EXHIBIT 13
EXH 13
EXHIBIT 13
The following information is contained in the 2000 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 2000 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, 2000, are as follows:
Quarterly Common Stock Prices
2000 High Low Close
---------------------------------------------------------------------
4th Quarter $ 37.47 $ 29.19 $ 36.10
3rd Quarter 33.75 22.53 32.03
2nd Quarter 26.97 21.88 22.97
1st Quarter 23.57 16.78 22.78
1999 High Low Close
--------------------------------------------------------------------
4th Quarter $ 27.13 $ 20.94 $ 23.60
3rd Quarter 24.69 20.41 20.94
2nd Quarter 28.38 22.25 23.94
1st Quarter 27.25 19.50 27.22
1998 High Low Close
--------------------------------------------------------------------
4th Quarter $ 22.66 $ 12.75 $ 21.94
3rd Quarter 19.13 12.57 14.28
2nd Quarter 17.25 14.75 15.16
1st Quarter 16.81 11.35 15.82
Adjusted to reflect two-for-one stock split distributed on March 16, 2001.
EXH 13-1
ITEM 5. (b) Holders:
2000 1999 1998
- ---------------------------------------------------------------------------
Number of common
shares outstanding 529,209,956 531,481,632 531,368,068
Number of registered
common shareholders 67,995 69,899 62,525
Approximate number of
common shareholders 143,400 148,600 145,500
Share amounts have been adjusted to reflect the two-for-one stock split
distributed on March 16, 2001.
ITEM 5. (c) Quarterly cash dividends:
2000 1999
------ ------
4th Quarter $.043 $.038
3rd Quarter .043 .038
2nd Quarter .043 .038
1st Quarter .038 .033
Per-share amounts have been adjusted to reflect the two-for-one
stock split distributed on March 16, 2001.
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
13-65.
EXH 13-2
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except for share and per-share amounts)
AFLAC INCORPORATED AND SUBSIDIARIES
For the Year 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Revenues:
Premiums, principally supplemental
health insurance $ 8,239 $ 7,264 $ 5,943 $ 5,874 $ 5,910
Net investment income 1,550 1,369 1,138 1,078 1,022
Realized investment gains (losses) (102) (13) (2) (5) 2
Gain on sale of television business - - - 267 60
Other income 33 20 25 37 106
-------- -------- -------- -------- --------
Total revenues 9,720 8,640 7,104 7,251 7,100
-------- -------- -------- -------- --------
Benefits and expenses:
Benefits and claims 6,618 5,885 4,877 4,833 4,896
Expenses 2,090 1,977 1,676 1,553 1,554
-------- -------- -------- -------- --------
Total benefits and expenses 8,708 7,862 6,553 6,386 6,450
-------- -------- -------- -------- --------
Pretax earnings 1,012 778 551 865 650
Income taxes 325 207 64 280 256
-------- -------- -------- -------- --------
Net earnings $ 687(1) $ 571(2) $ 487(3) $ 585(4) $ 394(5)
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (basic) $ 1.30(1) $ 1.07(2) $ .91(3) $ 1.07(4) $ .70(5)
Net earnings (diluted) 1.26(1) 1.04(2) .88(3) 1.04(4) .68(5)
Cash dividends .167 .147 .128 .112 .097
Shareholders' equity 8.87 7.28 7.09 6.44 3.85
Price range: High 37.47 28.38 22.66 14.47 11.00
Low 16.78 19.50 11.35 9.38 7.07
Close 36.10 23.60 21.94 12.78 10.69
Price/earnings ratio:* High 31.2x 28.4x 29.1x 21.9x 18.3x
Low 14.0 19.5 14.6 14.2 11.8
Common shares used for basic EPS (In thousands) 530,607 531,737 532,609 544,220 560,704
Common shares used for diluted EPS (In thousands) 544,906 550,845 551,745 563,192 577,843
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
(In millions, except for share and per-share amounts)
AFLAC INCORPORATED AND SUBSIDIARIES
At Year-End 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Assets:
Investments and cash $ 32,167 $ 32,024 $ 26,994 $ 22,880 $ 20,744
Other 5,065 5,017 4,228 6,590 4,286
-------- -------- -------- -------- --------
Total assets $ 37,232 $ 37,041 $ 31,222 $ 29,470 $ 25,030
======== ======== ======== ======== ========
Liabilities and shareholders' equity:
Policy liabilities $ 28,566 $ 29,604 $ 24,034 $ 19,885 $ 20,234
Notes payable 1,079 1,018 596 523 354
Income taxes 1,894 1,511 1,865 1,827 1,181
Other liabilities 999 1,040 957 3,805 1,135
Shareholders' equity 4,694 3,868 3,770 3,430 2,126
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $ 37,232 $ 37,041 $ 31,222 $ 29,470 $ 25,030
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings** $ 657 $ 550 $ 429 $ 374 $ 347
Operating earnings per share (basic)** 1.24 1.03 .81 .69 .62
Operating earnings per share (diluted)** 1.20 1.00 .78 .66 .60
Pretax profit margin*** 10.3% 9.9% 9.3% 8.6% 8.4%
After-tax profit margin*** 6.7% 6.4% 6.0% 5.4% 4.9%
Operating return on equity**** 21.7% 20.9% 18.7% 18.8% 19.9%
Yen/dollar exchange rate at year-end (yen) 114.75 102.40 115.70 130.10 116.10
Average yen/dollar exchange rate (yen) 107.83 113.96 130.89 121.07 108.84
(1) Includes a benefit of $99 ($.19 per basic share, $.18 per diluted share) from the termination of a retirement liability;
(2) Includes gain of $67 ($.13 per basic share, $.12 per diluted share) due to a reduction in deferred tax liabilities from a
tax rate cut in Japan and a charge of $41 ($.08 per basic share, $.07 per diluted share) for the policyholder protection fund
in 1999 in Japan; (3) Includes gain of $121 ($.23 per basic share, $.22 per diluted share) due to a reduction in deferred
income tax liabilities from a tax rate cut in Japan and a charge of $65 ($.12 per basic and diluted share) for the
policyholder protection fund in Japan in 1998; (4) Includes gain of $211 ($.39 per basic share, $.38 per diluted share) from
the sale of the broadcast business in 1997; (5) Includes gain of $48 ($.09 per basic share, $.08 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 the gains from the sale of the television business in 1996 and 1997; excludes charges for the policyholder
protection fund and benefits of tax rate reductions in 1998 and 1999; excludes gain from release of retirement liability in
2000; (***) Operating basis; (****) Based on operating earnings and excluding unrealized gains on investment securities, net.
Share and per-share amounts have been adjusted to reflect the two-for-one stock split payable on March 16, 2001.
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
operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service
the two markets for our insurance business.
On February 13, 2001, the board of directors declared a two-for-one stock
split, effectively increasing the number of shares by 100%. All share and
per-share amounts have been restated for the split.
RESULTS OF OPERATIONS
Several significant nonoperating items affected earnings during the
three-year period ended December 31, 2000.
In the second quarter of 2000, the release of an accrued unfunded
liability for projected retirement payments increased pretax earnings by $101
million ($99 million after taxes, or $.19 per basic share and $.18 per diluted
share). (See Note 10 of the Notes to the Consolidated Financial Statements.)
During the second quarter of 2000, we sold one security reported as
available for sale at a pretax loss of $34 million. We also recorded a pretax
impairment loss of $57 million on another security, which was carried in the
held-to-maturity category. These losses are included in realized investment
gains and losses. The combined effect of these losses decreased net earnings
by $58 million ($.11 per basic and diluted share) for the year ended December
31, 2000.
In both 1998 and 1999, 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 $121 million ($.23 per basic share and $.22 per diluted
share). The deferred tax effect for the 1999 tax reduction was recognized in
the first quarter of 1999, increasing net earnings by $67 million ($.13 per
basic share and $.12 per diluted share).
Another factor affecting net earnings was the policyholder protection
system established by the Japanese government during the first quarter of
1998. The pretax charge for our obligation to the protection fund was $111
million ($65 million after taxes, or $.12 per basic and diluted share). In
1999, the Japanese government and the life insurance industry agreed to
legislation that increased 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 taxes, or $.08 per basic share and $.07 per diluted share). For further
information regarding the policyholder protection fund, see Note 2 of the
Notes to the Consolidated Financial Statements.
EXH 13-5
The results of operations by business segment, together with nonoperating
items, for the three-year period ended December 31, 2000, 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,
------------------ ---------------------
2000 1999 2000 1999 1998
------------------ ---------------------
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 18.6% 29.6% $ 771 $ 651 $ 502
AFLAC U.S. . . . . . . . . . . . . 13.3 11.4 290 256 230
Other business segments. . . . . . (6) (4) 2
----- ----- -----
Total business segments . . . . 16.8 23.2 1,055 903 734
Interest expense, noninsurance
operations . . . . . . . . . . . (9.3) (40.9) (16) (15) (10)
Corporate and eliminations . . . . 19.9 45.0 (26) (32) (60)
----- ----- -----
Pretax operating earnings. . . . 18.3 28.9 1,013 856 664
Income taxes . . . . . . . . . . . 16.4 30.4 356 306 235
----- ----- -----
Operating earnings . . . . . . . 19.4 28.1 657 550 429
Nonoperating items:
Realized investment gains
(losses), net of tax. . . . . . . (69) (5) 2
Release of retirement liability,
net of tax . . . . . . . . . . . 99 - -
Deferred income tax benefit from
Japanese tax rate reductions . . - 67 121
Provisions for the policyholder
protection fund, net of tax. . . - (41) (65)
----- ----- -----
Net earnings . . . . . . . . . . 20.3% 17.4% $ 687 $ 571 $ 487
==== ==== ===== ===== =====
Operating earnings per basic share . 20.4% 27.2% $ 1.24 $ 1.03 $ .81
Operating earnings per diluted share 20.0 28.2 1.20 1.00 .78
==== ==== ===== ===== =====
Net earnings per basic share . . . . 21.5% 17.6% $ 1.30 $ 1.07 $ .91
Net earnings per diluted share . . . 21.2 18.2 1.26 1.04 .88
==== ==== ===== ===== =====
Per-share amounts have been adjusted to reflect the two-for-one stock split
payable on March 16, 2001.
=============================================================================
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the gain from the
release of the retirement accrual in 2000, the deferred income tax benefits
from the Japanese income tax rate reductions, and the charges for the
policyholder protection fund. Operating earnings per share amounts referenced
in the following discussion are based on the diluted number of average
outstanding shares and reflect the two-for-one stock split payable on March
16, 2001.
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 by comparing our reported operating results with those that would
have been reported had foreign currency rates remained unchanged from the
previous year.
FOREIGN CURRENCY TRANSLATION EFFECT ON OPERATING RESULTS
(Years ended December 31)
Including Foreign Excluding Foreign
Currency Changes Currency Changes*
------------------------ ------------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------
Premium income 13.4% 22.2% 1.2% 8.5% 9.4% 7.7%
Net investment income 13.2 20.3 5.6 9.6 10.7 11.1
Operating revenues 13.5 21.8 1.7 8.8 9.5 8.0
Total benefits and
expenses 13.0 21.0 .9 8.0 8.3 7.4
Operating earnings 19.4 28.1 14.6 16.5 20.6 18.6
Operating earnings
per share 20.0 28.2 18.2 18.0 20.5 21.2
- ----------------------------------------------------------------------------
* 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 and 2000 after
several years of weakening. The average yen/dollar exchange rates were 107.83
in 2000, 113.96 in 1999 and 130.89 in 1998. The stronger yen in 2000 and 1999
increased operating earnings per share by $.02 in 2000 compared with 1999 and
by $.06 in 1999 compared with 1998. The weaker yen in 1998 lowered operating
earnings per share by $.02 in 1998 compared with 1997. Reported operating
earnings per share increased 20.0% to $1.20 in 2000, 28.2% to $1.00 in 1999
and 18.2% to $.78 in 1998.
Our primary financial objective is the growth of operating earnings per
share excluding the effect of foreign currency fluctuations. Our goal for
2000 was 17% growth, which we exceeded. Excluding the effect of currency
fluctuations, operating earnings per share increased 18.0% in 2000 compared
with 1999, 20.5% in 1999 compared with 1998, and 21.2% in 1998 compared with
1997.
