as well as historic and solar tax credits. In 2021, the combined effective tax rate differs from theU.S. statutory rate primarily due to historic and solar tax credits. Total income taxes were$403 million in 2022 and$997 million in 2021. Japanese income taxes onAflac Japan's results account for most of the Company's consolidated income tax expense.Aflac Japan holds certainU.S. dollar-denominated assets in aDelaware Statutory Trust (DST). These assets are mostly comprised of variousU.S. dollar-denominated commercial mortgage loans. The functional currency of the DST forU.S. tax purposes was historically the Japanese yen. In 2022, the Company requested a change in tax accounting method through the Internal Revenue Service's automatic consent procedures to change its functional currency on the DST forU.S. tax purposes to theU.S. dollar. As a result, foreign currency translation gains or losses on assets held in the DST will no longer be recognized forU.S. tax purposes. The Company historically recorded a deferred tax liability for foreign currency translation gains on the DST assets, which was released in the third quarter of 2022 as a result of the functional currency change and subsequently adjusted for foreign currency impacts in the fourth quarter of 2022. This change in functional currency resulted in the Company recognizing an income tax benefit of$452 million ($0.71 per basic and diluted share, respectively) in 2022. InAugust 2022 , the Inflation Reduction Act of 2022 (IRA) was signed intoU.S. law. EffectiveJanuary 1, 2023 , the law imposes a 15% corporate alternative minimum tax rate and a 1% excise tax on the Company's repurchases of its common stock. The Company does not anticipate any impacts from the new corporate minimum tax rate since its current tax rate is above the 15% minimum rate. Further, the Company expects the charges associated with the excise tax to be recognized in equity consistent with other costs related to treasury stock.
For additional information, see Note 10 of the Notes to the Consolidated
Financial Statements and the Critical Accounting Estimates – Income Taxes
section of this MD&A.
The Company expects that its adjusted effective tax rate for future periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in theU.S. and in foreign jurisdictions. See the risk factor entitled "Tax rates applicable to the Company may change" in Part I, Item 1A. Risk Factors for more information.
Foreign Currency Translation
Aflac Japan's premiums and a significant portion of its investment income are received in yen, and its claims and most expenses are paid in yen.Aflac Japan purchases yen-denominated assets andU.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. Yen-denominated income statement accounts are translated toU.S. dollars using the weighted average Japanese yen/U.S. dollar foreign exchange rate for the reporting period, except realized gains and losses on securities transactions which are translated at the exchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated toU.S. dollars using the spot Japanese yen/U.S. dollar foreign exchange rate at the end of the reporting period. RESULTS OF OPERATIONS BY SEGMENTU.S. GAAP financial reporting requires that a company report financial and descriptive information about operating segments in its annual and interim period financial statements. Furthermore, the Company is required to report a measure of segment profit or loss, certain revenue and expense items, and segment assets. The Company's insurance business consists of two segments:Aflac Japan and AflacU.S. Aflac Japan is the principal contributor to consolidated earnings. In addition, the Parent Company, other business units that are not individually reportable, and business activities, including reinsurance retrocession activities, not included inAflac Japan or AflacU.S. are included in Corporate and other. See the Item 1. Business section of this Form 10-K for a summary of each segment's products and distribution channels. 39 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Consistent withU.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company'sU.S. GAAP measure of segment performance. The Company believes that a presentation of this measure is vitally important to an understanding of the underlying profitability drivers and trends of its business. Additional performance measures used to evaluate the financial condition and performance of the Company's segments are listed below. •Operating Ratios •New Annualized Premium Sales •New Money Yield •Return on Average Invested Assets •Average Weekly Producer For additional information on the Company's performance measures included in this MD&A, see the Glossary of Selected Terms found directly following Part IV. See Note 2 of the Notes to the Consolidated Financial Statements for the reconciliation of segment results to the Company's consolidatedU.S. GAAP results and additional information. AFLAC JAPAN SEGMENT
Aflac Japan Pretax Adjusted Earnings
Changes inAflac Japan's pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results forAflac Japan for the years endedDecember 31 . Aflac Japan Summary of Operating Results
(In millions) 2022 2021 Net earned premiums$ 9,548 $ 11,853 Net investment income:(1) Yen -denominated investment income 1,140
1,262
U.S. dollar-denominated investment income 1,641
1,845
Net investment income 2,782
3,107
Amortized hedge costs related to certain foreign currency
exposure management strategies 112
76
Adjusted net investment income 2,669 3,031 Other income (loss) 35 41 Total adjusted revenues 12,252 14,925 Benefits and claims, net 6,565 7,963 Adjusted expenses: Amortization of deferred policy acquisition costs 547 653 Insurance commissions 563 706 Insurance and other expenses 1,520 1,849 Total adjusted expenses 2,630 3,208 Total benefits and adjusted expenses 9,195
11,171
Pretax adjusted earnings$ 3,056 $
3,754
Weighted-average yen/dollar exchange rate 130.17 109.79
In Dollars In Yen
Percentage change over previous period: 2022 2021 2022 2021
Net earned premiums (19.4) % (6.4) % (4.2) % (3.9) %
Adjusted net investment income (11.9) 14.0 5.5 17.6
Total adjusted revenues (17.9) (2.9) (2.2) (.2)
Pretax adjusted earnings (18.6) 15.0 (3.1) 18.5
(1) Net interest cash flows from derivatives associated with certain investment
strategies of
reclassified from net investment gains (losses) and included in adjusted
earnings as a component of net investment income.
40
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
In yen terms,Aflac Japan's net earned premiums decreased in 2022, mainly due to limited-pay products reaching premium paid-up status and a slightly declining in force. Adjusted net investment income, in yen terms, increased in 2022 primarily due to increases in floating rate income earned fromU.S. dollar-denominated investment that were driven by stronger dollar exchange rates, increasing interest rates, and higher income from make whole payments received on called securities, which were partially offset by lower income from alternative assets and higher hedge costs. The decrease in pretax adjusted earnings in yen was primarily due to a decrease in revenues and an increase in the benefit ratio resulting from a wider scope of "deemed hospitalization" that was in effect through most of the third quarter of 2022. Annualized premiums in force atDecember 31, 2022 , were ¥1.30 trillion, compared with ¥1.36 trillion in 2021. The decrease in annualized premiums in force in yen of 4.4% in 2022 and 4.7% in 2021 was driven primarily by limited-pay products reaching paid up status and lower sales as a result of pandemic conditions. Annualized premiums in force, translated into dollars at respective year-end exchange rates, were$9.8 billion in 2022 and$11.8 billion in 2021. As ofDecember 31, 2022 ,Aflac Japan exceeded 23 million individual policies in force inJapan .Aflac Japan continued to be the number one seller of cancer insurance policies inJapan throughout 2022, with more than 14 million cancer policies in force as ofDecember 31, 2022 .Aflac Japan's investment portfolios includeU.S. dollar-denominated securities and reverse-dual currency securities (yen-denominated debt securities with dollar coupon payments). In years when the yen strengthens in relation to the dollar, translatingAflac Japan's U.S. dollar-denominated investment income into yen lowers growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. In years when the yen weakens, translatingU.S. dollar-denominated investment income into yen magnifies growth rates for net investment income, total adjusted revenues, and pretax adjusted earnings in yen terms. The following table illustrates the effect of translatingAflac Japan's U.S. dollar-denominated investment income and related items into yen by comparing certain segment results with those that would have been reported had foreign currency exchange rates remained unchanged from the prior year. Amounts excluding foreign currency impact onU.S. dollar-denominated investment income were determined using the average foreign currency exchange rate for the comparable prior year period. See non-U.S. GAAP financial measures defined above. Aflac Japan Percentage Changes Over Prior Year (Yen Operating Results) For the Years Ended December 31, Including Foreign Excluding Foreign Currency Changes Currency Changes 2022 2021 2022 2021 Adjusted net investment income 5.5 % 17.6 % (5.0) % 15.6 % Total adjusted revenues (2.2) (.2) (4.3) (.5) Pretax adjusted earnings (3.1) 18.5 (11.3) 16.9
The following table presents a summary of operating ratios in yen terms for
Ratios to total adjusted revenues: 2022 2021
Benefits and claims, net 53.6 % 53.3 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 4.5 4.4
Insurance commissions 4.6 4.7
Insurance and other expenses 12.4 12.4
Total adjusted expenses 21.5 21.5
Pretax adjusted earnings 24.9 25.2
Ratios to total premiums:
Benefits and claims, net 68.9 % 67.2 %
Adjusted expenses:
Amortization of deferred policy acquisition costs 5.7 5.5
41
-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, the benefit ratio to total premiums increased, compared with 2021, primarily due to a decrease in total premiums and higher third sector benefits due substantially to an increase in medical hospitalization claims as a result of a wider scope of "deemed hospitalization" related to COVID-19, partially offset by the continued change in mix of first and third sector business. In 2022, the adjusted expense ratio was flat, compared with 2021, reflecting the decrease in total adjusted revenues and an offsetting decrease in total adjusted expenses. In total for 2022, the pretax adjusted profit margin decreased when compared with 2021, primarily due to lower adjusted revenues, a higher benefit ratio and a flat expense ratio.
The following table presentsAflac Japan's new annualized premium sales for the years endedDecember 31 . In Dollars In Yen (In millions of dollars and billions of yen) 2022 2021 2022 2021 New annualized premium sales$ 416 $ 499 ¥ 54.8 ¥ 54.8 Increase (decrease) over prior period (16.7) % 4.6 %
.0 % 7.7 %
In 2022, new annualized premium sales on a yen basis were essentially flat, compared with 2021, reflecting constrained sales in the first half of the year due to ongoing pandemic conditions offset by a new cancer product launch in certain distribution channels and first sector product updates in the second half of the year.
The following table details the contributions to
premium sales by major insurance product for the years ended
2022 2021
Cancer 56.5 % 49.2 %
Medical and other health:
Medical 26.6 37.2
Income support 1.3 .5
Life insurance:
Traditional life (1) 8.1 9.0
WAYS 3.5 .8
Child endowment .3 .3
Other 3.7 3.0
Total 100.0 % 100.0 %
(1) Includes term and whole life
The foundation ofAflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical, income support, and nursing care insurance products. With continued cost pressure on Japan's health care system, the Company expects the need for third sector products will continue to rise in the future and that the medical and cancer insurance productsAflac Japan provides will continue to be an important part of its product portfolio. Moreover, inNovember 2022 ,Aflac Japan refreshed its first sector savings-type products WAYS and Child Endowment and began to actively promote sales of these products after having curtailed sales of both products beginning in 2013. The refreshment of these first sector products positionAflac Japan for potential future long-term sales opportunities by marketing these products to a younger demographic as well as potential cross-selling opportunities ofAflac Japan's third sector products. Sales ofAflac Japan cancer products in theJapan Post Group channel experienced a material decline beginning inAugust 2019 .Japan Post Group resumed proactive sales of cancer insurance policies onApril 1, 2021 andAflac Japan continues to strengthen the strategic alliance. InApril 2022 , approximately 10,000 employees ofJapan Post Co. were transferred to Japan Post Insurance.Japan Post Group has informedAflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products andAflac Japan cancer products but will not include sales of other financial products. The Company expects continued collaboration to further position both companies for long-term growth and a gradual improvement ofJapan Post Group cancer insurance sales in the intermediate term. For example, in 2021 and 2022,Aflac Japan observed an increase in the number of proposals to potential customers in the Japan Post Group channel, and theJapan Post Group continues to conduct a nationwide campaign to improve certain sales process practices. For additional information, see the risk factor entitled "Sales of the Company's products and 42 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in theU.S. and sales associates and other distribution partners inJapan ," in Part I, Item 1A. Risk Factors.Aflac Japan continues to promote digital and web-based sales to groups and use of its system that enables smart device-based insurance application by allowing the customer and anAflac Japan operator to see the same screen through their smart devices. Further,Aflac Japan continues to utilize its virtual sales tool that enables online consultations and policy applications to be completed entirely online.
