What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-02 · 255 added, 185 removed, 1081 unchanged (29% 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 six-month periods ended June 30, 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 nine-month periods ended September 30, 2023 and 2022, respectively.

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

31 unchanged sentences

Performance Highlights

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;

Total revenues were $5.0 billion in the third quarter of 2023, compared with $4.7 billion in the third quarter of 2022.

Net earnings were $1.6 billion, or $2.64 per diluted share in the third quarter of 2023, compared with $1.8 billion, or $2.82 per diluted share in the third quarter of 2022.

Total revenues were $14.9 billion in the first nine months of 2023, compared with $15.2 billion in the first nine months of 2022.

Net earnings were $4.4 billion, or $7.28 per diluted share in the first nine months of 2023, compared with $4.2 billion, or $6.57 per diluted share, in the first nine months of 2022.

Results in the third quarter of 2023 included pretax net investment gains of $423 million, compared with pretax net investment gains of $199 million in the third quarter of 2022.

Net investment gains in the third quarter of 2023 included an increase in credit loss allowances of $29 million;

$381 million of net gains from certain derivative and foreign currency gains or losses;

$9 million of net losses on equity securities;

$47 million of net gains on equity securities;

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

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;

Results in the first nine months of 2023 included pretax net investment gains of $1.1 billion, compared with pretax net investment gains of $885 million in the first nine months of 2022.

Net investment gains in the first nine months of 2023 included an increase in credit loss allowances of $60 million;

$1.0 billion of net gains from certain derivative and foreign currency gains or losses;

$35 million of net gains on equity securities;

and $105 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 average yen/dollar exchange rate (1) for the three-month period ended September 30, 2023 was 144.97, or 5.4% weaker than the average yen/dollar exchange rate (1) of 137.08 for the same period in 2022.

The average yen/dollar exchange rate (1) for the nine-month period ended September 30, 2023 was 138.38, or 8.5% weaker than the average yen/dollar exchange rate (1) of 126.65 for the same period in 2022.

Adjusted earnings (2) in the third quarter of 2023 were $1.1 billion, or $1.84 per diluted share, compared with $910 million, or $1.44 per diluted share in the third quarter of 2022.

The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by $.06.

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.

Adjusted earnings (2) in the first nine months of 2023 were $3.0 billion, or $4.97 per diluted share, compared with $2.8 billion, or $4.35 per diluted share, in the first nine months of 2022.

The weaker yen/dollar exchange rate negatively impacted adjusted earnings per diluted share by $.17.

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%.

Total investments and cash at September 30, 2023 were $111.3 billion, compared with $117.4 billion at December 31, 2022.

In the first nine months of 2023, Aflac Incorporated repurchased $2.1 billion, or 30.2 million of its common shares.

At September 30, 2023, the Company had 86.4 million remaining shares authorized for repurchase.

Shareholders’ equity was $22.7 billion, or $38.63 per share, at September 30, 2023, compared with $20.1 billion, or $32.73 per share, at December 31, 2022.

Shareholders’ equity at September 30, 2023 included a cumulative decrease of $866 million 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 loss on investment

securities and derivatives of $427 million, compared with a net unrealized loss of $729 million at December 31, 2022.

Shareholders’ equity at September 30, 2023 also included an unrealized foreign currency translation loss of $4.5 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 third quarter of 2023 was 29.1%.

Shareholders’ equity excluding accumulated other comprehensive income (AOCI) (2) (adjusted book value) was $28.4 billion, or $48.44 per share at September 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 third quarter of 2023 was 16.1%.

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

31 unchanged sentences

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

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.

• Adjusted net investment gains and losses are net investment gains and losses adjusted for i) amortized hedge cost/income related to foreign currency exposure management strategies and certain derivative activity, ii) net interest cash flows from foreign currency and interest rate derivatives associated with certain investment

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

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

35 unchanged sentences

In Millions Per Diluted Share In Millions Per Diluted Share

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022 2023 2022

6 unchanged sentences

(3) (1) (.01) .00 (38) (1) (.06) .00

Income tax (benefit) expense on items excluded from

Income tax (benefit) expense

on items excluded from

adjusted earning (2)

7 unchanged sentences

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

(2) Primarily reflects release of $695 in deferred taxes in the third quarter of 2022

(3) Prior period foreign currency impact reflected as “N/A” to isolate change for current period only.

