On October 27, 2020 Aflac Incorporated (NYSE: AFL) reported its third quarter results (Press release, Aflac, OCT 27, 2020, View Source [SID1234569156]).
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Total revenues were $5.7 billion in the third quarter of 2020, compared with $5.5 billion in the third quarter of 2019. Net earnings were $2.5 billion, or $3.44 per diluted share, compared with $777 million, or $1.04 per diluted share a year ago. The increase in net earnings in the third quarter of 2020 reflects a $1.4 billion benefit primarily from the release of valuation allowances on deferred tax benefits, which were allowed due to newly released U.S. tax regulations.
Net earnings in the third quarter of 2020 included pretax net investment gains of $117 million, or $0.16 per diluted share, compared with pretax net investment losses of $119 million, or $0.16 per diluted share a year ago. The net investment gains were driven by gains of $142 million, reflecting a decline in the allowances associated with the company’s estimate of current expected credit losses (CECL); net losses from certain derivatives and foreign currency activities of $38 million; an increase in the fair value of equity securities of $12 million; and net gains of $2 million from sales and redemptions.
The average yen/dollar exchange rate* in the third quarter of 2020 was 106.23, or 1.0% stronger than the average rate of 107.31 in the third quarter of 2019. For the first nine months, the average exchange rate was 107.63, or 1.4% stronger than the rate of 109.16 a year ago.
Total investments and cash at the end of September 2020 were $146.1 billion, compared with $139.5 billion at September 30, 2019. In the third quarter, Aflac Incorporated repurchased $400 million, or 10.9 million of its common shares. At the end of September 2020, the company had 110.9 million remaining shares authorized for repurchase.
Shareholders’ equity was $32.5 billion, or $46.16 per share, at September 30, 2020, compared with $29.4 billion, or $40.04 per share, at September 30, 2019. Shareholders’ equity at the end of the third quarter included a net unrealized gain on investment securities and derivatives of $9.5 billion, compared with a net unrealized gain of $8.9 billion at September 30, 2019. Shareholders’ equity at the end of the third quarter also included an unrealized foreign currency translation loss of $1.3 billion, compared with an unrealized foreign currency translation loss of $1.5 billion at September 30, 2019. The annualized return on average shareholders’ equity in the third quarter was 31.7%, driven primarily by a benefit from new tax regulations.
Adjusted earnings* in the third quarter were $994 million, compared with $863 million in the third quarter of 2019, reflecting an increase of 15.2% driven primarily by favorable effective tax rates. This increase includes a cumulative adjustment of $202 million, or $0.28 per share, with respect to the first nine months of 2020, of which $69 million, or $0.10 per share, related to the third quarter of 2020. Adjusted earnings included a pretax variable investment income of $21 million on alternative investments, which was $6 million above long-term return expectations. Adjusted earnings per diluted share* increased 19.8% to $1.39 in the quarter. The slightly stronger yen/dollar exchange rate did not have a significant impact on adjusted earnings per diluted share.
For the first nine months of 2020, total revenues were down 2.8% to $16.2 billion, compared with $16.7 billion in the first nine months of 2019. Net earnings were $3.8 billion, or $5.31 per diluted share, compared with $2.5 billion, or $3.37 per diluted share, for the first nine months of 2019. Adjusted earnings for the first nine months of 2020 were $2.8 billion, or $3.88 per diluted share, compared with $2.6 billion, or $3.41 per diluted share, in 2019. Adjusted earnings included $22 million of pretax variable investment income on alternative investments, which was $18 million below long-term return expectations. Excluding the positive impact of $0.02 per share from the stronger yen/dollar exchange rate, adjusted earnings per diluted share increased 13.2% to $3.86 for the first nine months of 2020.
Shareholders’ equity excluding AOCI* was $24.6 billion, or $34.91 per share at September 30, 2020, compared with $22.2 billion, or $30.18 per share, at September 30, 2019. The annualized adjusted return on equity excluding foreign currency impact* in the third quarter was 16.8%.
AFLAC JAPAN
In yen terms, Aflac Japan’s net premium income was ¥336.5 billion for the quarter, or 3.3% lower than a year ago, mainly due to limited-pay products reaching paid-up status. Net investment income, net of amortized hedge costs*, decreased 0.2% to ¥70.2 billion. Total revenues in yen declined 2.8% to ¥407.9 billion. Pretax adjusted earnings in yen for the quarter declined 11.6% on a reported basis. Pretax adjusted earnings decreased 11.1% on a currency-neutral basis. The pretax adjusted profit margin for the Japan segment was 19.4%, compared with 21.4% a year ago. The decrease in the profit margin is largely due to a reduction in revenues and an increase in expenses in the quarter.
For the first nine months, premium income in yen was ¥1.0 trillion, or 2.6% lower than a year ago. Net investment income, net of amortized hedge costs, increased 1.9% to ¥208.1 billion. Total revenues in yen were down 1.9% to ¥1.2 trillion. Pretax adjusted earnings were ¥262.3 billion, or 3.8% lower than a year ago.
In dollar terms, net premium income decreased 2.3% to $3.2 billion in the third quarter. Net investment income, net of amortized hedge costs, increased 0.6% to $663 million. Total revenues declined by 1.8% to $3.8 billion. Pretax adjusted earnings declined 10.9% to $747 million.