EXH 13-7
Our objective for 2001 and 2002 is to increase operating earnings per
share by 15% to 17% excluding the impact of currency translation. We expect
to achieve the high end of our objective for 2001. If we achieve a 16.7%
increase, the following table shows the likely results for operating earnings
per share in 2001 using various yen/dollar exchange rate scenarios.
2001 OPERATING EPS SCENARIOS
Annual Average Yen Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 2000 on EPS
- ------------------ ---------------- --------- ----------
100.00 $ 1.45 20.8% $ .05
105.00 1.42 18.3 .02
107.83* 1.40 16.7 -
110.00 1.39 15.8 (.01)
115.00 1.36 13.3 (.04)
120.00 1.34 11.7 (.06)
125.00 1.31 9.2 (.09)
*Actual 2000 average exchange rate
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings were 35.2% in 2000, 35.8% in 1999 and 35.4% in 1998. Japanese income
taxes on AFLAC Japan's operating results accounted for most of our income tax
expense.
EXH 13-8
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to our
earnings, ranks number one in terms of premium income and profits among all
foreign life and non-life insurance companies operating in Japan. Among all
life insurance companies operating in Japan, AFLAC Japan ranked second in
terms of individual policies in force and 12th in terms of assets according to
Financial Services Agency (FSA) data as of September 30, 2000.
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
(In millions) 2000 1999 1998
---------------------------------
Premium income . . . . . . . . . . . . $ 6,684 $ 5,906 $ 4,738
Investment income. . . . . . . . . . . 1,261 1,111 917
Other income . . . . . . . . . . . . . 7 4 2
------ ------ ------
Total revenues . . . . . . . . . . . 7,952 7,021 5,657
------ ------ ------
Benefits and claims. . . . . . . . . . 5,649 5,039 4,119
Operating expenses . . . . . . . . . . 1,532 1,331 1,036
------ ------ ------
Total benefits and expenses. . . . . 7,181 6,370 5,155
------ ------ ------
Pretax operating earnings. . . . . . $ 771 $ 651 $ 502
====== ====== ======
- ------------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income . . . . . . . . . . . 13.2% 24.6% (1.4)%
Investment income. . . . . . . . . . 13.5 21.2 2.7
Total revenues . . . . . . . . . . . 13.3 24.1 (.7)
Pretax operating earnings. . . . . . 18.6 29.6 (.4)
- ------------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income . . . . . . . . . . . 7.1% 8.5% 6.6%
Investment income. . . . . . . . . . 7.4 5.2 11.0
Total revenues . . . . . . . . . . . 7.2 8.0 7.3
Pretax operating earnings. . . . . . 12.3 12.3 7.5
- ------------------------------------------------------------------------------
Ratios to total revenues in dollars:
Benefits and claims. . . . . . . . . 71.0% 71.8% 72.8%
Operating expenses . . . . . . . . . 19.3 18.9 18.3
Pretax operating earnings. . . . . . 9.7 9.3 8.9
==============================================================================
EXH 13-9
JAPANESE ECONOMY
For the last several years, Japan has been working to overcome its
depressed economy. The financial strength of many Japanese businesses
continued to deteriorate in 2000 with some experiencing bankruptcy or
requesting financial protection or assistance. As we have indicated in the
past, Japan's weak economy has created a challenging environment for AFLAC
Japan, as yields available for new investments remain at historically low
levels and consumer confidence continues to lag. The time required for the
Japanese economy to fully recover remains uncertain.
AFLAC JAPAN SALES
AFLAC Japan produced strong sales results during the last three years,
despite the weak Japanese economy. New annualized premium sales were: $921
million in 2000, up 20.4%; $765 million in 1999, up 32.2%; and $579 million in
1998, up 11.4%. New annualized premium sales in yen were: 99.8 billion yen in
2000, up 14.6%; 87.0 billion yen in 1999, up 15.4%; and 75.4 billion yen in
1998, up 19.9%.
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force in yen of 6.3% in
2000, 8.7% in 1999 and 7.2% in 1998 reflect the high persistency of AFLAC
Japan's business and the sales of new policies. Annualized premiums in force
were: 740.4 billion yen, 696.6 billion yen and 640.8 billion yen at December
31, 2000, 1999 and 1998, respectively. As a result of fluctuations in year-
end exchange rates, annualized premiums in force, as measured in dollars,
were: $6.5 billion, $6.8 billion and $5.5 billion at December 31, 2000, 1999
and 1998, respectively.
In addition to strong sales growth, we also continued to grow our
distribution system in Japan. During 2000, we recruited 2,039 new agencies.
We believe that new agencies will continue to be attracted to AFLAC Japan's
high commissions, superior products, customer service and brand image.
We continued to invest in marketing to improve sales. An improved
incentive pay system for AFLAC Japan's employed sales managers was introduced
in 2000 to provide better rewards for sales performance. We introduced a new
optional commission contract in July 2000 that was structured to attract new
agents. The new contract pays a higher first-year commission and limits
renewal commissions to nine years. Our original contract pays renewal
commissions for the life of the policy.
We increased expenditures during the last three years for expanded sales
promotion efforts in Japan and will continue to do so in 2001. Additionally,
we will continue to aggressively promote our brand and products through
advertising. We plan on improving the products we offer and introducing new
ones. We will invest in new technologies, including our laptop sales aid, to
maintain our cost and service advantages.
We also continued to refine our product line. In mid-2000, we began
selling new, lower-premium cancer life and care products to meet the needs
of cost-sensitive buyers. Approximately 29% of new cancer life and 59% of
care policy sales were from the lower-premium products. At the end of 2000,
we introduced a major revision to our cancer life product. Our new cancer
life product offers a variety of coverage choices to our customers. As a
EXH 13-10
result, employers will be able to customize an AFLAC cancer life policy that
best suits the needs of their workers.
Rider MAX, which provides accident and medical/sickness benefits as a
rider to our cancer life policy, has been extremely popular since its
introduction in 1998.
AFLAC Japan's sales mix as measured in yen has changed during the last
few years. Cancer life sales accounted for 40.3% of total sales in 2000,
46.7% in 1999, and 49.7% in 1998. Rider MAX accounted for 41.2% of sales in
2000, 39.6% in 1999, and 33.0% in 1998. Ordinary life and annuities
accounted for 13.6% of sales in 2000 compared with 7.8% in 1999 and 3.8% in
1998.
Although consumer confidence continued to lag because of the economic
worries and concerns over the financial strength of insurers, AFLAC products
remained popular. Our reputation for financial strength, combined with a
diverse product line and aggressive sales and marketing, helped us grow over
the last three years in spite of the difficult economy. AFLAC sold more
insurance policies than any other life insurance company in Japan for the
first half of the Japanese fiscal year.
Our objective for 2001 is to increase sales in yen by 15% compared with
2000.
AFLAC JAPAN INVESTMENTS
Investment income is affected by available cash flow from operations,
investment yields achievable on new investments and foreign currency exchange
rates on dollar-denominated investment income. 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 2000. For instance, the yield on 10-year Japanese government bonds, as
measured by a composite index, fluctuated from a high of 1.97% in September
2000 to a low of 1.54% in December 2000 and closed the year at 1.63%.
Investment income in yen increased 7.4% in 2000, compared with 5.2% in 1999
and 11.0% in 1998.
AFLAC Japan's new money rates for investments in debt securities
(including dollar-denominated investments) were 3.78% for 2000, 4.74% for 1999
and 4.19% for 1998. 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 4.82% in 2000, 5.01% in 1999 and 5.26% in 1998,
reflect the cumulative effect of lower investment yields available in Japan
since the early 1990s.
AFLAC Japan has invested in reverse-dual currency securities and other
private placement securities to secure higher yields than Japanese government
bonds would have provided while still adhering to prudent 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. To compensate for lower
investment yields, we have implemented premium rate increases over the last
several years, including one in 1999, which should contribute to stability in
the pretax operating profit margin.
EXH 13-11
INSURANCE DEREGULATION IN JAPAN
Trade talks in 1994 and 1996 between the governments of the United States
and Japan, and Japan's 1996 plan for a financial "Big Bang," produced a
framework for the deregulation of the Japanese insurance industry. These
measures 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. AFLAC and other foreign-owned insurers, as
well as many small to medium-sized Japanese insurers, operate primarily in the
third sector.
As of January 1, 2001, additional insurance companies were permitted to
sell the type of third-sector products that AFLAC Japan currently offers. We
anticipate that by July 1, 2001, all insurance companies will be permitted to
compete in the third sector. As a result, we expect competition to increase.
However, we also expect increased product and distribution opportunities for
AFLAC Japan. In order to respond to the expected increase in competition
and the opportunities available to us, we have taken action to expand our
marketing initiatives and enhance our competitiveness.
In the third quarter of 2000, AFLAC Japan and Dai-ichi Mutual Life
Insurance Company (Dai-ichi Life) agreed to a major marketing alliance that
anticipates the sale of each company's products through their respective
distribution systems. The initial focus will be the sale of AFLAC Japan's
cancer life and Rider MAX products through Dai-ichi Life's sales force of
50,000 people. Sales are expected to commence in the second quarter of
2001, pending approval by regulatory authorities.
As previously mentioned, we plan to continue expanding our distribution
system through the addition of new agencies. In support of this objective,
we introduced a commission contract in July 2000 that is structured to
attract new agents.
We recognize that we will face increasing competition in the future,
and we continue to look for ways to improve. At the same time, we believe
companies will find it difficult to compete with us because our low-cost
structure allows us to provide competitive benefits and services to
policyholders and above-average compensation to our sales force.
AFLAC JAPAN - OTHER
The increase in the expense ratio in 2000 and 1999 was primarily due to
increased expenditures for sales promotion, marketing and advertising.
The benefit ratio has declined primarily due to the mix of business
shifting to newer products, which have a lower loss ratio than the earlier
versions of the cancer life product. The pretax operating profit margin was
9.7% in 2000, compared with 9.3% in 1999 and 8.9% in 1998. The expansion of
the margin was largely due to the declining benefit ratio.
In July 2000, we initiated a voluntary internal compliance review to
examine the solicitation practices of our agents and to determine the extent
to which inappropriate premium discounts, if any, may have been given to
customers, and to put in place any corrective measures necessary to ensure
full regulatory compliance in the future. We informed the FSA at the time
the review was initiated. The results of this review have been provided to
EXH 13-12
the FSA, including AFLAC Japan's proposed steps to strengthen and improve
the internal control system and the internal disciplinary actions that have
been taken against certain employees. The FSA requested that AFLAC Japan
make periodic reports regarding the progress being made to implement these
measures. The FSA also notified AFLAC Japan that it will not impose any
administrative sanction in connection with the results of this compliance
review.
Although Japan's economic outlook remains uncertain, we continue to
believe it is one of the best insurance markets in the world for
supplemental insurance products. The need for our products in Japan
continues, 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.
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) 2000 1999 1998
----------------------------------
Premium income . . . . . . . . . . . . . $ 1,554 $ 1,358 $ 1,198
Investment income. . . . . . . . . . . . 277 245 216
Other income . . . . . . . . . . . . . . 5 3 4
------ ------ ------
Total revenues . . . . . . . . . . . . 1,836 1,606 1,418
------ ------ ------
Benefits and claims. . . . . . . . . . . 969 845 749
Operating expenses . . . . . . . . . . . 577 505 439
------ ------ ------
Total benefits and expenses. . . . . . 1,546 1,350 1,188
------ ------ ------
Pretax operating earnings. . . . . . $ 290 $ 256 $ 230
====== ====== ======
- -----------------------------------------------------------------------------
Percentage changes over previous year:
Premium income . . . . . . . . . . . . 14.4% 13.4% 12.8%
Investment income. . . . . . . . . . . 13.2 13.1 20.3
Total revenues . . . . . . . . . . . . 14.3 13.2 14.1
Pretax operating earnings. . . . . . . 13.3 11.4 24.9
- -----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims. . . . . . . . . . 52.8% 52.6% 52.8%
Operating expenses . . . . . . . . . . 31.4 31.4 31.0
Pretax operating earnings. . . . . . . 15.8 16.0 16.2
=============================================================================
EXH 13-13
AFLAC U.S. SALES
New annualized premium sales were: $712 million in 2000, up 28.3%; $555
million in 1999, up 15.1%; and $482 million in 1998, up 20.3%.
