EXHIBIT 13
EXH 13
EXHIBIT 13
The following information is contained in the 1997 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 1997 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, 1997, are as
follows:
Quarterly Common Stock Prices
1997 High Low Close
--------------------------------------------------------------------
4th Quarter $ 56.31 $ 44.25 $ 51.13
3rd Quarter 57.88 48.50 54.25
2nd Quarter 51.38 38.38 47.25
1st Quarter 43.50 37.50 37.50
1996
---------------------------------------------------------------------
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 33.00 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
EXH 13-1
ITEM 5. (b) Holders:
1997 1996 1995
- ---------------------------------------------------------------------------
Number of common
shares outstanding 133,218,010 137,884,887 141,974,309
Number of registered
common shareholders 57,788 49,474 39,317
Approximate number of
common shareholders 128,900 113,300 88,700
ITEM 5. (c) Quarterly cash dividends:
1997 1996
------ ------
4th Quarter $.115 $.10
3rd Quarter .115 .10
2nd Quarter .115 .10
1st Quarter .10 .087
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 13-24, and Note
10, Statutory Accounting and Dividend Restrictions, of the Notes to the
Consolidated Financial Statements, also presented in this Exhibit 13 on page
13-64.
EXH 13-2
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except for per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES
For the Year 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Revenues:
Premiums, principally supplemental
health insurance $ 5,873,661 $ 5,910,036 $ 6,070,830 $ 5,180,732 $ 4,225,390
Net investment income 1,077,715 1,021,955 1,024,960 838,825 689,272
Realized investment gains (losses) (5,440) 1,980 (270) (58) 2,937
Gain on sale of television business 267,223 60,264 - - -
Other income 37,543 105,968 95,100 91,259 83,019
---------- ---------- ---------- ---------- ----------
Total revenues 7,250,702 7,100,203 7,190,620 6,110,758 5,000,618
---------- ---------- ---------- ---------- ----------
Benefits and expenses:
Benefits and claims 4,833,077 4,895,522 5,034,266 4,256,541 3,423,297
Expenses 1,552,805 1,554,680 1,555,359 1,349,881 1,148,937
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 6,385,882 6,450,202 6,589,625 5,606,422 4,572,234
---------- ---------- ---------- ---------- ----------
Pretax earnings 864,820 650,001 600,995 504,336 428,384
Income taxes 279,797 255,638 251,938 211,546 184,495
---------- ---------- ---------- ---------- ----------
Net earnings $ 585,023(1) $ 394,363(2) $ 349,057 $ 292,790 $ 243,889(3)
========== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (basic) $ 4.30(1) $ 2.81(2) $ 2.40 $ 1.93 $ 1.57(3)
Net earnings (diluted) 4.16(1) 2.73(2) 2.33 1.89 1.55(3)
Cash dividends .445 .387 .338 .298 .26
Shareholders' equity 25.75 15.42 15.03 11.72 8.80
Price range: High $ 57.88 $ 44.00 $ 29.83 $ 24.08 $ 22.67
Low 37.50 28.25 21.25 16.83 16.50
Close 51.13 42.75 29.00 21.33 19.00
Price/earnings ratio:* High 21.8x 18.3x 12.8x 12.7x 14.8x
Low 14.1 11.8 9.1 8.9 10.8
Common shares used for EPS (basic) 136,055 140,176 145,677 151,446 154,875
Common shares used for EPS (diluted) 140,798 144,461 149,492 154,648 157,857
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
(In thousands, except for per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES
At Year-End 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Assets:
Investments and cash $22,879,910 $20,744,107 $20,044,964 $15,993,768 $12,469,140
Other 6,574,095 4,276,277 5,171,545 4,293,311 2,973,546
---------- ---------- ---------- ---------- ----------
Total assets $29,454,005 $25,020,384 $25,216,509 $20,287,079 $15,442,686
========== ========== ========== ========== ==========
Liabilities and shareholders' equity:
Policy liabilities $19,885,068 $20,234,205 $19,513,504 $16,006,607 $12,065,471
Notes payable 523,209 353,533 327,268 184,901 122,062
Income taxes 1,827,337 1,181,121 1,397,709 1,392,441 950,278
Other liabilities 3,787,919 1,125,956 1,843,887 951,363 939,251
Shareholders' equity 3,430,472 2,125,569 2,134,141 1,751,767 1,365,624
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $29,454,005 $25,020,384 $25,216,509 $20,287,079 $15,442,686
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings** $ 374,486 $ 347,425 $ 348,734 $ 293,053 $ 241,654(3)
Operating earnings per share (basic)** $ 2.75 $ 2.48 $ 2.39 $ 1.94 $ 1.56(3)
Operating earnings per share (diluted)** 2.66 2.40 2.33 1.89 1.53(3)
Pretax profit margin** 8.6% 8.4% 8.4% 8.3% 8.5%
After-tax profit margin** 5.4% 4.9% 4.8% 4.8% 4.8%(3)
Operating return on equity*** 18.8% 19.9% 22.0% 20.4% 19.9%(3)
Yen/dollar exchange rate at year-end 130.10 116.10 102.95 99.85 112.00
Average yen/dollar exchange rate 121.07 108.84 94.10 102.26 111.21
Notes: (1) Includes gain of $211,190 ($1.55 per basic share, $1.50 per diluted share) from the sale of the broadcast
business in 1997.
(2) Includes gain of $48,211 ($.34 per basic share, $.33 per diluted share) from the sale of the broadcast business
in 1996.
(3) Excludes gain of $11,438 ($.07 per share) from cumulative effect of accounting changes in 1993.
(*) Based on diluted operating earnings per share.
(**) Excludes realized investment gains/losses and in 1996 and 1997, the gains from the sale of the
television business.
(***)Based on operating earnings and excluding unrealized gains on securities available for sale, net.
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 and marketed at the work site, 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.
RESULTS OF OPERATIONS
In 1997, the Company completed the sale of its broadcast business,
which consisted of seven network-affiliated television stations. The total
pretax gain from the sale was $327.5 million. The sale of one station
closed on December 31, 1996. The pretax and after-tax gains recognized in
1996 on this sale were $60.3 million and $48.2 million, respectively. The
effect of the after-tax gain on 1996 basic and diluted net earnings per
share was $.34 and $.33, respectively. The pretax and after-tax gains
recognized during the second quarter of 1997 on the closing of the six
remaining stations were $267.2 million and $211.2 million, respectively. The
effect of the after-tax gain on 1997 basic and diluted net earnings per
share was $1.55 and $1.50, respectively. For further information, see Note
2 of the Notes to the Consolidated Financial Statements.
EXH 13-5
The table below sets forth the results of operations by business
segment for the years shown and the percentage changes from the previous
year.
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Percentage change Years ended
over previous year December 31,
------------------ ------------------------
1997 1996 1997 1996 1995
------------------ ------------------------
Insurance operations (excluding
realized investment gains and
losses):
AFLAC Japan................. (5.4)% (5.1)% $504.1 $532.8 $561.4
AFLAC U.S................... 43.4 23.0 184.3 128.5 104.5
----- ----- -----
Total 4.1 (.7) 688.4 661.3 665.9
Broadcast division operations.. 35.0 3.5 25.6 19.0
Interest expense, noninsurance
operations................... 16.7 (10.8) (10.5) (12.5) (11.3)
Corporate expenses, other
operations and eliminations.. 9.3 (20.0) (78.4) (86.6) (72.3)
----- ----- -----
Pretax operating earnings.. 2.6 (2.2) 603.0 587.8 601.3
Realized investment
gains (losses)............... (5.4) 1.9 (.3)
Gain on sale of television
business..................... 267.2 60.3 -
----- ----- -----
Earnings before income
taxes.................... 33.0 8.2 864.8 650.0 601.0
Income taxes................... 9.5 1.5 279.8 255.6 251.9
----- ----- -----
Net earnings............... 48.3% 13.0% $585.0 $394.4 $349.1
==== ==== ===== ===== =====
Net earnings per share:
Basic........................ 53.0% 17.1% $ 4.30 $ 2.81 $ 2.40
Diluted...................... 52.4 17.2 4.16 2.73 2.33
==== ==== ===== ===== =====
============================================================================
The following discussion of earnings comparisons focuses on pretax
operating earnings and excludes realized investment gains/losses and the
gains from the sale of the television business in 1996 and 1997. Operating
earnings per share referred to in the following discussion are based on the
diluted number of average outstanding shares.
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.
EXH 13-6
The following table illustrates the effect of foreign currency
translation on the Company's reported results by comparing those results as
if foreign currency exchange rates had remained unchanged from the previous
year. In years when the yen weakens, translating yen into dollars causes
fewer dollars to be reported. When the yen strengthens, translating yen
into dollars causes more dollars to be reported.
Selected Percentage Changes for Supplemental Consolidated Data
(Years Ended December 31)
Adjusted to
As Exclude Foreign
Reported Currency Changes*
------------------------ ------------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
Premium income (.6)% (2.6)% 17.2% 8.5% 10.1% 9.2%
Net investment income 5.5 (.3) 22.2 14.0 11.9 14.2
Total revenues** 2.1 (1.3) 17.7 10.9 11.3 9.8
Total benefits and
expenses (1.0) (2.1) 17.5 8.0 10.5 9.7
Operating earnings*** 7.8 (.4) 19.0 15.2 11.5 11.3
Operating earnings
per diluted share*** 10.8 3.0 23.3 18.3 15.5 15.3
- ----------------------------------------------------------------------------
* Amounts excluding foreign currency changes for each year were
determined using the average yen/dollar exchange rate for each
respective prior year.
** Includes realized investment gains and losses, and the gains from the
sale of the television business in 1996 and 1997.
*** Excludes realized investment gains and losses, and the gains from the
sale of the television business in 1996 and 1997.
============================================================================
In the third quarter of 1995, the yen began to weaken in relation to
the dollar and continued to weaken throughout 1996 and 1997. The average
yen-to-dollar exchange rates were 121.07 in 1997, 108.84 in 1996 and 94.10
in 1995. Operating earnings per share, which were affected by these
currency fluctuations, increased 10.8% to $2.66 in 1997, 3.0% to $2.40 in
1996 and 23.3% to $2.33 in 1995. The weakening of the yen in 1997 and 1996
lowered operating earnings by $.18 per share in 1997 compared with 1996 and
$.29 per share in 1996 compared with 1995. The strengthening of the yen in
1995 benefited operating earnings by $.15 per share in 1995 compared with
1994. 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.
Despite the weakening of the yen during 1996 and 1997, operating
earnings per share increased in each year of the three-year period ended
December 31, 1997. The increases reflected strong earnings in the
functional currencies of AFLAC's core insurance operations in Japan and the
United States, a consolidated benefit from additional investment income
associated with profit repatriations from AFLAC Japan to AFLAC U.S., and in
1997, additional investment income earned on the proceeds from the sale of
the television business. The Company's share repurchase program also
increased operating earnings per share.
EXH 13-7
The Company's primary financial objective is the growth of operating
earnings per share before the effect of foreign currency fluctuations. In
1996, the Company set this objective at an annual growth rate of 15% to 17%
through the year 2000. The goal for 1997 was 17% growth, which the Company
exceeded. Excluding the effect of currency fluctuations, operating earnings
per share increased 18.3% in 1997, 15.5% in 1996 and 15.3% in 1995.
In early 1998, the Company raised its 1998 objective for growth in
operating earnings per share from a 17% increase to 20% before the effect of
currency translation. If that objective is achieved, the following table
shows various results for operating earnings per share in 1998 when the
estimated impact from foreign currency translation is included.
Annual Yen Average Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1997 on EPS
- ------------------ ---------------- --------- ----------
1998 @ 110.00 $ 3.35 25.9% $ .16
1998 @ 115.00 3.27 22.9 .08
1998 @ 120.00 3.20 20.3 .01
1998 @ 121.07* 3.19 19.9 -
1998 @ 125.00 3.14 18.0 (.05)
1998 @ 130.00 3.09 16.2 (.10)
1998 @ 135.00 3.04 14.3 (.15)
*Actual 1997 average exchange rate
Profit Repatriation
AFLAC Japan repatriated profits to AFLAC U.S. of $347.0 million in
1997, $217.3 million in 1996 and $140.5 million in 1995. The profit
transfer in 1997 included $124.8 million of a non-recurring nature related
to gains realized from the valuation of investments as determined on a
Japanese regulatory accounting basis. Since the first repatriation in 1989,
AFLAC Japan has repatriated $1.0 billion, which has enhanced the Company's
flexibility and profitability. 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 lower on investment income earned in
the United States. Management estimates that cumulative profit transfers
from 1992 through 1997 have benefited consolidated net earnings by $41.3
million in 1997, $25.7 million in 1996 and $13.9 million in 1995.
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 determined using accounting principles that
differ materially from U.S. generally accepted accounting principles. Such
differences relate primarily to the 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 1998 profit repatriation will approximate 20 billion
yen ($155 million using the December 31, 1997, exchange rate).
EXH 13-8
Share Repurchase Program
During 1997, the board of directors authorized the purchase of up to an
additional 4.0 million shares of AFLAC Incorporated common stock. Including
shares remaining under a previous authorization, the Company had approval to
purchase up to 5.6 million shares as of December 31, 1997. The Company had
purchased 26.8 million shares from the inception of the share repurchase
program in February 1994 through December 31, 1997.
The shares purchased were financed with bank borrowings and available
cash. Interest expense related to the share repurchase program was $9.0
million in 1997, $9.4 million in 1996 and $5.3 million in 1995. Consolidated
interest expense, including interest expense from insurance operations, was
$13.7 million in 1997, $16.2 million in 1996 and $15.6 million in 1995.
