UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-07434
| Aflac Incorporated | ||
| (Exact name of registrant as specified in its charter) | ||
| Georgia | 58-1167100 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 1932 Wynnton Road | Columbus | Georgia | 31999 | |||||||||||
| (Address of principal executive offices) | (ZIP Code) | |||||||||||||
Registrant’s telephone number, including area code: 706.323.3431706.323.3431
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbols(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $.10 Par Value | AFL | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | Smaller reporting company | ☐ | |||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes þ☑ No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 28, 2019,30, 2022, was $40,396,253,541.$34,906,869,651.
The number of shares of the registrant’s common stock outstanding at February 12, 2020,16, 2023, with $.10 par value, was 722,520,700.
612,208,648.
Documents Incorporated By Reference
Certain information contained in the Notice and Proxy Statement for the Company’s 20202023 Annual Meeting of Shareholders is incorporated by reference into Part III hereof.
Aflac Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 20192022
Table of Contents
| PART I | Page | ||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 1B. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
| Item 7. | |||||||||||
| Item 7A. | |||||||||||
| Item 8. | |||||||||||
| Item 9. | |||||||||||
| Item 9A. | |||||||||||
| Item 9B. | |||||||||||
| Item 9C. | |||||||||||
| PART III | |||||||||||
| Item 10. | |||||||||||
| Item 11. | |||||||||||
| Item 12. | |||||||||||
| Item 13. | |||||||||||
| Item 14. | |||||||||||
| PART IV | |||||||||||
| Item 15. | |||||||||||
| Item 16. | |||||||||||
i
PART I
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. Aflac Incorporated and its subsidiaries (the Company) desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected herein, and in any other statements made by Company officials in communications with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. Furthermore, forward-looking information is subject to numerous assumptions, risks and uncertainties. In particular, statements containing words such as the ones listed below or similar words, as well as specific projections of future results, generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements.
| • expect | • anticipate | • believe | • goal | • objective | ||||||||||
| • may | • should | • estimate | • intends | • projects | ||||||||||
| • will | • assumes | • potential | • target | • outlook | ||||||||||
The Company cautions readers that the following factors, in addition to other factors mentioned from time to time, could cause actual results to differ materially from those contemplated by the forward-looking statements:
•defaults and credit downgrades of investments
•global fluctuations in interest rates and exposure to significant interest rate risk
•concentration of business in Japan
•limited availability of acceptable yen-denominated investments
•foreign currency fluctuations in the yen/dollar exchange rate
•differing interpretations applied to investment valuations
•significant valuation judgments in determination of expected credit losses recorded on the Company's investments
•decreases in the Company's financial strength or debt ratings
•decline in creditworthiness of other financial institutions
•concentration of the Company's investments in any particular single-issuer or sector
•major public health issues, including COVID-19 and any resulting or coincidental economic effects, on the Company's business and financial results
•the Company's ability to attract and retain qualified sales associates, brokers, employees, and distribution partners
•deviations in actual experience from pricing and reserving assumptions
•ability to continue to develop and implement improvements in information technology systems and on successful execution of revenue growth and expense management initiatives
•interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems
•subsidiaries' ability to pay dividends to the Parent Company
•inherent limitations to risk management policies and procedures
•operational risks of third party vendors
•tax rates applicable to the Company may change
•failure to comply with restrictions on policyholder privacy and information security
•extensive regulation and changes in law or regulation by governmental authorities
•competitive environment and ability to anticipate and respond to market trends
•catastrophic events, including, but not necessarily limited to, as a result of climate change, epidemics, pandemics (such as COVID-19), tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, terrorism or other acts of violence, and damage incidental to such events
•ability to protect the Aflac brand and the Company's reputation
•ability to effectively manage key executive succession
•changes in accounting standards
•level and outcome of litigation
•allegations or determinations of worker misclassification in the United States
1
ITEM 1. BUSINESS
OVERVIEW
Aflac Incorporated (the Parent Company) was incorporated in 1973 under the laws of the state of Georgia. The Parent Company and its subsidiaries (collectively, the Company) provide financial protection to more than 50 million people worldwide. The Company’s principal business is supplemental health and life insurance products with the goal to provide customers the best value in supplemental insurance products in the United States (U.S.) and Japan. When a policyholder or insured gets sick or hurt, the Company pays cash benefits fairly and promptly for eligible claims, directly to the insured (unless assigned otherwise). For more than sixty years,claims. Throughout its 67-year history, the Company’s supplemental insurance policies have given policyholders the opportunity to focus on recovery, not financial stress.
The Company has continued to develop and expand its product offerings over time. In Japan, the Company is cultivating an innovation-driven culture to meet the rapidly changing customer and societal needs. Through acquisitions completed in 2019 and 2020, the Company expanded its U.S. product offerings to network dental and vision and employer paid group life and disability. The Company has also been investing in new distribution opportunities through acquisitions and partnerships. In recent years, the Company has pivoted to digital sales methods and accelerated related digital investments. For information on the reporting segments see the Result of Operations by Segment section of Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
The Company is authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and Japan. The Company’s website is: www.aflac.com. Information included on the Company’s website is not incorporated by reference into this filing. The Company makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission (SEC).
REVENUE-GENERATING ACTIVITIES
The Company's strategy for growth in the U.S. and Japan has remained straightforward and consistent for many years. The Company develops relevant supplemental health insurance products offering financial protection from the rising out-of-pocket expenses associated with medical events that are not covered by the insureds' primary coverage. The Company also offers a complement of other voluntary health and sells themlife insurance products to fit the needs of its customers. Additionally, the Company aims to obtain more customers by selling where the customer prefers to purchase protection, whether through expandedan agent or broker, a distribution channels.partner or directly from the Company. To help promote its insurance products, the Company’s marketing campaigns feature the Aflac Duck.
2
In 1999, the Company had been running commercials for nearly a decade, but its brand awareness was hovering at about 10%. An innovative marketing campaign with something unique and memorable that would build brand awareness was needed. The Aflac Duck’s first commercial in the U.S., “Park Bench,” aired on January 1, 2000 and taught consumers how to pronounce “Aflac.” The Aflac Duck made his international debut in Japan in 2003. In the two decades since his U.S. debut, the Aflac Duck has become one of the most familiar advertising icons in the world, appearing in severalmany commercials and countless print ads in both the U.S. and Japan. Today, the Aflac Duck is a helpmate who increases brand knowledge and connection.
The Company's insurance business consists of two reporting segments: Aflac Japan and Aflac U.S. The Parent Company’s primary insurance subsidiaries aresubsidiary in the Aflac Japan segment is Aflac Life Insurance Japan Ltd. in Japan (Aflac Japan) and(ALIJ). Aflac U.S. includes the insurance subsidiaries American Family Life Assurance Company of Columbus (Aflac); Continental American Insurance Company (CAIC), branded as Aflac Group Insurance (AGI); American Family Life Assurance Company of New York (Aflac New York) and; Tier One Insurance Company (TOIC) in the U.S. (collectively, Aflac U.S.).
In November 2020, the Company, paid $75 million at closingthrough its insurance subsidiaries Aflac and madeAflac New York, acquired Zurich North America’s U.S. Corporate Life and Pensions business, which consists of group life, disability and absence management products. Aflac and Aflac New York agreed to reinsure on an additional commitmentindemnity basis Zurich North America’s U.S. in-force group life and disability policies with annualized earned premium of upover $100 million. Aflac also acquired assets needed to $21 million in contingent consideration payable over three years based onsupport the achievement by Argus of certain performance targets. Argus isgroup life and disability business, along with an addition to the Aflac U.S. segment.absence management platform.
AFLAC JAPAN
Aflac Japan is the principal contributor to the Parent Company's consolidated earnings and the largest insurer in Japan in terms of cancer and medical (third sector insurance products) policies in force. As of December 31, 2019, Aflac Japan exceeded 24 million individual policies in force in Japan. Aflac Japan continued to be the number one seller of cancer insurance policies in Japan throughout 2019, with more than 15 million cancer policies in force as of December 31, 2019.
Insurance Products
Third Sector Insurance Products
Cancer
Cancer Insurance Aflac U.S.'sJapan pioneered the cancer insurance market in Japan in 1974, and remains the number one provider of cancer insurance in Japan today. Aflac Japan's cancer insurance products provide a lump-sum benefit upon initial diagnosis of cancer and subsequentfixed daily benefits for treatment receivedsubsequent hospitalization and outpatient treatments due to cancer.cancer, as well as cancer-related surgical and convalescent care benefits.
Medical and Other Health
Medical Insurance Aflac Japan's medical insurance products provide benefits for hospitalization, surgeries and outpatient treatment of various illnesses, as well as lump sum benefits related to three critical illnesses: cancer, heart attack, and stroke.
Income Support Insurance Aflac Japan's Income Support Insurance provides fixed-benefit amounts in the event that a policyholder is unable to work due to significant illness or injury.
3
Other
Nursing Care Insurance Aflac Japan's Nursing Care Insurance provides coverage for out-of-pocket costs incurred when receiving public nursing care services.
Work Leave Insurance Aflac Japan’s Work Leave Insurance offers benefits for relatively short-term hospitalization and home care associated with work leave of less than a year. It is a product that meets the growing need for leave benefits, especially for employees of small and medium-sized companies.
First Sector Insurance Products
Life
Protection-Type Life Insurance
Whole Life Aflac Japan launched Prepare Smart Whole-Life Insurance in 2018, a whole life insurance product with low cash surrender value, which offers non-smoking policyholders further discounted premiums, and it provides beneficiaries, typically a designated family member, with a pre-determined benefit payment upon the death of the insured.
GIFT GIFT is a term life insurance product that provides a designated family member with a fixed amount of money every month upon a breadwinner’s death or serious disability as family support.
Savings-Type Life Insurance
WAYS and Child Endowment WAYS is an insurance product which has features that allow policyholders to convert a portion of their life insurance to medical, nursing care or fixed annuity benefits at a predetermined age. Aflac Japan's child endowment insurance product offers a death benefit until a child reaches age 18. This product also pays a lump-sum at the time of the child's entry into high school, as well as an educational annuity for each of the four years during his or her college education. In November 2022, Aflac Japan refreshed its WAYS and Child Endowment products and began to actively promote sales of these products after having curtailed sales of both products beginning in 2013.
Distribution Channels
Traditional Sales ChannelThis distribution channel includes individual agencies, independent corporate agencies and affiliated corporate agencies. Aflac Japan was represented by approximately 7,400 sales agencies at the end of 2022, with approximately 110,000 licensed sales associates employed by those agencies, including individual agencies.
Dai-ichi LifeAflac Japan's alliance with Dai-ichi Life was launched in 2001, and approximately 40,000 Dai-ichi Life representatives offer Aflac's cancer products. Dai-ichi Life is included in Aflac Japan's affiliated corporate agencies distribution channel.
Japan Post GroupAflac Japan's alliance with Japan Post Group, which is included in Aflac Japan's affiliated corporate agencies distribution channel, was launched in 2008. After the alliance strengthened in 2013, the number of postal outlets of Japan Post Co. Ltd. (Japan Post Co.) selling Aflac Japan's cancer product increased to more than 20,000. Japan Post Insurance Co., Ltd. (Japan Post Insurance) offers Aflac Japan cancer products through its 76 directly managed offices. Additionally, in April 2022, approximately 10,000 employees of Japan Post Co. were transferred to Japan Post Insurance. Japan Post Group has informed Aflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products and Aflac Japan cancer products but will not include sales of other financial products. See the "Aflac Japan Segment" subsection of MD&A for more about this alliance.
Daido LifeIn 2013, Aflac Japan and Daido Life Insurance entered into an agreement for Daido to sell Aflac Japan's cancer insurance products specifically to the Hojinkai market, which is an association of small businesses. Currently, Daido also sells Aflac Japan's cancer insurance products to the market in the tax payment association, which is a not-for-profit association for small businesses to support tax related matters. Daido Life is included in Aflac Japan's affiliated corporate agencies distribution channel.
4
BanksConsumers in Japan rely on banks to provide not only traditional bank services, but also as one key source to provide insurance solutions and other services. At December 31, 2022, Aflac Japan had agreements with approximately 90% of the total number of banks in Japan to sell its products.
Competitive Markets
The Company competes with other insurance carriers through policyholder service, price, product design and sales efforts, as the number of insurance companies offering stand-alone cancer and medical insurance has more than doubled since the deregulation of the Japan market in 2001. However, based on Aflac Japan's size of annualized premiums in force and diversified distribution network, the Company believes it is well-positioned to continue to adapt to increased competition. Furthermore, the Company believes the continued development and maintenance of operating efficiencies will allow Aflac Japan to offer affordable products that appeal to consumers. The Company believes Aflac Japan will remain a leading provider of third sector products such as cancer and medical insurance coverage in Japan, principally due to its experience in the market, well-known brand, low-cost operations, expansive marketing system and product expertise.
Government Regulation
Financial Services Agency (FSA) The financial and business affairs of Aflac Japan are subject to examination by Japan's FSA. Aflac Japan files annual and interim reports and financial statements for the Japanese insurance operations based on a March 31 fiscal year end, prepared in accordance with Japanese regulatory accounting practices prescribed or permitted by the FSA. Japanese regulatory basis earnings are determined using accounting principles that differ materially from U.S. generally accepted accounting principles (U.S. GAAP). For additional information, see Note 13 of the Notes to the Consolidated Financial Statements.
Two FSA regulations applicable to Aflac Japan are outlined below.
▪Privacy and Cybersecurity
With regard to personal information obtained from policyholders, the insured, or others, Aflac Japan is regulated in Japan by the Act on the Protection of Personal Information (APPI) and guidelines issued by FSA and other governmental authorities. The FSA updated its guidelines regarding cybersecurity in February 2022.
•FSA Solvency Standard
The FSA maintains a solvency standard, the solvency margin ratio (SMR), which is used by Japanese regulators to monitor the financial strength of insurance companies. Aflac Japan's SMR is sensitive to interest rate, credit spread and foreign exchange rate changes. See the Liquidity and Capital Resources section of Item 7. MD&A for additional information on SMR, including a discussion of measures the Company has taken to mitigate the sensitivity of Aflac Japan's SMR.
Japan Companies ActAflac Japan dividend distributions to the Parent Company are subject to permitted dividend capacity under the Japan Companies Act.
Policyholder ProtectionThe Japanese insurance industry has a policyholder protection corporation that provides funds for the policyholders of insolvent insurers. For additional information, see the policyholder protection section of the MD&A.
For additional information regarding Aflac Japan's operations and regulations, see the "Aflac Japan Segment" subsection of the MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
AFLAC U.S.
The Company designs its U.S. insurance products to provide supplemental coverage for people who already have major medical or primary insurance coverage, as Aflac U.S. offers cancer insurance on anpolicies pay benefits regardless of other insurance. Aflac U.S. products are distributed in the individual basis.and group supplemental insurance markets. Aflac's individual policies are portable, meaning that individuals may retain their full insurance coverage upon separation from employment or affiliation with a group, generally at the same premium. Individual policies are typically guaranteed-renewable for the lifetime of the policyholder (to age 75 for short-term disability policies).
5
Insurance Products
Accident
Accident Insurance Aflac U.S. offers accident coverage on both an individual and group basis. These policies pay cash benefits in the event of a covered injury. The accident portion of the policy includes lump-sum benefits for accidental death, dismemberment and specific injuries as well as fixed benefits for hospital confinement. Additional benefits are also available for home modifications, wellness and increased benefits for injuries related to participationsparticipation in an organized sporting activity.
Disability
Disability Insurance Aflac U.S. offers short-term disability benefits on both an individual and group basis and long-term disability benefits on a group basis. The
Critical Care
Cancer InsuranceAflac U.S.'s cancer insurance products provide a lump-sum benefit upon initial diagnosis of cancer and subsequent benefits for treatment received due to cancer. Aflac U.S. offers cancer insurance on an individual short-term disability product offers an Aflac Value Rider that pays a benefit, less claims, for every consecutive five-year term that the policy is in force.basis.
Critical Illness Insurance Aflac U.S. offers coverage for critical illness plans on both an individual and group basis. These policies are designed to pay cash benefits in the event of critical illnesses such as heart attack, stroke or cancer.
Hospital Indemnity Insurance Aflac U.S. offers hospital indemnity coverage on both an individual and group basis. Hospital indemnity products provide policyholders fixed dollar benefits triggered by hospitalization due to accident or sickness. Indemnity benefits for inpatient and outpatient surgeries, as well as various other diagnostic events, are also available. Aflac U.S. also offers a lump sum rider for a range of critical illness events that can be added to its individual accident, short-term disability
Dental and hospital indemnity products.Vision
Dental and Vision Insurance Aflac U.S. now offers network dental and vision products on a group basis. Aflac U.S. offersbasis and fixed-benefit dental coverage on both an individual and group basis. Aflac U.S. offers Vision NowSM,is an individually issued policy which provides fixed benefits for serious eye health conditions and loss of sight as well as coverage for corrective eye materials and exam benefits.
Life
Life (Term and Whole)Insurance Aflac U.S. offers term- and whole-life policies on both an individual and group basis.
Seasonality
In recent years, new annualized premium sales are generally higher in the fourth quarter for Aflac U.S. group business due to the timing of open enrollment for many employers. As a result, approximately half of total new annualized premium sales for Aflac U.S. group business are generated in the fourth quarter, which typically results in over one third of total Aflac U.S. total sales being generated in the fourth quarter.
Distribution Channels
Independent Associates/Career Agents The career agent channel in Aflac U.S. focuses on marketing Aflac to the small business market, defined as employers of between three and 99 employees. Sales associates in the U.S. are independent contractors and are paid commissions and other variable compensation based on first-year and renewal premiums from their sales of insurance products.
Brokers The broker channel of Aflac U.S. focuses on selling to the mid- and large-case market, which is comprised of employers with 100 or more employees and typically an average size of 1,000 employees or more. Brokers in the U.S. are
6
independent contractors and are paid commissions based on first-year and renewal premiums from their sales of insurance products.
Consumer MarketsWhile Aflac U.S. concentrates on marketingprimarily markets its insurance products at the worksite. This method offers policies to individuals through employment, trade and other associations. Aflac U.S. believes that worksite, marketing enables sales associates and brokers to reach a greater number of prospective policyholders and lowers distribution costs, compared with individually marketed business. Aflac U.S. is also expanding its distribution strategy to directly reach consumers outside of the traditional worksite through digital lead generation.
Aflac U.S. competes against several supplemental insurance carriers on a national and regional basis. Aflac U.S. believes its policies, premium rates, platforms, value-added services and sales commissions are competitive by product type. Moreover, Aflac U.S. believes that its products are distinct from competitive offerings given its product focus (including features, benefits and claims service model), distribution capabilities and brand awareness.
Since Aflac products provide an additional level of financial protection for policyholders, the Company believes the increased financial exposure some employees may face creates a favorable opportunity for Aflac U.S. products. However, given the profitability erosion some major medical carriers are facing in their core lines of business, the Company has seen a more competitive landscape as these carriers seek entry into Aflac's supplemental product segments and leverage their core benefit offerings by bundling and discounting products in order to gain market share.
Government Regulation
State Insurance Regulation The Parent Company and its U.S. insurance subsidiaries, Aflac, CAIC, TOIC (Nebraska-domiciled insurance companies) and, Aflac New York (a New York-domiciled insurance company) and ABS (a licensed third party administrator in most U.S. jurisdictions and a pre-paid limited health service organization in Florida) are subject to state regulations in the U.S. as an insurance holding company system. Such regulations generally provide that certain transactions between companies within the holding company system must be fair and equitable. In addition, transfers of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and certain transactions between companies within the system, including management fees, loans and advances are subject to prior notice to, or approval by, state regulatory authorities. These laws generally require, among other things, the insurance holding company and each insurance company directly owned by the holding company to register with the insurance departments of their respective domiciliary states and to furnish annually financial and other information about the operations of companies within the holding company system.
