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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-01 · 234 added, 148 removed, 1032 unchanged (27% of the section changed)

42 unchanged sentences

MD&A OVERVIEW

MD&A is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the three-month periods ended March 31, 2023 and 2022, respectively.

MD&A is intended to inform the reader about matters affecting the financial condition and results of operations of Aflac Incorporated and its subsidiaries for the six-month periods ended June 30, 2023 and 2022, respectively.

Results of operations for interim periods are not necessarily indicative of results for the entire year.

13 unchanged sentences

Company Overview

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to millions of policyholders and customers in Japan and the U.S.

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.

Aflac Incorporated (the Parent Company) and its subsidiaries (collectively, the Company) provide financial protection to millions of policyholders and customers in Japan and the United States (U.S.).

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 U.S.

The Company's insurance business consists of two reporting segments:

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Performance Highlights

Total revenues were $4.8 billion in the first three months of 2023, compared with $5.2 billion in the first three months of 2022.

Net earnings were $1.2 billion, or $1.94 per diluted share in the first three months of 2023, compared with $1.0 billion, or $1.60 per diluted share, in the first three months of 2022.

Results in the first quarter of 2023 included pretax net investment gains of $123 million, compared with pretax net investment gains of $122 million in the first three months of 2022.

Net investment gains in the first three months of 2023 included an increase in credit loss allowances of $30 million;

Total revenues were $5.2 billion in the second quarter of 2023, compared with $5.3 billion in the second quarter of 2022.

Net earnings were $1.6 billion, or $2.71 per diluted share in the second quarter of 2023, compared with $1.4 billion, or $2.17 per diluted share in the second quarter of 2022.

Total revenues were $10.0 billion in the first six months of 2023, compared with $10.5 billion in the first six months of 2022.

Net earnings were $2.8 billion, or $4.64 per diluted share in the first six months of 2023, compared with $2.4 billion, or $3.77 per diluted share, in the first six months of 2022.

Results in the second quarter of 2023 included pretax net investment gains of $555 million, compared with pretax net investment gains of $564 million in the second quarter of 2022.

Net investment gains in the second quarter of 2023 included an increase in credit loss allowances of $1 million;

$541 million of net gains from certain derivative and foreign currency gains or losses;

1 unchanged sentence

and $24 million of net gains from sales and redemptions.

The average yen/dollar exchange rate (1) for the three-month period ended March 31, 2023 was 132.30, or 12.2% weaker than the average yen/dollar exchange rate (1) of 116.18 for the same period in 2022.

Adjusted earnings (2) in the first quarter of 2023 were $1.0 billion, or $1.55 per diluted share, compared with $942 million, or $1.44 per diluted share, in the first quarter of 2022.

Results in the first six months of 2023 included pretax net investment gains of $678 million, compared with pretax net investment gains of $686 million in the first six months of 2022.

Net investment gains in the first six months of 2023 included an increase in credit loss allowances of $31 million;

$640 million of net gains from certain derivative and foreign currency gains or losses;

$12 million of net losses on equity securities;

and $81 million of net gains from sales and redemptions.

The average yen/dollar exchange rate (1) for the three-month period ended June 30, 2023 was 137.53, or 5.9% weaker than the average yen/dollar exchange rate (1) of 129.39 for the same period in 2022.

The average yen/dollar exchange rate (1) for the six-month period ended June 30, 2023 was 134.97, or 9.0% weaker than the average yen/dollar exchange rate (1) of 122.79 for the same period in 2022.

Adjusted earnings (2) in the second quarter of 2023 were $954 million, or $1.58 per diluted share, compared with $945 million, or $1.47 per diluted share in the second quarter of 2022.

The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by $.04.

Total investments and cash at March 31, 2023 were $120.5 billion, compared with $117.4 billion at December 31, 2022.

In the first quarter of 2023, Aflac Incorporated repurchased $700 million, or 10.3 million of its common shares.

At March 31, 2023, the Company had 106.3 million remaining shares authorized for repurchase.

Shareholders’ equity was $19.8 billion, or $32.65 per share, at March 31, 2023, compared with $20.1 billion, or $32.73 per share, at December 31, 2022.