The difference between the percentage increases in net earnings and net
earnings per share primarily reflects the impact of the share repurchase
program.
Income Taxes
The Company's effective income tax rates were 32.4% in 1997, 39.3% in
1996 and 41.9% in 1995. Japanese income taxes on AFLAC Japan's operating
results, which were taxed at Japan's corporate income tax rate of 45.3%,
accounted for most of the Company's income tax expense. The decline in the
effective tax rates in 1997 and 1996 resulted primarily from increased
earnings from the Company's U.S. business segment, which included the gains
from the sale of the television business in 1996 and 1997.
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.
AFLAC was ranked number one in financial strength among Japan's major life
insurers in Nikkei Business Magazine. 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 1997.
EXH 13-9
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
In Dollars
(In millions) 1997 1996 1995
----------------------------------
Premium income.................... $4,802.7 $4,951.6 $5,195.4
Investment income, as adjusted*... 928.6 920.5 941.3
Other income 1.9 1.6 (.5)
------- ------- -------
Total revenues, as adjusted*.... 5,733.2 5,873.7 6,136.2
------- ------- -------
Benefits and claims............... 4,156.3 4,293.7 4,486.3
Operating expenses................ 1,036.9 1,022.3 1,068.0
------- ------- -------
Total benefits and expenses 5,193.2 5,316.0 5,554.3
------- ------- -------
Pretax operating earnings, as
adjusted*..................... 540.0 557.7 581.9
Investment income applicable to
profit repatriations............ (35.9) (24.9) (20.5)
------- ------- -------
Pretax operating earnings....... $ 504.1 $ 532.8 $ 561.4
======= ======= =======
- ---------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income.................. (3.0)% (4.7)% 18.9%
Investment income*.............. .9 (2.2) 22.9
Total revenues*................. (2.4) (4.3) 19.4
Pretax operating earnings*...... (3.2) (4.2) 20.3
Pretax operating earnings....... (5.4) (5.1) 19.1
- ---------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income.................. 7.9% 10.2% 9.4%
Investment income*.............. 12.3 13.1 13.1
Total revenues*................. 8.6 10.7 9.9
Pretax operating earnings*...... 7.8 10.9 10.7
Pretax operating earnings....... 5.4 9.8 9.7
- ---------------------------------------------------------------------------
Ratios to total revenues, as adjusted:*
Benefits and claims............. 72.5% 73.1% 73.1%
Operating expenses.............. 18.1 17.4 17.4
Pretax operating earnings....... 9.4 9.5 9.5
Ratio of pretax operating earnings
to total reported revenues...... 8.9% 9.1% 9.2%
============================================================================
* Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $35.9 million in 1997,
$24.9 million in 1996 and $20.5 million in 1995, foregone due to profit
repatriations.
============================================================================
EXH 13-10
Japanese Economy
Since the last half of 1997, there has been widespread concern
regarding the economic outlook of many Asian countries, including Japan.
The financial strength of some Japanese financial institutions has
deteriorated, and others have experienced bankruptcy. Some experts believe
Japan's economy could weaken further. As management has indicated in the
past, the weak economy in Japan has resulted in a difficult marketing
environment for AFLAC Japan, declining interest rates for new money
investments and decreased consumer confidence. The time required for the
Japanese economy to recover remains uncertain.
AFLAC Japan Sales
The percentage increases in premium income reflect the growth of
premiums in force. The increases in annualized premiums in force in yen of
5.2% in 1997, 12.2% in 1996 and 7.5% in 1995 reflect the high persistency of
AFLAC Japan's business and sales of new policies. Annualized premiums in
force were: 597.8 billion yen ($4.6 billion) at December 31, 1997; 568.1
billion yen ($4.9 billion) at December 31, 1996; and 506.4 billion yen ($4.9
billion) at December 31, 1995. New annualized premiums from sales were:
$515.3 million in 1997, down 28.5% (down 20.4% in yen); $721.0 million in
1996, down 4.8% (up 10.0% in yen); and $757.4 million in 1995, up 19.8% (up
10.3% in yen).
AFLAC Japan's sales mix is changing, although cancer life still
accounts for the majority of insurance in force. Cancer life sales
accounted for 52.5% of total new sales in yen in 1997, 46.7% in 1996 and
71.2% in 1995. Living benefit life, which was introduced in the fourth
quarter of 1995, accounted for 28.3% of total new sales in 1997 and 39.5% in
1996. Care product sales represented 6.8% of total new sales in 1997, 10.6%
in 1996 and 15.6% in 1995.
AFLAC Japan's new policy sales in 1997 were affected by a lingering
weak economy and a series of premium rate increases that AFLAC and the
insurance industry have implemented since 1993, including the most recent
one in the fourth quarter of 1996. Additionally, consumer confidence in the
life insurance industry declined following the April 1997 collapse of Nissan
Mutual Life Insurance Company.
Management has taken several actions to help mitigate the impact of the
weak sales environment in Japan. First, a new economy cancer life policy
was introduced in January 1997. This new plan has lower premium rates and
benefit levels and was developed to combat the impact of increased premium
rates for new issues. In addition, the Company has increased the use of
direct-mail marketing for its products as a supplemental distribution method
and will continue its popular television advertising program. The incentive
pay system for AFLAC Japan's employed sales managers was revised to reward
them for improved sales performance. The Company made additional
expenditures in the second half of 1997 that will continue in 1998 for
expanded sales promotion efforts in Japan.
In December 1997, AFLAC Japan received approval from Japanese
regulators to sell three new riders to the Company's popular cancer life
policy. One rider adds cancer surgical benefits, while another provides
supplemental accident coverage. The third rider provides supplemental
medical benefits for general hospitalization. In September 1997, the
EXH 13-11
Japanese government increased the copayments for the employer-sponsored
health care program from 10% to 20% for the primary insured, thereby
increasing the portion of the costs the insured must pay. Given the
increase in copayments, the Company believes the medical benefits should be
especially appealing to consumers. During 1998, AFLAC Japan will primarily
market the accident and medical riders in a single affordable package that
should be attractive in the current economy.
In 1998, the Company expects to increase sales by 15% to 20% compared
with 1997 and maintain the profit margin at approximately the 1997 level.
Management also expects revenues in yen to increase 7% and the Company's
strong policy persistency to continue.
AFLAC Japan Investments
Due to the continued low level of available investment yields in Japan,
the Ministry of Finance has directed 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 life policy sales made after July 1, 1994.
Premium rates on new care policy issues were increased by an average of 10%
in November 1993 and an additional 16% in September 1995. As a result of
continuing low yields, the Company increased premium rates by approximately
13% on new policy issues for all product lines beginning in the fourth
quarter of 1996.
Investment income is affected by available cash flow from operations,
investment yields achievable on new investments and foreign currency
exchange rates. Investment income in dollars in 1997 and 1996 was affected
by the weaker yen. Despite a general decline in available investment
yields, investment income in yen increased 12.3% in 1997 and 13.1% in 1996.
Funds available for investment during the three-year period 1995 through
1997 were reduced by the annual profit repatriations previously discussed.
Rates of return on fixed-maturity securities in Japan remained low in 1997
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 2.89% in May 1997 to a low of 1.79% in November 1997, closing the
year at 1.94%. AFLAC Japan's new money rates for investments were 5.20% for
1997, 4.07% for 1996 and 4.71% for 1995. The improvement in AFLAC Japan's
new money yield in 1997 resulted from restructuring portions of the existing
dollar-denominated investment portfolio and a greater allocation of cash
flow to private placement securities, which included dual-currency
securities (yen-denominated bonds with a dollar coupon). The cumulative
effect of lower investment yields is reflected in the overall rate of return
(net of investment expenses) on AFLAC Japan's average investments and cash,
at amortized cost. This return was 5.37% in 1997, compared with 5.55% in
1996 and 5.81% in 1995.
By concentrating on selected sectors of the bond market, 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 invest new money in the near term at an
adequate spread over premium pricing assumptions for new business and
assumed interest rates for policy liabilities. The premium increases
implemented during the past three years will have a positive impact on
investment margins and therefore should contribute to stability in the
pretax operating profit margin.
EXH 13-12
Insurance 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 through
the year 2001 and includes provisions to avoid "radical change" in the third
sector of the insurance industry, which includes supplemental insurance.
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. Although the Company has
inherent competitive strengths in distribution, products and investments
that should enable the support of business expansion in a more competitive
environment, the ultimate impact of deregulation is not presently
determinable.
AFLAC Japan Other
During the three-year period ended December 31, 1997, the benefit ratio
and the operating expense ratio were relatively stable. The decline of the
benefit ratio in 1997 is primarily attributable to newer products that have
somewhat lower loss ratios than the cancer life plan. Annual claims
experience and persistency studies continue to support the current reserving
assumptions.
During the second quarter of 1997, Nissan Mutual Life Insurance
Company, a medium-sized Japanese insurer, was declared insolvent by the
Japanese Ministry of Finance. Previously, all life insurers doing business
in Japan had agreed to contribute to a voluntary policyholder protection
fund that would be used to help offset insurer insolvencies. The total
assessment was allocated among the life insurance companies based on
relative company size. During the second quarter of 1997, AFLAC Japan
recognized a pretax charge of 3.0 billion yen ($24.9 million) for this
policyholder protection fund. The after-tax amount was $13.6 million, or
$.10 per share for both basic and diluted earnings per share. Without this
charge, the expense ratio would have decreased from 18.1% to 17.7% in 1997.
The Japanese government increased the consumption tax from 3% to 5%
effective April 1, 1997. AFLAC Japan currently incurs consumption tax on
most of the commissions paid to its agents. The Company implemented changes
in compensation arrangements with its agents to mitigate a portion of this
tax increase. The consumption tax increase had no material affect on 1997
consolidated net earnings.
In March 1997, the Japanese government ratified new income tax
provisions that increase income taxes on investment income received by
foreign companies operating in Japan from securities issued from their home
country. The new provisions are effective beginning in 1998. Management
has mitigated some of the tax impact through investment alternatives and by
restructuring portions of the existing investment portfolio. Management
estimates the net impact of this tax change will decrease 1998 net earnings
by $13 million.
Most of the Company's income tax expense represents Japanese income
taxes on AFLAC Japan's operating results calculated at the Japanese
corporate tax rate of 45.3%. In December 1997, Japanese government leaders
EXH 13-13
announced proposals to stimulate the Japanese economy. If enacted as
presently proposed, the Japanese corporate tax rate would be reduced
beginning in 1999. The proposals also include tax-base broadening
provisions whereby certain accrued expenses would no longer be deductible
for tax purposes until paid. Discussions continue among government leaders,
and these corporate tax changes are expected to be finalized in March 1998.
Even with Japan's economic slowdown, the Company believes the market
for supplemental insurance remains bright. Need 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. Estimated investment income earned from profits repatriated to and
retained by AFLAC U.S. from 1992 through 1997, along with estimated
investment income earned from the sales proceeds of the television business,
have been reclassified in the presentation on the following page in order to
improve comparability between years.
EXH 13-14
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
(In millions) 1997 1996 1995
--------------------------------
Premium income......................... $1,061.7 $ 945.8 $ 859.8
Investment income, as adjusted*........ 103.8 86.3 78.3
Other income........................... 1.8 1.5 1.2
------- ------- -------
Total revenues, as adjusted*......... 1,167.3 1,033.6 939.3
------- ------- -------
Benefits and claims.................... 667.0 590.4 533.1
Operating expenses..................... 391.9 347.4 322.9
------- ------- -------
Total benefits and expenses.......... 1,058.9 937.8 856.0
------- ------- -------
Pretax operating earnings, as
adjusted*........................ 108.4 95.8 83.3
Investment income applicable to
profit repatriations and, in 1997,
proceeds from the sale of the
television business.................. 75.9 32.7 21.2
------- ------- -------
Pretax operating earnings.......... $ 184.3 $ 128.5 $ 104.5
====== ====== ======
- ----------------------------------------------------------------------------
Percentage increases over previous year:
Premium income....................... 12.2% 10.0% 8.5%
Investment income* ................. 20.3 10.2 14.3
Total revenues*...................... 12.9 10.0 8.9
Pretax operating earnings*........... 13.2 15.0 7.7
Pretax operating earnings............ 43.4 23.0 15.8
- ----------------------------------------------------------------------------
Ratios to total revenues, as adjusted:*
Benefits and claims.................. 57.1% 57.1% 56.7%
Operating expenses................... 33.6 33.6 34.4
Pretax operating earnings............ 9.3 9.3 8.9
Ratio of pretax operating earnings to
total reported revenues.............. 14.8% 12.1% 10.9%
============================================================================
*Excludes estimated investment income of $75.9 million in 1997, related to
investment of profit repatriation funds retained by AFLAC U.S. and
investment of proceeds from the sale of the television business, and $32.7
million in 1996 and $21.2 million in 1995 related to investment of profit
repatriation funds retained by AFLAC U.S.
============================================================================
AFLAC U.S. Sales
The percentage increases in premium income reflect the growth of
premiums in force. The increases in annualized premiums in force of 14.7%
in 1997, 11.1% in 1996 and 8.8% in 1995 were favorably affected by increased
EXH 13-15
sales at the work site through cafeteria plans (Internal Revenue Code
Section 125) and an improvement in the persistency for several lines of
business. Annualized premiums in force were: $1.2 billion at December 31,
1997; $1.1 billion at December 31, 1996; and $954.0 million at December 31,
1995.