Like all U.S. insurance companies, Aflac, CAIC, TOIC and Aflac New York CAIC and TOIC are subject to regulation and supervision in the jurisdictions in which they do business. In general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to, among other things:
•granting and revoking licenses to transact business
•regulating trade and claims practices
•licensing of insurance agents and brokers
•approval of policy forms and premium rates
•standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements
•capital requirements
•limitations on dividends to shareholders
•the nature of and limitations on investments
•deposits of securities for the benefit of policyholders
•filing of financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by regulatory authorities
•periodic examinations of the market conduct, financial, and other affairs of insurance companies
The insurance laws of Nebraska that govern Aflac's activities provide that the acquisition or change of “control” of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the Nebraska Department of Insurance (NDOI). A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company (in the case of Aflac, CAIC and TOIC, the Parent Company) must generally file with the NDOI an application for change of control containing certain information required by statute and published regulations and provide a copy to Aflac. In Nebraska, control is generally presumed to exist if any person, directly or indirectly, acquires 10% or more of an insurance company or of any other person or entity controlling the insurance company. The 10% presumption is not conclusive and control may be found to exist at less than 10%. Similar laws apply in New York, the domiciliary jurisdiction of Aflac's New York insurance subsidiary.
7
State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the National Association of Insurance Commissioners (NAIC). In 2016,2020, the NDOI and New York State Department of Financial Services (NYSDFS) conducted full-scope, risk-focused financial examinations were conducted by the NDOI, New York Department of Financial Services (NYDFS), and the South Carolina Department of Insurance (SCDOI) on their respective state domiciled insurance entities Aflac, Aflac New York, and CAIC, respectively.entities. The examinations covered the reporting period January 1, 2016 – December 31, 2019. There were no material findings contained in the NDOI or NYSDFS final exam reports. CAIC redomiciled to Nebraska asIn 2023, the NYSDFS will commence a routine market conduct examination on Aflac New York of the five-year period ended December 2016 and TOIC redomiciled to Nebraska effective March 11, 2019. The NDOI and NYDFS are scheduled to conduct a full-scope comprehensive financial examination covering years 2016-2019 in 2020.31, 2022.
NAIC Risk-Based Capital The NAIC continually reviews regulatory matters, such as risk-based capital (RBC) modernization, group capital calculations and liquidity risk assessment and principle-based reserving. The NAIC has adopted a valuation manual containing a principle-based approach to calculation of life insurance reserves. The valuation manual became effective January 1, 2017. There is a three-year transition period, beginning January 1, 2017, during which companies can choose on a product by product basis to implement principle-based reserving for new business. The Company anticipates that the adoption of this manual will not cause a material impact on the statutory reserves of Aflac, Aflac New York, CAIC or TOIC.assessment. The NAIC uses an RBC formula relating to insurance risk, business risk, asset risk and interest rate risk to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mix of risk inherent in the insurer's operations. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of a company's regulatory total adjusted capital to its authorized control level RBC as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels are company action, regulatory action, authorized control, and mandatory control. AsSee Note 13 of December 31, 2019, based on year-end statutory accounting results, Aflac's company action level RBC ratio was 539%. The 2018 RBC as filed is lower than Aflac U.S. stand-alone RBC duethe Notes to the inclusionConsolidated Financial Statements and the Liquidity and Capital Resources section of Aflac JapanMD&A for the first quarter of 2018. The RBC charge reflects the business risk without any total adjusted capital (TAC). Aflac's NAIC RBC ratio remains high and reflects a very strong capital and surplus position.additional information on RBC.
Guaranty Association and Similar Arrangements Under state insurance guaranty association laws and similar laws in international jurisdictions, the Company is subject to assessments, based on the share of business the Company writes in the relevant jurisdiction, for certain obligations of insolvent insurance companies to policyholders and claimants. In the U.S., some states permit member insurers to recover assessments paid through full or partial premium tax offsets. The Company's policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile's statutory
definition of insolvency, the amount of the loss is reasonably estimable and the related premium upon which the assessment is based is written. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction.
Federal InitiativesRegulation Federal legislation and administrative policies in several areas, including health care reform legislation, financial services reform legislation, securities regulation, pension regulation, privacy, tort reform legislation and taxation, can significantly and adversely affect insurance companies. FederalCertain federal regulations applicable to Aflac U.S. are outlined below.
•Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act (ACA)
•Dodd-Frank Act
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) and regulations issued thereunder, in particular rules to require central clearing for certain types of derivatives, may have an impact on the Company's derivative activity, including activity on behalf of Aflac Japan. In addition, in 2015 and 2016, six U.S. financial regulators, including the U.S. Commodity Futures Trading Commission (CFTC), issued final rules regarding the exchange of initial margin (IM) and variation margin (VM) for uncleared swaps that impose greater obligations on swap dealers regarding uncleared swaps with certain counterparties, such as the Company. The requirements of such rules with respect to IM are currently being phased in and will be fully implemented by September 1, 2020, although an extension to September 1, 2021 is expected for covered entities with an aggregate average notional amount below $50 billion. The margin requirements are expected to result in more stringent collateral requirements and to affect other aspects of the Company's derivative activity.
The Dodd-Frank Act also established a Federal Insurance Office (FIO) under the U.S. Treasury Department to monitor all aspects of the insurance industry and of lines of business other than certain health insurance, certain long-term care insurance and crop insurance. Traditionally, U.S. insurance companies have been regulated primarily by state insurance departments. The FIO does not directly regulate
8
•Privacy and Cybersecurity
In the insurance industry, but under Dodd-Frank it has the power to preempt state insurance regulations thatabsence of a comprehensive federal privacy law, states are inconsistent with international agreements reached by the federal government, subject to certain requirements and restrictions. The FIO and certain federal agencies must achieve consensus positions with the state insurance regulators when taking positions on insurance proposals by certain international forums. The President and Congress have stated proposals to reform or repeal certain provisionsmaking a push towards privacy legislation. Personally identifiable information is used in support of many of the Dodd-Frank Act, someCompany's business processes. For many years, the standard for protection and treatment of which have been implemented. The Company cannot predict with any degree of certainty what impact, if any, such proposals might have on Aflac's business, financial condition, or results of operations.
Cybersecurity also continues to be an area of evolving focus for U.S. legislation and regulatory activity. In March 2017,Industry regulators as well as the federal government have updated existing standards and increased their focus on enforcement. For example, the National Institute of Standards and Technology (NIST) issued enhanced security guidelines of the software supply chain and NYSDFS published increased security guidelines related to ransomware.
The Company has a cross-functional team that tracks and monitors new and emerging legislation and regulations to ensure privacy and cybersecurity regulation issuedprograms are evaluated and comply with regulatory requirements. This includes a robust third party risk management and assessment program. Over the last several years, processes have developed to support the data subject request process required by the NYDFS went into effect that requires covered entities, including Aflac New York,CCPA, privacy impact assessments have been implemented as required by CPRA and a dedicated privacy and security center has been added to maintain an information security program meeting certain security, data disposal, audit, activity
For further information concerning Aflac U.S. operations, see the "Aflac U.S. Segment" subsection of the MD&A and Notes 2 and 13 of the Notes to the Consolidated Financial Statements in this report.
CORPORATE AND OTHER
The Company's other operations include the Parent Company, Aflac Global Ventures LLC and its subsidiaries, asset management subsidiaries, results of reinsurance retrocession activities and a printing subsidiary.
Investments of Aflac U.S., as well as certain sub-advised assets of Aflac Japan, are managed by the Company’s U.S. asset management subsidiary, Aflac Asset Management LLC (AAM), and investments of Aflac Japan are managed pursuant to an investment advisory agreement between Aflac Japan and the Company's asset management subsidiary in Japan, Aflac Asset Management Japan Ltd. (AAMJ). AAMJ is licensed as a discretionary asset manager under the Japan Financial Instruments and Exchange Act and is subject to rules of the Japan Investment Advisors Association, a self-regulatory organization with mandatory membership for Japan investment managers. Effective January 19, 2021, AAM is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. AAM and AAMJ are reported in Corporate and Other; however, the assets that they manage are reported in the respective Aflac Japan and Aflac U.S. segments.
In 2022, the Company established Aflac Re Bermuda Ltd. (Aflac Re Bermuda), a Bermuda domiciled insurer that reinsures certain policies issued by ALIJ. Aflac Re Bermuda is subject to regulation in Bermuda, where the Bermuda Monetary Authority (BMA) has broad administrative powers relating to granting and revoking licenses to transact reinsurance business, approval of specific reinsurance transactions, capital requirements and solvency standards, limitations on dividends to shareholders, the nature of and limitations on investments, and the filing of financial statements in accordance with prescribed or permitted accounting practices.
In 2020, the Company purchased newly issued common stock of Trupanion, Inc., a provider of medical insurance for pets in the United States and Canada, resulting in the Company owning approximately 9% of the outstanding common stock of Trupanion, Inc. The shares were registered for resale and, pursuant to the Shareholder Agreement, subject to certain exceptions, the Company has agreed that it will not transfer its shares of Trupanion, Inc. common stock during a restricted period ending on November 13, 2023. The Company also entered into an alliance agreement with Trupanion, Inc. to sell pet insurance in worksites in the U.S., subject to certain exceptions, and to explore on an exclusive basis potential
9
distribution opportunities for pet insurance in Japan. On November 10, 2022, the Company and Trupanion announced a joint venture between ALIJ and Trupanion to provide pet insurance in Japan.
For additional information on the Company's other operations, see the "Corporate and Other" subsection of the MD&A and Note 8 in the Notes to the Consolidated Financial Statements.
The Company’s overarching human capital philosophy is, “If you take care of your employees, your employees will take care of the business.” As of December 31, 2019,2022, Aflac Japan had 6,1786,996 employees, Aflac U.S. had 4,7994,839 employees, and the Company's other operations had 7521,047 employees. The Company's compensation and benefit expense totaled approximately $1.9 billion in 2022, compared with approximately $2.0 billion in 2021. The Company believes its employee relations are generally satisfactory.
Talent
The Company uses internal and external resources to attract, retain and develop talent across a variety of backgrounds and demographics.
Aflac Japan seeks diverse talent through annual recruitment of new university graduates as well as mid-career recruitment of those with specialty skills or expertise. For its employees, Aflac Japan implements standard and unified training and development programs focusing on a range of business skills. For example, Aflac Japan’s Leadership Program allows select managers to participate in a comprehensive training program to learn about innovation and the global business environment. Aflac Japan implemented a human capital management system, beginning in January 2021 with managers and more senior leadership positions and in January 2022 with all other employees. Under the new system, employees have access to descriptions and necessary skills for all job positions across the Company and are able to more proactively design their careers.
Aflac U.S. recruiting efforts include partnerships with colleges and universities, including historically black colleges and universities, and civic organizations to attract diverse talent. Aflac U.S. also offers a variety of internships, co-operative opportunities and transitional programs to allow emerging talent to develop. Educational opportunities are available for self-development and growth to help employees further enhance their technical and professional skills.
Compensation
The Aflac Japan and Aflac U.S. Human Resources divisions operate as centralized internal compensation functions to provide oversight and input to the respective management teams with the objective of providing compensation that is consistent with job scope, duties and responsibilities. The compensation function evaluates new-hire job offers, promotions and compensation adjustments with the goal of consistent and equitable compensation. Defined salary structures are reviewed regularly and updated utilizing market data. Job levels and associated compensation are determined based on annually updated market data, job scope, duties and responsibilities. Employee performance reviews are conducted annually and are factored into employee bonuses and salaries.
Health and Wellness
In 2022, Aflac Japan was certified, for the fifth consecutive year, as one of the top 500 Leading Companies in Health and Productivity Management under the Certified Health & Productivity Management Outstanding Organizations Recognition Program with Japan's Ministry of Economy, Trade and Industry. This certification is awarded for best practices in employee health management, strategically focused work style and development of a socially appreciative work environment. Aflac Japan's current certification was in recognition of wide-ranging initiatives including a walking campaign, online seminars focused on improving health literacy, efforts to improve lifestyle habits such as support for smoke-free efforts, promotion of cancer screening, as well as COVID-19 control measures, including flexible working arrangements, workplace environment improvements and vaccination support.
Aflac U.S. Health and Wellness, a training and service program works to enhance organizational health, encourage healthy lifestyles among all U.S. employees, provide diverse wellness programs to meet a wide range of personal health needs, recognize employees for participating in healthier lifestyles activities, and support a positive corporate culture that is focused on celebrating and improving the quality of life for all U.S. employees.
10
Diversity, Equity & Inclusion
The Company’s corporate culture reflects its commitment to diversity, equity and inclusion at all levels of the Company. For example:
•As of December 31, 2022, women account for 54% of Aflac Japan employees and 33% of those in leadership roles. Women also held 19% of senior management roles. Aflac Japan's goal is to further increase the percentage of women in line manager positions by 2025.
•As of December 31, 2022, 49% of Aflac U.S. and the Parent Company employees located in the U.S. were people of color and 66% were women. Women also occupied 50% of leadership roles located in the U.S. and 31% of senior management roles. In 2022, 62% of new hires located in the U.S. were people of color and 69% were women.
•Established in 2009, Aflac Heartful Services Co., Ltd. (Aflac Heartful Services), a subsidiary of Aflac Japan, promotes the hiring of employees with disabilities. Aflac Heartful Services has established a barrier-free work environment and provides, among other things, specialized training, specially-trained supervisors and development opportunities to support those with disabilities. Of Aflac Heartful Services’ 154 employees as of December 31, 2022, 124 have a disability. Aflac Heartful Services supports these employees with the assistance of advisors for long-term career support.
•Both Aflac Japan and Aflac U.S. have created diversity councils that include employees from various levels that meet regularly to discuss activities and initiatives. The councils are designed to create avenues in which employees can communicate and appreciate one another’s cultural differences.
•Women and people of color comprise approximately 64% of the Parent Company’s board of directors.
Employee Engagement and Culture
The Company strives to have an engaged employee culture by developing programs including career development support and programs emphasizing work life balance. Each year, Aflac Japan conducts a human capital engagement survey in which all employees answer questions about the company and their organization to measure engagement across the company and detect organizational issues. The results of the survey are reported to Aflac Japan's Human Capital Management Committee to identify issues, formulate enhancement/improvement measures and implement them. Aflac U.S. provides an employee engagement survey every other year to employees to gather their views on company culture and satisfaction, and works with its leadership to monitor continuous improvements and enhance the employee experience.
11
Information about the Company's Executive Officers
| NAME | PRINCIPAL OCCUPATION(1) | AGE | ||||||
| Daniel P. Amos | Chairman, Aflac Incorporated and Aflac, since 2001; Chief Executive Officer, Aflac Incorporated and Aflac, since 1990; President, Aflac, | |||||||
| Steven K. Beaver | Senior Vice President, Chief Financial Officer, Aflac U.S., since 2019; Senior Vice President, Financial Planning and Analysis, Aflac Incorporated, from 2018 until 2019; Senior Vice President, Global Strategic Projects, Corporate Financial Planning and Analysis, Aflac Incorporated, from 2017 until | |||||||
| Max K. | Executive Vice President, Chief Financial Officer, Aflac Incorporated, since 2020; | |||||||
| Frederick J. Crawford | President and Chief Operating Officer, Aflac Incorporated, since 2020; Executive Vice President, Chief Financial Officer, Aflac Incorporated, from 2015 until | |||||||
| J. Todd Daniels | Executive Vice President, Chief Financial Officer, Aflac Japan, since 2018; Executive Vice President, Global Chief Risk Officer and Chief Actuary, Aflac Incorporated, from 2016 until | 52 | ||||||
| Bradley E. Dyslin | Executive Vice President, Global Chief | |||||||
| June Howard | Chief Accounting Officer, Aflac Incorporated and Aflac, since 2010; Senior Vice President, Financial Services, Aflac Incorporated and Aflac, since | |||||||
| Masatoshi Koide | President and Representative Director, Aflac Japan, since 2018; President and Chief Operating Officer, Aflac Japan | |||||||
| Charles D. Lake, II | President, Aflac International, since 2014; Chairman and Representative Director, Aflac Japan, since 2018; Chairman, Aflac Japan, from 2008 until 2018 | |||||||
| Virgil R. Miller | President, Aflac U.S., since 2023; Deputy President, Aflac U.S., from 2022 until 2023; Executive Vice President, President of Group and Individual Benefits Division, Aflac U.S., from 2021 until 2022; Executive Vice President, Chief Operating Officer, Aflac U.S., from 2018 until 2021; Senior Vice President, Chief Administrative Officer, Aflac U.S., from 2016 until 2018 | 54 | ||||||
| Albert A. Riggieri | Senior Vice President, Global Chief Risk Officer and Chief Actuary, Aflac Incorporated, since 2018; Senior Vice President, Corporate Actuary, Aflac, from 2016 until | |||||||
| Audrey B. Tillman | Executive Vice President, General Counsel, Aflac Incorporated and Aflac, since | |||||||
(1)Unless specifically noted, the respective executive officer has held the occupation(s) set forth in the table for at least the last five years. Each executive officer is appointed annually by the board of directors and serves until his or her successor is chosen and qualified, or until his or her death, resignation or removal.
ITEM 1A. RISK FACTORS
The Company faces a wide range of risks, and its continued success depends on its ability to identify, prioritize and appropriately manage enterprise risk exposures. Readers should carefully consider each of the following risks and all of the other information set forth in this Form 10-K. These risks and other factors may affect forward-looking statements, including those in this document or made by the Company elsewhere, such as in earnings release webcasts, investor conference presentations or press releases. The risks and uncertainties described herein may not be the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial may also adversely affect its business. If any of the following risks and uncertainties develops into actual events, there could be a material impact on the Company.
Investment and Markets Risk Factors
Difficult conditions in global capital markets and the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the U.S. and sales associates and other distribution partners in Japan.
The Company's results of operations are materially affected by conditions in the global capital markets and the global economy generally, including in its two primary operating markets of the U.S. and Japan. Economies globally experienced significant inflation in 2022, with inflation rates and impact varying by country. Central bank and government efforts to control inflation, through reductions in stimulus and asset purchases as well as interest rate increases, have resulted in a decline in economic activity globally. Supply chain issues remaining from the COVID-19 pandemic, as well as geopolitical events, have contributed to inflation and volatility in energy prices. Although some markets have proven resilient in the face of inflation control measures, continued weakening of global financial markets impacts the creditworthiness and value of the Company's existing investment portfolio, influences opportunities for new investments, and may contribute to generally weak economic fundamentals, which can have a negative impact on its results of operations and financial condition.positions.
As previously disclosed,the Company holds a significant amount of fixed maturity securities issued by borrowers located in the second half of 2019 and the first quarter of 2020 there have been news reports and public comments regarding improper sales practices relating to sales of JPI products by JPI and JPC, each an affiliate of Japan Post Holdings (together with JPI and JPC, the Japan Post Group). JPC and JPI are important distribution and alliance partnersmany different parts of the Company, whichworld, its financial results are directly influenced by global financial markets. Recent weakness in 2018 collectively accounted for approximately 25% of Aflac Japan’s third sector sales. On July 24, 2019, after such news reports and other public comments, the Japan Post Group announced that they had established a Special Investigative Committee comprised of independent former prosecutors to determine whether JPC and JPI sales practices with respect to JPI products had caused disadvantages to customers holding such policies that were not otherwise the result of honoring such customers’ intentions.
