SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarter ended September 30, 1994
Commission File No. 1-7434
AFLAC INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1167100
- - - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999
-----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (706) 323-3431
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class November 4, 1994
---------------------------- ---------------------
Common Stock, $.10 Par Value 99,656,345 shares
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993............ 2
Consolidated Statements of Earnings -
Three Months Ended September 30, 1994 and 1993
Nine Months Ended September 30, 1994 and 1993....... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1994 and 1993....... 5
Notes to Consolidated Financial Statements............ 6
Review by Independent Certified Public
Accountants......................................... 8
Independent Auditors' Report.......................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............. 16
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for per-share amounts - Unaudited)
September 30, December 31,
1994 1993
------------- -------------
ASSETS
Investments:
Securities available for sale:
Fixed maturities (1994 at market; 1993
at amortized cost; amortized cost,
$14,741,386 in 1994; market value,
$11,570,386 in 1993) $ 15,729,938 $ 10,055,436
Equity securities, at market value
(cost, $66,562 in 1994 and
$67,692 in 1993) 79,635 82,065
Fixed maturities held to maturity,
at amortized cost (market value
$2,418,540 in 1993) - 2,082,326
Mortgage loans on real estate 25,951 57,485
Other long-term investments 4,804 1,726
Short-term investments 311,911 166,689
------------ ------------
Total investments 16,152,239 12,445,727
Cash 36,862 23,413
Receivables, primarily premiums 301,936 231,977
Accrued investment income 190,258 184,087
Deferred policy acquisition costs 2,364,103 1,953,248
Property and equipment, at cost, less
accumulated depreciation 584,354 361,246
Securities held as collateral for
loaned securities 663,908 -
Intangible assets, net 110,931 114,165
Other 123,787 128,823
------------ ------------
Total assets $ 20,528,378 $ 15,442,686
============ ============
(continued)
2
<PAGE>
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for per-share amounts - Unaudited)
September 30, December 31,
1994 1993
------------- -------------
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities:
Future policy benefits $ 14,327,151 $ 10,932,225
Unearned premiums 322,578 302,846
Unpaid policy claims 905,072 712,066
------------ ------------
Total policy liabilities 15,554,801 11,947,137
Notes payable 210,151 122,062
Income taxes, primarily deferred 1,359,580 950,278
Payable for return of collateral on
loaned securities 663,908 -
Payables for security transactions 494,558 659,158
Other 506,299 398,427
------------ ------------
Total liabilities 18,789,297 14,077,062
------------ ------------
Shareholders' equity:
Common stock of $.10 par value. Authorized
175,000; issued 103,898 in 1994 and
103,710 in 1993 10,390 10,371
Additional paid-in capital 197,167 195,730
Unrealized foreign currency
translation gains 175,152 123,294
Unrealized gains on securities
available for sale 270,880 14,811
Retained earnings 1,211,532 1,029,625
Treasury stock (124,639) (6,568)
Notes receivable for stock purchases (1,401) (1,639)
------------ ------------
Total shareholders' equity 1,739,081 1,365,624
------------ ------------
Total liabilities and shareholders' equity $ 20,528,378 $ 15,442,686
============ ============
Shareholders' equity per share $ 17.41 $ 13.20
============ ============
Shares outstanding at end of period 99,871 103,471
============ ============
See accompanying notes to consolidated financial statements.
