EXHIBIT 13
EXH 13
EXHIBIT 13
The following information is contained in the 1996 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 1996 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, 1996, are as
follows:
Quarterly Common Stock Prices
1996 High Low Close
---------------------------------------------------------------------
4th Quarter $ 44.00 $ 35.75 $ 42.75
3rd Quarter 37.38 28.25 35.50
2nd Quarter 32.88 29.00 29.88
1st Quarter 32.88 28.83 31.25
1995
--------------------------------------------------------------------
4th Quarter $ 29.42 $ 26.33 $ 29.00
3rd Quarter 29.25 24.33 27.67
2nd Quarter 29.83 26.00 29.17
1st Quarter 28.50 21.25 27.33
1994
--------------------------------------------------------------------
4th Quarter $ 22.92 $ 21.33 $ 21.33
3rd Quarter 24.08 21.67 22.75
2nd Quarter 23.25 19.33 22.50
1st Quarter 21.25 16.83 20.50
EXH 13-1
ITEM 5. (b) Holders:
1996 1995 1994
- ---------------------------------------------------------------------------
Number of common
shares outstanding 137,884,887 141,974,309 149,454,647
Number of registered
common shareholders 49,474 39,317 34,628
Approximate number of
common shareholders 113,300 88,700 67,500
ITEM 5. (c) Quarterly cash dividends:
1996 1995
------ ------
4th Quarter $.10 $.087
3rd Quarter .10 .087
2nd Quarter .10 .087
1st Quarter .087 .077
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 13-21, and Note
10, Statutory Accounting and Dividend Restrictions, of the Notes to the
Consolidated Financial Statements, also presented in this Exhibit 13 on page
13-57.
EXH 13-2
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except for per-share amounts):
For the Year 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Revenues:
Premiums, principally supplemental health $ 5,910,036 $ 6,070,830 $ 5,180,732 $ 4,225,390 $ 3,369,201
Net investment income 1,021,955 1,024,960 838,825 689,272 533,166
Realized investment gains (losses) 1,980 (270) (58) 2,937 (3,264)
Gain on sale of television station 60,264 - - - -
Other income 105,968 95,100 91,259 83,019 87,369
---------- ---------- ---------- ---------- ----------
Total revenues 7,100,203 7,190,620 6,110,758 5,000,618 3,986,472
---------- ---------- ---------- ---------- ----------
Benefits and expenses:
Benefits and claims 4,895,522 5,034,266 4,256,541 3,423,297 2,692,353
Expenses 1,554,680 1,555,359 1,349,881 1,148,937 969,575
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 6,450,202 6,589,625 5,606,422 4,572,234 3,661,928
---------- ---------- ---------- ---------- ----------
Pretax earnings 650,001 600,995 504,336 428,384 324,544
Income taxes 255,638 251,938 211,546 184,495 141,177
---------- ---------- ---------- ---------- ----------
Net earnings $ 394,363 $ 349,057 $ 292,790 $ 243,889(1) $ 183,367
========== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net earnings $ 2.73 $ 2.33 $ 1.89 $ 1.55(1) $ 1.19
Cash dividends .387 .338 .298 .26 .23
Shareholders' equity 15.42 15.03 11.72 8.80 7.00
Price range: High $ 44.00 $ 29.83 $ 24.08 $ 22.67 $ 18.60
Low 28.25 21.25 16.83 16.50 12.80
Close 42.75 29.00 21.33 19.00 18.40
Price/earnings ratio:* High 18.3x 12.8x 12.7x 14.8x 15.6x
Low 11.8 9.1 8.9 10.8 10.8
Common shares used for EPS 144,512 149,540 154,652 157,801 153,815
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
At Year-End
Assets:
Investments and cash $20,746,535 $20,044,964 $15,993,768 $12,469,140 $ 9,461,341
Other 4,276,277 5,171,545 4,293,311 2,973,546 2,440,033
---------- ---------- ---------- ---------- ----------
Total assets $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374
========== ========== ========== ========== ==========
Liabilities and shareholders' equity:
Policy liabilities $20,234,205 $19,513,504 $16,006,607 $12,065,471 $ 9,350,241
Notes payable 353,533 327,268 184,901 122,062 125,800
Income taxes, primarily deferred 1,181,121 1,397,709 1,392,441 950,278 848,514
Other liabilities 1,128,384 1,843,887 951,363 939,251 494,937
Shareholders' equity 2,125,569 2,134,141 1,751,767 1,365,624 1,081,882
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
Operating earnings** $ 347,425 $ 348,734 $ 293,053 $ 241,654(1) $ 183,426
Operating earnings per share** $ 2.40 $ 2.33 $ 1.89 $ 1.53(1) $ 1.19
Pretax profit margin** 8.4% 8.4% 8.3% 8.5% 8.2%
After-tax profit margin** 4.9% 4.8% 4.8% 4.8%(1) 4.6%
Operating return on equity*** 19.9% 22.0% 20.4% 19.9%(1) 18.4%
Yen/dollar exchange rate at year-end 116.10 102.95 99.85 112.00 124.70
Average yen/dollar exchange rate 108.84 94.10 102.26 111.21 126.67
Notes: (1) Excludes gain of $11,438 ($.07 per share) from cumulative effect of accounting changes in 1993.
(*) Based on operating earnings per share.
(**) Excludes realized investment gains/losses, net of tax, and in 1996, the gain from the sale of a
television station.
(***)Excludes realized investment gains/losses and unrealized gains on securities available for sale, net.
For segment and foreign information, see Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Note 2 of Notes to the Consolidated Financial Statements.
EXH 13-4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The primary business of AFLAC Incorporated (the Parent Company) and
subsidiaries (the Company) is supplemental health insurance, which is
marketed and administered primarily through American Family Life Assurance
Company of Columbus (AFLAC). Most of AFLAC's policies are individually
underwritten in the payroll market, with premiums paid by the employee. The
Company's operations in Japan (AFLAC Japan) and the United States (AFLAC
U.S.) service the two markets for the Company's insurance operations. AFLAC
Japan and AFLAC U.S. are the primary components for this discussion and
analysis due to their significance to the Company's consolidated financial
condition and results of operations.
The Company paid a three-for-two stock split on March 18, 1996. All
share and per-share amounts have been restated for the stock split.
RESULTS OF OPERATIONS
During 1996, the Company entered into definitive agreements for the
sale of its broadcast division business consisting of seven network-
affiliated television stations. The total pretax gain from this transaction
is estimated to be $325 million. Finalization of the transaction is subject
to approval by the Federal Communications Commission. The sale of one
station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996.
The pretax and after-tax gains recognized on the sale of WAFB-TV in 1996
were $60.3 million and $48.2 million, respectively. The effect of the after-
tax gain on 1996 net earnings per share was $.33. Management expects the
sale of the six remaining stations to be finalized during the first half of
1997. For further information, see Note 2 of the Notes to the Consolidated
Financial Statements.
Net earnings (including realized investment gains/losses and the gain
on the sale of the television station in 1996) were $394.4 million, or $2.73
per share, in 1996, compared with $349.1 million, or $2.33 per share, in
1995, and $292.8 million, or $1.89 per share, in 1994.
Operating earnings per share (excluding realized investment gains/losses
and the gain on the sale of the television station in 1996) increased 3.0%
to $2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994.
Operating earnings were $347.4 million in 1996, $348.7 million in 1995 and
$293.1 million in 1994.
EXH 13-5
The following table sets forth the results of operations by business
component for the years shown and the percentage changes from the previous
year.
SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT
(In millions, except for per-share amounts)
Percentage change Years ended
over previous year December 31,
------------------ ------------------------
1996 1995 1996 1995 1994
------------------ ------------------------
Insurance operations (excluding
realized investment gains and
losses):
AFLAC Japan................. (5.1)% 19.1% $532.8 $561.4 $471.4
AFLAC U.S................... 23.0 15.8 128.5 104.5 90.2
----- ----- -----
Total (.7) 18.6 661.3 665.9 561.6
Broadcast division operations.. 35.0 10.4 25.6 19.0 17.2
Interest expense, noninsurance
operations................... (10.8) (14.7) (12.5) (11.3) (9.9)
Capitalized interest,
building construction........ - - 2.4
Corporate expenses, other
operations and eliminations.. (20.0) (7.9) (86.6) (72.3) (66.9)
----- ----- -----
Pretax operating earnings.. (2.2) 19.2 587.8 601.3 504.4
Realized investment
gains (losses)............... 1.9 (.3) (.1)
Gain on sale of television
station...................... 60.3 - -
----- ----- -----
Earnings before income
taxes.................... 8.2 19.2 650.0 601.0 504.3
Income taxes................... 1.5 19.1 255.6 251.9 211.5
----- ----- -----
Net earnings............... 13.0% 19.2% $394.4 $349.1 $292.8
==== ==== ===== ===== =====
Net earnings per share..... 17.2% 23.3% $ 2.73 $ 2.33 $ 1.89
==== ==== ===== ===== =====
============================================================================
The following discussion of earnings comparisons focuses on pretax
operating earnings and excludes realized investment gains/losses and the
gain of $60.3 million from the sale of one television station in 1996.
Foreign Currency Translation
Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar
exchange rate can have a significant effect on the Company's reported
results. During the first half of 1995, the yen strengthened substantially
versus the dollar. In the third quarter of 1995, the yen began to weaken in
relation to the dollar and continued to weaken throughout 1996. The average
yen-to-dollar exchange rates were 108.84 in 1996, 94.10 in 1995 and 102.26
in 1994. Operating earnings per share, which were
EXH 13-6
affected by the fluctuations in the value of the yen, increased 3.0% to
$2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994. The
weakening of the yen in 1996 lowered operating earnings by approximately
$.29 per share in 1996 compared with 1995, and the strengthening of the yen
in 1995 and 1994 benefited operating earnings by $.15 per share in 1995
compared with 1994 and $.12 per share in 1994 compared with 1993. These
per-share amounts were solely attributable to the translation effect of the
fluctuations in the yen and not to any fundamental change in business
operations.
The Company sets its growth objective for operating earnings per share
before the effect of foreign currency fluctuations. Excluding the effect of
currency fluctuations, operating earnings per share increased 15.5%, 15.3%
and 15.7% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The goal for 1996 was 15% growth in operating earnings per share
excluding the effect of foreign currency translation. In the fourth quarter
of 1996, the Company raised its primary financial objective for 1997 through
2000 from 13%-15% annual growth in operating earnings per share to 15%-17%,
excluding the effect of foreign currency translation.
The following table illustrates the effect of foreign currency
translation on the Company's reported results by comparing those results as
if foreign currency rates had remained unchanged. In years when the yen
weakens, translating yen into dollars causes smaller increases or negative
percentage changes for financial results in dollars. When the yen
strengthens, translating yen into dollars causes larger increases for
financial results in dollars.
Supplemental Consolidated Data
Selected Percentage Changes
Years Ended December 31,
Adjusted to
As Exclude Foreign
Reported Currency Changes*
---------------------- ----------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------
Premium income (2.6)% 17.2% 22.6% 10.1% 9.2% 14.3%
Net investment income (.3) 22.2 21.7 11.9 14.2 13.6
Total revenues** (1.3) 17.7 22.2 11.3 9.8 14.0
Total benefits and
expenses (2.1) 17.5 22.6 10.5 9.7 14.5
Operating earnings*** (.4) 19.0 21.3 11.5 11.3 13.1
Operating earnings per
share*** 3.0 23.3 23.5 15.5 15.3 15.7
- ----------------------------------------------------------------------------
* Amounts excluding foreign currency changes for each year shown above
were determined using the average yen/dollar exchange rate for each
respective prior year.
** Includes the gain from the sale of the television station in 1996.
***Excludes realized investment gains/losses and, in 1996, the gain on the
sale of the television station.
============================================================================
EXH 13-7
The Company's objective for 1997 is to increase operating earnings per
share by 17% excluding the effect of currency translation. However, if that
objective is achieved and the yen/dollar exchange rate averages 120.00
compared with the 1996 average rate of 108.84, operating earnings per share
including foreign currency translation would increase by approximately 10%
in 1997.
Despite the weakening of the yen during 1996, operating earnings per
share increased in each year of the three-year period ended December 31,
1996. The increases reflected strong earnings in the functional currencies
of AFLAC's core insurance operations in Japan and the United States,
improved operating earnings by the AFLAC Broadcast Division, and a
consolidated benefit from additional investment income associated with
profit repatriations from AFLAC Japan to AFLAC U.S. Partially offsetting the
increases were higher corporate expenses and increased interest expense
associated with the Company's share repurchase program. However, the share
repurchase program benefited earnings per share.
Profit Repatriation
AFLAC Japan repatriated profits to AFLAC U.S. of $217.3 million in
1996, $140.5 million in 1995, $132.9 million in 1994, $97.9 million in 1993
and $33.4 million in 1992. The profit transfers to AFLAC U.S. adversely
impact AFLAC Japan's investment income. However, profit repatriations
benefit AFLAC U.S. investment income and consolidated operations because
higher investment yields can be obtained on funds invested in the United
States. Also, income tax expense is presently lower on investment income
earned in the United States. Management estimates that cumulative profit
transfers from 1992 through 1996 have benefited consolidated net earnings by
$25.7 million in 1996, $13.9 million in 1995 and $7.4 million in 1994.
Repatriated profits represent a portion of the after-tax earnings
reported to the Japanese Ministry of Finance as of March 31 each year. Such
regulatory basis earnings are based on accounting principles that differ
materially from generally accepted accounting principles. Such differences
relate primarily to valuation of investments, policy benefit and claim
reserves, acquisition costs and deferred income taxes. Japanese regulatory
earnings and related profit repatriations may therefore vary materially from
year to year because of these differences. Management currently expects
that the 1997 profit repatriation amount will fall between the amounts
transferred in 1995 and 1996.