3 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2023 2022 2023 2022

57 unchanged sentences

The Company's combined U.S.

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.

and Japanese effective income tax rate on pretax earnings was 13.1% for the three-month period ended September 30, 2023, compared with (34.0)% 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.

and Japanese effective income tax rate on pretax earnings was 11.7% for the nine-month period ended September 30, 2023, compared with 2.5% for the same period in 2022.

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

2 unchanged sentences

MD&A in the 2022 Annual Report.

Aflac Japan holds certain U.S.

dollar-denominated assets in a Delaware Statutory Trust (DST).

These assets are mostly comprised of various U.S.

dollar-denominated commercial mortgage loans.

The functional currency of the DST for U.S.

tax purposes was historically the Japanese yen.

In the third quarter of 2022, the Company requested a change in tax accounting method through the Internal Revenue Service's automatic consent procedures to change the functional currency of the DST for U.S.

tax purposes to the U.S.

As a result, foreign currency translation gains or losses on assets held in the DST are no longer recognized for U.S.

tax purposes.

The Company historically recorded a deferred tax liability for foreign currency translation gains on the DST assets, which was released in the third quarter of 2022 as a result of the functional currency change.

The change in functional currency resulted in the Company recognizing an income tax benefit of $695 million ($1.10 per basic and diluted share, respectively) in the third quarter of 2022.

The Company expects that its effective tax rate on adjusted earnings for future periods will be approximately 20%.

13 unchanged sentences

dollar foreign exchange rate at the end of the reporting period.

Reconciliation of Book Value to Adjusted Book Value

The following table is a reconciliation of items impacting adjusted book value and adjusted book value per diluted share to the most directly comparable U.S.

GAAP financial measures of book value and book value per diluted share, respectively.

(In millions, except for share and per-share amounts) September 30,

2023 December 31,

GAAP book value $ 22,669 $ 20,140

Items impacting U.S.

GAAP book value:

Unrealized foreign currency translation gains (losses) (4,484) (3,564)

Unrealized gains (losses) on securities and derivatives (427) (729)

Effect of changes in discount rate assumptions (866) (2,100)

Pension liability adjustment 17 (36)

Total accumulated other comprehensive income (5,760) (6,429)

Adjusted book value 28,429 26,569

Number of shares outstanding at end of period 586,897 615,256

GAAP book value per common share $ 38.63 $ 32.73

Items impacting U.S.

GAAP book value per common share:

Unrealized foreign currency translation gains (losses) per common share (7.64) (5.79)

Unrealized gains (losses) on securities and derivatives per common share (.73) (1.18)

Effect of changes in discount rate assumptions per common share (1.48) (3.41)

Pension liability adjustment per common share .03 (.06)

Total accumulated other comprehensive income per common share (9.81) (10.45)

Adjusted book value per common share 48.44 43.18

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

Reconciliation of Return on Equity to Adjusted Return on Equity

The following table is a reconciliation of items impacting adjusted return on equity to the most directly comparable U.S.

GAAP financial measure of return on equity for the three-month period ended September 30, 2023.

GAAP return on equity - net earnings (1)

Impact of excluding unrealized foreign currency translation gains (losses) (4.5)

Impact of excluding unrealized gains (losses) on securities and derivatives .8

Impact of excluding effect of changes in discount rate assumptions (3.1)

Impact of excluding pension liability adjustment .0

Impact of excluding accumulated other comprehensive income (6.8)

GAAP return on equity less accumulated other comprehensive income 22.3

Differences between adjusted earnings and net earnings (2)

Adjusted return on equity - reported 15.6

Impact of foreign currency (3)

Adjusted return on equity, excluding impact of foreign currency 16.1

GAAP return on equity is calculated by dividing net earnings (annualized) by average shareholders' equity.

