EXHIBIT 13
EXH 13
EXHIBIT 13
The following information is contained in the 1999 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 1999 Form 10-K have been reproduced herein as Exhibit
13 for purposes of electronic filing of this Form 10-K.
PART II
ITEM 5. (a) Market Information:
The Company's common stock is principally traded on the New York Stock
Exchange. The Company is also listed on the Pacific Stock Exchange and the
Tokyo Stock Exchange.
The high, low and closing quarterly sales prices for the Company's common
stock, as published in the U.S. consolidated transaction reporting system, for
the last three fiscal years ended December 31, 1999, are as follows:
Quarterly Common Stock Prices
1999 High Low Close
---------------------------------------------------------------------
4th Quarter $ 54.25 $ 41.88 $ 47.19
3rd Quarter 49.38 40.81 41.88
2nd Quarter 56.75 44.50 47.88
1st Quarter 54.50 39.00 54.44
1998 High Low Close
--------------------------------------------------------------------
4th Quarter $ 45.31 $ 25.50 $ 43.88
3rd Quarter 38.25 25.13 28.56
2nd Quarter 34.50 29.50 30.31
1st Quarter 33.62 22.69 31.63
1997 High Low Close
--------------------------------------------------------------------
4th Quarter $ 28.16 $ 22.13 $ 25.56
3rd Quarter 28.94 24.25 27.13
2nd Quarter 25.69 19.19 23.63
1st Quarter 21.75 18.75 18.75
EXH 13-1
ITEM 5. (b) Holders:
1999 1998 1997
- ---------------------------------------------------------------------------
Number of common
shares outstanding 265,740,816 265,684,034 266,436,020
Number of registered
common shareholders 69,899 62,525 57,788
Approximate number of
common shareholders 155,900 145,500 128,900
ITEM 5. (c) Quarterly cash dividends:
1999 1998
------ ------
4th Quarter $.075 $.065
3rd Quarter .075 .065
2nd Quarter .075 .065
1st Quarter .065 .058
For information concerning dividend restrictions, see Management's
Discussion and Analysis of Financial Condition, the section concerning
shareholders' equity, presented in this Exhibit 13 on page 13-23, and Note 9,
Statutory Accounting and Dividend Restrictions, of the Notes to the
Consolidated Financial Statements, also presented in this Exhibit 13 on page
13-62.
EXH 13-2
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except for share and per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES
For the Year 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues:
Premiums, principally supplemental
health insurance $ 7,264 $ 5,943 $ 5,874 $ 5,910 $ 6,071
Net investment income 1,369 1,138 1,078 1,022 1,025
Realized investment gains (losses) (13) (2) (5) 2 -
Gain on sale of television business - - 267 60 -
Other income 20 25 37 106 95
-------- -------- -------- -------- --------
Total revenues 8,640 7,104 7,251 7,100 7,191
-------- -------- -------- -------- --------
Benefits and expenses:
Benefits and claims 5,885 4,877 4,833 4,896 5,034
Expenses 1,977 1,676 1,553 1,554 1,556
-------- -------- -------- -------- --------
Total benefits and expenses 7,862 6,553 6,386 6,450 6,590
-------- -------- -------- -------- --------
Pretax earnings 778 551 865 650 601
Income taxes 207 64 280 256 252
-------- -------- -------- -------- --------
Net earnings $ 571(1) $ 487(2) $ 585(3) $ 394(4) $ 349
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (basic) $ 2.15(1) $ 1.83(2) $ 2.15(3) $ 1.41(4) $ 1.20
Net earnings (diluted) 2.07(1) 1.76(2) 2.08(3) 1.36(4) 1.17
Cash dividends .29 .253 .224 .194 .169
Shareholders' equity 14.56 14.19 12.88 7.71 7.53
Price range: High 56.75 45.31 28.94 22.00 14.92
Low 39.00 22.69 18.75 14.13 10.63
Close 47.19 43.88 25.56 21.38 14.50
Price/earnings ratio:* High 28.4x 29.0x 21.8x 18.3x 12.8x
Low 19.5 14.5 14.1 11.8 9.1
Common shares used for basic EPS (In thousands) 265,869 266,305 272,110 280,352 291,355
Common shares used for diluted EPS (In thousands) 275,423 275,872 281,596 288,922 298,984
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
(In millions, except for share and per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES
At Year-End 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Assets:
Investments and cash $ 32,024 $ 26,994 $ 22,880 $ 20,744 $ 20,045
Other 5,017 4,228 6,590 4,286 5,172
-------- -------- -------- -------- --------
Total assets $ 37,041 $ 31,222 $ 29,470 $ 25,030 $ 25,217
======== ======== ======== ======== ========
Liabilities and shareholders' equity:
Policy liabilities $ 29,604 $ 24,034 $ 19,885 $ 20,234 $ 19,514
Notes payable 1,111 596 523 354 327
Income taxes 1,511 1,865 1,827 1,181 1,398
Other liabilities 947 957 3,805 1,135 1,844
Shareholders' equity 3,868 3,770 3,430 2,126 2,134
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $ 37,041 $ 31,222 $ 29,470 $ 25,030 $ 25,217
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings** $ 550 $ 429 $ 374 $ 347 $ 349
Operating earnings per share (basic)** 2.07 1.61 1.38 1.24 1.20
Operating earnings per share (diluted)** 2.00 1.56 1.33 1.20 1.17
Pretax profit margin*** 9.9% 9.3% 8.6% 8.4% 8.4%
After-tax profit margin*** 6.4% 6.0% 5.4% 4.9% 4.8%
Operating return on equity**** 20.9% 18.7% 18.8% 19.9% 22.0%
Yen/dollar exchange rate at year-end (yen) 102.40 115.70 130.10 116.10 102.95
Average yen/dollar exchange rate (yen) 113.96 130.89 121.07 108.84 94.10
Notes: (1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in deferred tax
liabilities from a tax rate cut in Japan and a charge of $41 ($.15 per basic and diluted share) for a mandated
policyholder protection fund in 1999.
(2) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in deferred income tax
liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated
policyholder protection fund in Japan in 1998.
(3) Includes gain of $211 ($.77 per basic share, $.75 per diluted share) from the sale of the broadcast business
in 1997.
(4) Includes gain of $48 ($.17 per basic share, $.16 per diluted share) from the sale of the broadcast business
in 1996.
(*) Based on diluted operating earnings per share. (**) Excludes realized investment gains/losses and in 1996 and
1997, the gains from the sale of the television business; excludes charges for the policyholder protection fund
and benefits of tax rate reductions in 1998 and 1999. (***) Operating basis. (****) Based on operating earnings
and excluding unrealized gains on investment securities, net.
EXH 13-4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
AFLAC Incorporated is the parent company of American Family Life
Assurance Company of Columbus, AFLAC. Our principal business is supplemental
health and life insurance, which is marketed and administered through AFLAC.
Most of AFLAC's policies are individually underwritten and marketed at
worksites through independent agents, with premiums paid by the employee. Our
businesses in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service
the two markets for our insurance operations.
RESULTS OF OPERATIONS
Several significant non-operating items affected our net earnings during
the three-year period ended December 31, 1999.
Two corporate income tax rate reductions were enacted in Japan. The
statutory tax rate for AFLAC Japan declined from 45.3% to 41.7% in 1998 and
from 41.7% to 36.2% in 1999. These tax rate declines caused reductions in our
deferred income tax liability. The deferred tax effect for the 1998 tax
reduction was recognized in the first quarter of 1998, increasing net earnings
by $121 million ($.45 per basic share and $.44 per diluted share). The
deferred tax effect for the 1999 tax reduction was recognized in the first
quarter of 1999, increasing net earnings by $67 million ($.25 per basic share
and $.24 per diluted share).
Another factor affecting net earnings was a policyholder protection
system mandated by the Japanese government during the first quarter of 1998.
The pretax charge for our obligation to the new protection fund was $111
million ($65 million after tax, or $.24 per basic and diluted share). In
1999, Toho Mutual Life Insurance Company, a Japanese insurer, was declared
insolvent by Japanese government regulators. This insolvency is expected to
deplete most of the policyholder protection fund established in 1998. In
order to replenish the policyholder protection fund, the Japanese government
and the life insurance industry agreed to new legislation that will increase
the life insurance industry's legal obligation to the fund. Our share of the
industry's obligation was recognized in the fourth quarter of 1999 and
decreased pretax earnings by $64 million ($41 million after-tax, or $.15 per
basic and diluted share). For further information regarding this policyholder
protection fund, see Note 2 of the Notes to the Consolidated Financial
Statements.
Affecting net earnings in 1997 was the sale of our television business,
which consisted of seven network-affiliated stations. The sale of one station
closed on December 31, 1996. The sale of the six remaining stations was
completed in 1997. The pretax and after-tax gains recognized during the
second quarter of 1997 on the closing of these six stations were $267 million
and $211 million, respectively. The effect of the after-tax gain on 1997
basic and diluted net earnings per share was $.77 and $.75, respectively.
EXH 13-5
The results of operations by business segment, together with non-
operating items, for the three-year period ended December 31, 1999, were as
follows.
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Percentage change Years ended
over previous year December 31,
------------------ ---------------------
1999 1998 1999 1998 1997
------------------ ---------------------
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 29.6% (.4)% $ 651 $ 502 $ 504
AFLAC U.S. . . . . . . . . . . . . 11.4 24.9 256 230 184
Television operations. . . . . . . - - 4
Other business segments. . . . . . (4) 2 (2)
---- ---- ----
Total business segments . . . . 23.2 6.3 903 734 690
Interest expense, non-insurance
operations . . . . . . . . . . . (40.9) 1.2 (15) (10) (10)
Corporate and eliminations . . . . 45.0 23.4 (32) (60) (77)
---- ---- ----
Pretax operating earnings. . . . 28.9 10.1 856 664 603
Income taxes . . . . . . . . . . . 30.4 2.8 306 235 229
---- ---- ----
Operating earnings . . . . . . . 28.1 14.6 550 429 374
Non-operating items:
Deferred income tax benefit from
Japanese tax rate reductions . . 67 121 -
Provisions for the Japanese
mandated policyholder
protection fund, net of tax. . . (41) (65) -
Gain on sale of television
business, net of tax. . . . . . . - - 211
Realized investment gains
(losses), net of tax. . . . . . . (5) 2 -
---- ---- ----
Net earnings . . . . . . . . . . 17.4% (16.8)% $ 571 $ 487 $ 585
==== ==== ==== ==== ====
Operating earnings per basic share . 28.6% 16.7% $2.07 $1.61 $1.38
Operating earnings per diluted share 28.2 17.3 2.00 1.56 1.33
==== ==== ==== ==== ====
Net earnings per basic share . . . . 17.5% (14.9)% $2.15 $1.83 $2.15
Net earnings per diluted share . . . 17.6 (15.4) 2.07 1.76 2.08
==== ==== ==== ==== ====
==============================================================================
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the charges for the
mandated policyholder protection fund, the deferred income tax benefits from
the Japanese income tax rate reductions and the gain from the sale of the
television business. Operating earnings per share referred to in the
following discussion are based on the diluted number of average outstanding
shares.
EXH 13-6
FOREIGN CURRENCY TRANSLATION
Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar
exchange rate can have a significant effect on our reported results. In years
when the yen weakens, translating yen into dollars causes fewer dollars to be
reported. When the yen strengthens, translating yen into dollars causes more
dollars to be reported.
The following table illustrates the effect of foreign currency
translation on our reported operating results by comparing these results as if
foreign currency rates had remained unchanged from the previous year.
SELECTED PERCENTAGE CHANGES FOR SUPPLEMENTAL CONSOLIDATED DATA
(YEARS ENDED DECEMBER 31)
Including Foreign Excluding Foreign
Currency Changes Currency Changes*
------------------------ ------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
Premium income 22.2% 1.2% (.6)% 9.4% 7.7% 8.5%
Net investment income 20.3 5.6 5.5 10.7 11.1 14.0
Operating revenues 21.8 1.7 (.7) 9.5 8.0 8.2
Total benefits and
expenses 21.0 .9 (1.0) 8.3 7.4 8.0
Operating earnings 28.1 14.6 7.8 20.6 18.6 15.2
Operating earnings
per share 28.2 17.3 10.8 20.5 21.1 18.3
- -----------------------------------------------------------------------------
* Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current year as each respective
prior year.
=============================================================================
The yen strengthened in relation to the dollar during 1999 after several
years of weakening. The average yen/dollar exchange rates were 113.96 in
1999, 130.89 in 1998, and 121.07 in 1997. The stronger yen in 1999 compared
with 1998 increased operating earnings by $.12 per share in 1999. The weaker
yen in 1998 and 1997 lowered operating earnings per share by $.05 in 1998
compared with 1997, and by $.09 in 1997 compared with 1996. Reported
operating earnings per share increased 28.2% to $2.00 in 1999, 17.3% to $1.56
in 1998 and 10.8% to $1.33 in 1997.
Our primary financial objective is to grow operating earnings per share
before the effect of foreign currency translations. Our goal for 1999 was 20%
growth, which we exceeded. Excluding the effect of currency fluctuations,
operating earnings per share increased 20.5% in 1999 compared with 1998, 21.1%
in 1998 compared with 1997, and 18.3% in 1997 compared with 1996.
Our objective for 2000 is to increase operating earnings per share growth
by 15% to 17% excluding the impact of currency translation. If we achieve a
17% increase, the following table shows the likely results for operating
earnings per share in 2000 when the impact from various foreign currency
translations is included.
EXH 13-7
2000 OPERATING EPS SCENARIOS
Annual Average Yen Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1999 on EPS
- ------------------ ---------------- --------- ----------
100.00 $ 2.48 24.0% $ .14
105.00 2.42 21.0 .08
110.00 2.38 19.0 .04
113.96* 2.34 17.0 -
115.00 2.33 16.5 (.01)
120.00 2.29 14.5 (.05)
125.00 2.25 12.5 (.09)
*Actual 1999 average exchange rate
INTEREST EXPENSE
The shares purchased under our share repurchase program were financed
with bank borrowings, available cash, and in 1999, proceeds from an offering
of senior notes. Interest expense related to the share repurchase program was
$15 million in 1999, $10 million in 1998, and $9 million in 1997. Consolidated
interest expense, including interest expense from insurance operations, was
$18 million in 1999, $13 million in 1998 and $14 million in 1997.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings were 35.8% in 1999, 35.4% in 1998 and 37.9% in 1997. Japanese income
taxes on AFLAC Japan's operating results accounted for most of our income tax
expense. The higher effective tax rate in 1997 primarily resulted from U.S.
alternative minimum tax incurred. The 1999 reduction in the statutory tax
rate in Japan did not significantly change our combined U.S./Japan effective
tax rate as it largely shifted income tax expense from our Japanese to our
U.S. business due to the operation of the U.S. foreign tax credit provisions.
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan is a branch of AFLAC and the principal contributor to our
earnings. AFLAC Japan ranks number one in terms of premium income and profits
among all foreign life and non-life insurance companies operating in Japan.
AFLAC Japan ranks second in terms of individual policies in force and 14th in
assets among all life insurance companies operating in Japan.