Share Repurchase Program
During 1996, the board of directors authorized the purchase of up to an
additional 7.0 million shares of AFLAC Incorporated common stock. Including
shares remaining under a previous authorization, the Company had approval to
purchase up to 8.0 million shares as of December 31, 1996. The Company had
purchased 20.4 million shares from the inception of the plan in February
1994 through December 31, 1996. The difference in the percentage increases
of net earnings and net earnings per share primarily reflects the impact of
the share repurchase program.
The shares purchased were financed with available cash and bank
borrowings. Interest expense related to the share repurchase program was
$9.4 million in 1996, $5.3 million in 1995 and $2.6 million in 1994.
Consolidated interest expense, including interest expense from insurance
EXH 13-8
operations, was $16.2 million in 1996, $15.6 million in 1995 and $13.5
million in 1994.
Income Taxes
The Company's effective income tax rates were 39.3% in 1996, and 41.9%
in both 1995 and 1994. Japanese income taxes on AFLAC Japan's operating
results, which were taxed at Japan's corporate income tax rate of 45.3%,
made up most of the Company's income tax expense. The decrease in the
effective tax rate in 1996 resulted from changes in the contributions from
the Company's business components, primarily the gain on the sale of the
television station.
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to the
Company's 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 ranks
fourth in terms of individual policies in force and 17th in terms of assets.
The transfer of profits from AFLAC Japan to AFLAC U.S. distorts
comparisons of operating results between years. Therefore, the AFLAC Japan
summary of operations table on the following page presents investment
income, total revenues and pretax operating earnings calculated on a pro
forma basis in order to improve comparability between years. The pro forma
adjustment represents cumulative investment income foregone by AFLAC Japan
on funds repatriated to AFLAC U.S. during 1992 through 1996.
EXH 13-9
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
In Dollars
(In millions) 1996 1995 1994
----------------------------------
Premium income.................... $4,951.6 $5,195.4 $4,370.7
Investment income, as adjusted*... 920.5 941.3 766.0
Other income 1.6 (.5) 2.8
------- ------- -------
Total revenues, as adjusted*.... 5,873.7 6,136.2 5,139.5
------- ------- -------
Benefits and claims............... 4,293.7 4,486.3 3,752.8
Operating expenses................ 1,022.3 1,068.0 902.9
------- ------- -------
Total benefits and expenses 5,316.0 5,554.3 4,655.7
------- ------- -------
Pretax operating earnings, as
adjusted*..................... 557.7 581.9 483.8
Investment income applicable to
profit repatriations............ (24.9) (20.5) (12.4)
------- ------- -------
Pretax operating earnings....... $ 532.8 $ 561.4 $ 471.4
======= ======= =======
- ---------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income.................. (4.7)% 18.9% 25.5%
Investment income*.............. (2.2) 22.9 23.1
Total revenues*................. (4.3) 19.4 25.1
Pretax operating earnings*...... (4.2) 20.3 19.7
Pretax operating earnings....... (5.1) 19.1 18.2
- ---------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income.................. 10.2% 9.4% 15.4%
Investment income*.............. 13.1 13.1 13.1
Total revenues*................. 10.7 9.9 15.0
Pretax operating earnings*...... 10.9 10.7 10.0
Pretax operating earnings....... 9.8 9.7 8.5
- ---------------------------------------------------------------------------
Ratios to total revenues, as adjusted*:
Benefits and claims............. 73.1% 73.1% 73.0%
Operating expenses.............. 17.4 17.4 17.6
Pretax operating earnings....... 9.5 9.5 9.4
Ratio of pretax operating earnings
to total reported revenues...... 9.1 9.2 9.2
============================================================================
* Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $24.9 million in 1996,
$20.5 million in 1995 and $12.4 million in 1994 foregone due to profit
repatriations.
============================================================================
EXH 13-10
Japan Sales
The percentage increases in premium income in yen reflect the growth of
premiums in force. The increases in annualized premiums in force of 12.2%
in 1996, 7.5% in 1995 and 14.5% in 1994 reflect the high persistency of our
business, premium rate increases during the last three years, sales of new
policies, and conversions of existing policies to policies with higher
benefits and premiums. New annualized premiums from sales and conversions
were: $728.9 million in 1996, down 5.6% (up 9.1% in yen); $772.0 million in
1995, up 13.4% (4.3% in yen); and $680.9 million in 1994, up 18.2% (10.0%
in yen).
Sales growth, excluding conversions, has been positively affected by
product broadening. AFLAC Japan's sales mix is changing, although cancer
insurance still accounts for the majority of insurance in force. Cancer
insurance sales accounted for 46.7% of total new sales in yen in 1996, 71.2%
in 1995 and 81.3% in 1994. Sales of AFLAC Japan's living benefit life
product were very strong in 1996. Living benefit life, which was introduced
in the fourth quarter of 1995, accounted for 39.5% of total new sales in
1996. Care product sales represented 10.6% of total new sales in 1996,
15.6% in 1995 and 17.9% in 1994. Management believes that the sale of newly
introduced products will continue to be important to AFLAC Japan's new sales
growth.
Japan Investments
Due to the continued low level of available investment yields in Japan,
the Ministry of Finance has required insurers to increase premium rates on
new policy issues in recent years. AFLAC Japan increased premium rates by
an average of 16% on all cancer policy sales made after July 1, 1994.
Premium rates on new care policy issues were increased by an average of 16%
in September 1995. As a result of continuing low yields, the Company
increased premium rates by approximately 13% on all new policy issues
beginning in the fourth quarter of 1996.
Investment income, which is affected by available cash flow from
operations and investment yields achievable on new investments, continually
increased in 1994 and 1995, despite a general decline in available
investment yields. Investment income declined in 1996 due to the weaker yen
(increased 13.1% in yen). Funds available for investment during the three-
year period 1994 through 1996 were reduced by the annual profit
repatriations previously discussed and expenditures of $173.5 million in
1994 for the final construction phase of the administrative office building
in Tokyo. Rates of return on fixed-maturity securities in Japan remained low
in 1996 compared with historical levels. For instance, the yield on 10-year
Japanese government bonds, as measured by a composite index, declined from a
high of 3.54% in February 1996 to a low of 2.51% in November 1996, closing
the year at 2.77%. AFLAC Japan's new money rates for investments were 4.07%
for 1996, 4.71% for 1995 and 5.17% for 1994. The cumulative effect of lower
investment yields is reflected in the overall rate of return (net of
investment expenses) on AFLAC Japan's average invested assets, at amortized
cost. This return was 5.54% in 1996, compared with 5.81% in 1995 and 6.00%
in 1994.
For AFLAC Japan, the duration of policy benefit liabilities is longer
than that of the related assets. Therefore, there is a risk that
reinvestment of the proceeds at maturity of such investments will be at a
EXH 13-11
yield below that of the interest required for the accretion of policy
liabilities. At December 31, 1996, the average duration of the policy
liabilities was approximately 13 years, unchanged from 1995. The average
duration of the yen-denominated invested assets was approximately nine years
in both 1996 and 1995. The weighted-average period to maturity of fixed-
maturity securities at December 31, 1996, was 12.2 years, compared with 11.3
years at December 31, 1995. Over the next five years, $2.4 billion, at
amortized cost, or 14.8%, of AFLAC Japan's fixed-maturity securities are
scheduled to mature.
By concentrating on selected sectors, AFLAC Japan has secured higher
yields than 10-year Japanese government bonds would have provided while
still adhering to conservative standards for credit quality. Management
believes that it can maintain an overall return on invested assets with an
adequate spread over premium pricing assumptions and assumed interest rates
for policy liabilities for the near term. The premium increases implemented
during the past three years will have a positive impact on these spreads and
therefore contribute to stability in the pretax operating profit margin.
Japan Deregulation
In December 1996, the governments of the United States and Japan
reached an agreement on deregulation of the Japanese insurance industry.
The agreement calls for the gradual liberalization of the industry over the
next four years and includes provisions to avoid "radical change" in the
third sector of the insurance industry. AFLAC and other foreign-owned
insurers, as well as some small to medium-sized Japanese insurers, operate
primarily in the third sector. One of the measures for avoiding radical
change in the third sector is the prohibition of additional Japanese life
and non-life insurance companies from selling cancer or medical insurance
until January 1, 2001.
Japan Other
During the three-year period ended December 31, 1996, the benefit ratio
and the operating expense ratio have been stable. Annual claims experience
and persistency studies continue to support the current reserving
assumptions.
In 1994, the Japanese government passed a package of tax reform bills
centering on an increase in the consumption tax, which is similar to a sales
tax in the United States. The consumption tax is scheduled to increase from
the current rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently
incurs consumption tax on agents' commissions. Had the rate increase been
enacted effective January 1, 1996, pretax operating earnings would have been
reduced by approximately $16.4 million ($9.0 million after income tax) in
1996.
In late 1996, the Japanese government proposed new income tax
provisions that would increase Japan's income taxes on investment income
received by foreign companies operating in Japan from securities issued from
their home country. The government plans to finalize the proposal in March
1997. The new provisions are expected to be effective beginning in 1998.
If the proposal had been enacted in 1996 in its present form, AFLAC Japan's
income tax expense would have been increased, and net earnings of the
Company would have decreased by approximately $23.7 million for the year
1996.
EXH 13-12
Management is evaluating the impact of this proposal and will seek to
mitigate much of the tax impact through investment alternatives and by
restructuring portions of the existing investment portfolio. Based on a
preliminary review, management does not expect this tax change as it is
presently proposed to materially affect future net earnings of the Company.
Even with Japan's economic slowdown, the Company believes the market
for supplemental insurance remains bright. Demand for the Company's
products in Japan has continued, and the Company remains 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.
AFLAC U.S. pretax operating earnings continued to benefit from
additional investment income earned on profit transfers received from AFLAC
Japan. AFLAC U.S. received profit transfers in the amounts of $217.3
million in 1996, $140.5 million in 1995, $132.9 million in 1994, $97.9
million in 1993 and $33.4 million in 1992. AFLAC U.S. in turn increased
dividend payments to the Parent Company in the amounts of $64.3 million in
1996, $21.2 million in 1995, $51.9 million in 1994 and $10.1 million in
1993. Estimated investment income earned from profits repatriated to and
retained by AFLAC U.S. from 1992 through 1996 has been reclassified in the
presentation on the following page in order to improve comparability between
years.
EXH 13-13
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
(In millions) 1996 1995 1994
--------------------------------
Premium income......................... $ 945.8 $ 859.8 $ 792.5
Investment income, as adjusted*........ 86.3 78.3 68.5
Other income........................... 1.5 1.2 1.9
------- ------- -------
Total revenues, as adjusted*......... 1,033.6 939.3 862.9
------- ------- -------
Benefits and claims.................... 590.4 533.1 490.2
Operating expenses..................... 347.4 322.9 295.3
------- ------- -------
Total benefits and expenses.......... 937.8 856.0 785.5
------- ------- -------
Pretax operating earnings, as
adjusted*........................ 95.8 83.3 77.4
Investment income applicable to
profit repatriations................. 32.7 21.2 12.8
------- ------- -------
Pretax operating earnings.......... $ 128.5 $ 104.5 $ 90.2
====== ====== ======
- ----------------------------------------------------------------------------
Percentage increases over previous year:
Premium income....................... 10.0% 8.5% 9.7%
Investment income* ................. 10.2 14.3 10.0
Total revenues*...................... 10.0 8.9 9.6
Pretax operating earnings*........... 15.0 7.7 12.2
Pretax operating earnings............ 23.0 15.8 20.1
- ----------------------------------------------------------------------------
Ratios to total revenues, as adjusted*:
Benefits and claims.................. 57.1% 56.7% 56.8%
Operating expenses................... 33.6 34.4 34.2
Pretax operating earnings............ 9.3 8.9 9.0
Ratio of pretax operating earnings to
total reported revenues.............. 12.1 10.9 10.3
============================================================================
*Excludes estimated investment income of $32.7 million in 1996, $21.2
million in 1995 and $12.8 million in 1994 related to investment of profit
repatriation funds retained by AFLAC U.S.
============================================================================
U.S. Sales
The percentage increases in premium income reflect the growth of
premiums in force. The increases in annualized premiums in force of 11.1%
in 1996, 8.8% in 1995 and 9.1% in 1994 were favorably affected by an
improvement in the persistency for several lines of business and increased
sales at the work site through cafeteria plans (Internal Revenue Code
Section 125).
EXH 13-14
New annualized premiums from sales and policy conversions were: $326.6
million in 1996, up 17.0%; $279.1 million in 1995, up 13.6%; and $245.8
million in 1994, up 7.3%. Product lines developed since 1986 have
contributed greatly to new sales growth, accounting for 66.2% of total sales
in 1996.
U.S. Other
Management expects the operating expense ratio, excluding discretionary
advertising expenses, to decline in the future due to continued improvements
in operating efficiencies. By improving administrative systems and
controlling other costs, management has been able to redirect funds to a
national advertising program without significantly affecting the operating
expense ratio. For more information regarding advertising expenses, see
Note 2 of the Notes to the Consolidated Financial Statements.
At the same time, the operating results continue to reflect relatively
stable benefit ratios. Management expects future benefit ratios for some of
the Company's supplemental products to increase slightly due to the
Company's ongoing efforts to improve policy persistency by enhancing
policyholder benefits. In addition, potential minimum benefit ratio
requirements by insurance regulators may also result in an increase to these
ratios. However, the aggregate benefit ratio has been relatively stable due
to the mix of business shifting towards accident and hospital indemnity
policies, which have lower benefit ratios than other products.
Management expects the pretax operating profit margin, which was 9.3%
excluding the effect of repatriation in 1996, to remain approximately the
same in 1997.
Management continues to believe that there are significant
opportunities to market high-quality, affordable supplemental insurance
products in the U.S. marketplace.
BROADCAST OPERATIONS
The Company's broadcast operations include seven network-affiliated
television stations located in small to mid-size U.S. markets. Broadcast
revenues increased 13.3% in 1996 and 5.1% in 1995 primarily due to increased
advertising revenues from an improved U.S. economy and from the political
elections in 1996.
As previously mentioned, the Company entered into definitive agreements
during 1996 for the sale of its broadcast division business. The sale of
one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996.