(2) See separate reconciliation of net earnings to adjusted earnings above.

(3) Impact of foreign currency is calculated by restating all foreign currency components of the income statement to the weighted average foreign currency exchange rate for the comparable prior year period.

The impact is the difference of the restated adjusted earnings compared to reported adjusted earnings.

Current period income is restated using the weighted average prior period exchange rate, which eliminates the foreign currency impact for the current period.

This allows for equal comparison of this financial measure.

RESULTS OF OPERATIONS BY SEGMENT

27 unchanged sentences

Aflac Japan Summary of Operating Results

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

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2023 2022 2023 2022

Net earned premiums (1)

$ 1,973 $ 2,125 $ 6,207 $ 7,084

Net investment income:

21 unchanged sentences

previous period:

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

Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022 2023 2022 2023 2022

4 unchanged sentences

Pretax adjusted earnings 6.4 (14.8) (3.2) (10.5) 11.4 7.4 4.9 5.9

(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.

(1) Includes a gain (loss) of $22 and $(41) for the three-month periods and $22 and $(42) for the nine-month periods ended September 30, 2023 and 2022, respectively, related to remeasurement of the deferred profit liability for limited-payment contracts.

(2) Net interest cash flows from derivatives associated with certain investment strategies of $(79) and $(25) for the three-month periods and $(214) and $(37) for the nine-month periods ended September 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.

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.

For the three- and nine-month periods ended September 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 that occurred in January 2023, partially offset by an unlock of future deferred profit liability assumptions in the third quarter of 2023.

Adjusted net investment income in yen terms increased in the three-month period ended September 30, 2023, as compared with the same period in 2022, primarily due to higher

variable net investment income and floating rate income.

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

For the three- and nine-month periods ended September 30, 2023, pretax adjusted earnings in yen terms increased, as compared with the same periods in 2022, primarily due to the decrease in total benefits and claims and a decrease in total adjusted expenses related to expense control efforts and the internal reinsurance transaction with Aflac Re that occurred in January 2023, offset by lower revenues.

Annualized premiums in force decreased 4.4% to ¥1.26 trillion as of September 30, 2023, compared with ¥1.32 trillion as of September 30, 2022.

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

Annualized premiums in force, translated into dollars at respective period-end exchange rates, were $8.4 billion at September 30, 2023, compared with $9.1 billion at September 30, 2022.

As of September 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.

11 unchanged sentences

(Yen Operating Results)

For the Periods Ended June 30,

For the Periods Ended September 30,

Including Foreign

1 unchanged sentence

Currency Changes

Three Months Six Months

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

Three Months Ended September 30, Nine Months Ended September 30,

Ratios to total adjusted revenues:

12 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- 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.

For the three- and nine-month periods ended September 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 from lower medical hospitalization claims related to deemed hospitalization modifications and an associated update to reserve assumptions in the third quarter of 2023, internal reinsurance activity in 2023, and the continued change in the mix of first and third sector business.

The total adjusted expense ratio decreased in the three- and nine-month periods ended September 30, 2023, 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 that occurred in January 2023.

In total, the pretax adjusted profit margin increased in the three- and nine-month periods ended September 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 September 30.

Premium persistency 93.5 % 94.3 %

Aflac Japan Sales

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

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

In Dollars In Yen

Three Months Six Months

Three Months Nine 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 7.8 % (12.0) % 7.9 % (18.9) % 12.4 % 10.2 % 16.6 % (4.1) %

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.

The increase in new annualized premium sales on a yen basis in the third quarter and the first nine 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

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

Three Months Nine Months

2023 2022 2023 2022

23 unchanged sentences

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 June 30.

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

Independent corporate and individual 44.4 % 49.3 %

2 unchanged sentences

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

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.

During the three-month period ended September 30, 2023, Aflac Japan recruited 6 new sales agencies.