13
Japan is the largest market for the Company's insurance products, and the Company owns substantial holdings in Japan Government Bonds (JGBs). Government actions to stimulate the economy affect the value of the Company's existing holdings, its reinvestment rate on new investments in JGBs or other yen-denominated assets, and consumer behavior relative to the Company's suite of insurance products. The additional government debt from fiscal stimulus actions could adversely impact the Japan sovereign credit profile, which could in turn lead to volatility in Japanese capital and currency markets.
Should investors become concerned with any of the Company's investment holdings, including the concentration in JGBs, its access to market sharesources of funding could be negatively impacted. It is possible that lenders or profitability.debt investors may also become concerned if the Company incurs large investment losses or if the level of the Company's business activity decreases due to a market downturn or there are further adverse economic trends in the U.S. or Japan, specifically, or generally in developed markets.
The Company operates in a competitive environmentneeds liquidity to pay its operating expenses, dividends on its common stock, interest on its debt, and in an industry that is subject to ongoing changes from market pressures brought about by customer demands, legislative reform, marketing practicesliabilities. See the "Liquidity and changes to health care and health insurance delivery. These factors requireCapital Resources" Item 7, MD&A, for more information. In the event the Company's current resources do not meet its needs, the Company may need to anticipate market trends and make changes to differentiate the Company's products and services from those of its competitors. The Company also faces the potential of competition from existing or new companies in the U.S. and Japan that have not historically been active in the supplemental health insurance industry, but some of which have greater financial, marketing and management resources than the Company does. Further, some of these potential competitors could introduce new means of product development and delivery that disrupt the Company’s business model. Failure to anticipate market trends and/or to differentiate the Company's products and services can affect the Company's ability to retain or grow profitable lines of business. Further, as employers and brokers are increasingly requesting a full-suite of products from one insurance provider, a failure to react and adapt to these demands could result in decreased sales or market share.
Broad economic factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, inflation, and strain with the U.S. supply chain all affect the business and economic environment and, indirectly, the amount and profitability of the Company's business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for financial and insurance products could be adversely affected. This adverse effect could be particularly significant for companies such as Aflac that distribute supplemental, discretionary insurance products primarily through the worksite in the event that economic conditions result in lower revenuesa decrease in the number of new hires and total employees. Adverse changes in the economy could potentially lead the Company's customers to be less favorableinclined to purchase supplemental insurance coverage or to decide to cancel or modify existing insurance coverage. Further, Aflac U.S. may experience higher rates of policy termslapses during periods of increased job turnover and conditions, whichworkforce mobility within the U.S. economy. The above factors could adversely affect the Company's operating results. As a result, the Company's ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations may be adversely affected.
See the risk factor entitled "Major public health issues, including COVID-19 and enhancing its business systems; however, these changes tend to challengeany resulting or coincidental economic effects, could have an adverse impact on the Company's complex integrated environment. The Company's success is dependent in large part on maintaining or improving the effectivenessfinancial condition and results of existing systemsoperations and continuing to develop and enhance information systems that support its business processes in a cost-efficient manner. If the Company does not maintain the effectivenessother aspects of its systems, the Company's operations and reputation could be adversely affected and it could be exposed to litigation as well as to regulatory proceedings and fines or penalties.business" for more information.
Defaults, downgrades, widening credit spreads or other events impairing the value of the fixed maturity securities and loan receivables in the Company's investment portfolio may reduce the Company's earnings and capital position.
The Company is subject to the risk that the issuers and/or guarantors of fixed maturity securities and loan receivables the Company owns may default on principal or interest. A significant portion of the Company's portfolio represents an unsecured obligation of the issuer, including some that may be subordinated to other debt in the issuer’s capital structure. In these cases, many factors can influence the overall creditworthiness of the issuer and ultimately its ability to service and repay the Company's holdings. This can include changes in the global economy, the company's assets, strategy, or management, shifts in the dynamics of the industries in which they compete, their access to additional funding, and the overall health of the credit markets. Factors unique to the Company's securities including contractual protections such as financial covenants or relative position in the issuer's capital structure also influence the value of the Company's holdings.
Most of the Company's investments carry a rating by one or more of the nationally recognized statistical rating organizationsNationally Recognized Statistical Rating Organizations (NRSROs or rating agencies). Any change in the rating agencies' approach to evaluating credit and assigning an opinion could negatively impact the fair value of the Company's portfolio. The Company employs a team ofAny expected or sustained credit analysts to monitor the creditworthinessdeterioration of the issuers in its portfolio. Any credit-related declines in the fair value of positions held in the Company's portfolio believed to be not temporary in natureinvestments will negatively impact the Company's net income and capital position through credit impairment and other credit related losses. TheseCredit related losses that are not temporary in nature would also affect the Company's solvency ratios in the U.S. and Japan. Aflac Japan has certain regulatory accounting requirements for realizing impairments that could be triggered by credit-related losses, which may be different from U.S. GAAP and statutory requirements. These impairment losses could negatively impact Aflac Japan's earnings, and the corresponding
14
dividends and capital deployment.
The Company is also subject to the risk that any collateral providing credit enhancement to the Company's positionsinvestments could deteriorate. These instruments may include senior secured first lien loans, such as commercial mortgage loans, bank loans, middle market loans, and loan-backed securities where the underlying loan or collateral notes may default on principal, interest, or other payments, causing an adverse change in cash flows to the positions held in the Company's investment portfolio.
The Company is exposed to sovereign credit risk through instruments issued directly by governments and government entities as well as banks and other institutions that rely in part on the strength of the underlying government for their credit quality. In addition to the U.S. and Japan, many governments, especially in Europe, have been subject to rating downgrades due to the need for fiscal and budgetary remediation and structural reforms, reduced economic activity, and investment needed to support banks or other systemically important entities. Additional downgrades or default of the Company's sovereign issuers will have a negative impact on its portfolio and could reduce the Company's earnings and capital.
holdings. For more information, regarding credit risk, see the Credit Risk"Critical Accounting Estimates" section of Item 7, MD&A, and the "Credit Risk" subsection of Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of this Form 10-K.Risk.
The Company is exposed to significant interest rate risk, which may adversely affect its results of operations, financial condition and liquidity.
The Company has substantial investment portfolios that support its policy liabilities. Interest rate risk is an inherent portfolio, business and capital risk for the Company, and significant changes in interest rates could have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows through realized losses, impairments, changes in unrealized positions, and liquidity. Changes in interest rates could also result in the Company having to recognize gains or losses because the Company disposes of some or all of its investments prior to their maturity.
The Company's exposure to interest rate risk relates primarily to the ability to invest future cash flows to support the interest rate assumption made at the time the Company's products were priced and the related reserving assumptions were established. Low levels of interest rates on investments experienced in Japan and the U.S. over the last decade have also reduced the level of investment income earned by the Company. TheWhile interest rates currently are rising in the U.S. and other regions, interest rates in Japan remain low, and the Company's overall level of investment income will continue to be negatively impacted in a persistent low-interest-rate environment.from Japan’s low interest rates and from investments made prior to the start of recent rate increases. While the Company generally seeks to maintain a diversified portfolio of fixed-income investments that reflects the cash flow and duration characteristics of the liabilities it supports, the Company may not be able to fully mitigate the interest rate risk of its assets relative to its liabilities. The Company's exposure toProlonged periods of low interest raterates also heighten the risk relates primarily to the ability to investassociated with future cash flows to support theincreases in interest rate assumption made at the timerates because an increasing proportion of the Company's products were priced andinvestment portfolio include investments that bear lower rates of return than the related reserving assumptions were established. embedded book yield of the investment portfolio. A rise in interest rates decreases the fair value of the Company's debt securities.
A sustained decline in interest rates could hinder the Company's ability to earn the returns assumed in the pricing and the reserving for its insurance products at the time they were sold and issued. Due to low interest rates, the Company's ability to earn the returns it expectsissued and may also influence the Company's ability to develop and price attractive new products and could impact its overall sales levels. The Company's first sector products are more interest rate sensitive than third sector products. As discussed in Item 1.1, Business, beginning in 2013, Aflac Japan began to curtail sales of first sector savings-type products due to persistent low interest rates in Japan. The continuing negative interest rate imposed by the Bank of Japan (BoJ) on excess bank reserves could continue to have a negative impact on the distribution and pricing of these products.
Conversely and concurrently, a rise in interest rates couldwould improve the Company's ability to earn higher rates of return on future investments, as well as floating rate investments held in its investment portfolio. However, anrising interest rates negatively impact the fair values of the Company's fixed maturity investments which results in reductions to the Company's overall equity. Significant increases in interest rates could cause declines in the values of the Company's investment portfolio which have a secondary impact on the Company's overall evaluation of its deferred tax asset position. An increase in the differential of short-term U.S. and Japan interest rates would also increase the cost of hedging a portion of the U.S. dollar-denominated assets in the Aflac Japan segment into yen, which could have a material adverse effect on the Company's business, results of operations or financial condition. The Company’s floating rate investments typically bear interest based on the London Interbank Offered Rate (LIBOR). Regulatory and industry initiatives to eliminate LIBOR as an interest rate benchmark may create uncertainty in the valuation of LIBOR-based loans, as well as for other LIBOR-based derivatives and assets. This may adversely impact both pricing and liquidity in such instruments. The Company is unable to predict with certainty how LIBOR elimination may impact markets, pricing, liquidity and other factors or the Company's activities.
Rising interest rates also negatively impact the SMR sincecapital ratios in certain jurisdictions because unrealized losses on the available-for-sale investment portfolio factor into the ratio. In addition to the unrealized losses negatively impacting capital ratios, significant unrealized losses could impact the amount of dividends that could be paid under local regulations, including in Japan. For Aflac Japan, rising interest rates and widening credit spreads, which go to reduce the fair value of Aflac Japan’s fixed-maturity investments, when combined with a strengthening yen, and the resulting decrease in the yen value of Aflac Japan’s U.S. dollar-denominated fixed-maturity investments, have a negative impact to SMR.For regulatory accounting purposes for Aflac Japan, there are also certain requirements for realizing impairments that could be triggered
15
by rising interest rates, negatively impacting Aflac Japan's regulatory earnings and corresponding dividends and capital deployment.
The Company’s floating rate investments typically bear interest based on the U.S. Dollar (USD) London Interbank Offered Rate (LIBOR), although the Company’s more recent loan acquisitions bear interest based on the Secured Overnight Financing Rate (SOFR). Investments bearing interest based on LIBOR are expected to transition to a rate based on SOFR or another reference rate prior to the USD LIBOR cessation date of June 30, 2023. The upcoming cessation of USD LIBOR as an interest rate riskbenchmark may create uncertainty in the valuation of USD LIBOR-based loans, derivatives, and other financial contracts. The Company is still an inherent portfolio, businessunable to predict with certainty how the upcoming cessation of USD LIBOR may impact markets, pricing, liquidity and capital risk for the Company, and significant changes in interest rates could have a material adverse effect onother factors or the Company's consolidated resultsactivities.
See the "Interest Rate Risk" subsection of operations, financial condition or cash flows through realized losses, impairments, changes in unrealized positions,Item 7A, Quantitative and liquidity.Qualitative Disclosures about Market Risk for more information.
The Company's concentration of business in Japan poses risks to its operations.operations and financial condition.
The Company's operations in Japan, including realizednet investment gains and losses on Aflac Japan's investment portfolio, accounted for 69% of the Company's total revenues in 2019,2022, compared with 69% in 2021 and 70%68% in both 2018 and 2017.2020. The Japanese operations accounted for 83%80% of the Company's total assets at December 31, 2019,2022, compared with 84%82% at December 31, 2018.2021.
Any potential deterioration in Japan's credit quality or access to markets, the overall economy of Japan, or an increase in Japanese market volatility could adversely impact Aflac Japan's operations and its financial condition and thereby Aflac's overall financial performance. Further, because of the concentration of the Company's business in Japan and its need for long-dated yen-denominated assets, the Company has a substantial concentration of Japan Government Bond (JGBs)JGBs in its investment portfolio. As suchportfolio exposing the Company has material exposure to credit deterioration and potential downgrades of JGBs. See the Japanese economy, geo-political climate, political regime,risk factor entitled “Any decrease in the Company's financial strength or debt ratings may have an adverse effect on its competitive position and other factors that generally determine a country's creditworthiness. Specifically, the NRSROs, credit rating agencies registered with the SEC, have placed increased scrutiny on JGBs, which are a significant component of the Company’s overall investment portfolio, resulting in downgrades as discussed later in this Risk Factors section. access to liquidity and capital” for more information.
The Company seeks to match investment currency and interest rate risk to its yen liabilities. The low level of interest rates available on yen-denominated securities has a negative effect on overall net investment income. A large portion of the cash available for reinvestment each year is deployed in yen-denominated instruments and subject to the low level of yen interest rates.
Lack of availability of acceptable yen-denominated investments could adversely affect the Company's results of operations, financial position or liquidity.
The Company attemptsaims to match both the duration and currency of its assets with its liabilities. This is very difficult for Aflac Japan due to the lack of available long-dated yen-denominated fixed income instruments beyond JGBs.
Investing in U.S. dollar-denominated investments in Aflac Japan also creates an unmatched foreign currency exposure and related SMRcapital ratio volatility, as Aflac Japan’s insurance liabilities are yen-denominated. Although the Company engages in certain foreign exchange hedging activities to partially mitigate this risk, and such hedged assets may be used to satisfy yen-denominated insurance liabilities and other business obligations, important risks remain.
Foreign exchange derivatives used for hedging are periodically settled, which results in cash receipt or payment at maturity or early termination. Cumulative net cash settlements on derivatives hedging currency exposure of Aflac Japan's
16
U.S. dollar-denominated investments are associated with existing U.S. dollar-denominated investments that continue to be hedged, previously hedged investments that continue to be held but are no longer hedged, as well as,and investments previously hedged that have since been sold, matured or redeemed and may or may not have not been converted to yen. The Company’s foreign exchange derivatives are typically shorter-dated than the underlying U.S. dollar-denominated investments being hedged, which creates roll-over risks within the hedging program that could increase the cost of such derivatives. If the Company reduces the notional amount of foreign exchange derivatives prior to the maturity of the hedged U.S. dollar-denominated investments, the foreign exchange gains or losses on the U.S. dollar-denominated investments remain economically unrealized. These foreign currency gains or losses on the investments are only economically realized, or monetized,, through sale,, maturity or redemption of the investments and concurrent conversion to yen. However, the Company may not realize the benefit of offsetting adverse cash settlements on hedging derivatives with cash receipts on the U.S. dollar-denominated investments if the currency exchange rates move in an adverse direction before the investments are converted to yen, or if the investments are never converted to yen. As an example of the latter, if the Company’s actual insurance risk experience in Japan is as expected or more favorable than expected, the need for yen to pay expenses and claims would correspondingly remain at or below expected levels, thereby diminishing operational requirements to convert U.S. dollar-denominated investments to yen. The settlement of the foreign exchange derivatives is reported in the investing activities section of the Company’s consolidated statements of cash flows in the line item “Settlement of derivatives, net.”
The Company relies on third parties, and in some cases subcontractors, to provide information technology and data services. It also relies on various parties in its distribution channels including agencies, banks and Japan Post in Japan, as well as sales associates and brokers in the U.S., to provide services to prospective and existing customers. Although the Company provides for appropriate protections through its contracts and performs information security risk assessments of its third-party service providers and business associates, the Company still has limited control over their actions and practices. In addition, despite the security measures the Company has in place to ensure compliance with applicable laws and rules, the Company's facilities and systems, and those of the Company's third-party providers and participants in its distribution channels may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. From time to time, the Company, its third party providers and participants in the Company’s distribution channels have experienced and will likely continue to experience such events. In such cases, notification to affected individuals, state and federal regulators, state attorneys general and media may be required, depending upon the number of affected individuals and whether personal information including health or financial data was subject to unauthorized access.
Due to the size of Aflac Japan, where functional currency is the Japanese yen, fluctuations in the exchange rate of exchange between the yen and the U.S. dollar can have a significant effect on the Company's reported financial position and results of operations. Aflac Japan's premiums and approximately halfa significant portion of its investment income are received in yen, and its claims and mostalmost all expenses are paid in yen. Aflac Japan purchases yen-denominated assets and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. TheseCertain unhedged U.S. dollar denominated assets and otherliabilities held by Aflac Japan are re-measured to yen with the volatility reported in earnings. Furthermore, the yen-denominated financial statement items are, however,balance sheet of Aflac Japan is translated into U.S. dollars for financial reporting purposes.purposes with foreign exchange impact reflected in equity. Accordingly, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported financial position and results of operations. In periods when yen weakens, translating yen into U.S. dollars causes fewer U.S. dollars to be reported. When yen strengthens, translating yen into U.S. dollars causes more U.S. dollars to be reported. Any unrealized foreign currency translation adjustments are reported in accumulated other comprehensive income. As a result, yenYen weakening has the effect of suppressing current year results in relation to the prior year, while yen strengthening has the effect of magnifying current year results in relation to the prior year. In addition, the weakening of the yen relative to the U.S. dollar will generally adversely affect the value of the Company's yen-denominated investments in U.S. dollar terms.
The Company engages in certain foreign currency hedging activities to hedge the exposure to yen from its net investment in Japanese operations. These hedging activities are limited in scope, and the Company cannot provide assurance that these activities will be effective. In addition, an increase in the difference between short-term U.S. and Japan interest rates would increase the cost of hedging a portion of the U.S. dollar-denominated assets in the Aflac Japan segment into yen, which could have a material adverse effect on the Company's business, results of operations or financial condition. As indicated in the MD&A, the Company has determined that the unhedged U.S. dollar-denominated investment portfolio acts as a natural economic currency hedge of a portion of the Company’s investment in Aflac Japan against erosion of economic value. However,At the same time, the unhedged U.S. dollar-denominated investment portfolio at the same time creates an unmatched foreign currency exposure and subjects Aflac Japan to volatility in regulatory capital, including SMR, and earnings, which may adversely impact Aflac Japan’s ability to pay dividends to the Parent Company. The overall investment strategy in Aflac Japan is guided primarily by the objective of securing the long-term financial strength of Aflac Japan and funding of yen liabilities. As a result, the Company has historically maintained and currently maintains the size of the unhedged portfolio at levels below the economic equity surplus in Aflac Japan. However,Japan, but there can be no assurance that this strategy will be successful.
Additionally, the Company is exposed to currency risk when yen cash flows are converted into U.S. dollars, resulting in an increase or decreasechanges in the Company's U.S. dollar-denominated cash flows and earnings when exchange gains or losses,
17
respectively, are realized. This primarily occurs when the CompanyAflac Japan pays dividends funds from Aflac Japanin yen to the Parent Company, but it also has an impact when cash in the form of yen is converted to U.S. dollars for investment into U.S. dollar-denominated assets. The exchange rates prevailing at the time of dividend payment may differ from the exchange rates prevailing at the time the yen profits were earned. In 2018, theThe Parent Company began entering intoutilizes forward contracts to accomplish a dual objective of hedging foreign currency exchange rate risk related to dividend payments by Aflac Japan, and reducing enterprise-wide hedge costs. IfHowever, if the markets experience a significant strengthening of yen, this could cause cash strain at the Parent Company as a result of cash collateral and potentially cash settlement requirements. Based on the timing and severity of exchange rate fluctuations combined with the level of outstanding activity in this program, the cash strain at the Parent Company could be significant.