3
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<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except for per-share amounts-Unaudited) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
1994 1993 % Change 1994 1993 % Change
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health insurance $1,362,309 $1,106,552 23.1 $3,796,341 $3,100,934 22.4
Net investment income 217,298 181,869 19.5 612,547 503,971 21.5
Realized investment gains (losses) (248) 539 (345) 1,309
Other income 22,152 19,281 66,153 60,217
---------- ---------- ---------- ----------
Total revenues 1,601,511 1,308,241 22.4 4,474,696 3,666,431 22.0
---------- ---------- ---------- ----------
Benefits and expenses:
Benefits and claims 1,119,696 902,339 24.1 3,109,235 2,505,299 24.1
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs 41,138 34,683 107,762 91,132
Insurance commissions 181,731 146,934 503,834 411,445
Insurance expenses 91,916 85,963 276,939 258,333
Interest expense 3,794 2,562 9,918 7,597
Capitalized interest on building construction - (2,509) (2,419) (6,522)
Other operating expenses 33,724 26,994 97,413 85,761
---------- ---------- ---------- ----------
Total acquisition and operating expenses 352,303 294,627 19.6 993,447 847,746 17.2
---------- ---------- ---------- ----------
Total benefits and expenses 1,471,999 1,196,966 23.0 4,102,682 3,353,045 22.4
---------- ---------- ---------- ----------
Earnings before income taxes and cumulative
effect of accounting changes 129,512 111,275 16.4 372,014 313,386 18.7
Income taxes 53,453 46,735 156,620 136,358
---------- ---------- ---------- ----------
Earnings before cumulative effect of
accounting changes 76,059 64,540 17.8 215,394 177,028 21.7
Cumulative effect on prior years of accounting changes - - - 11,438
---------- ---------- ---------- ----------
Net earnings $ 76,059 $ 64,540 $ 215,394 $ 188,466
========== ========== ========== ==========
Earnings per share:
Earnings before cumulative effect of
accounting changes $ .74 $ .61 21.3 $ 2.08 $ 1.68 23.8
Cumulative effect of accounting changes - - - .11
---------- ---------- ---------- ----------
Net earnings $ .74 $ .61 $ 2.08 $ 1.79
========== ========== ========== ==========
Shares used in computing earnings per share 102,812 105,241 103,513 105,197
========== ========== ========== ==========
Cash dividends per share $ .115 $ .10 15.0 $ .33 $ .288 14.6
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands - Unaudited)
Nine Months Ended
September 30,
----------------------------
1994 1993
----------- -----------
Cash flows from operating activities:
Net earnings $ 215,394 $ 188,466
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,615,173 1,312,022
Increase in deferred income taxes 57,473 55,122
Decrease in income taxes payable (47,703) (86,351)
Increase in deferred policy
acquisition costs (196,507) (138,953)
Increase in receivables (42,833) (24,259)
Other, net 116,052 79,717
----------- -----------
Net cash provided by operating
activities 1,717,049 1,385,764
----------- -----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed-maturity securities matured
or called 61,303 77,771
Fixed-maturity securities sold 788,222 750,213
Equity securities 37,676 32,591
Mortgage loans, net 34,288 25,728
Other long-term, net - 2,011
Costs of investments acquired:
Fixed-maturity securities (2,204,738) (1,948,735)
Equity securities (30,525) (40,617)
Other long-term, net (3,078) -
Short-term investments, net (127,824) (99,112)
Additions to property and equipment, net (183,152) (133,720)
----------- -----------
Net cash used by investing activities (1,627,828) (1,333,870)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 83,000 -
Principal payments under debt obligations (12,384) (15,182)
Dividends paid to stockholders (33,487) (29,723)
Purchase of treasury stock net of reissues (118,071) (1,322)
Other, net 1,456 3,019
----------- -----------
Net cash used by financing
activities (79,486) (43,208)
----------- -----------
Effect of exchange rate changes on cash 3,714 6,468
----------- -----------
Net change in cash 13,449 15,154
Cash at beginning of year 23,413 36,138
----------- -----------
Cash at end of period $ 36,862 $ 51,292
=========== ===========
Supplemental disclosures of cash flow information:
Noncash financing activities included capital lease obligations incurred
for computer equipment totaling $13,594 and $27,298 in 1994 and 1993,
respectively. See accompanying notes to consolidated financial statements.
5
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (none of which were other than
normal recurring accruals with the exception of the adjustments required for
the adoption of new accounting standards discussed in Notes 2 and 3)
necessary to present fairly the financial position as of September 30, 1994,
and the results of operations for the three-month and nine-month periods
ended September 30, 1994 and 1993, and cash flows for the nine months ended
September 30, 1994 and 1993. Results of operations for interim periods are
not necessarily indicative of results for the entire year. For further
information on accounting policies and other financial statement disclosures,
refer to the Notes to the Consolidated Financial Statements included in the
Company's annual report to shareholders for the year ended December 31, 1993.
2. Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, issued by the
Financial Accounting Standards Board. Under the new standard, the Company
classified all fixed-maturity securities as "available for sale." Such
securities are carried at market value rather than amortized cost. The
related unrealized gains and losses, less amounts applicable to policy
liabilities and deferred income taxes, are reported in a separate component
of shareholders' equity together with unrealized gains and losses on equity
securities. As a result, this change in accounting method has no effect on
net earnings.