Accident/disability coverage continued to be our best-selling product,
accounting for approximately 55% of sales in 2000 and 56% of sales in both
1999 and 1998. Cancer expense insurance accounted for 23% to 25% of sales
during the three-year period ending December 31, 2000. Our newest product,
dental insurance, was introduced in July 2000 and generated 3.4% of sales in
2000. Our objective for 2001 is to increase sales by 12% to 15%.
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force of 16.9% in 2000,
14.3% in 1999 and 14.6% in 1998 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: $1.9
billion at December 31, 2000; $1.6 billion at December 31, 1999; and $1.4
billion at December 31, 1998.
AFLAC U.S. INVESTMENTS
Investment income increased 13.2% in 2000, compared with 13.1% in 1999
and 20.3% in 1998. The larger increase in 1998 was due to investing the
majority of the annual profits repatriated from AFLAC Japan in 1997.
Investment income in 1998 also benefited from investing the proceeds from the
sale of the television business in 1997. During 2000, available cash flow was
invested at an average yield of 8.22% compared with 7.93% during 1999 and
7.71% during 1998. The overall return on average invested assets, net of
investment expenses, was 7.62% for 2000, compared with 7.51% for 1999 and
7.44% for 1998.
AFLAC U.S. - OTHER
We expect the operating expense ratio, excluding discretionary
advertising expenses, to remain relatively level in the future. 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 2000, SmartApp
enabled us to process approximately 78% of our payroll 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 our advertising
program without significantly affecting the operating expense ratio.
The aggregate benefit ratio has been relatively stable. The mix of
business has shifted toward accident/disability policies, which have lower
benefit ratios than other products.
We expect the pretax operating profit margin to remain approximately the
same in 2001.
We continue to believe that there are significant opportunities to market
high-quality, affordable supplemental insurance products in the U.S.
marketplace.
EXH 13-14
OTHER OPERATIONS
Corporate expenses are net of investment income of $12 million in 2000,
$13 million in 1999 and $2 million in 1998. Corporate operating expenses
consist primarily of salary and facilities expenses. Corporate expenses,
excluding investment income, were $38 million in 2000, $45 million in 1999 and
$60 million in 1998. The reduction in corporate expenses primarily reflects
lower retirement expense.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
We will adopt Statement of Financial Accounting Standards (SFAS) No. 133
as amended, Accounting for Derivative Instruments and Hedging Activities, on
January 1, 2001. 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. This standard will change the accounting for
our cross-currency and interest rate swaps. In accordance with SFAS No. 133,
we will be required to recognize in net earnings the change in unrealized
gains/losses on the interest rate components of our cross-currency swaps (see
Note 4 of the Notes to the Consolidated Financial Statements). The cumulative
effect for adopting this new accounting standard as of January 1, 2001, will
increase liabilities and decrease shareholders' equity (accumulated other
comprehensive income) by approximately $1 million, representing the fair value
of our outstanding derivative instruments that have not been recorded in the
financial statements at December 31, 2000.
The adoption of SFAS No. 133 will increase volatility in reported net
earnings in the future. If this accounting standard had been in effect on
January 1, 2000, net earnings would have increased by approximately $19
million for the year ended December 31, 2000, related to the change in fair
value of the interest rate components of the cross-currency swaps.
For information regarding other new Statements of Financial Accounting
Standards, see Note 1 of the Notes to the Consolidated Financial Statements.
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, 2000, was 114.75 yen to one U.S.
dollar, or 10.8% weaker than the December 31, 1999, exchange rate of 102.40.
The weaker yen rate decreased reported investments and cash by $3.2 billion,
total assets by $3.6 billion and total liabilities by $3.5 billion, compared
with the amounts that would have been reported for 2000 if the exchange rate
EXH 13-15
had remained unchanged from year-end 1999 (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 fair value of that security will increase by approximately
5% if market interest rates decrease by 100 basis points. Likewise, the fair
value of the debt security will decrease by approximately 5% if market
interest rates increase by 100 basis points.
The estimated effect of potential increases in interest rates on the fair
values of our debt security investments, notes payable and cross-currency
swaps follows:
SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS
TO INTEREST RATE CHANGES
(December 31)
2000 1999
------------------- -------------------
+100 +100
Market Basis Market Basis
(In millions) Value Points Value Points
------------------- -------------------
Debt securities:
Fixed-maturity securities:
Yen-denominated $ 20,615 $ 18,760 $ 20,379 $ 18,613
Dollar-denominated 5,259 4,879 4,760 4,400
Perpetual debentures:
Yen-denominated 5,035 4,550 5,450 4,917
Dollar-denominated 334 313 306 285
------- ------- ------- -------
Total debt securities $ 31,243 $ 28,502 $ 30,895 $ 28,215
======= ======= ======= =======
Notes payable* $ 1,043 $ 1,004 $ 962 $ 934
======= ======= ======= =======
Cross-currency swaps
included in other liabilities $ 30 $ 21 $ 108 $ 91
======= ======= ======= =======
* 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.
EXH 13-16
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. (See Note 3
of the Notes to the Consolidated Financial Statements.)
The following is a comparison of average 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)
2000 1999 1998
------------ ------------ ------------
U.S. Japan* U.S. Japan* U.S. Japan*
----- ----- ----- ----- ----- -----
Policies issued during year:
Required interest on
policy reserves 6.48% 3.00% 6.59% 3.42% 6.81% 3.50%
New money yield on
investments 8.15 3.51 7.85 4.48 7.62 3.76
Policies in force at end
of year:
Required interest on
policy reserves 6.42 5.21 6.42 5.29 6.41 5.38
Investment yield 7.62 4.65 7.51 4.94 7.44 5.17
*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. The average duration of
policy liabilities was approximately 12 years in both 2000 and 1999. The
average duration of the yen-denominated debt securities was approximately 10
years in 2000 and nine years in 1999. 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, $3.0 billion at amortized cost (with an average yield of
5.77%), of AFLAC Japan's yen-denominated debt securities are scheduled to
mature.
We have outstanding interest rate swaps on 19.1 billion yen ($167
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.
EXH 13-17
At December 31, 2000, we also had yen-denominated bank borrowings in the
amount of 19.6 billion yen ($171 million) with a blended variable interest
rate of .73%. The effect on net earnings in 2000 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.
EQUITY PRICE RISK
Equity securities at December 31, 2000, totaled $236 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 .92. 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 9.2%,
or $22 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 notes payable 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 entered into cross-currency swaps to convert the
dollar-denominated principal and interest into yen-denominated obligations on
the $450 million senior notes that were issued in 1999. The cross-currency
swaps have a notional amount of $450 million (55.6 billion yen). These swaps
have also 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. For information
regarding new accounting requirements for derivative instruments as of January
1, 2001, see Accounting Pronouncements Not Yet Adopted on page 13-39.
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. The following table
compares the dollar values of yen-denominated assets and liabilities at
various exchange rates.
EXH 13-18
DOLLAR VALUE OF YEN-DENOMINATED ASSETS AND LIABILITIES
AT SELECTED EXCHANGE RATES
(December 31)
2000 1999
(In millions) ------------------------- -------------------------
99.75 114.75* 129.75 87.40 102.40* 117.40
Yen Yen Yen Yen Yen Yen
------------------------- -------------------------
Yen-denominated
financial instruments:
Assets:
Securities available
for sale:
Fixed maturities $19,457 $16,913 $14,958 $18,857 $16,099 $14,039
Perpetual debentures 1,969 1,712 1,514 2,015 1,718 1,500
Equity securities 79 68 61 66 56 49
Securities held to
maturity:
Fixed maturities 4,193 3,645 3,223 5,143 4,389 3,829
Perpetual debentures 3,960 3,442 3,044 4,572 3,903 3,404
Cash and cash
equivalents 618 537 475 659 563 491
Other financial
instruments 3 4 3 5 2 2
------ ------ ------ ------ ------ ------
Subtotal 30,279 26,321 23,278 31,317 26,730 23,314
------ ------ ------ ------ ------ ------
Liabilities:
Notes payable 1,139 1,048 980 1,094 999 929
Cross-currency swaps 107 34 (22) 186 93 23
------ ------ ------ ------ ------ ------
Subtotal 1,246 1,082 958 1,280 1,092 952
------ ------ ------ ------ ------ ------
Net yen-denominated
financial instruments 29,033 25,239 22,320 30,037 25,638 22,362
Other yen-denominated
assets 4,118 3,580 3,166 4,412 3,766 3,285
Other yen-denominated
liabilities (32,470) (28,227) (24,962) (34,140) (29,141) (25,417)
------ ------ ------ ------ ------ ------
Consolidated yen-
denominated net
assets subject to
foreign currency
fluctuation $ 681 $ 592 $ 524 $ 309 $ 263 $ 230
====== ====== ====== ====== ====== ======
* Actual year-end rates
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation 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 $1.5 billion on
investment securities at December 31, 2000, consisted of $2.6 billion in gross
unrealized gains and $1.1 billion in gross unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen debt
securities markets. We are exposed to credit risk in our investment activity.
Credit risk is a consequence of extending credit and/or carrying investment
positions. We require that all securities have an initial rating of Class 1
or 2 as determined by the Securities Valuation Office of the National
Association of Insurance Commissioners. 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:
2000 1999
------ ------
AAA 25.0% 28.0%
AA 22.4 24.6
A 36.8 33.5
BBB 15.1 12.1
BB .7 1.8
----- -----
100.0% 100.0%
===== =====
The issuers of two debt securities held in our investment portfolio
experienced significant credit rating downgrades during the first half of
2000. During the second quarter of 2000, we sold one security carried in
the available-for-sale category at a pretax loss of $34 million. We
recorded a pretax impairment loss of $57 million on the other security,
which was carried in the held-to-maturity category. We also reclassified
this security to the available-for-sale category. These losses decreased
net earnings by $58 million ($.11 per basic and diluted share) for the year
ended December 31, 2000.
Private placement investments accounted for 51.5% and 49.0% of our total
debt securities as of December 31, 2000 and 1999, 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 prudent standards for credit quality. Most of AFLAC's private
placement issues are issued under medium-term note programs and have standard
covenants commensurate with credit ratings, except when internal credit
analysis indicates that additional protective and/or event-risk covenants are
required.
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.
EXH 13-20
The following table shows an analysis of investment securities (at cost
or amortized cost) at December 31:
AFLAC Japan AFLAC U.S.
------------------- -------------------
(In millions) 2000 1999 2000 1999
------------------- -------------------
Securities available for sale:
Fixed maturities $16,757 $15,491 $ 3,648* $ 3,405*
Perpetual debentures 2,173 2,411 174 153
Equity securities 64 45 97 92
------ ------ ------ ------
Subtotal 18,994 17,947 3,919 3,650
------ ------ ------ ------
Securities held to maturity:
Fixed maturities 3,645 4,389 - -
Perpetual debentures 3,442 3,903 - -
------ ------ ------ ------
Subtotal 7,087 8,292 - -
------ ------ ------ ------
Total investment securities $26,081 $26,239 $ 3,919 $ 3,650
====== ====== ====== ======
*Includes securities held by the parent company of $262 in 2000 and $240
in 1999
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 2000 and 1999. Cash, cash equivalents and
short-term investments totaled $610 million, or 1.9% of total investments and
cash, as of December 31, 2000, compared with $617 million, or 1.9% of total
investments and cash, at December 31, 1999.
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 decreased $1.0 billion, or 3.5%, during 2000. AFLAC
Japan policy liabilities decreased $1.3 billion, or 4.7%, and AFLAC U.S.
policy liabilities increased $252 million, or 10.9%. The decrease in policy
liabilities was primarily due to the weaker yen, partially offset by the aging
of policies in force, the addition of new business 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 weaker yen at year-end
2000 compared with 1999 decreased reported policy liabilities by $3.1 billion.
DEBT
In September 2000, we filed a shelf registration statement with
Japanese regulatory authorities to issue up to 100 billion yen of yen-
denominated Samurai notes. United States residents or entities are not
permitted to purchase or hold these securities. On October 25, 2000, we
issued in Japan 30 billion yen ($278 million) of Samurai notes with a 1.55%
coupon, payable semiannually, due October 25, 2005. These notes are
EXH 13-21
redeemable at our option at any time with a redemption price equal to the
principal amount of the notes being redeemed plus a premium. We received
net proceeds of 29.9 billion yen ($277 million) after issue costs.