For the first nine months, premium income in dollars was $9.5 billion, or 1.2% lower than a year ago. Net investment income, net of amortized hedge costs, increased 3.2% to $1.9 billion. Total revenues were down 0.5% to $11.4 billion. Pretax adjusted earnings were $2.4 billion, or 2.5% lower than a year ago.
For the quarter, new annualized premium sales (sales) for protection-type first sector and third sector products decreased 32.8% to ¥12.2 billion, and total sales decreased 32.0% to ¥12.6 billion, or $119 million. For the first nine months, sales for protection-type first sector and third sector products decreased 41.1% to ¥35.3 billion, and total sales decreased 40.4% to ¥36.4 billion, or $339 million. The decline in sales largely reflects the impact of reduced activity during the COVID-19 pandemic.
AFLAC U.S.
Aflac U.S. net premium income declined 2.6% to $1.4 billion in the third quarter. Net investment income decreased 4.4% to $175 million as a result of the lower interest rate environment and ongoing capital management activity. Total revenues were down 1.5% to $1.6 billion, largely due to a decline in earned premium from reduced sales activity as well as lower net investment income, partially offset by $24 million of other income primarily derived from Argus third party administrative fees. Pretax adjusted earnings were $329 million, 1.8% lower than a year ago, primarily reflecting a decline in revenues and an increase in expenses, despite lower utilization during the pandemic. The pretax adjusted profit margin for the U.S. segment was 20.5%, compared with 20.6% a year ago.
For the first nine months, premium income declined 0.4% to $4.3 billion. Net investment income decreased 3.1% to $523 million. Total revenues were up 0.8% to $4.9 billion, reflecting $78 million of other income primarily derived from Argus third party administrative fees. Pretax adjusted earnings were $1.1 billion, or 8.6% higher than a year ago.
Aflac U.S. sales decreased 35.7% in the quarter to $221 million. For the first nine months of the year, total new sales decreased 32.7% to $705 million, reflecting the ongoing impact of the COVID-19 pandemic.
CORPORATE AND OTHER
For the quarter, total revenue decreased 10.3% to $87 million, primarily due to an $8 million decline in net investment income including amortized hedge income, which was $36 million. Pretax adjusted earnings were a loss of $39 million, compared with a loss of $17 million a year ago, primarily reflecting higher interest expense and lower net investment income including amortized hedge income.
For the first nine months of the year, total revenue increased 1.7% to $292 million, primarily due to an $11 million increase in net investment income including amortized hedge income, which was $137 million. Pretax adjusted earnings were a loss of $69 million, compared with a loss of $62 million a year ago, primarily reflecting increased interest expense and partially offset by an increase in amortized hedge benefits.
IMPACT OF NEW TAX REGULATIONS
On September 29, 2020, the U.S. Treasury and Internal Revenue Service issued Final and Proposed Regulations. Under the guidance of these regulations, the company will recognize a one-time income tax benefit of $1.4 billion due to the release of previously established valuation allowances related to deferred foreign tax credits. As a result, adjusted earnings benefited in the current period from a lower effective tax rate, and the company believes this will also reduce the effective tax rate in future periods, subject to any future changes in the U.S. tax policy.
DIVIDEND
The board of directors declared the fourth quarter dividend of $0.28 per share, payable on December 1, 2020 to shareholders of record at the close of business on November 18, 2020.
OUTLOOK
Commenting on the company’s results, Chairman and Chief Executive Officer Daniel P. Amos stated: "As a result of the global COVID-19 pandemic, many people have been facing the most challenging times of their lives for various reasons, and our thoughts and prayers are with everyone affected. The safety and health of everyone with whom we do business remains our greatest priority.
"The environment created by COVID-19 continues to impact our sales results both in the United States and Japan. As communicated, we expect this to significantly affect full year sales results in both countries, with the potential for a modest sales improvement for the remainder of the year, contingent upon the pace of economic recovery. Economic conditions and claims activity within this environment remain uncertain in both the Japan and the U.S. as both countries address the pandemic.
"We have taken several actions to navigate the pandemic in Japan and the U.S. Early in the fourth quarter, we offered a voluntary separation plan to eligible employees, which will result in a reduction in our U.S. insurance and corporate workforce of approximately 9%. We expect run-rate annual savings in the range of $45 to $50 million and will record a one-time expense associated with the separation plan of approximately $45 million in the fourth quarter. Other activities include a tactical approach to product development, investment in our distribution platforms, the promotion of wellness benefits with policyholders in the U.S., and accelerated investment in automation and digital roadmaps. You see the impact of these moves beginning to come through our results in the way of elevated investment, recovery in our benefit ratios and movement in persistency. While in total these activities represent short-term headwinds to pretax profit margins, they serve us well as we enter 2021 and an expected recovery in economic conditions.
"As always, we are committed to prudent liquidity and capital management. This includes maintaining strong capital ratios on behalf of our policyholders in both the U.S. and Japan and a tactical approach to capital allocation. It goes without saying that we treasure our record of dividend growth. With the fourth quarter’s declaration, 2020 will mark the 38th consecutive year of dividend increases. Our dividend track record is supported by the strength of our capital and cash flows. At the same time, we remain in the market repurchasing shares and focused on integrating the growth investments we have made in our platform. By doing so, we look to emerge from this period in a continued position of strength and leadership."
*See Non-U.S. GAAP Financial Measures section for an explanation of foreign exchange and its impact on the financial statements and definitions of the non-U.S. GAAP financial measures used in this earnings release, as well as a reconciliation of such non-U.S. GAAP financial measures to the most comparable U.S. GAAP financial measures.