Shareholders’ equity at March 31, 2023 included a cumulative decrease of $4.9 billion from the effect of changes in discount rate assumptions on insurance contracts, driven by the adoption of the new accounting guidance for long-duration insurance contracts, compared with a corresponding cumulative decrease of $2.1 billion at December 31, 2022, and a net unrealized gain on investment securities and derivatives of $1.3 billion, compared with a net unrealized loss of $729 million at December 31, 2022.

Shareholders’ equity at March 31, 2023 also included an unrealized foreign currency translation loss of $3.6 billion, compared with an unrealized foreign currency translation loss of $3.6 billion at December 31, 2022.

The annualized return on average shareholders’ equity in the first quarter of 2023 was 23.8%.

Shareholders’ equity excluding accumulated other comprehensive income (AOCI) (2) (adjusted book value) was $27.1 billion, or $44.66 per share at March 31, 2023, compared with $26.6 billion, or $43.18 per share, at December 31, 2022.

The annualized adjusted return on equity (ROE) excluding foreign currency impact (2) in the first quarter of 2023 was 14.8%.

Adjusted earnings (2) in the first six months of 2023 were $1.9 billion, or $3.13 per diluted share, compared with $1.9 billion, or $2.91 per diluted share, in the first six months of 2022.

The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by $.11.

Total investments and cash at June 30, 2023 were $116.5 billion, compared with $117.4 billion at December 31, 2022.

In the first six months of 2023, Aflac Incorporated repurchased $1.4 billion, or 20.8 million of its common shares.

At June 30, 2023, the Company had 95.8 million remaining shares authorized for repurchase.

Shareholders’ equity was $20.4 billion, or $34.30 per share, at June 30, 2023, compared with $20.1 billion, or $32.73 per share, at December 31, 2022.

Shareholders’ equity at June 30, 2023 included a cumulative decrease of $5.1 billion from the effect of changes in discount rate assumptions on insurance contracts, compared with a corresponding cumulative

decrease of $2.1 billion at December 31, 2022, and a net unrealized gain on investment securities and derivatives of $2.0 billion, compared with a net unrealized loss of $729 million at December 31, 2022.

Shareholders’ equity at June 30, 2023 also included an unrealized foreign currency translation loss of $4.2 billion, compared with an unrealized foreign currency translation loss of $3.6 billion at December 31, 2022.

The annualized return on average shareholders’ equity in the second quarter of 2023 was 32.5%.

Shareholders’ equity excluding accumulated other comprehensive income (AOCI) (2) (adjusted book value) was $27.8 billion, or $46.61 per share at June 30, 2023, compared with $26.6 billion, or $43.18 per share, at December 31, 2022.

The annualized adjusted return on equity (ROE) excluding foreign currency impact (2) in the second quarter of 2023 was 14.3%.

dollar exchange rates are based on the published MUFG Bank, Ltd.

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GAAP financial measures for adjusted earnings and adjusted earnings per share (basic or diluted) are net earnings and net earnings per share, respectively.

• Adjusted net investment gains and losses are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest cash flows from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses.

interest cash flows from foreign currency and interest rate derivatives associated with certain investment strategies, which are both reclassified to net investment income, and iii) the impact of interest cash flows from derivatives associated with notes payable, which is reclassified to interest expense as a component of total adjusted expenses.

The Company considers adjusted net investment gains and losses important as it represents the remainder amount that is considered outside management’s control, while excluding the components that are within management’s control and are accordingly reclassified to net investment income and interest expense.

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These amortized hedge costs/ income are estimated at the inception of the derivatives based on the specific terms of each contract and are recognized on a straight-line basis over the term of the hedge.

The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/

income related to hedging certain foreign currency exchange risks and are an important component of net investment income.

The Company believes that amortized hedge costs/income measure the periodic currency risk management costs/income related to hedging certain foreign currency exchange risks and are an important component of net investment income.

There is no comparable U.S.