For more information regarding unhedged U.S. dollar-denominated securities, see the risk factor belowabove entitled, “Lack of availability of acceptable yen-denominated investments could adversely affect the Company’s results of operations, financial
position or liquidity”. ForSee the "Currency Risk" subsection of Item 7A, Quantitative and Qualitative Disclosures about Market Risk for more information regardinginformation.
The valuation of the Company's investments and derivatives includes methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may adversely affect the Company's results of operations or financial condition.
The Company reports a significant amount of its fixed maturity securities and other financial instruments at fair value. As such, valuations may include inputs and assumptions that are less observable or require greater estimation and valuation methods that are more sophisticated, thereby resulting in values that may be greater or less than the value at which the investments may be ultimately sold. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within the Company's consolidated financial statements and the period-to-period changes in value could vary significantly.
Valuations of the Company's derivatives fluctuate with changes in underlying market variables, such as interest rates and foreign currency risk, seeexchange rates. During periods of market turbulence created by political instability, economic uncertainty, government interventions or other factors, the Currency Risk subsection withinCompany may experience significant changes in the Market Risksvolatility of Financial Instruments sectionits derivative valuations. Extreme market conditions can also affect the liquidity of MD&A.
Where valuation and interest rates are based on USD LIBOR, the upcoming cessation of USD LIBOR as an interest rate benchmark may create uncertainty in valuation of USD LIBOR-based loans, derivatives and other financial contracts in the pricing of such assets in markets for their sale and disposition.
See the "Critical Accounting Estimates" section of Item 7, MD&A, and Notes 1, 3, 4, and 5 of the Notes to the Consolidated Financial Statements for more information.
The determination of the amount of expected credit losses recorded on the Company's investments is based on significant valuation judgments and could materially impact its results of operations or financial position.
The Company is subject to taxation in Japan,estimates an expected lifetime credit loss on investments measured at amortized cost including held-to-maturity fixed maturity securities, loan receivables and inloan commitments. For the U.S. under federal and numerous state and local tax jurisdictions. In preparing the Company's financial statements,Company’s available-for-sale fixed maturity securities, the Company estimatesevaluates estimated credit losses only when the amount of tax that will become payable, but the Company's effective tax rate may be different than estimates due to numerous factors including accounting for income taxes, the mix of earnings from Japan and the U.S., the results of tax audits, adjustments to thefair value of uncertain tax positions, changesthe available-for-sale fixed maturity security is below its amortized cost basis.
The Company’s approach to estimatesestimating credit losses is complex and other factors. Further, changes in U.S. or Japan tax laws or interpretations of such laws could increase the Company's corporate taxes and reduce earnings.
incorporates significant judgments. In addition to a security, or an asset class, or issuer-specific credit fundamentals, it remains difficult to predict the timingconsiders relevant historical information (e.g. loss statistics), current market conditions and effect that future tax law changes could have onreasonable and supportable micro and macroeconomic forecasts. The Company's management updates its expected credit loss assumptions regularly as conditions change and as new information becomes available and reflects expected credit losses in the Company's earnings bothwhen considered necessary. Furthermore, additional credit losses may need to be taken in the future. Historical trends may not be indicative of future expectations of credit losses. See Note 3 of the Notes to the Consolidated Financial Statements in this report for more information.
18
The Company cannot provide assurance that these evaluations will be accurate and effective. If the Company’s estimates of credit losses are not accurate and actual credit losses are higher than the Company’s estimates, the Company’s net income and capital position will be negatively impacted. These higher losses would also negatively affect the Company's solvency ratios in the U.S. and Japan.
For regulatory accounting purposes for Aflac Japan, there are certain requirements for realizing impairments that could be triggered by rising interest rates, credit-related losses, or changes in foreign jurisdictions. exchange, negatively impacting Aflac Japan's earnings and corresponding dividend and capital deployment.
Any of these factors could cause the Company to experience an effective tax rate significantly different from previous periods or the Company's current estimates. If the Company's effective tax rate were to increase,decrease in the Company's financial conditionstrength or debt ratings may have an adverse effect on its competitive position and access to liquidity and capital.
NRSROs may change their ratings or outlook on an insurer's ratings due to a variety of factors including but not limited to competitive position; profitability; cash generation and other sources of liquidity; capital levels; quality of the investment portfolio; and perception of management capabilities. The ratings assigned to the Company by the NRSROs are important factors in the Company's ability to access liquidity and capital from the bank market, debt capital markets or other available sources, such as reinsurance transactions. Downgrades of the Company's credit ratings could give its derivative counterparties the right to require early termination of derivatives transactions or delivery of additional collateral, thereby adversely affecting the Company's liquidity.
Downgrades of the Company's ratings could also have a material adverse effect on agent recruiting and retention, sales, competitiveness and the marketability of its products, all of which could negatively impact the Company's liquidity, operating results of operationsand financial condition. Additionally, sales through the bank channel in Japan could be adversely affected.affected as a result of their reliance on and sensitivity to ratings levels.
The Company cannot predict what actions rating agencies may take, or what actions the Company may take in response to the actions of rating agencies. As with other companies in the financial services industry, the Company's ratings could be downgraded at any time and without any notice by any NRSRO.
A decline in the creditworthiness of other financial institutions could adversely affect the Company.
The Company has exposure to and routinely executes transactions with counterparties in the financial services industry, including broker dealers, derivative counterparties, commercial banks and other institutions.
The Company uses derivative instruments to mitigate various risks associated with its investment portfolio, notes payable, and subsidiary dividends. The Company enters into a variety of agreements involving assorted instruments including foreign currency forward contracts; foreign currency options; foreign currency swaps; and interest rate swaps and swaptions. The Company'sCompany's use of derivatives results in financial exposure to derivative counterparties. If the Company's counterparties fail or refuse to honor their obligations under derivative instruments, the Company's hedges of the risks will be ineffective, and the Company's financial condition and results of operations could be adversely affected.
The Company engages in derivative transactions directly with affiliates and unaffiliated third parties under International Swaps and Derivatives Association, Inc. (ISDA) agreements and other documentation. Most of the ISDA agreements also include Credit Support Annexes (CSAs) provisions, which generally provide for two-way collateral postings at the first dollar of exposure. The Company mitigates the risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value while generally requiring that collateral be posted at the outset of the transaction. In addition, a significant portion of the derivative transactions have provisions that give the counterparty the right to terminate the transaction upon a downgrade of Aflac’s financial strength rating. The actual amount of payments that the Company could be required to make depends on market conditions, the fair value of outstanding affected transactions, and other factors prevailing at and after the time of the downgrade. If the Company is required to post collateral to support derivative contracts and/or pay cash to settle the contracts at maturity, the Company's liquidity could be strained. In addition, the Company's cleared swaps result in counterparty exposure to clearing brokers and central clearinghouses; while this exposure is mitigated in part by clearinghouse and clearing broker capital and regulation, no assurance can be provided that these counterparties will fulfill their obligations. The Company also has exposure to counterparties to securities lending transactions in the event they fail to return loaned securities. The Company is also exposed to the risk that there may be a decline in value of securities posted as collateral for securities lending programs or a decline in value of investments made with cash posted as collateral for such programs.
Further, the Company has agreements with various Japanese financial institutions for the distribution of its insurance products. For example, at December 31, 2019,2022, the Company had agreements with 367359 banks to market Aflac's products in Japan. Sales through these banks represented 4.3%4.0% of Aflac Japan's new annualized premium sales in 2019.2022. Any material adverse effect on these or other financial institutions could also have an adverse effect on the Company's sales.
The Company has entered into significant reinsurance transactions with large, highly rated counterparties.counterparties, including affiliates. In addition, Aflac Japan has entered into a reinsurance transaction with Aflac Re Bermuda. (For additional
19
information on this transaction, see Note 16 of the Notes to the Consolidated Financial Statements.) Aflac Re Bermuda is a newly formed entity with less capital than external counterparties with which the Company has conducted reinsurance transactions in the past. Negative events or developments affecting any one of these counterparties could have an adverse effect on the Company's financial position or results of operations.
All of these risks related to exposure to other financial institutions could adversely impact the Company's consolidated results of operations and financial condition.
Due to the evolving nature of the amountCOVID-19 pandemic, the COVID-19 pandemic and any resulting or coincidental economic effects could continue to impact the Company's business, financial condition, results of impairments takenoperations, capital position, liquidity or prospects in a number of ways. The pandemic may cause changes to estimates of future earnings, capital deployment and other guidance the Company has provided to the markets in the "2023 Outlook" section of Item 7, MD&A.
Policies issued by Aflac Japan and Aflac U.S. are primarily sold and enrolled in person through face-to-face interaction. Likewise, recruiting of new agents and brokers largely occurs through in-person contact. The ability of individual agents and agencies, strategic alliance partners, brokers and other distribution partners to make sales in Japan and the U.S. and the ability to conduct agent and broker recruiting has been reduced by efforts to mitigate the effects of the pandemic, and by cultural and workplace changes that were caused by or are coincidental with the pandemic and may be long-term in nature, including social distancing techniques and remote working by employees. These efforts and changes may hinder sales of the Company’s products in Japan and the U.S. The Company cannot predict with certainty the continuing impact of these events on its distribution channels and financial results, but the impact to date has varied between Aflac Japan and Aflac U.S. For example, most Aflac U.S. business customers, and most of the independent agents in its agency channel, are small businesses who may lack the financial resources to weather an economic downturn and may be disproportionately negatively impacted by the economic uncertainty surrounding COVID-19. These factors may continue to negatively impact sales beyond 2022. See the risk factors entitled “Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the U.S. and sales associates and other distribution partners in Japan” and “Difficult conditions in global capital markets and the economy, including those caused by 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” for more information.
Further, the Company's operations, as well as those of its vendors, service providers and counterparties, may also be adversely affected by the COVID-19 pandemic or the mitigation efforts and cultural and workplace changes outlined above. During 2022, the Company implemented return to work plans for Aflac Japan and Aflac U.S. that are adaptable and based upon multiple factors including government orders, guidelines issued by public health authorities, the location and job responsibilities of specific Company personnel, rates of COVID-19 vaccinations, cases and deaths in various localities and other factors. The Company may nevertheless experience operational disruptions.
The assumptions and estimates that the Company uses in establishing premiums and reserves depend on the Company's judgment regarding the likelihood of future events and are inherently uncertain, including without limitation in regard to the effects of COVID-19. See the risk factor entitled “If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, the Company's financial results would be adversely affected” and the "Executive Summary" section of Item 7, MD&A, for more information.
20
For more information on the effects of the COVID-19 pandemic on markets and investments, see the risk factor entitled, “Difficult conditions in global capital markets and the economy, including those caused by 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.”
Sales of the Company's products and services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the U.S. and sales associates and other distribution partners in Japan.
The Company's sales, results of operations and financial condition could be materially adversely affected if its sales networks deteriorate or if the Company does not adequately provide support, training and education for its existing network of sales associates, brokers, other distribution partners and employees. In the U.S., competition exists for sales associates and brokers with demonstrated ability. Further, low rates of unemployment, such as those currently reflected in the U.S. employment market, tend to make it more difficult for Aflac U.S. to maintain its network of sales associates. In Japan, the Company's sales results are dependent upon its relationship with sales associates and other distribution partners, including Japan Post Group. Sales of Aflac Japan cancer products in the Japan Post Group channel experienced a material decline beginning in August 2019. While Japan Post Group resumed proactive sales of cancer insurance policies on April 1, 2021 and the Company anticipates a gradual improvement of cancer insurance sales through the Japan Post Group channel over the intermediate term, the Company can provide no assurance regarding the ultimate timing or extent of any recovery in such sales. It is baseduncertain what long-term effect these developments will have on significant valuation judgments and could materially impact itsthe Company’s results of operations or financial position.condition, but any such effects could be material. See the "Aflac Japan Segment" section of Item 7. MD&A for more information.
The Company regularly reviewscompetes with other insurers and financial institutions primarily on the basis of its entire investment portfolio for declines in value.products, compensation, support services and financial rating. The majorityCompany's sales associates, brokers and other distribution partners are independent contractors and may sell products of its competitors. If the Company's competitors offer products that are more attractive, or pay higher commissions than the Company does, any or all of these distribution partners may concentrate their efforts on selling the Company's competitors' products instead of the Company's investments are evaluated for other-than-temporary impairment usingCompany's. In addition to the Company's debt impairment model.
commissioned sales force in the U.S., Aflac has expanded its sales leadership team to include a salaried sales force of over 200 market directors and broker sales professionals. The Company's debt impairment model includes emphasis on the ultimate collection of the cash flows frominability to attract and retain qualified sales associates, brokers and other distribution partners, including its investments. The determination of the amount of impairments under this model is based upon the Company's periodic evaluation and assessment of known and inherent risks associated with the respective securities. Such evaluations and assessments are revised as conditions change and new information becomes available.
Additionally, as the Japan and U.S. employment markets continue to evolve, there is risk that the Company's practices regarding attracting, developing, and retaining employees may not be fully effective. Employees may leave the Company or choose other employers over the Company due to various factors, including a competitive labor market. Although Aflac U.S. has not experienced any material labor shortage to date, it has experienced elevated levels of workforce turnover and there has been an overall tightening of, and increased competition within, the U.S. labor market. These conditions, together with higher levels of inflation may result in increased operating expenses. A sustained labor shortage or continuing increased turnover rates within the Aflac U.S. workforce, due to labor market factors or the state of the issuerU.S. economy, could lead to increased costs of the day-to-day operation of the Aflac U.S. business, the inability to hire and retain employees, or the outsourcing of certain operations. Failure to successfully meet and maintain sufficient levels of employees may diminish the Company's ability to achieve its financial and compliance objectives, both of which are time consuming and personnel-intensive.
If future policy benefits, claims or expenses exceed those anticipated in establishing premiums and reserves, the Company's financial results would be adversely affected.
The assumptions and estimates that the Company must apply considerableuses in establishing premiums and reserves depend on the Company's judgment in determiningregarding the likelihood of the security recoveringfuture events and are inherently uncertain. Many factors can cause actual outcomes to deviate from these assumptions and estimates, such as changes in value whileincidence rates, economic conditions, changes in government healthcare policy, advances in medical technology, changes in treatment patterns, and changes in average lifespan. Accordingly, the Company owns it. Factorscannot determine with precision the ultimate amounts that may influence this includeit will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level the Company assumes prior to payment of benefits or claims. If the Company's assessment ofactual experience is different from its assumptions or estimates, the issuer’s ability to continue making timely payments of interestCompany's premiums and principal, the overall level of interest rates and credit spreads, and other factors. The Company also verifies whether it has the intent to sell or if it is more likely than notreserves may prove inadequate. As a result, the Company would be requiredincur a charge to sell the security prior to recovery of its amortized cost. If the Company determines it is unlikely to recover the book value of the instrument prior to disposal of the security, the Company will reduce the carrying value of the security to its fair value and recognize any associated impairment lossearnings in the Company's consolidated statement of earnings or other comprehensive income, depending on the nature of the loss.
21
The success of the Company's business depends in part on effective information technology systems, on continuing to develop and implement improvements in technology, and on successful execution of revenue growth and expense management initiatives.
The Company's business depends in large part on its technology systems for interacting with employers, policyholders, sales associates, and brokers, and the Company's business strategy involves providing customers with easy-to-use products to meet their needs and ensuring employees have the technology in place to support those needs. Some of the Company's information technology systems and software are older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or upgrade to current standards including adequate business continuity procedures. As such, the Company is investing in technology and other capabilities to continuously enhance its customer experience, while also seeking to increase efficiencies. The Company is also developing new and innovative products and enhancing existing products. The Company will continue to incur expenses related to, among other things, investments in digital capabilities and product innovation. Further, the Company’s long-term strategy depends on successful operational execution and its ability to execute on its transformational initiatives, including investments in technology and other initiatives intended to grow revenue and control expenses, combined with its ability to achieve efficiencies and attract and retain personnel. If the Company does not maintain the effectiveness of its systems and continue to develop and enhance information systems that support its business processes in a cost-efficient manner, the Company's sales, business retention, operations and reputation could be adversely affected and it could be exposed to litigation, regulatory proceedings and fines or penalties.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality, integrity or privacy of sensitive data residing on such systems, could harm the Company's business.
The Company stores confidential policyholder, employee, agent, broker, and other proprietary information on its information technology systems. The Company also depends heavily on its telecommunication, information technology and other operational systems and on the integrity and timeliness of data it uses to run its businesses and service its customers. The Company’s information technology and other systems, as well as those of third party providers and participants in the Company’s distribution channels, have been and will likely continue to be subject to physical or electronic break-ins, unauthorized tampering, security breaches, social engineering, phishing, web application attacks, computer viruses or other malicious codes, or other cyber-related attacks, that may result in the failure to adequately maintain the security, confidentiality, integrity, or privacy of sensitive data, including personal information relating to customers and prospective customers, or in the misappropriation of the Company's intellectual property or proprietary information. The risk of a cyber incident impacting business operations has grown as third parties continue to develop new and highly sophisticated methods of attack. The Company and its third-parties or vendors have and may continue to experience outages or cyberattacks that disrupt the operations or impact the confidentiality, availability or integrity of information, which may result in operational, legal, regulatory or financial harm. Furthermore, depending upon the type of attack, it could impact the confidentiality, integrity and/or availability of IT systems and data, disrupting business operations and resulting in the loss of consumer confidence. Although the Company attempts to manage its exposure to such events through the purchase of cyber liability insurance, such events are inherently unpredictable, and insurance may not be sufficient to protect the Company against all losses. As a result, events such as these could adversely affect the Company's financial condition or results of operation. Although the minor data leakage issues the Company has experienced to date have not had a material effect on its business, there is no assurance that the Company's security systems or processes will prevent or mitigate future break-ins, tampering, security breaches or other cyber-related attacks. As the Company pursues IT transformation and increased cloud adoption, it inherently exposes the Company to potential cyber related attacks.
Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by the Company or others, including third party providers and participants in the company’s distribution channels, could delay or disrupt the Company's ability to do business and service its customers, seriously harm the Company's brand, reputation, and ability to compete effectively, subject it to regulatory sanctions and other claims, lead to a loss of customers and revenues and otherwise adversely affect the Company's business. In addition, the costs to address or remediate system interruptions or security threats and vulnerabilities, whether before or after an incident, could be significant.
As a holding company, the Parent Company depends on the ability of its subsidiaries to transfer funds to it to meet its debt service and other obligations and to pay dividends on its common stock.
The Parent Company is a holding company and has no direct operations, and its most significant assets are the stock of its subsidiaries. Because the Parent Company conducts its operations through its operating subsidiaries, the Parent
22
Company depends on those entities for dividends and other payments to generate the funds necessary to meet its debt service and other obligations, to pay dividends on and conduct repurchases of its common stock, and to make investments into its subsidiaries or external investment opportunities.
Aflac is domiciled in Nebraska and is subject to insurance regulations that impose certain limitations and restrictions on payments of dividends, management fees, loans and advances by Aflac to the Parent Company. The Nebraska insurance statutes require prior approval for dividend distributions that exceed the greater of the net income from operations, which excludes net realized investment gains, for the previous year determined under statutory accounting principles, or 10% of statutory capital and surplus as of the previous year-end. In addition, theThe Nebraska insurance department also must approve
service arrangements and other transactions within the affiliated group of companies. After the Japan branch conversion, the Nebraska insurance department and the FSA approved their respective domiciled insurance company service arrangements and transactions. The FSA does not allow dividends or other payments from Aflac Japan unless it meets certain financial criteria as governed by Japanese corporate law. Under these criteria, dividend capacity at the Japan subsidiary will be defined as retained earnings plus other capital reserve less net after-tax net unrealized losses on available-for-sale securities.