Management expects the sale of the remaining six stations will close during
the first half of 1997.
OTHER OPERATIONS
The Parent Company's operating expenses consist primarily of corporate
overhead expenses such as salary costs, retirement provisions, professional
fees and litigation expenses. These expenses have increased in recent
years, principally due to the growth in corporate service activities,
EXH 13-15
changes in the legal environment in certain states, and to greater
retirement accruals for certain senior officers and beneficiaries due to
enhanced benefits, early retirements and revisions in actuarial assumptions.
Other operations include minor insurance operations in Taiwan and
Canada. As of December 31, 1996, the Company was in the process of selling
its Canadian operation. Additional expense charges were recognized in 1996
for estimated termination costs and fair value adjustments related to these
operations.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding Statements of Financial Accounting Standards
(SFAS) adopted during 1996 and those to be adopted in 1997, see Note 1 of
the Notes to the Consolidated Financial Statements.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET
During the last two years, the financial condition of the Company has
remained strong in the functional currencies of its operations. The
investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow
and consist of high-quality securities.
Due to the relative size of AFLAC Japan, changes in the yen/dollar
exchange rate can have a significant effect on the Company's financial
statements. The yen/dollar exchange rate at the end of each period is used
to convert yen-denominated balance sheet items to U.S. dollars for reporting
purposes. The exchange rate at December 31, 1996, was 116.10 yen to one
U.S. dollar, 11.3% weaker than the December 31, 1995, exchange rate of
102.95. Management estimates that the weaker yen rate decreased invested
assets, including cash, by $2.2 billion, total assets by $2.6 billion and
total liabilities by $2.6 billion compared with the amounts that would have
been reported using the previous year-end exchange rate. For additional
information on exchange rates, see Note 2 of the Notes to the Consolidated
Financial Statements.
EXH 13-16
Invested Assets
Fixed-maturity securities available for sale are carried at fair value.
The following table shows an analysis of invested assets at December 31:
(In thousands) 1996 1995 % Change
------------ ------------ --------
AFLAC U.S.:
Total invested assets, at
cost or amortized cost $ 1,910,154 $ 1,543,549 23.8%
Unrealized gains
on securities available
for sale 101,258 128,697
------------ ------------
Total invested assets $ 2,011,412 $ 1,672,246 20.3%
============ ============ ======
AFLAC Japan:
Total invested assets, at
cost or amortized cost $ 16,390,997 $ 15,924,083 2.9%
Unrealized gains
on securities available
for sale 2,334,537 2,468,018
------------ ------------
Total invested assets $ 18,725,534 $ 18,392,101 1.8%
============ ============ ======
Consolidated:
Total invested assets, at
cost or amortized cost $ 18,309,930 $ 17,447,551 4.9%
Unrealized gains
on securities available
for sale 2,436,605 2,597,413
------------ ------------
Total invested assets $ 20,746,535 $ 20,044,964 3.5%
============ ============ ======
The continued growth in invested assets reflects the strength of the
Company's primary business, substantial cash flows from operations, strong
new annualized premium sales and significant premium income growth in both
AFLAC U.S. and AFLAC Japan. In addition, AFLAC U.S. received $94.5 million
in cash in conjunction with the sale of a television station on December 31,
1996. Offsetting these positive factors was a decrease in unrealized
investment gains due in part to the weaker yen/dollar exchange rate. Net
unrealized gains of $2.4 billion on investments in fixed-maturity securities
at December 31, 1996, consisted of $2.4 billion in gross unrealized gains
and $27.7 million in gross unrealized losses.
EXH 13-17
AFLAC invests primarily within the Japanese and U.S. fixed-maturity
markets. The Company uses specific criteria to judge the credit quality and
liquidity of its investments and utilizes a variety of credit rating
services to monitor this criteria. Applying those various credit ratings to
a standardized rating system based on a nationally recognized service's
categories, the percentages of the Company's fixed-maturity securities
available for sale, at amortized cost, as of December 31 were as follows:
1996 1995
------ ------
AAA 46.2% 49.2%
AA 19.6 22.2
A 26.0 24.6
BBB 8.2 4.0
------ ------
100.0% 100.0%
====== ======
Private placement investments accounted for 28.8% and 23.1% of the
Company's total fixed-maturity securities available for sale as of December
31, 1996 and 1995, respectively. AFLAC Japan has made investments in the
private sector to secure higher yields than those available from Japanese
government bonds. At the same time, the Company has adhered to its
conservative standards for credit quality.
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 1996 and 1995. Cash and short-term
investments totaled $261.7 million as of December 31, 1996, or 1.3% of total
invested assets, compared with $236.3 million, or 1.2% of total invested
assets, at December 31, 1995. For additional information concerning
investments and fair values, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements.
Policy Liabilities
Policy liabilities increased $720.7 million, or 3.7%, during 1996.
AFLAC Japan policy liabilities increased $536.0 million, or 3.0%, and AFLAC
U.S. policy liabilities increased $177.0 million, or 11.6%. These increases
were primarily due to the addition of new business, the aging of policies in
force 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 decreased reported policy liabilities by $2.4 billion in
1996. During 1995, policy liabilities increased $3.4 billion, or 23.2%.
The weaker yen in 1995 compared with 1994 decreased reported policy
liabilities by $557.0 million.
Debt
The Company has a reducing, revolving credit agreement that currently
provides for bank borrowings of up to $450 million in either U.S. dollars or
equivalent Japanese yen. At December 31, 1996, borrowings of 33.0 billion
yen ($284.2 million) were outstanding under this agreement. The Company has
entered into interest rate swaps with notional amounts equal to the unpaid
principal amount during the six-year term of the loan. These transactions
effectively change the Company's interest rate exposure on this loan from
variable rates to fixed interest rates. The fixed rate is 2.74% after the
effect of the swaps. Interest payments are made based on variable interest
EXH 13-18
rates, and the Company either pays to or receives from the counterparty an
amount necessary to equal the fixed swap rate. At December 31, 1996, the
floating rate, based on the three-month Tokyo Interbank Offered Rate (TIBOR)
plus loan costs of 25 basis points, was .79%.
In the second quarter of 1996, the Company converted another loan with
outstanding principal of $29.3 million and a 5.965% fixed rate from dollar-
denominated to yen-denominated amounts with a variable interest rate based
on TIBOR plus loan costs of 25 basis points. At December 31, 1996, bank
borrowings of 2.0 billion yen ($17.5 million) were outstanding under this
agreement at a variable interest rate of .88%. Also at December 31, 1996,
the Company had 1.1 billion yen ($9.9 million) of short-term borrowings
outstanding under a line of credit at an interest rate of .76%.
The Company has designated these yen-denominated borrowings as a hedge
of its net investment in AFLAC Japan. Foreign currency translation
gains/losses are included in the unrealized foreign currency translation
gains component in shareholders' equity. Outstanding principal and related
accrued interest payable on the yen-denominated borrowings are translated
into dollars at end-of-period exchange rates. Interest expense is
translated at average monthly exchange rates for the period the interest
expense is incurred.
The Company's ratio of debt to total capitalization (debt plus
shareholders' equity, excluding the unrealized market gains on securities
available for sale) was 16.1% and 16.5% as of December 31, 1996 and 1995,
respectively. For further information concerning notes payable, see Note 7
of the Notes to the Consolidated Financial Statements.
The following table provides information about the Company's debt
obligations and related contracts that are sensitive to changes in interest
rates. For debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on implied forward rates in the
yield curve at the reporting date. For interest rate swaps, the table
presents notional amounts and weighted-average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. The information is
presented in U.S. dollar equivalents, which is the Company's reporting
currency. The instrument's actual cash flows are denominated in both U.S.
dollars and Japanese yen. The table on the following page assumes a
constant foreign currency exchange rate.
EXH 13-19
DEBT OBLIGATIONS AND RELATED CONTRACTS
Total Maturity Schedule
at ------------------------------------------
Dec. 31,
(In thousands) 1996 1997 1998 1999 2000 2001
------- ------ ------ ------ ------ ------
Debt obligations:
Payable in U.S.
dollars:
Fixed interest
rate $ 16,467 $ 9,322 $ 7,145
Weighted-average
interest rate 10.16% 10.23% 10.32%
- ----------------------------------------------------------------------------
Payable in
Japanese yen:
Variable interest
rate $ 27,303 $27,303
Weighted-average
interest rate .83% 1.13%
Variable interest
rate with swap
contracts $284,238 $56,848 $56,848 $56,848 $56,848 $56,846
Interest rate .78% 1.13% 1.96% 2.62% 3.45% 3.71%
- ----------------------------------------------------------------------------
Weighted-average
interest rate of
all debt 1.26% 1.49% 2.08% 2.62% 3.45% 3.71%
- ----------------------------------------------------------------------------
Interest rate swaps:
Payable in Japanese
yen:
Notional amount $284,238 $56,848 $56,848 $56,848 $56,848 $56,846
Weighted-average
pay fixed
interest rate 2.74% 2.74% 2.74% 2.74% 2.74% 2.74%
Weighted-average
receive variable
interest rate .78 1.13 1.96 2.62 3.45 3.71
There are no principal payments scheduled after 2001.
============================================================================
Security Lending
AFLAC Japan uses short-term (usually seven days) security lending
arrangements to increase investment income with minimal risk. This program
increased AFLAC Japan's investment income by approximately $1.1 million in
1996 and $.9 million in 1995. For further information regarding such
arrangements, see Note 4 of the Notes to the Consolidated Financial
Statements.
EXH 13-20
Policyholder Protection 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 the
Company in the past. The Company believes that future assessments relating
to companies currently involved in insolvency proceedings will not
materially impact the consolidated financial statements.
The Life Insurance Association of Japan, an industry organization, is
currently implementing a policyholder protection fund. The purpose of the
fund is to provide capital support to member companies for business assumed
from insolvent life insurers. AFLAC Japan has pledged investment securities
to the Life Insurance Association of Japan for this program. The Company
retains ownership of the securities and receives the related investment
income. The amount of securities pledged is based on premium income and
policy reserves. As of December 31, 1996, $49.5 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund.
Shareholders' Equity
Shareholders' equity decreased $8.6 million from December 31, 1995, to
December 31, 1996. This was primarily due to a decrease in net unrealized
gains on securities available for sale of $202.6 million, net treasury stock
purchases of $175.3 million and dividends paid of $54.2 million. Offsetting
these decreases were net earnings of $394.4 million and an increase in
unrealized foreign exchange gains of $16.5 million.
The Company's insurance operations continue to provide its primary
sources of liquidity. Capital needs can also be supplemented by borrowed
funds. The principal sources of cash from insurance operations are premiums
and investment income. Primary uses of cash in the insurance operations are
policy claims, commissions, operating expenses, income taxes and payments to
the Parent Company for management fees and dividends. Both the sources and
uses of cash are reasonably predictable. The Company's investment
objectives provide for liquidity through the ownership of high-quality
investment securities. AFLAC insurance policies are generally not interest-
sensitive and therefore are not subject to unexpected policyholder
redemptions due to investment yield changes. Also, the majority of AFLAC
policies provide indemnity benefits rather than reimbursement for actual
medical costs and therefore are not subject to the increasing risks of
medical cost inflation.
The achievement of continued long-term growth will require growth in
AFLAC's statutory capital and surplus. AFLAC may secure additional
statutory capital through various sources, such as internally generated
statutory earnings or equity contributions by the Parent Company from funds
generated through debt or equity offerings. The disposition of the AFLAC
Broadcast Division will increase the Company's capital resources upon
closing of the transaction. Management believes outside sources for
additional debt and equity capital, if needed, will continue to be available
for capital expenditures and business expansion.
Parent Company capital resources are largely dependent upon the ability
of the subsidiaries to pay management fees and dividends. The Georgia
Insurance Department imposes certain limitations and restrictions on
EXH 13-21
payments of dividends, management fees, loans and advances by AFLAC to the
Parent Company. The Georgia Insurance Statutes require prior approval for
dividend distributions that exceed the greater of statutory earnings for the
previous year or 10% of statutory capital and surplus as of the previous
year-end. In addition, the Georgia Insurance Department must approve
service arrangements and other transactions within the affiliated group.
These regulatory limitations are not expected to affect the level of
management fees or dividends paid by AFLAC to the Parent Company. A life
insurance company's statutory capital and surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners
(NAIC), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles
and are intended to emphasize policyholder protection and company solvency.
Currently, prescribed or permitted statutory accounting principles
(SAP) may vary between states and between companies. The NAIC is in the
process of recodifying SAP to promote standardization throughout the
industry. Completion of this project will result in changes in statutory
accounting practices for the Company. The impact on the Company's statutory
capital and surplus is not presently determinable.
A risk-based capital formula that establishes capital requirements
relating to insurance risk, business risk, asset risk and interest rate risk
was adopted by the NAIC in 1992 for U.S. life insurance companies. These
requirements are intended 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 continues to reflect a very strong capital and
surplus position. Also, there are various ongoing regulatory initiatives by
the NAIC relating to investments, reinsurance, limited benefit insurance
policies, dividend restrictions, revisions to the risk-based capital formula
and other related matters.
In addition to restrictions by U.S. insurance regulators, the Japanese
Ministry of Finance (MOF) imposes restrictions on and requires approval for
the remittances of earnings from AFLAC Japan to AFLAC U.S. 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. Total funds
received from AFLAC Japan were $253.6 million in 1996, $179.5 million in
1995 and $167.9 million in 1994. During the last few years, the MOF has
developed solvency standards, a version of risk-based capital requirements.
For additional information on regulatory restrictions on dividends, profit
transfers and other remittances, see Note 10 of the Notes to the
Consolidated Financial Statements.
Other
For information regarding pending litigation, see Note 12 of the Notes
to the Consolidated Financial Statements.
CASH FLOW
Operating cash flows for AFLAC Japan are translated using average
monthly exchange rates for the year. The average yen/dollar exchange rate,
which is used to convert revenues, expenses and cash flows, weakened 13.5%
in 1996 compared with 1995, strengthened 8.7% in 1995 compared with 1994,
EXH 13-22
and strengthened 8.8% in 1994 compared with 1993. The average exchange
rates for 1996, 1995 and 1994 were 108.84, 94.10 and 102.26, respectively.