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Reconciliation of Net Earnings to Adjusted Earnings

In Millions Per Diluted Share

Three Months Ended March 31,

In Millions Per Diluted Share In Millions Per Diluted Share

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022 2023 2022 2023 2022

1 unchanged sentence

Items impacting net earnings:

Adjusted net investment (gains) losses (1)

Adjusted net investment

(gains) losses (1)

(651) (567) (1.08) (.88) (859) (701) (1.41) (1.08)

Other and non-recurring (income) loss

Income tax (benefit) expense on items excluded from adjusted earning (26) 28 (.04) .04

(35) 0 (.06) .00 (35) 0 (.06) .00

Income tax (benefit) expense on items excluded from

adjusted earning

5 119 .01 .19 (21) 147 (.03) .23

Adjusted earnings 954 945 1.58 1.47 1,907 1,887 3.13 2.91

Current period foreign currency impact (2)

41 N/A .07 N/A

Adjusted earnings excluding current period foreign currency impact $ 994 $ 942 $ 1.62 $ 1.44

Current period foreign currency

25 N/A .04 N/A 66 N/A .11 N/A

Adjusted earnings excluding

current period foreign currency

impact $ 979 $ 945 $ 1.62 $ 1.47 $ 1,973 $ 1,887 $ 3.24 $ 2.91

(1) See reconciliation of net investment (gains) losses to adjusted net investment (gains) losses below.

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Reconciliation of Net Investment (Gains) Losses to Adjusted Net Investment (Gains) Losses

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

4 unchanged sentences

Net interest cash flows from derivatives associated with certain investment strategies

(82) (1) (151) (10)

Interest rate component of the change in fair value of foreign currency swaps on notes payable

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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.

On June 9, 2023, the Company amended the U.S.

defined benefit plan to freeze future benefits under the plan for all participants effective January 1, 2024, which resulted in the Company recognizing a curtailment gain of approximately $49 million in the second quarter of 2023.

The curtailment gain is both unusual and non-recurring and is unrelated to other recurring benefit costs associated with the plan;

therefore, the Company has excluded the curtailment gain from adjusted earnings.

Other items excluded from adjusted earnings also included an impairment for certain finite-lived intangible assets of approximately $11 million in the second quarter of 2023 as a result of the Company exiting the third-party administration business acquired in connection with the purchase of Aflac Benefit Solutions, Inc.

(formerly known as Argus Dental & Vision, Inc.) in 2019.

The impairment of these intangible assets are not related to the ongoing operations of the business and occur infrequently;

therefore, the Company has excluded the impairment from adjusted earnings.

The Company's combined U.S.

and Japanese effective income tax rate on pretax earnings was 11.5% for the three-month period ended March 31, 2023, compared with 19.1% for the same period in 2022.

and Japanese effective income tax rate on pretax earnings was 10.4% for the three-month period ended June 30, 2023, compared with 18.4% for the same period in 2022.

The Company's combined U.S.

and Japanese effective income tax rate on pretax earnings was 10.9% for the six-month period ended June 30, 2023, compared with 18.7% for the same period in 2022.

The combined effective tax rate differs from the U.S.

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Aflac Japan Summary of Operating Results

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

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previous period:

Three Months Ended March 31, Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022 2023 2022 2023 2022

Net earned premiums (11.6) % (18.0) % (14.6) % (14.7) % (6.2) % (3.1) % (6.0) % (2.9) %

Adjusted net investment income (10.1) (3.6) 2.4 5.9

Adjusted net investment

income (11.9) (8.7) (11.0) (6.3) (6.4) 8.4 (2.4) 7.3

Total adjusted revenues (11.6) (16.0) (13.8) (13.0) (6.2) (.5) (5.2) (.9)

Pretax adjusted earnings (5.8) (11.3) (7.6) (8.2) (.1) 5.5 1.5 5.1

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(62) and $(10) for the three-month periods ended March 31, 2023 and 2022, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(73) and $(2) for the three-month periods and $(135) and $(12) for the six-month periods ended June 30, 2023 and 2022, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

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

In the three-month period ended March 31, 2023, Aflac Japan's net earned premiums decreased, in yen terms, mainly due to limited-pay products reaching premium paid-up status and the implementation of the Aflac Re global reinsurance strategy.

Adjusted net investment income, in yen terms, increased in the three-month period ended March 31, 2023, primarily due to the impact of foreign exchange on U.S.

dollar-denominated investments offset by higher hedge costs.