EXH 13-8
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
(In millions) 1999 1998 1997
---------------------------------
Premium income . . . . . . . . . . . . $ 5,906 $ 4,738 $ 4,803
Investment income. . . . . . . . . . . 1,111 917 893
Other income . . . . . . . . . . . . . 4 2 1
------ ------ ------
Total revenues . . . . . . . . . . . 7,021 5,657 5,697
------ ------ ------
Benefits and claims. . . . . . . . . . 5,039 4,119 4,156
Operating expenses . . . . . . . . . . 1,331 1,036 1,037
------ ------ ------
Total benefits and expenses. . . . . 6,370 5,155 5,193
------ ------ ------
Pretax operating earnings. . . . . . $ 651 $ 502 $ 504
====== ====== ======
- ------------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income . . . . . . . . . . . 24.6% (1.4)% (3.0)%
Investment income. . . . . . . . . . 21.2 2.7 (.3)
Total revenues . . . . . . . . . . . 24.1 (.7) (2.6)
Pretax operating earnings. . . . . . 29.6 (.4) (5.4)
- ------------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income . . . . . . . . . . . 8.5% 6.6% 7.9%
Investment income. . . . . . . . . . 5.2 11.0 11.0
Total revenues . . . . . . . . . . . 8.0 7.3 8.4
Pretax operating earnings. . . . . . 12.3 7.5 5.4
- ------------------------------------------------------------------------------
Ratios to total revenues in dollars:
Benefits and claims. . . . . . . . . 71.8% 72.8% 73.0%
Operating expenses . . . . . . . . . 18.9 18.3 18.2
Pretax operating earnings. . . . . . 9.3 8.9 8.8
==============================================================================
JAPANESE ECONOMY
Japan's economy has been weak for several years. The financial strength
of many Japanese financial institutions deteriorated during that time, and
some experienced bankruptcy. As we have indicated in the past, the weak
economy in Japan in recent years has resulted in a difficult marketing
environment for AFLAC Japan, continued low yields available for new
investments and decreased consumer confidence.
Many commentators believe the Japanese economy has bottomed out and is on
the way to recovery. The Japanese government has developed various economic
stimulus packages in the last few years. The time required for the Japanese
economy to fully recover remains uncertain.
EXH 13-9
AFLAC JAPAN SALES
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force in yen of 8.7% in
1999, 7.2% in 1998 and 5.2% in 1997 reflect the high persistency of AFLAC
Japan's business and the sales of new policies. Annualized premiums in force
were: 696.6 billion yen ($6.8 billion) at December 31, 1999; 640.8 billion yen
($5.5 billion) at December 31, 1998; and 597.8 billion yen ($4.6 billion) at
December 31, 1997.
AFLAC Japan produced strong sales results in 1999, despite the weak
Japanese economy. New annualized premiums from sales were: $761 million in
1999, up 32.4%; $575 million in 1998, up 11.5%; and $515 million in 1997, down
28.5%. New annualized premiums from sales in yen were: 86.6 billion yen in
1999, up 15.6%; 74.9 billion yen in 1998, up 20.1%; and 62.4 billion yen in
1997, down 20.4%.
Although consumer confidence continued to lag because of the economic
worries, AFLAC products remained popular. Our reputation for financial
strength, combined with a diverse product line and aggressive sales and
marketing, helped guide us through the difficult economy. We reported an
increase in new annualized premium sales, while the life insurance market as a
whole declined in 1999.
New product development is one of several actions we have taken to help
mitigate the impact of the weak sales environment in Japan. One of our new
products, Rider MAX, was one of our most popular products in 1999. This
product, which was introduced in 1998, provides accident and medical/sickness
benefits as a rider to our cancer life policy. We began test-marketing a
fixed-annuity product in 1999. We introduced ordinary life and an economy
cancer life policy in 1997. The economy plan, which has lower premium rates
and benefit levels, was developed to combat the impact of increased premium
rates for new issues.
We continue to invest in marketing to improve sales. The incentive pay
system for AFLAC Japan's employed sales managers was revised in 1997 to better
reward them for improved sales performance. We increased expenditures during
the last three years for expanded sales promotion efforts in Japan and will
continue to do so in 2000. In addition, we will continue our popular
television advertising program that was initiated in 1997. We have also
emphasized our financial strength ratings in Japan and are recruiting more
individual agencies.
AFLAC Japan's sales mix is changing, although cancer life still accounts
for the majority of insurance in force. Cancer life sales accounted for 46.4%
of total new sales in yen in 1999, 49.4% in 1998 and 52.5% in 1997. Rider MAX
accounted for 39.8% of our sales in 1999 and 33.2% in 1998. Ordinary life
accounted for 7.8% of new sales in 1999, 3.8% in 1998 and 1.6% in 1997.
Living benefit life accounted for 2.3% of total new sales in 1999, 7.2% in
1998 and 28.3% in 1997.
Our objectives for 2000 are to increase sales in yen by 10% to 15%
compared with 1999 and to improve the profit margin.
EXH 13-10
AFLAC JAPAN INVESTMENTS
Investment income is affected by available cash flow from operations,
investment yields achievable on new investments and foreign currency exchange
rates. Investment income in yen increased 5.2% in 1999, compared with 11.0%
in 1998. This is due primarily to the effect of translating AFLAC Japan's
dollar-denominated investment income into yen. The stronger yen has the
effect of reducing dollar-denominated investment income as reported in yen.
Also, rates of return on yen-denominated debt securities in Japan remained low
in 1999. For instance, the yield on 10-year Japanese government bonds, as
measured by a composite index, fluctuated from a high of 2.45% in February
1999 to a low of 1.23% in May 1999 and closed the year at 1.64%.
AFLAC Japan's new money rates for investments in debt securities
(including dollar-denominated) were 4.74% for 1999, 4.19% for 1998 and 5.20%
for 1997. The overall rate of return (net of investment expenses) on AFLAC
Japan's average investments and cash at amortized cost has declined. These
returns, which were 5.01% in 1999, 5.26% in 1998 and 5.37% in 1997, reflect
the cumulative effect of lower investment yields available in Japan since the
early 1990s.
AFLAC Japan has made investments in reverse dual currency bonds and the
private placement market to secure higher yields than Japanese government
bonds would have provided while still adhering to conservative standards for
credit quality. We believe that we can invest new money in the near term at an
adequate spread over policy premium pricing assumptions for new business and
assumed interest rates for policy liabilities. The premium rate increases
recently implemented, including one in 1999, have a positive impact on
investment margins and therefore should contribute to stability in the pretax
operating profit margin.
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. This program produced investment income
for AFLAC Japan of approximately $1 million in each of the years 1997 through
1999. For further information regarding such arrangements, see Note 4 of the
Notes to the Consolidated Financial Statements.
INSURANCE DEREGULATION IN JAPAN
In December 1996, the governments of the United States and Japan reached
an agreement on deregulation of the Japanese insurance industry. The
agreement called for the gradual liberalization of the industry through the
year 2001 and included provisions to avoid "radical change" in the third
sector of the insurance industry, which includes our supplemental health
insurance products. AFLAC and other foreign-owned insurers, as well as many
small to medium-sized Japanese insurers, operate primarily in the third
sector. Beginning January 1, 2001, additional insurance companies will be
allowed to sell the type of third sector products that AFLAC Japan currently
offers. AFLAC has inherent competitive advantages through its distribution,
products, administrative efficiency and financial strength that should enable
it to grow even in a more competitive environment. However, the ultimate
impact of deregulation is not known.
EXH 13-11
AFLAC JAPAN - OTHER
The increase in the expense ratio in 1999 was primarily due to increased
expenditures for sales promotion, marketing and advertising.
The benefits ratio has declined primarily due to the mix of business
shifting to newer products that have a lower loss ratio than the traditional
cancer life insurance and also due to favorable claims experience on cancer
life insurance. Pretax operating earnings in yen increased 12.3% for 1999.
This increase was largely due to the lower benefit ratio during 1999.
Even with Japan's depressed economic conditions, we believe the market
for supplemental insurance remains bright. The need for our products in Japan
has continued, and we remain optimistic about increasing penetration within
existing groups, selling new products, opening new accounts and developing
additional supplemental products for the Japanese market.
EXH 13-12
INSURANCE OPERATIONS, AFLAC U.S.
The following table presents a summary of AFLAC U.S. operating results.
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
(In millions) 1999 1998 1997
----------------------------------
Premium income . . . . . . . . . . . . . $ 1,358 $ 1,198 $ 1,062
Investment income. . . . . . . . . . . . 245 216 180
Other income . . . . . . . . . . . . . . 3 4 1
------ ------ ------
Total revenues . . . . . . . . . . . . 1,606 1,418 1,243
------ ------ ------
Benefits and claims. . . . . . . . . . . 845 749 667
Operating expenses . . . . . . . . . . . 505 439 392
------ ------ ------
Total benefits and expenses. . . . . . 1,350 1,188 1,059
------ ------ ------
Pretax operating earnings. . . . . . $ 256 $ 230 $ 184
====== ====== ======
- -----------------------------------------------------------------------------
Percentage increases over previous year:
Premium income . . . . . . . . . . . . 13.4% 12.8% 12.2%
Investment income. . . . . . . . . . . 13.1 20.3 51.0
Total revenues . . . . . . . . . . . . 13.2 14.1 16.6
Pretax operating earnings. . . . . . . 11.4 24.9 43.4
- -----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims. . . . . . . . . . 52.6% 52.8% 53.7%
Operating expenses . . . . . . . . . . 31.4 31.0 31.5
Pretax operating earnings. . . . . . . 16.0 16.2 14.8
==============================================================================
AFLAC U.S. SALES
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force of 14.3% in 1999,
14.6% in 1998 and 14.7% in 1997 were favorably affected by increased sales at
the worksite primarily through cafeteria plans and an improvement in the
persistency of several products. Annualized premiums in force were: $1.6
billion at December 31, 1999; $1.4 billion at December 31, 1998; and $1.2
billion at December 31, 1997.
New annualized premiums from sales and policy conversions were: $555
million in 1999, up 15.1%; $482 million in 1998, up 20.3%; and $401 million in
1997, up 22.7%. Accident/disability coverage was the best-selling product for
the sixth year in a row, accounting for more than 56% of new sales in both
1999 and 1998, and 54% of new sales in 1997. Cancer expense insurance
accounted for 24% to 25% of new sales during the three-year period ending
December 31, 1999.
EXH 13-13
AFLAC U.S. INVESTMENTS
Investment income increased 13.1% in 1999 compared with 20.3% in 1998,
and 51.0% in 1997. The larger increases in 1997 and 1998 are the result of
investment income received from investing the proceeds received in 1997 from
the sale of the television business and investing the majority of the annual
profit repatriation funds. Profit repatriation in 1997 was $347 million,
including $125 million of a nonrecurring nature. During 1999, available cash
flow was invested at an average yield of 7.93% compared with 7.71% during 1998
and 7.64% during 1997. The overall return on average invested assets, net of
investment expenses, was 7.51% for 1999, compared with 7.44% for 1998 and
7.61% for 1997.
AFLAC U.S. - OTHER
We expect the operating expense ratio, excluding discretionary
advertising expenses, to benefit in the future from continued improvements in
operating efficiencies. State-of-the-art technology is one way we can control
expense growth, and SmartApp, a laptop-based, point-of-sale system, is a good
example. In 1999, SmartApp enabled us to process approximately 70% of our
business electronically. About half of these policies required no human
intervention. The electronic imaging of our claims and correspondence is
also benefiting our expense ratio. By improving administrative systems and
controlling other costs, we have been able to redirect funds in recent years
to national advertising programs without significantly affecting the operating
expense ratio.
The aggregate benefit ratio has been relatively stable. The mix of
business has shifted towards accident and hospital indemnity policies, which
have lower benefit ratios than other products.
We expect the pretax operating profit margin to remain approximately the
same in 2000.
We continue to believe that there are significant opportunities to market
high-quality, affordable supplemental insurance products in the U.S.
marketplace.
OTHER OPERATIONS
Corporate expenses are net of investment income of $13 million in 1999
and $2 million in both 1998 and 1997. Corporate operating expenses consist
primarily of salary, retirement, litigation and consulting expenses.
Corporate expenses excluding investment income were $45 million in 1999, $60
million in 1998 and $78 million in 1997. The reduction in corporate expenses
primarily reflects lower retirement and litigation expenses.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards (SFAS), see Note 1 of the Notes to the Consolidated Financial
Statements.
EXH 13-14
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET
During the last two years, our financial condition has remained strong in
the functional currencies of our operations. The investment portfolios of
AFLAC Japan and AFLAC U.S. have continued to grow and primarily consist of
investment-grade securities.
The yen/dollar exchange rate at the end of each period is used to
translate yen-denominated balance sheet items to U.S. dollars for reporting
purposes. The exchange rate at December 31, 1999, was 102.40 yen to one U.S.
dollar, 13.0% stronger than the December 31, 1998, exchange rate of 115.70.
The stronger yen rate increased reported investments and cash by $3.1 billion,
total assets by $3.5 billion and total liabilities by $3.5 billion, compared
with the amounts that would have been reported for 1999 if the exchange rate
had remained unchanged from year-end 1998. For additional information on
exchange rates, see Note 2 of the Notes to the Consolidated Financial
Statements.
MARKET RISKS OF FINANCIAL INSTRUMENTS
Our financial instruments are exposed primarily to three types of market
risks: interest rate, equity price and foreign currency exchange rate.
INTEREST RATE RISK
Our primary interest rate exposure results from the effect of changes in
interest rates on the fair value of our investments in debt securities. We
use modified duration analysis, which provides a measure of price percentage
volatility, to estimate the amount of sensitivity to interest rate changes in
our debt securities. For example, if the current duration of a debt security
is five, then the market value of that security will increase by approximately
5% if market interest rates decrease by 100 basis points. Likewise, the value
of the debt security will decrease by approximately 5% if market interest
rates increase by 100 basis points.
EXH 13-15
The estimated effect of potential increases in interest rates on the fair
values of our debt security investments and notes payable follows:
SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS
TO INTEREST RATE CHANGES
DECEMBER 31
1999 1998
------------------- -------------------
+100 +100
Market Basis Market Basis
(In millions) Value Points Value Points
------------------- -------------------
Debt securities:
Fixed-maturity securities:
Yen-denominated $ 20,379 $ 18,613 $ 16,748 $ 15,317
Dollar-denominated 4,760 4,400 4,560 4,232
Perpetual debentures:
Yen-denominated 5,450 4,917 4,250 3,816
Dollar-denominated 306 285 247 232
------- ------- ------- -------
Total $ 30,895 $ 28,215 $ 25,805 $ 23,597
======= ======= ======= =======
Notes payable* $ 1,077 $ 1,044 $ 585 $ 576
======= ======= ======= =======
*Includes cross currency and interest rate swaps; excludes capitalized leases
Should significant amounts of unrealized losses occur because of
increases in market yields, we would not expect to realize significant losses
because we have the ability to hold such securities to maturity.
The unrealized gains and losses on debt securities, less amounts
applicable to policy liabilities and deferred income taxes, are reported in
accumulated other comprehensive income. The portion of unrealized gains
credited to policy liabilities represents gains that would not inure to the
benefit of our shareholders if such gains were actually realized. For further
information, see Note 3 of the Notes to the Consolidated Financial Statements.
EXH 13-16
The following is a comparison of the actuarially assumed interest rates
for policy reserves and investment yields, based on amortized cost, for the
years ended December 31:
COMPARISON OF INTEREST RATES FOR POLICY RESERVES
AND INVESTMENT YIELDS
(Net of investment expenses)
1999 1998 1997
------------ ------------ ------------
U.S. Japan* U.S. Japan* U.S. Japan*
----- ----- ----- ----- ----- -----
Policies issued during year:
Required interest on
policy reserves 6.59% 3.42% 6.81% 3.50% 6.80% 3.50%
New money yield on
investments 7.85 4.48 7.62 3.76 7.53 4.29
Policies in force at end
of year:
Required interest on
policy reserves 6.42 5.29 6.41 5.38 6.40 5.46
Investment yield 7.51 4.94 7.44 5.17 7.61 5.34
*Represents yen-denominated investments for Japan
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable long-duration yen-denominated securities. At December 31, 1999,
the average duration of policy liabilities was approximately 12 years,
compared with 13 years in 1998. The average duration of the yen-denominated
debt securities was approximately nine years in 1999 and 1998. Currently,
when our debt securities mature, the proceeds are reinvested at a yield below
that of the interest required for the accretion of policy benefit liabilities
on policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent years.