The ability of Aflac and Aflac Japan to pay dividends or make other payments to the Parent Company could also be constrained by the Company's dependency on financial strength ratings from independent rating agencies. The Company's ratings from these agencies depend to a large extent on Aflac's capitalization level. Any inability of Aflac to pay dividends or make other payments to the Parent Company could have a material adverse effect on the Company's financial condition and results of operations.
For the foregoing reasons, there is no assurance that the earnings from, or other available assets of, the Parent Company's operating subsidiaries will be sufficient to make distributions to enable the Company to operate.
The Company's risk management policies and procedures may prove to be ineffective and leave the Company exposed to unidentified or unanticipated risk, which could adversely affect the Company's businesses or result in losses.
The Company has developed an enterprise-wide risk management and governance framework to mitigate risk and loss to the Company. The Company maintains policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed.
However, there are inherent limitations to risk management strategies because risk may exist, or emerge in the future, that the Company has not appropriately anticipated or identified. If the Company's risk management framework proves ineffective, the Company may suffer unexpected losses and could be materially adversely affected. As the Company's businesses change and the markets in which it operates evolve, the Company's risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new products or new business strategieschanges, and risks may present risks that are not be appropriately identified, monitored or managed. In times of market stress, unanticipated market movements or unanticipated claims experience resulting from greater than expected morbidity, mortality, longevity, or persistency, the effectiveness of the Company's risk management strategies may be limited, resulting in losses to the Company. In addition, underUnder difficult or less liquid market conditions, the Company's risk management strategies may not be effectiveineffective or more difficult or expensive to execute because other market participants may be using the same or similar strategies to manage risk under the same challenging market conditions. In such circumstances, it may be difficult or more expensive for the Company to mitigate risk due to the activity of such other market participants.risk.
Many of the Company's risk management strategies or techniques are based upon historical customer and market behavior and all such strategies and techniques are based to some degree on management’s subjective judgment. The Company cannot provide assurance that its risk management framework, including the underlying assumptions or strategies, will be accurate and effective.
Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully effective. Models are utilized by theThe Company's businesses and corporate areas primarily use models to project future cash flows associated with pricing products, calculating reserves and valuing assets, as well as inand evaluating risk and determining capital requirements, among other uses. These models are utilized under a risk management policy approved by the Company's executive risk management committees, however, the models may not operate properly and rely on assumptions and projections that are inherently uncertain. As the Company's businesses continue to grow and evolve, the number and complexity of models the Company utilizes expands, increasing the Company's exposure to error in the design, implementation or use of models, including the associated input data and assumptions.
Past or future misconduct by the Company's employees or employees of the Company's third parties (suppliers which are cost-based relationships and alliance partners which are revenue-generating relationships) could result in violations of law by the Company, regulatory sanctions and/or serious reputational or financial harm, and the precautions the Company takes to
23
prevent and detect this activity may not be effective in all cases. Despite the Company's published Supplier Code of Conduct, due diligence of the Company's alliance partners, and rigorous contracting procedures (including financial, legal, IT security, and risk reviews), there can be no assurance that controls and procedures that the Company employs which are designed to assess third party viability and prevent the Company from taking excessive or inappropriate risks, will be effective. Additionally, the use of third parties also poses operational risks that could result in financial loss, operational disruption, brand damage, or compliance issues. Inadequate oversight of Aflac’sthe Company's third party suppliers due to the lack of policies, procedures, training and governance may lead to financial loss or damage to the Aflac brand.
The concentrationuse of third party vendors to support the Company's operations makes the Company susceptible to the operational risk of those third parties, which could lower revenues, increase costs, reduce profits, disrupt business, or damage the Company’s reputation.
The Company utilizes third-party vendors to provide certain business support services and functions, which exposes the Company to risks outside the control of the Company that may lead to business disruptions. The reliance on these third-party vendors creates a number of business risks, such as the risk that the Company may not maintain service quality, control or effective management of the outsourced business operations and that the Company cannot control the information systems, facilities or networks of such third-party vendors. Additionally, the Company is at risk of being unable to meet legal, regulatory, financial or customer obligations if the information systems, facilities or networks of a third-party vendor are disrupted, damaged or fail, whether due to physical disruptions, such as fire, natural disaster, pandemic or power outage, or due to cybersecurity incidents, ransomware or other impacts to vendors, including labor strikes, political unrest and terrorist attacks. Since certain third-party vendors conduct operations for the Company outside the U.S., the political and military events in foreign jurisdictions could have an adverse impact on the Company’s outsourced operations. The Company may be adversely affected by a third party vendor who operates in a poorly controlled manner or fails to deliver contracted services, which could lower revenues, increase costs, reduce profits, disrupt business, or damage the Company’s reputation.
Regulatory Risk Factors
Tax rates applicable to the Company may change.
The Company is subject to taxation in Japan, and in the U.S. under federal and numerous state and local tax jurisdictions. In preparing the Company's financial statements, the Company estimates the amount of tax that will become payable, but the Company's effective tax rate may be different than estimates due to numerous factors including accounting for income taxes, the mix of earnings from Japan and the U.S., the results of tax audits, adjustments to the value of uncertain tax positions, changes to estimates and other factors. Further, changes in U.S. or Japan tax laws or interpretations of such laws could increase the Company's corporate taxes and reduce earnings.
In addition, it remains difficult to predict the timing and effect that future tax law changes could have on the Company's earnings both in the U.S. and in foreign jurisdictions, including in connection with the current presidential administration's continuing interest in raising revenue from the corporate sector in the U.S. Any of these factors could cause the Company to experience an effective tax rate significantly different from previous periods or the Company's current estimates. If the Company's effective tax rate were to increase, the Company's financial condition and results of operations could be adversely affected.
If the Company fails to comply with restrictions on customer privacy and information security, including taking steps to ensure that its third-party service providers and business associates who access, store, process or transmit sensitive customer information maintain its security, integrity, confidentiality and availability, the Company's reputation and business operations could be materially adversely affected.
The collection, maintenance, use, protection, disclosure and disposal of individually identifiable data by the Company's businesses are regulated at the international, federal and state levels. These laws and rules are subject to change by legislation or administrative or judicial interpretation. With regard to personal information obtained from policyholders, the insured, or others, Aflac Japan is regulated in Japan by the APPI and guidelines issued by FSA and other governmental authorities.
Various state laws in the U.S. address the unauthorized access and acquisition of personal information and the use and disclosure of individually identifiable health data. HIPAA requires the Company to impose privacy and security requirements on its business associates (as such term is defined in the HIPAA regulations). Several states including California and New York, in which Aflac U.S. conducts significant portions of its business, have made changes to their privacy or cybersecurity laws or regulations in recent years. Further, the U.S. Congress and many states are considering new privacy and security requirements that would apply to the Company's business. Compliance with new privacy and
24
security laws, requirements, and new regulations may result in cost increases due to necessary systems changes, new limitations or constraints on the Company's business models, the development of new administrative processes, and the effects of potential noncompliance by the Company's business associates. They also may impose further restrictions on the Company's collection, disclosure and use of customer identifiable data that are housed in one or more of the Company's investment portfoliosadministrative databases. Noncompliance with any privacy laws or any security breach involving the misappropriation, loss, theft or other unauthorized disclosure of sensitive or confidential customer information, whether by the Company or by one of its third parties, could have a material adverse effect on the Company's business, reputation, brand and results of operations, including: material fines and penalties; compensatory, special, punitive and statutory damages; consent orders regarding the Company's privacy and security practices; adverse actions against the Company's licenses to do business; and injunctive relief.
In addition, under Japanese laws and regulations, including the APPI, if a leak or loss of personal information by Aflac Japan or its business associates should occur, depending on factors such as the volume of personal data involved and the likelihood of other secondary damage, Aflac Japan may be required to file reports to the FSA; issue public releases explaining such incident to the public; or become subject to an FSA business improvement order, which could pose a risk to the Company's reputation.
Although the Company provides for appropriate protections through its contracts and performs information security risk assessments of its third-party service providers and business associates, the Company still has limited control over their actions and practices. In addition, despite the security measures the Company has in place to ensure compliance with applicable laws and rules, the Company's facilities and systems, and those of the Company's third-party providers and participants in its distribution channels may be vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. From time to time, the Company, its third party providers and participants in the Company’s distribution channels have experienced and will likely continue to experience such events. In such cases, notification to affected individuals, state and federal regulators, state attorneys general and media may be required, depending upon the number of affected individuals and whether personal information including health or financial data was subject to unauthorized access.
Extensive regulation and changes in legislation can impact profitability and growth.
Aflac's insurance subsidiaries are subject to complex laws and regulations that are administered and enforced by a number of governmental authorities, that exercise a degree of interpretive latitude, including the FSA and Ministry of Finance (MOF) in Japan, state insurance regulators, the BMA in Bermuda, the SEC, the NAIC, the FIO, the U.S. Department of Justice, state attorneys general, the U.S. Commodity Futures Trading Commission, and the U.S. Treasury, including the Internal Revenue Service (IRS), in the U.S. The Company is subject to the risk that compliance with any particular single-issuerregulator's or sectorenforcement authority's interpretation of a legal or regulatory issue may result in non-compliance with another regulator's or enforcement authority's interpretation of the economy maysame issue, particularly when compliance is judged in hindsight. Further, regulatory authorities periodically re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, could have ana material adverse effect on the Company's financial position orcondition and results of operations.
If the Company's subsidiaries fail to meet the minimum capital or operational requirements established by its respective regulators, they could have anbe subject to examination or corrective action, or the Company's financial strength ratings could be downgraded, or both. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase the Company's direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on the Company's financial condition and results of operations. See the “Government Regulation” subsections of Item 1, Business, for more information.
General Risk Factors
Competition could adversely affect the Company's ability to increase or maintain its market share or profitability.
The Company operates in a competitive environment and in an industry that is subject to ongoing changes from market pressures brought about by customer demands, legislative reform, marketing practices and changes to health care and health insurance delivery. These factors require the Company to anticipate market trends and make changes to differentiate the Company's products and services from those of its competitors. The Company also faces potential
25
competition from existing or new companies in the U.S. and Japan that have not historically been active in the supplemental health insurance industry, but some of which have greater financial, marketing and management resources than the Company. Further, some of these potential competitors could introduce new means of product development and delivery that disrupt the Company’s business model. Failure to anticipate market trends and/or to differentiate the Company's products and services can affect the Company's ability to retain or grow profitable lines of business. Further, as employers and brokers are increasingly requesting a full suite of products from one insurance provider, a failure to react and adapt to these demands could result in decreased sales or market share.
The Company's future success will depend, in part, on its ability to keep pace with rapid technological changes and to use technology to satisfy and grow customer demand for the Company's products and services and to create additional efficiencies in its operations. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. A failure to meet evolving customer demands through innovative product development, effective distribution channels, and continuous investment in the Company's technology could adversely affect the Company's operating results. Further, the evolving fragmentation of media and marketing channels that has developed over recent years could weaken the impact of the Company’s advertising efforts over time. As a result, the Company's ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations may be adversely affected.
Catastrophic events, including as a result of climate change, could adversely affect the Company's financial condition and results of operations as well as the availability of the Company’s infrastructure and systems.
The Company's insurance operations are exposed to the risk of catastrophic events including, but not necessarily limited to, epidemics, pandemics, tornadoes, hurricanes, earthquakes, tsunamis, war or other military action, and terrorism or other acts of violence. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in the Company's financial results for any fiscal quarter or year and could materially reduce its profitability or harm the Company's financial condition, as well as affect its ability to write new business. In addition, such events may lead to periods of voluntary or required premium grace periods, which may lead to volatility in lapse rates and related premiums. Additionally, the Company's business operations may be adversely affected by such catastrophic events to the extent they disrupt the Company's physical infrastructure, human resources or systems that support its businesses and customers. Although the Company has a global crisis management framework to minimize the business disruption from a catastrophic event, such framework may not be effective to avoid an adverse impact to the Company from such an event. Climate change may increase the frequency and severity of natural disasters such as hurricanes, tornadoes, floods and forest fires. Further, the Company cannot predict the effects that any legal or regulatory changes made in response to climate change concerns would have on the Company’s business. In addition, while assessment of risks related to climate change are part of the Company's credit review process, climate change-related risks may adversely impact the value of the securities that the Company holds.
Events, including those external to the Company's operations, could damage the Company's reputation.
The Company has made significant investments in the Aflac brand over a long period of time. Because insurance products are intangible, the Company's ability to compete for and maintain policyholders relies to a large extent on consumer trust in the Company's business, including its alliance partners, sales associates and other distribution partners. The perception of unfavorable business practices or financial weakness with respect to the Company, its alliance partners, sales associates or other distribution partners could create doubt regarding the Company's ability to honor the commitments it has made to its policyholders. Such perceptions could also negatively impact the Company’s ability to attract and retain qualified sales associates, brokers and other distribution partners, including its alliance partners in Japan, and could have a material adverse effect on the Company's sales, results of operations and financial position. The Company's global investment guidelines establish
The Company depends heavily on key management personnel, and the loss of services of one or more of its key executives could harm the Company's business.
The Company’s success depends to a significant extent uponon the efforts and abilities of its key management personnel. The loss of the services of one or more of the Company's senior executives could significantly undermine its management expertise, and the Company's business could be adversely affected.
26
Changes in accounting standards issued by the Financial Accounting Standard Boards (FASB) or other standard-setting bodies may adversely affect the Company's financial statements.
The Company's financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time to time the Company is required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB. The impact of accounting pronouncements that have been issued but not yet implemented and are applicable to the Company is disclosed in Note 1 of the Notes to the Consolidated Financial Statements. The pronouncements expected to have the most significant impact on the Company's financial position or results of operations are outlined below.
Changes to accounting standards could have a material adverse effect on the Company's results of operations and financial condition. For information on new accounting pronouncements and the impact, if any, on the Company's financial position or results of operations, seeSee Note 1 of the Notes to the Consolidated Financial Statements in this report.for more information.
The Company faces risks related to litigation, regulatory investigations and inquiry and other matters.
The Company is a defendant in various lawsuits considered to be in the normal course of business. The final results of any litigation cannot be predicted with certainty, and plaintiffs may seek very large amounts in class actions or other litigation. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows. However, a substantial legal liability or a significant federal, state or other regulatory action against the Company, as well as regulatory inquiries or investigations, could harm the Company's reputation, result in changes in operations, result in material fines or penalties, result in significant costs due to legal fees, settlements or judgments against the Company, or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Without limiting the foregoing, the litigation and regulatory matters the Company is, has been, or may become, subject to include matters related to sales agent recruiting, policy sales practices, claim payments and procedures including denial or delay of benefits, the low level of Aflac U.S. benefit ratios in recent financial periods, material misstatements or omissions in the Company's financial reports or other public statements, and/or corporate governance, corporate culture or business ethics matters. Further, the Company may be subject to claims of or litigation regarding sexual or other forms of misconduct or harassment, or discrimination on the basis of race, color, national origin, religion, gender, or other bases, notwithstanding that the Company's Code of Business Conduct and Ethics prohibits such harassment and discrimination by its employees, the Company has ongoing training programs and provideprovides opportunities to report claims of noncompliant conduct, and it investigates and may take disciplinary action regarding alleged harassment or discrimination. Any violations of or deviation from laws, regulations, internal or external codes or standards of normative behavior, or perceptions of such violations or deviations, by the Company's employees or by independent sales agents could adversely impact the Company's reputation and brand value, financial condition and results of operations.
Allegations or determinations of agent misclassification could adversely affect the Company’s results of operations, financial condition and liquidity.
A majority of the Company's U.S. sales force is, and has historically been, comprised of independent agents. While the Company believes that it has properly classified such agents as independent contractors, the Company may be subject to claims, regulatory action by state or federal departments of labor or tax authorities, changes in state or federal law, or litigation asserting that such agents are employees. The laws and regulations governing the classification of workers in the U.S. may be changed or interpreted differently compared to past interpretations, including in states where the Company generates significant sales through independent agents. An allegation or determination that independent agents in the Company’s U.S. sales force have been misclassified as independent contractors could result in changes in the Company’s operations and U.S. business model, result in material fines or penalties, result in significant costs due to legal fees, settlements or judgments against the Company, or otherwise have a material adverse effect on the Company's business, results of operation, financial condition and liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
In Tokyo, Japan, the Company has two primary campuses. The first campus includes a building, owned by the Company, for the customer call center, the claims department, the information technology departments, and training facility. This campus also includes a leased property, which houses Aflac Japan's policy administration and customer service departments. The second campus comprises leased office space, which serves as Aflac Japan's headquarters and houses administrative and investment support functions. The Company also leases additional office space in Tokyo, along with regional offices located throughout the country.
27
In the U.S., Aflacthe Company owns land and buildings that comprise two primary campuses located in Columbus, Georgia. These campuses include buildings that serve as the Company's worldwide headquarters and house administrative support and information technology functions for U.S. operations. AflacThe Company leases office space in Columbia, South Carolina, which houses the Company's CAIC subsidiary (branded as Aflac Group Insurance). Aflac also leases office space; in New York, thatNew York, which houses the Company's Global Investment division. Aflac alsodivision; in Tampa, Florida, which houses the Company's ABS subsidiary; and in Farmington, Connecticut, Windsor, Connecticut and Plantation, Florida, which houses the operations of the Company's group life, disability and absence management business. The Company leases other administrative office space throughout the U.S., Puerto Rico and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits considered to be in the normal course of business. Members of the Company's senior legal and financial management teams review litigation on a quarterly and annual basis. The final results of any litigation cannot be predicted with certainty. Although some of this litigation is pending in states where large punitive damages, bearing little relation to the actual damages sustained by plaintiffs, have been awarded in recent years, the Company believes the outcome of pending litigation will not have a material adverse effect on its financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Aflac Incorporated's common stock is principally traded on the New York Stock Exchange under the symbol AFL. Until the beginning of October 2019, Aflac Incorporated's stock was also listed on the Tokyo Stock Exchange under designator 8686.
Holders
As of February 12, 2020,16, 2023, there were 86,22384,297 holders of record of the Company's common stock.
Dividends
For a summary of dividends paid to shareholders in 2022 and 2021 and potential restrictions on the Company's ability to pay future dividends, see the Liquidity and Capital Resources section of Item 7. MD&A.
29
Stock Performance Graph
The following graph compares the five-year performance of the Company's common stock to the Standard & Poor's 500 Index (S&P 500) and the Standard & Poor's Life and Health Insurance Index (S&P Life and Health). The Standard & Poor's Life and Health Insurance Index includes: Aflac Incorporated, Globe Life Inc., Lincoln National Corporation, MetLife Inc., Principal Financial Group Inc., and Prudential Financial Inc. and Unum Group.
Performance Graphic Index
December 31,
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||||||||||||||
| Aflac Incorporated | 100.00 | 100.52 | 119.73 | 154.45 | 164.04 | 194.48 | Aflac Incorporated | 100.00 | 106.21 | 125.92 | 108.82 | 146.43 | 185.03 | |||||||||||||||||||||||||||||||||||||||
| S&P 500 | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | S&P 500 | 100.00 | 95.62 | 125.72 | 148.85 | 191.58 | 156.89 | |||||||||||||||||||||||||||||||||||||||
| S&P Life & Health Insurance | 100.00 | 93.69 | 116.98 | 136.20 | 107.91 | 132.92 | S&P Life & Health Insurance | 100.00 | 79.23 | 97.60 | 88.35 | 120.76 | 133.25 | |||||||||||||||||||||||||||||||||||||||
Copyright© 20202023 Standard & Poor’s, a division of S&P Global. All rights reserved.