The increase in pretax adjusted earnings in yen for the three-month period ended March 31, 2023 was primarily due to a decrease in total benefits and adjusted expenses.

Annualized premiums in force decreased 4.8% to ¥1.28 trillion as of March 31, 2023, compared with ¥1.35 trillion as of March 31, 2022.

The decrease in annualized premiums in force in yen was driven primarily by limited-pay products

reaching premium paid-up status and lower sales.

Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $9.6 billion at March 31, 2023, compared with $11.0 billion at March 31, 2022.

As of March 31, 2023, Aflac Japan exceeded 23 million individual policies in force in Japan, with more than 14 million cancer policies in force in Japan.

For the three- and six-month periods ended June 30, 2023, net earned premiums in yen terms decreased, as compared with the same periods in 2022, primarily due to limited-pay products reaching premium paid-up status and the internal reinsurance transaction with Aflac Re.

Adjusted net investment income in yen terms decreased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to lower variable net investment income, higher hedge costs, and the impact of the transfer of assets to support the internal reinsurance transaction with Aflac Re.

For the three- and six-month periods ended June 30, 2023, total benefits and claims in yen terms decreased, as compared with the same periods in 2022, primarily due to assumption updates in the third quarter of 2022.

For the three-

month period ended June 30, 2023, pretax adjusted earnings in yen terms decreased slightly, as compared with the same period in 2022, primarily due to the decrease in total revenues offset by lower benefits and claims as well as lower adjusted expenses related to expense control efforts and the internal reinsurance transaction with Aflac Re.

For the six-month period ended June 30, 2023, pretax adjusted earnings in yen terms increased, as compared with the same period in 2022, primarily due to the decrease in total benefits and adjusted expenses offset by lower revenues.

Annualized premiums in force decreased 4.8% to ¥1.27 trillion as of June 30, 2023, compared with ¥1.33 trillion as of June 30, 2022.

The decrease in annualized premiums in force in yen was driven primarily by limited-pay products reaching premium paid-up status and lower sales.

Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $8.7 billion at June 30, 2023, compared with $9.7 billion at June 30, 2022.

As of June 30, 2023, Aflac Japan exceeded 23 million individual policies in force in Japan, with more than 14 million cancer policies in force in Japan.

Aflac Japan's investment portfolios include U.S.

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(Yen Operating Results)

For the Periods Ended March 31,

For the Periods Ended June 30,

Including Foreign

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Currency Changes

Three Months Six Months

2023 2022 2023 2022 2023 2022 2023 2022

4 unchanged sentences

The following table presents a summary of operating ratios in yen terms for Aflac Japan.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Ratios to total adjusted revenues:

2023 2022 2023 2022

Total benefits and claims, net 50.0 % 51.5 % 51.0 % 52.6 %

10 unchanged sentences

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

In the three-month period ended March 31, 2023, the total benefits and claims ratio to total premiums decreased, compared with the same period in the prior year, primarily due to a decrease in the third sector benefit ratio due to favorable experience and the continued change in the mix of first and third sector business.

In the three-month period ended March 31, 2023, the total adjusted expense ratio decreased slightly, compared with the same period in the prior year, reflecting the decrease in total adjusted revenues and an offsetting decrease in total adjusted expenses due to expense control efforts as well as the reinsurance transaction with Aflac Re.

In total, the pretax adjusted profit margin

increased in the three-month period ended March 31, 2023 primarily due to a lower benefit ratio and a lower expense ratio and an offsetting decrease in total adjusted revenues.

The following table presents Aflac Japan's premium persistency on a 12-month rolling basis as of March 31.

For the three- and six-month periods ended June 30, 2023, the total benefits and claims ratio to total premiums decreased, as compared with the same periods in 2022, primarily due to a decrease in the third sector benefit ratio due to favorable experience and an associated update to reserve assumptions in the third quarter of 2022, as well as the continued change in the mix of first and third sector business.

The total adjusted expense ratio decreased, as compared with the same periods in 2022, primarily due to the decrease in total adjusted revenues and an offsetting decrease in total adjusted expenses due to expense control efforts and the internal reinsurance transaction with Aflac Re.