Since 1994, premium rates on new business have been increased several times
(the latest occurred in July 1999) to help offset the lower investment yields
available. Over the next five years, $3.4 billion at amortized cost (with an
average yield of 6.04%), of AFLAC Japan's yen-denominated debt securities are
scheduled to mature.
We have outstanding interest rate swaps on 34.3 billion yen ($336
million) of variable-interest-rate yen-denominated bank borrowings. These
swaps reduce the impact of fluctuations in interest rates on borrowing costs
and effectively change our interest rates from variable to fixed. Therefore,
movements in market interest rates should have no material effect on earnings.
At December 31, 1999, we also had yen-denominated bank borrowings in the
amount of 21.9 billion yen ($214 million) with a variable interest rate of
.51%. The effect on net earnings in 1999 due to changes in market interest
rates was immaterial. For further information on our notes payable, see Note
6 of the Notes to the Consolidated Financial Statements.
EXH 13-17
EQUITY PRICE RISK
Equity securities at December 31, 1999, totaled $215 million, or .7% of
total investments and cash on a consolidated basis. We use beta analysis to
measure the sensitivity of our equity securities portfolio to fluctuations in
the broad market. The beta of our equity securities portfolio is 1.20. For
example, if the overall stock market value changed by 10%, the value of
AFLAC's equity securities would be expected to change by approximately 12%, or
$26 million.
CURRENCY RISK
Most of AFLAC Japan's investments and cash are denominated in yen. When
yen-denominated financial instruments mature or are sold, the proceeds are
generally reinvested in yen-denominated securities and are held to fund yen-
denominated policy obligations.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, AFLAC Incorporated has yen-denominated bank borrowings that have been
designated as a hedge of our investment in AFLAC Japan. The unrealized foreign
currency translation gains and losses related to these borrowings are reported
in accumulated other comprehensive income.
AFLAC Incorporated has cross currency swaps on its $450 million senior
notes. We have entered into cross currency swaps to convert the dollar-
denominated principal and interest into yen-denominated obligations. These
swaps have been designated as a hedge of our investment in AFLAC Japan. The
unrealized foreign currency translation gains and losses related to these
swaps are reported in accumulated other comprehensive income.
We attempt to match yen-denominated assets to yen-denominated liabilities
on a consolidated basis in order to minimize the exposure of our shareholders'
equity to foreign currency translation fluctuations.
EXH 13-18
The following table compares the dollar values of yen-denominated assets
and liabilities at various exchange rates.
DOLLAR VALUE OF YEN-DENOMINATED ASSETS AND LIABILITIES
AT SELECTED EXCHANGE RATES
DECEMBER 31
1999 1998
(In millions) ------------------------- -------------------------
87.40 102.40* 117.40 100.70 115.70* 130.70
Yen Yen Yen Yen Yen Yen
------------------------- -------------------------
Yen-denominated
financial instruments:
Assets:
Securities available
for sale:
Fixed maturities $18,857 $16,099 $14,039 $15,001 $13,057 $11,558
Perpetual debentures 2,015 1,718 1,500 1,286 1,119 991
Equity securities 66 56 49 26 23 20
Securities held to
maturity:
Fixed maturities 5,143 4,389 3,829 4,534 3,947 3,494
Perpetual debentures 4,572 3,903 3,404 4,014 3,494 3,093
Cash and cash
equivalents 659 563 491 354 308 272
Other financial
instruments 5 2 2 12 8 8
------ ------ ------ ------ ------ ------
Total 31,317 26,730 23,314 25,227 21,956 19,436
------ ------ ------ ------ ------ ------
Liabilities:
Notes payable 1,278 1,091 951 664 578 511
------ ------ ------ ------ ------ ------
Total 1,278 1,091 951 664 578 511
------ ------ ------ ------ ------ ------
Net yen-denominated
financial instruments 30,039 25,639 22,363 24,563 21,378 18,925
Other yen-denominated
assets 4,412 3,766 3,285 3,655 3,181 2,816
Other yen-denominated
liabilities (34,142) (29,142) (25,418) (27,815) (24,208) (21,430)
------ ------ ------ ------ ------ ------
Consolidated yen-
denominated net
assets subject to
foreign currency
fluctuation $ 309 $ 263 $ 230 $ 403 $ 351 $ 311
====== ====== ====== ====== ====== ======
* Actual year-end rates
For information regarding the effect of foreign currency translation on
operating earnings per share, see Results of Operations on pages 13-7 through
13-8 and Note 2 of the Notes to the Consolidated Financial Statements.
EXH 13-19
INVESTMENTS AND CASH
The continued growth in investments and cash reflects the substantial
cash flows from operations. Net unrealized gains of $1.2 billion on
investment securities at December 31, 1999, consisted of $2.8 billion in gross
unrealized gains and $1.6 billion in gross unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen debt
securities markets. We use specific criteria to judge the credit quality and
liquidity of our investments and use a variety of credit rating services to
monitor these criteria. Applying those various credit ratings to a
standardized rating system based on the categories of a nationally recognized
rating service, the percentages of our debt securities, at amortized cost, as
of December 31 were as follows:
1999 1998
------ ------
AAA 28.0% 38.1%
AA 24.6 17.6
A 33.5 31.2
BBB 12.1 13.1
BB 1.8 -
----- -----
100.0% 100.0%
===== =====
At December 31, 1999, we owned debt securities rated below investment
grade in the amount of $530 million at amortized cost, or 1.8% of total debt
securities. These securities were issued by two Japanese banks that had
credit rating downgrades following our purchase of the debt securities.
Subsequent to December 31, 1999, these two banks were upgraded to `BBB.'
However, another corporate issue with an amortized cost of $210 million was
downgraded to `BB.'
Private placement investments accounted for 49.0% and 43.9% of our total
debt securities as of December 31, 1999 and 1998, respectively. AFLAC Japan
has made investments in the private placement market to secure higher yields
than those available from Japanese government bonds. At the same time, we
have adhered to historically conservative standards for credit quality. We
require that all private placement issuers have an initial rating of Class 1
or 2 as determined by the Securities Valuation Office of the National
Association of Insurance Commissioners (NAIC). Most of AFLAC's private
placement issues are issued under medium-term note programs and have standard
covenants commensurate with credit rankings, except when internal credit
analysis indicates that additional protective and/or event-risk covenants are
required.
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities to
their contractual or economic maturity dates. We have made this our formal
policy. Accordingly, debt securities carried at a fair value of $6.4 billion
were reclassified as of October 1, 1998, from the category "available for
sale" to "held to maturity." The related unrealized gain of $1.1 billion as
of October 1, 1998, on these securities is being amortized over the remaining
term of the securities.
EXH 13-20
Securities that are available for sale are reported in the balance sheet
at fair value, and securities that are held to maturity are reported at
amortized cost.
The following table shows an analysis of investment securities (at cost
or amortized cost) at December 31:
AFLAC Japan AFLAC U.S.
------------------- -------------------
(In millions) 1999 1998 1999 1998
------------------- -------------------
Available for sale:
Fixed-maturity securities $15,491 $12,886 $ 3,405* $ 2,772
Perpetual debentures 2,411 1,344 153 111
Equity securities 45 22 92 79
------ ------ ------ ------
Total available for sale 17,947 14,252 3,650 2,962
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 4,389 3,947 - -
Perpetual debentures 3,903 3,494 - -
------ ------ ------ ------
Total held to maturity 8,292 7,441 - -
------ ------ ------ ------
Total $26,239 $21,693 $ 3,650 $ 2,962
====== ====== ====== ======
*Includes $240 of securities held by the parent company
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 1999 and 1998. Cash, cash equivalents and
short-term investments totaled $617 million, or 1.9% of total investments and
cash, as of December 31, 1999, compared with $384 million, or 1.4% of total
investments and cash, at December 31, 1998.
For additional information concerning investments and fair values, see
Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
POLICY LIABILITIES
Policy liabilities increased $5.6 billion, or 23.2%, during 1999. AFLAC
Japan policy liabilities increased $5.3 billion, or 24.3%, and AFLAC U.S.
policy liabilities increased $224 million, or 10.8%. Changes in policy
liabilities were primarily due to the addition of new business, the aging of
policies in force, the stronger yen and the effect of the market value
adjustment for securities available for sale (see Note 3 of the Notes to the
Consolidated Financial Statements). The stronger yen at year-end 1999
compared with 1998 increased reported policy liabilities by $3.1 billion.
DEBT
In April 1999, we issued $450 million of senior notes with a 6.50%
interest coupon, payable semiannually, due April 15, 2009. The notes are
redeemable at our option at any time with a redemption price equal to the
EXH 13-21
principal amount of the notes being redeemed plus a make-whole amount. We
received net proceeds of $446 million after discount and issue costs. These
proceeds were temporarily invested in short-duration securities and are being
used primarily to purchase shares of our common stock. The net proceeds may
also be used to repay indebtedness or for general corporate purposes. We have
entered into cross currency swaps that had the effect of converting the
dollar-denominated principal and interest into yen-denominated obligations.
At December 31, 1999, the outstanding principal was 55.6 billion yen ($543
million) at an interest rate of 1.67% after the effect of the cross currency
swap.
AFLAC Incorporated has an unsecured reducing revolving credit agreement
that provides for bank borrowings through July 2001 in either U.S. dollars or
Japanese yen. At December 31, 1999, 25.9 billion yen ($253 million) were
outstanding under this agreement.
AFLAC Incorporated also has an unsecured revolving credit agreement that
provides for bank borrowings through November 2002 in either U.S. dollars or
Japanese yen. At December 31, 1999, 25.8 billion yen ($252 million) were
outstanding.
We have entered into interest rate swaps that effectively change the
interest rates on a portion of these loans from variable to fixed. We make
interest payments to the bank based on variable interest rates, and we pay to,
or receive from, the swap counterparty an amount necessary to equal the fixed
rate.
We also had a .50% short-term yen-denominated note payable in the amount
of $45 million at December 31, 1999, which was due January 18, 2000. This
loan was renewed until April 17, 2000.
The proceeds from these loans were primarily used to fund our share
repurchase program. When any portion of these loans is denominated in yen,
the principal amounts of the loans as stated in dollars will fluctuate due to
changes in the yen/dollar exchange rate.
We have designated these yen-denominated borrowings and the cross
currency swaps as a hedge of our net investment in AFLAC Japan. Foreign
currency translation gains/losses are included in accumulated other
comprehensive income. Outstanding principal and related accrued interest
payable on these yen-denominated items are translated into dollars at end-of-
period exchange rates.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the net unrealized gains on investment securities) was 28.1%
as of December 31, 1999 and 19.6% as of December 31, 1998. For further
information concerning swaps and notes payable, see Notes 4 and 6 of the Notes
to the Consolidated Financial Statements.
POLICYHOLDER GUARANTY FUNDS
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business in those states can be assessed for policyholder
losses up to prescribed limits that are incurred by insolvent companies with
similar lines of business. Such assessments have not been material to us in
the past. We believe that future assessments relating to companies in the
U.S. currently involved in insolvency proceedings will not materially impact
the consolidated financial statements.
EXH 13-22
The Life Insurance Association of Japan, an industry organization,
implemented a policyholder protection fund in 1996 to provide capital support
to insolvent life insurers. AFLAC Japan pledged investment securities to the
Life Insurance Association of Japan under this program. A separate, mandatory
policyholder protection system was enacted by the Japanese government during
1998. The life insurance industry is making contributions to these funds over
a 10-year period. We have recorded a liability for our share of these
obligations.
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was
declared insolvent by Japanese government regulators. Most of the mandatory
policyholder protection fund that was established in 1998 is expected to be
used to satisfy the industry's share of the policyholder obligations in this
new insolvency. The Japanese government and the life insurance industry
agreed to new legislation that will increase the life insurance industry's
legal obligation to the fund. See Note 2 of the Notes to the Consolidated
Financial Statements.
SHAREHOLDERS' EQUITY
Our insurance operations continue to provide the primary sources of
liquidity. Capital needs are also supplemented by borrowed funds. The
principal sources of cash from insurance operations are premiums and
investment income. Primary uses of cash in the insurance operations are
policy claims, commissions, operating expenses, income taxes and payments to
AFLAC Incorporated for management fees and dividends. Both the sources and
uses of cash are reasonably predictable. Our investment objectives provide
for liquidity through the ownership of high-quality investment securities.
AFLAC insurance policies are generally not interest-sensitive and therefore
are not subject to unexpected policyholder redemptions due to investment yield
changes. Also, the majority of our policies provide indemnity benefits rather
than reimbursement for actual medical costs and thus are not subject to the
risks of medical-cost inflation.
The achievement of continued long-term growth will require growth in
AFLAC's statutory capital and surplus. We may secure additional statutory
capital through various sources, such as internally generated statutory
earnings or equity contributions by AFLAC Incorporated from funds generated
through debt or equity offerings. In April 1999, AFLAC Incorporated received
net proceeds of $446 million from an issuance of $450 million of senior notes
which increased our capital resources. We believe outside sources for
additional debt and equity capital, if needed, will continue to be available
for capital expenditures, business expansion and the funding of our share
repurchase program.
AFLAC Incorporated capital resources are largely dependent upon the
ability of AFLAC to pay management fees and dividends. The Georgia Insurance
Department imposes certain limitations and restrictions on payments of
dividends, management fees, loans and advances by AFLAC to AFLAC Incorporated.
The Georgia Insurance Statutes require prior approval for dividend
distributions that exceed the greater of statutory earnings for the previous
year or 10% of statutory capital and surplus as of the previous year-end. In
addition, the Georgia Insurance Department must approve service arrangements
and other transactions within the affiliated group. These regulatory
limitations are not expected to affect the level of management fees or
dividends paid by AFLAC to AFLAC Incorporated. A life insurance company's
EXH 13-23
statutory capital and surplus is computed according to rules prescribed by the
NAIC, as modified by the insurance department in the insurance company's state
of domicile. Statutory accounting rules are different from generally accepted
accounting principles and are intended to emphasize policyholder protection
and company solvency.
Currently, prescribed or permitted statutory accounting principles (SAP)
used by insurers for financial reporting to state insurance regulators may
vary among states and among companies. The NAIC has recodified SAP to promote
standardization throughout the industry. The NAIC has scheduled these new
accounting principles to become effective for 2001.
The NAIC uses a risk-based capital formula relating to insurance risk,
business risk, asset risk and interest rate risk to facilitate identification
by insurance regulators of inadequately capitalized insurance companies based
upon the types and mixtures of risks inherent in the insurer's operations.
AFLAC's NAIC risk-based capital ratio remains high and reflects a very strong
capital and surplus position. Also, there are various ongoing regulatory
initiatives by the NAIC relating to insurance products, investments, revisions
to the risk-based capital formula and other actuarial and accounting matters.
In addition to restrictions by U.S. insurance regulators, the Japanese
Financial Supervisory Agency (FSA) may impose restrictions on transfers of
funds from AFLAC Japan. Payments are made from AFLAC Japan to AFLAC
Incorporated for management fees and to AFLAC U.S. for allocated expenses and
remittances of earnings. Total funds received from AFLAC Japan were $282
million in 1999, $192 million in 1998 and $386 million in 1997. These amounts
include annual profit transfers from AFLAC Japan of $243 million in 1999, $154
million in 1998 and $347 million in 1997. The FSA may not allow transfers of
funds if the payment would cause AFLAC Japan to lack sufficient financial
strength for the protection of policyholders. The FSA maintains solvency
standards, a version of risk-based capital requirements. AFLAC Japan's
solvency margin significantly exceeds regulatory minimums. For additional
information on regulatory restrictions on dividends, profit transfers and
other remittances, see Note 9 of the Notes to the Consolidated Financial
Statements.
