Aflac Incorporated Announces Second Quarter Results, Reports Second Quarter Net Earnings of $1.6 Billion, Declares Third Quarter Cash Dividend

COLUMBUS, Ga., Aug. 1, 2023 /PRNewswire/ -- Aflac Incorporated (NYSE: AFL) today reported its second quarter results.

Total revenues were $5.2 billion in the second quarter of 2023, compared with $5.3 billion in the second quarter of 2022. Net earnings were $1.6 billion, or $2.71 per diluted share, compared with $1.4 billion, or $2.17 per diluted share a year ago.

Net earnings in the second quarter of 2023 included net investment gains of $555 million, or $0.92 per diluted share, compared with net investment gains of $564 million, or $0.88 per diluted share a year ago. These net investment gains were driven by net gains on certain derivatives and foreign currency activities of $541 million and $24 million of net gains from sales and redemptions, both of which were largely driven by changes in exchange rates. Net investment losses included a $9 million loss from a decrease in the fair value of equity securities and a $1 million increase in the company's current expected credit losses (CECL) reserves and impairments.

Adjusted earnings* in the second quarter were $954 million, compared with $945 million in the second quarter of 2022, reflecting an increase of 1.0%. Adjusted earnings per diluted share* increased 7.5% to $1.58 in the quarter. Variable investment income ran $29 million, or $0.04 per share, below the company's long-term return expectations. The weaker yen/dollar exchange rate negatively impacted adjusted earnings per share by $0.04.

The average yen/dollar exchange rate in the second quarter of 2023 was 137.53, or 5.9% weaker than the average rate of 129.39 in the second quarter of 2022. For the first six months, the average exchange rate was 134.97, or 9.0% weaker than the rate of 122.79 a year ago.

Total investments and cash at the end of June 2023 were $116.5 billion, compared with $121.4 billion at June 30, 2022. The decline in the carrying amount of the portfolio is principally driven by the weaker yen offset by higher interest rates.

Shareholders' equity was $20.4 billion, or $34.30 per share, at June 30, 2023, compared with $19.6 billion, or $30.82 per share, at June 30, 2022. Shareholders' equity at the end of the second quarter included a cumulative decrease of $5.1 billion for the effect of the change in discount rate assumptions on insurance reserves, compared with a corresponding cumulative decrease of $6.5 billion at June 30, 2022 and a net unrealized gain on investment securities and derivatives of $2.0 billion, compared with a net unrealized gain of $2.9 billion at June 30, 2022. Shareholders' equity at the end of the second quarter also included an unrealized foreign currency translation loss of $4.2 billion, compared with an unrealized foreign currency translation loss of $3.2 billion at June 30, 2022. The annualized return on average shareholders' equity in the second quarter was 32.5%.

For the first six months of 2023, total revenues were down 4.9% to $10.0 billion, compared with $10.5 billion in the first half of 2022. Net earnings were $2.8 billion, or $4.64 per diluted share, compared with $2.4 billion, or $3.77 per diluted share, for the first six months of 2022. Adjusted earnings for the first half of 2023 were $1.9 billion, or $3.13 per diluted share, compared with $1.9 billion, or $2.91 per diluted share, in 2022. Excluding the negative impact of $0.11 per share from the weaker yen/dollar exchange rate, adjusted earnings per diluted share increased 11.3% to $3.24 for the first six months of 2023.

Shareholders' equity excluding AOCI (or adjusted book value*) was $27.8 billion, or $46.61 per share at June 30, 2023, compared with $26.5 billion, or $41.82 per share, at June 30, 2022. The annualized adjusted return on equity excluding foreign currency impact* in the second quarter was 14.3%.

AFLAC JAPAN

In yen terms, Aflac Japan's net earned premiums were ¥283.4 billion for the quarter, or 6.2% lower than a year ago, mainly due to limited pay products reaching paid-up status and a reinsurance transaction in the first quarter. Adjusted net investment income decreased 6.4% to ¥88.0 billion, mainly due to lower variable investment income, higher hedge costs and the transfer of assets as part of the reinsurance transaction. Total adjusted revenues in yen declined 6.2% to ¥372.5 billion. Pretax adjusted earnings in yen for the quarter declined 0.1% on a reported basis to ¥113.4 billion, primarily due to decreased revenues offset by lower benefits and expenses during the quarter. Pretax adjusted earnings decreased 3.5% on a currency-neutral basis. The pretax adjusted profit margin for the Japan segment increased to 30.4%, compared with 28.6% a year ago.