30
Issuer Purchases of Equity Securities
During the year ended December 31, 2019,2022, the Parent Company repurchased shares of Aflacits common stock as follows:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| January 1 - January 31 | 4,465,400 | $ | 46.44 | 4,465,400 | 64,582,487 | January 1 - January 31 | 1,933,400 | $ | 61.87 | 1,933,400 | 53,895,617 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| February 1 - February 28 | 4,170,417 | 48.65 | 3,624,583 | 60,957,904 | February 1 - February 28 | 3,183,212 | 63.58 | 2,845,206 | 51,050,411 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 1 - March 31 | 2,162,830 | 49.50 | 2,147,500 | 58,810,404 | March 1 - March 31 | 3,233,866 | 61.93 | 3,228,600 | 47,821,811 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| April 1 - April 30 | 2,177,000 | 49.21 | 2,177,000 | 56,633,404 | April 1 - April 30 | 2,592,239 | 62.98 | 2,589,500 | 45,232,311 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| May 1 - May 31 | 2,813,277 | 50.99 | 2,812,850 | 53,820,554 | May 1 - May 31 | 4,284,400 | 57.22 | 4,284,400 | 40,947,911 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 1 - June 30 | 1,964,259 | 54.44 | 1,952,000 | 51,868,554 | June 1 - June 30 | 4,315,931 | 56.12 | 4,310,888 | 36,637,023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 1 - July 31 | 1,360,017 | 54.33 | 1,360,017 | 50,508,537 | July 1 - July 31 | 3,670,800 | 55.40 | 3,670,800 | 32,966,223 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| August 1 - August 31 | 2,491,225 | 51.22 | 2,483,400 | 48,025,137 | August 1 - August 31 | 3,983,200 | 61.37 | 3,983,200 | 28,983,023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 1 - September 30 | 2,111,075 | 51.81 | 2,103,600 | 45,921,537 | September 1 - September 30 | 3,406,571 | 59.47 | 3,403,200 | 25,579,823 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | 2,476,152 | 52.43 | 2,476,100 | 43,445,437 | October 1 - October 31 | 2,817,100 | 60.01 | 2,817,100 | 22,762,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| November 1 - November 30 | 1,938,000 | 54.03 | 1,938,000 | 41,507,437 | November 1 - November 30 | 2,867,949 | 69.91 | 2,856,100 | 119,906,623 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 1 - December 31 | 4,456,463 | 52.92 | 4,453,824 | 37,053,613 | December 1 - December 31 | 3,268,609 | 70.89 | 3,264,800 | 116,641,823 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 32,586,115 | (1) | $ | 50.82 | 31,994,274 | 37,053,613 | Total | 39,557,277 | (1) | $ | 61.29 | 39,187,194 | 116,641,823 | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)During the year ended December 31, 2019, 591,8412022, 370,083 shares were purchased in connection with income tax withholding obligations related to the vesting of restricted-share-based awards during the period.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
31
| (In millions, except for share and per-share amounts) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Revenues: | |||||||||||||||||||
| Net premiums, principally supplemental health insurance | $ | 18,780 | $ | 18,677 | $ | 18,531 | $ | 19,225 | $ | 17,570 | |||||||||
| Net investment income | 3,578 | 3,442 | 3,220 | 3,278 | 3,135 | ||||||||||||||
| Realized investment gains (losses) | (135 | ) | (430 | ) | (151 | ) | (14 | ) | 106 | ||||||||||
| Other income | 84 | 69 | 67 | 70 | 61 | ||||||||||||||
| Total revenues | 22,307 | 21,758 | 21,667 | 22,559 | 20,872 | ||||||||||||||
| Benefits and expenses: | |||||||||||||||||||
| Benefits and claims, net | 11,942 | 12,000 | 12,181 | 12,919 | 11,746 | ||||||||||||||
| Expenses | 5,920 | 5,775 | 5,468 | 5,573 | 5,264 | ||||||||||||||
| Total benefits and expenses | 17,862 | 17,775 | 17,649 | 18,492 | 17,010 | ||||||||||||||
| Pretax earnings | 4,445 | 3,983 | 4,018 | 4,067 | 3,862 | ||||||||||||||
| Income taxes | 1,141 | 1,063 | (586 | ) | 1,408 | 1,329 | |||||||||||||
| Net earnings | $ | 3,304 | $ | 2,920 | $ | 4,604 | $ | 2,659 | $ | 2,533 | |||||||||
| Share and Per-Share Amounts | |||||||||||||||||||
| Net earnings (basic) | $ | 4.45 | $ | 3.79 | $ | 5.81 | $ | 3.23 | $ | 2.94 | |||||||||
| Net earnings (diluted) | 4.43 | 3.77 | 5.77 | 3.21 | 2.92 | ||||||||||||||
| Cash dividends paid | 1.08 | 1.04 | .87 | .83 | .79 | ||||||||||||||
| Cash dividends declared | 1.08 | 1.04 | .87 | .83 | .79 | ||||||||||||||
| Weighted-average common shares used for basic EPS (In thousands) | 742,414 | 769,588 | 792,042 | 822,942 | 861,307 | ||||||||||||||
| Weighted-average common shares used for diluted EPS (In thousands) | 746,430 | 774,650 | 797,861 | 827,841 | 866,344 | ||||||||||||||
| Supplemental Data | |||||||||||||||||||
| Yen/dollar exchange rate at year-end (yen) | 109.56 | 111.00 | 113.00 | 116.49 | 120.61 | ||||||||||||||
| Weighted-average yen/dollar exchange rate (yen) | 109.07 | 110.39 | 112.16 | 108.70 | 120.99 | ||||||||||||||
| (In millions) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Assets: | |||||||||||||||||||
| Investments and cash | $ | 138,091 | $ | 126,243 | $ | 123,659 | $ | 116,361 | $ | 105,897 | |||||||||
| Other | 14,677 | 14,163 | 13,558 | 13,458 | 12,359 | ||||||||||||||
| Total assets | $ | 152,768 | $ | 140,406 | $ | 137,217 | $ | 129,819 | $ | 118,256 | |||||||||
| Liabilities and shareholders’ equity: | |||||||||||||||||||
| Policy liabilities | $ | 106,554 | $ | 103,188 | $ | 99,147 | $ | 93,726 | $ | 87,631 | |||||||||
| Income taxes | 5,370 | 4,020 | 4,745 | 5,387 | 4,340 | ||||||||||||||
Notes payable and lease obligations (1) | 6,569 | 5,778 | 5,289 | 5,360 | 4,971 | ||||||||||||||
| Other liabilities | 5,316 | 3,958 | 3,438 | 4,864 | 3,606 | ||||||||||||||
| Shareholders’ equity | 28,959 | 23,462 | 24,598 | 20,482 | 17,708 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 152,768 | $ | 140,406 | $ | 137,217 | $ | 129,819 | $ | 118,256 | |||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements included in this section constitute forward-looking statements within the meaning of the U.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 | |||||
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 ended December 31, 20182021, filed on February 25, 2019,23, 2022, for reference to discussion of the year ended December 31, 2017,2020, the earliest of the three years presented. Amounts reported in this MD&A may not addfoot due to rounding.
32
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 2019,2022, total revenues were up 2.5%down 11.8% to $22.3$19.5 billion, compared with $21.8$22.1 billion for the full year of 2018.2021. Net earnings were $3.3$4.2 billion, or $4.43 per diluted share, compared with $2.9 billion, or $3.77$6.59 per diluted share, for the full year of 2018.2022, 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 20192022 included pretax net realized investment lossesgains of $135$363 million, compared with net realized investment lossesgains of $430$468 million in 2018.2021. Net investment lossesgains in 20192022 included $31an increase in credit loss allowances of $36 million; $273 million of other-than-temporary impairment losses and changes in loan loss reserves; $236 million in net lossesgains from certain derivativesderivative and foreign currency gains or losses; $101$341 million of net gainslosses on equity securities; and $31$467 million of net gains from sales and redemptions.
The average yen/dollar exchange rate(1) in 20192022 was 109.07,130.17, or 1.2% stronger15.7% weaker than the rate of 110.39109.79 in 2018.2021.
Adjusted earnings(2) for the full year of 20192022 were $3.3$3.4 billion, or $4.44$5.33 per diluted share, compared with $3.2$4.0 billion, or $4.16$5.94 per diluted share, in 2018.2021. The strongerweaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by $.02.$.34.
Total investments and cash at the end of December 201931, 2022 were $138.1$117.4 billion, compared with $126.2$143.0 billion at December 31, 2018. 2021. The decline in the portfolio was principally driven by the weaker yen and higher interest rates. In 2019,2022, Aflac Incorporated repurchased $1.6$2.4 billion, or 32.039.2 million of its common shares. At the end of December 31, 2022, the Company had 37.1116.6 million remaining shares authorized for repurchase.
Shareholders’ equity was $29.0$22.4 billion, or $39.84$36.35 per share, at December 31, 2019,2022, compared with $23.5$33.3 billion, or $31.06$50.99 per share, at December 31, 2018.2021. Shareholders’ equity at December 31, 20192022 included a net unrealized gainloss on investment securities and derivatives of $8.5 billion,$729 million, compared with a net unrealized gain of $4.2$9.6 billion at December 31, 2018.2021. Shareholders’ equity at December 31, 20192022 also included an unrealized foreign currency translation lossof $1.6$3.6 billion, compared with an unrealized foreign currency translation loss of $1.8$2.0 billion at December 31, 2018.2021. The annualized return on average shareholders’ equity in 20192022 was 12.6%15.1%.
Shareholders’ equity excluding accumulated other comprehensive income (AOCI)(2) (adjusted book value)(2) was $22.3$26.8 billion, or $30.74$43.51 per share at December 31, 2019,2022, compared with $21.3$25.9 billion, or $28.22$39.65 per share, at December 31, 2018.2021. The annualized adjusted return on equity excluding foreign currencyimpact(2) in 20192022 was 15.1%13.7%.
(1) Yen/U.S. dollar exchange rates are based on the published MUFG 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
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 Business - 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.
Regulatory Environment
See Item 1. Business - Aflac U.S.Japan Government Regulation and Aflac JapanU.S. Government Regulation for a discussion of regulatory developments that may impact the Company and the associated risks.
Competitive Environment
See Item 1. Business - Aflac U.S. CompetitionJapan Competitive Markets and Aflac Japan CompetitionU.S. Competitive Markets for a discussion of the competitive environment and the basis on which the Company competes in each of its segments.
The Company’s strategy to drive long-term shareholder value is to pursue growth through product development and distribution expansion and digital advancements to improve the customer experience.achieve efficiencies by modernizing its technology and streamlining its operations.
The Company's objectives in 20202023 are to maintain strong pre-tax margins with increased sales production through product refreshment in its Aflac 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 Aflac U.S. segments through disciplined product pricing, stable investment returns and leveraging a periodThe Company believes that its strategy of favorable benefit ratios to invest in its platformpositioning itself for future growth and efficiency. The Company believes thatefficiency while defending and leveraging its market-leading position, powerful brand recognition and diverse distribution in Japan and the U.S. will provide support toward these objectives.
The Company believes thatannounced a 5.0% increase in the first quarter 2023 dividend compared to the prior quarter, and it intends to maintain strong capital ratios in Aflac Japan and Aflac U.S. in support of its efforts will supportcommitment to shareholder dividends while remaining tactical in its prudent strategies fordeployment of capital deployment in the form of dividends, share repurchases and opportunistic investments that enhance the Company’s business with a focus on digital distribution and leveraging the Company’s brand, distribution and scale.investments. The Company has stated that the dividend payout ratio from its Aflac Japan segment is likelyintends to be to 100%maintain a minimum SMR of FSA earnings from500% for Aflac Japan and 100%a target combined RBC over time of U.S. statutory earnings fromapproximately 400% for Aflac U.S. In its Aflac U.S. segment,, consistent with the Company plans to maintain a risk-based capital (RBC) ratio in the 500% range for 2020.Company's risk management practices.
Aflac Japan Segment
34
For Aflac U.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 into U.S. platforms, continues to scale its acquisitions, and focuses on earned premium growth. For the 2023 through 2024 period, the Company expects Aflac U.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 U.S. interest rates remain stable.
For important disclosures applicable to statements made in this 20202023 Outlook, please see the Risk Factors section and the statement on Forward-Looking Information at the beginning of Item 1. Business, the Risk Factors identified in Item 1A. and this Item 7. Management Discussion and Analysis.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.
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 management uses adjusted earnings and adjusted earnings per diluted share to evaluate the financial performance both including and excluding the impact of its insurance operations on a consolidated basis,foreign currency translation to monitor, respectively, cumulative currency impacts and the Company believes that a presentation of these measurescurrency-neutral operating performance over time. The average yen/dollar exchange rate is vitally important to an understanding of its underlying profitability drivers and trends of its insurance business. The Company believes that amortized hedge costs/income, which are a component of adjusted earnings, measurebased on the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income.published MUFG Bank, Ltd. telegraphic transfer middle rate (TTM).
The Company defines the non-U.S. GAAP financial measures included in this filingdocument as follows:
•Adjusted earnings are the profits derived from operations.The most comparable U.S. GAAP measure is net earnings. 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 realizedadjusted net investment gains and losses, except for amortized hedge costs/income related to foreign currency exposure management strategies and net interest cash flows from derivatives associated with certain investment strategies.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.
35
•Adjusted net investment gains and losses are net investment gains and losses adjusted earnings 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 period divided byimpact 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 weighted average outstanding shares (basic or diluted) forremainder amount that is considered outside management’s control, while excluding the period presented.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 earnings per share.investment gains and losses.
•Amortized hedge costs/income represent costs/income incurred or recognized inas a result of using foreign currency forward
•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 computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates fluctuations driven solely by yen-to-dollar currency rate changes.net earnings and net earnings per share, respectively.
Adjusted book value is the U.S. GAAP book value (representing total shareholders'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 it excludesthey exclude AOCI, which fluctuates due to market movements that are outside management'smanagement’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 return on equity (ROE) excluding foreign currency impact is calculated using adjusted earnings excluding the current period foreign currency impact of the yen/dollar exchange rate, as reconciled with total U.S. GAAP net earnings, 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 isfor adjusted return on average 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 on U.S. dollar-denominated investment income using the average foreign currency exchange rate for the comparable prior year period. The Company considers U.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 comparable U.S. GAAP financial measure for U.S. dollar-denominated investment income excluding foreign currency impact is the corresponding net investment income amount from the U.S. dollar denominated investments translated to yen.
36
The following table is a reconciliation of items impacting adjusted earnings and adjusted earnings per diluted share to the most directly comparable U.S. GAAP financial measures of net earnings and net earnings per diluted share, respectively, for the years ended December 31.
Reconciliation of Net Earnings to Adjusted Earnings(1)
| In Millions | Per Diluted Share | In Millions | Per Diluted Share | |||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 3,304 | $ | 2,920 | $ | 4.43 | $ | 3.77 | Net earnings | $ | 4,201 | $ | 4,325 | $ | 6.59 | $ | 6.39 | |||||||||||||||||||||||||||||||||
| Items impacting net earnings: | Items impacting net earnings: | |||||||||||||||||||||||||||||||||||||||||||||||||
Realized investment (gains) losses (2),(3),(4),(5) | 15 | 297 | .02 | .38 | ||||||||||||||||||||||||||||||||||||||||||||||
Adjusted net investment (gains) losses (1) | Adjusted net investment (gains) losses (1) | (447) | (462) | (.70) | (.68) | |||||||||||||||||||||||||||||||||||||||||||||
| Other and non-recurring (income) loss | 1 | 75 | .00 | .10 | Other and non-recurring (income) loss | (1) | 73 | .00 | .11 | |||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense on items excluded from adjusted earnings | (3 | ) | (83 | ) | .00 | (.11 | ) | |||||||||||||||||||||||||||||||||||||||||||
Tax reform adjustment (6) | (4 | ) | 18 | (.01 | ) | .02 | ||||||||||||||||||||||||||||||||||||||||||||
Income tax (benefit) expense on items excluded from adjusted earnings (2) | Income tax (benefit) expense on items excluded from adjusted earnings (2) | (357) | 83 | (.56) | .12 | |||||||||||||||||||||||||||||||||||||||||||||
| Adjusted earnings | 3,314 | 3,226 | 4.44 | 4.16 | Adjusted earnings | 3,397 | 4,019 | 5.33 | 5.94 | |||||||||||||||||||||||||||||||||||||||||
Current period foreign currency impact | (15 | ) | N/A | (.02 | ) | N/A | 215 | N/A | .34 | N/A | ||||||||||||||||||||||||||||||||||||||||
| Adjusted earnings excluding current period foreign currency impact | $ | 3,299 | $ | 3,226 | $ | 4.42 | $ | 4.16 | Adjusted earnings excluding current period foreign currency impact | $ | 3,613 | $ | 4,019 | $ | 5.67 | $ | 5.94 | |||||||||||||||||||||||||||||||||
(1) Amounts may not foot due to rounding.
Reconciling Items
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) | $ | (462) | |||||||
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 growth and 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 capitalinvestment 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. Realized
Net investment gains and losses excluded from adjusted earnings include the following:
•Securities Transactions
•Credit Losses
•Changes in the Fair Value of Equity Securities
•Certain Derivative and Foreign Currency Activities.
37
Securities Transactions, Impairments,Credit Losses and Gains (Losses) onChanges in the Fair Value of Equity 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. ImpairmentsCredit losses include other-than-temporary-impairment losses on investmentfor held-to-maturity fixed maturity securities, as well as changes inavailable-for-sale fixed maturity securities, loan loss reserves forreceivables, loan receivables. Startingcommitments and reinsurance recoverables. Changes in the first quarter of 2018, gains and losses from changes in fair value of equity securities are recordedthe result of gains or losses driven by fluctuations in earnings.market prices.
Certain Derivative and Foreign Currency Gains (Losses)Activities
The Company's derivative activities include include:
•foreign currency forwards and options used in hedging foreign exchange risk on certain fixed maturity securities; U.S. dollar-denominated investments in Aflac Japan's portfolio, with options used on a standalone basis and/or in a collar strategy;
•foreign currency forwards and options thatused to economically hedge certain portions of forecasted cash flows denominated in yen and hedge the Company's long-termlong 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 and credit defaults swaps held in consolidatedthat are associated with variable interest entity (VIE) bond purchase commitments, and investments in special-purpose entities, (VIEs); including VIEs where the Company is the primary beneficiary;
•interest rate swaps used to economically hedge interest rate fluctuations in certain variable-rate investments; and
•interest rate swaptions used to hedge changes in the fair value associated with interest rate changesfluctuations for certain U.S. dollar-denominated available-for-sale securities. 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 yen/dollar exchange rate from adjusted earnings. Amortized hedge costs/ income related to certain foreign currency exposure management strategies (see Amortized Hedge Cost/Income section below), and net interest cash flows from derivatives associated with certain investment strategies and notes payable are reclassified from realized investment gains (losses) and included in adjusted earnings.exchange rate.
For additional information regarding realizednet 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
The U.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 with U.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 the U.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. In May 2021, the Parent Company used a portion of the net proceeds from its April 2021 issuance of various series of senior notes to redeem $700 million of its 3.625% senior notes due June 2023. The pretax expense due to the early redemption of these notes was $48 million.
38
Other items also include conversionexcluded from adjusted earnings included integration costs related to legally converting the Company's Japan business to a subsidiary;acquisition of Zurich 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 Japan branch conversionintegration costs were an immaterial amountare excluded from adjusted earnings for one year following the year-ended December 31, 2019acquisition and $75amounted to $26 million for the year-endedyear ended December 31, 2018.2021.