RATING AGENCIES
AFLAC is rated `AA' by Standard & Poor's and `Aa3' by Moody's for
financial strength. Duff & Phelps rates AFLAC `AA' in claims-paying ability.
A.M. Best, an independent rating service that analyzes the financial condition
and operating performance of insurance companies, gives AFLAC an `A+' or
superior rating. AFLAC Incorporated's credit rating for senior debt is `A' by
both Standard & Poor's and Duff & Phelps, and `A2' by Moody's.
OTHER
In 2000, AFLAC Japan will begin developing a new computerized policy
administration system at an estimated cost in excess of $100 million. The
project is scheduled to be completed in 2002. The project will be financed
with operating cash flow.
For information regarding pending litigation, see Note 11 of the Notes to
the Consolidated Financial Statements.
EXH 13-24
CASH FLOW
Operating cash flows for AFLAC Japan's yen-denominated items are
translated into dollars using average monthly exchange rates for the year. In
years when the yen weakens, translating yen into dollars causes fewer dollars
to be reported. When the yen strengthens, translating yen into dollars causes
more dollars to be reported.
For additional information, see the Consolidated Statements of Cash Flows
on pages 13-31 and 13-32.
OPERATING ACTIVITIES
In 1999, consolidated cash flow from operations increased 12.3% to $2.8
billion, compared with $2.5 billion in 1998 and $2.6 billion in 1997. Net
cash flow from operations for AFLAC Japan increased 11.7% (decreased 2.7% in
yen) to $2.5 billion in 1999, compared with $2.2 billion in 1998 and $2.3
billion in 1997. AFLAC Japan represented 88% of the consolidated net cash
flow from operations in 1999, 89% in 1998 and 90% in 1997. The decrease in
cash flow from operations in 1998 was due to the weaker yen.
INVESTING ACTIVITIES
Consolidated cash flow used by investing activities increased 22.1% to
$2.7 billion in 1999, compared with $2.2 billion in 1998 and $2.4 billion in
1997. The sale of the television business generated cash flow of $351 million
in 1997. AFLAC Japan accounted for 74% of the consolidated net cash used by
investing activities in 1999, compared with 86% in 1998 and 81% in 1997.
Operating cash flow is primarily used to purchase debt securities. When
market opportunities arise, we dispose of selected debt securities available
for sale to improve future investment yields or lengthen maturities.
Therefore, dispositions before maturity can vary significantly from year to
year. Dispositions before maturity ranged between 4% and 8% of the annual
average investment portfolio of debt securities available for sale during the
three years ended December 31, 1999.
In 1999, we paid $17 million for minor equity interests in two companies
that provide outsourcing for human resource functions. In 1998, we purchased
a small Japanese insurance agency. Its main functions are to provide
policyholder-related services and direct marketing programs for AFLAC Japan.
FINANCING ACTIVITIES
In 1999, net cash provided by financing activities was $113 million,
compared with net cash used by financing activities of $151 million in 1998
and $132 million in 1997. We received net proceeds of $446 million in
connection with the issuance of 6.50% senior notes due 2009. Treasury stock
purchases of $224 million in 1999, $125 million in 1998 and $314 million in
1997 were funded by proceeds from new borrowings.
Dividends to shareholders in 1999 were $77 million ($72 million paid in
cash; $5 million through issuance of treasury shares). Dividends to
EXH 13-25
shareholders in 1998 were $67 million ($63 million paid in cash; $4 million
through issuance of treasury shares). Dividends to shareholders in 1997 were
$61 million ($57 million paid in cash; $4 million through issuance of treasury
shares). The 1999 dividend of $.29 per share increased 14.6% over 1998. The
1998 dividend of $.253 per share represented an increase of 12.9% over the
1997 dividend of $.224 per share.
In addition to issuing treasury shares for dividends to shareholders,
we also issue treasury shares for AFLAC stock options, AFL Stock Plan and
the AFLAC Associate Stock Bonus Plan (see Note 10).
YEAR 2000
We did not experience any material date-related problems with our
internal information or other systems and have not experienced any material
disruptions in connection with external information and data exchanges. We
will continue to monitor our internal systems and external information and
data exchanges throughout the year for first-date occurrence events. Based on
the information now available to us, we do not expect any material disruptions
with respect to such events.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information, so long as
those informational statements are identified as forward-looking and are
accompanied by meaningful, cautionary statements identifying important factors
that could cause actual results to differ materially from those discussed. We
desire to take advantage of these provisions. This report contains cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in this discussion and analysis, and in
any other statements made by company officials in oral discussions with the
financial community and contained in documents filed with the Securities and
Exchange Commission (SEC). Forward-looking statements are not based on
historical information and relate to future operations, strategies, financial
results or other developments. In particular, statements containing words
such as "expect," "anticipate," "believe," "goal," "objective," or similar
words as well as specific projections of future results, generally qualify as
forward-looking. AFLAC undertakes no obligation to update such forward-
looking statements.
We caution readers that the following factors, in addition to other
factors mentioned from time to time in our reports filed with the SEC, could
cause actual results to differ materially: regulatory developments,
assessments for insurance company insolvencies, competitive conditions, new
products, ability to repatriate profits from Japan, general economic
conditions in the United States and Japan, changes in U.S. and/or Japanese tax
laws, adequacy of reserves, credit and other risks associated with AFLAC's
investment activities, significant changes in interest rates, and fluctuations
in foreign currency exchange rates.
EXH 13-26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In millions, except for share 1999 1998 1997
and per-share amounts) -------- -------- --------
Revenues:
Premiums, principally supplemental
health insurance $ 7,264 $ 5,943 $ 5,874
Net investment income 1,369 1,138 1,078
Realized investment losses (13) (2) (5)
Gain on sale of television business - - 267
Other income 20 25 37
------- ------- -------
Total revenues 8,640 7,104 7,251
------- ------- -------
Benefits and expenses:
Benefits and claims 5,885 4,877 4,833
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 257 201 180
Insurance commissions 931 773 773
Insurance expenses 641 504 479
Provision for mandated policyholder
protection fund 64 111 -
Interest expense 18 13 14
Other operating expenses 66 74 107
------- ------- -------
Total acquisition and
operating expenses 1,977 1,676 1,553
------- ------- -------
Total benefits and expenses 7,862 6,553 6,386
------- ------- -------
Earnings before income taxes 778 551 865
------- ------- -------
Income tax expense (benefit):
Current 230 277 292
Deferred -- operations 44 (92) (12)
Deferred tax benefit from
Japanese tax rate reductions (67) (121) -
------- ------- -------
Total income taxes 207 64 280
------- ------- -------
Net earnings $ 571 $ 487 $ 585
======= ======= =======
Net earnings per share:
Basic $ 2.15 $ 1.83 $ 2.15
Diluted 2.07 1.76 2.08
======= ======= =======
Common shares used in computing
earnings per share (In thousands):
Basic 265,869 266,305 272,110
Diluted 275,423 275,872 281,596
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-27
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In millions) 1999 1998
-------- --------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$18,896 in 1999 and $15,658 in 1998) $ 20,859 $ 17,617
Perpetual debentures (amortized cost
$2,564 in 1999 and $1,455 in 1998) 2,024 1,366
Equity securities (cost $137 in 1999
and $101 in 1998) 215 177
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $4,280 in
1999 and $3,691 in 1998) 4,389 3,947
Perpetual debentures (fair value, $3,732 in
1999 and $3,131 in 1998) 3,903 3,494
Other investments 18 19
Cash and cash equivalents 616 374
-------- --------
Total investments and cash 32,024 26,994
Receivables, primarily premiums 270 272
Accrued investment income 369 316
Deferred policy acquisition costs 3,692 3,067
Property and equipment, at cost less
accumulated depreciation 509 466
Other 177 107
-------- --------
Total assets $ 37,041 $ 31,222
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
EXH 13-28
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In millions, except for share amounts) 1999 1998
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 27,310 $ 22,218
Unpaid policy claims 1,618 1,263
Unearned premiums 361 309
Other policyholders' funds 315 244
-------- --------
Total policy liabilities 29,604 24,034
Notes payable 1,111 596
Income taxes 1,511 1,865
Other 947 957
Commitments and contingencies
(Notes 10 and 11)
-------- --------
Total liabilities 33,173 27,452
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 400,000 shares; issued 320,349
shares in 1999 and 317,971 shares in 1998 32 32
Additional paid-in capital 310 235
Retained earnings 3,356 2,862
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 232 219
Unrealized gains on investment securities 1,032 1,332
Treasury stock, at average cost (1,094) (910)
-------- --------
Total shareholders' equity 3,868 3,770
-------- --------
Total liabilities and
shareholders' equity $ 37,041 $ 31,222
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-29
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
(In millions, except for 1999 1998 1997
per-share amounts) -------- -------- --------
Common stock:
Balance at beginning of year $ 32 $ 16 $ 16
Two-for-one stock split - 16 -
------- ------- -------
Balance at end of year 32 32 16
------- ------- -------
Additional paid-in capital:
Balance at beginning of year 235 227 209
Exercise of stock options 17 8 6
Gain on treasury stock reissued 58 16 12
Two-for-one stock split - (16) -
------- ------- -------
Balance at end of year 310 235 227
------- ------- -------
Retained earnings:
Balance at beginning of year 2,862 2,442 1,918
Net earnings 571 487 585
Dividends to shareholders ($.29 per
share in 1999, $.253 in 1998 and
$.224 in 1997) (77) (67) (61)
------- ------- -------
Balance at end of year 3,356 2,862 2,442
------- ------- -------
Accumulated other comprehensive income:
Balance at beginning of year 1,551 1,559 510
Change in unrealized foreign
currency translation gains during
year, net of income taxes 13 (55) 44
Change in unrealized gains (losses)
on investment securities during
year, net of income taxes (300) 47 1,005
------- ------- -------
Balance at end of year 1,264 1,551 1,559
------- ------- -------
Treasury stock:
Balance at beginning of year (910) (814) (527)
Purchases of treasury stock (224) (125) (314)
Cost of shares issued 40 29 27
------- ------- -------
Balance at end of year (1,094) (910) (814)
------- ------- -------
Total shareholders' equity $ 3,868 $ 3,770 $ 3,430
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-30
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In millions) 1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 571 $ 487 $ 585
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,570 2,173 2,310
Deferred income taxes (23) (213) (12)
Change in income taxes payable (364) 16 68
Increase in deferred policy
acquisition costs (299) (226) (227)
Gain on sale of television business - - (267)
Provision for mandated policyholder
protection fund 64 111 -
Other, net 288 152 152
-------- -------- --------
Net cash provided by
operating activities 2,807 2,500 2,609
-------- -------- --------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Securities available for sale:
Fixed-maturity securities sold 1,311 941 1,722
Fixed-maturity securities
matured 164 698 422
Perpetual debentures sold 14 - -
Equity securities 73 57 64
Securities held to maturity:
Fixed-maturity securities matured
or called 36 8 -
Other investments, net 4 42 10
Proceeds from sale of television business - - 351
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (3,322) (2,966) (4,141)
Perpetual debentures (862) (917) (798)
Equity securities (82) (60) (55)
Securities held to maturity:
Fixed maturity securities (43) - -
Additions to property and
equipment, net (14) (40) (9)
Purchase of investees and subsidiary (17) (8) -
-------- -------- --------
Net cash used by investing
activities $ (2,738) $ (2,245) $ (2,434)
-------- -------- --------
(continued)
EXH 13-31
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
(In millions) 1999 1998 1997
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings $ 446 $ 124 $ 409
Principal payments under debt
obligations (94) (125) (203)
Dividends paid to shareholders (72) (63) (57)
Purchases of treasury stock (224) (125) (314)
Treasury stock reissued 39 30 25
Other, net 18 8 8
-------- -------- --------
Net cash provided (used) by
financing activities 113 (151) (132)
-------- -------- --------
Effect of exchange rate changes
on cash and cash equivalents 60 34 (16)
-------- -------- --------
Net change in cash and
cash equivalents 242 138 27
Cash and cash equivalents,
beginning of year 374 236 209
-------- -------- --------
Cash and cash equivalents,
end of year $ 616 $ 374 $ 236
======== ======== ========
Supplemental disclosures of cash
flow information - See Note 12
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-32
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(In millions) 1999 1998 1997
-------- -------- --------
Net Earnings $ 571 $ 487 $ 585
-------- -------- --------
Other comprehensive income, before
income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains
during year (128) (84) 44
Unrealized gains (losses) on
investment securities:
Unrealized holding gains (losses)
arising during year (379) 171 1,693
Reclassification adjustment for
realized (gains) losses included
in net earnings 13 3 4
-------- -------- --------
Total other comprehensive
income, before income taxes (494) 90 1,741
Income tax expense (benefit)
related to items of other
comprehensive income (207) 98 692
-------- -------- --------
Other comprehensive income,
net of income taxes (287) (8) 1,049
-------- -------- --------
Total comprehensive income $ 284 $ 479 $ 1,634
======== ======== ========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: AFLAC Incorporated (the Parent Company) and its
subsidiaries (the Company) primarily sell supplemental health insurance in
Japan and the United States. The Company's insurance operations are conducted
through American Family Life Assurance Company of Columbus (AFLAC), which
operates in the United States (AFLAC U.S.) and as a branch in Japan (AFLAC
Japan). Most of our insurance policies are individually underwritten and
marketed at worksites through independent agents, with premiums paid by the
employee. AFLAC Japan, which conducts its insurance operations in Japanese
yen, accounted for 81%, 80% and 79% of the Company's total revenues for 1999,
1998 and 1997, respectively, and 87% and 86% of total assets at December 31,
1999 and 1998, respectively.
BASIS OF PRESENTATION: We prepare our financial statements in accordance
with generally accepted accounting principles (GAAP). These principles are
established primarily by the Financial Accounting Standards Board (FASB) and
the American Institute of Certified Public Accountants. The preparation of
financial statements in conformity with GAAP requires us to make estimates
when recording transactions resulting from business operations, based on
information currently available. The most significant items on our balance
sheet that involve a greater extent of accounting estimates and actuarial
determinations subject to changes in the future are: deferred policy
acquisition costs, liabilities for future policy benefits and unpaid policy
claims and accrued liabilities for unfunded retirement plans. As additional
information becomes available (or actual amounts are determinable), the
recorded estimates will be revised and reflected in operating results.
Although some variability is inherent in these estimates, we believe the
amounts provided are adequate.
TRANSLATION OF FOREIGN CURRENCIES: The functional currency of AFLAC
Japan's insurance operations is the Japanese yen. We translate financial
statement accounts that are maintained in foreign currencies into U.S. dollars
as follows. Assets and liabilities denominated in foreign currencies are
translated at end-of-period exchange rates. Realized gains and losses on
security transactions are translated at the exchange rate on the trade dates
of the transactions. Other revenues, expenses and cash flows are translated
from Japanese yen into U.S. dollars using average exchange rates for the year.
The resulting currency translation adjustments are reported in accumulated
other comprehensive income. We include in earnings realized currency exchange
gains and losses resulting from transactions. Realized currency exchange
gains and losses were immaterial during the three-year period 1997 through
1999.
AFLAC Japan maintains an investment portfolio of dollar-denominated
securities on behalf of AFLAC U.S. The functional currency for these
investments is the dollar. The related investment income and
realized/unrealized investment gains and losses are also denominated in
dollars.