The following table details the contributions to
premium sales by agency type for the years ended
2022 2021
Independent corporate and individual 49.5 % 51.1 %
Affiliated corporate (1) 46.5 43.7
Bank 4.0 5.2
Total 100.0 % 100.0 %
(1)
In 2022,Aflac Japan recruited 38 new sales agencies. AtDecember 31, 2022 ,Aflac Japan was represented by approximately 7,400 sales agencies, with approximately 110,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due toAflac Japan's focus on supporting agencies with strong management frameworks, high productivity and more producing agents.
At
banks, approximately 90% of the total number of banks in
As previously reported, onDecember 19, 2018 , the Parent Company andAflac Japan entered into a Basic Agreement with Japan Post Holdings Co., Ltd., a Japanese corporation (Japan Post Holdings). Pursuant to the terms of the Basic Agreement, among other items, Japan Post Holdings andAflac Japan agreed to reconfirm existing initiatives regarding cancer insurance and to consider new joint initiatives. InJune 2021 , the Parent Company,Aflac Japan andJapan Post Group agreed to pursue several specific initiatives toward building a "'Co-creation Platform' to support customers and local communities," consistent with Japan Post Group's medium-term management plan announced inMay 2021 . The initiatives are directed at, among other items, the promotion ofAflac Japan cancer insurance, digital transformation within theJapan Post Group , and certain diversity efforts. As previously reported, onFebruary 28, 2019 , the Parent Company entered a Shareholders Agreement with Japan Post Holdings,J&A Alliance Holdings Corporation , aDelaware corporation, solely in its capacity as trustee ofJ&A Alliance Trust , aNew York voting trust (Trust), andGeneral Incorporated Association J&A Alliance , a Japanese general incorporated association. According to a Schedule 13G/A filed by Japan Post Holdings with theSEC onJanuary 6, 2021 , the Trust had beneficially acquired 7.45% of the outstandingAflac Incorporated common shares as ofDecember 31, 2020 . Japan Post Holdings is the sole beneficiary of the Trust. According to a Form 13F filed by Japan Post Holdings with theSEC onNovember 2, 2022 , Japan Post Holdings owned 52.3 millionAflac Incorporated common shares as ofSeptember 30, 2022 . OnMay 1, 2020 , the Parent Company filed a registration statement on Form S-3 that registered the sale of its common stock from time to time byJ&A Alliance Holdings Corporation in its capacity as trustee of the Trust. The filing was made strictly pursuant to a contractual requirement contained in the Shareholders Agreement. Notwithstanding the filing of the Form S-3, the Trust continues to be subject to a lockup period for a period expiring four years after the Trust acquired 7% of the Parent Company's outstanding shares. After expiration of such period, the Trust has agreed not to own more than the greater of 10% of the Parent Company's outstanding shares or such shares representing 22.5% of the voting rights in the Parent Company. In light of the fact that the shares acquired by the Trust, like allAflac Incorporated common shares, will be eligible for 10-for-1 voting rights after being held for 48 consecutive months, the Shareholders Agreement further provides for voting restrictions that effectively limit the trustee's voting rights to no more than 20% of the voting rights in the Parent Company and further restrict the trustee's voting rights with respect to certain change in control transactions. Japan Post Holdings 43 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations will not have a Board seat on the Parent Company's Board of Directors and will not have rights to control, manage or intervene in the management of the Parent Company. The foregoing is subject to and qualified in its entirety by reference to the full text of the Basic Agreement, a copy of which is attached as Exhibit 10.1 to the Company's Current Report on Form 8-K filedDecember 19, 2018 , and the Shareholders Agreement, a copy of which is attached as Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q filedApril 26, 2019 , the terms of which exhibits are incorporated herein by reference.
Aflac Japan Investments
The level of investment income in yen is affected by available cash flow from operations, the timing of investing the cash flow, yields on new investments, the effect of yen/dollar exchange rates onU.S. dollar-denominated investment income, and other factors. As part of the Company's portfolio management and asset allocation process,Aflac Japan invests in yen andU.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, public and private fixed maturity securities and public equity securities.Aflac Japan's U.S. dollar-denominated investments include fixed maturity investments and growth assets, including alternative investments in limited partnerships or similar investment vehicles.Aflac Japan has been investing in both publicly-traded and privately originatedU.S. dollar-denominated investment-grade and below-investment-grade fixed maturity securities and loan receivables, and has entered into foreign currency forwards and options to hedge the currency risk on the fair value of a portion of theU.S. dollar investments. The following table details the investment purchases forAflac Japan for the years endedDecember 31 . (In millions) 2022 2021 Yen-denominated: Fixed maturity securities: Japan government and agencies$ 0 $ 1,208 Private placements 854 695 Other fixed maturity securities 113 171 Equity securities 398 216 Other investments 22 10 Total yen-denominated$ 1,387 $ 2,300 U.S. dollar-denominated: Fixed maturity securities: Other fixed maturity securities$ 559 $ 1,963 Infrastructure debt 347 52 Collateralized loan obligations 498 216 Equity securities 22 8 Commercial mortgage and other loans: Transitional real estate loans 1,645 1,768 Commercial mortgage loans 0 31 Middle market loans 1,203 2,428 Other investments 391 404 Total U.S. dollar-denominated$ 4,666 $ 6,870 Total Aflac Japan purchases$ 6,053 $ 9,170
See the Investments section of this MD&A for further discussion of these
investment programs, and see Notes 1, 3 and 4 of the Notes to the Consolidated
Financial Statements for more information regarding loans and loan receivables.
Funds available for investment include cash flows from operations, investment
income, and funds generated from maturities, redemptions, securities lending,
and other securities transactions. Securities lending is also used from time to
time to accelerate the availability of funds for investment. Purchases of
securities from period to period are determined
44
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
based on multiple objectives including appropriate portfolio diversification,
the relative value of a potential investment and availability of investment
opportunities, liquidity, credit and other risk factors while adhering to the
Company's investment policy guidelines.
The following table presents the results of
the years ended and as of
2022 2021
Total purchases for the period (in millions) (1) $ 5,640 $ 8,756
New money yield (1),(2) 4.48 % 3.50 %
Return on average invested assets (3) 2.78 2.72
Portfolio book yield, including
end of period (1),(2)
3.06 % 2.60 %
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses, external management fees, and amortized hedge costs (3) Net of investment expenses and amortized hedge costs, year-to-date number reflected on a quarterly average basis
The increase in the Aflac Japan new money yield in 2022 was primarily due to
increases in
See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and
the Investments and Hedging Activities sections of this MD&A for additional
information on the Company’s investments and hedging strategies.
AFLACU.S. SEGMENT
Aflac
Changes in AflacU.S. pretax adjusted earnings and profit margins are primarily affected by morbidity, mortality, expenses, persistency and investment yields. The following table presents a summary of operating results for AflacU.S. for the years endedDecember 31 . Aflac U.S. Summary of Operating Results (In millions) 2022 2021 Net earned premiums$ 5,570 $ 5,614 Adjusted net investment income (1) 755 754 Other income 161 121 Total adjusted revenues 6,486 6,489 Benefits and claims 2,442 2,447 Adjusted expenses: Amortization of deferred policy acquisition costs 605 517 Insurance commissions 553 550 Insurance and other expenses 1,562 1,498 Total adjusted expenses 2,720 2,564 Total benefits and adjusted expenses 5,162 5,011 Pretax adjusted earnings$ 1,324 $ 1,478 Percentage change over previous period: Net earned premiums (.8) % (2.5) % Adjusted net investment income .1 7.0 Total adjusted revenues .0 (1.2) Pretax adjusted earnings (10.4) 16.6 (1) Net interest cash flows from derivatives associated with certain investment strategies of$(4) and$2 in 2022 and 2021, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.
In 2022, Aflac
persistency. Other income increased in 2022 due to an increase in fee income.
The decrease in pretax adjusted earnings was driven primarily by an increase in
45 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations deferred policy acquisition cost (DAC) amortization associated with lower persistency and an increase in planned spending reflecting, in part, platform and growth investments. Annualized premiums in force were essentially flat in 2022 and decreased 1.6% in 2021. Annualized premiums in force atDecember 31 were$6.0 billion in 2022 and 2021.
The following table presents a summary of operating ratios for Aflac
the years ended
Ratios to total adjusted revenues: 2022 2021 Benefits and claims 37.7 % 37.7 % Adjusted expenses: Amortization of deferred policy acquisition costs 9.3 8.0 Insurance commissions 8.5 8.5 Insurance and other expenses 24.1 23.1 Total adjusted expenses 41.9 39.5 Pretax adjusted earnings 20.4 22.8 Ratios to total premiums: Benefits and claims 43.8 % 43.6 % Adjusted expenses: Amortization of deferred policy acquisition costs 10.9 9.2 The benefit ratio to total premiums increased slightly in 2022, compared with 2021, reflecting higher incurred claims, mostly offset by reserve releases related to lower persistency. The adjusted expense ratio increased in 2022, compared with 2021, primarily due to higher DAC amortization associated with lower persistency and higher planned spending reflecting ongoing investments in theU.S. platform. The pretax adjusted profit margin decreased in 2022 when compared with 2021, primarily due to the higher adjusted expense ratio.
Aflac
The following table presents Aflac’s
years ended
(In millions) 2022 2021 New annualized premium sales$ 1,483 $ 1,278
Increase (decrease) over prior period 16.1 % 16.9 %
New annualized premium sales for accident insurance increased 5.2%; disability sales increased 28.1%; critical care insurance sales (including cancer insurance) increased 9.6%; hospital indemnity insurance sales increased 8.1%; dental/vision sales increased 32.3%; and life sales increased 36.5% in 2022, compared with 2021. The increase in sales for AflacU.S. in 2022 reflects continued improvement from investment in growth initiatives as well as productivity gains.
The following table details the contributions to Aflac’s
premium sales by major insurance product category for the years ended
2022 2021
Accident 22.8 % 25.1 %
Disability 25.5 23.1
Critical care (1) 20.1 21.3
Hospital indemnity 15.3 16.4
Dental/vision 5.8 5.1
Life 10.5 9.0
Total 100.0 % 100.0%
(1) Includes cancer, critical illness and hospital intensive care products
46 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, the AflacU.S. sales force included an average of approximately 6,200U.S. agents, including brokers, who were actively producing business on a weekly basis. The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity. AflacU.S. believes that during 2021 and 2022, constraints in the labor market limited its recruiting of new sales agents, and that limitations on face-to-face sales opportunities during the COVID-19 pandemic suppressed the development of newly recruited agents into business producers and the productivity of veteran agents and brokers. AflacU.S. believes that the above factors have acted as a headwind to sales and to growth in the number of average weekly producers. AflacU.S. remains focused on mitigating and reversing these trends as theU.S. economy continues to recover from the pandemic. AflacU.S. remains focused on supporting its agency channel, most of which are small businesses, by offering financial support and an extended value proposition. The AflacU.S. sales team has pivoted to accommodate preferred enrollment conditions which include realizing sales at the worksite through in-person enrollment, an enrollment call center, video enrollment through co-browsing and self-enrollment. The traditional agent sales team is also using virtual recruiting and training through video conferencing in order to maintain or increase the recruiting pipeline. The AflacU.S. broker sales team is focused on product enhancements, as well as leveraging technology based solutions to drive enrollment. AflacU.S. Investments
The level of investment income is affected by available cash flow from
operations, the timing of investing the cash flow, yields on new investments,
and other factors.