In total, the pretax adjusted profit margin increased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to the lower benefit ratio, the lower expense ratio and an offsetting decrease in total adjusted revenues.

The following table presents Aflac Japan's premium persistency on a 12-month rolling basis as of June 30.

Premium persistency 93.8 % 94.3 %

Aflac Japan Sales

The following table presents Aflac Japan’s new annualized premium sales for the periods ended March 31.

The following table presents Aflac Japan’s new annualized premium sales for the periods ended June 30.

In Dollars In Yen

Three Months Six Months

(In millions of dollars and billions of yen) 2023 2022 2023 2022 2023 2022 2023 2022

1 unchanged sentence

Increase (decrease) over prior period 19.7 % (20.9) % 8.0 % (21.6) % 26.6 % (6.4) % 18.9 % (10.7) %

In 2023, the new annualized premium sales on a yen basis increased, compared with 2022, due primarily to sales of Aflac Japan's new cancer insurance product and updated first sector products, all of which were launched in the second half of 2022.

Further, these products were launched at Dai-ichi Life and other financial institutions in January 2023.

The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the periods ended March 31.

The increase in new annualized premium sales on a yen basis in the second quarter and the first six months of 2023 was primarily driven by sales of Aflac Japan's new cancer insurance product and updated first sector products, all of which were launched in the second half of 2022.

Further, these products were launched at Dai-ichi Life and other financial institutions in January 2023 and at Japan Post Group in April 2023.

The following table details the contributions to Aflac Japan's new annualized premium sales by major insurance product for the periods ended June 30.

Three Months Six Months

2023 2022 2023 2022

Cancer 67.7 % 53.4 % 64.2 % 53.2 %

4 unchanged sentences

Traditional life (1)

6.1 9.2 6.6 9.1

WAYS 6.6 .8 7.6 .8

Child endowment .4 .2 .5 .3

2 unchanged sentences

(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, income support, and nursing care insurance products.

The foundation of Aflac Japan's product portfolio has been, and continues to be, third sector products, which include cancer, medical, income support, and other products such as nursing care and work leave insurance.

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.

3 unchanged sentences

Japan Post Group resumed proactive sales of cancer insurance policies in April 2021 and Aflac Japan continues to strengthen the strategic alliance.

In April 2023, Japan Post Group began selling Aflac Japan's new cancer insurance product that was launched in August 2022.

In April 2023, Japan Post Group began selling Aflac Japan's new cancer insurance product that was first launched in other channels in August 2022.

For additional information, see the risk factor 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.

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Further, Aflac Japan continues to utilize its virtual sales tool that enables online consultations and policy applications to be completed entirely online.

The following table details the contributions to Aflac Japan's new annualized premium sales by agency type for the three-month periods ended March 31.

The following table details the contributions to Aflac Japan's new annualized premium sales by agency type for the three-month periods ended June 30.

Independent corporate and individual 44.8 % 48.4 %

2 unchanged sentences

(1) Includes Japan Post Group, Dai-ichi Life and Daido Life

During the three-month period ended March 31, 2023, Aflac Japan recruited 4 new sales agencies.

At March 31, 2023, Aflac Japan was represented by approximately 7,300 sales agencies, with approximately 110,000 licensed sales associates employed by those agencies.

During the three-month period ended June 30, 2023, Aflac Japan recruited 5 new sales agencies.

At June 30, 2023, Aflac Japan was represented by approximately 7,200 sales agencies, with approximately 113,000 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 March 31, 2023, Aflac Japan had agreements to sell its products at 359 banks, approximately 90% of the total number of banks in Japan.

At June 30, 2023, Aflac Japan had agreements to sell its products at 360 banks, approximately 90% of the total number of banks in Japan.

Aflac Japan Investments

10 unchanged sentences

The following table details the investment purchases for Aflac Japan.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

10 unchanged sentences

Other fixed maturity securities $ 101 $ 249 $ 477 $ 334

Infrastructure debt 4 114 4 114

Collateralized loan obligations 0 431 0 498

Equity securities 0 22 0 22

Commercial mortgage and other loans:

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See the Investments section of this MD&A for further discussion of these investment programs, and see Notes 3 and 4 of the Notes to the Consolidated Financial Statements and Notes 1, 3 and 4 of the Notes to the Consolidated Financial Statements in the 2022 Annual Report for more information regarding loans and loan receivables.