In April 1999, we issued $450 million of senior notes with a 6.50%
coupon, payable semiannually, due April 15, 2009. At December 31, 2000, the
outstanding principal, less unamortized discount, was $449 million. The notes
are redeemable at our option at any time at a redemption price equal to the
principal amount of the notes being redeemed plus a make-whole amount. We
received net proceeds of $446 million after discount and issue costs. A
portion of the proceeds is being used to construct a new administrative office
building in the United States. We entered into cross-currency swaps that have
the effect of converting the dollar-denominated principal and interest into
yen-denominated obligations. The notional amount of the cross-currency swaps
is $450 million (55.6 billion yen) with a blended fixed interest rate of
1.67%. At December 31, 2000, we recorded a liability in the amount of $30
million for the fair value of the swaps.
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, 2000, 12.9 billion yen ($113 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, 2000, 25.8 billion yen ($225 million) were
outstanding.
We have entered into interest rate swaps that effectively change the
interest rates on a portion of these bank borrowings from variable to fixed.
We make interest payments to the banks based on variable interest rates, and
we pay to, or receive from, the swap counterparties an amount necessary to
equal the fixed rate.
When any portion of these loans or notes is denominated in yen, the
principal amounts 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.
The ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 25.1% as
of December 31, 2000 and 26.4% as of December 31, 1999. 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
EXH 13-22
United States currently involved in insolvency proceedings will not materially
impact the consolidated financial statements.
In 1998, the Japanese government established the Life Insurance
Policyholders Protection Corporation. Funding by the life insurance industry,
as determined by government legislation, is made over a 10-year period. We
recognize charges for our estimated share of any assessment as funding
legislation is enacted. We periodically review our estimated liability for
policyholder protection fund assessments based on updated information and any
adjustments are reflected in net earnings. For further information regarding
the policyholder protection fund, see Note 2 of the Notes to the Consolidated
Financial Statements.
In October 2000, two Japanese life insurance companies filed
applications with the court for protection under a special reorganization
law for financial institutions. Japanese government officials have
indicated that they do not expect any additional protection fund assessments
to be imposed on the insurance industry for the financial problems of these
insurers.
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. The primary uses of cash for 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 investment-grade debt securities.
AFLAC insurance policies generally are 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 therefore are generally 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 October 2000, we received $277 million
from the issuance of Samurai notes in Japan and in April 1999, we received net
proceeds of $446 million from the issuance 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
EXH 13-23
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
statutory capital and surplus is determined according to rules prescribed by
the National Association of Insurance Commissioners (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.
The NAIC has recodified Statutory Accounting Principles (SAP) to promote
standardization throughout the industry. These new accounting principles were
effective January 1, 2001, and are to be applied prospectively. Previously,
prescribed or permitted SAP could vary among states and among companies. The
transition adjustments to adopt the new accounting principles increased
statutory capital and surplus by approximately $130 million as of January 1,
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
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 $199 million in 2000, $282 million in 1999 and
$192 million in 1998. These amounts include annual profit transfers from
AFLAC Japan of $157 million in 2000, $243 million in 1999 and $154 million in
1998. In light of deregulation in the insurance market, we elected to
repatriate less than the maximum amount in 2000 in order to maintain a strong
solvency margin in Japan. In 2000, the maximum amount we could have
repatriated was $351 million. We repatriated the maximum amounts in 1999 and
1998. 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 its own solvency standards, a version of
risk-based capital requirements. AFLAC Japan's solvency margin significantly
exceeds regulatory minimums. The FSA is also in the process of modifying the
solvency margin used by regulators in Japan to monitor the financial strength
of insurance companies. For additional information on regulatory restrictions
on dividends, profit transfers and other remittances, see Note 9 of the Notes
to the Consolidated Financial Statements.
For the Japanese reporting fiscal year ending March 31, 2002, AFLAC Japan
will be required to adopt a new Japanese statutory accounting standard
regarding fair value accounting for investments. Currently, debt securities
are recorded at amortized cost for FSA purposes. Under the new accounting
standard AFLAC Japan will be required to record debt securities in four
categories: at fair value in an available-for-sale category, at amortized cost
in a held-to-maturity category, at amortized cost in a special category for
securities held for long-term holding purposes, or at fair value in a trading
category.
EXH 13-24
Under this new regulatory accounting standard, the unrealized gains and
losses on debt securities available for sale will be reported in FSA capital
and surplus. This new accounting method may result in significant
fluctuations in FSA equity, in the AFLAC Japan solvency margin and in amounts
available for annual profit repatriation.
RATING AGENCIES
AFLAC is rated `AA' by both Standard & Poor's and Fitch IBCA, Duff &
Phelps, and `Aa3' by Moody's for financial strength. A.M. Best assigned AFLAC
an `A+, superior' rating for financial strength and operating performance.
AFLAC Incorporated's credit rating for senior debt is `A' by both Standard &
Poor's and Fitch IBCA, Duff & Phelps, and `A2' by Moody's.
OTHER
AFLAC Japan is developing a new computerized policy administration system
at an estimated cost of approximately $150 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.
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 13-32 and 13-33.
OPERATING ACTIVITIES
In 2000 consolidated cash flow from operations increased 16.9% to $3.3
billion, compared with $2.8 billion in 1999 and $2.5 billion in 1998. Net
cash flow from operations for AFLAC Japan increased 18.7% (increased 18.0% in
yen) to $2.9 billion in 2000, compared with $2.5 billion in 1999 and $2.2
billion in 1998. AFLAC Japan represented 89% of the consolidated net cash
flow from operations in 2000, 88% in 1999 and 89% in 1998.
INVESTING ACTIVITIES
Consolidated cash flow used by investing activities increased 11.7% to
$3.1 billion in 2000, compared with $2.7 billion in 1999 and $2.2 billion in
1998. AFLAC Japan accounted for 90% of the consolidated net cash used by
investing activities in 2000, compared with 74% in 1999 and 86% in 1998.
EXH 13-25
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 3% and 5% of the annual
average investment portfolio of debt securities available for sale during the
three years ended December 31, 2000.
FINANCING ACTIVITIES
In 2000 net cash used by financing activities was $168 million, compared
with net cash provided by financing activities of $113 million in 1999 and net
cash used by financing activities of $151 million in 1998. In 2000, we
received net proceeds of $277 million in connection with the issuance in Japan
of 1.55% Samurai bonds due in 2005. In 1999, we received net proceeds of $446
million in connection with the issuance of 6.50% senior notes due in 2009.
Treasury stock purchases of $239 million, $224 million and $125 million were
made in 2000, 1999 and 1998, respectively.
Dividends to shareholders in 2000 were $87 million ($82 million paid in
cash; $5 million through issuance of treasury shares under the dividend
reinvestment plan). Dividends to shareholders in 1999 were $77 million ($72
million paid in cash; $5 million through issuance of treasury shares under the
dividend reinvestment plan). Dividends to shareholders in 1998 were $67
million ($63 million paid in cash; $4 million through issuance of treasury
shares under the dividend reinvestment plan). The 2000 dividend of $.167 per
share increased 13.6% over 1999. The 1999 dividend of $.147 per share
represented an increase of 14.8% over the 1998 dividend of $.128 per share.
We issued treasury shares for certain AFLAC stock options, the AFL
Stock Plan and the AFLAC Associate Stock Bonus Plan (see Note 10 of the
Notes to the Consolidated Financial Statements).
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
EXH 13-26
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 or accounting requirements, 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 13-27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In millions, except for share 2000 1999 1998
and per-share amounts) -------- -------- --------
Revenues:
Premiums, principally supplemental
health insurance $ 8,239 $ 7,264 $ 5,943
Net investment income 1,550 1,369 1,138
Realized investment losses (102) (13) (2)
Other income 33 20 25
------- ------- -------
Total revenues 9,720 8,640 7,104
------- ------- -------
Benefits and expenses:
Benefits and claims 6,618 5,885 4,877
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 302 257 201
Insurance commissions 1,040 931 773
Insurance expenses 758 641 504
Release of retirement liability (101) - -
Provision for policyholder
protection fund - 64 111
Interest expense 19 18 13
Other operating expenses 72 66 74
------- ------- -------
Total acquisition and
operating expenses 2,090 1,977 1,676
------- ------- -------
Total benefits and expenses 8,708 7,862 6,553
------- ------- -------
Earnings before income taxes 1,012 778 551
------- ------- -------
Income tax expense (benefit):
Current 338 230 277
Deferred - operations (13) 44 (92)
Deferred tax benefit from
Japanese tax rate reductions - (67) (121)
------- ------- -------
Total income taxes 325 207 64
------- ------- -------
Net earnings $ 687 $ 571 $ 487
======= ======= =======
Net earnings per share:
Basic $ 1.30 $ 1.07 $ .91
Diluted 1.26 1.04 .88
======= ======= =======
Common shares used in computing
earnings per share (In thousands):
Basic 530,607 531,737 532,609
Diluted 544,906 550,845 551,745
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
Share and per-share amounts have been adjusted to reflect the two-for-one
stock split payable on March 16, 2001.
EXH 13-28
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In millions) 2000 1999
-------- --------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$20,405 in 2000 and $18,896 in 1999) $ 22,172 $ 20,859
Perpetual debentures (amortized cost
$2,347 in 2000 and $2,564 in 1999) 2,046 2,024
Equity securities (cost $161 in 2000
and $137 in 1999) 236 215
Securities held to maturity, at amortized cost:
Fixed maturities (fair value $3,702 in
2000 and $4,280 in 1999) 3,645 4,389
Perpetual debentures (fair value $3,323 in
2000 and $3,732 in 1999) 3,442 3,903
Other investments 17 18
Cash and cash equivalents 609 616
-------- --------
Total investments and cash 32,167 32,024
Receivables, primarily premiums 301 270
Accrued investment income 380 369
Deferred policy acquisition costs 3,685 3,692
Property and equipment, at cost less
accumulated depreciation 481 509
Other 218 177
-------- --------
Total assets $ 37,232 $ 37,041
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
EXH 13-29
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In millions, except for share amounts) 2000 1999
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 26,114 $ 27,310
Unpaid policy claims 1,745 1,618
Unearned premiums 361 361
Other policyholders' funds 346 315
-------- --------
Total policy liabilities 28,566 29,604
Notes payable 1,079 1,018
Income taxes 1,894 1,511
Payables for return of cash collateral
on loaned securities 127 -
Other 872 1,040
Commitments and contingencies
(Notes 10 and 11)
-------- --------
Total liabilities 32,538 33,173
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 1,000,000 shares; issued 644,813
shares in 2000 and 640,698 shares in 1999 32 32
Additional paid-in capital 336 310
Retained earnings 3,956 3,356
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 194 232
Unrealized gains on investment securities 1,474 1,032
Treasury stock, at average cost (1,298) (1,094)
-------- --------
Total shareholders' equity 4,694 3,868
-------- --------
Total liabilities and
shareholders' equity $ 37,232 $ 37,041
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
Share amounts have been adjusted to reflect the two-for-one stock split
payable on March 16, 2001.
EXH 13-30
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
(In millions, except for 2000 1999 1998
per-share amounts) -------- -------- --------
Common stock:
Balance at beginning of year $ 32 $ 32 $ 16
Two-for-one stock split - - 16
------- ------- -------
Balance at end of year 32 32 32
------- ------- -------
Additional paid-in capital:
Balance at beginning of year 310 235 227
Exercise of stock options 18 17 8
Gain on treasury stock reissued 8 58 16
Two-for-one stock split - - (16)
------- ------- -------
Balance at end of year 336 310 235
------- ------- -------
Retained earnings:
Balance at beginning of year 3,356 2,862 2,442
Net earnings 687 571 487
Dividends to shareholders ($.167 per
share in 2000, $.147 in 1999 and
$.128 in 1998) (87) (77) (67)
------- ------- -------
Balance at end of year 3,956 3,356 2,862
------- ------- -------
Accumulated other comprehensive income:
Balance at beginning of year 1,264 1,551 1,559
Change in unrealized foreign
currency translation gains (losses)
during year, net of income taxes (38) 13 (55)
Change in unrealized gains (losses)
on investment securities during
year, net of income taxes 442 (300) 47
------- ------- -------
Balance at end of year 1,668 1,264 1,551
------- ------- -------
Treasury stock:
Balance at beginning of year (1,094) (910) (814)
Purchases of treasury stock (239) (224) (125)
Cost of shares issued 35 40 29
------- ------- -------
Balance at end of year (1,298) (1,094) (910)
------- ------- -------
Total shareholders' equity $ 4,694 $ 3,868 $ 3,770
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
Per-share amounts have been adjusted to reflect the two-for-one stock split
payable on March 16, 2001.