As part of the Company's portfolio management and asset allocation process, AflacU.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. AflacU.S. has been investing in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loan receivables.
The following table details the investment purchases for Aflac
(In millions) 2022 2021
Fixed maturity securities:
Other fixed maturity securities $ 635 $ 770
Infrastructure debt 191 91
Collateralized loan obligations 199 65
Equity securities 33 213
Commercial mortgage and other loans:
Transitional real estate loans 342 525
Commercial mortgage loans 0 276
Middle market loans 301 190
Other investments 44 45
Total Aflac U.S. Purchases $ 1,745 $ 2,175
Funds available for investment include cash flows from operations, investment
income, and funds generated from maturities, redemptions, and other securities
transactions. Purchases of securities from period to period are determined based
on multiple objectives, including appropriate portfolio diversification, the
relative value of a potential investment and availability of investment
opportunities, liquidity, credit and other risk factors while adhering to the
Company's investment policy guidelines.
47
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table presents the results of Aflac's U.S. investment yields for
the years ended and as of December 31 .
2022 2021
Total purchases for period (in millions) (1)
New money yield (1),(2)
5.16 % 3.41 % Return on average invested assets (3) 4.72 4.87
Portfolio book yield, end of period (1),(2) 5.39 % 4.94 %
(1) Includes fixed maturity securities, commercial mortgage and other loans, equity securities, and excludes alternative investments in limited partnerships (2) Reported on a gross yield basis; excludes investment expenses and external management fees (3) Net of investment expenses, year-to-date number reflected on a quarterly average basis
The increase in the Aflac
2022
See Note 3 of the Notes to the Consolidated Financial Statements and the Market
Risks of Financial Instruments - Credit Risk subsection of Item 7A. for more
information regarding the sector concentrations of the Company's investments.
CORPORATE AND OTHER
Changes in the pretax adjusted earnings of Corporate and other are primarily
affected by investment income. The following table presents a summary operating
results for Corporate and other for the years ended December 31 .
Corporate and Other Summary of Operating Results
(In millions) 2022
2021
Net earned premiums$ 145 $ 180 Net investment income (loss) (1) 30
(73)
Amortized hedge income related to certain foreign currency
management strategies 68
57
Adjusted net investment income 98 (16) Other income 24 11 Total adjusted revenues 267 175 Benefits and claims, net 146 166 Adjusted expenses: Interest expense 162 165 Other adjusted expenses 182 142 Total adjusted expenses 344 307 Total benefits and adjusted expenses 490 473 Pretax adjusted earnings$ (223) $ (298) (1) The change in value of federal historic rehabilitation and solar investments in partnerships of$91 and$138 in 2022 and 2021, respectively, is included as a reduction to net investment income. Tax credits on these investments of$83 and$115 in 2022 and 2021, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings. See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments. In 2022, total adjusted revenues increased compared with 2021, primarily due to higher adjusted net investment income from higher interest rates and an increase in amortized hedge income, partially offset by the impact of federal tax credit investments and a reduction in net earned premiums as a result of significant yen weakening. Total adjusted expenses increased, as compared to 2021, primarily due to higher expenses associated with employee compensation and benefits and travel. These results also reflect the impact of foreign currency on net earned premiums and the corresponding benefits.The Parent Company invests in partnerships that specialize in rehabilitating historic structures or the installation of solar equipment in order to receive federal historic rehabilitation and solar tax credits. These investments are classified as limited partnerships and included in other investments in the consolidated balance sheet. The change in value of each investment is recorded as a reduction to net investment income. Tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings. 48
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
INVESTMENTS The Company's investment strategy utilizes disciplined asset and liability management while seeking long-term risk-adjusted investment returns and the delivery of stable income within regulatory and capital objectives, and preserving shareholder value. In attempting to optimally balance these objectives, the Company seeks to maintain on behalf ofAflac Japan a diversified portfolio of yen-denominated investment assets, aU.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedgedU.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, AflacU.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. AflacU.S. invests in both publicly traded and privately originated investment-grade and below-investment-grade fixed maturity securities and loans. The Company is also a signatory to thePrinciples for Responsible Investment , a global framework for incorporating environmental, social and governance (ESG) considerations into investment and ownership decisions.
For additional information concerning the Company’s investments, see Notes 3, 4,
and 5 of the Notes to the Consolidated Financial Statements.
The following tables detail investments by segment as of
Investment Securities by Segment
2022
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 61,615 $ 12,231 $ 1,895 $ 75,741
Held to maturity, fixed maturity
securities,
at amortized cost (1) 19,056 0 0 19,056
Equity securities 650 51 390 1,091
Commercial mortgage and other loans:
Transitional real estate loans (1) 5,133 1,140 182 6,455
Commercial mortgage loans (1) 1,269 729 15 2,013
Middle market loans (1) 4,557 471 0 5,028
Other investments:
Policy loans 190 24 0 214
Short-term investments (2) 319 184 1,029 1,532
Limited partnerships 1,900 208 182 2,290
Other 0 34 0 34
Investment in affiliate (3) 0 195 (195) 0
Total investments 94,689 15,267 3,498 113,454
Cash and cash equivalents 1,601 720 1,622 3,943
Total investments and cash $ 96,290 $ 15,987 $ 5,120 $ 117,397
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re Bermuda is
eliminated in Corporate and other
49
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
2021
Corporate and
(In millions) Aflac Japan Aflac U.S. Other Total
Available for sale, fixed maturity
securities,
at fair value $ 81,793 $ 14,910 $ 1,993 $ 98,696
Held to maturity, fixed maturity
securities,
at amortized cost (1) 22,000 0 0 22,000
Equity securities 714 226 663 1,603
Commercial mortgage and other loans:
Transitional real estate loans (1) 4,226 1,020 45 5,291
Commercial mortgage loans (1) 1,217 669 8 1,894
Middle market loans (1) 4,297 304 0 4,601
Other investments:
Policy loans 216 20 0 236
Short-term investments (2) 590 302 834 1,726
Limited partnerships 1,534 169 155 1,858
Other 0 22 0 22
Total investments 116,587 17,642 3,698 137,927
Cash and cash equivalents 2,053 681 2,317 5,051
Total investments and cash $ 118,640 $ 18,323 $ 6,015 $ 142,978
(1) Net of allowance for credit losses
(2) Includes securities lending collateral
The ratings of the Company's securities referenced in the table below are based
on the ratings designations provided by major rating organizations such as
Moody's, Standard & Poor's and Fitch or, if not rated, are determined based on
the Company's internal analysis of such securities. When the ratings issued by
the rating agencies differ, the Company utilizes the second lowest rating when
three or more rating agency ratings are available or the lowest rating when only
two rating agency ratings are available.
The distributions of fixed maturity securities the Company owns, by credit
rating, as of
Composition of Fixed Maturity Securities by Credit Rating
2022 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
AAA 1.6 % 1.5 % 1.0 % .9 %
AA 5.2 5.3 5.1 5.2
A 68.0 68.1 68.9 68.5
BBB 23.0 22.9 22.5 22.8
BB or lower 2.2 2.2 2.5 2.6
Total 100.0 % 100.0 % 100.0 % 100.0 %
As of
securities in its investment portfolio that were guaranteed by third parties was
immaterial both individually and in the aggregate.
The following table presents the 10 largest unrealized loss positions in the
Company’s portfolio as of
50
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Credit Amortized Fair
(In millions) Rating Cost Value Unrealized Loss
Autostrade Per Litalia Spa BBB $ 149 $ 108 $ (41)
JP Morgan Chase and Co. A 210 171 (39)
KLM Royal Dutch Airlines B 135 96 (39)
Investcorp Capital Limited BB 329 291 (38)
Prologis LP A 172 142 (30)
Urban Renaissance Agency A 184 154 (30)
GLP Pte Ltd. BBB 113 83 (30)
Banco de Chile A 150 127 (23)
Citigroup Inc A 176 154 (22)
Morgan Stanley A 135 113 (22)
Generally, declines in fair values can be a result of changes in interest rates,
yen/dollar exchange rate, and changes in net spreads driven by a broad market
move or a change in the issuer's underlying credit quality. The Company believes
these issuers have the ability to continue making timely payments of principal
and interest. See the Unrealized Investment Gains and Losses section in Note 3
of the Notes to the Consolidated Financial Statements for further discussions of
unrealized losses related to financial institutions and other corporate
investments.
The Company’s portfolio of below-investment-grade securities includes debt
securities purchased while the issuer was rated investment grade plus other
loans and bonds purchased as part of an allocation to that segment of the
market. The following is the Company’s below-investment-grade exposure at
Below-Investment-Grade Investments
2022
Unrealized
Par Amortized Fair Gain
(In millions) Value Cost (1) Value (Loss)
Investcorp Capital Limited$ 329 $ 329 $ 291 $ (38) Pemex Project Funding Master Trust 226 226 230 4 Commerzbank 188 145 209 64 Telecom Italia SpA 151 151 178 27 KLM Royal Dutch Airlines 151 135 96 (39) Apache Corporation 138 110 130 20 Howmet Aerospace Inc. 100 70 97 27 IKB Deutsche Industriebank AG 98 47 75 28 Generalitat de Catalunya 60 24 58 34 National Gas Co. Trinidad & Tobago 52 50 48 (2) Other Issuers 84 85 69 (16) Subtotal (2) 1,577 1,372 1,481 109 High yield corporate bonds 785 666
697 31
Middle market loans 4,732 4,562 4,554 (8)
Grand Total $ 7,094 $ 6,600 $ 6,732 $ 132
(1) Net of allowance for credit losses
(2) Securities initially purchased as investment grade, but have subsequently
been downgraded to below investment grade
The Company invests in middle market loans primarily to U.S. corporate
borrowers, most of which have below-investment-grade ratings. The objectives of
this program include enhancing the yield on invested assets, achieving further
diversification of credit risk, and mitigating the risk of rising interest rates
and hedge costs through the acquisition of floating rate assets.
51
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The Company maintains an allocation to higher yielding corporate bonds within the Aflac Japan and AflacU.S. portfolios. Most of these securities were rated below-investment-grade at the time of purchase, but the Company also purchased several that were rated investment grade which, because of market pricing, offer yields commensurate with below-investment-grade risk profiles. The objective of this allocation was to enhance the Company's yield on invested assets and further diversify credit risk. All investments in this program must have a minimum rating at purchase of low BB using the Company's above described rating methodology and are managed by the Company's internal credit portfolio management team.
The Company maintains diversification in investments by sector to avoid concentrations to any one sector, thus managing exposure risk. The following table shows the distribution of fixed maturities by sector classification as ofDecember 31 . 2022 Gross Amortized Gross Unrealized Unrealized % of (In millions) Cost (1) Gains Losses Fair Value Total Government and agencies $ 43,854$ 3,304 $ (1,732) $ 45,426 46.4 % Municipalities 2,590 215 (150) 2,655 2.7 Mortgage- and asset-backed securities 2,167 75 (96) 2,146 2.3 Public utilities 7,450 545 (288) 7,707 7.9 Electric 6,036 456 (197) 6,294 6.4 Natural Gas 249 28 (10) 267 .3 Other 565 35 (48) 553 .6 Utility/Energy 600 26 (33) 593 .6 Sovereign and supranational 1,238 113 (17) 1,334 1.3 Banks/financial institutions 9,340 595 (636) 9,299 9.9 Banking 5,633 434 (364) 5,704 6.0 Insurance 1,703 119 (81) 1,740 1.8 Other 2,004 42 (191) 1,855 2.1 Other corporate 27,886 2,107 (1,609) 28,384 29.5 Basic Industry 2,452 263 (112) 2,602 2.6 Capital Goods 3,394 180 (226) 3,350 3.6 Communications 2,866 284 (109) 3,039 3.0 Consumer Cyclical 2,206 184 (71) 2,320 2.3 Consumer Non-Cyclical 6,238 383 (362) 6,259 6.7 Energy 2,664 330 (85) 2,909 2.8 Other 1,371 81 (146) 1,306 1.5 Technology 3,534 122 (257) 3,399 3.7 Transportation 3,161 280 (241) 3,200 3.3 Total fixed maturity securities $ 94,525$ 6,954 $ (4,528) $ 96,951 100.0 %
(1) Net of allowance for credit losses
Securities by Type of Issuance
The Company has investments in both publicly and privately issued securities.