The following table presents the results of Aflac Japan’s investment yields for the periods ended March 31.

The following table presents the results of Aflac Japan’s investment yields for the periods ended June 30.

Three Months Six Months

2023 2022 2023 2022

Total purchases for the period (in millions) (1)

3 unchanged sentences

Return on average invested assets (3)

2.77 2.97 2.67 2.75

Portfolio book yield, including U.S.

5 unchanged sentences

(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 the three-month period ended March 31, 2023 was primarily due to increases in U.S.

The increase in the Aflac Japan new money yield in the three- and six-month periods ended June 30, 2023 was primarily due to increases in U.S.

interest rates.

5 unchanged sentences

Summary of Operating Results

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

1 unchanged sentence

Adjusted net investment income (1)

203 193 400 377

Other income 35 41 70 83

16 unchanged sentences

Pretax adjusted earnings 7.6 1.5 6.8 .9

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(7) and $1 for the three-month periods ended March 31, 2023 and 2022, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(8) and $1 for the three-month periods and $(15) and $2 for the six-month periods ended June 30, 2023 and 2022, respectively, have been reclassified from net investment gains (losses) and included in adjusted earnings as a component of net investment income.

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

In the three-month period ended March 31, 2023, net earned premiums for Aflac U.S.

increased primarily driven by continued investments in growth initiatives.

Adjusted net investment income increased in the three-month period ended March 31, 2023 primarily due to higher floating rate income due to higher volumes and rates.

The increase in pretax adjusted earnings in the three-month period ended March 31, 2023 was driven primarily by lower benefits and higher revenues, partially offset by higher expenses.

Annualized premiums in force increased 1.4% to $6.0 billion at March 31, 2023, compared with $5.9 billion at March 31, 2022.

For the three- and six-month periods ended June 30, 2023, net earned premiums increased, as compared with the same periods in 2022, primarily due to continued investments in growth initiatives, including group life and disability, network dental and vision, and consumer markets businesses.

Adjusted net investment income increased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to higher floating rate income due to higher volumes and rates, partially offset by lower variable net investment income.

Pretax adjusted earnings increased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to higher adjusted revenues and lower benefits, partially offset by higher adjusted expenses.

Higher expenses were driven mainly by higher planned spending reflecting ongoing investments in the U.S.

Annualized premiums in force increased 2.3% to $6.1 billion at June 30, 2023, compared with $5.9 billion at June 30, 2022.

The following table presents a summary of operating ratios for Aflac U.S.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

Ratios to total adjusted revenues:

2023 2022 2023 2022

Total benefits and claims 38.8 % 40.4 % 39.0 % 40.5 %

10 unchanged sentences

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

For the three-month period ended March 31, 2023, the total benefits and claims ratio to total premiums decreased compared with the same period in 2022, reflecting assumption updates in the third quarter of 2022 and reserve remeasurement gains related to experience.

The total adjusted expense ratio increased in the three-month period ended March 31, 2023, when compared with the same period in 2022, primarily due to higher planned spending, reflecting ongoing investments in the U.S.

platform and higher DAC amortization associated with lower persistency.

The pretax adjusted profit margin increased in the three-month period ended March 31, 2023, compared with the same period in 2022, primarily due to the lower benefit ratio.

For the three- and six-month periods ended June 30, 2023, the total benefits and claims ratio to total premiums decreased, as compared with the same periods in 2022, primarily due to assumption updates in the third quarter of 2022, reserve remeasurement gains related to experience, and continued lower claims utilization.

The total adjusted expense ratio increased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to higher planned spending reflecting ongoing investments in the U.S.

platform, which the Company expects will decrease over time as its group life and disability, network dental and vision and consumer markets businesses grow to scale and improve their profitability.

Additionally, the Company believes that the expense ratio continues to be elevated in light of relatively high lapses, but in future periods the Company expects the expense ratio to decrease from the level experienced in the second quarter of 2023.