We have designated the cross currency swaps and the yen-denominated notes
payable (Note 6) held by the Parent Company as a hedge of our net investment
in AFLAC Japan. Outstanding principal and related accrued interest payable on
these items are translated into dollars at end-of-period exchange rates.
Currency translation adjustments are reported in accumulated other
comprehensive income.
EXH 13-34
INSURANCE REVENUE AND EXPENSE RECOGNITION: The supplemental health and
life insurance policies we issue are classified as long-duration contracts.
The contract provisions generally cannot be changed or canceled during the
contract period; however, we may adjust premiums for supplemental health
policies issued in the United States within prescribed guidelines and with the
approval of state insurance regulatory authorities.
Insurance premiums for health and life policies are recognized as earned
income ratably over the premium payment periods of the policies. When
revenues are recorded, the related amounts of benefits and expenses are
charged against such revenues, so as to result in recognition of profits in
proportion to premium revenues during the period the policies are expected to
remain in force. This association is accomplished by means of annual
additions to the liability for future policy benefits and the deferral and
subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and the liability
for future policy benefits requires the use of estimates consistent with sound
actuarial valuation techniques. For new policy issues, we review our
actuarial assumptions and deferrable acquisition costs each year and revise
them when necessary to more closely reflect recent experience and studies of
actual acquisition costs. For policies in force, we evaluate deferred policy
acquisition costs by major product groupings to determine that they are
recoverable from future revenues. We charge against earnings costs that are
not recoverable.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on
hand, money market instruments and other debt instruments with a maturity of
90 days or less when purchased.
INVESTMENTS: Our fixed-maturity securities and perpetual debentures
(debt securities) are classified as either held to maturity or available for
sale. Securities classified as held to maturity are securities that we have
the ability and intent to hold to maturity or redemption and are carried at
amortized cost. All other debt securities and our equity securities are
classified as available for sale and are carried at fair value. If the fair
value is higher than the amortized cost for debt securities or the purchase
cost for equity securities, the excess is an unrealized gain; and if lower
than cost, the difference is an unrealized loss.
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities to
their contractual or economic maturity dates. We have now made this our
formal policy. Accordingly, debt securities carried at a fair value of $6.4
billion were reclassified as of October 1, 1998, from the category "available
for sale" to "held to maturity." The related unrealized gain of $1.1 billion
as of October 1, 1998, on these securities is being amortized from other
comprehensive income into investment income over the remaining term of the
securities. The related premium over amortized cost in the carrying value of
the debt securities that was created when the reclassification occurred is
also being amortized as an offsetting charge to investment income.
These unamortized unrealized gains and losses, plus the net unrealized
gains and losses on securities available for sale, less amounts applicable to
policy liabilities and deferred income taxes, are reported in accumulated
other comprehensive income. The portion of unrealized gains credited to
EXH 13-35
policy liabilities represents gains that would not inure to the benefit of
shareholders if such gains were actually realized. These amounts relate to
policy reserve interest requirements and reflect the difference between market
investment yields and estimated minimum required interest rates on policy
reserves.
Amortized cost of debt securities is based on the purchase price adjusted
for accrual of discount or amortization of premium. The amortized cost of
debt securities purchased at a discount will equal the face or par value at
maturity. Debt securities purchased at a premium will have an amortized cost
equal to face or par value at the earlier of a call date or maturity.
Interest is recorded as income when earned and is adjusted for
amortization of any premium or discount. Dividends on equity securities are
recorded as income on the ex-dividend dates.
For the collateralized mortgage obligations held in our fixed-maturity
securities portfolio, we recognize income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied at the time of
acquisition. This adjustment is reflected in net investment income.
We identify the cost of each individual investment so that when any are
sold, we are able to record the gain or loss on that transaction in our
Consolidated Statements of Earnings.
We continually monitor the difference between the cost and estimated fair
value of our investments. If any of our investments experience a decline in
value that is other than temporary, we establish a valuation allowance for the
decline and record a realized loss in the Consolidated Statements of Earnings.
We lend fixed-maturity securities to financial institutions in short-term
security lending transactions. These securities continue to be carried as
investment assets on our balance sheet during the term of the loans and are
not recorded as sales. We receive cash or other securities as collateral for
such loans. For loans involving unrestricted cash collateral, the collateral
is recorded as an asset with a corresponding liability for the return of the
collateral. For loans involving securities as collateral, the collateral is
not recorded as an asset or liability.
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business
and converting existing policies are deferred and amortized, with interest,
over the premium payment periods in proportion to the ratio of annual premium
income to total anticipated premium income. Anticipated premium income is
estimated by using the same mortality and withdrawal assumptions used in
computing liabilities for future policy benefits. In this manner, the related
acquisition expenses are matched with revenues. Costs deferred include first-
year commissions in excess of renewal year commissions and certain direct and
allocated policy issue, underwriting and marketing expenses, all of which vary
with and are primarily related to the production of new business.
EXH 13-36
INSURANCE LIABILITIES: The liabilities for future policy benefits are
computed by a net level premium method using estimated future investment
yields, withdrawals and recognized morbidity and mortality tables modified to
reflect our experience, with reasonable provision for possible future adverse
deviations in experience.
Unpaid policy claims are estimates computed on an undiscounted basis
using statistical analyses of historical claim experience adjusted for current
trends and changed conditions. The ultimate liability may vary significantly
from such estimates. We regularly adjust these estimates as new experience
data emerges and reflect the changes in operating results in the year such
adjustments are made.
INCOME TAXES: Income tax provisions are generally based on pretax
earnings reported for financial statement purposes which differ from those
amounts used in preparing the Company's income tax returns. Deferred income
taxes are recognized for temporary differences between the financial reporting
basis and income tax basis of assets and liabilities, based on enacted tax
laws and statutory tax rates applicable to the periods in which the temporary
differences are expected to reverse.
DERIVATIVES: We have only limited activity with derivative financial
instruments. We do not use them for trading purposes nor do we engage in
leveraged derivative transactions. We currently use three types of
derivatives -- interest rate swaps, cross currency swaps and foreign currency
forward contracts.
We use the accrual method to account for the interest rate swaps in
connection with our bank borrowings. The difference between amounts paid and
received under such agreements is reported in interest expense in the
Consolidated Statements of Earnings. Changes in the fair value of these swap
agreements are not recognized in the financial statements. These swaps reduce
the impact of changes in interest rates on our borrowing costs and effectively
change our related interest exposure from variable to fixed.
We use cross currency swaps in connection with our $450 million senior
notes, which in effect converts the dollar-denominated principal and interest
into yen-denominated obligations. These swaps have been designated as hedges
of our investment in AFLAC Japan. The cross currency swaps are recorded as a
portion of the notes payable. Changes in the fair value of the swaps are
recorded in accumulated other comprehensive income.
We occasionally use short-term foreign currency forward contracts
(usually five months or less) in connection with annual profit transfers from
AFLAC Japan. These contracts are designated at inception as hedges of our
investment in AFLAC Japan and are accounted for using the deferral method. We
record the gains and losses during the period that the contracts are
outstanding and at termination of the contracts as unrealized foreign currency
translation gains in accumulated other comprehensive income.
EMPLOYEE STOCK OPTIONS: We use the intrinsic value method to value
employee stock options. Under this method, compensation cost is recognized
only for the excess, if any, of the market price of the stock at the grant
date over the amount an employee must pay upon exercise to acquire the stock.
Our stock option plan requires that the exercise price be equal to 100% of the
fair market value at the date of grant; therefore, no compensation expense is
recognized.
EXH 13-37
TREASURY SHARES: We record treasury shares purchased at cost, which is
the market value at the time of the transaction, and as a reduction of
shareholders' equity. We use the weighted-average purchase cost to determine
the cost of treasury shares that are reissued. We record realized gains and
losses as additional paid-in capital when treasury shares are reissued.
EARNINGS PER SHARE: We present two earnings per share (EPS) calculations
- -- basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings
by the weighted-average number of shares outstanding for the period. Diluted
EPS is computed by dividing net earnings by the weighted-average number of
shares outstanding for the period plus the shares representing the dilutive
effect of stock options and other common stock equivalents.
ACCOUNTING CHANGES ADOPTED: On January 1, 1999, we adopted Statement of
Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for
Insurance Related Assessments. This SOP provides guidance for determining
when an entity should recognize a liability for guaranty fund and other
insurance related assessments, and how to measure the liability. There was no
effect on net earnings or shareholders' equity due to our adoption of this SOP
since our previous accounting method for guaranty fund and other insurance
related assessments conformed to the requirements of this SOP.
We also adopted SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, on January 1, 1999. This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past, we
expensed all such costs as they were incurred. The adoption of this SOP had
no material effect on net earnings for the year ended December 31, 1999.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: SFAS No. 133 as amended,
Accounting for Derivative Instruments and Hedging Activities, was issued in
June 1998. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
investment securities and other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative will be included
in either earnings or other comprehensive income depending on the intended use
of the derivative instrument. We are currently evaluating this standard,
which for us becomes effective January 1, 2001.
RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to
conform to the current year presentation.
(2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company consists of two reportable business segments: AFLAC Japan
insurance and AFLAC U.S. insurance. Prior to April 15, 1997, AFLAC Broadcast
Division (the Company's television business in the United States) was included
as a reportable business segment. We sell supplemental health and life
insurance through our AFLAC Japan and AFLAC U.S. operations. Most of our
policies are individually underwritten and marketed at worksites through
independent agents, with premiums paid by the employee.
EXH 13-38
Operating business segments that are not individually reportable are
included in the "Other" category, which includes minor insurance operations in
foreign countries other than Japan and our printing subsidiary.
We evaluate our business segments based on GAAP pretax operating
earnings. We do not allocate corporate overhead expenses to business
segments.
Information regarding components of operations and lines of business for
the years ended December 31 follows:
(In millions) 1999 1998 1997
-------- -------- --------
Total revenues:
AFLAC Japan:
Earned premiums:
Cancer life $ 4,582 $ 3,839 $ 4,011
Other accident and health 730 413 336
Life insurance and annuities 594 486 456
Net investment income 1,111 917 893
Other income 4 2 1
------- ------- -------
Total AFLAC Japan revenues 7,021 5,657 5,697
------- ------- -------
AFLAC U.S.:
Earned premiums:
Cancer expense 535 489 456
Accident/disability 447 345 252
Other health 344 341 334
Life insurance 32 23 20
Net investment income 245 216 180
Other income 3 4 1
------- ------- -------
Total AFLAC U.S. revenues 1,606 1,418 1,243
------- ------- -------
Television operations - U.S. - - 16
Other business segments 23 39 34
------- ------- -------
Total business segments 8,650 7,114 6,990
Realized investment
gains (losses) (13) (2) (5)
Gain on sale of television
business - - 267
Corporate* 39 30 40
Intercompany eliminations (36) (38) (41)
------- ------- -------
Total $ 8,640 $ 7,104 $ 7,251
======= ======= =======
*Includes investment income of $13 in 1999 and $2 in both 1998 and 1997.
EXH 13-39
(In millions) 1999 1998 1997
-------- -------- --------
Earnings before income taxes:
AFLAC Japan $ 651 $ 502 $ 504
AFLAC U.S. 256 230 184
Television operations - U.S. - - 4
Other business segments (4) 2 (2)
------- ------- -------
Total business segments 903 734 690
Provision for the Japanese mandated
policyholder protection fund (64) (111) -
Realized investment
gains (losses) (13) (2) (5)
Gain on sale of television
business - - 267
Interest expense, non-insurance
operations (15) (10) (10)
Corporate* (33) (60) (77)
------- ------- -------
Total $ 778 $ 551 $ 865
======= ======= =======
Advertising expense:
AFLAC Japan $ 46 $ 21 $ 24
AFLAC U.S. 33 34 23
------- ------- -------
Total $ 79 $ 55 $ 47
======= ======= =======
*Includes investment income of $13 in 1999 and $2 in both 1998 and 1997.
Total assets at December 31 were as follows:
(In millions) 1999 1998
-------- --------
Total assets:
AFLAC Japan $ 32,274 $ 26,950
AFLAC U.S. 4,448 4,212
Other business segments 34 59
-------- --------
Total business segments 36,756 31,221
Corporate 5,213 4,636
Intercompany eliminations (4,928) (4,635)
-------- --------
Total $ 37,041 $ 31,222
======== ========
Total depreciation and amortization expense was $33 million in 1999, $29
million in 1998 and $33 million in 1997. AFLAC Japan accounted for $20
million in 1999, $17 million in 1998 and $20 million in 1997.
Advertising and depreciation expenses are included in insurance expenses.
EXH 13-40
Total expenditures for long-lived assets were $22 million in 1999, $47
million in 1998 and $11 million in 1997. The increase in 1998 primarily
relates to the construction of an administrative office building for AFLAC
U.S.
Receivables consisted primarily of monthly insurance premiums due from
individual policyholders or their employers for payroll deduction of premiums.
At December 31, 1999, $157 million, or 57.9% of total receivables were related
to AFLAC Japan's operations ($139 million at December 31, 1998).
SALE OF TELEVISION BUSINESS: In 1997, we completed the sale of our
television business, which consisted of seven network-affiliated television
stations. The sale of one station closed in 1996. The sale of the remaining
six stations closed on April 15, 1997. The pretax and after-tax gains
recognized in the second quarter of 1997 were $267 million and $211 million,
respectively. The 1997 after-tax gain was $.77 per basic share and $.75 per
diluted share.
POLICYHOLDER PROTECTION FUND: During the second quarter of 1997, Nissan
Mutual Life Insurance Company, was declared insolvent. All life insurers
doing business in Japan had previously agreed to contribute to a voluntary
policyholder protection fund over a 10-year period that would be used to help
offset insurer insolvencies. During the second quarter of 1997, AFLAC Japan
recognized a pretax charge of $25 million for its obligation to this
policyholder protection fund. The after-tax charge was $14 million ($.05 per
basic and diluted share).
In 1998, the Japanese government created a mandatory policyholder
protection system, and subsequently established the Life Insurance
Policyholders Protection Corporation. The life insurance industry is required
to contribute to this fund semiannually over a 10 year period. The charge for
our share of the life insurance industry's obligation under the plan enacted
in early 1998 was recognized in the first quarter of 1998 and decreased pretax
earnings by $111 million for the year ended December 31, 1998. The after-tax
charge was $65 million, or $.24 per basic and diluted share.
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was
declared insolvent by Japanese government regulators. This insolvency is
expected to deplete most of the policyholder protection fund that was
established in 1998. In order to replenish the protection fund, the Japanese
government and the life insurance industry agreed to new legislation that will
increase the life insurance industry's legal obligation to the fund. Our
share of this new obligation was recognized in the fourth quarter of 1999 and
decreased pretax earnings by $64 million ($41 million after-tax, or $.15 per
basic and diluted share).
The total liability accrued for our remaining obligations to Japanese
policyholder protection funds was $262 million at December 31, 1999.
EXH 13-41
YEN-TRANSLATION EFFECTS: AFLAC Japan owns U.S. dollar-denominated
securities, which we have designated as an economic currency hedge of a
portion of our investment in AFLAC Japan. In addition, we have designated the
Parent Company's yen-denominated notes payable (Note 6) as a hedge of our net
investment in AFLAC Japan. The dollar values of our yen-denominated net
assets subject to foreign currency translation fluctuations for financial
reporting purposes are summarized as follows at December 31 (translated at
end-of-year exchange rates):
(In millions) 1999 1998
-------- --------
AFLAC Japan net assets $ 3,129 $ 2,735
Less:
AFLAC Japan dollar-denominated
net assets 1,772 1,805
Parent Company yen-denominated
net liabilities 1,094 579
------- -------
Consolidated yen-denominated net assets
subject to foreign currency
translation fluctuations $ 263 $ 351
======= =======
The following table shows the yen/dollar exchange rates used for the
three-year period ended December 31, 1999, and their effect on selected
financial data.