The Company's ability to sell either type of security is a function of overall
market liquidity which is impacted by, among other things, the amount of
outstanding securities of a particular issuer or issuance, trading history of
the issue or issuer, overall market conditions, and idiosyncratic events
affecting the specific issue or issuer.
52
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following table details investment securities by type of issuance as of
Investment Securities by Type of Issuance
2022 2021
Amortized Fair Amortized Fair
(In millions) Cost (1) Value Cost (1) Value
Publicly issued securities:
Fixed maturity securities $ 77,176 $ 79,090 $ 88,552 $ 103,034
Equity securities 882 882 950 950
Total publicly issued 78,058 79,972 89,502 103,984
Privately issued securities: (2)
Fixed maturity securities (3) 17,349 17,861 18,817 22,531
Equity securities 209 209 653 653
Total privately issued 17,558 18,070 19,470 23,184
Total investment securities $ 95,616 $ 98,042 $ 108,972 $ 127,168
(1) Net of allowance for credit losses
(2) Primarily consists of securities owned by
The following table details the Company’s reverse-dual currency securities as of
Reverse-Dual Currency Securities(1)
(Amortized cost, in millions) 2022 2021
Privately issued reverse-dual currency securities $ 4,049
Publicly issued collateral structured as reverse-dual currency
securities
1,383 1,596 Total reverse-dual currency securities$ 5,432 $ 6,380 Reverse-dual currency securities as a percentage of total investment securities 5.7 % 5.9 %
(1)Principal payments in yen and interest payments in dollars
Aflac Japan has a portfolio of privately issued securities to better match liability characteristics and secure higher yields than those available on Japanese government or other public corporate bonds.Aflac Japan's investments in yen-denominated privately issued securities consist primarily of non-Japanese issuers, are rated investment grade at purchase and have longer maturities, thereby allowing the Company to improve asset/liability matching and overall investment returns. These securities are generally either privately negotiated arrangements or issued under medium-term note programs and have standard documentation commensurate with credit ratings of the issuer, except when internal credit analysis indicates that additional protective and/or event-risk covenants were required. Many of these investments have protective covenants appropriate to the specific investment. These may include a prohibition of certain activities by the borrower, maintenance of certain financial measures, and specific conditions impacting the payment of the Company's notes. HEDGING ACTIVITIES The Company uses derivative contracts to hedge foreign currency exchange rate risk and interest rate risk. The Company uses various strategies, including derivatives, to manage these risks. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for more information about market risk and the Company's use of derivatives.
Derivatives are designed to reduce risk on an economic basis while minimizing
the impact on financial results. The Company’s derivatives programs vary
depending on the type of risk being hedged. See Note 4 of the Notes to the
Consolidated Financial Statements for:
•A description of the Company's derivatives, hedging strategies and underlying
risk exposure.
•Information about the notional amount and fair market value of the Company's
derivatives.
•The unrealized and realized gains and losses impact on adjusted earnings of
derivatives in cash flow, fair value, net investments in foreign operations, or
non-qualifying hedging relationships.
53
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Foreign Currency Exchange Rate Risk Hedge Program
The Company has deployed the following hedging strategies to mitigate exposure
to foreign currency exchange rate risk:
•Aflac Japan hedges
Japan’s
•Aflac Japan maintains certain unhedged
which serve as an economic currency hedge of a portion of the Company’s
investment in
Program below).
•The Parent Company designates yen-denominated liabilities (notes payable and
loans) as non-derivative hedging instruments and designates certain foreign
currency forwards and options as derivative hedges of the Company’s net
investment in
•The Parent Company enters into forward and option contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by its subsidiary, ALIJ, and reducing enterprise-wide hedge costs (see Enterprise Corporate Hedging Program below). The following table presents metrics related toAflac Japan's U.S. dollar-denominated hedge program and the Parent Company's enterprise corporate hedging program, including associated amortized hedge costs/income, for the years endedDecember 31 . See the Results of Operations section of this MD&A for the Company's definition of amortized hedge costs/income. 2022 2021Aflac Japan : FX Forwards
FX forward (sell USD, buy yen) notional at end of period (in
billions) (1)
$4.1 $6.4 Weighted average remaining tenor (in months) (2) .7 2.6 Amortized hedge income (cost) for period (in millions)$(44) $(55) FX Options FX option notional at the end of period (in billions) (1)$13.5 $11.6 Weighted average remaining tenor (in months) (2) 6.4 6.0 Amortized hedge income (cost) for period (in millions)$(68) $(22) Corporate and other (Parent Company): FX Forwards
FX forward (buy USD, sell yen) notional at end of period (in
billions)(1)
$5.0 $5.0 Weighted average remaining tenor (in months)(2) 10.8 11.5 Amortized hedge income (cost) for period (in millions)$71 $62 FX Options FX option notional at the end of period (in billions) (1)$2.6 $1.9 Weighted average remaining tenor (in months) (2) 9.0 7.3 Amortized hedge income (cost) for period (in millions)$(3) $(5) (1) Notional is reported net of any offsetting positions withinAflac Japan or the Parent Company, respectively. (2) Tenor based on period reporting date to settlement date Amortized hedge costs/income can fluctuate based upon many factors, including the derivative notional amount, the length of time of the derivative contract, changes in bothU.S. and Japan interest rates, and supply and demand for dollar funding. Amortized hedge costs/income have fluctuated in recent periods due to changes in the previously mentioned factors.
Aflac Japan buysU.S. dollar-denominated investments, typically corporate bonds, and hedges them back to yen with foreign currency forwards and options to hedge foreign currency exchange rate risk. This economically creates yen assets that match yen liabilities during the life of the derivative and provides favorable capital treatment under the Japan SMR 54 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations calculations. The currency risk being hedged is generally based on fair value of hedged investments. The following table summarizes theU.S. dollar-denominated investments held byAflac Japan as ofDecember 31 . 2022 2021 Amortized Fair Amortized Fair (In millions) Cost (1) Value Cost (1) Value
Available-for-sale securities:
Fixed maturity securities$ 14,321 $ 15,191 $ 17,615 $ 20,478 Equity securities 33 33 24 24
Commercial mortgage and other loans:
Transitional real estate loans (floating rate) 5,133 5,088 4,226 4,293 Commercial mortgage and other loans 1,269 1,129 1,217 1,265 Middle market loans (floating rate) 4,557 4,545 4,297 4,352 Other investments 1,899 1,899 1,534 1,534 Total U.S. Dollar Program 27,212 27,885 28,913 31,946
Available-for-sale securities:
Fixed maturity securities – economically converted to
yen
2,209 2,795 2,236 3,328
Total
Japan
$ 29,421 $
30,680
(1) Net of allowance for credit losses
TheU.S. Dollar Program includes allU.S. dollar-denominated investments inAflac Japan other than the investments in certain consolidated VIEs where the instrument is economically converted to yen as a result of a derivative in the consolidated VIE. The Company uses one-sided foreign currency put options to mitigate the settlement risk onU.S. dollar-denominated assets related to extreme foreign currency rate changes. From time to time,Aflac Japan also maintains a collar program on a portion of itsU.S. Dollar Program to mitigate against more extreme moves in foreign exchange and therefore support SMR. As ofDecember 31, 2022 , there were no collars inAflac Japan , and none of the Company's foreign currency options hedgingAflac Japan's U.S. dollar-denominated assets were in-the-money. In 2021, the Company moved to a strategy that contains one-sided put options, fewer foreign currency forwards and no collars in order to reduce its exposure to pricing volatility and the related risk of negative settlements should there be a material weakening in the yen. Depending on further developments, including the possibility of further market volatility, there may be additional costs associated with maintaining the options program. The Company is continually evaluating other adjustments, including the possibility of changing the level of hedging employed with theU.S. dollar-denominated investments.
As of
dollar-denominated portfolio was
dollar-denominated assets shown in the table above as a result of consolidation
that have been economically converted to yen using derivatives).
Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. The following table presents the settlements associated with the Company's currency derivatives used for hedgingAflac Japan's U.S. dollar-denominated investments for the years endedDecember 31 . (In millions) 2022 2021
Net cash inflows (outflows)
Enterprise Corporate Hedging Program
The Company has designated certain yen-denominated liabilities and foreign currency forwards and options of the Parent Company as accounting hedges of its net investment inAflac Japan . The Company's consolidated yen-denominated net asset position was partially hedged at$11.6 billion as ofDecember 31, 2022 , with hedging instruments comprised of$4.0 billion of yen-denominated debt and$7.6 billion of foreign currency forwards and options, compared with$10.2 billion as ofDecember 31, 2021 , with hedging instruments comprised of$3.3 billion of yen-denominated debt and$6.9 billion of foreign currency forwards and options. 55
-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company makes its accounting designation of net investment hedge at the beginning of each quarter. If the total of the designated Parent Company non-derivative and derivative notional is equal to or less than the Company's net investment inAflac Japan , the hedge is deemed to be effective, and the currency exchange effect on the yen-denominated liabilities and the change in estimated fair value of the derivatives are reported in the unrealized foreign currency component of other comprehensive income. The Company's net investment hedge was effective during the years endedDecember 31, 2022 and 2021, respectively. For additional information on the Company's net investment hedging strategy, see Note 4 of the Notes to the Consolidated Financial Statements. In order to economically mitigate risks associated with the enterprise-wide exposure to the yen and the level and volatility of hedge costs, the Parent Company enters into foreign exchange forward and option contracts. By buyingU.S. dollars and selling yen, the Parent Company is effectively lowering its overall economic exposure to the yen, whileAflac Japan's U.S. dollar exposure remains reduced as a result ofAflac Japan's U.S. Dollar Program that economically creates yen assets. Among other objectives, this strategy is intended to offset the enterprise-wide amortized hedge costs by generating amortized hedge income. This activity is reported in Corporate and other. The Company continually evaluates the program's efficacy.
Interest Rate Risk Hedge Program
Aflac Japan and AflacU.S. use interest rate swaps from time to time to mitigate the risk of investment income volatility for certain variable-rate investments. In 2022, the Company expanded the use of interest rate swaps for this hedging strategy. Additionally, to manage interest rate risk associated with itsU.S. dollar-denominated investments held byAflac Japan , from time to time the Company utilizes interest rate swaptions. For additional discussion of the risks associated with the foreign currency exposure refer to the Currency Risk section in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, and Item 1A, specifically to the Risk Factors titled "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity."
See Note 4 of the Notes to the Consolidated Financial Statements for additional
information on the Company’s hedging activities.
POLICY LIABILITIES The following table presents policy liabilities by segment and in total for the years endedDecember 31 . (In millions) 2022 2021 Japan segment: Future policy benefits$ 71,150 $ 81,176 Unpaid policy claims 2,610 2,903 Other policy liabilities 7,835 9,534 Total Japan policy liabilities 81,594 93,613U.S. segment: Future policy benefits 9,960 9,865 Unpaid policy claims 1,952 1,933 Other policy liabilities 117 119 Total U.S. policy liabilities 12,029 11,916 Consolidated: Future policy benefits 80,749 90,588 Unpaid policy claims 4,561 4,836 Other policy liabilities 7,948 9,648 Total consolidated policy liabilities (1)$ 93,258 $ 105,072
(1) The sum of the Japan and
and retrocession activity.