In total, the pretax adjusted profit margin increased in the three- and six-month periods ended June 30, 2023, as compared with the same periods in 2022, primarily due to the lower benefit ratio.

For the full year of 2023, the Company expects the benefit ratio to be slightly below the outlook range of 47% to 50% and the expense ratio to be slightly above the outlook range of 37% to 40%.

The following table presents premium persistency for Aflac U.S.

on a 12-month rolling basis as of March 31.

on a 12-month rolling basis as of June 30.

Premium persistency 78.2 % 78.1 %

The following table presents Aflac's U.S.

new annualized premium sales for the periods ended March 31.

new annualized premium sales for the periods ended June 30.

Three Months Six Months

(In millions) 2023 2022 2023 2022

6 unchanged sentences

dental/vision sales increased 23.6%;

and life sales increased 10.3% in the first quarter of 2023, compared with the first quarter of 2022.

The increase in sales for Aflac U.S.

in the first quarter of 2023 reflects continued improvement from investment in growth initiatives as well as productivity gains.

and life sales increased 36.2% in the second quarter of 2023, compared with the second quarter of 2022.

The increase in new annualized premium sales for Aflac U.S.

in the second quarter of 2023 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 periods ended March 31.

new annualized premium sales by major insurance product category for the periods ended June 30.

Three Months Six Months

2023 2022 2023 2022

Accident 22.4 % 24.6 % 23.0 % 24.9 %

1 unchanged sentence

Critical care (1)

20.4 20.6 20.5 20.9

Hospital indemnity 14.3 14.9 15.1 15.8

Dental/vision 7.4 6.4 7.0 6.0

Life 10.7 8.3 9.5 8.2

Total 100.0 % 100.0 % 100.0 % 100.0 %

(1) Includes cancer, critical illness, and hospital intensive care products

In the first quarter of 2023, the Aflac U.S.

In the second quarter of 2023, the Aflac U.S.

sales force included an average of approximately 6,200 U.S.

6 unchanged sentences

The following table details the investment purchases for Aflac U.S.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

2 unchanged sentences

Infrastructure debt 0 10 0 19

Collateralized loan obligations 0 199 0 199

Equity securities 0 11 0 19

7 unchanged sentences

The following table presents the results of Aflac's U.S.

investment yields for the periods ended March 31.

investment yields for the periods ended June 30.

Three Months Six Months

2023 2022 2023 2022

Total purchases for period (in millions) (1)

$ 288 $ 466 $ 529 $ 988

New money yield (1),(2)

1 unchanged sentence

Return on average invested assets (3)

4.91 4.79 4.77 4.79

Portfolio book yield, end of period (1),(2)

5 unchanged sentences

The increase in the Aflac U.S.

new money yield in the three-month period ended March 31, 2023 was primarily due to increases in U.S.

new money yield in the three- and six-month periods ended June 30, 2023 was primarily due to increases in U.S.

interest rates.

1 unchanged sentence

CORPORATE AND OTHER

Changes in the pretax adjusted earnings of Corporate and other are primarily affected by investment income.

Changes in the pretax adjusted earnings of Corporate and other are primarily affected by internal reinsurance activity and net investment income.

The following table presents a summary of results for Corporate and other.

Corporate and Other Summary of Operating Results

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In millions) 2023 2022 2023 2022

1 unchanged sentence

Net investment income (loss) (1)

14 (9) 21 (5)

Amortized hedge income related to certain foreign currency management strategies 38 14 67 25

9 unchanged sentences

Pretax adjusted earnings $ (52) $ (75) $ (58) $ (117)

(1) The change in value of federal historic rehabilitation and solar investments in partnerships of $51 and $12 for the three-month periods ended March 31, 2023, and 2022, respectively, is included as a reduction to net investment income.

Tax credits on these investments of $52 and $16 for the three-month periods ended March 31, 2023, and 2022, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings.

(1) The change in value of federal historic rehabilitation and solar investments in partnerships of $53 and $31 for the three-month periods and $105 and $42 for the six-month periods ended June 30, 2023, and 2022, respectively, is included as a reduction to net investment income.