Income Taxes
The Company's combined U.S. and Japanese effective income tax rate on pretax earnings was 25.7%8.8% in 20192022 and 26.7%18.7% in 2018. The decrease in2021. In 2022, the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018 drove the reduction in thecombined effective tax rate for 2019differs from the U.S. statutory rate primarily due to the impact of the tax accounting method change discussed below, as well as historic and 2018.solar tax credits. In 2021, the combined effective tax rate differs from the U.S. statutory rate primarily due to historic and solar tax credits. Total income taxes were $1.1 billion$403 million in both 20192022 and 2018.$997 million in 2021. Japanese income taxes on Aflac Japan's results account for most of the Company's consolidated income tax expense.
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 furtheradditional information, see "Critical Accounting Estimates - Income Taxes" in this MD&A, and 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 additionalfuture periods will be approximately 20%. The effective tax rate continues to be subject to future tax law changes both in the U.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 and U.S. dollar-denominated assets, which may be hedged to yen, to support yen-denominated policy liabilities. These and other yen-denominated financial statement items are, however, translated into dollars for financial reporting purposes. The Company translates Aflac Japan’s yen-denominatedYen-denominated income statement intoaccounts are translated to U.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 Company translates its yen-denominatedexchange rate on the trade date of each transaction. Yen-denominated balance sheet accounts are translated to U.S. dollars using the spot Japanese yen/U.S. dollar foreign exchange rate at the end of the reporting period.
RESULTS OF OPERATIONS BY SEGMENT
U.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. Aflac'sThe Company's insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac Japan is the principal contributor to consolidated earnings. BusinessesIn addition, the Parent Company, other business units that are not individually reportable, such as the Parent Company, asset management subsidiaries and business activities, including reinsurance retrocession activities, not included in Aflac Japan or Aflac U.S. are included in the Corporate and other segment.other. See the Item 1. Business section of this Form 10-K for a summary of each segment's products and distribution channels,channels.
39
Consistent with U.S. GAAP guidance for segment reporting, pretax adjusted earnings is the Company's U.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 consolidated U.S. GAAP results and additional information.
AFLAC JAPAN SEGMENT
Aflac Japan Pretax Adjusted Earnings
Changes in Aflac 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 for Aflac Japan for the years ended December 31.
| (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 $(86) and $(33) 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.
40
| (In millions) | 2019 | 2018 | ||||||
| Net premium income | $ | 12,772 | $ | 12,762 | ||||
| Net investment income: | ||||||||
| Yen-denominated investment income | 1,307 | 1,283 | ||||||
| U.S. dollar-denominated investment income | 1,446 | 1,356 | ||||||
| Net investment income | 2,753 | 2,639 | ||||||
| Amortized hedge costs related to certain foreign currency exposure management strategies | 257 | 236 | ||||||
| Net investment income, less amortized hedge costs | 2,496 | 2,403 | ||||||
| Other income (loss) | 45 | 41 | ||||||
| Total adjusted revenues | 15,313 | 15,206 | ||||||
| Benefits and claims, net | 8,877 | 8,913 | ||||||
| Adjusted expenses: | ||||||||
| Amortization of deferred policy acquisition costs | 709 | 710 | ||||||
| Insurance commissions | 731 | 735 | ||||||
| Insurance and other expenses | 1,734 | 1,640 | ||||||
| Total adjusted expenses | 3,174 | 3,085 | ||||||
| Total benefits and adjusted expenses | 12,051 | 11,998 | ||||||
| Pretax adjusted earnings | $ | 3,261 | $ | 3,208 | ||||
| Weighted-average yen/dollar exchange rate | 109.07 | 110.39 | ||||||
| In Dollars | In Yen | |||||||||||
| Percentage change over previous period: | 2019 | 2018 | 2019 | 2018 | ||||||||
| Net premium income | .1 | % | .1 | % | (1.1 | )% | (1.5 | )% | ||||
Net investment income, less amortized hedge costs | 3.9 | 7.5 | 2.2 | 5.5 | ||||||||
| Total adjusted revenues | .7 | 1.2 | (.6 | ) | (.5 | ) | ||||||
| Pretax adjusted earnings | 1.7 | 5.0 | .2 | 3.1 | ||||||||
In yen terms, Aflac Japan's net premium incomeearned premiums decreased in 2019, primarily2022, mainly due to limited-pay products reaching premium paid-up status. Netstatus and a slightly declining in force. Adjusted net investment income, net of amortized hedge costs,in yen terms, increased in 20192022 primarily due to increased investmentsincreases in floating rate income earned from U.S. dollar-denominated floating rateinvestment 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 $25 million of income relatedhigher hedge costs. The decrease in pretax adjusted earnings in yen was primarily due to a partial calldecrease in revenues and an increase in the benefit ratio resulting from a wider scope of a concentrated yen-denominated exposure.
Annualized premiums in force at December 31, 2019,2022, were ¥1.49¥1.30 trillion, compared with ¥1.53¥1.36 trillion in 2018.2021. The decrease in annualized premiums in force in yen of 2.5%4.4% in 20192022 and 1.6%4.7% in 20182021 was driven primarily by limited-pay products reaching paid up status.status and lower sales as a result of pandemic conditions. Annualized premiums in force, translated into dollars at respective year-end exchange rates, were $13.6$9.8 billion in 20192022 and $13.8$11.8 billion in 2018.2021. As of December 31, 2022, Aflac Japan exceeded 23 million individual policies in force in Japan. Aflac Japan continued to be the number one seller of cancer insurance policies in Japan throughout 2022, with more than 14 million cancer policies in force as of December 31, 2022.
Aflac Japan's investment portfolios include U.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, translating Aflac 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, translating U.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 translating Aflac 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 dollar/yenforeign currency exchange rates remained unchanged from the prior year. Amounts excluding foreign currency impact on U.S. dollar-denominated investment income a non-U.S. GAAP financial measure, were determined using the average dollar/yenforeign 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 Currency Changes | Excluding Foreign 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 | |||||||||||||||||||||||||||||||
| Including Foreign Currency Changes | Excluding Foreign Currency Changes | ||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||
| Net investment income, less amortized hedge costs | 2.2 | % | 5.5 | % | 2.9 | % | 6.4 | % | |||||
| Total adjusted revenues | (.6 | ) | (.5 | ) | (.5 | ) | (.3 | ) | |||||
| Pretax adjusted earnings | .2 | 3.1 | .7 | 3.7 | |||||||||
The following table presents a summary of operating ratios in yen terms for Aflac Japan for the years ended December 31.
| 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
| Ratios to total adjusted revenues: | 2019 | 2018 | ||||
| Benefits and claims, net | 58.0 | % | 58.6 | % | ||
| Adjusted expenses: | ||||||
| Amortization of deferred policy acquisition costs | 4.6 | 4.7 | ||||
| Insurance commissions | 4.8 | 4.8 | ||||
| Insurance and other expenses | 11.3 | 10.8 | ||||
| Total adjusted expenses | 20.7 | 20.3 | ||||
| Pretax adjusted earnings | 21.3 | 21.1 | ||||
| Ratios to total premiums: | ||||||
| Benefits and claims, net | 69.5 | % | 69.9 | % | ||
| Adjusted expenses: | ||||||
| Amortization of deferred policy acquisition costs | 5.5 | 5.6 | ||||
In 2019,2022, the benefit ratio decreased,to total premiums increased, compared to the prior year,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 as first sector products become paid-up.business. In 2019,2022, the adjusted expense ratio increased mainly due to lower premium income from paid-up first sector productswas flat, compared with 2021, reflecting the decrease in total adjusted revenues and higher expenses for advanced technology implementation.an offsetting decrease in total adjusted expenses. In total for 2019,2022, the pretax adjusted profit margin (calculated by dividingdecreased when compared with 2021, primarily due to lower adjusted earnings by adjusted revenues) increased reflecting continued strength inrevenues, a higher benefit ratiosratio and favorable net investment income. For 2020, the Company anticipates the Aflac Japan pretax adjusted profit margin (calculated by dividing adjusted earnings by adjusted revenues) to remain stable. For further information, see the 2020 Outlook section of this MD&A.a flat expense ratio.
Aflac Japan Sales
The following table presents Aflac Japan's new annualized premium sales for the years ended December 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 Dollars | In Yen | |||||||||||||||
| (In millions of dollars and billions of yen) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| New annualized premium sales | $ | 731 | $ | 869 | ¥ | 79.7 | ¥ | 95.9 | ||||||||
| Increase (decrease) over prior period | (15.9 | )% | 2.7 | % | (16.9 | )% | 1.1 | % | ||||||||
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 Aflac Japan's new annualized premium sales by major insurance product for the years ended December 31.
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||||||||||
| Cancer | 59.2 | % | 65.8 | % | Cancer | 56.5 | % | 49.2 | % | |||||||||||||||||
| Medical and other health: | Medical and other health: | |||||||||||||||||||||||||
| Medical | 31.0 | 25.0 | Medical | 26.6 | 37.2 | |||||||||||||||||||||
| Income support | 1.2 | 1.8 | Income support | 1.3 | .5 | |||||||||||||||||||||
| Ordinary life: | ||||||||||||||||||||||||||
| Life insurance: | Life insurance: | |||||||||||||||||||||||||
Traditional life (1) | Traditional life (1) | 8.1 | 9.0 | |||||||||||||||||||||||
| WAYS | .5 | .5 | WAYS | 3.5 | .8 | |||||||||||||||||||||
| Child endowment | .2 | .3 | Child endowment | .3 | .3 | |||||||||||||||||||||
Other ordinary life (1) | 7.4 | 6.1 | ||||||||||||||||||||||||
| Other | .5 | .5 | Other | 3.7 | 3.0 | |||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | Total | 100.0 | % | 100.0 | % | |||||||||||||||||
(1) Includes term and whole life
The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical, and income support, insurance products. Aflac Japan has been focusing more on promotion of cancer and medicalnursing care insurance products in this low-interest-rate environment. These products are less interest-rate sensitive and more profitable compared to first sector savings 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 products Aflac Japan provides will continue to be an important part of its product portfolio.
Sales of Aflac Japan cancer products in the Japan Post Group channel experienced a material decline beginning in August 2019 which2019. Japan Post Group resumed proactive sales of cancer insurance policies on April 1, 2021 and Aflac Japan continues to strengthen the strategic alliance. In April 2022, approximately 10,000 employees of Japan Post Co. were transferred to Japan Post Insurance. Japan Post Group has informed Aflac Japan that the transferred employees' responsibilities will include sales of Japan Post Insurance products and Aflac Japan cancer products but will not include sales of other financial products. The Company expects continued into 2020.collaboration to further position both companies for long-term growth and a gradual improvement of Japan Post Group cancer insurance sales in the intermediate term. For 2019, salesexample, in 2021 and 2022, Aflac Japan observed an increase in the number of proposals to potential customers in the Japan Post Group channel, declined by approximately 50.0% compared with 2018. The Company expects very little sales production inand the Japan Post channel duringGroup continues to conduct a nationwide campaign to improve certain sales process practices. For additional information, see the first half of 2020 and is uncertain with regard to production during the second halfrisk factor entitled "Sales of the year. SeeCompany's products and
42
services are dependent on its ability to attract, retain and support a network of qualified sales associates, brokers and employees in the 2020 Outlook section of this MD&A for information on U.S. and sales associates and other distribution partners in Japan," in Part I, Item 1A. Risk Factors.
Aflac Japan earned premium expectations.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 an Aflac 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.
| 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) Includes Japan Post, contributed 50.0% of total new annualized premium sales in 2019, compared with 55.3% in 2018. Japan Post offers Aflac's cancer insurance products in more than 20,000 postal outlets. Notwithstanding the recent reduction in sales of Aflac Japan's cancer products in the Japan Post channel, the Company believes this alliance with Japan Post hasDai-ichi Life and will benefit its cancer insurance sales over the long term. Daido Life
In 2019,2022, Aflac Japan recruited 7738 new sales agencies. At December 31, 2019,2022, Aflac Japan was represented by more than 9,000approximately 7,400 sales agencies, with more than 109,000approximately 110,000 licensed sales associates employed by those agencies. The number of sales agencies has declined in recent years due to Aflac Japan's focus on supporting agencies with strong management frameworks, high productivity and more producing agents.
At December 31, 2019,2022, Aflac Japan had agreements to sell its products at 367359 banks, approximately 90% of the total number of banks in Japan. Bank channel sales accounted for 4.3% of new annualized premium sales in 2019 for Aflac Japan, compared with 4.6% in 2018.
Strategic Alliance with Japan Post Holdings
On May 1, 2020, the Parent Company’sCompany filed a registration statement on Form S-3 that registered the sale of its common stock commenced on April 29, 2019 throughfrom time to time by J&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 and that it plannedcontinues to complete such purchases within Japan Post’s fiscal year 2019 (which ends March 31, 2020).
In light of the fact that the shares acquired by the Trust, like all Aflac 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
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.
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 on U.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 and U.S. dollar-denominated investments. Yen-denominated investments primarily consist of JGBs, and 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 public equity securities and alternative investments in limited partnerships or similar investment vehicles. Aflac Japan has been investing in both publicly-traded and privately originated U.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 the U.S. dollar investments.
The following table details the investment purchases for Aflac Japan for the years ended December 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 | |||||||||||||
| (In millions) | 2019 | 2018 | |||||||
| Yen-denominated: | |||||||||
| Fixed maturity securities: | |||||||||
| Japan government and agencies | $ | 583 | $ | 3,895 | |||||
| Private placements | 1,122 | 1,185 | |||||||
| Other fixed maturity securities | 542 | 796 | |||||||
| Equity securities | 212 | 221 | |||||||
| Total yen-denominated | $ | 2,459 | $ | 6,097 | |||||
| U.S. dollar-denominated: | |||||||||
| Fixed maturity securities: | |||||||||
| Other fixed maturity securities | $ | 2,767 | $ | 1,299 | |||||
| Infrastructure debt | 66 | 0 | |||||||
| Bank loans | 0 | 346 | |||||||
| Equity securities | 58 | 120 | |||||||
| Commercial mortgage and other loans: | |||||||||
| Transitional real estate loans | 1,846 | 3,168 | |||||||
| Commercial mortgage loans | 565 | 13 | |||||||
| Middle market loans | 1,442 | 839 | |||||||
| Other investments | 145 | 314 | |||||||
| Total dollar-denominated | $ | 6,889 | $ | 6,099 | |||||
| Total Aflac Japan purchases | $ | 9,348 | $ | 12,196 | |||||
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
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 Aflac Japan's investment yields for the years ended and as of December 31.
| 2019 | 2018 | 2022 | 2021 | ||||||||||||||||||||||
Total purchases for the period (in millions) (1) | $ | 9,203 | $ | 11,882 | Total purchases for the period (in millions) (1) | $ | 5,640 | $ | 8,756 | ||||||||||||||||
New money yield (1),(2) | 3.83 | % | 3.06 | % | New money yield (1),(2) | 4.48 | % | 3.50 | % | ||||||||||||||||
Return on average invested assets (3) | 2.33 | 2.33 | Return on average invested assets (3) | 2.78 | 2.72 | ||||||||||||||||||||
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1) | 2.64 | % | 2.61 | % | |||||||||||||||||||||
Portfolio book yield, including U.S. dollar-denominated investments, end of period (1),(2) | Portfolio book yield, including U.S. dollar-denominated investments, 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 20192022 was primarily due to decreased allocations to lower yielding yen-denominated asset classes.increases in U.S. interest rates.
See Notes 3, 4 and 5 of the Notes to the Consolidated Financial Statements and the Investments sectionand Hedging Activities sections of this MD&A for additional information on the Company's investments and hedging strategies.
AFLAC U.S. SEGMENT
Aflac U.S. Pretax Adjusted Earnings
Changes in Aflac U.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 Aflac U.S. for the years ended December 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 U.S. net earned premiums decreased, primarily due to lower 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
| (In millions) | 2019 | 2018 | ||||||
| Net premium income | $ | 5,808 | $ | 5,708 | ||||
| Net investment income | 720 | 727 | ||||||
| Other income | 22 | 8 | ||||||
| Total adjusted revenues | 6,550 | 6,443 | ||||||
| Benefits and claims | 2,871 | 2,887 | ||||||
| Adjusted expenses: | ||||||||
| Amortization of deferred policy acquisition costs | 573 | 534 | ||||||
| Insurance commissions | 590 | 585 | ||||||
| Insurance and other expenses | 1,244 | 1,152 | ||||||
| Total adjusted expenses | 2,407 | 2,271 | ||||||
| Total benefits and adjusted expenses | 5,279 | 5,158 | ||||||
| Pretax adjusted earnings | $ | 1,272 | $ | 1,285 | ||||
| Percentage change over previous period: | ||||||||
| Net premium income | 1.8 | % | 2.6 | % | ||||
| Net investment income | (1.0 | ) | .8 | |||||
| Total adjusted revenues | 1.7 | 2.4 | ||||||
| Pretax adjusted earnings | (1.0 | ) | 3.2 | |||||
Annualized premiums in force increased 1.1%were essentially flat in 20192022 and 3.0%decreased 1.6% in 2018.2021. Annualized premiums in force at December 31 were $6.3$6.0 billion in 2019, compared with $6.2 billion in 2018.2022 and 2021.
The following table presents a summary of operating ratios for Aflac U.S. for the years ended December 31.
| 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 | ||||||||||||||||||
| Ratios to total adjusted revenues: | 2019 | 2018 | ||||
| Benefits and claims | 43.8 | % | 44.8 | % | ||
| Adjusted expenses: | ||||||
| Amortization of deferred policy acquisition costs | 8.7 | 8.3 | ||||
| Insurance commissions | 9.0 | 9.1 | ||||
| Insurance and other expenses | 19.0 | 17.9 | ||||
| Total adjusted expenses | 36.7 | 35.2 | ||||
| Pretax adjusted earnings | 19.4 | 19.9 | ||||
| Ratios to total premiums: | ||||||
| Benefits and claims | 49.4 | 50.6 | ||||
| Adjusted expenses: | ||||||
| Amortization of deferred policy acquisition costs | 9.9 | 9.4 | ||||
The benefit ratio decreasedto total premiums increased slightly in 2019,2022, compared with 2018, primarily due to somewhat elevated lapses and a change in business mix from2021, reflecting higher loss ratio,incurred claims, mostly offset by reserve building productsreleases related to lower loss ratio, guaranteed issue products.persistency. The adjusted expense ratio increased in 2019,2022, compared with 2018,2021, primarily due to deferred policy acquisition costs (DAC) capitalization related tohigher DAC amortization associated with lower than anticipated sales as well as anticipatedpersistency and higher planned spending increases reflecting ongoing investments in the U.S. platform, distribution, and customer experience. Both the lower benefit and higher DAC amortization ratios were also impacted by increases in lapses as a result of large case volatility and replacement of an administrative partner. These items impacted persistency in the short-term but are expected to drive profitable earned premium growth in future periods. platform.The pretax adjusted
profit margin declineddecreased in 20192022 when compared with 2018,2021, primarily due to the higher adjusted expense ratios, offset somewhat by lower benefit ratios. For expectations for 2020, see the 2020 Outlook section of this MD&A.ratio.