In years when the yen weakens, translating yen into dollars causes smaller
increases or negative percentage changes for financial results in dollars.
When the yen strengthens, translating yen into dollars causes larger
increases for financial results in dollars.
For additional information, reference should be made to the
Consolidated Statements of Cash Flows on pages 13-30 and 13-31.
Operating Activities
In 1996, consolidated cash flow from operations decreased 8.4% to $2.7
billion, compared with $2.9 billion in 1995 and $2.4 billion in 1994. Net
cash flow from operations for AFLAC Japan decreased 10.6% to $2.5 billion in
1996, compared with $2.7 billion in 1995 and $2.1 billion in 1994. AFLAC
Japan represented 91% of the consolidated net cash flow from operations in
1996, 93% in 1995 and 90% in 1994. The decrease in cash flow from
operations in 1996 was due to the weaker yen. Cash flow from operations in
1995 was favorably affected by an acceleration of remittances from premium
collection agencies to AFLAC Japan in the amount of $121.5 million. This
cash flow change did not affect premium income.
Investing Activities
Consolidated cash flow used by investing activities decreased 11.3% to
$2.5 billion in 1996, compared with $2.9 billion in 1995 and $2.2 billion in
1994. The sale of one television station in 1996 generated $98.5 million in
cash flow. AFLAC Japan accounted for 91% of the consolidated net cash used
by investing activities in 1996, compared with 90% in 1995 and 89% in 1994.
Included in AFLAC Japan's portion for 1994 were expenditures of $173.5
million for the final construction phase of an administrative office
building in Tokyo.
Operating cash flow is primarily used to purchase high-quality fixed-
maturity securities. When market opportunities arise, the Company disposes
of certain fixed-maturity securities to improve future investment yields or
lengthen maturities by reinvesting in securities of similar or higher
quality. Therefore, dispositions before maturity can vary significantly
from year to year. Dispositions before maturity ranged between 4% and 9% of
the annual average investment portfolio of fixed-maturity securities for the
three years ended December 31, 1996.
Financing Activities
In 1996, net cash used by financing activities was $157.9 million,
compared with $93.4 million in 1995 and $130.4 million in 1994. Treasury
stock purchases of $204.2 million in 1996 were funded by proceeds from new
borrowings in the amount of $135.9 million and available cash. In 1995,
treasury stock purchases of $224.2 million were funded by proceeds from new
borrowings of $198.3 million and available cash. Treasury stock purchases
of $131.7 million in 1994 were funded by proceeds from new borrowings in the
amount of $84.0 million and available cash. The Company has sold treasury
shares to the sales associate stock bonus plan and its dividend reinvestment
plan. These dispositions have generated proceeds in the amounts of $34.5
million, $9.7 million and $2.8 million for the years 1996, 1995 and 1994,
respectively. All cash dividends paid by the Parent Company were funded by
EXH 13-23
dividends received from its subsidiaries. Cash dividends paid to
shareholders amounted to $54.2 million in 1996, an increase of 10.7% over
1995. Cash dividends paid to shareholders in 1995 were $48.9 million, an
increase of 8.9% over the 1994 cash dividends of $44.9 million. The 1996
cash dividend of $.387 per share increased 14.5% over 1995. The 1995 cash
dividend of $.338 per share represented an increase of 13.4% over the 1994
cash dividend of $.298 per share.
SAFE HARBOR PROVISIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information about
their companies, so long as those 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. The Company desires 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 officers
of the Company in oral discussions with analysts and contained in documents
filed with the Securities and Exchange Commission (the 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 generally qualify as
forward-looking. The Company undertakes no obligation to update such
forward-looking statements.
The Company cautions that the following factors, in addition to other
factors mentioned from time to time in the Company's reports filed with the
SEC, could cause the Company's actual results to differ materially:
regulatory developments, competitive conditions, new products, Japanese
Ministry of Finance approval of profit repatriations to the United States,
general economic conditions in the United States and Japan, changes in U.S.
and/or Japan tax laws, adequacy of reserves, credit and other risks
associated with the Company's investment portfolio, significant changes in
interest rates and fluctuations in foreign currency exchange rates.
EXH 13-24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In thousands, except for per 1996 1995 1994
share amounts) ---------- ---------- ----------
Revenues:
Premiums, principally supplemental
health insurance $5,910,036 $6,070,830 $5,180,732
Net investment income 1,021,955 1,024,960 838,825
Realized investment gains (losses) 1,980 (270) (58)
Gain on sale of television station 60,264 - -
Other income 105,968 95,100 91,259
--------- --------- ---------
Total revenues 7,100,203 7,190,620 6,110,758
--------- --------- ---------
Benefits and expenses:
Benefits and claims 4,895,522 5,034,266 4,256,541
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 162,475 168,779 153,503
Insurance commissions 778,082 802,176 689,096
Insurance expenses 437,265 424,974 361,881
Interest expense 16,186 15,611 13,496
Capitalized interest on
building construction - - (2,419)
Other operating expenses 160,672 143,819 134,324
--------- --------- ---------
Total acquisition and
operating expenses 1,554,680 1,555,359 1,349,881
--------- --------- ---------
Total benefits and expenses 6,450,202 6,589,625 5,606,422
--------- --------- ---------
Earnings before income taxes 650,001 600,995 504,336
Income taxes:
Current 239,682 233,662 146,472
Deferred 15,956 18,276 65,074
--------- --------- ---------
Total income taxes 255,638 251,938 211,546
--------- --------- ---------
Net earnings $ 394,363 $ 349,057 $ 292,790
========= ========= =========
Net earnings per share $ 2.73 $ 2.33 $ 1.89
========= ========= =========
Common shares used in computing
earnings per share (In thousands) 144,512 149,540 154,652
========= ========= =========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-25
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 1996 1995
---------- ----------
ASSETS:
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$17,941,200 in 1996 and
$17,104,743 in 1995) $ 20,327,726 $ 19,675,006
Equity securities (cost $86,249 in
1996 and $80,912 in 1995) 136,328 108,062
Mortgage loans on real estate 17,802 22,213
Other long-term investments 2,999 3,343
Short-term investments 261,680 232,201
----------- -----------
Total investments 20,746,535 20,040,825
Cash - 4,139
Receivables, primarily premiums 226,981 199,634
Accrued investment income 253,850 256,659
Deferred policy acquisition costs 2,582,946 2,565,027
Property and equipment, at cost less
accumulated depreciation 471,907 552,061
Securities held as collateral for
loaned securities 573,911 1,378,197
Intangible assets, at cost less
accumulated amortization of $27,122
in 1996 and $37,263 in 1995 60,933 104,546
Other 105,749 115,421
----------- -----------
Total assets $ 25,022,812 $ 25,216,509
=========== ===========
(continued)
EXH 13-26
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In thousands) 1996 1995
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 18,697,173 $ 18,000,296
Unpaid policy claims 1,039,257 1,016,295
Unearned premiums 288,976 301,452
Other policyholders' funds 208,799 195,461
----------- -----------
Total policy liabilities 20,234,205 19,513,504
Notes payable 353,533 327,268
Income taxes, primarily deferred 1,181,121 1,397,709
Payables for return of collateral
on loaned securities 573,911 1,378,197
Payables for security transactions 99,408 80,014
Other 455,065 385,676
Commitments and contingencies
(Notes 11 and 12)
----------- -----------
Total liabilities 22,897,243 23,082,368
----------- -----------
Shareholders' equity:
Common stock of $.10 par value. Authorized
175,000; issued 157,239 shares in 1996
and 156,358 in 1995 15,724 15,636
Additional paid-in capital 208,994 196,928
Unrealized foreign currency translation
gains 229,782 213,319
Unrealized gains on securities available
for sale 280,154 482,787
Retained earnings 1,917,794 1,577,605
Treasury stock, at average cost (526,425) (351,117)
Notes receivable for stock purchases (454) (1,017)
----------- -----------
Total shareholders' equity 2,125,569 2,134,141
----------- -----------
Total liabilities and
shareholders' equity $ 25,022,812 $ 25,216,509
=========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-27
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Common stock:
Balance at beginning of year $ 15,636 $ 15,600 $ 15,556
Exercise of stock options 88 36 44
---------- ---------- ----------
Balance at end of year 15,724 15,636 15,600
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 196,928 192,899 190,545
Exercise of stock options 6,461 3,199 2,119
Gain on treasury stock reissued 5,688 830 235
Cash in lieu of fractional shares (83) - -
---------- ---------- ----------
Balance at end of year 208,994 196,928 192,899
---------- ---------- ----------
Unrealized foreign currency
translation gains:
Balance at beginning of year 213,319 174,091 123,294
Change in unrealized translation
gains during year, net of
income taxes 16,463 39,228 50,797
---------- ---------- ----------
Balance at end of year 229,782 213,319 174,091
---------- ---------- ----------
Unrealized gains on
securities available for sale:
Balance at beginning of year 482,787 228,844 14,811
Cumulative effect of accounting
change, net of income taxes - - 461,478
Change in unrealized gains (losses)
during year, net of income taxes (202,633) 253,943 (247,445)
---------- ---------- ----------
Balance at end of year 280,154 482,787 228,844
---------- ---------- ----------
Retained earnings:
Balance at beginning of year 1,577,605 1,277,487 1,029,625
Net earnings 394,363 349,057 292,790
Cash dividends ($.387 per share
in 1996, $.338 in 1995 and
$.298 in 1994) (54,174) (48,939) (44,928)
---------- ---------- ----------
Balance at end of year $ 1,917,794 $ 1,577,605 $ 1,277,487
---------- ---------- ----------
(continued)
EXH 13-28
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Treasury stock:
Balance at beginning of year $ (351,117) $ (135,776) $ (6,568)
Purchases of treasury stock (204,169) (224,204) (131,734)
Cost of shares issued to sales
associates stock bonus plan
and dividend reinvestment plan 28,861 8,863 2,526
---------- ---------- ----------
Balance at end of year (526,425) (351,117) (135,776)
---------- ---------- ----------
Notes receivable for stock purchases (454) (1,017) (1,378)
---------- ---------- ----------
Total shareholders' equity $ 2,125,569 $ 2,134,141 $ 1,751,767
========== ========== ==========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-29
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 394,363 $ 349,057 $ 292,790
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,482,615 2,539,406 2,236,198
Deferred income taxes 15,956 18,276 65,074
Change in income taxes payable 14,915 79,785 (9,666)
Increase in deferred policy
acquisition costs (264,734) (248,522) (262,696)
Change in receivables and
advance premiums (32,083) 124,882 (44,984)
Gain on sale of television station (60,264) - -
Other, net 145,982 81,214 92,530
---------- ---------- ----------
Net cash provided by
operating activities 2,696,750 2,944,098 2,369,246
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Fixed-maturity securities sold 1,707,537 626,938 1,125,179
Fixed-maturity securities
matured 560,305 506,043 353,422
Equity securities 17,057 42,247 42,208
Mortgage loans, net 3,970 2,775 35,395
Other long-term investments, net 344 1,695 -
Short-term investments, net - 100,634 -
Costs of investments acquired:
Fixed-maturity securities (4,854,398) (4,082,021) (3,425,922)
Equity securities (23,473) (44,459) (40,632)
Other long-term investments, net - - (3,312)
Short-term investments, net (41,130) - (147,849)
Additions to property and
equipment, net (9,183) (17,391) (185,395)
Proceeds from sale of television
station 98,500 - -
---------- ---------- ----------
Net cash used by investing
activities $(2,540,471) $(2,863,539) $(2,246,906)
---------- ---------- ----------
(continued)
EXH 13-30
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings $ 135,940 $ 198,291 $ 84,000
Principal payments under debt
obligations (76,492) (31,442) (42,681)
Dividends paid to shareholders (54,174) (48,939) (44,928)
Purchases of treasury stock (204,169) (224,204) (131,734)
Treasury stock reissued 34,549 9,693 2,761
Other, net 6,466 3,235 2,163
---------- ---------- ----------
Net cash used by
financing activities (157,880) (93,366) (130,419)
---------- ---------- ----------
Effect of exchange rate changes
on cash (2,538) (697) 2,309
---------- ---------- ----------
Net change in cash (4,139) (13,504) (5,770)
Cash at beginning of year 4,139 17,643 23,413
---------- ---------- ----------
Cash at end of year $ - $ 4,139 $ 17,643
========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash payments during the year for:
Interest on debt obligations $ 14,286 $ 12,764 $ 13,742
Income taxes 223,851 154,011 154,826
Noncash financing activities included capital lease obligations incurred for
computer equipment totaling $8,524 in 1996, $2,517 in 1995 and $18,210 in
1994.
Noncash operating activities included future advertising credits received
from the sale of a television station totaling $1.4 million at fair value in
1996.
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: AFLAC Incorporated (the Parent Company) and
subsidiaries (the Company) operate predominantly in the insurance industry
and primarily sell supplemental health insurance in Japan and the United
States. The Company's insurance operations are conducted through American
Family Life Assurance Company of Columbus (AFLAC), which operates in the
United States (AFLAC U.S.) and as a branch in Japan (AFLAC Japan). Most of
AFLAC's insurance policies are individually underwritten in the payroll
market, with premiums paid by the employee. AFLAC Japan accounted for 82%,
85% and 84% of the Company's total revenues for 1996, 1995 and 1994,
respectively, and 88% and 90% of total assets at December 31, 1996 and 1995,
respectively.