See Note 7 of the Notes to the Consolidated Financial Statements for additional
information on the Company’s policy liabilities.
56
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Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
BENEFIT PLANS
information on the Company’s Japanese and
to the Consolidated Financial Statements.
POLICYHOLDER PROTECTION
The Japanese insurance industry has a policyholder protection system that provides funds for the policyholders of insolvent insurers. Legislation enacted regarding the framework of theLife Insurance Policyholder Protection Corporation (LIPPC) included government fiscal measures supporting the LIPPC. InMarch 2022 , Japan's Diet passed legislation that extended the government's fiscal support of the LIPPC throughMarch 2027 . InMarch 2022 , the LIPPC reached the required balance for the total life industry of ¥400 billion as specified by its Articles of Incorporation. As a result, additional contributions are not expected to be required unless the balance is reduced due to payments made by the LIPPC to the policyholders of insolvent insurers.Aflac Japan recognized an expense of ¥.9 billion and ¥1.8 billion for LIPPC assessments in the years endedDecember 31, 2022 and 2021, respectively.
Guaranty Fund Assessments
UnderU.S. state guaranty association laws, certain insurance companies can be assessed (up to prescribed limits) for certain obligations to the policyholders and claimants of impaired or insolvent insurance companies that write the same line or similar lines of business. The amount of the guaranty fund assessment that an insurer is assessed is based on its proportionate share of premiums in that state. See Note 15 of the Notes to the Consolidated Financial Statements for further information on guaranty fund assessments. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of the businesses, fund business growth and provide for an ability to withstand adverse circumstances. Financial leverage (leverage) refers to an investment strategy of using debt to increase the potential ROE. The Company targets and actively manages liquidity, capital and leverage in the context of a number of considerations, including: •business investment and growth needs •strategic growth objectives •financial flexibility and obligations •capital support for hedging activity •a constantly evolving business and economic environment •a balanced approach to capital allocation and shareholder deployment.
The governance framework supporting liquidity, capital and leverage includes
global senior management and board committees that review and approve all
significant capital related decisions.
The Company's cash and cash equivalents include unrestricted cash on hand, money market instruments, and other debt instruments with a maturity of 90 days or less when purchased, all of which has minimal market, settlement or other risk exposure. The target minimum amount for the Parent Company's cash and cash equivalents is approximately$1.8 billion to provide a capital buffer and liquidity support at the holding company. This amount excludes$400 million of proceeds from the issuance of senior sustainability notes in 2021, unallocated proceeds of which contribute to total cash but are not intended to support holding company liquidity. The Company remains committed to prudent liquidity and capital management. AtDecember 31, 2022 , the Company held$3.9 billion in cash and cash equivalents for stress conditions, which includes the Parent Company's target minimum amount of$1.8 billion .Aflac Japan and AflacU.S. generate cash flows from their operations and provide the primary sources of liquidity to the Parent Company through management fees and dividends, withAflac Japan being the largest contributor. The primary uses of cash by the Parent Company are shareholder dividends, the repurchase of its common stock, interest on its outstanding indebtedness and operating expenses. 57
-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table presents the amounts provided to the Parent Company for the years endedDecember 31 . Liquidity Provided by Subsidiaries to Parent Company (In millions) 2022 2021 Management fees paid by subsidiaries$ 136 $ 130 Dividends declared or paid by subsidiaries 3,006 2,791
The following table details
totals above, for the years ended
Aflac Japan Remittances (In millions of dollars and billions of yen) 2022 2021 Aflac Japan management fees paid to Parent Company$ 61 $ 59
dollars)
2,412 2,138
¥ 236.7 The Company intends to maintain higher than historical levels of liquidity and capital at the Parent Company for stress conditions and with the goals of addressing the Company's hedge costs and related potential need for collateral and mitigating against long-term weakening of the Japanese yen. Further, the Company plans to continue to maintain a portfolio of unhedgedU.S. dollar-denominated investments at Aflac Japan and to consider whether the amount of such investments should be increased or decreased relative to the Company's view of economic equity surplus inAflac Japan in light of potentially rising hedge costs and other factors. See the Hedging Activity subsection of this MD&A for more information.
The Company believes that its balance of cash and cash equivalents and cash
generated by operations will be sufficient to satisfy both its short-term and
long-term cash requirements and plans for cash, including material cash
requirements from known contractual obligations and returning capital to
shareholders through share repurchases and dividends.
In addition to cash and cash equivalents, the Company also maintains credit facilities, both intercompany and with external partners, and a number of other available tools to support liquidity needs on a global basis. InSeptember 2021 , the Parent Company filed a shelf registration statement with theSEC that allows the Company to issue an indefinite amount of debt securities, in one or more series, from time to time untilSeptember 2024 . The Company believes outside sources for additional debt and equity capital, if needed, will continue to be available. Additionally, as ofDecember 31, 2022 , the Parent Company and Aflac had four lines of credit with third parties and ten intercompany lines of credit. The Company was in compliance with all of the covenants of its notes payable and lines of credit atDecember 31, 2022 . For additional information, see Note 9 of the Notes to the Consolidated Financial Statements. 58 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table presents the estimated payments of the Company's material cash requirements from known contractual obligations as ofDecember 31, 2022 . The Company translated its yen-denominated obligations using theDecember 31, 2022 , exchange rate. Actual future payments as reported in dollars will fluctuate with changes in the yen/dollar exchange rate. Total Total Short-term Long-term (In millions) Liability(1) Payments Payments Payments
Future policy benefits liability (Note 7)(2)
Unpaid policy claims liability (Note 7)(3)
4,561 4,555 2,862 1,693 Other policyholders' funds (Note 7)(4) 6,123 7,533 352 7,181 Long-term debt - principal (Note 9) 7,295 7,103 0 7,103 Long-term debt - interest (Note 9) 44 2,705 165 2,540 Cash collateral on loaned securities (Note 3) 1,809 1,809 1,809 0 Operating service agreements (Note 15) N/A 386 175 211 Operating lease obligations (Note 9) 139 144 44 100 Finance lease obligations (Note 9) 8 8 3 5 Total contractual obligations$ 100,728 $ 217,637 $ 13,173 $ 204,464 (1) Liability amounts are those reported on the consolidated balance sheet as ofDecember 31, 2022 . (2) The estimated payments reflect future estimated cash payments to be made to policyholders and others for future policy benefits. These projected cash outflows are based on assumptions for future policy persistency, mortality, morbidity, and other assumptions comparable with the Company's experience, consider future premium receipts on current policies in force and assume market growth and interest crediting consistent with assumptions used in amortizing deferred acquisition costs. These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows exceeds the corresponding liability amount. Due to the significance of the assumptions used, actual cash outflow amounts and timing will differ, possibly materially, from these estimates. (3) The estimated payments include assumptions as to the timing of policyholders reporting claims for prior periods and the amount of those claims. Actual amounts and timing of unpaid policy claims payments may differ significantly from the estimates above. (4) These cash outflows are undiscounted with respect to interest and, as a result, the sum of the cash outflows exceeds the corresponding liability amount.
For more information on the Company’s major contractual obligations, see the
applicable Note in the Notes to the Consolidated Financial Statements as
indicated in the line items in the table above.
The Company's consolidated financial statements convey its financing arrangements during the periods presented. The Company has not engaged in material intra-period short-term financings during the periods presented that are not otherwise reported in its balance sheet or disclosed therein. As ofDecember 31, 2022 , the Company had no material letters of credit, standby letters of credit, guarantees or standby repurchase obligations. The Company has not entered into transactions involving the transfer of financial assets with an obligation to repurchase financial assets that have been accounted for as a sale under applicable accounting standards, including securities lending transactions. See Notes 1, 3, and 4 of the Notes to the Consolidated Financial Statements for more information on the Company's securities lending and derivative activities. With the exception of disclosed activities in those referenced footnotes and the Risk Factors entitled, "The Company is exposed to foreign currency fluctuations in the yen/dollar exchange rate" and "Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity," the Company is not aware of any trend, demand, commitment, event or uncertainty that would reasonably result in its liquidity increasing or decreasing by a material amount. Consolidated Cash Flows
The Company consistently generates positive cash flows from operations, and has
the ability to adjust cash flow management from other sources of liquidity
including reinvestment cash flows and selling investments in order to meet
short-term cash needs.
The Company translates cash flows forAflac Japan's yen-denominated items intoU.S. dollars using weighted-average exchange rates. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. 59
-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table summarizes consolidated cash flows by activity for the years endedDecember 31 . (In millions) 2022 2021 Operating activities$ 3,879 $ 5,051 Investing activities (1,540) (2,378) Financing activities (3,551) (2,739)
Exchange effect on cash and cash equivalents 104 (24)
Net change in cash and cash equivalents
Operating Activities
The principal cash inflows for the Company's insurance activities come from
insurance premiums and investment income. The principal cash outflows are the
result of policy claims, operating expenses, income tax, as well as interest
expense. As a result of policyholder aging, claims payments are expected to
gradually increase over the life of a policy. Therefore, future policy benefit
reserves are accumulated in the early years of a policy and are designed to help
fund future claims payments.
The Company expects its future cash flows from premiums and investment
portfolios to be sufficient to meet its cash needs for benefits and expenses.
Consolidated cash flow from operations decreased 23.2% in 2022, compared with
2021.
Investing Activities
The Company's investment objectives provide for liquidity primarily through the
purchase of publicly traded investment-grade debt securities. Prudent portfolio
management dictates that the Company attempts to match the duration of its
assets with the duration of its liabilities. Currently, when the Company's fixed
maturity securities mature, the proceeds may be reinvested at a yield below that
required for the accretion of policy benefit liabilities on policies issued in
earlier years. However, the long-term nature of the Company's business and its
strong cash flows provide the Company with the ability to minimize the effect of
mismatched durations and/or yields identified by various asset adequacy
analyses. From time to time or when market opportunities arise, the Company
disposes of selected fixed maturity securities that are available for sale to
improve the duration matching of assets and liabilities, improve future
investment yields, and/or re-balance its portfolio. As a result, dispositions
before maturity can vary significantly from year to year.
As part of its overall corporate strategy, the Company has committed
$400 million to Aflac Ventures, LLC (Aflac Ventures ), as opportunities emerge.
Aflac Ventures is a subsidiary of Aflac Global Ventures, LLC (Aflac Global
Ventures ) which is reported in Corporate and other. The central mission of Aflac
Global Ventures is to support the organic growth and business development needs
of Aflac Japan and Aflac U.S. with an emphasis on digital applications designed
to improve the customer experience, gain efficiencies, and develop new markets
in an effort to enhance and defend long-term shareholder value. Investments are
included in equity securities or the other investments line in the consolidated
balance sheets.
As part of an arrangement with Federal Home Loan Bank of Atlanta (FHLB), Aflac
U.S. obtains low-cost funding from FHLB supported by acceptable forms of
collateral pledged by Aflac U.S. In 2022, Aflac U.S. borrowed and repaid $599
million under this program. As of December 31, 2022 , Aflac U.S. had outstanding
borrowings of $609 million reported in its balance sheet.
See Note 3 of the Notes to the Consolidated Financial Statements for details on
certain investment commitments.
Financing Activities
Cash flows from financing activities consist primarily of share repurchases,
dividends to shareholders and from time to time debt issuances and redemptions.