Aflac U.S. Sales
The following table presents Aflac's U.S. new annualized premium sales for the years ended December 31.
| (In millions) | 2022 | 2021 | ||||||||||||||||||
| New annualized premium sales | $ | 1,483 | $ | 1,278 | ||||||||||||||||
| Increase (decrease) over prior period | 16.1 | % | 16.9 | % | ||||||||||||||||
| (In millions) | 2019 | 2018 | ||||||
| New annualized premium sales | $ | 1,580 | $ | 1,601 | ||||
| Increase (decrease) over prior period | (1.3 | )% | 3.2 | % | ||||
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 Aflac U.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 U.S. new annualized premium sales by major insurance product category for the years ended December 31.
| 2019 | 2018 | |||||
| Accident | 28.5 | % | 29.2 | % | ||
| Short-term disability | 22.5 | 22.7 | ||||
Critical care (1) | 21.9 | 22.1 | ||||
| Hospital indemnity | 16.6 | 15.8 | ||||
| Dental/vision | 4.4 | 4.7 | ||||
| Life | 6.1 | 5.5 | ||||
| Total | 100.0 | % | 100.0% | |||
| 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
In 2019,2022, the Aflac U.S. sales forcesforce included an average of approximately 8,2006,200 U.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.needs, as well as serve as a leading indicator of future production capacity. Aflac U.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. Aflac U.S. believes that the above factors have acted as a headwind to sales and to growth in the number of average weekly producers. Aflac U.S. remains focused on mitigating and reversing these trends as the U.S. economy continues to recover from the pandemic.
Aflac U.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, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.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 U.S. as of December 31.
| (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 | ||||||||||||||||
| (In millions) | 2019 | 2018 | |||||||
| Fixed maturity securities: | |||||||||
| Other fixed maturity securities | $ | 1,032 | $ | 1,068 | |||||
| Infrastructure debt | 119 | 97 | |||||||
| Equity securities | 58 | 76 | |||||||
| Commercial mortgage and other loans: | |||||||||
| Transitional real estate loans | 423 | 610 | |||||||
| Commercial mortgage loans | 104 | 163 | |||||||
| Middle market loans | 99 | 141 | |||||||
| Other investments | 16 | 44 | |||||||
| Total Aflac U.S. Purchases | $ | 1,851 | $ | 2,199 | |||||
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
The following table presents the results of Aflac's U.S. investment yields for the years ended and as of December 31.
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||||||||||||
Total purchases for period (in millions) (1) | $ | 1,835 | $ | 2,155 | Total purchases for period (in millions) (1) | $ | 1,701 | $ | 2,130 | |||||||||||||||||||
New money yield (1), (2) | 4.51 | % | 4.55 | % | ||||||||||||||||||||||||
New money yield (1),(2) | New money yield (1),(2) | 5.16 | % | 3.41 | % | |||||||||||||||||||||||
Return on average invested assets (3) | 5.07 | 5.16 | Return on average invested assets (3) | 4.72 | 4.87 | |||||||||||||||||||||||
Portfolio book yield, end of period (1) | 5.40 | % | 5.55 | % | ||||||||||||||||||||||||
Portfolio book yield, end of period (1),(2) | 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 U.S. new money yield for the year ended December 31, 2022 was primarily due to increases in U.S. interest rates.
See Note 3 of the Notes to the Consolidated Financial Statements and the Market Risks of Financial Instruments - Credit Risk subsection of MD&AItem 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) | |||||||||||||
| (In millions) | 2019 | 2018 | ||||||
| Premium income | $ | 200 | $ | 208 | ||||
| Net investment income | 88 | 77 | ||||||
Amortized hedge income related to certain foreign currency management strategies | 89 | 36 | ||||||
| Net investment income, including amortized hedge income | 177 | 113 | ||||||
| Other income | 15 | 18 | ||||||
| Total adjusted revenues | 393 | 339 | ||||||
| Benefits and claims, net | 194 | 199 | ||||||
| Adjusted expenses: | ||||||||
| Interest expense | 133 | 120 | ||||||
| Other adjusted expenses | 137 | 159 | ||||||
| Total adjusted expenses | 270 | 279 | ||||||
| Total benefits and adjusted expenses | 464 | 478 | ||||||
| Pretax adjusted earnings | $ | (72 | ) | $ | (139 | ) | ||
48
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 of Aflac Japan a diversified portfolio of yen-denominated investment assets, a U.S. dollar-denominated investment portfolio hedged back to yen and a portfolio of unhedged U.S. dollar-denominated assets. As part of the Company's portfolio management and asset allocation process, Aflac U.S. invests in fixed maturity investments and growth assets, including public equity securities and alternative investments in limited partnerships. Aflac U.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 the Principles 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 December 31.
Investment Securities by Segment
| 2019 | 2022 | |||||||||||||||||||||||||||||||||||||
| (In millions) | Aflac Japan | Aflac U.S. | Corporate and Other | Total | (In millions) | Aflac Japan | Aflac U.S. | Corporate and Other | Total | |||||||||||||||||||||||||||||
Available for sale, fixed maturity securities, at fair value | $ | 75,780 | $ | 13,703 | $ | 1,779 | $ | 91,262 | 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 | 30,085 | 0 | 0 | 30,085 | ||||||||||||||||||||||||||||||||||
Held to maturity, fixed maturity securities, at amortized cost (1) | Held to maturity, fixed maturity securities, at amortized cost (1) | 19,056 | 0 | 0 | 19,056 | |||||||||||||||||||||||||||||||||
| Equity securities | 657 | 67 | 78 | 802 | Equity securities | 650 | 51 | 390 | 1,091 | |||||||||||||||||||||||||||||
| Commercial mortgage and other loans: | Commercial mortgage and other loans: | |||||||||||||||||||||||||||||||||||||
| Transitional real estate loans | 4,507 | 943 | 0 | 5,450 | ||||||||||||||||||||||||||||||||||
| Commercial mortgage loans | 1,308 | 399 | 0 | 1,707 | ||||||||||||||||||||||||||||||||||
| Middle market loans | 2,141 | 271 | 0 | 2,412 | ||||||||||||||||||||||||||||||||||
Transitional real estate loans (1) | Transitional real estate loans (1) | 5,133 | 1,140 | 182 | 6,455 | |||||||||||||||||||||||||||||||||
Commercial mortgage loans (1) | Commercial mortgage loans (1) | 1,269 | 729 | 15 | 2,013 | |||||||||||||||||||||||||||||||||
Middle market loans (1) | Middle market loans (1) | 4,557 | 471 | 0 | 5,028 | |||||||||||||||||||||||||||||||||
| Other investments: | Other investments: | |||||||||||||||||||||||||||||||||||||
| Policy loans | 234 | 16 | 0 | 250 | Policy loans | 190 | 24 | 0 | 214 | |||||||||||||||||||||||||||||
Short-term investments (1) | 386 | 242 | 1 | 629 | ||||||||||||||||||||||||||||||||||
Short-term investments (2) | Short-term investments (2) | 319 | 184 | 1,029 | 1,532 | |||||||||||||||||||||||||||||||||
| Limited partnerships | 496 | 55 | 17 | 568 | Limited partnerships | 1,900 | 208 | 182 | 2,290 | |||||||||||||||||||||||||||||
| Other | 0 | 30 | 0 | 30 | Other | 0 | 34 | 0 | 34 | |||||||||||||||||||||||||||||
Investment in affiliate (3) | Investment in affiliate (3) | 0 | 195 | (195) | 0 | |||||||||||||||||||||||||||||||||
| Total investments | 115,594 | 15,726 | 1,875 | 133,195 | Total investments | 94,689 | 15,267 | 3,498 | 113,454 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | 1,674 | 417 | 2,805 | 4,896 | Cash and cash equivalents | 1,601 | 720 | 1,622 | 3,943 | |||||||||||||||||||||||||||||
| Total investments and cash | $ | 117,268 | $ | 16,143 | $ | 4,680 | $ | 138,091 | 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
| 2018 | 2021 | |||||||||||||||||||||||||||||||||||||
| (In millions) | Aflac Japan | Aflac U.S. | Corporate and Other | Total | (In millions) | Aflac Japan | Aflac U.S. | Corporate and Other | Total | |||||||||||||||||||||||||||||
Available for sale, fixed maturity securities, at fair value | $ | 69,409 | $ | 12,132 | $ | 1,354 | $ | 82,895 | 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 | 30,318 | 0 | 0 | 30,318 | ||||||||||||||||||||||||||||||||||
Held to maturity, fixed maturity securities, at amortized cost (1) | Held to maturity, fixed maturity securities, at amortized cost (1) | 22,000 | 0 | 0 | 22,000 | |||||||||||||||||||||||||||||||||
| Equity securities | 806 | 137 | 44 | 987 | Equity securities | 714 | 226 | 663 | 1,603 | |||||||||||||||||||||||||||||
| Commercial mortgage and other loans: | Commercial mortgage and other loans: | |||||||||||||||||||||||||||||||||||||
| Transitional real estate loans | 3,621 | 756 | 0 | 4,377 | ||||||||||||||||||||||||||||||||||
| Commercial mortgage loans | 763 | 301 | 0 | 1,064 | ||||||||||||||||||||||||||||||||||
| Middle market loans | 1,144 | 334 | 0 | 1,478 | ||||||||||||||||||||||||||||||||||
Transitional real estate loans (1) | Transitional real estate loans (1) | 4,226 | 1,020 | 45 | 5,291 | |||||||||||||||||||||||||||||||||
Commercial mortgage loans (1) | Commercial mortgage loans (1) | 1,217 | 669 | 8 | 1,894 | |||||||||||||||||||||||||||||||||
Middle market loans (1) | Middle market loans (1) | 4,297 | 304 | 0 | 4,601 | |||||||||||||||||||||||||||||||||
| Other investments: | Other investments: | |||||||||||||||||||||||||||||||||||||
| Policy loans | 219 | 13 | 0 | 232 | Policy loans | 216 | 20 | 0 | 236 | |||||||||||||||||||||||||||||
Short-term investments (1) | 0 | 141 | 11 | 152 | ||||||||||||||||||||||||||||||||||
Short-term investments (2) | Short-term investments (2) | 590 | 302 | 834 | 1,726 | |||||||||||||||||||||||||||||||||
| Limited partnerships | 333 | 37 | 7 | 377 | Limited partnerships | 1,534 | 169 | 155 | 1,858 | |||||||||||||||||||||||||||||
| Other | 0 | 26 | 0 | 26 | Other | 0 | 22 | 0 | 22 | |||||||||||||||||||||||||||||
| Total investments | 106,613 | 13,877 | 1,416 | 121,906 | Total investments | 116,587 | 17,642 | 3,698 | 137,927 | |||||||||||||||||||||||||||||
| Cash and cash equivalents | 1,779 | 641 | 1,917 | 4,337 | Cash and cash equivalents | 2,053 | 681 | 2,317 | 5,051 | |||||||||||||||||||||||||||||
| Total investments and cash | $ | 108,392 | $ | 14,518 | $ | 3,333 | $ | 126,243 | 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 NRSROsrating 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 December 31 were as follows:
Composition of Fixed Maturity Securities Portfolio by Credit Rating
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair 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 | % | |||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||
| AAA | 1.1 | % | 1.0 | % | 1.0 | % | .9 | % | |||||||||||
| AA | 4.3 | 4.4 | 3.9 | 4.0 | |||||||||||||||
| A | 68.6 | 69.8 | 67.9 | 69.9 | |||||||||||||||
| BBB | 23.1 | 22.1 | 23.2 | 21.6 | |||||||||||||||
| BB or lower | 2.9 | 2.7 | 4.0 | 3.6 | |||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
As of December 31, 2019,2022, the Company's direct and indirect exposure to 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 December 31, 2019.2022.
50
| (In millions) | Credit Rating | Amortized Cost | Fair Value | Unrealized Loss | |||||||||||||||||
| Diamond Offshore Drilling Inc. | CCC | $ | 64 | $ | 32 | $ | (32 | ) | |||||||||||||
| AXA | BBB | 296 | 271 | (25 | ) | ||||||||||||||||
| Transocean Inc. | CCC | 50 | 37 | (13 | ) | ||||||||||||||||
| Intesa Sanpaolo Spa | BBB | 142 | 132 | (10 | ) | ||||||||||||||||
| Baker Hughes Inc. | A | 123 | 114 | (9 | ) | ||||||||||||||||
| Kommunal Landspensjonskasse (KLP) | BBB | 137 | 129 | (8 | ) | ||||||||||||||||
| Mirvac Group Finance Ltd. | A | 91 | 84 | (7 | ) | ||||||||||||||||
| Autostrade Per Litalia Spa | BBB | 182 | 175 | (7 | ) | ||||||||||||||||
| Downer Group Finance Pty LTD | BBB | 91 | 85 | (6 | ) | ||||||||||||||||
| Chevron Corp. | AA | 148 | 142 | (6 | ) | ||||||||||||||||
| (In millions) | Credit Rating | Amortized Cost | Fair 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. As theThe Company believes these issuers have the ability to continue making timely payments of principal and interest, the Company views these changes in fair value to be temporary.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.
Below-Investment-Grade Securities
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.exposure at December 31.
Below-Investment-Grade Investments
| December 31, 2019 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Par Value | Amortized Cost | Fair Value | Unrealized Gain (Loss) | (In millions) | Par Value | Amortized Cost (1) | Fair Value | Unrealized Gain (Loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investcorp Capital Limited | $ | 388 | $ | 388 | $ | 452 | $ | 64 | Investcorp Capital Limited | $ | 329 | $ | 329 | $ | 291 | $ | (38) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Republic of South Africa | 365 | 365 | 372 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Barclays Bank PLC | 183 | 115 | 157 | 42 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pemex Project Funding Master Trust | Pemex Project Funding Master Trust | 226 | 226 | 230 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commerzbank | Commerzbank | 188 | 145 | 209 | 64 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Telecom Italia SpA | Telecom Italia SpA | 151 | 151 | 178 | 27 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| KLM Royal Dutch Airlines | 183 | 136 | 143 | 7 | KLM Royal Dutch Airlines | 151 | 135 | 96 | (39) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Telecom Italia SpA | 183 | 183 | 241 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Apache Corporation | Apache Corporation | 138 | 110 | 130 | 20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Howmet Aerospace Inc. | Howmet Aerospace Inc. | 100 | 70 | 97 | 27 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IKB Deutsche Industriebank AG | 118 | 51 | 102 | 51 | IKB Deutsche Industriebank AG | 98 | 47 | 75 | 28 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Arconic Inc. | 100 | 85 | 111 | 26 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EMC Corp. | 80 | 80 | 82 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Generalitat de Catalunya | 73 | 27 | 80 | 53 | Generalitat de Catalunya | 60 | 24 | 58 | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Teva Pharmaceuticals | 68 | 66 | 61 | (5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| National Gas Co. Trinidad & Tobago | National Gas Co. Trinidad & Tobago | 52 | 50 | 48 | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Issuers | 456 | 436 | 420 | (16 | ) | Other Issuers | 84 | 85 | 69 | (16) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal (1) | 2,197 | 1,932 | 2,221 | 289 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior secured bank loans | 462 | 480 | 459 | (21 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal (2) | Subtotal (2) | 1,577 | 1,372 | 1,481 | 109 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| High yield corporate bonds | 726 | 723 | 755 | 32 | High yield corporate bonds | 785 | 666 | 697 | 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Middle market loans, net of reserves (2) | 2,455 | 2,412 | 2,420 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Middle market loans | Middle market loans | 4,732 | 4,562 | 4,554 | (8) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grand Total | $ | 5,840 | $ | 5,547 | $ | 5,855 | $ | 308 | 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 senior secured bank loans and middle market loans primarily to U.S. corporate borrowers, most of which have below-investment-grade ratings. The objectives of these programsthis 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
The Company maintains an allocation to higher yielding corporate bonds within the Aflac Japan and Aflac U.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.
Fixed Maturity Securities by Sector
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 of December 31.
| 2022 | |||||||||||||||||||||||||||||
| (In millions) | Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | % of 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 | % | |||||||||||||||||||
| 2019 | ||||||||||||
| (In millions) | Amortized Cost | % of Total | ||||||||||
| Government and agencies | $ | 53,463 | 48.8 | % | ||||||||
| Municipalities | 2,414 | 2.2 | ||||||||||
| Mortgage- and asset-backed securities | 394 | .4 | ||||||||||
| Public utilities | 8,194 | 7.5 | ||||||||||
| Electric | 6,471 | 5.9 | ||||||||||
| Natural Gas | 303 | .3 | ||||||||||
| Other | 695 | .6 | ||||||||||
| Utility/Energy | 725 | .7 | ||||||||||
| Sovereign and Supranational | 2,042 | 1.9 | ||||||||||
| Banks/financial institutions | 9,947 | 9.1 | ||||||||||
| Banking | 6,029 | 5.5 | ||||||||||
| Insurance | 1,948 | 1.8 | ||||||||||
| Other | 1,970 | 1.8 | ||||||||||
| Other corporate | 33,002 | 30.1 | ||||||||||
| Basic Industry | 3,484 | 3.2 | ||||||||||
| Capital Goods | 3,187 | 2.9 | ||||||||||
| Communications | 4,057 | 3.7 | ||||||||||
| Consumer Cyclical | 3,271 | 3.0 | ||||||||||
| Consumer Non-Cyclical | 6,280 | 5.7 | ||||||||||
| Energy | 4,281 | 3.9 | ||||||||||
| Other | 1,464 | 1.3 | ||||||||||
| Technology | 3,129 | 2.9 | ||||||||||
| Transportation | 3,849 | 3.5 | ||||||||||
| Total fixed maturity securities | $ | 109,456 | 100.0 | % | ||||||||
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
The following table details investment securities by type of issuance as of December 31.
Investment Securities by Type of Issuance
| 2019 | 2018 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | (In millions) | Amortized Cost (1) | Fair Value | Amortized Cost (1) | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Publicly issued securities: | Publicly issued securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity securities | $ | 89,625 | $ | 105,557 | $ | 83,482 | $ | 93,255 | Fixed maturity securities | $ | 77,176 | $ | 79,090 | $ | 88,552 | $ | 103,034 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities | 717 | 717 | 936 | 936 | Equity securities | 882 | 882 | 950 | 950 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total publicly issued | 90,342 | 106,274 | 84,418 | 94,191 | Total publicly issued | 78,058 | 79,972 | 89,502 | 103,984 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Privately issued securities: (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity securities | 19,831 | (2 | ) | 23,299 | (2 | ) | 23,692 | 26,362 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Privately issued securities: (2) | Privately issued securities: (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities (3) | Fixed maturity securities (3) | 17,349 | 17,861 | 18,817 | 22,531 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities | 85 | 85 | 51 | 51 | Equity securities | 209 | 209 | 653 | 653 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total privately issued | 19,916 | 23,384 | 23,743 | 26,413 | Total privately issued | 17,558 | 18,070 | 19,470 | 23,184 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total investment securities | $ | 110,258 | $ | 129,658 | $ | 108,161 | $ | 120,604 | 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 Aflac Japan
The following table details the Company's reverse-dual currency securities as of December 31.
Reverse-Dual Currency Securities(1)
| (Amortized cost, in millions) | 2022 | 2021 | ||||||||||||
| Privately issued reverse-dual currency securities | $ | 4,049 | $ | 4,784 | ||||||||||
| 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 | % | ||||||||||
| (Amortized cost, in millions) | 2019 | 2018 | ||||||
| Privately issued reverse-dual currency securities | $ | 4,993 | $ | 5,120 | ||||
| Publicly issued collateral structured as reverse-dual currency securities | 1,678 | 1,657 | ||||||
| Total reverse-dual currency securities | $ | 6,671 | $ | 6,777 | ||||
| Reverse-dual currency securities as a percentage of total investment securities | 6.1 | % | 6.3 | % | ||||