BASIS OF PRESENTATION: The accompanying consolidated financial
statements of the Company are prepared in accordance with generally accepted
accounting principles. 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 generally accepted accounting principles requires management
to make estimates, based on the best information available, in recording
transactions resulting from business operations. The balance sheet amounts
that involve a greater extent of accounting estimates and actuarial
determinations subject to future changes are: deferred policy acquisition
costs, liabilities for future policy benefits and unpaid policy claims,
accrued liabilities for unfunded retirement plans for various officers and
beneficiaries, and contingent liabilities. As additional information
becomes available (or actual amounts are determinable), the recorded
estimates may be revised and reflected in operating results. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
maintained in foreign currencies, principally Japanese yen (the functional
currency of AFLAC Japan), are translated 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 securities
transactions are translated at the spot rate on the trade dates of the
transactions. Other revenues, expenses and cash flows are translated from
foreign currencies into U.S. dollars using average monthly exchange rates
for the year. The resulting currency translation adjustments are
accumulated and reported as a separate component of shareholders' equity.
Realized currency exchange gains and losses resulting from foreign currency
transactions are included in earnings. Such amounts were immaterial during
the three-year period 1994 through 1996.
The Parent Company has designated its yen-denominated notes payable
(Note 7) as a hedge of its net investment in AFLAC Japan. Outstanding
principal and related accrued interest payable on the yen-denominated
borrowings are translated into dollars at end-of-period exchange rates.
Currency translation adjustments are accumulated and reported as a separate
component of shareholders' equity. Interest expense is translated at
average monthly exchange rates for the period the borrowings are
outstanding.
EXH 13-32
INSURANCE REVENUE AND EXPENSE RECOGNITION: Supplemental health
insurance policies issued by the Company are classified as long-duration
contracts. The contract provisions generally cannot be changed or canceled
during the contract period; however, premiums for policies issued in the
United States may be adjusted within prescribed guidelines and subject to
approval by state insurance regulatory authorities.
Insurance premiums for health policies are recognized as earned income
ratably over the terms 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
over the period the policies are expected to be renewed. This association
is accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and future policy
benefits requires management's use of estimates consistent with sound
actuarial valuation techniques. For new policy issues, actuarial
assumptions and deferrable acquisition costs are reviewed each year and
revised when necessary to more closely reflect recent experience and studies
of actual acquisition costs. For all policies in force, deferred policy
acquisition costs are evaluated to determine that they are recoverable from
future revenues. Costs not recoverable would be charged against earnings.
INVESTMENTS: The Company classifies all fixed-maturity securities and
equity securities as "available for sale." Such securities are reported at
fair value. If the fair value is higher than amortized cost for fixed-
maturity securities or purchase cost for equity securities, the excess is an
unrealized gain; and if lower than cost, the difference is an unrealized
loss. The net unrealized gains and losses on securities available for sale,
less amounts applicable to policy liabilities and deferred income taxes, are
reported in a separate component of shareholders' equity. Amortized cost of
fixed-maturity securities is based on the purchase price adjusted for
accrual of discount or amortization of premium. The amortized cost of
fixed-maturity securities purchased at a discount will equal the face or par
value at maturity. Fixed-maturity securities purchased at a premium will
have an amortized cost equal to face or par value at the earlier of a call
date or maturity.
For investments that have experienced a decline in value below their
cost which is considered to be other than temporary, the decline is recorded
as a realized investment loss in the statement of earnings. Costs of
securities sold are determined on the first-in, first-out method. Purchases
and sales of securities are recorded on the trade dates of the transactions.
Fixed-maturity securities loaned to financial institutions in short-
term security lending transactions are not recorded as sales of securities,
but continue to be carried as investment assets during the term of the
loans. Securities received as collateral for such loans are reported
separately in assets at fair value with a corresponding liability of the
same amount for the return of such collateral at termination of the loans.
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.
EXH 13-33
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 commissions and certain direct and allocated policy issue,
underwriting and marketing expenses, all of which vary with and are
primarily related to the production of new business. Policy acquisition
costs deferred were $427.2 million in 1996, $413.5 million in 1995 and
$416.2 million in 1994. Of the policy acquisition costs deferred,
commissions represented 67.3% in 1996, 63.8% in 1995 and 66.6% in 1994.
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 the Company's experience, with reasonable provision for possible
future adverse deviations in experience.
Unpaid policy claims are estimates computed on an undiscounted basis
using statistical analyses of historical claim experience adjusted for
current trends and changed conditions. The ultimate liability may vary
significantly from such estimates. These estimates are regularly adjusted
in subsequent reporting periods as new experience data emerges and are
reflected in operating results in the year such adjustments are made.
INCOME TAXES: Different rules are used in computing U.S. and foreign
income tax expense presented in the accompanying financial statements from
those used in preparing the Company's income tax returns. Deferred income
taxes are recognized for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities, based on
enacted tax laws and statutory tax rates applicable to the periods in which
the temporary differences are expected to reverse.
The Parent Company and its U.S. subsidiaries, including foreign
branches, file a consolidated U.S. income tax return. Additionally, AFLAC
Japan is subject to Japanese corporate income taxes.
DERIVATIVES: Interest rate swaps are accounted for using the accrual
method. 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 the swap agreements are not
recognized in the Consolidated Balance Sheets.
INTANGIBLES: Television network affiliations and FCC licenses of
broadcast businesses acquired are amortized using the straight-line method
over 40 years. Unamortized intangibles are periodically reviewed to assess
recoverability using estimates of undiscounted future cash flows from the
related business.
TREASURY SHARES: Shares purchased are recorded at cost as a reduction
of shareholders' equity. The weighted-average purchase cost is used to
determine the cost of treasury shares sold to the AFLAC Associate Stock
Bonus Plan and the Company's dividend reinvestment plan. Any realized gains
or losses on the disposition of treasury shares are recorded in additional
paid-in capital.
EXH 13-34
EARNINGS PER SHARE: Earnings per share are based on the weighted-
average number of common shares outstanding during the periods, including
the dilutive effect of shares issuable under the stock option plans. All
share and per-share amounts have been adjusted to reflect the three-for-two
stock split paid March 18, 1996.
ACCOUNTING CHANGES ADOPTED: Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the
asset. Long-lived assets and certain identifiable intangibles to be
disposed of must be reported at the lower of carrying amount or fair value
less related selling costs. The primary assets of the Company that are
subject to SFAS No. 121 are investment real estate, and property and
equipment used in the Company's daily operations. There was no material
effect on the financial statements from the adoption of this new accounting
standard.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
1996. This Statement provides a choice of accounting methods for employee
stock compensation plans, including stock option plans. This accounting
standard had no effect on earnings as the Company has elected to use the
intrinsic value method. Under this method, compensation cost is recognized
only for the excess, if any, of the market price of stock over the amount an
employee must pay upon exercise to acquire the stock at the grant date. For
further information regarding SFAS No. 123, see Note 9.
On January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures.
These accounting standards require impaired mortgage loans to be measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate, or at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. The
implementation of these standards by the Company had no material effect.
Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. As required, the
financial information for prior years was not restated. This accounting
change had no effect on earnings. For further information, see Note 3.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: The Financial Accounting
Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, in June 1996. This
Statement was amended by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125. SFAS No. 125 establishes
criteria for determining whether transfers of financial assets are sales or
secured borrowings and must be applied prospectively to all applicable
transactions occurring after December 31, 1996. SFAS No. 127 amended the
EXH 13-35
effective date for those transactions concerning secured obligations and
collateral, which must now be applied prospectively to all applicable
transactions occurring after December 31, 1997. Earlier or retroactive
application is not permitted. Beginning in 1998, as required by these
standards, the Company will no longer recognize securities held as
collateral as an asset, nor the related liability for return of such
collateral, based on the Company's current security lending agreements (see
Note 4). This change will have no affect on the Company's net earnings or
shareholders' equity.
RECLASSIFICATIONS: Certain prior-year amounts have been reclassified
to conform to the current year presentation.
EXH 13-36
(2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company's only reportable industry segment is insurance. The
Company's principal foreign operations are conducted in Japan. The
components of operations for the years ended December 31 were as follows:
(In thousands) 1996 1995 1994
--------- --------- ---------
Total revenues:
Insurance:
Japan $5,848,751 $6,115,689 $5,127,418
U.S. 1,066,364 960,443 875,729
Realized investment
gains (losses) 1,759 (270) 17
--------- --------- ---------
Total U.S. and
Japan insurance 6,916,874 7,075,862 6,003,164
Broadcast operations - U.S. 92,380 81,569 77,596
Gain on sale of television
station 60,264 - -
Corporate and other operations 69,611 74,392 67,334
Intercompany eliminations (38,926) (41,203) (37,336)
--------- --------- ---------
Total $7,100,203 $7,190,620 $6,110,758
========= ========= =========
Earnings before income taxes:
Insurance:
Japan $ 532,798 $ 561,361 $ 471,364
U.S. 128,532 104,459 90,216
Realized investment
gains (losses) 1,759 (270) 17
--------- --------- ---------
Total U.S. and
Japan insurance 663,089 665,550 561,597
Broadcast operations - U.S. 25,591 18,953 17,164
Gain on sale of television
station 60,264 - -
Corporate and other operations (86,399) (72,189) (64,552)
Interest expense
(noninsurance operations) (12,544) (11,319) (9,873)
--------- --------- ---------
Total $ 650,001 $ 600,995 $ 504,336
========= ========= =========
EXH 13-37
(In thousands) 1996 1995 1994
--------- --------- ---------
Depreciation and amortization
expense:
Insurance:
Japan $ 26,405 $ 21,353 $ 16,072
U.S. 12,780 10,656 9,403
--------- --------- ---------
Total U.S. and
Japan insurance 39,185 32,009 25,475
Broadcast operations - U.S. 8,198 8,725 7,397
Corporate and other operations 2,354 2,547 3,162
--------- --------- ---------
Total $ 49,737 $ 43,281 $ 36,034
========= ========= =========
Advertising expense - insurance:
Japan $ 13,580 19,883 9,417
U.S. 22,038 15,044 14,058
--------- --------- ---------
Total $ 35,618 34,927 23,475
========= ========= =========
Total expenditures for long-lived
assets:
Insurance:
Japan $ 2,806 $ 2,009 $ 175,464
U.S. 9,093 12,150 11,663
---------- ---------- ----------
Total U.S. and
Japan insurance 11,899 14,159 187,127
Broadcast operations - U.S. 3,864 5,851 5,485
Corporate and other operations 2,730 1,200 1,548
---------- ---------- ----------
Total $ 18,493 $ 21,210 $ 194,160
========== ========== ==========
Total assets at December 31 were as follows:
(In thousands) 1996 1995
---------- ----------
Total assets:
Insurance:
Japan $22,117,213 $22,715,138
U.S. 2,673,678 2,239,324
---------- ----------
Total U.S. and
Japan insurance 24,790,891 24,954,462
Broadcast operations - U.S. 115,709 159,627
Corporate and other operations 2,834,343 2,726,366
Intercompany eliminations (2,718,131) (2,623,946)
---------- ----------
Total $25,022,812 $25,216,509
========== ==========
EXH 13-38
During 1996, the Company entered into definitive agreements for the
sale of the AFLAC Broadcast Division consisting of seven network-affiliated
television stations. Cash sales proceeds, after applicable selling
expenses, will approximate $449.2 million. Total sales proceeds also
include future advertising credits over a five-year period with a fair value
of $6.3 million. The Company will also receive cash for an adjustment of
various current assets and liabilities. The pretax gain for the entire
transaction is estimated to be $325 million. Finalization of the
transaction is subject to approval by the Federal Communications Commission.
The sale of one station (WAFB-TV in Baton Rouge, Louisiana) closed on
December 31, 1996, with a pretax gain of $60.3 million and an after-tax gain
of $48.2 million ($.33 per share). The operating results of WAFB-TV
included in the consolidated financial statements were revenues of $18.6
million in 1996 and earnings before interest and income taxes of $7.8
million. Management expects the sale of the six remaining stations to be
finalized during the first half of 1997.
Net assets of AFLAC Japan totaled $1.7 billion at December 31, 1996,
and $1.8 billion at December 31, 1995. U.S. dollar-denominated securities
(including accrued investment income) are owned by AFLAC Japan. Such
securities amounted to $1.4 billion and $1.3 billion at December 31, 1996,
and December 31, 1995, respectively. AFLAC Japan's investments in dollar-
denominated securities constitute an economic currency hedge of a portion of
the Company's investment in its foreign branch. In addition, the Parent
Company has designated its yen-denominated bank borrowings of $311.5 million
at December 31, 1996, and $230.7 million at December 31, 1995, (Note 7) as a
hedge of its net investment in AFLAC Japan. The Company's yen-denominated
net assets subject to foreign currency translation fluctuations for
financial reporting purposes were $15.9 million and $284.4 million at
December 31, 1996 and 1995, respectively. Such amounts consist of AFLAC
Japan's net assets, less its dollar-denominated investments and the Parent
Company's yen-denominated borrowings.
The 1996 year-end yen-to-dollar exchange rate, which was used to
convert balance sheet items to U.S. dollars, weakened 11.3% compared with
1995, while the 1995 year-end exchange rate weakened 3.0% compared with
1994, based on the yen/dollar rates of 116.10, 102.95 and 99.85 at December
31, 1996, 1995 and 1994, respectively. If the exchange rates had remained
unchanged from the respective prior year-end rates, the Company's total
assets would have been higher by approximately $2.6 billion in 1996 and
approximately $664.6 million in 1995. Total liabilities would have been
higher by approximately $2.6 billion in 1996 and approximately $648.5
million in 1995.
The average yen/dollar exchange rate, which was used to convert
revenues, expenses and cash flows, weakened 13.5% in 1996 compared with
1995, strengthened 8.7% in 1995 compared with 1994, and strengthened 8.8% in
1994 compared with 1993. The average exchange rates for 1996, 1995 and 1994
were 108.84, 94.10 and 102.26, respectively. The fluctuations decreased net
earnings by approximately $42.7 million in 1996 compared with 1995, and
increased net earnings by approximately $23.0 million in 1995 and $19.7
million in 1994, compared with the respective prior years.
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 $253.6 million in 1996, $179.5 million in
EXH 13-39
1995 and $167.9 million in 1994. See Note 10 for information concerning
restrictions on remittances from AFLAC Japan.
The Company's receivables consisted primarily of monthly insurance
premiums due from individual policyholders or their employers for payroll
deduction of premiums. At December 31, 1996, $126.3 million, or 55.7% of
total receivables, were receivables for AFLAC Japan ($119.0 million at
December 31, 1995).