For the first six months, net earned premiums in yen were ¥570.4 billion, or 6.0% lower than a year ago. Adjusted net investment income decreased 2.4% to ¥168.9 billion. Total adjusted revenues in yen were down 5.2% to ¥741.7 billion. Pretax adjusted earnings were ¥217.7 billion, or 1.5% higher than a year ago.

In dollar terms, net earned premiums decreased 11.6% to $2.1 billion in the second quarter. Adjusted net investment income decreased 11.9% to $637 million. Total adjusted revenues declined by 11.6% to $2.7 billion. Pretax adjusted earnings declined 5.8% to $822 million.

For the first six months, net earned premiums in dollars were $4.2 billion, or 14.6% lower than a year ago. Adjusted net investment income decreased 11.0% to $1.2 billion. Total adjusted revenues were down 13.8% to $5.5 billion. Pretax adjusted earnings were $1.6 billion, or 7.6% lower than a year ago.

For the quarter, total new annualized premium sales (sales) increased 26.6% to ¥16.1 billion, or $117 million, primarily reflecting the continued rollout of the new cancer product. For the first six months, total new sales increased 18.9% to ¥29.3 billion, or $217 million.

AFLAC U.S.

Aflac U.S. net earned premiums rose 2.2% to $1.4 billion in the second quarter compared to the prior year, reflecting the strong contribution from growth initiatives. Adjusted net investment income increased 5.2% to $203 million, largely due to higher floating rate income offset by lower variable investment income. Total adjusted revenues were up 2.1% to $1.7 billion. Pretax adjusted earnings were $369 million, 7.6% higher than a year ago, primarily due to lower benefits and higher revenues offset by higher expenses. The pretax adjusted profit margin for the U.S. segment was 22.2%, compared with 21.1% a year ago.

For the first six months, net earned premiums rose 1.6% to $2.9 billion. Adjusted net investment income increased 6.1% to $400 million. Total adjusted revenues were up 1.7% to $3.3 billion. Pretax adjusted earnings were $721 million, or 6.8% higher than a year ago.

Aflac U.S. sales increased 6.4% in the quarter to $324 million, reflecting continued improvement from investment in growth initiatives as well as productivity gains. For the first half of the year, total new sales increased 5.8% to $639 million.

CORPORATE AND OTHER

For the quarter, total adjusted revenues increased 233.3% to $140 million compared to the prior year, primarily due to the reinsurance transaction in the first quarter of 2023 resulting in an increase to both total net earned premiums and adjusted net investment income, which also increased due to higher rates and higher amortized hedge income that were partially offset by a higher volume of tax credit investments. Pretax adjusted earnings were a loss of $52 million, compared with a loss of $75 million a year ago, reflecting the increase in adjusted revenue, partially offset by higher total net benefit and claims and other adjusted expenses.

For the first six months, total adjusted revenues increased 131.0% to $268 million, Pretax adjusted earnings were a loss of $58 million, compared with a loss of $117 million a year ago.

DIVIDEND AND CAPITAL RETURNED TO SHAREHOLDERS

The board of directors declared the third quarter dividend of $0.42 per share, payable on September 1, 2023 to shareholders of record at the close of business on August 23, 2023.

In the second quarter, Aflac Incorporated deployed $700 million in capital to repurchase 10.5 million of its common shares. At the end of June 2023, the company had 95.8 million remaining shares authorized for repurchase.

OUTLOOK

Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "Aflac delivered very strong earnings for both the quarter and the first six months. We remain actively focused on numerous initiatives in the U.S. and Japan around new products and distribution strategies to set the stage for future growth.

"Looking at our operations in Japan, I am pleased that our sales results reflect improvements through agencies and strategic alliances, including Daido Life and Dai-ichi Life. I am also encouraged by the early sales results of Japan Post Company and Japan Post Insurance, which began selling our new cancer insurance product in April. We look to gain new customers through products like WAYS and Child Endowment to increase opportunities to sell our third sector products, as we prepare for the anticipated launch of our new medical product in mid-September.

"In the U.S., I remain encouraged by the continued improvement in the productivity of our agents and brokers as well as contribution from our growth initiatives, including group life and disability; network dental and vision; and consumer markets. We continue to work toward reinforcing our leading position and accelerating our momentum as we enter the second half of the year.