New annualized premiums from sales and policy conversions were: $400.9
million in 1997, up 22.7%; $326.6 million in 1996, up 17.0%; and $279.1
million in 1995, up 13.6%. Accident/disability coverage was the best-
selling product for the fourth year in a row, while sales of cancer coverage
remained strong, up 9.7% in 1997.
AFLAC 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. The Company has developed a laptop, point-of-
sale computer system that allows sales associates to input the customer's
information, capture the signature, and electronically transmit the
application from the field to headquarters in a completely paperless
transaction. At year-end 1997, approximately 50% of new business was
transmitted via this laptop compared with about 16% in 1996. By improving
administrative systems and controlling other costs, management has been able
to redirect funds to a national advertising program without significantly
affecting the pretax operating profit margin. For more information
regarding advertising expenses, see Note 2 of the Notes to the Consolidated
Financial Statements.
The operating results reflect slightly higher benefit ratios 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 investment earnings from profit repatriation and from the
broadcast sale in 1997, to remain approximately the same or increase
slightly in 1998.
Management continues to believe that there are significant
opportunities to market high-quality, affordable supplemental insurance
products in the U.S. marketplace.
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 fluctuated in recent
years due to changes in the legal environment in certain states and to
enhanced benefits, early retirements and revisions in actuarial assumptions
for retirement accruals.
EXH 13-16
On March 12, 1997, the Company sold its Canadian insurance subsidiary
at a nominal gain. Other operations include an insurance operation in
Taiwan. Additional expense charges were recognized in 1996 and 1997 for
estimated termination costs and fair value adjustments related to these
operations.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards (SFAS), see Note 1 of the Notes to the Consolidated Financial
Statements.
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.
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, 1997, was 130.10 yen to one
U.S. dollar, 10.8% weaker than the December 31, 1996, exchange rate of
116.10. Management estimates that the weaker yen rate decreased reported
investments and cash by $2.2 billion, total assets by $2.9 billion and total
liabilities by $2.8 billion compared with the amounts that would have been
reported for 1997 if the exchange rate had remained unchanged from year-end
1996. For additional information on exchange rates, see Note 2 of the Notes
to the Consolidated Financial Statements.
Market Risks of Financial Instruments
The Company is exposed primarily to three types of market risks on its
financial instruments. These are interest rate, equity price and foreign
currency exchange rate risk.
Interest Rate Risk
The primary interest rate exposure is the effect of changes in interest
rates on the fair value of the Company's investments in fixed-maturity
securities. The Company uses modified duration analysis to estimate the
amount of sensitivity to interest rate changes in its fixed-maturity
securities. Modified duration analysis provides a measure of price
percentage volatility. For example, if the current duration of a bond is
five, then the market value of the bond will increase by approximately 5% if
market interest rates decrease by 100 basis points. Likewise, the value of
the bond will decrease by approximately 5% if market interest rates increase
by 100 basis points.
EXH 13-17
The following table shows the effect of changes in interest rates on
the fair values of the Company's fixed-maturity securities and notes
payable.
SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS
TO INTEREST RATE CHANGES
(DECEMBER 31, 1997)
-150 -100 - 50 Market + 50 +100 +150
Basis Basis Basis Value Basis Basis Basis
(In millions) Points Points Points 12/31/97 Points Points Points
- ----------------------------------------------------------------------------
Fixed-maturity
securities:
Yen-denominated $21,069 $20,045 $19,084 $18,191 $17,355 $16,577 $15,851
Dollar-
denominated 4,787 4,594 4,414 4,236 4,083 3,925 3,775
------ ------ ------ ------ ------ ------ ------
Total $25,856 $24,639 $23,498 $22,427 $21,438 $20,502 $19,626
====== ====== ====== ====== ====== ====== ======
Notes payable* $ 482 $ 490 $ 498 $ 505 $ 513 $ 520 $ 528
*Excludes capitalized leases.
The unrealized gains and losses on fixed-maturity securities, less
amounts applicable to policy liabilities and deferred income taxes, are
reported in accumulated other comprehensive income in 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. For further information, see Note 3 of the Notes to
the Consolidated Financial Statements.
The Company attempts to match the duration of its assets with the
duration of its liabilities. For AFLAC Japan, the duration of policy
benefit liabilities is longer than that of the related assets due to the
unavailability of qualified long-duration securities. Therefore, there is a
risk that reinvestment of the proceeds at maturity of such investments will
be at a yield below that of the interest required for the accretion of
policy liabilities. At December 31, 1997, the average duration of the
policy liabilities was approximately 13 years, unchanged from 1996. The
average duration of the yen-denominated invested assets was approximately
nine years in 1997 and 1996. Over the next five years, $2.4 billion, at
amortized cost, or 16.1%, of AFLAC Japan's yen-denominated fixed-maturity
securities are scheduled to mature.
The following is a comparison of the actuarially assumed interest rates
for policy reserves and investment yields for:
U.S. Japan
--------- ---------
Policies issued in 1997:
Required interest on policy reserves 7.07% 3.50%
Investment portfolio - new money yield 7.64 5.20
All policies in force at December 31, 1997:
Required interest on policy reserves 6.40 5.43
Investment portfolio yield 7.79 5.37
EXH 13-18
The Company has outstanding interest rate swaps on all of its variable-
interest-rate yen-denominated borrowings. These swaps reduce the impact of
changes in interest rates on the Company's borrowing costs and effectively
change the Company's interest rate from variable to fixed. Therefore, there
was no effect on net earnings due to changes in market interest rates. For
further information on the Company's notes payable, see Note 7 of the Notes
to the Consolidated Financial Statements.
Equity Price Risk
Equity securities at December 31, 1997, totaled $146.3 million, or .6%
of total investments and cash on a consolidated basis. The Company uses
beta analysis to measure the sensitivity of its equity securities portfolio
to fluctuations in the broad market. The beta of the Company's equity
securities portfolio is .93. For example, if the overall stock market value
changed by 10%, the value of AFLAC's equity securities would be expected to
change by approximately 9.3%, or $13.6 million.
Currency Risk
Most of AFLAC Japan's investments and cash are denominated in yen.
When the yen-denominated financial instruments mature or are sold, the
proceeds are generally reinvested in yen-denominated securities and are held
to fund yen-denominated policy obligations rather than converted into
dollars. Therefore, there is no significant economic or foreign currency
transaction risk.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, the Parent Company has yen-denominated borrowings that have been
designated as a hedge of the Company's investment in AFLAC Japan. The
unrealized foreign currency translation gains and losses are reported in
accumulated other comprehensive income in shareholders' equity. The Company
attempts to match its yen-denominated assets to its yen-denominated
liabilities on a consolidated basis in order to minimize the exposure of its
shareholders' equity to foreign currency translation fluctuations.
EXH 13-19
The following table compares the U.S. dollar values of the Company's
yen-denominated assets and liabilities at various exchange rates.
Dollar Value of Yen-Denominated Assets and Liabilities
At Selected Exchange Rates
(December 31, 1997)
115.10 120.10 130.10* 140.10 145.10
(In millions) Yen Yen Yen Yen Yen
- ----------------------------------------------------------------------------
Yen-denominated financial
instruments:
Assets:
Fixed-maturity
securities $20,561.3 $19,705.3 $18,190.7 $16,892.3 $16,310.2
Cash and cash
equivalents 185.0 177.3 163.7 152.0 146.7
Securities held as
collateral 3,429.7 3,286.9 3,034.2 2,817.7 2,720.6
Other financial
instruments 18.9 18.1 16.7 15.4 15.0
-------- -------- -------- -------- --------
Total 24,194.9 23,187.6 21,405.3 19,877.4 19,192.5
-------- -------- -------- -------- --------
Liabilities:
Securities held as
collateral 3,429.7 3,286.9 3,034.2 2,817.7 2,720.6
Notes payable 563.0 539.6 498.1 462.5 446.6
-------- -------- -------- -------- --------
Total 3,992.7 3,826.5 3,532.3 3,280.2 3,167.2
-------- -------- -------- -------- --------
Net yen-denominated
financial instruments 20,202.2 19,361.1 17,873.0 16,597.2 16,025.3
Other yen-denominated
assets 2,964.1 2,840.7 2,622.3 2,435.1 2,351.2
Other yen-denominated
liabilities (22,614.5)(21,672.9)(20,007.1)(18,578.9)(17,938.7)
-------- -------- -------- -------- --------
Total yen-denominated
net assets subject
to foreign currency
fluctuation $ 551.8 $ 528.9 $ 488.2 $ 453.4 $ 437.8
======== ======== ======== ======== ========
*Actual year-end rate.
For information regarding the effect of foreign currency translation on
operating earnings per share, see Results of Operations on pages 13-5
through 13-8 and Note 2 of the Notes to the Consolidated Financial
Statements.
EXH 13-20
Investments and Cash
Fixed-maturity securities available for sale are carried at fair value.
The following table shows an analysis of investments and cash at December
31:
(In millions) 1997 1996 % Change
-------- -------- --------
AFLAC U.S.:
Total investments and cash,
at cost or amortized cost $ 2,678 $ 1,910 40.2%
Unrealized gains on securities
available for sale 228 101
-------- --------
Total investments and cash $ 2,906 $ 2,011 44.5%
======== ======== ======
AFLAC Japan:
Total investments and cash,
at cost or amortized cost $ 16,743 $ 16,391 2.1%
Unrealized gains on securities
available for sale 3,155 2,335
-------- --------
Total investments and cash $ 19,898 $ 18,726 6.3%
======== ======== ======
Consolidated:
Total investments and cash,
at cost or amortized cost $ 19,497 $ 18,307 6.5%
Unrealized gains on securities
available for sale 3,383 2,437
-------- --------
Total investments and cash $ 22,880 $ 20,744 10.3%
======== ======== ======
The continued growth in investments and cash reflects the substantial
cash flows from operations, and $98.5 million and $350.6 million received in
cash in conjunction with the sale of the television business in 1996 and
1997, respectively. In addition, there was an increase in net unrealized
gains on securities available for sale. Net unrealized gains of $3.4
billion on securities available for sale at December 31, 1997, consisted of
$3.4 billion in gross unrealized gains and $17.9 million in gross unrealized
losses.
EXH 13-21
AFLAC invests primarily within the Japanese, U.S. and Euroyen 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 these 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:
1997 1996
------ ------
AAA 38.3% 46.2%
AA 20.5 19.6
A 28.9 26.0
BBB 12.3 8.2
------ ------
100.0% 100.0%
====== ======
The Company does not hold any securities rated below BBB.
Private placement investments accounted for 36.3% and 28.8% of the
Company's total fixed-maturity securities available for sale as of December
31, 1997 and 1996, respectively. AFLAC Japan has made investments in the
private placement market to secure higher yields than those available from
Japanese government bonds. At the same time, the Company has adhered to its
conservative standards for credit quality. The Company's purchases in the
private placement market are often done through Euro medium-term note
programs. Securities in these programs are more marketable due to
standardized documentation and relatively wide distribution. All of the
Company's private placement investments are rated as Class 1 or 2 by the
Securities Valuation Office of the National Association of Insurance
Commissioners.
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 1997 and 1996. Cash, cash equivalents and
short-term investments totaled $279.0 million, or 1.2% of total investments
and cash, as of December 31, 1997, compared with $259.3 million, or 1.2% of
total investments and cash, at December 31, 1996.
For additional information concerning investments and fair values, see
Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Policy Liabilities
Policy liabilities decreased $349.1 million, or 1.7%, during 1997.
AFLAC Japan policy liabilities decreased $520.7 million, or 2.8%, and AFLAC
U.S. policy liabilities increased $179.3 million, or 10.6%. Changes in
policy liabilities were primarily due to the addition of new business, the
aging of policies in force, the weaker yen and the effect of the market
value adjustment for securities available for sale (see Note 3 of the Notes
to the Consolidated Financial Statements). The weaker yen in 1997 compared
with 1996 decreased reported policy liabilities by $2.2 billion. The weaker
yen in 1996 compared with 1995 decreased reported policy liabilities by $2.4
billion in 1996.
EXH 13-22
Debt
The Company has a reducing revolving credit agreement that provides for
bank borrowings through July 2001 in either U.S. dollars or equivalent
Japanese yen. Under the terms of the agreement, the borrowing limits were
reduced to $400 million at July 15, 1997, and will reduce to $325 million on
July 15, 1998. At December 31, 1997, bank borrowings of 45.4 billion yen
($349.0 million) were outstanding under this agreement.
The Company also has a revolving credit agreement that provides for
bank borrowings through October 2002 in either U.S. dollars or equivalent
Japanese yen. The borrowing limit is $250 million. At December 31, 1997,
bank borrowings of 19.4 billion yen ($149.1 million) were outstanding under
this agreement.
The proceeds from these loans were used to fund the Company's share
repurchase program. When any portion of these loans is denominated in yen,
the principal amounts of the loans in dollars will fluctuate due to changes
in the yen/dollar exchange rate. The Company intends to service these loans
with yen-denominated funds received as profit repatriations from AFLAC
Japan.
The Company has entered into interest rate swaps that effectively
change the Company's interest rate on these loans from variable to fixed.
The variable rate on the 45.4 billion yen ($349.0 million) loan is 1.03%,
and the fixed rate is 2.29% after the effect of the swaps (including loan
costs of 25 basis points). The variable rate on the 19.4 billion yen
($149.1 million) loan is .99%, and the fixed rate is 1.24% after the effect
of the swaps (including loan costs of 20 basis points). Interest payments
are made to the bank based on variable interest rates, and the Company
either pays to or receives from the swap counterparty an amount necessary to
equal the fixed rate. The variable interest rate at December 31, 1997, is
based on the three-month Tokyo Interbank Offered Rate of 1.15%, plus loan
costs.