EXH 13-40
(3) INVESTMENTS
The amortized cost for fixed-maturity securities, purchase cost for
equity securities and the fair values of investments in securities available
for sale at December 31 were as follows:
December 31, 1996
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Fixed-maturity securities:
Yen-denominated:
Japan national government
direct obligations $ 5,787.7 $ 1,201.6 $ 1.4 $ 6,987.9
Japan government guaranteed 310.2 40.5 - 350.7
Japan municipalities 618.3 78.8 - 697.1
Corporate obligations:
Public utilities 2,501.2 366.0 - 2,867.2
Banks and other financial
institutions 400.1 36.7 - 436.8
Foreign issuers:
Euroyen 4,738.8 507.7 7.7 5,238.8
Samurai 194.3 22.4 - 216.7
Other foreign 43.1 .5 - 43.6
Other corporate 353.7 64.4 - 418.1
-------- -------- -------- --------
Total yen-denominated 14,947.4 2,318.6 9.1 17,256.9
-------- -------- -------- --------
U.S. dollar-denominated:
U.S. government direct
obligations 81.4 1.2 - 82.6
U.S. agencies (FNMA, etc.) 291.5 7.4 .7 298.2
U.S. mortgage-backed
securities 235.8 3.3 2.4 236.7
Sovereign and Supranational 121.5 6.6 - 128.1
Corporate obligations:
Public utilities 157.4 2.4 3.7 156.1
Asset-backed securities 148.8 5.2 - 154.0
Banks and other financial
institutions 907.7 35.0 4.0 938.7
Other corporate 1,031.8 33.8 7.8 1,057.8
-------- -------- -------- --------
Total dollar-denominated 2,975.9 94.9 18.6 3,052.2
-------- -------- -------- --------
Other foreign securities 17.9 .8 - 18.7
-------- -------- -------- --------
Total fixed-maturity
securities available
for sale 17,941.2 2,414.3 27.7 20,327.8
Equity securities 86.2 52.6 2.5 136.3
-------- -------- -------- --------
Total securities
available for sale $18,027.4 $ 2,466.9 $ 30.2 $20,464.1
======== ======== ======== ========
EXH 13-41
December 31, 1995
------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- --------
Fixed-maturity securities:
Yen-denominated:
Japan national government
direct obligations $ 5,504.9 $ 1,239.1 $ .6 $ 6,743.4
Japan government guaranteed 492.6 51.2 .1 543.7
Japan municipalities 845.7 89.9 .4 935.2
Corporate obligations:
Public utilities 2,882.9 408.4 .1 3,291.2
Banks and other financial
institutions 421.4 35.6 - 457.0
Foreign issuers:
Euroyen 3,931.4 484.8 15.4 4,400.8
Samurai 243.5 28.7 - 272.2
Other corporate 242.8 62.2 - 305.0
-------- -------- ------- --------
Total yen-denominated 14,565.2 2,399.9 16.6 16,948.5
-------- -------- ------- --------
U.S. dollar-denominated:
U.S. government direct
obligations 107.6 4.1 - 111.7
U.S. agencies (FNMA, etc.) 200.0 10.8 - 210.8
U.S. mortgage-backed
securities 189.8 7.7 .3 197.2
Sovereign and Supranational 155.4 12.9 .1 168.2
Corporate obligations:
Public utilities 150.1 8.3 .5 157.9
Asset-backed securities 114.6 7.3 .7 121.2
Banks and other financial
institutions 794.8 70.0 .3 864.5
Other corporate 809.3 67.5 .4 876.4
-------- -------- ------- --------
Total dollar-denominated 2,521.6 188.6 2.3 2,707.9
-------- -------- ------- --------
Other foreign securities 17.9 .7 - 18.6
-------- -------- ------- --------
Total fixed-maturity
securities available
for sale 17,104.7 2,589.2 18.9 19,675.0
Equity securities 80.9 29.3 2.1 108.1
-------- -------- ------- --------
Total securities available
for sale $17,185.6 $ 2,618.5 $ 21.0 $19,783.1
======== ======== ======= ========
EXH 13-42
The amortized cost and fair values of investments in fixed-maturity
securities available for sale at December 31, 1996, by contractual maturity
are shown below. This table excludes fixed-maturity securities in the
amount of $18.7 million, at fair value, held by minor foreign operations.
(In millions) AFLAC Japan AFLAC U.S.
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 383.4 $ 396.2 $ 7.5 $ 7.7
Due after one year through
five years 2,017.7 2,242.8 249.2 265.5
Due after five years through
10 years 2,878.1 3,318.1 278.8 292.9
Due after 10 years 10,883.4 12,538.9 989.2 1,010.3
U.S. mortgage-backed
securities 95.4 97.2 140.6 139.4
--------- --------- --------- ---------
Total fixed-maturity
securities available
for sale $16,258.0 $18,593.2 $ 1,665.3 $ 1,715.8
========= ========= ========= =========
Expected maturities will differ from contractual maturities because
some issuers have the right to call or prepay obligations with or without
call or prepayment penalties.
For AFLAC Japan, the duration of policy benefit liabilities is longer
than that of the related assets. Therefore, there is a risk that the
reinvestment of the proceeds at the maturity of such investments will be at
a yield below that of the interest required for the accretion of policy
liabilities. At December 31, 1996, the average duration of the yen-
denominated policy liabilities was approximately 13 years, unchanged from
1995. The average duration of the yen-denominated invested assets was
approximately nine years at both December 31, 1996 and 1995. The weighted-
average period to maturity of fixed-maturity securities of AFLAC Japan at
December 31, 1996, was 12.2 years, compared with 11.3 years at December 31,
1995.
Fair values for fixed-maturity securities were provided by outside
securities consultants using market quotations, prices provided by market
makers or estimates of fair values obtained from yield data relating to
investment securities with similar characteristics. The fair values for
equity securities were determined using market quotations as of the end of
the year on the principal public exchange markets.
EXH 13-43
Realized and unrealized gains and losses from investments for the years
ended December 31 were as follows:
(In thousands) 1996 1995 1994
---------- ---------- ----------
Realized gains (losses) on sale
or redemption of investments:
Fixed-maturity securities:
Gross gains from sales $ 20,994 $ 7,561 $ 19,054
Gross losses from sales (17,508) (16,293) (24,761)
Net gains from redemptions 112 924 2,416
---------- ---------- ----------
3,598 (7,808) (3,291)
Equity securities:
Gross gains from sales 2,529 9,471 5,346
Gross losses from sales (1,339) (1,662) (1,587)
Other long-term assets, net (2,808) (271) (526)
---------- ---------- ----------
Net realized gains (losses) $ 1,980 $ (270) $ (58)
========== ========== ==========
Changes in unrealized gains (losses):
Fixed-maturity securities $ (183,737) $ 1,749,389 $(1,030,290)
Equity securities 22,929 14,362 (1,585)
---------- ---------- ----------
Net unrealized gains (losses) $ (160,808) $ 1,763,751 $(1,031,875)
========== ========== ==========
The Company classifies all fixed-maturity securities as available for
sale. All fixed-maturity and equity securities are carried at fair value.
The related unrealized gains and losses, less amounts applicable to policy
liabilities and deferred income taxes, are reported in a separate component
of shareholders' equity. The portion of unrealized gains credited to policy
liabilities represents gains that would not inure to the benefit of the
shareholders if such gains were actually realized. These amounts are
necessary to cover policy reserve interest requirements based on market
investment yields at these dates.
The net effect of unrealized gains and losses from securities available
for sale on shareholders' equity at December 31 was:
(In thousands) 1996 1995
------------ ------------
Securities available
for sale -
unrealized gains $ 2,436,605 $ 2,597,413
Less:
Policy liabilities 2,023,107 1,865,077
Deferred income taxes 133,344 249,549
------------ ------------
Shareholders' equity,
net unrealized gains
on securities
available for sale $ 280,154 $ 482,787
============ ============
EXH 13-44
The following fixed-maturity securities individually exceeded 10% of
shareholders' equity at December 31:
1996 1995
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $5,787.7 $6,987.9 $5,504.9 $6,743.4
Tokyo Electric Power
Company, Ltd. 850.3 974.1 976.8 1,111.4
Chubu Electric Power 552.8 621.9 614.1 694.0
Province De Quebec 299.5 323.3 277.7 299.4
Tohoku Electric Power 223.7 254.7 251.9 286.2
ASLK-CGER IFICO 215.3 224.3 * *
BIL Asia Group 215.3 221.5 * *
Generale Bank N.V. 215.3 219.4 242.8 239.5
Abbey National PLC 215.3 249.5 * *
Societe Generale 214.6 236.5 * *
Tokyo Metropolitan
Government 211.5 237.5 324.9 356.2
Kyushu Electric Power
Company, Ltd. 211.3 245.6 250.5 289.5
Kansai Electric Power
Company, Ltd. * * 224.2 259.0
Chugoku Electric Power * * 211.2 238.1
Goldman Sachs Group * * 208.9 241.3
Finance Corp. of Local
Enterprise * * 208.7 233.4
*Less than 10%
The Company's investments in Japanese government bonds (at amortized
cost) constituted 34.0% and 35.1% of total fixed-maturity securities
available for sale at December 31, 1996 and 1995, respectively.
The components of net investment income for the years ended December 31
were as follows:
(In thousands) 1996 1995 1994
--------- --------- ---------
Fixed-maturity securities $1,026,611 $1,030,224 $ 841,917
Equity securities 1,705 1,466 1,255
Mortgage loans on real estate 1,693 1,893 3,193
Other long-term investments 93 130 146
Short-term investments 9,543 13,472 11,668
--------- --------- ---------
Gross investment income 1,039,645 1,047,185 858,179
Less investment expenses 17,690 22,225 19,354
--------- --------- ---------
Net investment income $1,021,955 $1,024,960 $ 838,825
========= ========= =========
The Life Insurance Association of Japan, an industry organization, is
currently implementing a policyholder protection fund. The purpose of the
fund is to provide capital support to member companies for business assumed
EXH 13-45
from insolvent life insurers. AFLAC Japan has pledged investment securities
to the Life Insurance Association of Japan for this program. The Company
retains ownership of the securities and receives the related investment
income. The amount of securities pledged is based on premium income and
policy reserves. As of December 31, 1996, $49.5 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund.
At December 31, 1996, fixed-maturity securities with a market value of
$4.4 million were on deposit with regulatory authorities in the United
States. Also, fixed-maturity securities with a market value of $9.7 million
were on deposit with the Central Bank of China, R.O.C., as required by the
Ministry of Finance in Taiwan.
(4) FINANCIAL INSTRUMENTS
NONDERIVATIVES: The carrying amounts for cash, receivables, accrued
investment income, accounts payable and payables for security transactions
approximated their fair values due to the short-term maturity of these
instruments. Consequently, such instruments are not included in the table
presented on the following page.
The methods of determining the fair values of the Company's fixed-
maturity and equity securities are described in Note 3. The fair values for
mortgage loans are estimated using discounted cash flow analyses and
interest rates being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of these calculations. At December 31, 1996, 72.7% of mortgage
loans were commercial and 27.3% were residential (at December 31, 1995,
74.5% and 25.5%, respectively).
The fair values for notes payable are estimated using discounted cash
flow analyses based on the Company's current borrowing rates for similar
types of borrowings.
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At December 31, 1996 and 1995, the
Company held Japanese government bonds as collateral for loaned securities.
Securities received as collateral for such loans are reported separately in
assets at fair value with a corresponding liability of the same amount for
the return of such collateral at termination of the loans. (Beginning in
1998, such collateral assets and the related liability will no longer be
included on the balance sheet under the new accounting provisions of SFAS
No. 125 and SFAS No. 127. Note 1.) The Company's security lending policy
requires that the fair value of the securities received as collateral be
105% or more of the fair value of the loaned securities as of the date the
securities are loaned and not less than 100% thereafter. Bond market
quotations are used to determine the fair value and carrying value of the
collateral asset and related liability.
DERIVATIVES: The Company has only limited activity with derivative
financial instruments and does not use them for trading purposes nor engage
in leveraged derivative transactions. In addition, the Company does not use
derivatives to hedge the foreign-currency-denominated net assets of its
foreign insurance operations. See Note 2 for additional information on the
Company's yen-denominated net assets.
EXH 13-46
The Company has outstanding interest rate swaps on certain of its
variable interest rate yen-denominated borrowings (Note 7). These swaps
reduce the impact of changes in interest rates on the Company's borrowing
costs and effectively change a portion of the Company's interest rate
exposure from variable interest rates to fixed interest rates. The interest
rate swaps have notional principal amounts that equal the unpaid principal
amount during the remaining five-year term of the loan (33.0 billion yen or
$284.2 million at December 31, 1996). Under these agreements, the Company
makes fixed-rate payments at 2.74% and receives floating-rate payments in
return (.78% at December 31, 1996, and .81% at December 31, 1995) based on
the three-month Tokyo Interbank Offered Rate.
The fair value of interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements at the
reporting date. The Company is exposed to nominal credit risk in the event
of nonperformance by counterparts to these interest rate swap agreements.
The counterparts are credit-worthy financial institutions.