InOctober 2022 , the Parent Company used a portion of the net proceeds from itsSeptember 2022 issuance of various series of senior notes to redeem$450 million of its 3.25% senior notes dueMarch 2025 . InSeptember 2022 , the Parent Company issued four series of senior notes totaling ¥73.0 billion through a public debt offering under itsU.S. shelf registration statement. The first series, which totaled ¥33.4 billion, bears interest at a fixed rate of 1.075% per annum, payable semi-annually, and will mature inSeptember 2029 . The second series, which totaled 60 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ¥21.1 billion, bears interest at a fixed rate of 1.320% per annum, payable semi-annually, and will mature inDecember 2032 . The third series, which totaled ¥6.5 billion, bears interest at a fixed rate of 1.594% per annum, payable semi-annually, and will mature inSeptember 2037 . The fourth series, which totaled ¥12.0 billion, bears interest at a fixed rate of 2.144% per annum, payable semi-annually, and will mature inSeptember 2052 . These notes are redeemable at the Parent Company's option at any time, in whole but not in part, upon the occurrence of certain changes affectingU.S. taxation, as specified in the indenture governing the terms of the issuance. In addition, the notes maturing inSeptember 2029 ,December 2032 andSeptember 2037 are redeemable at the Parent Company's option, in whole or in part from time to time, on or afterJune 14, 2029 ,June 14, 2032 andMarch 14, 2037 , respectively, at a redemption price equal to the aggregate principal amount of the applicable series to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption. InSeptember 2022 , the Parent Company used a portion of the net proceeds from itsSeptember 2022 issuance of various series of senior notes and theAugust 2022 senior term loan facility to redeem$750 million of its 3.625% senior notes dueNovember 2024 . InAugust 2022 , the Parent Company renewed a senior term loan facility with a commitment amount totaling ¥107.0 billion. The first tranche of the facility, which totaled ¥11.7 billion, bears interest at a rate per annum equal to theTokyo interbank market rate (TIBOR), or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2027 . The applicable margin ranges between .225% and .625%, depending on the Parent Company's debt ratings as of the date of determination. The second tranche, which totaled ¥25.3 billion, bears interest at a rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2029 . The applicable margin ranges between .325% and .725%, depending on the Parent Company's debt ratings as of the date of determination. The third tranche, which totaled ¥70.0 billion, bears interest at a rate per annum equal to TIBOR, or alternate TIBOR, if applicable, plus the applicable TIBOR margin and will mature inAugust 2032 . The applicable margin ranges between .475% and 1.025%, depending on the Parent Company's debt ratings as of the date of determination.
In
of its 3.625% senior notes due
InApril 2021 , the Parent Company issued five series of senior notes totaling ¥82.0 billion through a public debt offering under its then existingU.S. shelf registration statement. The first series, which totaled ¥30.0 billion, bears interest at a fixed rate of .633% per annum, payable semi-annually, and will mature inApril 2031 . The second series, which totaled ¥12.0 billion, bears interest at a fixed rate of .844% per annum, payable semi-annually, and will mature inApril 2033 . The third series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.039% per annum, payable semi-annually, and will mature inApril 2036 . The fourth series, which totaled ¥10.0 billion, bears interest at a fixed rate of 1.264% per annum, payable semi-annually, and will mature inApril 2041 . The fifth series, which totaled ¥20.0 billion, bears interest at a fixed rate of 1.560% per annum, payable semi-annually, and will mature inApril 2051 . The notes are redeemable at the Parent Company's option (i) at any time, in whole but not in part, upon the occurrence of certain changes affectingU.S. taxation, as specified in the indenture governing the terms of the issuance or (ii) on or after the date that is six months prior to the stated maturity date of the series, in whole or in part, at a redemption price equal to the aggregate principal amount to be redeemed plus accrued and unpaid interest on the principal amount to be redeemed to, but excluding, the date of redemption. InMarch 2021 , the Parent Company issued$400 million of senior sustainability notes through aU.S. public debt offering. The notes bear interest at a fixed rate of 1.125% per annum, payable semi-annually, and will mature inMarch 2026 . The Company intends, but is not contractually committed, to allocate an amount at least equivalent to the net proceeds from this issuance exclusively to existing or future investments in, or financing of, assets, businesses or projects that meet the eligibility criteria of the Company's sustainability bond framework described in the offering documentation in connection with such notes. These notes are redeemable at the Parent Company's option in whole at any time or in part from time to time at a redemption price equal to the greater of: (i) the aggregate principal amount of the notes to be redeemed or (ii) the amount equal to the sum of the present values of the remaining scheduled payments for principal of and interest on the notes to be redeemed, not including any portion of the payments of interest accrued as of such redemption date, discounted to such redemption date on a semiannual basis at the yield to maturity for aU.S. Treasury security with a maturity comparable to the remaining term of the notes, plus 10 basis points, plus in each case, accrued and unpaid interest on the principal amount of the notes to be redeemed to, but excluding, such redemption date.
See Note 9 of the Notes to the Consolidated Financial Statements for further
information on the debt issuances discussed above.
61 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Cash returned to shareholders through treasury stock purchases and dividends was$3.4 billion in 2022, compared with$3.2 billion in 2021.
The following tables present a summary of treasury stock activity during the
years ended
Treasury Stock Purchased
(In millions of dollars and thousands of shares) 2022 2021
Treasury stock purchases $ 2,401 $ 2,301
Number of shares purchased:
Share repurchase program 39,187 43,327
Other 370 437
Total shares purchased 39,557 43,764
Treasury Stock Issued
(In millions of dollars and thousands of shares) 2022 2021
Stock issued from treasury:
Cash financing$ 17 $ 26 Noncash financing 57 55 Total stock issued from treasury$ 74 $ 81 Number of shares issued 1,341 1,721 InNovember 2022 , the Company's board of directors authorized the purchase of an additional 100 million shares of its common stock. As ofDecember 31, 2022 , a remaining balance of 116.6 million shares of the Company's common stock was available for purchase under share repurchase authorizations by its board of directors. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.
In
law imposes a 1% excise tax on the Company’s repurchase of its common stock.
Cash dividends paid to shareholders in 2022 of$1.60 per share increased 21.2% over 2021. The following table presents the dividend activity for the years endedDecember 31 . Dividends Paid to Shareholders (In millions) 2022 2021 Dividends paid in cash$ 979 $ 855
Dividends through issuance of treasury shares 37 32
Total dividends to shareholders
$ 1,016 $ 887 InNovember 2022 , the board of directors announced a 5.0% increase in the quarterly cash dividend, effective with the first quarter of 2023. The first quarter 2023 cash dividend of$.42 per share is payable onMarch 1, 2023 , to shareholders of record at the close of business onFebruary 15, 2023 . Regulatory Restrictions
Aflac Japan is required to meet certain financial criteria as governed by Japanese corporate law in order to provide dividends to the Parent Company. Under these criteria, dividend capacity at the Japan subsidiary is basically defined as total equity excluding common stock, accumulated other comprehensive income amounts, capital reserves (representing statutorily required amounts inJapan ) but reduced for net after-tax unrealized losses on available-for-sale securities. These dividend capacity requirements are generally aligned with the SMR. Japan's FSA maintains its own solvency standard which is quantified through the SMR.Aflac Japan's SMR is sensitive to interest rate, credit spread, and foreign exchange rate changes, therefore the Company considers different ways to offset significant declines in SMR, including 62 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations the reduction of subsidiary dividends paid to the Parent Company and Parent Company capital contributions. In the event of a rapid change in market risk conditions causing SMR to decline, the Company has one senior unsecured revolving credit facility in the amount of ¥100 billion and a committed reinsurance facility in the amount of approximately ¥120 billion as a capital contingency plan. Additionally, the Company could take action to enter into derivatives on unhedgedU.S. dollar-denominated investments with foreign currency options or forwards. See Notes 8 and 9 of the Notes to the Consolidated Financial Statements for additional information. The Company has already undertaken various measures to mitigate the sensitivity ofAflac Japan's SMR. For example, the Company employs policy reserve matching (PRM) investment strategies, which is a Japan-specific accounting treatment that reduces SMR interest rate sensitivity since PRM-designated investments are carried at amortized cost consistent with corresponding liabilities. In order for a PRM-designated asset to be held at amortized cost, there are certain criteria that must be maintained. The primary criterion relates to maintaining the duration of designated assets and liabilities within a specified tolerance range. If the duration difference is not maintained within the specified range without rebalancing, then a certain portion of the assets must be re-classified as available for sale and held at fair value with any associated unrealized gain or loss recorded in surplus. To rebalance, assets may need to be sold in order to maintain the duration with the specified range, resulting in realizing a gain or loss from the sale. ForU.S. GAAP, PRM investments are categorized as available for sale. The Company also uses foreign currency derivatives to hedge a portion of itsU.S. dollar-denominated investments. See Notes 3, 4 and 8 of the Notes to the Consolidated Financial Statements for additional information on the Company's investment strategies, hedging activities, and reinsurance, respectively.Aflac Japan's SMR ratio remains high and reflects a strong capital and surplus position. As ofDecember 31, 2022 ,Aflac Japan's SMR was 878%, compared with 1,012% atDecember 31, 2021 . The Company is committed to maintaining strong capital levels, consistent with maintaining current insurance financial strength and credit ratings. The FSA is considering the introduction of an economic value-based solvency regime based on the Insurance Capital Standards (ICS) for insurance companies inJapan . The FSA is currently conducting field testing with insurance companies inJapan for the purpose of investigating the impact of the introduction of regulations. The FSA published provisional specifications inJune 2022 . Final specifications are expected to be decided in 2024, and a new capital regime to replace the current solvency regime is expected to be introduced in 2025.
Aflac
A life insurance company's statutory capital and surplus is determined according to rules prescribed by the NAIC, as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different fromU.S. GAAP and are intended to emphasize policyholder protection and company solvency. The continued long-term growth of the Company's business may require increases in the statutory capital and surplus of its insurance operations. The Company's insurance operations may secure additional statutory capital through various sources, such as internally generated statutory earnings, reduced dividends paid to the Parent Company, capital contributions by the Parent Company from funds generated through debt or equity offerings, or reinsurance transactions. The NAIC's RBC formula is used by insurance regulators to help identify inadequately capitalized insurance companies. The RBC formula quantifies insurance risk, business risk, asset risk and interest rate risk by weighing the types and mixtures of risks inherent in the insurer's operations. The combined RBC ratio for AflacU.S. as ofDecember 31, 2022 was 732%, compared with 659% as ofDecember 31, 2021 . The Company calculates its combined RBC ratio to include allU.S. regulated life insurance entities as if a single combinedU.S. RBC entity net of intercompany items related to capital resources and risk. The Company intends to maintain a target combined RBC over time of approximately 400% for AflacU.S. , consistent with the Company's risk management practices.
The table below presents RBC ratios for the Company’s
subsidiaries as of
the subsidiaries for which RBC was filed.