1999 1998 1997
------ ------ ------
Balance Sheets:
Yen/dollar exchange rate at
December 31 102.40 115.70 130.10
Yen percent weakening (strengthening) (13.0)% (12.4)% 10.8%
Exchange effect on total assets (billions)* $ 3.5 $ 2.8 $ (2.9)
Exchange effect on total
liabilities (billions)* $ 3.5 $ 2.7 $ (2.8)
Statements of Earnings:
Average exchange rate for the year 113.96 130.89 121.07
Yen percent weakening (strengthening) (14.9)% 7.5% 10.1%
Exchange effect on net earnings (millions)* $ 54 $ (20) $ (24)
Exchange effect on diluted net EPS* $ .20 $ (.07) $ (.08)
*Exchange effect amounts were determined using the same yen/dollar exchange
rate for the current year as each respective prior year.
OTHER: Payments are made from AFLAC Japan to the Parent Company for
management fees and to AFLAC U.S. for allocated expenses and remittances of
earnings. These payments totaled $282 million in 1999, $192 million in 1998
and $386 million in 1997. See Note 9 for information concerning restrictions
on remittances from AFLAC Japan.
EXH 13-42
(3) INVESTMENTS
The amortized cost for debt securities, cost for equity securities and
the fair values of these investments at December 31 are shown in the following
tables:
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale securities,
carried at fair value:
Fixed-maturity securities:
Yen-denominated:
Government and guaranteed $ 6,771 $ 1,995 $ 6 $ 8,760
Municipalities 558 53 - 611
Public utilities 3,363 457 44 3,776
Banks/financial institutions 2,290 13 242 2,061
Other corporate 923 41 73 891
------- ------- ------- -------
Total yen-denominated 13,905 2,559 365 16,099
------- ------- ------- -------
Dollar-denominated:
Government 251 1 8 244
Municipalities 30 - 1 29
Mortgage-backed securities 187 1 4 184
Sovereign and Supranational 203 1 3 201
Banks/financial institutions 2,028 12 115 1,925
Other corporate 2,292 10 125 2,177
------- ------- ------- -------
Total dollar-denominated 4,991 25 256 4,760
------- ------- ------- -------
Total fixed-maturity
securities 18,896 2,584 621 20,859
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Primarily banks/financial
institutions 2,253 1 536 1,718
Dollar-denominated:
Banks/financial institutions 311 5 10 306
------- ------- ------- -------
Total perpetual debentures 2,564 6 546 2,024
------- ------- ------- -------
Equity securities 137 91 13 215
------- ------- ------- -------
Total securities
available for sale $ 21,597 $ 2,681 $ 1,180 $ 23,098
======= ======= ======= =======
EXH 13-43
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity securities,
carried at amortized cost:
Fixed-maturity securities:
Yen-denominated:
Government $ 829 $ 5 $ 14 $ 820
Municipalities 372 14 - 386
Public utilities 665 2 57 610
Banks/financial institutions 1,273 36 31 1,278
Other corporate 1,250 30 94 1,186
------- ------- ------- -------
Total fixed-maturity
securities 4,389 87 196 4,280
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 3,903 73 244 3,732
------- ------- ------- -------
Total perpetual debentures 3,903 73 244 3,732
------- ------- ------- -------
Total securities held
to maturity $ 8,292 $ 160 $ 440 $ 8,012
======= ======= ======= =======
EXH 13-44
December 31, 1998
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale securities,
carried at fair value:
Fixed-maturity securities:
Yen-denominated:
Government and guaranteed $ 6,018 $ 1,515 $ 17 $ 7,516
Municipalities 541 55 - 596
Public utilities 2,884 336 104 3,116
Banks/financial institutions 1,447 30 140 1,337
Other corporate 518 11 37 492
------- ------- ------- ------
Total yen-denominated 11,408 1,947 298 13,057
------- ------- ------- ------
Dollar-denominated:
Government 221 14 - 235
Municipalities 10 1 - 11
Mortgage-backed securities 95 4 - 99
Sovereign and Supranational 161 14 - 175
Banks/financial institutions 1,881 157 3 2,035
Other corporate 1,882 145 22 2,005
------- ------- ------- -------
Total dollar-denominated 4,250 335 25 4,560
------- ------- ------- -------
Total fixed-maturity
securities 15,658 2,282 323 17,617
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 1,216 1 98 1,119
Dollar-denominated:
Banks/financial institutions 239 8 - 247
------- ------- ------- -------
Total perpetual debentures 1,455 9 98 1,366
------- ------- ------- -------
Equity securities 101 82 6 177
------- ------- ------- -------
Total securities
available for sale $ 17,214 $ 2,373 $ 427 $ 19,160
======= ======= ======= =======
EXH 13-45
December 31, 1998
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity securities,
carried at amortized cost:
Fixed-maturity securities:
Yen-denominated:
Government $ 769 $ - $ 51 $ 718
Municipalities 334 - 24 310
Public utilities 598 - 62 536
Banks/financial institutions 1,148 2 66 1,084
Other corporate 1,098 7 62 1,043
------- ------- ------- -------
Total fixed-maturity
securities 3,947 9 265 3,691
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 3,494 12 375 3,131
------- ------- ------- -------
Total perpetual debentures 3,494 12 375 3,131
------- ------- ------- -------
Total securities held
to maturity $ 7,441 $ 21 $ 640 $ 6,822
======= ======= ======= =======
EXH 13-46
Fair values for debt securities were provided by outside securities
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The fair values for equity
securities were determined using market quotations on the principal public
exchange markets.
The amortized cost and fair values of our investments in fixed-maturity
securities at December 31, 1999, by contractual maturity are shown below:
AFLAC Japan AFLAC U.S.
-------------------- ---------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
--------- --------- --------- ---------
Available for sale:
Due in one year or less $ 406 $ 420 $ 127 $ 127
Due after one year through
five years 2,545 2,911 392 389
Due after five years through
10 years 2,119 2,661 275 272
Due after 10 years 10,343 11,547 2,502 2,348
U.S. mortgage-backed
securities 78 78 109 106
-------- -------- -------- --------
Total fixed-maturity
securities available
for sale $ 15,491 $ 17,617 $ 3,405 $ 3,242
======== ======== ======== ========
Held to maturity:
Due in one year or less $ 20 $ 20 $ - $ -
Due after one year through
five years 365 366 - -
Due after five years through
10 years 850 869 - -
Due after 10 years 3,154 3,025 - -
-------- -------- -------- --------
Total fixed-maturity
securities held
to maturity $ 4,389 $ 4,280 $ - $ -
======== ======== ======== ========
Expected maturities may differ from contractual maturities because some
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
EXH 13-47
In recent years, AFLAC Japan has purchased subordinated perpetual
debenture securities issued primarily by European and Japanese banks. These
securities are subordinated to other debt obligations of the issuer, but rank
higher than equity securities. Although these securities have no contractual
maturity, the issue-date fixed-rate interest coupons subsequently increase to
a market-interest rate plus 150 to 300 basis points and change to a variable-
interest rate basis, generally by the 25th year after issuance, creating an
economic maturity date. The economic maturities of the perpetual debentures
owned at December 31, 1999, were as follows:
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
--------- --------- --------- ---------
Available for sale:
Due after five years
through 10 years $ 183 $ 187 $ 81 $ 79
Due after 15 years 2,228 1,691 72 67
------- ------- ------- -------
Total perpetual
debentures available
for sale $ 2,411 $ 1,878 $ 153 $ 146
======= ======= ======= =======
Held to maturity:
Due after one year
through five years $ 173 $ 177 $ - $ -
Due after five years
through 10 years 762 729 - -
Due after 10 years
through 15 years 1,136 1,131 - -
Due after 15 years 1,832 1,695 - -
------- ------- ------- -------
Total perpetual
debentures held
to maturity $ 3,903 $ 3,732 $ - $ -
======= ======= ======= =======
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable yen-denominated long-duration securities. At December 31, 1999,
the average duration of policy liabilities was approximately 12 years,
compared with 13 years in 1998. The average duration of the yen-denominated
debt securities was approximately nine years in 1999 and 1998. Currently,
when our debt securities mature, the proceeds are reinvested at a yield below
that of the interest required for the accretion of policy benefit liabilities
on policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent years.
Since 1994, premium rates on new policies issued in Japan have been increased
several times to help offset the lower investment yields available. Over the
next five years, $3.4 billion at amortized cost (with an average yield of
6.04%) of AFLAC Japan's yen-denominated debt securities are scheduled to
mature.
EXH 13-48
Realized and unrealized gains and losses from investments for the years
ended December 31 were as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Realized gains (losses) on sale
or redemption of securities:
Debt securities:
Available for sale:
Gross gains from sales $ 12 $ 16 $ 24
Gross losses from sales (39) (35) (32)
Net gains from redemptions (8) 1 -
Held to maturity:
Gross gains from redemptions 1 - -
------ ------ ------
(34) (18) (8)
Equity securities:
Gross gains from sales 27 20 16
Gross losses from sales (6) (5) (12)
Other long-term assets, net - 1 (1)
------ ------ ------
Net realized gains (losses) $ (13) $ (2) $ (5)
====== ====== ======
Changes in unrealized gains (losses):
Debt securities:
Available for sale $ (447) $ (377) $ 930
Held to maturity 34 154 -
Equity securities 2 10 16
------ ------ ------
Net unrealized gains (losses) $ (411) $ (213) $ 946
====== ====== ======
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at December 31 was:
(In millions) 1999 1998
-------- --------
Unrealized gains on securities available
for sale $ 1,501 $ 1,946
Unamortized unrealized gains on securities
transferred in 1998 to held to maturity 1,258 1,224
Less:
Policy liabilities 840 885
Deferred income taxes 887 953
-------- --------
Shareholders' equity, net unrealized gains
on investment securities $ 1,032 $ 1,332
======== ========
EXH 13-49
The following debt securities individually exceeded 10% of shareholders'
equity at December 31:
1999 1998
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $ 6,403 $ 8,368 $ 5,675 $ 7,157
The Tokyo Electric Power Co., Inc. 898 1,057 811 927
Chubu Electric Power Co., Inc. 695 764 698 714
Dai-Ichi Kangyo Bank 512 522 454 420
Sumitomo Bank 452 462 404 348
The Israel Electric Corporation
Limited 429 371 * *
Credit Suisse First Boston 427 398 393 394
Province of Quebec 394 407 * *
Deutsche Bank 387 313 * *
*Less than 10%
AFLAC Japan's investments in Japanese government bonds (at amortized
cost) constituted 22.2% and 23.9% of total debt securities at December 31,
1999 and 1998, respectively. Private placement investments held by AFLAC
Japan at amortized cost accounted for 45.8% and 41.2% of total debt securities
at December 31, 1999 and 1998, respectively. Most of the securities
classified as held to maturity and perpetual debentures classified as
available for sale constitute private placement investments.
At December 31, 1999, we owned debt securities rated below investment
grade (`BB') in the amount of $530 million at amortized cost ($541 million at
fair value), or 1.8% of total debt securities. These securities were issued
by two Japanese banks that had credit rating downgrades following our purchase
of the securities. Subsequent to December 31, 1999, these two banks were
upgraded to `BBB.' However, another corporate issue with an amortized cost of
$210 million was downgraded to `BB.'
The components of net investment income for the years ended December 31
were as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Fixed-maturity securities $ 1,129 $ 985 $ 942
Perpetual debentures 248 158 134
Short-term investments and
cash equivalents 7 8 15
Equity securities and other 2 3 4
------- ------- -------
Gross investment income 1,386 1,154 1,095
Less investment expenses 17 16 17
------- ------- -------
Net investment income $ 1,369 $ 1,138 $ 1,078
======= ======= =======
EXH 13-50
At December 31, 1999, debt securities with a fair value of $13 million
were on deposit with regulatory authorities. As of December 31, 1999, $64
million, at fair value, of AFLAC Japan's investment securities had been
pledged to Japan's policyholder protection fund. The Company retains
ownership of all securities on deposit and receives the related investment
income.
(4) FINANCIAL INSTRUMENTS
NONDERIVATIVES: The carrying amounts for cash and cash equivalents,
receivables, accrued investment income, accounts payable and payables for
security transactions approximated their fair values due to the short-term
nature of these instruments. Consequently, such instruments are not included
in the table presented in this note.
The methods of determining the fair values of our investments in debt and
equity securities are described in Note 3. The fair values for notes payable
with fixed interest rates were estimated using discounted cash flow analyses
based on current rates for similar loans and borrowings.
We lend fixed-maturity securities to financial institutions in short-term
security lending transactions. These securities continue to be carried as
investment assets on our balance sheet during the term of the loans and are
not recorded as sales. We receive cash or other securities as collateral for
such loans. These short-term security lending arrangements increase
investment income with minimal risk. At December 31, 1999 and 1998, we had
security loans outstanding in the amounts of $2.4 billion and $3.0 billion at
fair value, respectively. At December 31, 1999 and 1998, we held Japanese
government bonds as collateral for loaned securities in the amounts of $2.4
billion and $3.1 billion, at fair value. See Note 1 for a description of our
accounting policies for loaned securities.
Our security lending policy requires that the fair value of the
securities received as collateral and cash received as collateral be 102% and
100% or more, respectively, of the fair value of the loaned securities as of
the date the securities are loaned and not less than 100% thereafter.
DERIVATIVES: We have only limited activity with derivative financial
instruments and do not use them for trading purposes nor engage in leveraged
derivative transactions. See Note 1 for a description of our accounting
policies for derivative financial instruments. See Note 2 for additional
information on our yen-denominated net assets.
We have cross currency swaps outstanding related to our $450 million
senior notes. These cross currency swaps had the effect of converting the
dollar-denominated principal and interest into yen-denominated obligations.
The notional amount and terms of the swaps match the principal amount and
terms of the senior notes. These swaps have been designated as a hedge of our
net investment in AFLAC Japan.
We have outstanding interest rate swaps on 34.3 billion yen ($336
million) of our variable-interest-rate yen-denominated borrowings (Note 6).
These swaps reduce the impact of changes in interest rates on our borrowing
costs and effectively change our interest rate from variable to fixed. The
interest rate swaps have notional principal amounts that equal the anticipated
unpaid principal amounts on a portion of these loans. Under these agreements,
EXH 13-51
we make fixed-rate payments at 2.29% on one loan and 1.24% on another loan and
receive floating-rate payments (.21% at December 31, 1999, plus loan costs of
25 or 20 basis points, respectively) based on the three-month Tokyo Interbank
Offered Rate.
The fair value of the currency and the interest rate swaps is the
estimated amount that we would receive or pay to terminate the swap agreements
at the reporting date. We are exposed to credit risk in the event of
nonperformance by counterparties to these contracts. The counterparties are
U.S. and Japanese financial institutions with the following credit ratings as
of December 31, 1999.
Counterparty Notional Amount
Credit Rating (In millions)
------------------- ---------------------
AA $ 124
A 536
BBB 223
-------
Total $ 883
=======
The carrying values and estimated fair values of the Company's financial
instruments as of December 31 were as follows:
1999 1998
------------------------ -----------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $ 25,248 $ 25,139 $ 21,564 $ 21,308
Perpetual debentures 5,927 5,756 4,860 4,497
Equity securities 215 215 177 177
Securities held as
collateral for
loaned securities * 2,398 * 3,101
Liabilities:
Notes payable (excluding
capitalized leases) 1,000 962 578 578
Derivatives:
Cross currency swaps 91 108 - -
Interest rate swaps * 7 * 7
Payables for return of
collateral on loaned
securities * 2,398 * 3,101
* Off-balance sheet financial instrument
The above table excludes our liabilities for future policy benefits as
these liabilities are not considered financial instruments.