The carrying values and estimated fair values of the Company's
financial instruments as of December 31 were as follows:
1996 1995
------------------------ -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $20,327,726 $20,327,726 $19,675,006 $19,675,006
Equity securities 136,328 136,328 108,062 108,062
Mortgage loans 17,802 21,151 22,213 26,151
Policy loans 1,273 1,273 1,230 1,230
Short-term investments 261,680 261,680 232,201 232,201
Securities held as
collateral for
loaned securities 573,911 573,911 1,378,197 1,378,197
Liabilities:
Notes payable (excluding
capitalized leases) 328,141 328,825 297,103 298,522
Derivatives - interest
rate swaps - 8,802 - 4,876
Payables for return of
collateral on loaned
securities 573,911 573,911 1,378,197 1,378,197
EXH 13-47
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
(In thousands) 1996 1995
-------- --------
Land $124,264 $138,765
Buildings 327,757 360,949
Equipment 188,272 190,833
------- -------
640,293 690,547
Less accumulated depreciation 168,386 138,486
------- -------
Net property and equipment $471,907 $552,061
======= =======
(6) POLICY LIABILITIES
The liability for future policy benefits at December 31 consisted of
the following:
(In millions) Liability Amounts Interest Rates
---------------------------- -------------------
Policy Year
Issue of In 20
Year 1996 1995 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Foreign: 1995-96 $ 152.5 $ 17.4 4.0% 4.0%
1994-95 1,025.8 429.3 4.5 4.5
1990-95 7,457.7 7,399.9 5.5 5.5
1988-93 1,103.5 1,132.8 5.25 5.25
1987-88 1,203.9 1,269.6 5.5 5.5
1985-87 189.5 211.1 5.65 5.65
1985-86 936.5 999.5 6.75 5.5
1978-84 2,565.8 2,795.7 6.5 5.0
1974-79 597.0 603.1 7.0 5.0
Other 46.3 35.9
U.S.: 1988-96 481.5 368.4 8.0 6.0
1986-96 440.0 390.9 6.0 6.0
1985-86 25.4 24.8 6.5 6.5
1981-86 264.4 267.0 7.0 5.5
Other 157.4 164.6
Life insurance 1956-96 26.9 25.2 4.0-6.75 5.5
Adjustment for
market value of
securities (Note 3) 2,023.1 1,865.1
-------- --------
Total $18,697.2 $18,000.3
======== ========
EXH 13-48
The weighted-average interest rates reflected in the statements of
earnings for health insurance future policy benefits for Japan policies were
5.5% in 1996, 5.6% in 1995 and 5.7% in 1994, and for U.S. policies, 6.4% in
1996 and 6.3% in both 1995 and 1994.
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In thousands) 1996 1995 1994
--------- --------- ---------
Unpaid supplemental health claims -
beginning of year $1,014,736 $ 916,139 $ 699,395
--------- --------- ---------
Add claims incurred during the year
related to:
Current year 2,378,211 2,411,025 1,986,125
Prior years (158,418) (130,882) (63,552)
--------- --------- ---------
Total incurred 2,219,793 2,280,143 1,922,573
--------- --------- ---------
Less claims paid during the year:
On claims incurred during
current year 1,478,673 1,503,922 1,241,882
On claims incurred during
prior years 618,340 632,267 533,502
--------- --------- ---------
Total paid 2,097,013 2,136,189 1,775,384
--------- --------- ---------
Effect of foreign exchange rate
changes on unpaid claims (107,808) (45,357) 69,555
--------- --------- ---------
Unpaid supplemental health claims -
end of year 1,029,708 1,014,736 916,139
Unpaid claims for life and
other business 9,549 1,559 13,211
--------- --------- ---------
Total liability for
unpaid policy claims $1,039,257 $1,016,295 $ 929,350
========= ========= =========
EXH 13-49
(7) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In thousands) 1996 1995
--------- ---------
2.74% unsecured, yen-denominated notes payable
to banks under reducing revolving credit
agreement, due annually through July 2001 $ 284,238 $ 230,695
Unsecured, yen-denominated notes payable
to banks, due semiannually, through October
1997, variable interest rate (.88% at
December 31, 1996) 17,453 -
9.60% to 10.72% unsecured notes payable to
bank, due semiannually, through 1998 15,389 23,833
Obligations under capitalized leases, due
monthly through 2001, secured by computer
equipment in Japan 25,392 30,165
5.965% unsecured notes payable to banks,
refinanced in 1996 - 39,167
Short-term yen-denominated note payable to
bank under unsecured line of credit, variable
interest rate (.76% at December 31, 1996) 9,850 -
Other 1,211 3,408
-------- --------
Total notes payable $ 353,533 $ 327,268
======== ========
The 5.965% fixed rate notes payable that were outstanding at December
31, 1995, were converted in April 1996 from dollar-denominated to yen-
denominated amounts with a variable interest rate based on the Tokyo
Interbank Offered Rate plus loan costs of 25 basis points. At December 31,
1996, bank borrowings of 2.0 billion yen ($17.5 million) were outstanding
under this agreement.
Interest rate swaps related to the 2.74% (fixed rate after swaps) loan
are described in Note 4.
The aggregate maturities of notes payable during each of the five years
after December 31, 1996, are: 1997, $104.5 million; 1998, $72.0 million;
1999, $60.9 million; 2000, $58.8 million; and 2001, $57.2 million.
Certain of the Company's loan agreements contain financial covenants.
The most restrictive covenant requires the Company to maintain a minimum
consolidated shareholders' equity, as defined in the agreement, of
$1.0 billion. The Company was in compliance with the covenants at December
31, 1996.
EXH 13-50
(8) INCOME TAXES
The income tax effects of the temporary differences that give rise to
deferred income tax assets and liabilities as of December 31 were as
follows:
(In thousands) 1996 1995
---------- ----------
Deferred income tax liabilities:
Deferred acquisition costs $ 972,678 $ 982,239
Unrealized gains on securities
available for sale 949,978 1,103,153
Premiums receivable 73,353 122,974
--------- ---------
Total deferred income
tax liabilities 1,996,009 2,208,366
--------- ---------
Deferred income tax assets:
Difference in tax basis of
investment in Japan branch 2,354 87,096
Foreign tax credit carryforwards 116,607 122,203
Policy benefit reserves 720,755 729,638
Unfunded retirement benefits 63,292 53,334
Other accrued expenses 66,824 62,933
Other 187,975 94,060
--------- ---------
Total gross deferred tax assets 1,157,807 1,149,264
Less valuation allowance 162,903 151,398
--------- ---------
Total deferred income tax assets 994,904 997,866
--------- ---------
Deferred income tax liability 1,001,105 1,210,500
Current income tax liability 180,016 187,209
--------- ---------
Total income tax liability $1,181,121 $1,397,709
========= =========
A valuation allowance is provided when it is more likely than not that
deferred tax assets will not be realized. The Company has established
valuation allowances primarily for foreign tax credit and noninsurance loss
carryforwards that exceed projected future offsets. Only 35% of
noninsurance losses can be offset against life insurance taxable income each
year. During 1996, the valuation allowance for deferred tax assets
increased by $11.5 million ($59.8 million in 1995) due to changes in
carryforwards of foreign tax credits and noninsurance losses.
Foreign tax credit carryforwards available at December 31, 1996, expire
as follows: $25.9 million in 1997, $33.6 million in 1998, $16.5 million in
1999 and $40.6 million in 2000.
EXH 13-51
The components of income tax expense applicable to pretax earnings for
the years ended December 31 were as follows:
(In thousands) Japan U.S. Total
----------- --------- -----------
Income tax expense (benefit):
1996:
Current $ 206,716 $ 32,966 $ 239,682
Deferred 14,153 1,803 15,956
---------- -------- ----------
Total $ 220,869 $ 34,769 $ 255,638
========== ======== ==========
1995:
Current $ 213,784 $ 19,878 $ 233,662
Deferred 17,781 495 18,276
---------- -------- ----------
Total $ 231,565 $ 20,373 $ 251,938
========== ======== ==========
1994:
Current $ 133,885 $ 12,587 $ 146,472
Deferred 65,225 (151) 65,074
---------- -------- ----------
Total $ 199,110 $ 12,436 $ 211,546
========== ======== ==========
Income tax expense in the accompanying consolidated financial
statements is greater than 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 thousands) 1996 1995 1994
--------- --------- ---------
Income taxes based on U.S.
statutory rates $ 227,500 $ 210,348 $ 176,518
U.S. alternative minimum tax 26,333 12,558 10,712
Unrecognized foreign tax credits (11,331) 11,992 12,473
Noninsurance losses generating
no current tax benefit 12,344 7,010 5,561
Other, net 792 10,030 6,282
-------- -------- --------
Income tax expense $ 255,638 $ 251,938 $ 211,546
======== ======== ========
Most of the Company's income tax expense represents Japanese income
taxes on AFLAC Japan operating results calculated at Japan's corporate tax
rate of 45.3%.
EXH 13-52
Income taxes are recorded in the statements of earnings and directly in
certain shareholders' equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
(In thousands) 1996 1995 1994
-------- -------- --------
Statements of earnings $255,638 251,938 211,546
Shareholders' equity:
Unrealized gains and losses on
securities available for sale (116,205) (39,670) 289,658
Unrealized foreign currency
translation gains - (2,177) (1,980)
------- ------- -------
Total income taxes $139,433 $210,091 $499,224
======= ======= =======
Realized investment losses incurred by AFLAC Japan are generally
deductible for Japan income tax purposes. Accordingly, the income tax
effects recognized for realized and unrealized investment gains and losses
reflect such tax benefit of any losses related to AFLAC Japan operations.
Also, AFLAC Japan receives certain Japanese income tax benefits from foreign
exchange translation losses on its dollar-denominated investments. These
tax benefits are included directly in the shareholders' equity component of
unrealized foreign currency translation gains.
Deferred income tax expense, which results from differences in the
timing of reporting various income and expense items between the financial
statements and the income tax returns for the years ended December 31, is
summarized as follows:
(In thousands) 1996 1995 1994
--------- --------- --------
Recognition of deferred policy
acquisition costs $ 30,551 $ 22,753 $ 71,701
Adjustments to liability for
future policy benefits (8,678) (5,605) (11,417)
Noninsurance losses generating
no tax benefit 4,800 2,130 8,377
Unfunded retirement benefits (5,003) (3,351) (3,627)
Other, net (5,714) 2,349 40
------- ------- -------
Deferred income tax expense $ 15,956 $ 18,276 $ 65,074
======= ======= =======
In 1994, the Internal Revenue Service (IRS) proposed adjustments to the
Company's U.S. consolidated federal income tax returns for the years 1989
through 1991. The primary proposed adjustment related to the computation of
foreign-source income for purposes of utilizing foreign tax credits. These
issues were settled during 1996 with no material adjustments to the income
tax returns as originally filed. The IRS is currently examining the
Company's U.S. consolidated income tax returns for the years 1992 through
1994.
EXH 13-53
(9) 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) 1996 1995 1994
-------- -------- --------
Common stock - number of shares:
Issued:
Balance at beginning of year 156,358 155,999 155,565
Exercise of stock options 881 359 434
-------- -------- --------
Balance at end of year 157,239 156,358 155,999
-------- -------- --------
Treasury stock - number of shares:
Balance at beginning of year 14,384 6,544 358
Purchases of treasury stock 6,095 8,223 6,309
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (925) (311) (123)
Exercise of stock options (200) (72) -
-------- -------- --------
Balance at end of year 19,354 14,384 6,544
-------- -------- --------
Shares outstanding at end of year 137,885 141,974 149,455
======== ======== ========
STOCK SPLIT: The Company paid a three-for-two stock split on March 18,
1996. Share and per-share amounts have been adjusted to reflect this split.
SHARE REPURCHASE PROGRAM: During 1996, the Company's board of
directors authorized the purchase of up to an additional 7.0 million shares
of the Company's common stock. In total, the board of directors has
authorized the purchase of up to 28.4 million shares since the inception of
the repurchase program in February 1994. The Company purchased 5.9 million
shares during 1996, 8.2 million shares during 1995 and 6.3 million shares
during 1994 under this share repurchase program. The differences in
percentage increases in net earnings and net earnings per share primarily
reflect the impact of the share repurchase program.
STOCK OPTIONS: The Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, on January 1, 1996. This statement provides a choice of
accounting methods for employee stock compensation plans. A company can
elect to use the new fair-value-based method of accounting for employee
stock compensation plans, under which compensation cost is measured and
recognized in results of operations, or continue to account for these plans
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 (APB No. 25). Companies electing to remain with the method
prescribed by APB No. 25 must make disclosures of what net income and
earnings per share would have been if the fair-value-based method of
accounting had been applied. The Company has elected to continue to account
for employee stock options using the method prescribed by APB No. 25 and
include the required disclosures.
EXH 13-54
The Company's stock option plan allows grants for both incentive stock
options (ISO) and non-qualifying stock options (NQSO) to employees and NQSO
to members of the board of directors. The option period runs for 10 years
unless provided for otherwise in the individual option agreement. The
option price for an ISO must be equal to 100% of the fair market value at
the date of grant and at least 50% of the fair market value for a NQSO. The
options are exercisable immediately unless they are placed under a vesting
schedule which is determined by the compensation committee. No compensation
expense is recognized by the Company for ISO grants. For NQSO, the Company
incurs a compensation expense for the difference between the grant price and
market value at date of grant for all discounted NQSO. No discounted
options were granted during the three-year period ending December 31, 1996.
In August 1995, the board of directors made an additional 1,042,500
shares available for future grants. This represents 10% of the shares
previously approved for stock options by the shareholders. The board of
directors also approved 750,000 shares of non-qualified stock options to be
granted to managers of AFLAC Japan. At December 31, 1996, shares available
for future grants amounted to 6,045.
The following table summarizes stock option activity:
Option Weighted-Average
Shares Exercise Price
--------- ----------------
Outstanding at January 1, 1994 4,586,410 $ 8.04
Granted 4,108,523 19.01
Expired (938) -
Canceled (114,001) 18.41
Exercised (431,630) 5.95
----------
Outstanding at December 31, 1994 8,148,364 13.53
Granted 549,377 28.08
Canceled (25,313) 18.65
Exercised (470,047) 11.32
---------
Outstanding at December 31, 1995 8,202,381 14.62
Granted 1,830,085 32.79
Canceled (61,976) 24.96
Exercised (1,166,419) 10.56
---------
Outstanding at December 31, 1996 8,804,071 $18.86
=========
1996 1995 1994
--------- --------- ---------
Shares exercisable at
end of year 6,776,583 7,676,624 6,631,838
========= ========= =========
Weighted-average fair value
per share of shares granted
during the year $ 32.79 $ 28.08 $ 19.01
========= ========= =========
EXH 13-55
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Wgtd. Avg.