The Company has designated these yen-denominated borrowings, along with
the dollar-denominated investments held by AFLAC Japan, as a hedge of its
net investment in AFLAC Japan. Foreign currency translation gains/losses on
the borrowings are included in the accumulated other comprehensive income
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 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 net unrealized gains on securities
available for sale) was 19.6% and 16.1% as of December 31, 1997 and 1996,
respectively. For further information concerning notes payable, see Note 7
of the Notes to the Consolidated Financial Statements.
Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. This program increased AFLAC Japan's
investment income by approximately $1.5 million in 1997 and $1.1 million in
1996.
EXH 13-23
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.
Beginning in 1998, the Company will no longer recognize securities held as
collateral as an asset, nor the related liability for the return of such
collateral due to recently enacted accounting standards (Statements of
Financial Accounting Standards No. 125 and No. 127). For further
information regarding such arrangements, see Note 4 of the Notes to the
Consolidated Financial Statements.
Policy Guaranty Funds
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business in those states can be assessed for policyholder
losses up to prescribed limits that are incurred by insolvent companies with
similar lines of business. Such assessments have not been material to the
Company in the past. The Company believes that future assessments relating
to companies in the U.S. currently involved in insolvency proceedings will
not materially impact the consolidated financial statements.
The Life Insurance Association of Japan, an industry organization,
implemented a policyholder protection fund in 1996 to provide capital
support to insolvent life insurers. AFLAC Japan 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 was based on relative
company size. As of December 31, 1997, $40.4 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund, of which
approximately $33.8 million will be used in future years for assessment
payments for the 1997 insolvency of Nissan Mutual Life. The fund was
depleted by this insolvency, and the Japanese government may require
additional contributions in the future.
The Japanese Ministry of Finance and the Life Insurance Association of
Japan are discussing a permanent policyholder protection fund system that
will cover 90% of the reserves of any failed company. The contributions to
this system will also be based on relative company size. This new fund is
not expected to be established until April 1999.
Shareholders' Equity
Shareholders' equity increased $1.3 billion from December 31, 1996, to
December 31, 1997. This was primarily due to an increase in net unrealized
gains on securities available for sale of $1.0 billion, net earnings of
$585.0 million and an increase in unrealized foreign currency exchange gains
of $44.3 million. Offsetting these increases were net treasury stock
purchases of $286.2 million and dividends to shareholders of $60.5 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
EXH 13-24
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 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 recent disposition of the
broadcast business has increased the Company's capital resources.
Management believes outside sources for additional debt and equity capital,
if needed, will continue to be available for capital expenditures, business
expansion and funding the Company's share repurchase program.
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
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 many changes to SAP.
One change is the requirement that insurance companies establish a deferred
income tax liability for statutory accounting purposes. Management
estimates AFLAC's deferred tax liability under the present provisions of the
project would be approximately $180 million using SAP. The capital and
surplus of AFLAC, as determined on a U.S. statutory accounting basis, was
$1.8 billion at December 31, 1997.
The NAIC uses a risk-based capital formula relating to insurance risk,
business risk, asset risk and interest rate risk to facilitate
identification by insurance regulators of inadequately capitalized insurance
companies based upon the types and mixtures of risks inherent in the
insurer's operations. AFLAC's NAIC risk-based capital ratio continues to
increase and reflects 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, revisions to
the risk-based capital formula and other related matters.
EXH 13-25
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 $386.0 million in 1997, $253.6 million in
1996 and $179.5 million in 1995. During the last few years, the MOF has
developed solvency standards, a version of risk-based capital requirements.
Management believes the solvency margin of AFLAC Japan is very strong
compared with other Japanese insurers. For additional information on
regulatory restrictions on dividends, profit transfers and other
remittances, see Note 10 of the Notes to the Consolidated Financial
Statements.
Year 2000 System Conversion Costs
The Company initiated a corporatewide program to assure that all of its
computer systems in the United States and Japan will function properly in
the year 2000. Any computer software that has date-sensitive coding might
recognize a code of "00" as the year 1900 rather than the year 2000. If
this were to occur, disruptions in premium and claim processing could occur.
The Company has completed an assessment of the changes needed and
developed a comprehensive plan to upgrade its systems to be year 2000-
compliant. The conversion and testing of the changes is currently in
process. The Company will utilize both internal and external resources to
prepare the systems for the year 2000. The expenses incurred during the
year ended December 31, 1997, totaled $1.1 million. As of December 31,
1997, the Company has estimated the total remaining cost of the year 2000
system-conversion project to be approximately $3.0 million, which will be
expensed as incurred over the next two years. Management expects its year
2000 efforts to be completed on a timely basis.
The Company receives premium and claim information from many external
sources. Failure by a significant number of these customers to have year
2000-compliant systems could have a material effect on premium and claim
processing by the Company. To help minimize this exposure, the Company
initiated formal communications with its customers and is monitoring their
progress. In addition, the Company is making contingency plans to develop
interface programs capable of converting files that have noncompliant date
fields. However, there can be no guarantee that the systems of other
companies on which the Company depends will be completed on a timely basis.
Rating Agencies
AFLAC is rated "A+" (superior) by A.M. Best Company, an independent
rating service that analyzes the financial condition and operating
performance of insurance companies. AFLAC's claims-paying ability is rated
"AA" by both Standard & Poor's and Duff & Phelps Credit Rating Co.
Other
For information regarding pending litigation, see Note 12 of the Notes
to the Consolidated Financial Statements.
EXH 13-26
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 10.1%
in 1997 compared with 1996, weakened 13.5% in 1996 compared with 1995, and
strengthened 8.7% in 1995 compared with 1994. The average exchange rates
for 1997, 1996 and 1995 were 121.07, 108.84 and 94.10, respectively. In
years when the yen weakens, translating yen into dollars causes fewer
dollars to be reported. When the yen strengthens, translating yen into
dollars causes more dollars to be reported.
For additional information, reference should be made to the
Consolidated Statements of Cash Flows on pages 13-33 and 13-34.
Operating Activities
In 1997, consolidated cash flow from operations decreased 3.6% to $2.6
billion, compared with $2.7 billion in 1996 and $2.9 billion in 1995. Net
cash flow from operations for AFLAC Japan decreased 4.1% (increased 6.1% in
yen) to $2.3 billion in 1997, compared with $2.5 billion in 1996 and $2.7
billion in 1995. AFLAC Japan represented 91% of the consolidated net cash
flow from operations in both 1997 and 1996, and 93% in 1995. The decrease
in cash flow from operations in 1997 and 1996 was due to the weaker yen.
Investing Activities
Consolidated cash flow used by investing activities decreased 2.8% to
$2.4 billion in 1997, compared with $2.5 billion in 1996 and $3.0 billion in
1995. The sale of the television business generated cash flow of $350.6
million in 1997 and $98.5 million in 1996. AFLAC Japan accounted for 81% of
the consolidated net cash used by investing activities in 1997, compared
with 93% in 1996 and 91% in 1995.
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 during
the three years ended December 31, 1997.
Financing Activities
In 1997, net cash used by financing activities was $121.6 million,
compared with $157.9 million in 1996 and $93.4 million in 1995. Treasury
stock purchases of $314.3 million in 1997 were funded by proceeds from new
borrowings. In 1996, treasury stock purchases of $204.2 million were funded
by proceeds from new borrowings of $135.9 million and available cash.
Treasury stock purchases of $224.2 million in 1995 were funded by proceeds
from new borrowings in the amount of $198.3 million and available cash.
Debt repayments of $55.3 million in 1997 and $36.2 million in 1996 on yen-
denominated loans were made from annual profit repatriations from Japan.
The Company has sold treasury shares to its dividend reinvestment plan and
to the AFLAC Associate Stock Bonus Plan. These dispositions have generated
proceeds in the amounts of $39.8 million, $34.5 million and $9.7 million for
EXH 13-27
the years 1997, 1996 and 1995, respectively. Cash dividends paid to
shareholders amounted to $60.5 million in 1997, an increase of 11.7% over
1996. Cash dividends paid to shareholders in 1996 were $54.2 million, an
increase of 10.7% over the 1995 cash dividends of $48.9 million. The 1997
cash dividend of $.445 per share increased 15.0% over 1996. The 1996 cash
dividend of $.387 per share represented an increase of 14.5% over the 1995
cash dividend of $.338 per share.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information, so long
as those informational statements are identified as forward-looking and are
accompanied by meaningful, cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed. 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 as well as specific
projections of future results 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, assessments for insurance company insolvencies,
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 Japanese tax laws,
adequacy of reserves, credit and other risks associated with the Company's
investment activities, significant changes in interest rates and
fluctuations in foreign currency exchange rates.
EXH 13-28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In thousands, except for 1997 1996 1995
per share amounts) ---------- ---------- ----------
Revenues:
Premiums, principally supplemental
health insurance $5,873,661 $5,910,036 $6,070,830
Net investment income 1,077,715 1,021,955 1,024,960
Realized investment gains (losses) (5,440) 1,980 (270)
Gain on sale of television business 267,223 60,264 -
Other income 37,543 105,968 95,100
--------- --------- ---------
Total revenues 7,250,702 7,100,203 7,190,620
--------- --------- ---------
Benefits and expenses:
Benefits and claims 4,833,077 4,895,522 5,034,266
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 180,417 162,475 168,779
Insurance commissions 773,354 778,082 802,176
Insurance expenses 479,151 437,265 424,974
Interest expense 13,709 16,186 15,611
Other operating expenses 106,174 160,672 143,819
--------- --------- ---------
Total acquisition and
operating expenses 1,552,805 1,554,680 1,555,359
--------- --------- ---------
Total benefits and expenses 6,385,882 6,450,202 6,589,625
--------- --------- ---------
Earnings before income taxes 864,820 650,001 600,995
Income tax expense (benefit):
Current 291,979 239,682 233,662
Deferred (12,182) 15,956 18,276
--------- --------- ---------
Total income taxes 279,797 255,638 251,938
--------- --------- ---------
Net earnings $ 585,023 $ 394,363 $ 349,057
========= ========= =========
Net earnings per share:
Basic $ 4.30 $ 2.81 $ 2.40
Diluted 4.16 2.73 2.33
========= ========= =========
Common shares used in computing
earnings per share:
Basic 136,055 140,176 145,677
Diluted 140,798 144,461 149,492
========= ========= =========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-29
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 1997 1996
---------- ----------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$19,121,128 in 1997 and
$17,941,200 in 1996) $ 22,437,818 $ 20,327,726
Equity securities (cost $80,270 in
1997 and $86,249 in 1996) 146,326 136,328
Mortgage loans and other 16,747 20,801
Short-term investments 43,344 50,157
Cash and cash equivalents 235,675 209,095
----------- -----------
Total investments and cash 22,879,910 20,744,107
Receivables, primarily premiums 215,653 226,981
Accrued investment income 264,956 253,850
Deferred policy acquisition costs 2,581,828 2,582,946
Property and equipment, at cost less
accumulated depreciation 386,049 471,907
Securities held as collateral for
loaned securities 3,034,241 573,911
Intangible assets, at cost less
accumulated amortization of
$27,122 in 1996 - 60,933
Other 91,368 105,749
----------- -----------
Total assets $ 29,454,005 $ 25,020,384
=========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
EXH 13-30
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In thousands) 1997 1996
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 18,398,830 $ 18,697,173
Unpaid policy claims 1,010,519 1,039,257
Unearned premiums 276,673 288,976
Other policyholders' funds 199,046 208,799
----------- -----------
Total policy liabilities 19,885,068 20,234,205
Notes payable 523,209 353,533
Income taxes 1,827,337 1,181,121
Payables for return of collateral
on loaned securities 3,034,241 573,911
Payables for security transactions 215,654 99,408
Other 538,024 452,637
Commitments and contingencies
(Notes 11 and 12)
----------- -----------
Total liabilities 26,023,533 22,894,815
----------- -----------
Shareholders' equity:
Common stock of $.10 par value. Authorized
400,000 shares; issued 158,190 shares in
1997 and 157,239 shares in 1996 15,819 15,724
Additional paid-in capital 227,292 208,994
Retained earnings 2,442,309 1,917,794
Accumulated other comprehensive income:
Unrealized foreign currency
translation gains 274,074 229,782
Unrealized gains on securities
available for sale 1,284,717 280,154
----------- -----------
Total accumulated other comprehensive
income 1,558,791 509,936
Treasury stock, at average cost (812,672) (526,425)
Notes receivable for stock purchases (1,067) (454)
----------- -----------
Total shareholders' equity 3,430,472 2,125,569
----------- -----------
Total liabilities and
shareholders' equity $ 29,454,005 $ 25,020,384
=========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-31
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
(In thousands) 1997 1996 1995
--------- --------- ---------
Common stock:
Balance at beginning of year $ 15,724 $ 15,636 $ 15,600
Exercise of stock options 95 88 36
--------- --------- ---------
Balance at end of year 15,819 15,724 15,636
--------- --------- ---------
Additional paid-in capital:
Balance at beginning of year 208,994 196,928 192,899
Exercise of stock options 6,490 6,461 3,199
Gain on treasury stock reissued 11,808 5,688 830
Cash in lieu of fractional shares - (83) -
--------- --------- ---------
Balance at end of year 227,292 208,994 196,928
--------- --------- ---------
Retained earnings:
Balance at beginning of year 1,917,794 1,577,605 1,277,487
Net earnings 585,023 394,363 349,057
Cash dividends ($.445 per share
in 1997, $.387 in 1996 and
$.338 in 1995) (60,508) (54,174) (48,939)
--------- --------- ---------
Balance at end of year 2,442,309 1,917,794 1,577,605
--------- --------- ---------
Accumulated other comprehensive income:
Balance at beginning of year 509,936 696,106 402,935
Change in unrealized foreign
currency translation gains during
year, net of income taxes 44,291 16,463 39,228
Unrealized gains (losses)
on securities available for sale
during year, net of income
taxes and reclassification
adjustments 1,004,564 (202,633) 253,943
--------- --------- ---------
Balance at end of year 1,558,791 509,936 696,106
--------- --------- ---------
Treasury stock:
Balance at beginning of year (526,425) (351,117) (135,776)
Purchases of treasury stock (314,252) (204,169) (224,204)
Cost of shares issued to sales
associates stock bonus plan
and dividend reinvestment plan 28,005 28,861 8,863
--------- --------- ---------
Balance at end of year (812,672) (526,425) (351,117)
--------- --------- ---------
Notes receivable for stock purchases (1,067) (454) (1,017)
--------- --------- ---------
Total shareholders' equity $3,430,472 $2,125,569 $2,134,141
========= ========= =========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-32
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 585,023 $ 394,363 $ 349,057
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,309,714 2,482,615 2,539,406
Deferred income taxes (12,182) 15,956 18,276
Change in income taxes payable 67,776 14,915 79,785
Increase in deferred policy
acquisition costs (226,651) (264,734) (248,522)
Change in receivables and
advance premiums 7,574 (32,083) 124,882
Gain on sale of television business (267,223) (60,264) -
Other, net 134,419 143,553 81,214
---------- ---------- ----------
Net cash provided by
operating activities 2,598,450 2,694,321 2,944,098
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Fixed-maturity securities sold 1,721,764 1,707,537 626,938
Fixed-maturity securities
matured 421,530 560,305 506,043
Equity securities 63,846 17,057 42,247
Mortgage loans and other
investments, net 3,696 4,314 4,470
Short-term investments, net 5,934 - 5,049
Costs of investments acquired:
Fixed-maturity securities (4,938,661) (4,854,398) (4,082,021)
Equity securities (55,365) (23,473) (44,459)
Short-term investments, net - (5,733) -
Additions to property and
equipment, net (7,702) (9,183) (17,391)
Proceeds from sale of television
business 350,633 98,500 -
---------- ---------- ----------
Net cash used by investing
activities $(2,434,325) $(2,505,074) $(2,959,124)
---------- ---------- ----------
(continued)
EXH 13-33
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
(In thousands) 1997 1996 1995
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings $ 409,489 $ 135,940 $ 198,291
Principal payments under debt
obligations (202,768) (76,492) (31,442)
Dividends paid to shareholders (60,508) (54,174) (48,939)
Purchase of treasury stock (314,252) (204,169) (224,204)
Treasury stock reissued 39,813 34,549 9,693
Other, net 6,585 6,466 3,235
---------- ---------- ----------
Net cash used by
financing activities (121,641) (157,880) (93,366)
---------- ---------- ----------
Effect of exchange rate changes
on cash and cash equivalents (15,904) (12,719) 1,688
---------- ---------- ----------
Net change in cash and
cash equivalents 26,580 18,648 (106,704)
Cash and cash equivalents,
beginning of year 209,095 190,447 297,151
---------- ---------- ----------
Cash and cash equivalents,
end of year $ 235,675 $ 209,095 $ 190,447
========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash payments during the year for:
Interest on debt obligations $ 12,133 $ 14,286 $ 12,764
Income taxes 222,274 223,851 154,011
Non-cash financing activities included capital lease obligations incurred
for computer equipment totaling $6,348 in 1997, $8,524 in 1996 and $2,517 in
1995.