2022 2021
Aflac 692 % 635 %
CAIC 1,056 832
TOIC 4,321 5,829
Aflac New York 859 1,089
63
-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The NAIC completed its Solvency Modernization Initiative (SMI) process relating to updating theU.S. insurance solvency regulation framework. The SMI focused on key issues such as capital requirements, governance and risk management, group supervision, reinsurance, statutory accounting and financial reporting matters. The NAIC still has some ongoing initiatives related to SMI, such as monitoring the international efforts on group capital requirements as well as RBC. The NAIC utilizes a group capital calculation (GCC) that conceptually uses an RBC aggregation methodology for all entities within the insurance company holding system. The GCC is intended to be a regulatory tool used by regulators as a means to standardize group capital requirements. In 2021, the NAIC concluded its analysis of bond factor changes and formally adopted the new factors as proposed by Moody's Analytics. This initiative expanded the RBC bond factors from six designations to 20 designations to more closely align with rating scales used by rating agencies. The adopted changes did not have a significant impact on the combined RBC ratio for AflacU.S. Aflac, CAIC and TOIC are domiciled inNebraska and are subject to its regulations. The NDOI imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances to the Parent Company. UnderNebraska insurance law, prior approval of the NDOI is required for dividend distributions that exceed the greater of the net income from operations, which excludes net investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. Dividends declared by Aflac during 2023 in excess of$1.1 billion would be considered extraordinary and require such approval. Similar laws apply inNew York , the domiciliary jurisdiction of Aflac New York. Privacy and Cybersecurity Governance The Company's Board of Directors has adopted an information security policy directing management to establish and operate a global information security program with the goals of monitoring existing and emerging threats and ensuring that the Company's information assets and data, and the data of its customers, are appropriately protected from loss or theft. The Board has delegated oversight of the Company's information security program to theAudit and Risk Committee . The Company's senior officers, including its Global Security and Chief Information Security Officer, are responsible for the operation of the global information security program and communicates quarterly with theAudit and Risk Committee on the program, including with respect to the state of the program, compliance with applicable regulations, current and evolving threats, and recommendations for changes in the information security program. The global information security program also includes a cybersecurity incident response plan that is designed to provide a management framework across Company functions for a coordinated assessment and response to potential security incidents. This framework establishes a protocol to report certain incidents to the Global Security and Chief Information Security Officer and other senior officers, with the goal of timely assessing such incidents, determining applicable disclosure requirements and communicating with theAudit and Risk Committee . The incident response plan directs the executive officers to report certain incidents immediately and directly to the Lead Non-Management Director. Other
For information regarding commitments and contingent liabilities, see Note 15 of
the Notes to the Consolidated Financial Statements.
Additional Information Investors should note that the Company announces material financial information in itsSEC filings, press releases and public conference calls. In accordance withSEC guidance, the Company may also use the Investor Relations section of the Company's website (http://investors.aflac.com) to communicate with investors about the Company. It is possible that the financial and other information the Company posts there could be deemed to be material information. The information on the Company's website is not part of this document. Further, the Company's references to website URLs are intended to be inactive textual references only. CRITICAL ACCOUNTING ESTIMATES The Company prepares its financial statements in accordance withU.S. GAAP. These principles are established primarily by the FASB. In this MD&A, references toU.S. GAAP issued by the FASB are derived from the FASB Accounting Standards Codification™ (ASC). The preparation of financial statements in conformity withU.S. GAAP requires the Company to make estimates based on currently available information when recording transactions resulting from business operations. The estimates that the Company deems to be most critical to an understanding of its results of operations and financial condition are those related to the valuation of investments and derivatives, DAC, liabilities for future policy benefits and unpaid policy claims, and income taxes. The preparation and evaluation of these critical accounting estimates involve the use of various assumptions developed from management's analyses and judgments. The 64 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations application of these critical accounting estimates determines the values at which 93% of the Company's assets and 80% of its liabilities are reported as ofDecember 31, 2022 , and thus has a direct effect on net earnings and shareholders' equity. Subsequent experience or use of other assumptions could produce significantly different results.
Valuation of Investments, Including Derivatives
The Company's investments, primarily consisting of debt and equity securities, include both publicly issued and privately issued securities. For publicly issued securities, the Company determines the fair values from quoted market prices readily available from public exchange markets and price quotes and valuations from third party pricing vendors. For the majority of privately issued securities and derivatives associated with VIEs within the Company's investment portfolio, a third party pricing vendor has developed valuation models that the Company utilizes to determine fair values. Starting inJune 2021 andJuly 2022 , respectively, these models and associated processes and controls were transitioned to and executed by Company personnel. For the remaining privately issued securities, the Company uses non-binding price quotes from outside brokers. The Company has refined its valuation model for private placements to explicitly incorporate currency basis swap adjustments (market observable data) to assumed interest rate curves where appropriate. The Company estimates the fair values of its securities on a monthly basis. The Company monitors the estimated fair values obtained from its pricing vendors and brokers for consistency from month to month, while considering current market conditions. The Company also periodically discusses with its pricing brokers and vendors the pricing techniques they use to monitor the consistency of their approach and periodically assess the appropriateness of the valuation level assigned to the values obtained from them. If a fair value appears unreasonable, the Company will re-examine the inputs and assess the reasonableness of the pricing data with the vendor. Additionally, the Company may compare the inputs to relevant market indices and other performance measurements. Based on management's analysis, the valuation is confirmed or may be revised if there is evidence of a more appropriate estimate of fair value based on available market data. The Company has performed verification of the inputs and calculations in any valuation models to confirm that the valuations represent reasonable estimates of fair value. Inputs used to value derivatives include, but are not limited to, interest rates, credit spreads, foreign currency forward and spot rates, and interest volatility. The Company estimates an expected lifetime credit loss on investments measured at amortized cost including held-to-maturity fixed maturity securities, loan receivables and loan commitments on a quarterly basis. For the Company's available-for-sale fixed maturity securities, the Company evaluates estimated credit losses only when the fair value of the available-for-sale fixed maturity security is below its amortized cost basis The Company's approach to estimating credit losses is complex and incorporates significant judgments. In addition to a security, or an asset class, or an issuer-specific credit fundamentals, it considers past events, current economic conditions and forecasts of future economic conditions. The Company's estimates are revised as conditions change and new information becomes available. See the tabular disclosure entitled "Sensitivity of Fair Values of Financial Instruments to Interest Rate Change" in Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Notes 1, 3, 4 and 5 of the Notes to the Consolidated Financial Statements for additional information.
Deferred Policy Acquisition Costs and Policy Liabilities
Insurance premiums for most of the Company's health and life policies, including
cancer, accident, hospital, critical illness, dental, vision, term life, whole
life, long-term care and disability, are recognized as earned premiums over the
premium-paying periods of the contracts when due from policyholders. When earned
premiums are reported, the related amounts of benefits and expenses are charged
against such revenues, so that profits are recognized in proportion to earned
premiums during the period the policies are expected to remain in force. This
association is accomplished by means of annual additions to the liability for
future policy benefits and the deferral and subsequent amortization of policy
acquisition costs.
Premiums from the Company's products with limited-pay features, including term
life, whole life, WAYS, and child endowment, are collected over a significantly
shorter period than the period over which benefits are provided. Premiums for
these products are recognized as earned premiums over the premium-paying periods
of the contracts when due from policyholders. Any gross premium in excess of the
net premium is deferred and recorded in earnings, such that profits are
recognized in a constant relationship with insurance in force. Benefits are
recorded as an expense when they are incurred. A liability for future policy
benefits is recorded when premiums are recognized using the net premium method.
65
——————————————————————————–
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Deferred Policy Acquisition Costs
The calculation of DAC and the liability for future policy benefits requires the use of estimates based on sound actuarial valuation techniques. For new policy issues, the Company reviews its actuarial assumptions and deferrable acquisition costs each year and revise them when necessary to more closely reflect recent experience and studies of actual acquisition costs. For policies in force, the Company evaluates DAC by major product groupings to determine that they are recoverable from future revenues, and any amounts determined not to be recoverable are charged against net earnings. See Note 6 of the Notes to the Consolidated Financial Statements for a detail of the DAC activity for the past two years. Policy Liabilities
The Company’s policy liabilities, which are determined in accordance with
applicable guidelines as defined under
Practice, include two components that involve analysis and judgment: future
policy benefits and unpaid policy claims, which accounted for 87% and 5% of
total policy liabilities as of
Future policy benefits provide for claims that will occur in the future and are generally calculated as the present value of future expected benefits to be incurred less the present value of future expected net benefit premiums. The Company calculates future policy benefits based on assumptions of morbidity, mortality, persistency and interest. These assumptions are generally established and considered locked at the time a policy is issued. The assumptions used in the calculations are closely related to those used in developing the gross premiums for a policy. As required byU.S. GAAP, the Company also includes a provision for adverse deviation, which is intended to accommodate adverse fluctuations in actual experience. These assumptions may only be unlocked in certain circumstances based on the results of periodic DAC recoverability and premium deficiency testing. Unpaid policy claims include those claims that have been incurred and are in the process of payment as well as an estimate of those claims that have been incurred but have not yet been reported to the Company. The Company computes unpaid policy claims on a non-discounted basis using statistical analyses of historical claims payments, adjusted for current trends and changed conditions. The Company updates the assumptions underlying the estimate of unpaid policy claims regularly and incorporates its historical experience as well as other data that provides information regarding the Company's outstanding liability. The Company's insurance products provide fixed-benefit amounts per occurrence that are not subject to medical-cost inflation. Furthermore, the Company's business is widely dispersed in both theU.S. and Japan. This geographic dispersion and the nature of the Company's benefit structure mitigate the risk of a significant unexpected increase in claims payments due to localized epidemics and events of a catastrophic nature. Claims incurred under the Company's policies are generally reported and paid in a relatively short time frame. The unpaid claims liability is sensitive to morbidity assumptions, in particular, severity and frequency of claims. Severity is the ultimate size of a claim, and frequency is the number of claims incurred. The Company's claims experience is primarily related to the demographics of its policyholders. As a part of its established financial reporting and accounting practices and controls, the Company performs detailed annual actuarial reviews of its policyholder liabilities (gross premium valuation analysis) and reflects the results of those reviews in its results of operations and financial condition as required byU.S. GAAP. ForAflac Japan , the Company's annual reviews in 2022 and 2021 indicated no need to strengthen liabilities associated with policies inJapan . For AflacU.S. , the Company's annual reviews in 2022 and 2021 indicated no need to strengthen liabilities associated with policies in theU.S. 66 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The table below reflects the growth of the future policy benefits liability for the years endedDecember 31 . Future Policy Benefits (In millions of dollars and billions of yen) 2022 2021 Aflac U.S.$ 9,960 $ 9,865 Growth rate 1.0 % 2.0 % Aflac Japan$ 71,150 $ 81,176 Growth rate (12.4) % (8.4) % Consolidated$ 80,749 $ 90,588 Growth rate (10.9) % (7.4) % Yen/dollar exchange rate (end of period) 132.70 115.02 Aflac Japan ¥ 9,442 ¥ 9,337 Growth rate 1.1 % 1.8 % The growth of the future policy benefits liability in yen forAflac Japan and in dollars for AflacU.S. has been due to the aging of the Company's in-force block of business and the addition of new business. The following table summarizes certain significant assumptions made in establishing reserves for the Company's products and the net impact that could result from changes in these assumptions should they occur. UnderU.S. GAAP, the Company's reserves for its limited pay and long duration contracts are primarily calculated using locked-in assumptions. As such, the adverse hypothetical impacts illustrated in the table below are those that would increase the Company's best estimate reserves, but would not result in a premium deficiency requiring strengthening of reserves or write-off of DAC. The favorable hypothetical impacts in the table below would decrease the Company's best estimate reserves but they would not result in an immediate decrease to itsU.S. GAAP reserves (given that the Company would be required to leave the current assumptions locked in); rather, the positive impacts would be recognized in net earnings over the life of the policies in force. The information below is for illustrative purposes and includes the impacts of changes in a single assumption and not changes in any combination of assumptions. As a result of emerging experience, changes in current assumptions and the related impact that could result in the listed financial statement balances that are in excess of the amounts illustrated may occur in future periods. Increase (Decrease) in Best Estimate Reserves Assumption Current Assumption Assumption Change (in millions) (1) Expected portfolio book yields over Increase 25 basis points / Investment return the life of the business Decrease 25 basis points$(2,102) to$2,277 Pricing expectations adjusted to Increase / Decrease Expected Expected future claim best estimate based on Company Future Claim Payments: +5% to payments / base mortality experience -5%$4,994 to$(4,994) Pricing expectations adjusted to
Increase / Decrease Expected
best estimate based on Company Total Termination Rates: +5% to
Total termination rates experience -5% $(434) to $600
(1) Best estimate reserves are equal to the present value of claims, cash
values, expenses, and commissions minus the present value of gross premiums,
using current best estimate assumptions.