Remaining Wgtd. Avg. Wgtd. Avg.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ------------ ---------- ----------- ----------
$ 3.57 - $ 7.13 760,630 3.01 $ 4.52 760,630 $ 4.52
7.33 - 8.00 1,083,804 3.17 7.93 1,083,804 7.93
8.07 - 16.13 1,089,823 4.07 11.57 1,089,823 11.57
18.83 3,182,380 6.49 18.83 3,182,380 18.83
19.20 - 28.21 886,074 7.94 25.24 659,946 24.72
31.67 1,371,610 9.12 31.67 - -
33.94 - 42.94 429,750 9.69 36.47 - -
--------- ---------
$ 3.57 - $42.94 8,804,071 6.19 $ 18.86 6,776,583 $ 14.89
========= =========
Had compensation cost for the Company's stock options granted in 1996
and 1995 been determined using the fair-value-based method as described in
SFAS No. 123, the Company's net earnings and earnings per share would
approximate the pro forma amounts indicated below:
(In thousands, except for 1996 1995
per-share amounts) --------- ---------
Net earnings:
As reported $ 394,363 $ 349,057
Effect of stock options (8,479) (1,786)
--------- ---------
Pro forma net earnings $ 385,884 $ 347,271
========= =========
Earnings per share:
As reported $ 2.73 $ 2.33
Effect of stock options (.06) (.01)
--------- ---------
Pro forma net earnings per share $ 2.67 $ 2.32
========= =========
The fair value of each option granted during 1996 and 1995 was
estimated on the date of grant using the Black-Scholes multiple option
approach with the following assumptions: dividend yield of 1.0% for both
1996 and 1995, expected volatility of 19% for 1996 and 21% for 1995, risk-
free interest rate of 7.0% for 1996 and 6.5% for 1995, and expected life
from the vesting dates ranging from 3.65 years to 6.10 years for 1996 and
2.52 years to 7.10 years for 1995.
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. The provisions of SFAS No. 123 are
applicable prospectively and the above pro forma disclosures therefore do
not include amortization of the fair value of awards prior to 1995. Also,
the Company expects to grant additional awards in future years.
EXH 13-56
OTHER: 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.
(10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Net assets of the insurance subsidiaries aggregated $2.6 billion at
December 31, 1996, on a generally accepted accounting principles basis.
AFLAC Japan accounted for $1.7 billion of these net assets.
The Company's insurance subsidiaries are required to report their
results of operations and financial position to state insurance regulatory
authorities, and in the case of AFLAC Japan, to the Japanese Ministry of
Finance, on the basis of statutory accounting practices prescribed or
permitted by such authorities. As determined on a U.S. statutory accounting
basis, net income of AFLAC was $256.6 million in 1996, $194.3 million in
1995 and $252.5 million in 1994, and capital and surplus was $1.4 billion
and $1.2 billion at December 31, 1996 and 1995, respectively.
Reconciliations of AFLAC's net assets on a generally accepted
accounting principles basis to net assets determined on a U.S. statutory
accounting basis as of December 31 were as follows:
(In thousands) 1996 1995
----------- -----------
Net assets on generally accepted
accounting principles basis $ 2,644,408 $ 2,536,112
Adjustment of fixed-maturity securities
from fair value to amortized cost (2,385,328) (2,568,498)
Elimination of deferred policy
acquisition costs (2,580,682) (2,563,759)
Adjustment to liability for future
policy benefits 3,006,909 2,892,499
Adjustment to income tax liability 1,030,111 1,236,452
Reduction in premiums receivable (83,946) (65,107)
Establishment of asset valuation reserve (188,131) (185,180)
Elimination of statutory non-admitted assets (73,321) (63,098)
Difference in foreign currency translation (477) (51,423)
Other, net 35,977 78,398
----------- -----------
Net assets on U.S. statutory
accounting basis $ 1,405,520 $ 1,246,396
=========== ===========
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 the insurance subsidiaries. Dividends, management
fees (see Note 2) and other payments to the Parent Company by its insurance
subsidiaries are subject to various regulatory restrictions and approvals
related to safeguarding the interests of insurance policyholders. The
maximum amount of dividends that can be paid by insurance companies
domiciled in the State of Georgia to shareholders without prior approval of
EXH 13-57
the Commissioner of Insurance is the greater of the net gain from operations
for the previous year determined under statutory accounting principles or
10% of statutory surplus as of the previous year-end. Dividend payments by
AFLAC during 1997 in excess of $259.6 million would require such approval.
A portion of AFLAC Japan annual earnings, as determined on a Japan
statutory accounting basis, can be remitted each year to AFLAC U.S. after
satisfying various conditions imposed by Japanese regulatory authorities for
protecting policyholders and obtaining remittance approvals from such
authorities. These conditions include compliance with risk-based capital
guidelines for Japanese insurers. 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 U.S. dollar-denominated investments into yen. Earnings were
remitted from AFLAC Japan to AFLAC U.S. in the amount of $217.3 million in
1996, $140.5 million in 1995 and $132.9 million in 1994. Management expects
to continue to obtain approvals from Japanese regulatory authorities for
annual profit transfers.
Net assets (unaudited) of AFLAC Japan, based on Japanese statutory
accounting practices, aggregated $466.9 million and $412.8 million at
December 31, 1996 and 1995, respectively. Japanese statutory accounting
practices differ in many respects from U.S. generally accepted accounting
principles. Under Japanese statutory accounting practices, policy
acquisition costs are charged off immediately, policy benefit and claim
reserving methods are different, deferred income tax liabilities are not
recognized, and investment securities are carried at cost less certain
market value adjustments.
(11) BENEFIT PLANS
RETIREMENT PLANS: The Company sponsors several defined-benefit
retirement plans covering substantially all employees. The retirement
benefits for employees are generally based on years of service and formula-
determined salaries at retirement for AFLAC Japan employees, and salary
during the five highest consecutive years out of the last 10 years preceding
retirement for U.S. employees.
It is the Company's general policy to annually fund through a trust the
accrued costs for the U.S. employee plans to the extent deductible for U.S.
federal income tax purposes (such accrued costs are calculated under the
frozen entry-age actuarial cost method). A portion of the AFLAC Japan
employee retirement program is funded under a group annuity arrangement with
another insurance company. An accrued liability is included in the
consolidated financial statements for the unfunded portion of the AFLAC
Japan program and supplemental plans for certain Japan and U.S. officers.
EXH 13-58
The components of retirement expense and significant actuarial
assumptions for the years ended December 31 are shown below.
1996 1995 1994
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Basic employee plans:
Service cost for
benefits earned
during the year $2,169 $ 2,591 $2,610 $ 1,880 $2,269 $ 2,166
Interest cost on
projected benefit
obligations 1,031 3,142 1,148 2,686 999 2,569
Less actual investment
return on plan assets (1,117) (4,429) (518) (6,344) (1,135) 28
Net amortization
and deferral 702 1,861 696 4,370 278 (1,530)
----- ----- ----- ----- ----- -----
Total retirement
expense for basic
employee plans 2,785 3,165 3,936 2,592 2,411 3,233
Officers, retirees and
beneficiaries unfunded
supplemental plans 1,369 35,806 1,395 35,634 1,203 33,468
----- ------ ----- ------ ----- ------
Total retirement
expense $4,154 $38,971 $5,331 $38,226 $3,614 $36,701
===== ====== ===== ====== ===== ======
Significant actuarial
assumptions:
Discount rate for:
Net periodic pension
costs 4.0% 7.0% 4.0% 8.0% 4.4% 7.0%
Benefit obligations 4.0-5.5 7.0 4.0 7.0 4.0 8.0
Projected increase in
salary levels 3.5 5.0 3.5 5.0 4.5 5.0
Expected long-term
return on plan assets 2.5 9.0 4.5 9.0 5.5 9.0
EXH 13-59
Reconciliations of the funded status of the basic employee plans with
amounts recognized in the accompanying consolidated balance sheets as of
December 31 were as follows:
1996 1995
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Plan assets, at fair value
(primarily bonds, stocks
and insurance contracts) $18,445 $37,574 $18,769 $31,557
------ ------ ------ ------
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
based on employee service to
date and present salary levels:
Vested benefits 15,768 32,557 16,677 28,373
Non-vested benefits 94 1,167 128 1,455
Effect of assumed future
salary increases 8,789 13,945 10,187 12,696
------ ------ ------ ------
Projected benefit obligations 24,651 47,669 26,992 42,524
------ ------ ------ ------
Projected benefit obligations
in excess of plan assets (6,206) (10,095) (8,223) (10,967)
Unamortized net losses (gains) from
plan experience variations and
changes in actuarial assumptions (170) 9,731 1,029 11,486
Unrecognized prior service
cost (credit) 1,119 (222) 1,347 (249)
Unamortized net transition
(gain) loss 673 (1,083) 857 (1,205)
------ ------ ------ ------
Prepaid retirement cost
(liability) recognized in
consolidated balance sheets $(4,584) $(1,669) $(4,990) $ (935)
====== ====== ====== ======
In addition to the funded benefit obligations for basic employee plans,
the accrued retirement liability for unfunded supplemental retirement plans
for various officers and beneficiaries at December 31, 1996 and 1995, was
$165.7 million and $134.6 million, respectively. The actuarial present
value of projected benefit obligations for these plans was $170.2 million
and $161.2 million at December 31, 1996 and 1995, respectively. The
discount rates used were 4.0% in both 1996 and 1995 for AFLAC Japan, and
7.0% for AFLAC U.S. for both 1996 and 1995. Such supplemental retirement
plans include a lifetime obligation to the surviving spouse of the Company's
former chairman of the board. Benefits are payable at .5% of the Company's
"net earnings" for the previous year as defined in the agreement.
POSTRETIREMENT BENEFITS: In addition to pension benefits,
substantially all U.S. employees of the Company participate in health care
benefit plans. Employees become eligible for these benefits, up to age 65,
if they terminate employment after age 55 with 15 years of service. Certain
employees are eligible for nonmedical benefits. The accumulated benefit
obligation as of December 31, 1996 and 1995, was $9.4 million and $8.9
million, respectively, based on an assumed discount rate of 7.0% for both
years.
EXH 13-60
Net postretirement benefit cost for the years ended December 31
included the following components:
(In thousands) 1996 1995 1994
------ ------ ------
Service cost $ 296 $ 229 $ 251
Interest cost 630 536 743
Amortization of unrecognized gains (41) (207) -
----- ----- -----
Postretirement benefit cost $ 885 $ 558 $ 994
===== ===== =====
Actuarial assumptions used were:
Discount rate - periodic cost 7% 8% 7%
Projected health care cost
trend rate 12% 13% 14%
Ultimate trend rate 7% 7% 7%
Effect of a 1% point increase in the
health care cost trend rate on the:
Postretirement benefit obligation $ 466 $ 675 $ 487
Aggregate of service and
interest cost $ 86 $ 89 $ 94
STOCK BONUS PLAN: AFLAC U.S. maintains a stock bonus plan for eligible
U.S. sales associates. Contributions to the plan, which are determined
based on sales of insurance policies, are made by AFLAC U.S. to a trust and
are used to purchase the Parent Company's common stock for later
distribution to the participants. The participants are subject to vesting
requirements based on years of service. Any shares forfeited reduce future
contributions of AFLAC U.S. The net costs of this plan, which are included
in deferred policy acquisition costs, amounted to $8.9 million in 1996, $8.0
million in 1995 and $6.9 million in 1994.
(12) COMMITMENTS AND CONTINGENCIES
LITIGATION: The Company is 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. During 1995, the
Company settled certain litigation in Alabama related to an ancillary line
of business. However, the settlement was not material to the Company's
consolidated net earnings for the year. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of the litigation still pending will not have a material adverse
effect on the financial position of the Company.
LAND PURCHASE COMMITMENT: AFLAC Japan's administrative office building
is located on partially leased land. Under the terms of an agreement
entered into in 1991, the Company is committed to purchase the leased land,
at fair value, upon the demand of the owner. As of December 31, 1996, the
fair value of the leased land was estimated to be 2.1 billion yen ($18.4
million).
EXH 13-61
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 Peat Marwick 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 and conduct the audit procedures
that 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 Peat Marwick LLP appears on the following page.
The Audit Committee of the board of directors, which is composed of
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The committee
meets periodically with representatives of management, as well as the
independent and internal auditors, to review matters of a material nature
related to financial reporting and the planning, results and recommendations
of audits. The independent and internal auditors have free access to the
Audit Committee, without management present, to discuss any matter they
believe should be brought to the attention of the committee. The committee
is also responsible for making recommendations to the board of directors
concerning the selection of the independent auditors.
/s/ Daniel P. Amos
- ---------------------------------
Daniel P. Amos
President and Chief Executive Officer
/s/ Kriss Cloninger III
- ---------------------------------
Kriss Cloninger III
Executive Vice President and Chief Financial Officer
EXH 13-62
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AFLAC
Incorporated and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 29, 1997
EXH 13-63
Unaudited Consolidated Quarterly Financial Data
(In thousands, except per-share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------
1996 Amount % Change Amount % Change Amount % Change Amount % Change
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,729,920 .9% $ 1,741,657 (9.9)% $ 1,775,579 (2.0)% $ 1,853,047 7.0%
Net earnings 86,523 1.9 85,747 (7.7) 88,345 .4 133,748 60.5
- ------------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings $ .59 5.4 $ .59 (3.3) $ .62 3.3 $ .93 63.2
Cash dividends $ .087 $ .10 $ .10 $ .10
- -----------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------
1995 Amount % Change Amount % Change Amount % Change Amount % Change
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,713,676 23.1% $ 1,932,771 30.5% $ 1,811,718 13.1% $ 1,732,455 5.9%
Net earnings 84,873 21.3 92,916 33.9 87,960 15.6 83,308 7.6
- -----------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings $ .56 27.3 $ .61 35.6 $ .60 22.4 $ .57 11.8
Cash dividends $ .077 $ .087 $ .087 $ .087
- -----------------------------------------------------------------------------------------------------------------------------
EXH 13-64