Non-cash operating activities included advertising credits associated with
the sale of the television business of $4,853 in 1997 and $1,429 in 1996.
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-34
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(In thousands) 1997 1996 1995
---------- ---------- ----------
Net Earnings $ 585,023 $ 394,363 $ 349,057
Other comprehensive income, before
income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains
during year 43,782 16,463 38,578
Reclassification adjustment for
realized currency (gains) losses
on sale of subsidiary included
in net earnings 509 - (1,527)
Unrealized gains (losses) on
securities available for sale:
Unrealized holding gains (losses)
arising during year 1,693,389 (314,050) 214,274
Reclassification adjustment for
realized (gains) losses included
in net earnings 4,158 (4,788) (1)
--------- --------- ---------
Total other comprehensive
income, before income taxes 1,741,838 (302,375) 251,324
Income tax expense (benefit)
related to items of other
comprehensive income 692,983 (116,205) (41,847)
--------- --------- ---------
Other comprehensive income,
net of income taxes 1,048,855 (186,170) 293,171
--------- --------- ---------
Total comprehensive income $1,633,878 $ 208,193 $ 642,228
========= ========= =========
EXH 13-35
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 and marketed at the
work site, with premiums paid by the employee. AFLAC Japan, which conducts
most of its transactions in Japanese yen, accounted for 79%, 82% and 85% of
the Company's total revenues for 1997, 1996 and 1995, respectively, and 87%
and 88% of total assets at December 31, 1997 and 1996, 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 information currently 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 changes in the future 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 exchange 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 in the accumulated other comprehensive income
component of shareholders' equity.
Realized currency exchange gains and losses resulting from foreign
currency transactions are included in earnings, but were immaterial during
the three-year period 1995 through 1997.
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 in the
accumulated other comprehensive income component of shareholders' equity.
Interest expense is translated at average exchange rates for the period the
borrowings are outstanding.
EXH 13-36
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 are 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 remain in force. 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 that are not recoverable are charged against
earnings.
CASH AND CASH EQUIVALENTS: Effective for 1997, the Company changed its
method of reporting cash to include cash equivalents. Cash and cash
equivalents include cash on hand, money market instruments and other debt
instruments with a maturity of 90 days or less when purchased. Prior to
1997, cash equivalents were included in short-term investments. All prior
year amounts have been reclassified to reflect this change.
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 the accumulated other comprehensive income 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.
Included in fixed maturities are investments in collateralized mortgage
obligations whose amortized cost is determined using the interest method,
which includes anticipated prepayments. Prepayment assumptions are obtained
from Bloomberg. The retrospective adjustment method is used to adjust for
prepayment activity.
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 Consolidated Statements of Earnings.
EXH 13-37
Purchases and sales of securities are recorded on the trade dates of the
transactions.
Effective January 1, 1997, the Company changed its method of
determining the costs of investment securities sold from the first-in,
first-out (FIFO) method to the specific identification method. The specific
identification method allows the Company greater financial flexibility in
the matching of its assets and liabilities. Also, the specific
identification method is the predominant method used by the insurance
industry. This accounting change had no material effect on net earnings for
the year ended December 31, 1997.
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.
Beginning in 1998, the Company will no longer recognize securities held as
collateral as an asset, nor the related liability for the return of such
collateral due to recently enacted accounting standards (see Accounting
Changes Adopted).
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.
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business
and converting existing policies are deferred and amortized, with interest,
over the premium payment periods in proportion to the ratio of annual
premium income to total anticipated premium income. Anticipated premium
income is estimated by using the same mortality and withdrawal assumptions
used in computing liabilities for future policy benefits. In this manner,
the related acquisition expenses are matched with revenues. Costs deferred
include first-year commissions in excess of renewal 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 $407.8 million in 1997,
$427.2 million in 1996 and $413.5 million in 1995. Of the policy
acquisition costs deferred, commissions represented 69.7% in 1997, 67.3% in
1996 and 63.8% in 1995.
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
EXH 13-38
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: 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, except for short-term hedges of its annual
profit repatriations. The Company currently uses two types of derivatives,
interest rate swaps and foreign currency forward contracts.
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. These swaps reduce the impact of changes in
interest rates on the Company's borrowing costs and effectively change the
Company's related interest rate from variable to fixed.
The Company uses short-term foreign currency forward contracts (usually
five months or less) in connection with annual profit transfers from AFLAC
Japan. These contracts are designated at inception as hedges of the
Company's investment in AFLAC Japan and are accounted for using the deferral
method. Gains and losses during the period that the contracts are
outstanding and at termination of the contracts are reflected on the
Consolidated Balance Sheets in unrealized foreign currency translation gains
of the accumulated other comprehensive income component of shareholders'
equity.
TREASURY SHARES: Shares purchased are recorded at cost and 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. Realized
gains or losses on the disposition of treasury shares are recorded in
additional paid-in capital.
EARNINGS PER SHARE: As required, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share, in 1997.
All previously reported earnings per share data have been restated to
reflect this new accounting requirement. SFAS No. 128 requires the
presentation of two earnings per share (EPS) calculations, basic EPS and
diluted EPS, in the Consolidated Statements of Earnings. Basic EPS is
computed by dividing net earnings by the weighted-average number of shares
outstanding for the period. Diluted EPS is computed by dividing net
earnings by the weighted-average number of shares outstanding for the period
plus the shares for the dilutive effect of stock options and other common
stock equivalents. Diluted EPS as computed under SFAS No. 128 were the same
as the Company's previously reported EPS for each of the years in the three-
year period ended December 31, 1997.
EXH 13-39
The components of the weighted-average shares used in the earnings per
share calculations are as follows:
(In thousands) 1997 1996 1995
---------- ---------- ----------
Average outstanding shares used
for calculating basic EPS 136,055 140,176 145,677
Effect of stock options 4,743 4,285 3,815
---------- ---------- ----------
Average outstanding shares used
for calculating diluted EPS 140,798 144,461 149,492
========== ========== ==========
At December 31, 1997, options to purchase 725,525 shares of common
stock were outstanding, but were not included in the computation of diluted
EPS because the exercise price for these options was greater than the
average market price during the fourth quarter of 1997.
ACCOUNTING CHANGES ADOPTED: The Company adopted SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. This Statement was
amended by SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. SFAS No. 125 established criteria for
determining whether transfers of financial assets are sales or secured
borrowings and must be applied to all applicable transactions that occurred
after December 31, 1996. The adoption of the 1997 provisions of SFAS No.
125 had no effect on the Company's net earnings or shareholders' equity.
SFAS No. 127 amended the 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, related to the Company's security lending program, as an asset,
nor the related liability for return of such collateral. This change will
have no effect on the Company's net earnings or shareholders' equity.
As required, the Company adopted SFAS No. 128, Earnings per Share, in
1997 as described above in this Note under the caption, "Earnings Per
Share."
SFAS No. 129, Disclosures of Information about Capital Structure, was
effective in 1997. No changes in the Company's present disclosures
regarding its capital structure were required under SFAS No. 129.
The Company also adopted SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial
statements. SFAS No. 130 requires that all components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company's presentation of
comprehensive income includes, in addition to net earnings, changes in
unrealized foreign currency translation adjustments and changes in
unrealized gains and losses on securities available for sale.
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 121 established accounting standards for the
EXH 13-40
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 must 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 the carrying amount or fair
value less related selling costs. The adoption of this accounting standard
had no material effect on the financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, was effective
for 1996. This Statement provides a choice of accounting methods for
employee stock compensation plans, including employee stock option plans.
This accounting standard had no effect on earnings as the Company 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 at the
grant date over the amount an employee must pay upon exercise to acquire the
stock. For further information regarding SFAS No. 123, see Note 9.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, was issued in June
1997. This Statement requires that companies disclose segment data on the
basis that is used internally by management for evaluating segment
performance and allocating resources to segments. This Statement requires
that a company report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. It also requires various
reconciliations of total segment information to amounts in the consolidated
financial statements. The Company's current definition of its business
segments will not change. SFAS No. 131 is effective beginning in 1998.
RECLASSIFICATIONS: Certain prior-year amounts have been reclassified
to conform to the current year presentation.