In computing the estimate of unpaid policy claims, the Company considers many factors, including the benefits and amounts available under the policy; the volume and demographics of the policies exposed to claims; and internal business practices, such as incurred date assignment and current claim administrative practices. The Company monitors these conditions closely and makes adjustments to the liability as actual experience emerges. Claim levels are generally stable from period to period; however, fluctuations in claim levels may occur. In calculating the unpaid policy claim liability, the Company does not calculate a range of estimates. The following table shows the expected sensitivity of the unpaid policy claims liability as ofDecember 31, 2022 , to changes in severity and frequency of claims. 67
——————————————————————————–
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Sensitivity of Unpaid Policy Claims Liability
(In millions) Total Severity
Decrease Decrease Increase Increase
Total Frequency by 2% by 1% Unchanged by 1% by 2%
Increase by 2% $ (1) $ 24 $ 49 $ 74 $ 99
Increase by 1% (25) 0 24 49 74
Unchanged (49) (24) 0 24 49
Decrease by 1% (73) (49) (24) 0 24
Decrease by 2% (97) (73) (49) (25) (1)
Other policy liabilities, which accounted for 9% of total policy liabilities as
of December 31, 2022 , consisted primarily of annuity and unearned premium
reserves, and discounted advance premiums on deposit from policyholders in
conjunction with their purchase of certain Aflac Japan insurance products. These
advanced premiums are deferred upon collection and recognized as earned premiums
over the contractual premium payment period. Advanced premiums represented 11%
and 15% of the December 31, 2022 and 2021 other policy liabilities balances,
respectively. See the Aflac Japan segment subsection of this MD&A for further
information.
Income Taxes
Income tax provisions are generally based on pretax earnings reported for
financial statement purposes, which differ from those amounts used in preparing
the Company's income tax returns. Deferred income taxes are recognized for
temporary differences between the financial reporting basis and income tax basis
of assets and liabilities, based on enacted tax laws and statutory tax rates
applicable to the periods in which the Company expects the temporary differences
to reverse. The evaluation of a tax position in accordance with U.S. GAAP is a
two-step process. Under the first step, the enterprise determines whether it is
more likely than not that a tax position will be sustained upon examination by
taxing authorities. The second step is measurement, whereby a tax position that
meets the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. A valuation
allowance is established for deferred tax assets when it is more likely than not
that an amount will not be realized. The determination of a valuation allowance
for deferred tax assets requires management to make certain judgments and
assumptions.
In evaluating the ability to recover deferred tax assets, the Company's
management considers all available evidence, including taxable income in open
carry back years, the existence of cumulative losses in the most recent years,
forecasted earnings, future taxable income exclusive of reversing temporary
differences and carryforwards, future taxable temporary difference reversals,
and prudent and feasible tax planning strategies. In the event the Company
determines it is not more likely than not that it will be able to realize all or
part of its deferred tax assets in the future, a valuation allowance would be
charged to earnings in the period such determination is made. Likewise, if it is
later determined that it is more likely than not that those deferred tax assets
would be realized, the previously provided valuation allowance would be
reversed. Future economic conditions and market volatility, including increases
in interest rates or widening credit spreads, can adversely impact the Company's
tax planning strategies and in particular the Company's ability to utilize tax
benefits on previously recognized capital losses. The Company's judgments and
assumptions are subject to change given the inherent uncertainty in predicting
future performance and specific industry and investment market conditions.
Aflac Japan holds certain U.S. dollar-denominated assets in a DST. These assets
are mostly comprised of various U.S. dollar-denominated commercial mortgage
loans. The functional currency of the DST for U.S. tax purposes was historically
the Japanese yen. In 2022, the Company requested a change in tax accounting
method through the Internal Revenue Service's automatic consent procedures to
change its functional currency on the DST for U.S. tax purposes to the U.S.
dollar. As a result, foreign currency translation gains or losses on assets held
in the DST will no longer be recognized for U.S. tax purposes. The Company
historically recorded a deferred tax liability for foreign currency translation
gains on the DST assets, which was released in the third quarter of 2022 as a
result of the functional currency change and subsequently adjusted for foreign
currency impacts in the fourth quarter of 2022. This change in functional
currency resulted in the Company recognizing an income tax benefit of
$452 million ($0.71 per basic and diluted share, respectively) in 2022.
An increase or decrease in the Company’s effective tax rate by one percentage
point would have resulted in an increase or decrease in the Company’s 2022
income tax expense of
For additional information on income tax, see Note 10 of the Notes to the
Consolidated Financial Statements presented in this report.
68
——————————————————————————–
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Future Adoption of Accounting Standard for Long-Duration Insurance Contracts
InAugust 2018 , the FASB issued Accounting Standards Update (ASU) 2018-12, "Financial Services - Insurance, Targeted Improvements to the Accounting for Long-Duration Contracts" (LDTI). The update significantly changes how insurers account for long-duration contracts and amends existing recognition, measurement, presentation, and disclosure requirements applicable to the Company. Issues addressed in the new guidance include: 1) a requirement to review and, if there is a change, update cash flow assumptions for the liability for future policy benefits (LFPB) at least annually, and to update the discount rate assumption quarterly, 2) accounting for market risk benefits at fair value, 3) simplified amortization for deferred acquisition costs, and 4) enhanced financial statement presentation and disclosures. The Company has no products with market risk benefits. Since the initial issuance, the FASB has deferred the ASU effective date for two years, such that the amendments are now effective for the Company for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2022 . The amended guidance is to be applied as of the beginning of the earliest period presented, beginning on theJanuary 1, 2021 transition date (Transition Date). The Company will conclude implementation efforts and adopt the amendments as ofJanuary 1, 2023 . The adoption will have a significant impact on the Company's financial position, results of operations, and disclosures. The requirement to update assumptions for the LFPB will have a significant impact on the Company's results of operations, systems, processes and controls and the requirement to update discount rates will have a significant impact on its AOCI and equity. There are two permitted transition methods upon adoption and the Company has selected the modified retrospective transition method. The new guidance requires that discount rates used for the discounting of insurance liabilities be initially adjusted on the adoption date and subsequently at each reporting period to the market levels for the upper-medium-grade (low credit risk) fixed income instrument yields (single-A in the currency of the underlying insurance contract) reflecting the duration of the Company's insurance liabilities. The primary impact on transition under the modified retrospective method is driven by updating discount rates that increase reserves and lower AOCI by the corresponding amount, net of tax. The Transition Date impact from adoption will result in a decrease in AOCI of approximately$18.6 billion and a decrease in retained earnings of approximately$-0.3 billion . The impact to AOCI results from updating discount rate assumptions from the rates locked in for reserves held as of the Transition Date to rates determined by reference to the Transition Date market level yields for upper-medium-grade (low credit risk) fixed income instruments (as ofDecember 31, 2020 ). The decrease in AOCI as ofJanuary 1, 2023 will be reduced to approximately$2.1 billion due to rising interest rates and a weakening of the yen. As discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements, the Company has designed its discount rate methodology for both theU.S. and Japan insurance business. Under the provisions of the new ASU, discount rates are updated each reporting period. The impact to the Company's reported financial statements underU.S. GAAP is greatly influenced by the nature of the Company's business model. Adoption of the new guidance reflects the Company's concentration inJapan third-sector business, in particular cancer insurance, with respect to which the duration of liabilities is materially longer than asset durations, while Japan's aggregate block of business continues to see favorable experience from mortality, morbidity, and expenses. The long duration of the Company's third-sector insurance liabilities inJapan coupled with limited-to-no-liquidity of the Japanese long-dated fixed-income market creates challenges in application of the market-based discount rate guidance and requires the Company to apply significant judgments in the discount rate methodologies for its Japanese third-sector liabilities. Under the modified retrospective method, the impact of a low discount rate applied to long-duration third sector liabilities is recognized at adoption, while associated favorable morbidity margins are recognized over time thus driving a pronounced timing impact toU.S. GAAP equity. In addition, with respect to the Japan segment, the Company maintains a large portfolio of assets designated as held-to-maturity (HTM) as a strategy to reduce capital (solvency margin ratio or SMR) volatility. In a low interest rate environment, such as presently exists inJapan , assets designated as HTM that were purchased in a higher interest rate environment have significant embedded gains not reflected in AOCI (HTM securities are carried at amortized cost underU.S. GAAP), which serves as an economic offset to a low discount rate applied to policy liabilities. AtDecember 31, 2022 , the Company's HTM portfolio was$19.1 billion at amortized cost and had$2.2 billion in net unrealized gains. As ofDecember 31, 2020 (just prior to theJanuary 1, 2021 Transition Date), the Company's HTM portfolio was$24.5 billion at amortized cost and had$5.9 billion in net unrealized gains. After adoption of ASU 2018-12, the Company also expects net earnings and net earnings per share to reflect larger quarterly fluctuations in periods that the future cash flow assumptions are updated, which are used to calculate the liability for future policy benefits. See Note 1 of Notes to the Consolidated Financial Statements for additional information on the 69 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations impacts to the Company's consolidated statements of earnings for the years endedDecember 31, 2022 , and 2021, as restated under LDTI. The following table presents the expected impacts from the adoption of ASU 2018-12 to the Company's previously reported operating ratios for the years endedDecember 31 . As Reported As Adjusted 2022 2021 2022 2021 Aflac Japan: (1) Ratios to total premiums: Benefits and claims, net 68.8 % 67.0 % 67.4 % 67.9 % Ratios to total adjusted revenues: Total adjusted expenses 21.5 21.6 20.3 20.5 Aflac U.S.: Ratios to total premiums: Benefits and claims, net 43.8 % 43.6 % 45.9 % 47.0 % Ratios to total adjusted revenues: Total adjusted expenses 41.9 39.5 39.7 38.4
(1) Includes the impact of the deferred profit liability reclassification
discussed in Note 1 of the Notes to the Consolidated Financial Statements.
For the year endedDecember 31, 2022 , as restated under the new ASU, benefit ratios are lower forAflac Japan and higher for AflacU.S. , while expense ratios are modestly lower due to amortizing deferred acquisition costs at a slower rate. This results in a modestly higher pretax profit margin forAflac Japan and a slightly higher pretax profit margin for AflacU.S. For the year endedDecember 31, 2021 , as restated under the new ASU, benefit ratios are higher forAflac Japan and AflacU.S. , while expense ratios are modestly lower due to amortizing deferred acquisition costs at a slower rate. This results in a slightly higher pretax profit margin forAflac Japan and a modestly lower pretax profit margin for AflacU.S. Prior to adoption of the ASU, pandemic-related low claim experience is recognized in earnings in the reporting period when low claims are experienced, whereas under the new ASU, this pandemic-related low claim experience is recognized in line with experience-related remeasurement and potentially through annual assumptions updates, i.e., partially during the reporting period with the remainder recognized over the remaining expected life of each cohort. The Company has created a robust governance framework to support implementation of the updated standard. As part of its implementation, the Company has made relevant policy elections, which are outlined in Note 1 of the Notes to the Consolidated Financial Statements. The Company has also completed the modernization of its actuarial technology platform to enhance its modeling, data management, experience study and analytical capabilities, increase the end-to-end automation of key reporting and analytical processes and optimize its control framework. The Company has also put in place internal controls related to the new processes created as part of implementing the updated standard. The adoption of this new accounting guidance will not impact financial statements forAflac Japan under FSA requirements or for AflacU.S. under applicable statutory requirements. Therefore, adoption of the updated standard does not impact the Company's overall cash flows, subsidiaries' dividend capacity or their ability to meet applicable regulatory capital standards, nor does it affect the Company's existing debt covenants or strategies for capital deployment. New Accounting Pronouncements During the last three years, various accounting standard-setting bodies have been active in soliciting comments and issuing statements, interpretations and exposure drafts. For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, see Note 1 of the Notes to the Consolidated Financial Statements.
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