EXH 13-31
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In millions) 2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 687 $ 571 $ 487
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,737 2,570 2,173
Deferred income taxes (13) (23) (213)
Change in income taxes payable 477 (364) 16
Increase in deferred policy
acquisition costs (310) (299) (226)
Realized investment losses 102 13 2
Release of retirement liability (101) - -
Provision for policyholder
protection fund - 64 111
Other, net (296) 275 150
-------- -------- --------
Net cash provided by
operating activities 3,283 2,807 2,500
-------- -------- --------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Securities available for sale:
Fixed maturities sold 795 1,071 1,002
Fixed maturities matured 454 404 637
Perpetual debentures sold - 14 -
Equity securities 35 73 57
Securities held to maturity:
Fixed maturities matured or called 18 23 8
Other investments, net (2) 17 42
Costs of investments acquired:
Securities available for sale:
Fixed maturities (4,360) (3,322) (2,966)
Perpetual debentures (26) (862) (917)
Equity securities (67) (82) (60)
Securities held to maturity:
Fixed maturities - (43) -
Cash received as collateral on
loaned securities, net 127 - -
Additions to property and
equipment, net (26) (14) (40)
Other, net (7) (17) (8)
-------- -------- --------
Net cash used by investing
activities $ (3,059) $ (2,738) $ (2,245)
-------- -------- --------
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
EXH 13-32
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
(In millions) 2000 1999 1998
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings $ 294 $ 446 $ 124
Principal payments under debt
obligations (187) (94) (125)
Dividends paid to shareholders (82) (72) (63)
Purchases of treasury stock (239) (224) (125)
Treasury stock reissued 31 39 30
Other, net 15 18 8
-------- -------- --------
Net cash provided (used) by
financing activities (168) 113 (151)
-------- -------- --------
Effect of exchange rate changes
on cash and cash equivalents (63) 60 34
-------- -------- --------
Net change in cash and
cash equivalents (7) 242 138
Cash and cash equivalents,
beginning of year 616 374 236
-------- -------- --------
Cash and cash equivalents,
end of year $ 609 $ 616 $ 374
======== ======== ========
Supplemental disclosures of cash
flow information - See Note 12
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-33
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(In millions) 2000 1999 1998
-------- -------- --------
Net earnings $ 687 $ 571 $ 487
-------- -------- --------
Other comprehensive income, before
income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains
(losses) during year 97 (128) (84)
Unrealized gains (losses) on
investment securities:
Unrealized holding gains (losses)
arising during year 521 (379) 171
Reclassification adjustment for
realized (gains) losses included
in net earnings 101 13 3
-------- -------- --------
Total other comprehensive income
(loss), before income taxes 719 (494) 90
Income tax expense (benefit)
related to items of other
comprehensive income 315 (207) 98
-------- -------- --------
Other comprehensive income
(loss), net of income taxes 404 (287) (8)
-------- -------- --------
Total comprehensive income $ 1,091 $ 284 $ 479
======== ======== ========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-34
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 and life
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% of the Company's total revenues
for both 2000 and 1999, and 80% in 1998, and 86% and 87% of total assets at
December 31, 2000 and 1999, 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 degree of accounting estimates and actuarial
determinations subject to changes in the future are: deferred policy
acquisition costs and liabilities for future policy benefits and unpaid policy
claims. 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 date of
each transaction. Other revenues, expenses and cash flows are translated
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 1998 through 2000.
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 13-35
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 private placement debt
securities. Our past practice was to hold these securities to their
contractual or economic maturity dates. In 1998, we made this our formal
policy. Accordingly, certain debt securities were reclassified from the
available-for-sale category to the held-to-maturity category. The related
unrealized gain on these securities is being amortized from other
comprehensive income into investment income over the remaining term of the
securities. The related premium 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
policy liabilities represents gains that would not inure to the benefit of
EXH 13-36
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 our purchase price adjusted
for accrual of discount or amortization of premium. The amortized cost of
debt securities we purchased at a discount will equal the face or par value at
maturity. Debt securities we 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 the
consolidated statements of earnings.
We continually monitor the difference between the cost and estimated fair
value of our investments. If any investments experience a decline in value
that is deemed to be other than temporary, we write the security down to fair
value 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 collateralized by securities, 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 these
costs vary with and are primarily related to the production of new business.
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 provisions for possible future adverse
deviation in experience.
EXH 13-37
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 claims
experience 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 our 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 we expect the temporary
differences 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 convert 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 in
other liabilities. Changes in the fair value of the currency portion of the
swaps are recorded in accumulated other comprehensive income. The interest
portions, not related to the accrued interest, of the currency swaps are not
reflected in the financial statements.
We occasionally use short-term foreign currency forward contracts 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 as unrealized foreign
currency translation adjustments in accumulated other comprehensive income.
Effective January 1, 2001, we will be required to account for these
derivatives using new accounting principles. See the section in this note
titled, Accounting Pronouncements Not Yet Adopted.
JAPANESE POLICYHOLDER PROTECTION FUND: In 1998, the Japanese government
established the Life Insurance Policyholders Protection Corporation. Funding
by the life insurance industry, as determined by government legislation, is
made over a 10-year period. We recognize charges for our estimated share of
any assessment as funding legislation is enacted. We review our estimated
liability for policyholder protection fund assessments based on updated
information and any adjustments are reported in net earnings.
EXH 13-38
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 the fair
market value at the date of grant. Therefore, we do not recognize
compensation expense related to stock options.
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 in 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.
All share and per-share amounts have been adjusted to reflect the two-
for-one stock split declared by the board of directors on February 13, 2001,
payable on March 16, 2001.
ACCOUNTING CHANGES ADOPTED: We adopted Statement of Position (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. We capitalized $22 million and $9 million for the
years ended December 31, 2000 and 1999, respectively.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: We will adopt Statement of
Financial Accounting Standards (SFAS) No. 133 as amended, Accounting for
Derivative Instruments and Hedging Activities, on January 1, 2001. 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. This standard will change the accounting for our cross-currency
and interest rate swaps. In accordance with SFAS No. 133, we will be required
to recognize in net earnings the change in unrealized gains/losses on the
interest rate components of our cross-currency swaps (see Note 4). The
cumulative effect for adopting this new accounting standard as of January 1,
2001 will increase liabilities and decrease shareholders' equity (accumulated
other comprehensive income) by approximately $1 million, representing the fair
value of our outstanding derivative instruments that have not been recorded in
the financial statements at December 31, 2000.
The adoption of SFAS No. 133 will increase volatility in reported net
earnings in the future. If this accounting standard had been in effect on
January 1, 2000, net earnings would have increased by approximately
EXH 13-39
$19 million for the year ended December 31, 2000 related to the change in fair
value of the interest rate components of the cross-currency swaps.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, which replaces SFAS No. 125. SFAS No. 140 revises the standards
for accounting and reporting for transfers and servicing of financial assets
and extinguishments of liabilities. SFAS No. 140 is effective for transfers
occurring after March 31, 2001. The adoption of SFAS No. 140 is not expected
to have any impact on the Company's financial position or results of
operations.
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. 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.
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.
EXH 13-40
Information regarding components of operations and lines of business for
the years ended December 31 follows:
(In millions) 2000 1999 1998
-------- -------- --------
Revenues:
AFLAC Japan:
Earned premiums:
Cancer life $ 4,976 $ 4,582 $ 3,839
Other accident and health 1,037 730 413
Life insurance and annuities 671 594 486
Net investment income 1,261 1,111 917
Other income 7 4 2
------- ------- -------
Total AFLAC Japan revenues 7,952 7,021 5,657
------- ------- -------
AFLAC U.S.:
Earned premiums:
Cancer expense 585 535 489
Accident/disability 565 447 345
Other health 360 344 341
Life insurance 44 32 23
Net investment income 277 245 216
Other income 5 3 4
------- ------- -------
Total AFLAC U.S. revenues 1,836 1,606 1,418
------- ------- -------
Other business segments 31 23 39
------- ------- -------
Total business segments 9,819 8,650 7,114
Realized investment losses (102) (13) (2)
Corporate* 32 39 30
Intercompany eliminations (29) (36) (38)
------- ------- -------
Total revenues $ 9,720 $ 8,640 $ 7,104
======= ======= =======
*Includes investment income of $12 in 2000, $13 in 1999 and $2 in 1998
EXH 13-41
(In millions) 2000 1999 1998
-------- -------- --------
Earnings before income taxes:
AFLAC Japan $ 771 $ 651 $ 502
AFLAC U.S. 290 256 230
Other business segments (6) (4) 2
------- ------- -------
Total business segments 1,055 903 734
Release of retirement liability 101 - -
Provision for the policyholder
protection fund - (64) (111)
Realized investment losses (102) (13) (2)
Interest expense, noninsurance
operations (16) (15) (10)
Corporate* (26) (33) (60)
------- ------- -------
Total earnings before
income taxes $ 1,012 $ 778 $ 551
======= ======= =======
*Includes investment income of $12 in 2000, $13 in 1999 and $2 in 1998
(In millions) 2000 1999 1998
-------- -------- --------
Advertising expense:
AFLAC Japan $ 62 $ 46 $ 21
AFLAC U.S. 38 33 34
------- ------- -------
Total advertising expense $ 100 $ 79 $ 55
======= ======= =======
Assets at December 31 were as follows:
(In millions) 2000 1999
-------- --------
Assets:
AFLAC Japan $ 31,882 $ 32,274
AFLAC U.S. 4,964 4,448
Other business segments 46 34
-------- --------
Total business segments 36,892 36,756
Corporate 5,993 5,213
Intercompany eliminations (5,653) (4,928)
-------- --------
Total assets $ 37,232 $ 37,041
======== ========
Total depreciation and amortization expense was $33 million in both 2000
and 1999, and $29 million in 1998. AFLAC Japan accounted for $20 million in
both 2000 and 1999, and $17 million in 1998.
Advertising and depreciation expenses are included in insurance expenses.
EXH 13-42
Total expenditures for property and equipment were $26 million in 2000,
$22 million in 1999 and $47 million in 1998. The 1998 expenditures primarily
related 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, 2000, $150 million, or 49.8% of total receivables were related
to AFLAC Japan's operations ($157 million, or 57.9%, at December 31, 1999).
POLICYHOLDER PROTECTION FUND: In 1998, the Japanese government created a
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. We
recognized a pretax charge of $111 million in the first quarter of 1998 for
our share of the life insurance industry's obligation to the fund. The after-
tax amount was $65 million, or $.12 per basic and diluted share.
In 1999, the Japanese government and the life insurance industry agreed
to legislation that increased the life insurance industry's legal obligation
to the fund. Our share of this additional obligation was recognized in the
fourth quarter of 1999 and decreased pretax earnings by $64 million ($41
million after taxes, or $.08 per basic share and $.07 per diluted share).
The total liability accrued for our remaining obligations to the Japanese
policyholder protection fund was $227 million and $262 million at December 31,
2000 and 1999, respectively.
In October 2000, two Japanese life insurance companies filed applications
with the court for protection under a special reorganization law for financial
institutions. Japanese government officials have indicated that they do not
expect any additional protection fund assessments to be imposed on the
insurance industry for the financial problems of these insurers.
YEN-TRANSLATION EFFECTS: AFLAC Japan owns U.S. dollar-denominated
securities, which serve as an economic currency hedge of a portion of our
investment in AFLAC Japan. We have designated the Parent Company's yen-
denominated notes payable and cross-currency swaps (Note 6) as a hedge of our
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) 2000 1999
-------- --------
AFLAC Japan net assets $ 3,648 $ 3,129
Less:
AFLAC Japan dollar-denominated
net assets 1,969 1,772
Parent Company yen-denominated
net liabilities 1,087 1,094
------- -------
Consolidated yen-denominated net assets
subject to foreign currency
translation fluctuations $ 592 $ 263
======= =======
EXH 13-43
The following table shows the yen/dollar exchange rates used for the
three-year period ended December 31, 2000, and their effect on selected
financial data.
2000 1999 1998
------ ------ ------
Balance Sheets:
Yen/dollar exchange rate at
December 31 114.75 102.40 115.70
Yen percent weakening (strengthening) 10.8% (13.0)% (12.4)%
Exchange effect on total assets (billions)* $ (3.6) $ 3.5 $ 2.8
Exchange effect on total
liabilities (billions)* $ (3.5) $ 3.5 $ 2.7
Statements of Earnings:
Average exchange rate for the year 107.83 113.96 130.89
Yen percent weakening (strengthening) (5.7)% (14.9)% 7.5%
Exchange effect on net earnings (millions)* $ 11 $ 54 $ (20)
Exchange effect on diluted net EPS* $ .02 $ .10 $ (.04)
*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 $199 million in 2000, $282 million in 1999
and $192 million in 1998. See Note 9 for information concerning restrictions
on remittances from AFLAC Japan.