EXH 13-52
(5) POLICY LIABILITIES
The liability for future policy benefits at December 31 consisted of the
following:
Liability Amounts Interest Rates
------------------- -------------------
Policy Year
Issue of In 20
(In millions) Year 1999 1998 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Japan: 1999 $ 29 $ - 3.0% 3.0%
1997-99 993 409 3.5 3.5
1995-96 159 111 4.0 4.0
1994-96 2,383 1,763 4.5 4.5
1990-94 11,459 9,392 5.5 5.5
1988-91 841 711 5.25 5.25
1987-88 1,462 1,238 5.5 5.5
1985-86 1,231 1,051 6.75 5.5
1978-84 3,024 2,757 6.5 5.5
1974-79 934 698 7.0 5.0
U.S.: 1998-99 107 32 7.0 7.0
1988-99 730 673 8.0 6.0
1986-99 597 542 6.0 6.0
1981-86 280 258 7.0 5.5
Other 150 182
Life insurance
and annuities:
Japan: 1999 7 - 3.0 3.0
1997-99 235 114 3.5 3.5
1994-96 544 373 4.0 4.0
1988-93 842 652 5.25 5.25
1987-88 173 136 5.5 5.5
1985-87 253 210 5.65 5.65
U.S.: 1956-99 37 31 4.0-6.0 4.0-6.0
Adjustment for
unrealized gains on
investments (Note 3) 840 885
------ ------
Total $27,310 $22,218
====== ======
The weighted-average interest rates reflected in the Consolidated
Statements of Earnings for future policy benefits for Japanese policies were
5.3% in 1999, 5.4% in 1998, and 5.5% in 1997; and for U.S. policies, 6.4% for
each year in the three-year period ended December 31, 1999.
EXH 13-53
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In millions) 1999 1998 1997
-------- -------- --------
Unpaid supplemental health claims -
beginning of year $ 1,222 $ 987 $ 1,025
------- ------- -------
Add claims incurred during the year
related to:
Current year 3,081 2,460 2,346
Prior years (212) (136) (159)
------- ------- -------
Total incurred 2,869 2,324 2,187
------- ------- -------
Less claims paid during the year:
On claims incurred during
current year 1,969 1,579 1,507
On claims incurred during
prior years 709 617 626
------- ------- -------
Total paid 2,678 2,196 2,133
------- ------- -------
Effect of foreign exchange rate
changes on unpaid claims 145 107 (92)
------- ------- -------
Unpaid supplemental health claims -
end of year 1,558 1,222 987
Unpaid life claims - end of year 60 41 24
------- ------- -------
Total liability for
unpaid policy claims $ 1,618 $ 1,263 $ 1,011
======= ======= =======
Amounts shown for prior-year claims incurred during the year primarily
result from actual claim settlements at less than the original estimates,
which included a provision for adverse deviation.
EXH 13-54
(6) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In millions) 1999 1998
-------- --------
1.67% yen-denominated senior notes due April 2009 $ 541 $ -
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 222 294
Variable interest rate (.55% at December 31, 1999) 31 35
Revolving credit agreement due November 2002:
1.24% fixed interest rate 114 134
Variable interest rate (.50% at December 31, 1999) 138 115
.50% short term 45 -
Obligations under capitalized leases, due
monthly through 2004, secured by computer
equipment in Japan 20 18
------- -------
Total notes payable $ 1,111 $ 596
======= =======
In April 1999, we issued $450 million of senior notes with a 6.50%
coupon, payable semiannually, due April 15, 2009. The notes are redeemable at
our option at any time with a redemption price equal to the principal amount
of the notes being redeemed plus a make-whole amount. We have entered into
cross currency swaps that have the effect of converting the dollar-denominated
principal and interest into yen-denominated obligations. At December 31,
1999, the outstanding principal was 55.6 billion yen ($543 million using the
December 31, 1999 exchange rate), less loan discount of $2 million, for a net
payable of $541 million at an interest rate of 1.67%.
We have a reducing, revolving credit agreement that provides for bank
borrowings through July 2001 in either U.S. dollars or Japanese yen. The
current borrowing limit is $250 million. Under the terms of the agreement,
the borrowing limit will reduce to $125 million on July 15, 2000. At December
31, 1999, 22.7 billion yen ($222 million) was outstanding at a fixed interest
rate and 3.2 billion yen ($31 million) was outstanding at a variable interest
rate under this agreement.
We also have an unsecured revolving credit agreement that provides for
bank borrowings through November 2002 with a borrowing limit of $250 million,
payable in either U.S. dollars or Japanese yen. At December 31, 1999, 11.6
billion yen ($114 million) was outstanding at a fixed interest rate and 14.2
billion yen ($138 million) was outstanding at a variable interest rate under
this agreement.
Since these loans are denominated in yen, the principal amount of the
loans as stated in dollar terms at any date will fluctuate due to changes in
the yen/dollar exchange rate.
Interest rate swaps related to the 2.29% and 1.24% (fixed rates after
swaps) loans are described in Note 4.
EXH 13-55
The aggregate contractual maturities of notes payable during each of the
years after December 31, 1999, are: 2000, $180 million; 2001, $131 million;
2002, $256 million; 2003, $2 million; 2004, $1 million; and 2009, $541
million.
We were in compliance with all of the covenants of the credit agreements
at December 31, 1999.
(7) INCOME TAXES
The components of income tax expense (benefit) applicable to pretax
earnings for the years ended December 31 were as follows:
(In millions) Japan U.S. Total
------- ------- -------
1999:
Current $ 211 $ 19 $ 230
Deferred - operations (1) 45 44
Deferred tax benefit from
Japanese tax rate reduction (185) 118 (67)
------- ------- -------
Total $ 25 $ 182 $ 207
======= ======= =======
1998:
Current $ 252 $ 25 $ 277
Deferred - operations (88) (4) (92)
Deferred tax benefit from
Japanese tax rate reduction (121) - (121)
------- ------- -------
Total $ 43 $ 21 $ 64
======= ======= =======
1997:
Current $ 203 $ 89 $ 292
Deferred - operations (6) (6) (12)
------- ------- -------
Total $ 197 $ 83 $ 280
======= ======= =======
EXH 13-56
Income tax expense in the accompanying consolidated financial statements
varies from the amount computed by applying the expected U.S. tax rate of 35%
to pretax earnings. The principal reasons for the differences and the related
tax effects for the years ended December 31 are summarized as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Income taxes based on U.S.
statutory rates $ 272 $ 193 $ 303
Deferred tax benefit from Japanese
tax rate reductions (67) (121) -
U.S. alternative minimum tax - 12 50
Utilization of foreign tax credit
carryforwards (20) (47) (91)
Non-insurance losses generating
no current tax benefit 3 9 -
Other, net 19 18 18
------ ------ ------
Income tax expense $ 207 $ 64 $ 280
====== ====== ======
Income taxes are recorded in the Statements of Earnings and directly in
certain shareholders' equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Statements of Earnings $ 207 $ 64 $ 280
------ ------ ------
Other comprehensive income:
Change in unrealized foreign currency
translation gains (141) (29) -
Unrealized gains on investment securities:
Unrealized holding gains (losses)
arising during the year (75) 125 688
Reclassification adjustment
for realized (gains) losses
included in net earnings 9 2 4
------ ------ ------
Total income taxes allocated to
other comprehensive income (207) 98 692
------ ------ ------
Additional paid-in capital(exercise
of stock options) (2) (1) (1)
------ ------ ------
Total income taxes $ (2) $ 161 $ 971
====== ====== ======
In March 1998, the Japanese government reduced the corporate income tax
rate, which lowered AFLAC Japan's rate from 45.3% to 41.7%. The tax rate was
again reduced in March 1999, from 41.7% to 36.2%. These tax rate reductions
decreased our consolidated liability for deferred income taxes. The
reductions were the net effect of applying the new tax rates to the temporary
differences that exist between the Japanese tax basis and financial reporting
basis of assets and liabilities, and the limitations imposed by the U.S.
foreign tax credit provisions.
EXH 13-57
The reduction of the consolidated deferred income tax liability from the
1999 tax rate reduction increased net earnings in the first quarter of 1999 by
$67 million ($.25 per basic share, $.24 per diluted share). The 1998 tax rate
reduction reduced the deferred income tax liability in the first quarter of
1998 by $121 million ($.45 per basic share, $.44 per diluted share).
The 1999 reduction in the Japanese corporate income tax rate did not
significantly change our combined U.S./Japan effective tax rate due to the
operation of the U.S. foreign tax credit provisions.
Effective January 1, 1998, the Japanese government changed the income tax
provisions for foreign companies operating in Japan, increasing income taxes
on investment income and realized gains/losses from securities issued by
entities located in their home country. This change impacted income tax
expense applicable to comprehensive income beginning in 1998. Deferred income
tax of $129 million on unrealized gains/losses for 1998 on debt securities
includes $59 million related to accumulated unrealized gains existing as of
January 1, 1998, the effective date of the tax law change. Also, deferred
income tax benefits on changes in unrealized foreign currency translation
gains includes $80 million in 1999 and $29 million in 1998 that represent
Japanese income taxes on currency translation losses in 1998 that arise for
Japanese tax purposes from conversion of AFLAC Japan's dollar-denominated
investments into yen. This tax benefit for 1998 is net of a deferred income
tax expense in 1998 of $51 million for similar accumulated currency
translation gains existing as of January 1, 1998.
EXH 13-58
The income tax effects of the temporary differences that give rise to
deferred income tax assets and liabilities as of December 31 were as follows:
(In millions) 1999 1998
-------- --------
Deferred income tax liabilities:
Deferred acquisition costs $ 1,204 $ 1,023
Unrealized gains on investment securities 415 461
Other basis differences in investment
securities 725 792
Premiums receivable 79 67
------ ------
Total deferred income tax liabilities 2,423 2,343
------ ------
Deferred income tax assets:
Difference in tax basis of investment in
AFLAC Japan 227 61
Unrealized exchange loss on yen-denominated
notes payable 58 -
Policy benefit reserves 405 440
Policyholder protection fund 67 49
Unfunded retirement benefits 71 71
Other accrued expenses 80 33
Tax credit carryforwards 96 10
Other 211 223
------ ------
Total gross deferred tax assets 1,215 887
Less valuation allowance 157 89
------ ------
Total deferred income tax assets 1,058 798
------ ------
Net deferred income tax liability 1,365 1,545
Current income tax liability 146 320
------ ------
Total income tax liability $ 1,511 $ 1,865
====== ======
A valuation allowance is provided when it is more likely than not that
deferred tax assets will not be realized. We have established valuation
allowances primarily for foreign tax credit and non-insurance loss
carryforwards that exceed projected future offsets. Under U.S. income tax
rules, only 35% of non-insurance losses can be offset against life insurance
taxable income each year. During 1999, the valuation allowance for deferred
tax assets increased by $68 million (decreased by $44 million in 1998) due to
changes in carryforwards of foreign tax credits, alternative minimum tax
credits and non-insurance losses. For current U.S. income tax purposes,
foreign tax credit carryforwards of $46 million and alternative minimum tax
credits of $50 million were available at December 31, 1999. The foreign tax
credit carryforwards expire in 2004.
EXH 13-59
(8) SHAREHOLDERS' EQUITY
The following is a reconciliation of the number of shares of the
Company's common stock for the years ended December 31:
(In thousands of shares) 1999 1998 1997
-------- -------- --------
Common stock - issued:
Balance at beginning of year 317,971 316,380 314,478
Exercise of stock options 2,378 1,591 1,902
-------- -------- --------
Balance at end of year 320,349 317,971 316,380
-------- -------- --------
Treasury stock:
Balance at beginning of year 52,287 49,944 38,708
Purchases of treasury stock:
Open market 4,316 3,806 12,737
Other 188 212 390
Shares issued to sales associates
stock bonus plan and AFL
Stock Plan (832) (1,218) (1,526)
Exercise of stock options (1,351) (457) (365)
-------- -------- --------
Balance at end of year 54,608 52,287 49,944
-------- -------- --------
Shares outstanding at end of year 265,741 265,684 266,436
======== ======== ========
In February 1994, the board of directors authorized a share repurchase
program. As of December 31, 1999, approximately three million shares were
available for purchase under current authorizations.
STOCK OPTIONS: The Company's stock option plan allows grants for both
incentive stock options (ISO) and non-qualifying stock options (NQSO) to
employees and NQSO to members of the board of directors. The option period
runs for a maximum of 10 years. The exercise price must be equal to 100% of
the fair market value at the date of grant; therefore, no compensation expense
is recognized. The options are exercisable immediately unless they are placed
under a vesting schedule that is determined by the compensation committee of
the board of directors at the time of the grant. At December 31, 1999, 9.4
million shares were available for future grants.
EXH 13-60
The following table summarizes stock option activity:
Weighted-Average
Option Exercise Price
(In thousands of shares) Shares per Share
---------- ----------------
Outstanding at December 31, 1996 17,602 $ 9.43
Granted in 1997 1,451 26.73
Canceled in 1997 (40) 15.44
Exercised in 1997 (2,542) 5.78
-------
Outstanding at December 31, 1997 16,471 11.50
Granted in 1998 1,953 30.18
Canceled in 1998 (31) 23.74
Exercised in 1998 (2,148) 6.92
-------
Outstanding at December 31, 1998 16,245 14.33
Granted in 1999 1,244 46.78
Canceled in 1999 (75) 31.37
Exercised in 1999 (3,833) 9.33
-------
Outstanding at December 31, 1999 13,581 $ 18.61
=======
(In thousands of shares) 1999 1998 1997
---------- ---------- ----------
Shares exercisable at
end of year 11,084 12,946 13,256
======= ======= =======
The following table summarizes information about stock options
outstanding at December 31, 1999:
(In thousands Options Outstanding Options Exercisable
of shares) ----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs) Price Exercisable Price
- --------------- ----------- ------------ ---------- ----------- ----------
$ 2.00 - $ 8.07 1,494 1.2 $ 4.56 1,494 $ 4.56
9.42 3,629 3.4 9.42 3,629 9.42
9.60 - 14.10 1,104 4.9 12.75 1,104 12.75
15.83 2,080 6.1 15.83 2,080 15.83
16.97 - 26.63 1,934 7.2 22.94 1,934 22.94
27.31 - 30.09 2,059 8.4 29.74 683 29.42
30.44 - 54.31 1,281 9.7 46.14 160 43.06
------ ------
$ 2.00 - $54.31 13,581 5.6 $ 18.61 11,084 $ 14.37
====== ======
EXH 13-61
As permitted by Statement of Financial Accounting Standard No. 123, we do
not recognize compensation cost in the Consolidated Statements of Earnings for
employee stock options. Had compensation cost for stock options granted after
1994 been determined using the alternative fair-value-based method, the effect
on our net earnings and net earnings per share would approximate the following
pro forma amounts:
1999 1998 1997
-------- -------- --------
Decrease to:
Net earnings (in millions) $ 14 $ 13 $ 12
Net earnings per share - basic .05 .05 .04
Net earnings per share - diluted .05 .05 .04
For the above pro forma information, the fair value of each option
granted after 1994 was estimated on the date of grant using the Black-Scholes
multiple option approach with the following assumptions for options granted
during the three-year period ended December 31, 1999:
1999 1998 1997
--------- --------- ---------
Expected life from vesting
date (years) 3.7-4.7 3.5-4.4 3.4-6.1
Dividend yield .6% .6% 1.0%
Expected volatility 30.3% 27.3% 20.2%
Risk-free interest rate 6.0% 5.5% 6.0%
These fair value amounts were then amortized over the vesting periods of
the related options.