EXH 13-41
(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) 1997 1996 1995
--------- --------- ---------
Total revenues:
Insurance:
Japan $5,697,387 $5,848,751 $6,115,689
U.S. 1,243,193 1,066,364 960,443
Realized investment
gains (losses) (4,367) 1,759 (270)
--------- --------- ---------
Total U.S. and
Japan insurance 6,936,213 6,916,874 7,075,862
Broadcast operations - U.S. 16,107 92,380 81,569
Gain on sale of television
business 267,223 60,264 -
Corporate and other operations 72,344 69,611 74,392
Intercompany eliminations (41,185) (38,926) (41,203)
--------- --------- ---------
Total $7,250,702 $7,100,203 $7,190,620
========= ========= =========
Earnings before income taxes:
Insurance:
Japan $ 504,146 $ 532,798 $ 561,361
U.S. 184,346 128,532 104,459
Realized investment
gains (losses) (4,367) 1,759 (270)
--------- --------- ---------
Total U.S. and
Japan insurance 684,125 663,089 665,550
Broadcast operations - U.S. 3,532 25,591 18,953
Gain on sale of television
business 267,223 60,264 -
Corporate and other operations (79,604) (86,399) (72,189)
Interest expense
(non-insurance operations) (10,456) (12,544) (11,319)
--------- --------- ---------
Total $ 864,820 $ 650,001 $ 600,995
========= ========= =========
EXH 13-42
(In thousands) 1997 1996 1995
--------- --------- ---------
Depreciation and amortization
expense:
Insurance:
Japan $ 27,861 $ 26,405 $ 21,353
U.S. 10,865 12,780 10,656
--------- --------- ---------
Total U.S. and
Japan insurance 38,726 39,185 32,009
Broadcast operations - U.S. 501 8,198 8,725
Corporate and other operations 2,132 2,354 2,547
--------- --------- ---------
Total $ 41,359 $ 49,737 $ 43,281
========= ========= =========
Advertising expense - insurance:
Japan $ 23,948 $ 13,580 $ 19,883
U.S. 22,853 22,038 15,044
--------- --------- ---------
Total $ 46,801 $ 35,618 $ 34,927
========= ========= =========
Total expenditures for long-lived
assets:
Insurance:
Japan $ 1,420 $ 2,806 $ 2,009
U.S. 6,308 9,093 12,150
--------- --------- ---------
Total U.S. and
Japan insurance 7,728 11,899 14,159
Broadcast operations - U.S. 471 3,864 5,851
Corporate and other operations 2,857 2,730 1,200
--------- --------- ---------
Total $ 11,056 $ 18,493 $ 21,210
========= ========= =========
Total assets at December 31 were as follows:
(In thousands) 1997 1996
---------- ----------
Total assets:
Insurance:
Japan $25,588,751 $22,117,213
U.S. 3,763,173 2,673,678
---------- ----------
Total U.S. and
Japan insurance 29,351,924 24,790,891
Broadcast operations - U.S. - 115,709
Corporate and other operations 4,323,361 2,834,343
Intercompany eliminations (4,221,280) (2,720,559)
---------- ----------
Total $29,454,005 $25,020,384
========== ==========
EXH 13-43
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, 1997, $121.2 million, or 56.2% of
total receivables, were receivables related to AFLAC Japan's operations
($126.3 million at December 31, 1996).
SALE OF TELEVISION BUSINESS: In 1997, the Company completed the sale
of its broadcast business, which consisted of seven network-affiliated
television stations. The total pretax gain from the sale of the broadcast
business was $327.5 million. Cash sales proceeds received, after applicable
selling expenses, were $449.1 million. Total sales proceeds also included
advertising credits to be used by the Company over a five-year period with a
fair value of $6.3 million. The Company also received cash for various
current assets and liabilities.
The sale of one station closed on December 31, 1996. The pretax and
after-tax gains recognized on this sale in the fourth quarter of 1996 were
$60.3 million and $48.2 million, respectively. The after-tax gain amounted
to $.34 basic earnings per share and $.33 diluted earnings per share in
1996. The sale of the remaining six stations closed on April 15, 1997. The
pretax and after-tax gains recognized in the second quarter of 1997 were
$267.2 million and $211.2 million, respectively. The 1997 after-tax gain
amounted to $1.55 basic earnings per share and $1.50 diluted earnings per
share in 1997.
Broadcast revenues and operating expenses were included in other income
and other operating expenses, respectively, in the Consolidated Statements
of Earnings. Intangible assets reflected in the Consolidated Balance Sheets
prior to 1997 were associated with the broadcast business.
INSOLVENCY OF JAPANESE INSURER: During the second quarter of 1997,
Nissan Mutual Life Insurance Company, a Japanese insurer, was declared
insolvent by the Japanese Ministry of Finance. All life insurers doing
business in Japan previously agreed to contribute to a voluntary
policyholder protection fund, that would be used to help offset insurer
insolvencies. The total assessment was allocated among the life insurance
companies based on relative company size. During the second quarter of
1997, AFLAC Japan recognized a pretax charge of 3.0 billion yen ($24.9
million) for this policyholder protection fund. This assessment will be
paid over 10 years beginning in 1998. The after-tax charge was $13.6
million ($.10 per share for both basic and diluted earnings per share).
EXH 13-44
YEN-TRANSLATION EFFECTS: AFLAC Japan owns U.S. dollar-denominated
securities (including accrued investment income), which the Company has
designated as an economic currency hedge of a portion of the Company's
investment in AFLAC Japan. In addition, the Parent Company has designated
its yen-denominated bank borrowings (Note 7) as a hedge of its net
investment in AFLAC Japan. The Company's dollar values of yen-denominated
net assets subject to foreign currency translation fluctuations for
financial reporting purposes were as follows at December 31 (translated at
end-of-year exchange rates):
(In thousands) 1997 1996
---------- ----------
AFLAC Japan net assets $2,540,932 $1,697,003
Less:
AFLAC Japan dollar-denominated
assets less liabilities 1,555,219 1,369,600
Parent Company yen-denominated
liabilities less assets 497,493 312,893
--------- ---------
Total yen-denominated net assets
subject to foreign currency
translation fluctuations $ 488,220 $ 14,510
========= =========
The year-end yen/dollar exchange rate is used to translate yen-
denominated balance sheet items to U.S. dollars. The average yen/dollar
exchange rate is used to translate revenues, expenses and cash flows.
The following table shows the exchange rates used for the three-year
period ended December 31, 1997, and their effect on selected financial data.
1997 1996 1995
------ ------ ------
Balance Sheets:
Yen/dollar exchange rate at
December 31 130.10 116.10 102.95
Yen percent weakening 10.8% 11.3% 3.0%
Exchange effect on assets (billions) $ (2.9) $ (2.6) $ (.7)
Exchange effect on liabilities (billions) $ (2.8) $ (2.6) $ (.7)
Statements of Earnings:
Average exchange rate for the year 121.07 108.84 94.10
Yen percent weakening (strengthening) 10.1% 13.5% (8.7)%
Exchange effect on net earnings (millions) $(24.1) $(42.7) $ 23.0
Exchange effect on diluted net EPS $ (.17) $ (.30) $ .15
OTHER: Payments are made from AFLAC Japan to the Parent Company for
management fees and to AFLAC U.S. for allocated expenses and remittances of
earnings. These payments totaled $386.0 million in 1997, $253.6 million in
1996 and $179.5 million in 1995. See Note 10 for information concerning
restrictions on remittances from AFLAC Japan.
EXH 13-45
(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, 1997
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Fixed-maturity securities:
Yen-denominated:
Government and government
guaranteed:
Japan $ 5,406.9 $ 1,570.2 $ .1 $ 6,977.0
Other foreign 623.6 126.0 2.5 747.1
Municipalities:
Japan 517.6 71.5 - 589.1
Other foreign 241.2 51.8 - 293.0
Public utilities:
Japan 2,324.2 445.8 .4 2,769.6
Other foreign 214.4 23.1 - 237.5
Banks/financial institutions:*
Japan 427.0 64.7 - 491.7
U.S. 230.6 48.0 - 278.6
Other foreign 4,194.0 510.4 5.2 4,699.2
Other corporate:
Japan 484.3 106.6 .3 590.6
U.S. 346.9 31.3 - 378.2
Other foreign 131.1 7.8 .1 138.8
-------- -------- -------- --------
Total yen-denominated 15,141.8 3,057.2 8.6 18,190.4
-------- -------- -------- --------
*Primarily consists of private placement securities.
(continued)
EXH 13-46
December 31, 1997 (continued)
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. dollar-denominated:
U.S. government direct
obligations 31.3 1.0 - 32.3
U.S. agencies (FNMA, etc.) 282.8 14.5 - 297.3
Municipalities 13.4 .9 - 14.3
Mortgage-backed securities 312.4 11.2 .1 323.5
Sovereign and Supranational:
Japan 14.0 .8 - 14.8
U.S. 40.9 3.7 - 44.6
Other foreign 94.6 6.8 - 101.4
Public utilities:
U.S. 147.4 11.2 - 158.6
Other foreign 49.6 2.9 - 52.5
Asset backed 19.4 .7 - 20.1
Banks/financial institutions:
Japan 15.6 .8 - 16.4
U.S. 1,036.8 78.4 .4 1,114.8
Other foreign 589.0 43.4 - 632.4
Other corporate:
Japan 31.7 .9 - 32.6
U.S. 1,073.3 85.1 .2 1,158.2
Other foreign 216.0 13.2 6.7 222.5
-------- -------- -------- --------
Total dollar-denominated 3,968.2 275.5 7.4 4,236.3
-------- -------- -------- --------
Other foreign securities 11.1 - - 11.1
-------- -------- -------- --------
Total fixed-maturity
securities available
for sale 19,121.1 3,332.7 16.0 22,437.8
Equity securities 80.3 67.9 1.9 146.3
-------- -------- -------- --------
Total securities
available for sale $19,201.4 $ 3,400.6 $ 17.9 $22,584.1
======== ======== ======== ========
EXH 13-47
December 31, 1996
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Fixed-maturity securities:
Yen-denominated:
Government and government
guaranteed:
Japan $ 6,097.9 $ 1,242.2 $ 1.4 $ 7,338.7
Other foreign 499.8 92.8 - 592.6
Municipalities:
Japan 618.3 78.8 - 697.1
Other foreign 280.6 23.3 - 303.9
Public utilities:
Japan 2,708.6 399.4 - 3,108.0
Other foreign 68.9 13.4 - 82.3
Banks/financial institutions:*
Japan 400.1 36.7 - 436.8
U.S. 258.4 35.9 .6 293.7
Other foreign 3,037.3 269.2 5.3 3,301.2
Other corporate:
Japan 545.6 102.2 - 647.8
U.S. 388.8 24.2 1.8 411.2
Other foreign 43.1 .5 - 43.6
-------- -------- -------- --------
Total yen-denominated 14,947.4 2,318.6 9.1 17,256.9
-------- -------- -------- --------
*Primarily consists of private placement securities.
(continued)
EXH 13-48
December 31, 1996 (continued)
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. dollar-denominated:
U.S. government direct
obligations 81.4 1.2 - 82.6
U.S. agencies (FNMA, etc.) 291.5 7.4 .8 298.1
Municipalities .5 - - .5
Mortgage-backed securities 235.8 3.2 2.3 236.7
Sovereign and Supranational:
Japan 14.1 1.0 - 15.1
U.S. 16.3 .8 - 17.1
Other foreign 91.1 4.9 - 96.0
Public utilities:
U.S. 157.4 2.4 3.8 156.0
Other foreign 10.0 .5 - 10.5
Asset backed 148.8 5.2 - 154.0
Banks/financial institutions:
Japan - - - -
U.S. 917.6 35.2 3.9 948.9
Other foreign 126.4 4.3 .4 130.3
Other corporate:
Japan 3.3 .2 - 3.5
U.S. 846.9 26.3 7.2 866.0
Other foreign 34.8 2.3 .2 36.9
-------- -------- -------- --------
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
======== ======== ======== ========
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 13-49
The amortized cost and fair values of investments in fixed-maturity
securities available for sale at December 31, 1997, by contractual maturity
are shown below.
(In millions) AFLAC Japan AFLAC U.S.
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 556.4 $ 571.2 $ 20.1 $ 20.2
Due after one year through
five years 1,946.2 2,253.2 277.9 294.9
Due after five years through
10 years 2,265.3 2,731.9 267.3 288.7
Due after 10 years 11,700.7 14,063.4 1,774.9 1,890.8
U.S. mortgage-backed
securities 69.2 72.4 243.1 251.1
--------- --------- --------- ---------
Total fixed-maturity
securities available
for sale $16,537.8 $19,692.1 $ 2,583.3 $ 2,745.7
========= ========= ========= =========
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, 1997, the average duration of the yen-
denominated policy liabilities was approximately 13 years, unchanged from
1996. The average duration of the yen-denominated invested assets was
approximately nine years at both December 31, 1997 and 1996. The weighted-
average period to maturity of fixed-maturity securities of AFLAC Japan at
December 31, 1997, was 13.5 years, compared with 12.2 years at December 31,
1996.
EXH 13-50
Realized and unrealized gains and losses from investments for the years
ended December 31 were as follows:
(In thousands) 1997 1996 1995
---------- ---------- ----------
Realized gains (losses) on sale
or redemption of investments:
Fixed-maturity securities:
Gross gains from sales $ 24,417 $ 20,994 $ 7,561
Gross losses from sales (33,002) (17,508) (16,293)
Net gains from redemptions 227 112 924
---------- ---------- ----------
(8,358) 3,598 (7,808)
Equity securities:
Gross gains from sales 16,345 2,529 9,471
Gross losses from sales (12,145) (1,339) (1,662)
Other long-term assets, net (1,282) (2,808) (271)
---------- ---------- ----------
Net realized gains (losses) $ (5,440) $ 1,980 $ (270)
========== ========== ==========
Changes in unrealized gains (losses):
Fixed-maturity securities $ 930,164 $ (183,737) $ 1,749,389
Equity securities 15,977 22,929 14,362
---------- ---------- ----------
Net unrealized gains (losses) $ 946,141 $ (160,808) $ 1,763,751
========== ========== ==========
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 the accumulated other
comprehensive income 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 relate to policy reserve interest requirements and
reflect the difference between market investment yields and estimated
minimum required interest rates 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) 1997 1996
------------ ------------
Securities available
for sale -
unrealized gains $ 3,382,746 $ 2,436,605
Less:
Policy liabilities 1,271,701 2,023,107
Deferred income taxes 826,328 133,344
----------- -----------
Shareholders' equity,
net unrealized gains
on securities
available for sale $ 1,284,717 $ 280,154
=========== ===========
EXH 13-51
The following fixed-maturity securities individually exceeded 10% of
shareholders' equity at December 31:
1997 1996
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $5,178.0 $6,715.8 $5,787.7 $6,987.9
Tokyo Electric Power
Company, Ltd. 741.6 884.6 850.3 974.1
Chubu Electric Power 444.3 518.0 552.8 621.9
Province De Quebec * * 299.5 323.3
Tohoku Electric Power * * 223.7 254.7
ASLK-CGER IFICO * * 215.3 224.3
BIL Asia Group * * 215.3 221.5
Generale Bank N.V. * * 215.3 219.4
Abbey National PLC * * 215.3 249.5
Societe Generale * * 214.6 236.5
Tokyo Metropolitan
Government * * 211.5 237.5
Kyushu Electric Power
Company, Ltd. * * 211.3 245.6
*Less than 10%
AFLAC Japan's investments in Japanese government bonds (at amortized
cost) constituted 28.3% and 34.0% of total fixed-maturity securities
available for sale at December 31, 1997 and 1996, respectively. Private
placement investments held by AFLAC Japan (at amortized cost) accounted for
34.2% and 27.7% of total fixed-maturity securities available for sale at
December 31, 1997 and 1996, respectively.