EXH 13-44
(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, 2000
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities available for sale,
carried at fair value:
Fixed maturities:
Yen-denominated:
Government and guaranteed $ 6,554 $ 1,722 $ 52 $ 8,224
Municipalities 342 28 - 370
Public utilities 3,572 337 28 3,881
Sovereign and supranational 56 2 - 58
Banks/financial institutions 3,045 45 180 2,910
Other corporate 1,471 40 41 1,470
------- ------- ------- -------
Total yen-denominated 15,040 2,174 301 16,913
------- ------- ------- -------
Dollar-denominated:
Government 260 7 1 266
Municipalities 41 2 - 43
Mortgage-backed securities 429 9 - 438
Public utilities 325 4 13 316
Sovereign and supranational 139 7 - 146
Banks/financial institutions 2,072 41 74 2,039
Other corporate 2,099 50 138 2,011
------- ------- ------- -------
Total dollar-denominated 5,365 120 226 5,259
------- ------- ------- -------
Total fixed maturities 20,405 2,294 527 22,172
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Primarily banks/financial
institutions 2,010 1 299 1,712
Dollar-denominated:
Banks/financial institutions 337 9 12 334
------- ------- ------- -------
Total perpetual debentures 2,347 10 311 2,046
------- ------- ------- -------
Equity securities 161 93 18 236
------- ------- ------- -------
Total securities
available for sale $ 22,913 $ 2,397 $ 856 $ 24,454
======= ======= ======= =======
EXH 13-45
December 31, 2000
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities held to maturity,
carried at amortized cost:
Fixed maturities:
Yen-denominated:
Government $ 705 $ 28 $ 2 $ 731
Municipalities 328 38 - 366
Public utilities 584 5 59 530
Banks/financial institutions 1,115 43 17 1,141
Other corporate 913 36 15 934
------- ------- ------- -------
Total fixed maturities 3,645 150 93 3,702
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 3,442 83 202 3,323
------- ------- ------- -------
Total perpetual debentures 3,442 83 202 3,323
------- ------- ------- -------
Total securities held
to maturity $ 7,087 $ 233 $ 295 $ 7,025
======= ======= ======= =======
EXH 13-46
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities available for sale,
carried at fair value:
Fixed maturities:
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
Public utilities 271 2 17 256
Sovereign and supranational 203 1 3 201
Banks/financial institutions 2,028 12 115 1,925
Other corporate 2,021 8 108 1,921
------- ------- ------- -------
Total dollar-denominated 4,991 25 256 4,760
------- ------- ------- -------
Total fixed maturities 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 13-47
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Securities held to maturity,
carried at amortized cost:
Fixed maturities:
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 maturities 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
======= ======= ======= =======
Fair values for debt securities were determined using market quotations
provided by outside securities consultants, 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.
EXH 13-48
The amortized cost and fair values of our investments in fixed maturities
at December 31, 2000, 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 $ 302 $ 311 $ 125 $ 125
Due after one year through
five years 2,257 2,510 245 252
Due after five years through
10 years 1,855 2,353 429 435
Due after 10 years 12,264 13,361 2,500 2,388
U.S. mortgage-backed
securities 79 81 349 356
-------- -------- -------- --------
Total fixed maturities
available for sale $ 16,757 $ 18,616 $ 3,648 $ 3,556
======== ======== ======== ========
Held to maturity:
Due in one year or less $ 191 $ 191 $ - $ -
Due after one year through
five years 120 121 - -
Due after five years through
10 years 741 778 - -
Due after 10 years 2,593 2,612 - -
-------- -------- -------- --------
Total fixed maturities
held to maturity $ 3,645 $ 3,702 $ - $ -
======== ======== ======== ========
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.
In recent years we have 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, thereby creating an
economic maturity date.
EXH 13-49
The economic maturities of the perpetual debentures owned at December 31,
2000, were as follows:
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
--------- --------- --------- ---------
Available for sale:
Due after one year
through five years $ 27 $ 28 $ - $ -
Due after five years
through 10 years 152 157 100 101
Due after 10 years 1,994 1,693 74 67
------- ------- ------- -------
Total perpetual
debentures available
for sale $ 2,173 $ 1,878 $ 174 $ 168
======= ======= ======= =======
Held to maturity:
Due after one year
through five years $ 148 $ 153 $ - $ -
Due after five years
through 10 years 920 890 - -
Due after 10 years 2,374 2,280 - -
------- ------- ------- -------
Total perpetual
debentures held
to maturity $ 3,442 $ 3,323 $ - $ -
======= ======= ======= =======
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. The average duration of
policy liabilities was approximately 12 years for both 2000 and 1999. The
average duration of the yen-denominated debt securities was approximately 10
years in 2000 and nine years in 1999. Currently, when our debt securities
mature, the proceeds are reinvested at a yield below that of the average
interest required for the accretion of policy benefit liabilities on policies
issued in earlier years. Over the next five years, $3.0 billion at amortized
cost (with an average yield of 5.77%) of AFLAC Japan's yen-denominated debt
securities are scheduled to mature. However, the investment yield on new
investments has exceeded interest requirements on policies issued in recent
years. Several times since 1994 we have increased premium rates on new
policies issued in Japan to help offset the lower investment yields available
in Japan. Despite the shortfall in investment yields, adequate overall
margins still exist in the aggregate block of business.
EXH 13-50
Information regarding realized and unrealized gains and losses from
investments for the years ended December 31 follows:
(In millions) 2000 1999 1998
-------- -------- --------
Realized investment gains (losses)
on securities:
Debt securities:
Available for sale:
Gross gains from sales $ 9 $ 12 $ 16
Gross losses from sales (53) (39) (35)
Net gains (losses) from redemptions - (8) 1
Held to maturity:
Gross loss from impairment (57) - -
Gross gains from redemptions - 1 -
------ ------ ------
Total debt securities (101) (34) (18)
------ ------ ------
Equity securities:
Gross gains from sales 9 27 21
Gross losses from sales (10) (6) (5)
------ ------ ------
Total equity securities (1) 21 16
------ ------ ------
Net realized losses $ (102) $ (13) $ (2)
====== ====== ======
Changes in unrealized gains (losses):
Debt securities:
Available for sale $ 43 $ (447) $ (377)
Held to maturity (257) 34 154
Equity securities (3) 2 10
------ ------ ------
Net change in unrealized losses $ (217) $ (411) $ (213)
====== ====== ======
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at December 31 was as follows:
(In millions) 2000 1999
-------- --------
Unrealized gains on securities available
for sale $ 1,541 $ 1,501
Unamortized unrealized gains on securities
transferred to held to maturity 1,001 1,258
Less:
Policy liabilities - 840
Deferred income taxes 1,068 887
-------- --------
Shareholders' equity, net unrealized gains
on investment securities $ 1,474 $ 1,032
======== ========
EXH 13-51
The issuers of two debt securities held in our portfolio experienced
significant credit rating downgrades during the first half of 2000. During
the second quarter of 2000, we sold one security carried in the available-
for-sale category at a pretax loss of $34 million. We recorded a pretax
impairment loss of $57 million on the other security, which was carried in
the held-to-maturity category. We have reclassified this security to the
available-for-sale category. These losses, which were included in realized
investment losses, decreased net earnings by $58 million ($.11 per basic and
diluted share) for the year ended December 31, 2000.
At December 31, 2000, we owned debt securities rated below investment-
grade in the amount of $196 million at amortized cost ($166 million at fair
value), or .7% of total debt securities. The below investment-grade
securities were investment-grade at the time of purchase and were
subsequently downgraded by credit rating agencies.
The following debt securities individually exceeded 10% of shareholders'
equity at December 31:
2000 1999
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $ 5,755 $ 7,448 $ 6,403 $ 8,368
The Tokyo Electric Power Co., Inc. 857 979 898 1,057
Chubu Electric Power Co., Inc. 655 712 695 764
The Israel Electric Corporation
Limited 528 456 429 371
Dai-Ichi Kangyo Bank 457 487 512 522
Sumitomo Bank * * 452 462
Credit Suisse First Boston * * 427 398
Province of Quebec * * 394 407
Deutsche Bank * * 387 313
*Less than 10%
Private placement investments held by AFLAC Japan at amortized cost
accounted for $14.3 billion, or 48.0%, and $13.6 billion, or 45.8%, of total
debt securities at December 31, 2000 and 1999, respectively. Of the total
private placements, reverse-dual currency debt securities (principal payments
in yen, interest payments in dollars) accounted for $4.8 billion and $4.9
billion at amortized cost as of December 31, 2000 and 1999, respectively.
EXH 13-52
The components of net investment income for the years ended December 31
were as follows:
(In millions) 2000 1999 1998
-------- -------- --------
Fixed-maturity securities $ 1,280 $ 1,129 $ 985
Perpetual debentures 278 248 158
Short-term investments and
cash equivalents 7 7 8
Equity securities and other 4 2 3
------- ------- -------
Gross investment income 1,569 1,386 1,154
Less investment expenses 19 17 16
------- ------- -------
Net investment income $ 1,550 $ 1,369 $ 1,138
======= ======= =======
At December 31, 2000, debt securities with a fair value of $12 million
were on deposit with regulatory authorities. As of December 31, 2000, $183
million, at fair value, of AFLAC Japan's debt 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, cash collateral 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 obtained from an independent financial
information service.
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, 2000 and 1999, we had
security loans outstanding in the amounts of $123 million and $2.4 billion at
fair value, respectively. At December 31, 2000, we held cash in the amount of
$127 million as collateral for loaned securities. At December 31, 1999, we
held Japanese government bonds in the amount of $2.4 billion, at fair value,
as collateral for loaned securities. 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.
EXH 13-53
DERIVATIVES: We have cross-currency swaps outstanding related to our
$450 million senior notes. These cross-currency swaps have 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.
At December 31, 2000, we had outstanding interest rate swaps on 19.1
billion yen ($167 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, we make fixed-rate payments at 2.29% on one
loan and 1.24% on another loan and receive floating-rate payments (.55% at
December 31, 2000, plus loan costs of 25 and 20 basis points, respectively)
based on three-month Japanese yen LIBOR.
For information regarding new accounting requirements for derivative
instruments as of January 1, 2001, see Note 1, Accounting Pronouncements Not
Yet Adopted.
The fair values of the cross-currency and interest rate swaps are the
estimated amounts 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, 2000:
Counterparty Notional Amount
Credit Rating (In millions)
------------------- ---------------------
AA $ 318
A 195
BBB 104
-------
Total $ 617
=======
EXH 13-54
The carrying values and estimated fair values of the Company's financial
instruments as of December 31 were as follows:
2000 1999
------------------------ -----------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $ 25,817 $ 25,874 $ 25,248 $ 25,139
Perpetual debentures 5,488 5,369 5,927 5,756
Equity securities 236 236 215 215
Securities held as
collateral for
loaned securities* - - - 2,398
Liabilities:
Notes payable (excluding
capitalized leases) 1,048 1,043 999 962
Derivatives:
Cross-currency swaps:
Currency portion 34 34 93 93
Interest rate portion* (4) (4) (4) 15
Interest rate swaps* - 2 - 7
Payables for return of
collateral on loaned
securities* - - - 2,398
* Off-balance sheet financial instruments - the interest rate swap derivatives
will be recorded at fair value on the balance sheet as of January 1, 2001,
under the new accounting requirements of SFAS No. 133 (See Note 1).
The above table excludes liabilities for future policy benefits of $26.1
billion and $27.3 billion at December 31, 2000 and 1999, respectively, as
these liabilities are not considered financial instruments.