"As always, we are committed to prudent liquidity and capital management. We continue to generate strong investment results while remaining in a defensive position as we monitor evolving economic conditions. We remain committed to extending our track record of dividend growth, supported by the strength of our capital and cash flows. At the same time, we remain in the market repurchasing shares with a tactical approach, focused on the growth investments we have made in our platform to improve our strength and leadership position."

All relevant prior-year amounts have been adjusted for the adoption of accounting guidance on January 1, 2023 related to accounting for long-duration insurance contracts.

*See Non-U.S. GAAP Financial Measures section for an explanation of foreign exchange and its impact on the financial statements and definitions of the non-U.S. GAAP financial measures used in this earnings release, as well as a reconciliation of such non-U.S. GAAP financial measures to the most comparable U.S. GAAP financial measures.

ABOUT AFLAC INCORPORATED

Aflac Incorporated (NYSE: AFL), a Fortune 500 company, has helped provide financial protection and peace of mind for more than 67 years to millions of policyholders and customers through its subsidiaries in the U.S. and Japan. In the U.S., Aflac is the No. 1 provider of supplemental health insurance products.¹ In Japan, Aflac Life Insurance Japan is the leading provider of cancer and medical insurance policies in force. In 2021, the company became a signatory of the Principles for Responsible Investment (PRI). In 2022, the company was included in the Dow Jones Sustainability North America Index for the ninth year, the World's Most Ethical Companies by Ethisphere for the 17th consecutive year, Fortune's World's Most Admired Companies for the 22nd time and Bloomberg's Gender-Equality Index for the fourth consecutive year. To find out how to get help with expenses health insurance doesn't cover, get to know us at aflac.com or aflac.com/espanol. Investors may learn more about Aflac Incorporated and its commitment to corporate social responsibility and sustainability at investors.aflac.com under "Sustainability."

¹ LIMRA 2021 U.S. Supplemental Health Insurance Total Market Report

A copy of Aflac's financial supplement for the quarter can be found on the "Investors" page at aflac.com.

Aflac Incorporated will webcast its quarterly conference call via the "Investors" page of aflac.com at 8:00 a.m. (ET) on Wednesday, August 2, 2023.

Note: Tables within this document may not foot due to rounding.

NON-U.S. GAAP FINANCIAL MEASURES

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-U.S. GAAP financial measures included in this earnings release 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 are U.S. GAAP total revenues excluding adjusted net investment gains and losses. Adjusted expenses are U.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 comparable U.S. GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively.
• 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 in Japan 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) into U.S. dollars. The most comparable U.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 return on equity is adjusted earnings divided by average shareholders' equity, excluding accumulated other comprehensive income (AOCI). Management uses adjusted return on equity to evaluate the financial performance of the Company's insurance operations on a consolidated basis and believes that a presentation of this financial measure is vitally important to an understanding of the underlying profitability drivers and trends of the Company's insurance business. The Company considers adjusted return on equity important as it excludes components of AOCI, which fluctuate due to market movements that are outside management's control. The most comparable U.S. GAAP financial measure for adjusted return on equity is return on average equity (ROE) as determined using net earnings and average total shareholders' equity.
• 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 comparable U.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.
• 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 comparable U.S. GAAP financial measure for amortized hedge costs/ income.
• Adjusted book value is the U.S. GAAP book value (representing total shareholders' equity), less AOCI as recorded on the U.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 comparable U.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 book value including unrealized foreign currency translation gains and losses is adjusted book value plus unrealized foreign currency translation gains and losses. Adjusted book value including unrealized foreign currency translation gains and losses per common share is adjusted book value plus unrealized foreign currency translation gains and losses at the period end divided by the ending outstanding common shares for the period presented. The Company considers adjusted book value including unrealized foreign currency translation gains and losses, and its related per share financial measure, important as they exclude certain components of AOCI, which fluctuate due to market movements that are outside management's control; however, it includes the impact of foreign currency as a result of the significance of Aflac's Japan operation. The most comparable U.S. GAAP financial measures for adjusted book value including unrealized foreign currency translation gains and losses and adjusted book value including unrealized foreign currency translation gains and losses per common share are total book value and total book value per common share, respectively.
• Adjusted net investment income is net investment income adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, and ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are reclassified from net investment gains and losses to net investment income. The Company considers adjusted net investment income important because it provides a more comprehensive understanding of the costs and income associated with the Company's investments and related hedging strategies. The most comparable U.S. GAAP financial measure for adjusted net investment income is net investment income.
• 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 comparable U.S. GAAP financial measure for adjusted net investment gains and losses is net investment gains and losses.