The components of net investment income for the years ended December 31
were as follows:
(In thousands) 1997 1996 1995
--------- --------- ---------
Fixed-maturity securities $1,076,246 $1,026,611 $1,030,224
Equity securities 1,821 1,705 1,466
Mortgage loans and other 1,724 1,786 2,023
Short-term investments and
cash equivalents 15,634 9,543 13,472
--------- --------- ---------
Gross investment income 1,095,425 1,039,645 1,047,185
Less investment expenses 17,710 17,690 22,225
--------- --------- ---------
Net investment income $1,077,715 $1,021,955 $1,024,960
========= ========= =========
At December 31, 1997, fixed-maturity securities with a market value of
$3.8 million were on deposit with regulatory authorities in the United
States. As of December 31, 1997, $40.4 million, at fair value, of AFLAC
Japan's investment securities had been pledged to the Japan policyholder
protection fund. The amount of securities pledged is based on relative
company size. Also, fixed-maturity securities with a market value of $9.5
million were on deposit with the Central Bank of China, R.O.C., as required
by the Ministry of Finance in Taiwan. The Company retains ownership of
these securities on deposit and receives the related investment income.
EXH 13-52
(4) FINANCIAL INSTRUMENTS
NONDERIVATIVES: The carrying amounts for cash and cash equivalents,
receivables, accrued investment income, accounts payable and payables for
security transactions approximated their fair values due to the short-term
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 were estimated using discounted cash flow analyses and
interest rates being offered for similar loans to borrowers with similar
credit ratings. The fair values for notes payable with fixed interest rates
were 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, 1997 and 1996, 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, except for short-term hedges of its annual
profit repatriations. See Note 1 for a description of the Company's
accounting policies for derivative financial instruments. See Note 2 for
additional information on the Company's yen-denominated net assets.
The Company has outstanding interest rate swaps on all 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 the Company's interest rate from variable to fixed. The
interest rate swaps have notional principal amounts that equal the
anticipated unpaid principal amounts. Under these agreements, the Company
makes fixed-rate payments at 2.29% on one loan and 1.24% on another loan and
receives floating-rate payments in return (1.15% at December 31, 1997 plus
loan costs of 20 or 25 basis points) 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 counterparties to these interest rate swap agreements.
All counterparties are credit-worthy financial institutions.
EXH 13-53
The carrying values and estimated fair values of the Company's
financial instruments as of December 31 were as follows:
1997 1996
------------------------ -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $22,437,818 $22,437,818 $20,327,726 $20,327,726
Equity securities 146,326 146,326 136,328 136,328
Mortgage loans 14,137 17,248 17,802 21,151
Policy loans 1,288 1,288 1,273 1,273
Securities held as
collateral for
loaned securities 3,034,241 3,034,241 573,911 573,911
Liabilities:
Notes payable (excluding
capitalized leases): 505,223 505,223 328,141 328,825
Derivatives - interest
rate swaps* - 8,108 - 8,802
Payables for return of
collateral on loaned
securities 3,034,241 3,034,241 573,911 573,911
*Off-balance sheet financial instrument.
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
(In thousands) 1997 1996
-------- --------
Land $110,517 $124,264
Buildings 289,912 327,757
Equipment 147,400 188,272
------- -------
547,829 640,293
Less accumulated depreciation 161,780 168,386
------- -------
Net property and equipment $386,049 $471,907
======= =======
EXH 13-54
(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 1997 1996 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Foreign: 1997 $ 96.9 $ - 3.5% 3.5%
1995-96 67.0 59.2 4.0 4.0
1994-96 1,227.3 1,025.8 4.5 4.5
1990-94 7,595.1 7,457.7 5.5 5.5
1988-93 1,071.0 1,103.5 5.25 5.25
1987-88 1,144.7 1,203.9 5.5 5.5
1985-87 168.3 189.5 5.65 5.65
1985-86 891.0 936.5 6.75 5.5
1978-84 2,390.8 2,565.8 6.5 5.0
1974-79 616.0 597.0 7.0 5.0
Other 64.0 46.3
U.S.: 1988-97 589.9 481.5 8.0 6.0
1986-97 489.4 440.0 6.0 6.0
1985-86 25.7 25.4 6.5 6.5
1981-86 260.6 264.4 7.0 5.5
Other 158.3 157.3
Life insurance:
Foreign: 1995-97 242.3 93.4 3.5-4.0 3.5-4.0
U.S.: 1956-97 28.8 26.9 4.0-6.0 4.0-6.0
Adjustment for
market value of
securities (Note 3) 1,271.7 2,023.1
-------- --------
Total $18,398.8 $18,697.2
======== ========
The weighted-average interest rates reflected in the Consolidated
Statements of Earnings for health insurance future policy benefits for Japan
policies were 5.5% in both 1997 and 1996 and 5.6% in 1995, and for U.S.
policies, 6.4% in both 1997 and 1996 and 6.3% in 1995.
EXH 13-55
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In thousands) 1997 1996 1995
--------- --------- ---------
Unpaid supplemental health claims -
beginning of year $1,029,708 $1,014,736 $ 916,139
--------- --------- ---------
Add claims incurred during the year
related to:
Current year 2,356,595 2,378,211 2,411,025
Prior years (160,401) (158,418) (130,882)
--------- --------- ---------
Total incurred 2,196,194 2,219,793 2,280,143
--------- --------- ---------
Less claims paid during the year:
On claims incurred during
current year 1,514,259 1,478,673 1,503,922
On claims incurred during
prior years 627,172 618,340 632,267
--------- --------- ---------
Total paid 2,141,431 2,097,013 2,136,189
--------- --------- ---------
Effect of foreign exchange rate
changes on unpaid claims (92,229) (107,808) (45,357)
--------- --------- ---------
Unpaid supplemental health claims -
end of year 992,242 1,029,708 1,014,736
Unpaid claims for life and
other business 18,277 9,549 1,559
--------- --------- ---------
Total liability for
unpaid policy claims $1,010,519 $1,039,257 $1,016,295
========= ========= =========
Amounts shown for prior year claims incurred during the year result
from differences between actual claim settlement amounts and the original
estimates thereof.
EXH 13-56
(7) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In thousands) 1997 1996
--------- ---------
Unsecured, yen-denominated notes payable to banks:
2.29% (2.74% in 1996) reducing, revolving
credit agreement, due annually
through July 2001 $ 348,962 $ 284,238
1.24% revolving credit agreement,
due October 2002 149,116 -
Variable interest rate, paid in full - 17,453
Short-term line of credit - 9,850
9.60% to 10.72% unsecured notes payable to
bank, due semiannually, through September 1998 6,944 15,389
Obligations under capitalized leases, due
monthly through 2002, secured by computer
equipment in Japan 17,986 25,392
Other 201 1,211
-------- --------
Total notes payable $ 523,209 $ 353,533
======== ========
The Company has a reducing, revolving credit agreement that provides
for bank borrowings through July 2001 in either U.S. dollars or Japanese
yen. The current borrowing limit is $400 million. Under the terms of the
agreement, the borrowing limit will reduce to $325 million on July 15, 1998,
$250 million on July 15, 1999, and $125 million on July 15, 2000. At
December 31, 1997, 45.4 billion yen ($349.0 million) was outstanding under
this agreement.
In 1997, the Company entered into an unsecured revolving credit
agreement with a borrowing limit of $250 million, payable in either Japanese
yen or U.S. dollars. At December 31, 1997, 19.4 billion yen ($149.1 million)
was outstanding under this agreement.
Interest rate swaps related to the 2.29% and 1.24% (fixed rates after
swaps) loans are described in Note 4.
The aggregate contractual maturities of notes payable during each of
the five years after December 31, 1997, are: 1998, $39.6 million; 1999,
$80.0 million; 2000, $128.2 million; 2001, $126.2 million and 2002, $149.2
million.
The Company was in compliance with the covenants of the various credit
agreements at December 31, 1997.
EXH 13-57
(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) 1997 1996
---------- ----------
Deferred income tax liabilities:
Deferred acquisition costs $ 974,658 $ 972,678
Unrealized gains on securities
available for sale 1,332,170 949,978
Difference in tax basis of
investment in AFLAC Japan 85,877 -
Premiums receivable 73,017 73,353
--------- ---------
Total deferred income
tax liabilities 2,465,722 1,996,009
--------- ---------
Deferred income tax assets:
Other basis differences in
investment securities 153,287 62,855
Foreign tax credit carryforwards 64,052 116,607
Policy benefit reserves 515,913 720,755
Unfunded retirement benefits 71,593 63,292
Other accrued expenses 63,235 66,824
Difference in tax basis of
investment in AFLAC Japan - 2,354
Other 118,909 125,120
--------- ---------
Total gross deferred tax assets 986,989 1,157,807
Less valuation allowance 123,319 162,903
--------- ---------
Total deferred income tax assets 863,670 994,904
--------- ---------
Net deferred income tax liability 1,602,052 1,001,105
Current income tax liability 225,285 180,016
--------- ---------
Total income tax liability $1,827,337 $1,181,121
========= =========
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 non-insurance loss
carryforwards that exceed projected future offsets. Only 35% of non-
insurance losses can be offset against life insurance taxable income each
year. During 1997, the valuation allowance for deferred tax assets
decreased by $39.6 million (increased by $11.5 million in 1996) due to
changes in carryforwards of foreign tax credits and non-insurance losses.
Foreign tax credit carryforwards available at December 31, 1997, expire
as follows: $50.9 million in 2000 and $13.1 million in 2001.
EXH 13-58
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):
1997:
Current $ 202,661 $ 89,318 $ 291,979
Deferred (5,407) (6,775) (12,182)
---------- ---------- ----------
Total $ 197,254 $ 82,543 $ 279,797
========== ========== ==========
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
========== ========== ==========
Income tax expense in the accompanying consolidated financial
statements varies from the amount computed by applying the expected U.S. tax
rate of 35% to pretax earnings. The principal reasons for the differences
and the related tax effects for the years ended December 31 are summarized
as follows:
(In thousands) 1997 1996 1995
--------- --------- ---------
Income taxes based on U.S.
statutory rates $ 302,687 $ 227,500 $ 210,348
U.S. alternative minimum tax 50,026 26,333 12,558
Unrecognized foreign tax credits (91,096) (11,331) 11,992
Non-insurance losses generating
no current tax benefit - 12,344 7,010
Other, net 18,180 792 10,030
-------- -------- --------
Income tax expense $ 279,797 $ 255,638 $ 251,938
======== ======== ========
EXH 13-59
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) 1997 1996 1995
-------- -------- --------
Statements of earnings $279,797 $255,638 $251,938
------- ------- -------
Other comprehensive income:
Change in unrealized foreign currency
translation gains arising
during the year - - (2,177)
Unrealized gains on securities
available for sale:
Unrealized holding gains (losses)
arising during the year 688,197 (112,951) (40,263)
Reclassification adjustment
for realized (gains) losses
included in net earnings 4,786 (3,254) 593
------- ------- -------
Total income taxes allocated to
other comprehensive income 692,983 (116,205) (41,847)
------- ------- -------
Additional paid-in capital, exercise
of stock options (1,345) - -
------- ------- -------
Total income taxes $971,435 $139,433 $210,091
======= ======= =======
Realized investment losses incurred by AFLAC Japan on dispositions of
securities are generally deductible for Japanese income tax purposes.
Accordingly, the income tax effects recognized for net realized and
unrealized investment gains and losses reflect such tax benefit of any
losses related to AFLAC Japan operations. Also, AFLAC Japan received
certain Japanese income tax benefits from foreign exchange translation
losses on its dollar-denominated investments. These tax benefits are
included directly in shareholders' equity in the unrealized foreign currency
translation gains component of accumulated other comprehensive income.
In March 1997, the Japanese government ratified new income tax
provisions that increase income taxes on investment income received by
foreign companies operating in Japan from securities issued from their home
country. The new provisions are effective beginning in 1998. Management
has mitigated some of the tax impact through investment alternatives and by
restructuring portions of the existing investment portfolio. Management
estimates the net impact of this tax change will decrease 1998 net earnings
by $13 million.
Most of the Company's income tax expense represents Japanese income
taxes on AFLAC Japan's operating results calculated at Japan's corporate
tax rate of 45.3%. In December 1997, Japanese government leaders announced
proposals to stimulate the Japanese economy. If enacted as presently
proposed, the Japan corporate tax rate would be reduced beginning in 1999.
The proposals also included tax-base broadening provisions whereby certain
accrued expenses would no longer be deductible for tax purposes until paid.
These new proposals are expected to be finalized in March 1998.