The pro forma information presented above is not indicative of future
amounts. The provisions of SFAS No. 123 were applicable prospectively, and
the above pro forma disclosures therefore do not include amortization of the
fair value of awards prior to 1995. Also, we expect that additional options
will be granted in future years.
VOTING RIGHTS: In accordance with the Parent Company's Articles of
Incorporation, shares of common stock are generally entitled to one vote per
share until they have been held by the same beneficial owner for a continuous
period of 48 months, at which time they become entitled to 10 votes per share.
(9) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Net assets of the insurance subsidiaries aggregated $4.9 billion at
December 31, 1999, on a GAAP basis. AFLAC Japan accounted for $3.1 billion,
or 64.0%, of these net assets.
Our insurance subsidiaries are required to report their results of
operations and financial position to state insurance regulatory authorities,
and in the case of AFLAC Japan, to the Japanese Financial Supervisory Agency,
on the basis of statutory accounting practices prescribed or permitted by such
authorities. As determined on a U.S. statutory accounting basis, AFLAC's net
income was $344 million in 1999, $231 million in 1998 and $335 million in
1997, and capital and surplus was $1.6 billion at both December 31, 1999 and
1998. The sale of our television business generated $231 million of statutory
net income in 1997.
EXH 13-62
Reconciliations of AFLAC's net assets on a GAAP basis to net assets
determined on a U.S. statutory accounting basis as of December 31 were as
follows:
(In millions) 1999 1998
-------- --------
Net assets on GAAP basis $ 4,874 $ 4,591
Adjustment of debt securities from fair value
to amortized cost (2,691) (3,094)
Elimination of deferred policy acquisition costs (3,677) (3,059)
Adjustment to policy liabilities 1,801 1,788
Elimination of deferred income taxes 1,463 1,578
Reduction in premiums receivable (106) (77)
Establishment of asset valuation reserve (175) (147)
Elimination of statutory non-admitted assets (130) (110)
Difference in accrued expenses 260 139
Other, net (13) 39
------- -------
Net assets on U.S. statutory
accounting basis $ 1,606 $ 1,648
======= =======
The Parent Company depends on its subsidiaries for cash flow, primarily
in the form of dividends and management fees. Consolidated retained earnings
in the accompanying financial statements largely represent undistributed
earnings of our insurance subsidiary. Dividends, management fees (see Note 2)
and other payments to the Parent Company by its insurance subsidiary are
subject to various regulatory restrictions and approvals related to
safeguarding the interests of insurance policyholders. One of the primary
considerations is that our insurance subsidiary must maintain adequate risk-
based capital for the U.S. regulatory authorities and adequate solvency
margins for Japanese regulatory authorities. Also, the maximum amount of
dividends that can be paid to shareholders by insurance companies domiciled in
the State of Georgia without prior approval of the Commissioner of Insurance
is the greater of the net gain from operations for the previous year
determined under statutory accounting principles or 10% of statutory equity as
of the previous year-end. Dividend payments by AFLAC during 2000 in excess of
$333 million would require such approval. Dividends paid by AFLAC during 1999
were $162 million.
A portion of AFLAC Japan annual earnings, as determined on a Japanese
statutory accounting basis, can be remitted each year to AFLAC U.S. after
complying with solvency margin provisions and satisfying various conditions
imposed by Japanese regulatory authorities for protecting policyholders.
Profit remittances to the United States can fluctuate due to changes in the
amounts of Japanese regulatory earnings. Among other items, factors affecting
regulatory earnings include Japanese regulatory accounting practices and
fluctuations in currency translations of AFLAC Japan's dollar-denominated
investments into yen. Earnings were remitted from AFLAC Japan to AFLAC U.S.
in the amount of $243 million in 1999, $154 million in 1998 and $347 million
in 1997.
Net assets (unaudited) of AFLAC Japan, based on Japanese statutory
accounting practices, aggregated $638 million and $397 million at December 31,
1999 and 1998, respectively. Japanese statutory accounting practices differ
in many respects from U.S. GAAP. Under Japanese statutory accounting
EXH 13-63
practices, policy acquisition costs are charged off immediately, policy
benefit and claim reserving methods are different, policyholder protection
fund obligations are not accrued, deferred income tax liabilities are
recognized on a different basis, and investment securities are carried at cost
less certain market value adjustments for foreign exchange losses on dollar-
denominated securities. Accounting standards for financial instruments are in
the process of being revised in Japan.
(10) BENEFIT PLANS
Reconciliations of the funded status of the basic employee defined
benefit pension plans with amounts recognized in the accompanying consolidated
balance sheets as of December 31 were as follows:
1999 1998
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Projected benefit obligation:
Benefit obligation at
beginning of year $49,063 $60,420 $25,627 $50,465
Service cost 4,675 2,938 2,940 2,362
Interest cost 1,658 4,311 1,018 3,491
Actuarial loss (gain) (2,498) (5,799) 9,393 5,559
Benefits paid (554) (1,376) (440) (1,457)
Effect of foreign exchange
rate changes 370 - 10,525 -
Plan amendments - 1,864 - -
Benefit obligations assumed
from government plan 21,472 - - -
------ ------ ------ ------
Benefit obligation at
end of year 74,186 62,358 49,063 60,420
------ ------ ------ ------
Plan assets:
Fair value of plan assets at
beginning of year 26,486 48,541 18,547 45,530
Actual return on plan assets 727 9,260 465 2,878
Employer contribution 5,429 - 2,260 1,590
Benefits paid (554) (1,376) (440) (1,457)
Effect of foreign exchange
rate changes 632 - 5,654 -
Assets transferred from
government plan 17,110 - - -
------ ------ ------ ------
Fair value of plan assets at
end of year 49,830 56,425 26,486 48,541
------ ------ ------ ------
Funded status (24,356) (5,933) (22,577) (11,879)
Unrecognized net actuarial
loss (gain) 8,755 (703) 14,548 10,308
Unrecognized transition
obligation (asset) 4,578 (718) 567 (840)
Unrecognized prior service cost 1,013 1,890 1,098 165
------ ------ ------ ------
(Accrued) prepaid benefit cost $(10,010) $(5,464) $(6,364) $(2,246)
====== ====== ====== ======
EXH 13-64
In 1999 we transferred most of the assets of the AFLAC Japan employee
retirement plan from an insured arrangement to a trust managing a portfolio of
investment securities. In 1999, we also assumed a pension benefit program
together with the related assets for AFLAC Japan employees that was previously
administered by the Japanese government.
The components of retirement expense and actuarial assumptions for the
years ended December 31 are as follows:
1999 1998 1997
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Components of net periodic
benefit cost:
Service cost $4,675 $2,938 $2,940 $2,362 $2,224 $2,450
Interest cost 1,658 4,311 1,018 3,491 982 3,132
Expected return on plan
assets (1,516) (4,313) (451) (4,086) (429) (3,366)
Recognized net actuarial
loss 363 265 218 - - 405
Amortization of transition
obligation (asset) 258 (122) 77 (122) 83 (122)
Amortization of prior
service cost 77 138 67 16 72 (26)
Net curtailment gain - - - - - (377)
----- ----- ----- ----- ----- -----
Net periodic benefit cost $5,515 $3,217 $3,869 $1,661 $2,932 $2,096
===== ===== ===== ===== ===== =====
Weighted-average actuarial
assumptions as of fiscal
year-end:
Discount rate-net periodic
benefit cost 3.0% 6.5% 3.0% 7.0% 4.0% 7.0%
Discount rate-benefit
obligations 3.0 7.0 3.0 6.5 4.0 7.0
Expected return on plan
assets 4.5 9.0 2.5 9.0 2.5 9.0
Rate of compensation
increase 3.5 4.0 3.5 4.0 3.5 4.0
In addition to the benefit obligations for funded employee plans, we also
maintain unfunded supplemental retirement plans for certain officers and
beneficiaries. The expense recognized for these plans was $39 million in
1999, $30 million in 1998 and $35 million in 1997. The accrued retirement
liability for the unfunded supplemental retirement plans at December 31, 1999
and 1998, was $260 million and $223 million, respectively. The actuarial
present value of projected benefit obligations was $260 million and $236
million at December 31, 1999 and 1998, respectively. The discount rates used
were the same as for the funded plans. Such supplemental retirement plans
include a lifetime obligation to the surviving spouse of the Company's former
chairman of the board. Benefits are payable at .5% of the Company's pretax
earnings, as defined in the agreement, for the previous year.
EXH 13-65
Reconciliation of the benefit obligation of the unfunded retiree medical
program and other postretirement benefits for U.S. employees with amounts
recognized in the accompanying consolidated balance sheets as of December 31
were as follows:
(In thousands) 1999 1998
-------- --------
Benefit obligation:
Benefit obligation at beginning of year $ 10,822 $ 10,062
Service cost 361 320
Interest cost 752 684
Actuarial loss 503 95
Plan amendments 393 -
Benefits paid (343) (339)
------- -------
Unfunded benefit obligation at end of year 12,488 10,822
Unrecognized net actuarial gain 530 1,032
Unrecognized prior service cost (368) -
------- -------
Accrued benefit cost $ 12,650 $ 11,854
======= =======
The components of expenses for the retiree medical program and actuarial
assumptions are as follows:
(In thousands) 1999 1998 1997
-------- -------- --------
Service cost $ 361 $ 320 $ 313
Interest cost 752 684 674
Recognized net actuarial loss (gain) - (30) (34)
Amortization of prior service cost 26 - -
------- ------- -------
Net periodic benefit cost $ 1,139 $ 974 $ 953
======= ======= =======
Discount rate:
Net periodic cost 6.5% 7.0% 7.0%
Benefit obligations 7.0 6.5 7.0
Effect of 1-percentage point increase
in health care cost trend rate:
On total of service and interest
cost components $ 119 $ 102 $ 93
On postretirement benefit obligation 991 791 704
Effect of 1-percentage point decrease
in health care cost trend rate:
On total of service and interest
cost components (101) (97) (80)
On postretirement benefit obligation (846) (743) (650)
The projected health care cost trend rate used in 1999 was 9%, graded to
7% over four years.
STOCK BONUS PLAN: AFLAC U.S. maintains a stock bonus plan for eligible
U.S. sales associates. Plan participants are awarded rights on a monthly
basis to shares of AFLAC Incorporated common stock, based on their sales of
EXH 13-66
insurance policies. The cost of these awards, which are included in deferred
policy acquisition costs, amounted to $18 million in 1999, and $10 million in
both 1998 and 1997. Prior to July 1999, participants received the shares of
stock after satisfying various vesting requirements and other conditions.
This stock bonus program was revised effective July 1, 1999, to substantially
eliminate the vesting requirements and to make various other modifications.
As a result of this change, plan participants became 100% vested in their
accumulated share rights under the original program and the related shares of
stock held in a trust were distributed. The market value of the distributed
shares was charged against a liability for accrued stock compensation and the
excess of market value over share cost ($42 million) was recognized as
additional paid-in capital.
(11) CONTINGENCIES
LITIGATION: We are a defendant in various litigation considered to be
in the normal course of business. Some of this litigation is pending in
Alabama, where large punitive damages bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other companies,
including insurers, in recent years. Although the final results of any
litigation cannot be predicted with certainty, we believe the outcome of
pending litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
EXH 13-67
(12) SUPPLEMENTARY INFORMATION
1999 1998 1997
-------- -------- --------
Weighted-average shares used in
calculating earnings per share
(in thousands):
Average outstanding shares used
for calculating basic EPS 265,869 266,305 272,110
Effect of stock options 9,554 9,567 9,486
-------- -------- --------
Average outstanding shares used
for calculating diluted EPS 275,423 275,872 281,596
======== ======== ========
- ----------------------------------------------------------------------------
Other:
Policy acquisition costs deferred
during the year (in millions) $ 556 $ 436 $ 408
Commission deferred as a
percentage of total acquisition
costs deferred 72% 69% 70%
Personnel compensation and
benefits as a percentage
of insurance expenses 40% 37% 35%
- ----------------------------------------------------------------------------
Supplemental disclosures of cash
flow information (in millions):
Income taxes paid $ 411 $ 210 $ 222
Interest paid 17 12 12
Non-cash financing activities:
Capital lease obligations 4 7 6
Treasury shares issued for:
Dividends to shareholders 5 4 4
Associate stock bonus plan 54 10 10
- ----------------------------------------------------------------------------
Property and equipment (in millions):
Land $ 147 $ 131 $ 111
Buildings 374 335 290
Equipment 156 159 147
-------- -------- --------
677 625 548
Less accumulated depreciation 168 159 146
-------- -------- --------
Net property and equipment $ 509 $ 466 $ 402
======== ======== ========
- ----------------------------------------------------------------------------
EXH 13-68
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements of
AFLAC Incorporated and subsidiaries. The statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon management's best estimates and judgments. Informed judgments
and estimates are used for those transactions not yet complete or for which
the ultimate effects cannot be measured precisely. Financial information
elsewhere in this annual report is consistent with the information in the
financial statements.
The Company's internal controls are designed to reasonably assure that
AFLAC Incorporated's books and records reflect the transactions of the
Company, that assets are safeguarded, and that the Company's established
policies and procedures are followed. The effectiveness of the controls
system is supported by the selection and training of qualified personnel, an
organizational structure that provides an appropriate division of
responsibility, and a comprehensive internal audit program.
The Company engages KPMG LLP as independent auditors to audit its
financial statements and express their opinion thereon. Their audits
include reviews and tests of the Company's internal controls to the extent
they believe necessary to determine the audit procedures to be performed
that will support their opinion. Members of that firm also have the right
of full access to each member of management in conducting their audits. The
report of KPMG LLP appears on the following page.
The audit committee of the board of directors, which is composed of
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The committee
meets periodically with representatives of management, as well as the
independent and internal auditors, to review matters of a material nature
related to financial reporting and the planning, results and recommendations
of audits. The independent and internal auditors have free access to the
audit committee, without management present, to discuss any matter they
believe should be brought to the attention of the committee. The committee
is also responsible for making recommendations to the board of directors
concerning the selection of the independent auditors.
/s/ Daniel P. Amos
- ---------------------------------------
Daniel P. Amos
President and Chief Executive Officer
/s/ Kriss Cloninger III
- ---------------------------------------
Kriss Cloninger III
Executive Vice President and Chief Financial Officer
EXH 13-69
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, shareholders' equity, cash
flows and comprehensive income for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AFLAC
Incorporated and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Atlanta, Georgia
January 27, 2000
EXH 13-70
Unaudited Consolidated Quarterly Financial Data
(In millions, except for per-share amounts)
Three Months ended, March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,048 16.5% $ 2,032 19.3% $ 2,196 29.2% $ 2,365 21.6%
Net earnings 196(1) 21.9 130 26.9 144 33.5 102(2) (12.2)
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .74(1) 23.3% $ .49 28.9% $ .54 35.0% $ .38(2) (13.6)%
Net earnings (diluted) .71(1) 22.4 .47 27.0 .52 33.3 .37(2) (11.9)
Cash dividends .065 .075 .075 .075
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,757 2.9% $ 1,704 (15.2)% $ 1,700 (5.0)% $ 1,944 11.4%
Net earnings 160(3) 77.9 103 (66.1) 108 12.0 116 21.0
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .60(3) 81.8% $ .38 (65.8)% $ .40 14.3% $ .44 22.2%
Net earnings (diluted) .58(3) 81.3 .37 (65.4) .39 14.7 .42 20.0
Cash dividends .058 .065 .065 .065
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in deferred tax liabilities from a
tax rate cut in Japan; (2) Includes a charge of $41 ($.15 per basic and diluted share) for a mandated policyholder protection
fund in Japan; (3) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in deferred tax
liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder
protection fund in Japan.
EXH 13-71
21