At September 30, 2023, Aflac Japan was represented by approximately 7,100 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 June 30, 2023, Aflac Japan had agreements to sell its products at 360 banks, approximately 90% of the total number of banks in Japan.

At September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2023 2022 2023 2022

20 unchanged sentences

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 June 30.

Three Months Six Months

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

Three Months Nine Months

2023 2022 2023 2022

12 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- and six-month periods ended June 30, 2023 was primarily due to increases in U.S.

The decrease in the Aflac Japan new money yield in the three-month period ended September 30, 2023 was primarily due to higher allocations to lower yielding yen-denominated securities.

The increase in the Aflac Japan new money yield in the nine-month period ended September 30, 2023 was primarily due to increases in U.S.

interest rates.

5 unchanged sentences

Summary of Operating Results

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

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2023 2022 2023 2022

20 unchanged sentences

Pretax adjusted earnings 38.6 (14.8) 17.5 (5.0)

(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.

(1) Net interest cash flows from derivatives associated with certain investment strategies of $(9) and $(1) for the three-month periods and $(24) and $1 for the nine-month periods ended September 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.

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.

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

Adjusted net investment income increased in the three- and nine-month periods ended September 30, 2023, as compared with the same periods in 2022, primarily due to higher floating rate income due to higher volumes and rates and higher variable net investment income.

Pretax adjusted earnings increased in the three- and nine-month periods ended September 30, 2023, as compared with the same periods in 2022, primarily due to lower benefits and claims driven by reserve remeasurement gains related to assumption updates in the third quarter of 2023 and an increase in adjusted revenues, partially offset by higher adjusted expenses.

Higher adjusted expenses reflect ongoing investments in the U.S.

platform, as well as a $31 million write-off of certain capitalized software development costs in the third quarter of 2023.

Annualized premiums in force increased 2.9% to $6.1 billion at September 30, 2023, compared with $5.9 billion at September 30, 2022.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

Ratios to total adjusted revenues:

12 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- 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%.

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

The total adjusted expense ratio increased in the three- and nine-month periods ended September 30, 2023, as compared with the same periods in 2022, primarily due to ongoing investments in the U.S.

platform, as well as a $31 million write-off of certain capitalized software development costs in the third quarter of 2023.

The Company expects that this adjusted expense ratio will improve over time as its group life and disability, network dental and vision and consumer markets businesses grow to scale and improve their profitability.

For the full year of 2023, the Company expects the benefit ratio to be 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 June 30.

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

Premium persistency 78.7 % 77.9 %

The following table presents Aflac's U.S.

new annualized premium sales for the periods ended June 30.

Three Months Six Months

new annualized premium sales for the periods ended September 30.

Three Months Nine Months

(In millions) 2023 2022 2023 2022

4 unchanged sentences

critical care insurance sales (including cancer insurance) increased 10.2%;

hospital indemnity insurance sales increased 2.1%;

dental/vision sales increased 23.6%;

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

hospital indemnity insurance sales decreased 4.0%;

dental/vision sales decreased 2.1%;

and life sales increased 66.2% in the third quarter of 2023, compared with the third 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.

in the third 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 June 30.

Three Months Six Months

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

Three Months Nine Months

2023 2022 2023 2022

8 unchanged sentences

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

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

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

sales force included an average of approximately 6,000 U.S.

1 unchanged sentence

The Company believes that this average weekly producer equivalent metric allows sales management to monitor progress and needs, as well as serve as a leading indicator of future production capacity.

In July 2023, the U.S.

Department of Labor, U.S.

Treasury Department and U.S.

Department of Health and Human Services issued a proposed joint rule that, as written, would impose significant limitations on the structure of benefits for hospital indemnity and other fixed indemnity plans, including those sold by Aflac U.S.

The current benefit structure for these products allows the Company to vary the amount of benefits by the services or items received, severity of illness or injury, or any other characteristics particular to a course of treatment.