EXH 13-60
(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) 1997 1996 1995
-------- -------- --------
Common stock - issued:
Balance at beginning of year 157,239 156,358 155,999
Exercise of stock options 951 881 359
-------- -------- --------
Balance at end of year 158,190 157,239 156,358
-------- -------- --------
Treasury stock:
Balance at beginning of year 19,354 14,384 6,544
Purchases of treasury stock:
Open market 6,369 5,925 8,223
Received from employees
for taxes on option exercises 195 140 -
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (763) (937) (311)
Exercise of stock options (183) (158) (72)
-------- -------- --------
Balance at end of year 24,972 19,354 14,384
-------- -------- --------
Shares outstanding at end of year 133,218 137,885 141,974
======== ======== ========
In May 1997, the shareholders of the Company approved an increase in
the number of authorized shares of common stock from 175 million shares to
400 million shares.
SHARE REPURCHASE PROGRAM: During 1997, the Company's board of
directors authorized the purchase of up to an additional 4.0 million shares
of the Company's common stock. Since the inception of the share repurchase
program in February 1994, the board of directors has authorized the purchase
of up to 32.4 million shares, and as of December 31, 1997, the Company had
purchased 26.8 million shares. The differences in percentage increases in
net earnings and net earnings per share primarily reflect the impact of the
share repurchase program.
STOCK OPTIONS: In May 1997, the shareholders of the Company approved
the AFLAC Incorporated 1997 Stock Option Plan. The maximum number of shares
of common stock authorized for the grant of options under this plan is 7.0
million. At December 31, 1997, 6.3 million shares were available for future
grants.
The Company's stock option plan allows grants for both incentive stock
options (ISO) and non-qualifying stock options (NQSO) to employees and NQSO
to members of the board of directors. The option period runs for a maximum
of 10 years. The exercise price must be equal to 100% of the fair market
value at the date of grant; therefore, no compensation expense is recognized
by the Company. The options are exercisable immediately unless they are
placed under a vesting schedule which is determined by the compensation
committee of the board of directors.
EXH 13-61
The following table summarizes stock option activity:
Weighted-Average
Option Exercise Price
Shares per Share
--------- ----------------
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
Granted 725,525 53.45
Canceled (17,813) 29.75
Exercised (1,270,985) 11.56
---------
Outstanding at December 31, 1997 8,240,798 $ 23.01
========= =======
1997 1996 1995
--------- --------- ---------
Shares exercisable at
end of year 6,628,043 6,776,583 7,676,624
========= ========= =========
Weighted-average fair value
per share of shares granted
during the year $ 53.45 $ 32.79 $ 28.08
========= ========= =========
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs) Price Exercisable Price
- --------------- ----------- ------------ ---------- ----------- ----------
$ 3.57 - $ 7.13 587,380 2.2 $ 4.40 587,380 $ 4.40
7.33 - 8.00 571,004 2.1 7.90 571,004 7.90
8.07 - 16.13 885,449 3.5 11.81 885,449 11.81
18.83 2,861,269 5.5 18.83 2,861,269 18.83
19.20 - 28.21 827,436 6.9 25.23 818,436 25.24
31.67 1,352,985 8.1 31.67 446,566 31.67
33.94 - 42.94 429,750 8.7 36.47 143,285 36.47
49.50 - 55.38 725,525 9.6 53.45 314,654 53.34
--------- ---------
$ 3.57 - $55.38 8,240,798 5.9 $ 23.01 6,628,043 $ 19.35
========= =========
EXH 13-62
The Company does not recognize compensation cost in the Consolidated
Statements of Earnings for employee stock options. Had compensation cost
for the Company's stock options granted in 1995 through 1997 been determined
using the fair-value-based method as described in SFAS No. 123, the
Company's net earnings and net earnings per share would approximate the
following pro forma amounts:
(In thousands, except for 1997 1996 1995
per-share amounts) --------- --------- ---------
Net earnings:
As reported $ 585,023 $ 394,363 $ 349,057
Amortization of fair value
of options granted
after 1994 (12,137) (8,479) (1,786)
--------- --------- ---------
Pro forma net earnings $ 572,886 $ 385,884 $ 347,271
========= ========= =========
Earnings per share:
Basic, as reported $ 4.30 $ 2.81 $ 2.40
Amortization of fair value
of options granted
after 1994 (.09) (.06) (.01)
--------- --------- ---------
Pro forma basic earnings
per share $ 4.21 $ 2.75 $ 2.39
========= ========= =========
Earnings per share:
Diluted, as reported $ 4.16 $ 2.73 $ 2.33
Amortization of fair value
of options granted
after 1994 (.09) (.06) (.01)
--------- --------- ---------
Pro forma diluted earnings
per share $ 4.07 $ 2.67 $ 2.32
========= ========= =========
The fair value of each option granted during 1995 through 1997 was
estimated on the date of grant using the Black-Scholes multiple option
approach with the following assumptions:
1997 1996 1995
--------- --------- ---------
Expected life from vesting
date (years) 3.4-6.1 3.7-6.1 2.5-7.1
Dividend yield 1.0% 1.0% 1.0%
Expected volatility 20.2% 19.3% 21.3%
Risk-free interest rate 6.0% 7.0% 6.5%
EXH 13-63
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. The provisions of SFAS No. 123 were
applicable prospectively and the above pro forma disclosures therefore do
not include amortization of the fair value of awards prior to 1995. Also,
the Company expects to grant additional awards in future years.
VOTING RIGHTS: In accordance with the Parent Company's Articles of
Incorporation, shares of common stock are generally entitled to one vote per
share until they have been held by the same beneficial owner for a
continuous period of 48 months, at which time they become entitled to 10
votes per share.
(10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Net assets of the insurance subsidiaries aggregated $4.2 billion at
December 31, 1997, on a generally accepted accounting principles basis.
AFLAC Japan accounted for $2.5 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 $335.5 million in 1997, $256.6 million in
1996 and $194.3 million in 1995, and capital and surplus was $1.8 billion
and $1.4 billion at December 31, 1997 and 1996, 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) 1997 1996
----------- -----------
Net assets on GAAP basis $ 4,174,818 $ 2,644,408
Adjustment of fixed-maturity securities
from fair value to amortized cost (3,315,880) (2,385,328)
Elimination of deferred policy
acquisition costs (2,576,867) (2,580,682)
Adjustment to policy liabilities 2,110,730 2,992,056
Elimination of deferred income taxes 1,642,431 1,030,111
Reduction in premiums receivable (83,664) (83,946)
Establishment of asset valuation reserve (116,915) (188,131)
Elimination of statutory non-admitted assets (84,378) (73,321)
Difference in translation adjustment 67,523 (477)
Difference in accrued expenses 24,293 63,244
Other, net (70,786) (12,413)
----------- -----------
Net assets on U.S. statutory
accounting basis $ 1,771,305 $ 1,405,521
=========== ===========
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
EXH 13-64
fees (see Note 2) and other payments to the Parent Company by its insurance
subsidiary are subject to various regulatory restrictions and approvals
related to safeguarding the interests of insurance policyholders. One of
the primary considerations is that the insurance subsidiary must maintain
adequate risk-based capital. Also, the maximum amount of dividends that can
be paid by insurance companies domiciled in the State of Georgia to
shareholders without prior approval of the Commissioner of Insurance is the
greater of the net gain from operations for the previous year determined
under statutory accounting principles or 10% of statutory surplus as of the
previous year-end. Dividend payments by AFLAC during 1998 in excess of
$329.7 million would require such approval. Dividends paid by AFLAC during
1997 were $66.5 million.
A portion of AFLAC Japan annual earnings, as determined on a Japanese
statutory accounting basis, can be remitted each year to AFLAC U.S. after
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 $347.0 million in
1997, $217.3 million in 1996 and $140.5 million in 1995. 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 $400.0 million and $466.9 million at
December 31, 1997 and 1996, 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. 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 and their beneficiaries.
EXH 13-65
The components of retirement expense and significant actuarial
assumptions for the years ended December 31 are shown below.
1997 1996 1995
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Basic employee plans:
Service cost for
benefits earned
during the year $ 2,224 $ 2,450 $ 2,169 $ 2,591 $ 2,610 $ 1,880
Interest cost on
projected benefit
obligations 982 3,132 1,031 3,142 1,148 2,686
Less actual investment
return on plan assets (894) (7,166) (1,117) (4,429) (518) (6,344)
Net amortization
and deferral 620 4,057 702 1,861 696 4,370
Net curtailment gain - (377) - - - -
----- ----- ----- ----- ----- -----
Total retirement
expense for basic
employee plans 2,932 2,096 2,785 3,165 3,936 2,592
Officers, retirees and
beneficiaries - unfunded
supplemental plans 1,326 27,350 1,369 35,806 1,395 35,634
----- ------ ----- ------ ----- ------
Total retirement
expense $ 4,258 $29,446 $ 4,154 $38,971 $ 5,331 $38,226
===== ====== ===== ====== ===== ======
Significant actuarial
assumptions:
Discount rate for:
Net periodic pension
costs 4.0% 7.0% 4.0% 7.0% 4.0% 8.0%
Benefit obligations 4.0 7.0 4.0 7.0 4.0 7.0
Projected increase in
salary levels 3.5 5.0 3.5 5.0 3.5 5.0
Expected long-term
return on plan assets 2.5 9.0 2.5 9.0 4.5 9.0
EXH 13-66
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:
1997 1996
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Plan assets, at fair value
(primarily bonds, stocks
and insurance contracts) $18,547 $45,530 $18,445 $37,574
------ ------ ------ ------
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
based on employee service to
date and present salary levels:
Vested benefits 13,531 35,677 15,768 32,557
Non-vested benefits 1,158 3,067 94 1,167
Effect of assumed future
salary increases 10,938 11,721 8,789 13,945
------ ------ ------ ------
Projected benefit obligations 25,627 50,465 24,651 47,669
------ ------ ------ ------
Projected benefit obligations
in excess of plan assets (7,080) (4,935) (6,206) (10,095)
Unamortized net losses (gains) from
plan experience variations and
changes in actuarial assumptions 1,160 3,539 (170) 9,731
Unrecognized prior service
cost (credit) 932 182 1,119 (222)
Unamortized net transition
(gain) loss 523 (961) 673 (1,083)
------ ------ ------ ------
Prepaid retirement liability
recognized in consolidated
balance sheets $(4,465) $(2,175) $(4,584) $(1,669)
====== ====== ====== ======
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, 1997 and 1996, was
$195.4 million and $165.7 million, respectively. The actuarial present
value of projected benefit obligations for these plans was $198.9 million
and $170.2 million at December 31, 1997 and 1996, respectively. The
discount rates used were 4.0% for AFLAC Japan, and 7.0% for AFLAC U.S. 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 and retirees are eligible for nonmedical benefits. The
accumulated benefit obligation as of December 31, 1997 and 1996, was $10.1
million and $9.4 million, respectively, based on an assumed discount rate of
7.0% for both years.
EXH 13-67
Net postretirement benefit cost for the years ended December 31
included the following components:
(In thousands) 1997 1996 1995
------ ------ ------
Service cost $ 313 $ 296 $ 229
Interest cost 674 630 536
Amortization of unrecognized gains (34) (41) (207)
----- ----- -----
Postretirement benefit cost $ 953 $ 885 $ 558
===== ===== =====
The discount rate used in 1997 for the periodic cost was 7%, and the
projected health care cost trend rate was 11%, graded to 7% over four years.
A one percentage point increase in the health care cost trend rate would
increase the postretirement benefit obligation and the aggregate of service
and interest costs by approximately 7.0% and 9.4%, respectively.
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 $10.5 million in 1997,
$8.9 million in 1996 and $8.0 million in 1995.
(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. 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, 1997, the
fair value of the leased land was estimated to be 1.9 billion yen ($14.8
million).
EXH 13-68
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements of
AFLAC Incorporated and subsidiaries. The statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon management's best estimates and judgments. Informed judgments
and estimates are used for those transactions not yet complete or for which
the ultimate effects cannot be measured precisely. Financial information
elsewhere in this annual report is consistent with the information in the
financial statements.
The Company's internal controls are designed to reasonably assure that
AFLAC Incorporated's books and records reflect the transactions of the
Company, that assets are safeguarded, and that the Company's established
policies and procedures are followed. The effectiveness of the controls
system is supported by the selection and training of qualified personnel, an
organizational structure that provides an appropriate division of
responsibility, and a comprehensive internal audit program.
The Company engages KPMG 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 13-69
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity, cash
flows and comprehensive income for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 29, 1998
EXH 13-70
Unaudited Consolidated Quarterly Financial Data
(In thousands, except per-share amounts)
Three Months ended, March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,707,543 (1.3)% $ 2,008,687 15.3% $ 1,789,620 .8% $ 1,744,852 (5.8)%
Net earnings 90,157 4.2 302,793 253.1 96,079 8.8 95,994 (28.2)
- -----------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .66 8.2% $ 2.22 263.9% $ .70 11.1% $ .72 (25.8)%
Net earnings (diluted) .64 8.5 2.14 262.7 .68 9.7 .69 (25.8)
Cash dividends .10 .115 .115 .115
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31, 1996 June 30, 1996 September 30, 1996 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 (basic) $ .61 7.0% $ .61 (3.2)% $ .63 3.3% $ .97 64.4%
Net earnings (diluted) .59 5.4 .59 (3.3) .62 3.3 .93 63.2
Cash dividends .087 .10 .10 .10
- -----------------------------------------------------------------------------------------------------------------------------
EXH 13-71
72