EXH 13-55
(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 2000 1999 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Japan: 1999-00 $ 242 $ 29 3.0% 3.0%
1997-99 1,298 993 3.5 3.5
1994-96 2,590 2,542 4.0-4.5 4.0-4.5
1974-94 17,755 18,951 5.25-7.0 5.0-5.65
U.S.:
1998-00 190 107 7.0 7.0
1986-00 1,448 1,327 6.0-8.0 6.0
1981-86 276 280 6.5-7.0 5.5-6.5
Other 157 150
Life insurance
and annuities:
Japan: 1999-00 57 7 3.0 3.0
1997-99 292 235 3.5 3.5
1994-96 580 544 4.0 4.0
1985-93 1,188 1,268 5.25-5.65 5.25-5.65
U.S.: 1956-00 41 37 4.0-6.0 4.0-6.0
Adjustment for
unrealized gains on
investments (Note 3) - 840
------ ------
Total $26,114 $27,310
====== ======
The weighted-average interest rates reflected in the consolidated
statements of earnings for future policy benefits for Japanese policies were
5.2% in 2000, 5.3% in 1999, and 5.4% in 1998; and for U.S. policies, 6.4% for
each year in the three-year period ended December 31, 2000.
EXH 13-56
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In millions) 2000 1999 1998
-------- -------- --------
Unpaid supplemental health claims -
beginning of year $ 1,558 $ 1,222 $ 987
------- ------- -------
Add claims incurred during the year
related to:
Current year 3,663 3,081 2,460
Prior years (285) (212) (136)
------- ------- -------
Total incurred 3,378 2,869 2,324
------- ------- -------
Less claims paid during the year:
On claims incurred during
current year 2,303 1,969 1,579
On claims incurred during
prior years 813 709 617
------- ------- -------
Total paid 3,116 2,678 2,196
------- ------- -------
Effect of foreign exchange rate
changes on unpaid claims (150) 145 107
------- ------- -------
Unpaid supplemental health claims -
end of year 1,670 1,558 1,222
Unpaid life claims - end of year 75 60 41
------- ------- -------
Total liability for
unpaid policy claims $ 1,745 $ 1,618 $ 1,263
======= ======= =======
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 13-57
(6) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In millions) 2000 1999
-------- --------
6.50% senior notes due April 2009 (principal
amount $450) $ 449 $ 449
1.55% yen-denominated Samurai notes due October 2005
(principal amount 30 billion yen) 261 -
Unsecured, yen-denominated notes payable to banks:
Reducing revolving credit agreement due July 2001:
2.29% fixed interest rate 99 222
Variable interest rate (.78% at December 31, 2000) 14 31
Revolving credit agreement due November 2002:
1.24% fixed interest rate 68 114
Variable interest rate (.73% at December 31, 2000) 157 138
Short-term - 45
Obligations under capitalized leases due
monthly through 2005, secured by computer
equipment in Japan 31 19
------ ------
Total notes payable $ 1,079 $ 1,018
====== ======
In September 2000, we filed a shelf registration statement with Japanese
regulatory authorities to issue up to 100 billion yen of yen-denominated
Samurai notes. These securities are not for sale to United States residents
or entities. On October 25, 2000, we issued in Japan 30 billion yen ($278
million) of 1.55% Samurai notes, due October 25, 2005. Issue costs were $1
million. These 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 premium.
In April 1999, we issued $450 million of 6.50% senior notes 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. The notional amount of the cross-currency swaps is
$450 million (55.6 billion yen) with a blended fixed interest rate of 1.67%.
At December 31, 2000 and 1999, other liabilities included $30 million and $89
million, respectively, representing the currency and accrued interest portions
of the fair value of the cross-currency swaps.
We have an unsecured 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 $125 million. At December 31, 2000, 11.4
billion yen ($99 million) was outstanding at a fixed interest rate and 1.6
billion yen ($14 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, 2000, 7.8
billion yen ($68 million) was outstanding at a fixed interest rate and 18.1
billion yen ($157 million) was outstanding at a variable interest rate under
this agreement.
EXH 13-58
For those loans denominated in yen, the principal amount of the loans as
stated in dollar terms will fluctuate due to changes in the yen/dollar
exchange rate.
The cross-currency swaps and the interest rate swaps related to the 2.29%
and 1.24% (fixed rates after swaps) loans are described in Note 4.
The aggregate contractual maturities of notes payable during each of the
years after December 31, 2000, are: 2001, $123 million; 2002, $234 million;
2003, $8 million; 2004, $4 million; 2005, $261 million; and thereafter, $449
million.
We were in compliance with all of the covenants of the credit agreements
at December 31, 2000.
(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
------- ------- -------
2000:
Current $ 319 $ 19 $ 338
Deferred - operations (73) 60 (13)
------- ------- -------
Total income tax expense $ 246 $ 79 $ 325
======= ======= =======
1999:
Current $ 211 $ 19 $ 230
Deferred - operations (1) 45 44
Deferred tax benefit from
Japanese tax rate reduction (185) 118 (67)
------- ------- -------
Total income tax expense $ 25 $ 182 $ 207
======= ======= =======
1998:
Current $ 252 $ 25 $ 277
Deferred - operations (88) (4) (92)
Deferred tax benefit from
Japanese tax rate reduction (121) - (121)
------- ------- -------
Total income tax expense $ 43 $ 21 $ 64
======= ======= =======
EXH 13-59
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) 2000 1999 1998
------ ------ ------
Income taxes based on U.S.
statutory rates $ 354 $ 272 $ 193
Deferred tax benefit from Japanese
tax rate reductions - (67) (121)
U.S. alternative minimum tax - - 12
Utilization of foreign tax credit
carryforwards (22) (20) (47)
Release of retirement liability (33) - -
Noninsurance losses generating no
current tax benefit - 3 9
Nondeductible expenses 14 12 9
Other, net 12 7 9
------ ------ ------
Income tax expense $ 325 $ 207 $ 64
====== ====== ======
Income tax expense (benefit) for the years ended December 31 was
allocated as follows:
(In millions) 2000 1999 1998
------ ------ ------
Statements of earnings $ 325 $ 207 $ 64
------ ------ ------
Other comprehensive income:
Change in unrealized foreign currency
translation gains 135 (141) (29)
Unrealized gains on investment securities:
Unrealized holding gains (losses)
arising during the year 146 (75) 125
Reclassification adjustment
for realized (gains) losses
included in net earnings 34 9 2
------ ------ ------
Total income taxes allocated to
other comprehensive income 315 (207) 98
------ ------ ------
Additional paid-in capital(exercise
of stock options) (2) (2) (1)
------ ------ ------
Total income taxes $ 638 $ (2) $ 161
====== ====== ======
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 existed 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 13-60
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
$67 million ($.13 per basic share and $.12 per diluted share). The 1998 tax
rate reduction increased net earnings in the first quarter of 1998 by $121
million ($.23 per basic share and $.22 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.
Changes in unrealized foreign currency translation gains/losses included
deferred income tax expense of $76 million in 2000 and deferred income tax
benefits of $80 million in 1999 and $29 million in 1998 that represented
Japanese income taxes on currency translation gains/losses that arose for
Japanese tax purposes from the conversion of AFLAC Japan's dollar-denominated
investments into yen.
The income tax effects of the temporary differences that gave rise to
deferred income tax assets and liabilities as of December 31 were as follows:
(In millions) 2000 1999
-------- --------
Deferred income tax liabilities:
Deferred acquisition costs $ 1,077 $ 1,204
Unrealized gains on investment securities 455 415
Difference in tax basis of investment
in AFLAC Japan 82 -
Other basis differences in investment
securities 256 725
Premiums receivable 92 79
Unrealized exchange gain on yen-denominated
notes payable 6 -
Other liabilities 3 -
------ ------
Total deferred income tax liabilities 1,971 2,423
------ ------
Deferred income tax assets:
Difference in tax basis of investment in
AFLAC Japan - 227
Unrealized exchange loss on yen-denominated
notes payable - 58
Policy benefit reserves 63 405
Policyholder protection fund 28 67
Unfunded retirement benefits 34 71
Other accrued expenses 74 80
Tax credit carryforwards 112 96
Other 187 211
------ ------
Total gross deferred tax assets 498 1,215
Less valuation allowance 149 157
------ ------
Total deferred income tax assets 349 1,058
------ ------
Net deferred income tax liability 1,622 1,365
Current income tax liability 272 146
------ ------
Total income tax liability $ 1,894 $ 1,511
====== ======
EXH 13-61
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 noninsurance loss
carryforwards that exceed projected future offsets. Under U.S. income tax
rules, only 35% of noninsurance losses can be offset against life insurance
taxable income each year. During 2000, the valuation allowance for deferred
tax assets decreased by $8 million (increased by $68 million in 1999) due to
changes in carryforwards of foreign tax credits, alternative minimum tax
credits and noninsurance losses. For current U.S. income tax purposes,
foreign tax credit carryforwards of $32 million and alternative minimum tax
credits of $79 million were available at December 31, 2000. The foreign tax
credit carryforwards expire in 2004.
(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) 2000 1999 1998
-------- -------- --------
Common stock - issued:
Balance at beginning of year 640,698 635,941 632,761
Exercise of stock options 4,115 4,757 3,180
-------- -------- --------
Balance at end of year 644,813 640,698 635,941
-------- -------- --------
Treasury stock:
Balance at beginning of year 109,216 104,573 99,889
Purchases of treasury stock:
Open market 9,657 8,633 7,612
Other 269 375 425
Shares issued to sales associates
stock bonus plan and AFL
Stock Plan (1,182) (1,664) (2,437)
Exercise of stock options (2,357) (2,701) (916)
-------- -------- --------
Balance at end of year 115,603 109,216 104,573
-------- -------- --------
Shares outstanding at end of year 529,210 531,482 531,368
======== ======== ========
As of December 31, 2000, we had approximately 16.5 million shares
available for purchase under the share repurchase program authorized by the
board of directors.
STOCK SPLIT: On February 13, 2001, the board of directors declared a
two-for-one stock split to shareholders of record at the close of business on
February 27, 2001, payable on March 16, 2001. Share and per-share amounts
have been adjusted to reflect this split.
After the stock split, the par value will remain $.10 per share. The
adjustment to increase the common stock account will be recorded on March 16,
2001. In 2000 shareholders approved an increase in the number of authorized
shares from 400 million to one billion.
EXH 13-62
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 options have a
term of 10 years. The exercise price is equal to the fair market value at the
date of grant. Therefore, we do not recognize compensation expense related to
stock options. The options are exercisable immediately unless they are
subject to a vesting schedule determined by the board of directors. At
December 31, 2000, 13.4 million shares were available for future grants.
The following table summarizes stock option activity:
Weighted-Average
Option Exercise Price
(In thousands of shares) Shares per Share
---------- ----------------
Outstanding at December 31, 1997 32,957 $ 5.75
Granted in 1998 3,906 15.09
Canceled in 1998 (67) 11.75
Exercised in 1998 (4,296) 3.46
-------
Outstanding at December 31, 1998 32,500 7.16
Granted in 1999 2,479 23.39
Canceled in 1999 (155) 15.21
Exercised in 1999 (7,665) 4.67
-------
Outstanding at December 31, 1999 27,159 9.30
Granted in 2000 5,619 22.85
Canceled in 2000 (161) 14.39
Exercised in 2000 (6,636) 5.12
-------
Outstanding at December 31, 2000 25,981 $ 13.27
=======
(In thousands of shares) 2000 1999 1998
---------- ---------- ----------
Shares exercisable at
end of year 16,782 22,168 25,907
======= ======= =======
EXH 13-63
The following table summarizes information about stock options
outstanding at December 31, 2000:
(In thousands Options Outstanding Options Exercisable
of shares) ----------------------------------- ----------------------
Wgtd.-Avg. Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs) Price Exercisable Price
- --------------- ----------- ----------- --------- ----------- ---------
$ 1.23 - $ 4.03 610 .9 $ 3.25 610 $ 3.25
4.71 4,846 2.5 4.71 4,846 4.71
4.80 - 7.92 5,013 4.7 7.35 5,013 7.35
8.48 - 13.66 4,131 6.3 11.67 4,043 11.63
13.84 - 21.16 4,735 7.9 16.80 1,461 15.16
21.48 - 23.23 5,122 9.3 23.11 769 22.90
23.41 - 34.48 1,524 9.0 24.31 40 24.97
------ ------
$ 1.23 - $34.48 25,981 6.2 $ 13.27 16,782 $ 8.90
====== ======
As permitted by SFAS No. 123, which became effective in 1995, 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:
2000 1999 1998
-------- -------- --------
Decrease to:
Net earnings (in millions) $ 27 $ 13 $ 13
Net earnings per share - basic .05 .03 .02
Net earnings per share - diluted .05 .02 .02
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, 2000:
2000 1999 1998
--------- --------- ---------
Expected life from vesting
date (years) 4.2-5.8 3.7-4.7 3.5-4.4
Dividend yield .5% .6% .6%
Expected volatility 32.0% 30.3% 27.3%
Risk-free interest rate 6.0% 6.0% 5.5%
These fair value amounts were then amortized over the vesting periods of
the related options.