Tax credits on these investments of $56 and $28 for the three-month periods and $108 and $44 for the six-month periods ended June 30, 2023, and 2022, respectively, have been recorded as an income tax benefit in the consolidated statement of earnings.

See Note 3 of the Notes to the Consolidated Financial Statements for additional information on these investments.

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

In the three-month period ended March 31, 2023, total adjusted revenues increased compared to the same period in 2022 primarily due to higher total premiums associated with the Aflac Re global reinsurance strategy and an increase in adjusted net investment income.

Total adjusted expenses increased compared to the same period in 2022 primarily due to expenses associated with the Aflac Re global reinsurance strategy.

For the three- and six-month periods ended June 30, 2023, total adjusted revenues increased, as compared with the same periods in 2022, primarily due to higher total premiums associated with the internal reinsurance transaction with Aflac Re and an increase in adjusted net investment income, which was partially offset by the impact of historic and solar tax credits.

Total benefits and adjusted expenses increased, as compared with the same periods in 2022, primarily due to higher benefits and claims and expenses associated with the internal reinsurance transaction with Aflac Re.

These results also reflect the impact of foreign currency on total net earned premiums and the corresponding benefits.

Pretax adjusted earnings increased in the three-month period ended March 31, 2023 when compared to the same period in 2022 reflecting the increase in total adjusted revenue, partially offset by higher other adjusted expenses, net benefits and claims.

Pretax adjusted earnings increased in the three- and six-month periods ended June 30, 2023, compared with the same periods in 2022, primarily due to the increase in total adjusted revenue, which was partially offset by higher benefits and claims associated with the internal reinsurance transaction with Aflac Re and the increase in total adjusted expenses.

The Parent Company invests in partnerships that specialize in rehabilitating historic structures or the installation of solar equipment in order to receive federal historic rehabilitation and solar tax credits.

These investments are classified as

limited partnerships and included in other investments in the consolidated balance sheet.

These investments are classified as limited partnerships and included in other investments in the consolidated balance sheet.

The change in value of each investment is recorded as a reduction to net investment income.

11 unchanged sentences

Investment Securities by Segment

March 31, 2023

June 30, 2023

(In millions) Aflac Japan Aflac U.S.

20 unchanged sentences

Investment in affiliate (3)

0 119 (119) 0

Total investments 91,215 15,266 5,262 111,743

34 unchanged sentences

(3) For consolidated reporting, Aflac U.S.'s investment in Aflac Re is eliminated in Corporate and other

In recent quarters, the Company has noted a trend indicating a gradual strain in the valuations of the commercial real estate market in the United States, with specific concerns regarding office space.

Within the commercial mortgage and other loans category, the Company has invested in a variety of loans including transitional real estate loans (TREs) and commercial mortgage loans (CMLs) that are collateralized by commercial real estate, including some that are designed as office space.

These investments are well diversified by geography and among property types.

Further, the portfolio is well positioned with exposures concentrated in high quality underlying properties with institutional investors who are positioned to manage their assets during periods of market volatility.

The Company has not recognized any significant impacts in its financial statements as a result of declines in the values of its specific investments due to the lower loan-to-value (LTV) ratios associated with those investments;

however, the Company has experienced a limited number of properties that are currently in default of interest or maturity payments.

The Company continues to work with its counterparties to resolve these specific situations through loan continuance with potential modifications, or through the process of foreclosure or deed-in-lieu.

Further, the Company is continuing to monitor this trend and its impact on the valuations of the Company’s bespoke loans and related underlying commercial properties.

The Company utilizes external third-party asset managers to source, underwrite and manage each loan.

The Company remains in close contact with and monitors the activities of these managers closely.

In the event that a loan workout is necessary, the Company believes these external managers have the experience and resources to manage the process to maximize recovery.

The Company also monitors its commercial mortgage and other loan investments internally on an ongoing basis, including a review of loans by credit quality indicator and loans that are current, past due, restructured or under foreclosure.

See Note 3 of the Notes to the Consolidated Financial Statements for further information concerning credit quality indicators and information on loans that are on nonaccrual status.

What changed 10-Q

Item 2. Management’s Discussion and Analysis