If finalized in its current form, the proposed rule would eliminate Aflac U.S.’s ability to vary the amount of benefits provided by these products.

In addition, the proposed rule also proposes to change the tax treatment of all fixed indemnity products.

Under the proposal, if premiums are paid on a pretax basis (either by the employer or by employee pretax salary reduction), then the entire amount of the benefit would be taxable income regardless of the amount of the employee’s unreimbursed medical expenses.

Currently, only the benefits received in excess of unreimbursed medical or medical-related costs are subject to tax.

The comment period for the proposed rule closed on September 11, 2023.

has filed comments opposing the proposed rule.

The timing and substance of the final regulations, if any, is not known, and any such final rule could be the subject of litigation.

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.

3 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 30,

(In millions) 2023 2022 2023 2022

6 unchanged sentences

Transitional real estate loans 18 125 73 310

Commercial mortgage loans 19 0 19 0

Middle market loans 6 56 55 262

4 unchanged sentences

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

investment yields for the periods ended June 30.

Three Months Six Months

investment yields for the periods ended September 30.

Three Months Nine Months

2023 2022 2023 2022

12 unchanged sentences

The increase in the Aflac U.S.

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

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

interest rates.

4 unchanged sentences

Corporate and Other Summary of Operating Results

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

Three Months Ended September 30, Nine Months Ended September 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 25 19 92 44

9 unchanged sentences

Pretax adjusted earnings $ (49) $ (56) $ (107) $ (173)

(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.

(1) The change in value of federal historic rehabilitation and solar investments in partnerships of $64 and $19 for the three-month periods and $169 and $61 for the nine-month periods ended September 30, 2023, and 2022, respectively, is included as a reduction to net investment income.

Tax credits on these investments of $63 and $19 for the three-month periods and $171 and $63 for the nine-month periods ended September 30, 2023, and 2022, respectively, have been recorded as an income tax benefit in the consolidated statements 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.

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.

For the three-month period ended September 30, 2023, total adjusted revenues increased, as compared with the same period in 2022, primarily due to higher total premiums associated with the internal reinsurance transaction with Aflac Re that occurred in January 2023, partially offset by a decrease in adjusted net investment income resulting from the impact of historic and solar tax credits.

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

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- 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.

Pretax adjusted earnings increased in the three- and nine-month periods ended September 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 that occurred in January 2023 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 sheets.

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

Tax credits generated by these investments are recorded as an income tax benefit in the consolidated statement of earnings.

Tax credits generated by these investments are recorded as an income tax benefit in the consolidated statements of earnings.

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.

5 unchanged sentences

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.

The Company is also a signatory to the Principles for Responsible Investment, a global framework for incorporating sustainability 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.

1 unchanged sentence

Investment Securities by Segment

June 30, 2023

September 30, 2023

(In millions) Aflac Japan Aflac U.S.

18 unchanged sentences

Limited partnerships 2,252 246 131 2,629

Real estate owned 75 14 0 89

Other 0 34 0 34

37 unchanged sentences

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.

The Company monitors this trend and its impact on the valuations of the Company’s transitional real estate loans (TREs), commercial mortgage loans (CMLs) and related underlying commercial properties.

Within the commercial mortgage and other loans category, the Company has invested in a variety of loans including TREs and 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.

The Company has invested in certain TREs that are currently in default of interest or maturity payments.

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

During the third quarter of 2023, the Company took possession of commercial real estate properties securing defaulted loans through foreclosure and deed in lieu of foreclosure.

Properties acquired by the Company through foreclosure and deed in lieu of foreclosure are reported as real estate owned (REO) in other investments in the consolidated balance sheet.

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

The Company closely monitors the activities of these managers.

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.

The Company also monitors its commercial mortgage and other loan investments internally on an ongoing basis, including a review of loans' credit quality indicators and payment status as 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, information on loans that are on nonaccrual status, and REO obtained through foreclosure or deed in lieu of foreclosure.

What changed 10-Q

Item 2. Management’s Discussion and Analysis