EXH 13-64
The pro forma information presented above is not indicative of future
amounts. We were required to apply SFAS No. 123 prospectively. Therefore,
the above pro forma disclosures 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 $5.6 billion at
December 31, 2000, on a GAAP basis. AFLAC Japan accounted for $3.6 billion,
or 65.2%, of these net assets.
Our insurance subsidiaries are required to report their results of
operations and financial position to state insurance regulatory authorities,
on the basis of statutory accounting practices prescribed or permitted by such
authorities. Our branch in Japan, AFLAC Japan, must report to the Japanese
Financial Services Agency (FSA). As determined on a U.S. statutory accounting
basis, AFLAC's net income, which includes realized investment gains and
losses, was $210 million in 2000, $344 million in 1999 and $231 million in
1998. Capital and surplus was $1.7 billion and $1.6 billion at December 31,
2000 and 1999, respectively.
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) 2000 1999
-------- --------
Net assets on GAAP basis $ 5,572 $ 4,874
Adjustment of debt securities from fair value
to amortized cost (2,113) (2,691)
Elimination of deferred policy acquisition costs (3,663) (3,677)
Adjustment to policy liabilities 796 1,801
Elimination of deferred income taxes 1,678 1,463
Other, net (597) (164)
------- -------
Net assets on U.S. statutory
accounting basis $ 1,673 $ 1,606
======= =======
The National Association of Insurance Commissioners has recodified
statutory accounting principles to promote standardization throughout the
industry. We are adopting these new statutory accounting principles effective
January 1, 2001. As a result, statutory net assets will increase by
approximately $130 million on January 1, 2001.
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. Amounts available for dividends,
EXH 13-65
management fees (see Note 2) and other payments to the Parent Company by its
insurance subsidiary may fluctuate due to different accounting methods
required by regulatory authorities. These payments are also 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
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, which excludes realized investment gains and losses,
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 2001 in excess of $216 million would require such approval. Dividends
paid by AFLAC during 2000 were $234 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 $157 million in 2000, $243 million in 1999 and $154 million
in 1998. In light of the deregulation of the insurance market, we elected to
repatriate less than the maximum amount in 2000 in order to maintain a strong
solvency margin in Japan. In 2000, the maximum amount we could have
repatriated was $351 million. We repatriated the maximum amount in both 1999
and 1998.
Net assets (unaudited) of AFLAC Japan, based on Japanese statutory
accounting practices, aggregated $777 million and $638 million at December 31,
2000 and 1999, respectively. Japanese statutory accounting practices differ
in many respects from U.S. GAAP. Under Japanese statutory accounting
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 currently
carried at cost less certain market value adjustments for foreign exchange
losses on dollar-denominated securities.
For the Japanese reporting fiscal year ending March 31, 2002, AFLAC Japan
will be required to adopt a new Japanese statutory accounting standard
regarding fair value accounting for investments. Currently, debt securities
are recorded at amortized cost for FSA purposes. Under the new accounting
standard AFLAC Japan will be required to record debt securities in four
categories: at fair value in an available-for-sale category, at amortized
cost in a held-to-maturity category, at amortized cost in a special category
for securities held for long-term holding purposes, or at fair value in a
trading category.
Under this new regulatory accounting standard, the unrealized gains and
losses on debt securities available for sale will be reported in FSA capital
and surplus. This new accounting method may result in significant
fluctuations in FSA equity, in the AFLAC Japan solvency margin and in amounts
available for annual profit repatriation.
EXH 13-66
(10) BENEFIT PLANS
Reconciliations of the funded status of the basic employee defined-
benefit pension plans with amounts recognized in the consolidated balance
sheets as of December 31 were as follows:
2000 1999
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Projected benefit obligation:
Benefit obligation at
beginning of year $74,186 $62,358 $43,423 $60,420
Service cost 4,458 2,891 4,675 2,938
Interest cost 2,093 4,314 1,658 4,311
Actuarial loss (gain) 1,647 5,172 (2,498) (5,799)
Benefits paid (1,039) (1,326) (554) (1,376)
Effect of foreign exchange
rate changes (8,416) - 6,010 -
Plan amendments - - - 1,864
Benefit obligations assumed
from government plan - - 21,472 -
------ ------ ------ ------
Benefit obligation at
end of year 72,929 73,409 74,186 62,358
------ ------ ------ ------
Plan assets:
Fair value of plan assets at
beginning of year 49,830 56,425 23,441 48,541
Actual return on plan assets (628) 8,208 727 9,260
Employer contribution 6,138 - 5,429 -
Benefits paid (1,039) (1,326) (554) (1,376)
Effect of foreign exchange
rate changes (5,632) - 3,677 -
Assets transferred from
government plan - - 17,110 -
------ ------ ------ ------
Fair value of plan assets at
end of year 48,669 63,307 49,830 56,425
------ ------ ------ ------
Funded status (24,260) (10,102) (24,356) (5,933)
Unrecognized net actuarial
loss (gain) 8,455 1,273 8,755 (703)
Unrecognized transition
obligation (asset) 3,772 (597) 4,578 (718)
Unrecognized prior service cost 828 1,754 1,013 1,890
------ ------ ------ ------
Accrued benefit cost $(11,205) $(7,672) $(10,010) $(5,464)
====== ====== ====== ======
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.
EXH 13-67
The components of retirement expense and actuarial assumptions for the
years ended December 31 are as follows:
2000 1999 1998
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Components of net periodic
benefit cost:
Service cost $4,458 $2,891 $4,675 $2,938 $2,940 $2,362
Interest cost 2,093 4,314 1,658 4,311 1,018 3,491
Expected return on plan
assets (1,470) (5,013) (1,516) (4,313) (451) (4,086)
Recognized net actuarial
loss 202 - 363 265 218 -
Amortization of transition
obligation (asset) 333 (121) 258 (122) 77 (122)
Amortization of prior
service cost 81 138 77 138 67 16
----- ----- ----- ----- ----- -----
Net periodic benefit cost $5,697 $2,209 $5,515 $3,217 $3,869 $1,661
===== ===== ===== ===== ===== =====
Weighted-average actuarial
assumptions used in the
calculations:
Discount rate - net
periodic benefit cost 3.0% 7.0% 3.0% 6.5% 3.0% 7.0%
Discount rate - benefit
obligations 3.0 7.0 3.0 7.0 3.0 6.5
Expected return on plan
assets 2.5 9.0 4.5 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 surviving spouse of the Company's former chairman of the
board, John B. Amos, had been receiving lifetime spousal retirement benefits
under a shareholder-approved employment contract. The benefits were payable
at .5% of the Company's pretax earnings for the previous year, as defined in
the agreement. In May 2000, the former chairman's spouse unexpectedly
passed away. The Company had accrued an unfunded liability for projected
retirement payments based on a normal life expectancy. The release of the
remaining accrued liability increased net earnings by $99 million ($.19 per
basic share and $.18 per diluted share) for the year ended December 31,
2000.
Due to the release of the retirement liability, we recorded a net benefit
of $96 million related to all of the unfunded plans for 2000. We recognized
expense for these plans of $39 million in 1999 and $30 million in 1998. The
accrued retirement liability for the unfunded supplemental retirement plans at
December 31, 2000 and 1999, was $151 million and $260 million, respectively.
The actuarial present value of projected benefit obligations was $150 million
and $260 million at December 31, 2000 and 1999, respectively. The discount
rates used were the same as for the funded plans.
EXH 13-68
Reconciliations 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) 2000 1999
-------- --------
Benefit obligation:
Benefit obligation at beginning of year $ 12,488 $ 10,822
Service cost 408 361
Interest cost 874 752
Actuarial loss 1,610 503
Plan amendments - 393
Benefits paid (815) (343)
------- -------
Unfunded benefit obligation at end of year 14,565 12,488
Unrecognized net actuarial gain (loss) (1,080) 530
Unrecognized prior service cost (342) (368)
------- -------
Accrued benefit cost $ 13,143 $ 12,650
======= =======
The components of expenses for the retiree medical program and other
postretirement benefits, along with actuarial assumptions, were as follows for
the years ended December 31:
(In thousands) 2000 1999 1998
-------- -------- --------
Service cost $ 408 $ 361 $ 320
Interest cost 874 752 684
Recognized net actuarial gain - - (30)
Amortization of prior service cost 25 26 -
------- ------- -------
Net periodic benefit cost $ 1,307 $ 1,139 $ 974
======= ======= =======
Discount rate:
Net periodic cost 7.0% 6.5% 7.0%
Benefit obligations 7.0 7.0 6.5
Effect of 1-percentage point increase
in health care cost trend rate:
On total of service and interest
cost components $ 136 $ 119 $ 102
On postretirement benefit obligation 1,180 991 791
Effect of 1-percentage point decrease
in health care cost trend rate:
On total of service and interest
cost components (116) (101) (97)
On postretirement benefit obligation (1,010) (846) (743)
The projected health care cost trend rate used in 2000 was 10%, graded to
7% over five years.
EXH 13-69
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
insurance policies. The cost of these awards, which is included in deferred
policy acquisition costs, amounted to $18 million in both 2000 and 1999, and
$10 million in 1998. 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 13-70
(12) SUPPLEMENTARY INFORMATION
2000 1999 1998
-------- -------- --------
Weighted-average shares used in
calculating earnings per share
(in thousands):
Average outstanding shares used
for calculating basic EPS 530,607 531,737 532,609
Dilutive effect of stock options 14,299 19,108 19,136
-------- -------- --------
Average outstanding shares used
for calculating diluted EPS 544,906 550,845 551,745
======== ======== ========
- --------------------------------------------------------------------------
Other:
Policy acquisition costs deferred
during the year (in millions) $ 612 $ 556 $ 436
Commissions deferred as a
percentage of total acquisition
costs deferred 71% 72% 69%
Personnel compensation and
benefits as a percentage
of insurance expenses 42% 40% 37%
- --------------------------------------------------------------------------
Supplemental disclosures of cash
flow information (in millions):
Income taxes paid $ 215 $ 411 $ 210
Interest paid 21 17 12
Impairment loss on fixed
maturity security 57 - -
Noncash financing activities:
Capital lease obligations 25 4 7
Treasury shares issued for:
Dividends to shareholders 5 5 4
Associate stock bonus plan 7 54 10
- --------------------------------------------------------------------------
Property and equipment (in millions):
Land $ 132 $ 147 $ 131
Buildings 355 374 335
Equipment 169 156 159
-------- -------- --------
656 677 625
Less accumulated depreciation 175 168 159
-------- -------- --------
Net property and equipment $ 481 $ 509 $ 466
======== ======== ========
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EXH 13-71
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 comprises 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 with 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 13-72
INDEPENDENT AUDITORS' REPORT
The shareholders and board of directors of AFLAC Incorporated:
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Atlanta, Georgia
January 26, 2001
EXH 13-73
Unaudited Consolidated Quarterly Financial Data
(In millions, except for per-share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,398 17.1% $ 2,358 16.1% $ 2,475 12.7% $ 2,488 5.2%
Net earnings 156 (20.1) 202(1) 54.8 163 13.5 166 63.2
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .29 (21.6)% $ .38(1) 52.0% $ .31 14.8% $ .31 63.2%
Net earnings (diluted) .29 (17.1) .37(1) 54.2 .30 15.4 .30 57.9
Cash dividends .038 .043 .043 .043
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
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(2) 21.9 130 26.9 144 33.5 102(3) (12.2)
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .37(2) 23.3% $ .25 31.6% $ .27 35.0% $ .19(3) (13.6)%
Net earnings (diluted) .35(2) 20.7 .24 26.3 .26 30.0 .19(3) (9.5)
Cash dividends .033 .038 .038 .038
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes a benefit of $99 ($.19 per basic share, $.18 per diluted share) from the termination of a retirement liability
and realized investment loss of $58 ($.11 per basic and diluted share); (2) Includes gain of $67 ($.13 per basic share, $.12
per diluted share) due to a reduction in deferred tax liabilities from a tax rate cut in Japan; (3) Includes a charge of $41
($.08 per basic share, $.07 per diluted share) for the policyholder protection fund in Japan
Per-share amounts reflect the two-for-one stock split payable on March 16, 2001.
EXH 13-74
21