The effect of this accounting change on shareholders' equity was as
follows:
(In thousands) January 1, 1994 September 30, 1994
--------------- ------------------
Invested assets $ 1,851,141 $ 988,552
Policy liabilities (1,088,633) (440,855)
Deferred income taxes (301,030) (289,890)
------------ ------------
Shareholders' equity,
net unrealized gains $ 461,478 $ 257,807
============ ============
The portion of unrealized gains credited to policy liabilities at
January 1, 1994, and September 30, 1994, represents gains that would not
inure to the benefit of the shareholders, if such gains were actually
realized. These amounts are necessary to cover policy reserve interest
requirements based on market investment yields at these dates.
The changes in the separate shareholders' equity component, unrealized
gains on securities available for sale, for the nine months ended September
30, 1994, were as follows:
(In thousands)
Balance at December 31, 1993 $ 14,811
------------
Cumulative effect of adopting SFAS No. 115 at
January 1, 1994, net of deferred income taxes
of $301,030 461,478
Decrease in unrealized gains on fixed maturity
and equity securities during the nine months,
net of deferred income tax benefits of $10,701 (205,409)
------------
Net change for the period 256,069
------------
Balance at September 30, 1994 $ 270,880
============
6
<PAGE>
3. Effective January 1, 1993, three new accounting standards were adopted
through a one-time cumulative net credit to earnings of $11.4 million, or
$.11 per share, as follows:
(In thousands)
SFAS No. 109 - Deferred income taxes $ 22,000
SFAS No. 106 - Other post-retirement benefits (9,602)
SFAS No. 112 - Post-employment benefits (960)
-------
Net effect January 1, 1993 $ 11,438
=======
Additional information concerning these accounting changes is included
in Note 1 of notes to the Company's 1993 consolidated financial statements.
4. In February 1994, the board of directors authorized the purchase of up
to 4.6 million shares of AFLAC Incorporated common stock. Through September
30, 1994, 3.8 million shares had been purchased under the purchase program.
The impact of the share purchases did not materially affect earnings per
share.
In April 1994, permanent bank financing for the share purchase program
was arranged under a new revolving credit and term note agreement for up to
$150 million with interest at LIBOR plus 50 basis points. Principal payments
on the new loan are payable over five years beginning in June 1995. The
Company had other temporary borrowings outstanding at various times during
the first nine months of 1994 under line of credit arrangements with banks.
As of September 30, 1994, bank borrowings of $83 million were outstanding in
connection with the share purchase program. Related interest expense for the
nine months ended September 30, 1994, was $1.8 million.
Capitalization of interest on building construction ceased at the end of
the first quarter due to the completion of the new administrative office
building in Tokyo.
5. The changes in shareholders' equity during the nine months ended
September 30, 1994, are as follows:
(In thousands)
Shareholders' equity, beginning of year $ 1,365,624
----------
Net earnings 215,394
Change in unrealized gains on securities
available for sale 256,069
Change in unrealized foreign currency
translation gains 51,858
Shares issued for exercises of stock options 1,337
Purchases of treasury stock net of reissues (118,071)
Dividends to shareholders ($.33 per share) (33,487)
Other 357
----------
Net change for the period 373,457
----------
Shareholders' equity at September 30, 1994 $ 1,739,081
==========
At September 30, 1994, 4.0 million shares were held in the treasury
at a cost of $124.6 million.
7
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1994 and 1993 financial statements included in this
filing have been reviewed by KPMG Peat Marwick LLP, independent certified
public accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review is
included on page 9.
8
<PAGE>
KPMG PEAT MARWICK LLP
Certified Public Accountants
303 Peachtree Street, N.E. Telephone: 404-222-3000
Suite 2000 Telefax: 404-222-3050
Atlanta, GA 30308
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
AFLAC Incorporated
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of September 30, 1994, and the related consolidated
statements of earnings for the three-month and nine-month periods ended
September 30, 1994 and 1993, and the consolidated statements of cash flows
for the nine-month periods ended September 30, 1994 and 1993. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, as of January 1, 1994.
We have previously audited, in accordance with generally accepted auditing
standards, the accompanying consolidated balance sheet of AFLAC Incorporated
and subsidiaries as of December 31, 1993, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year
then ended (not presented herein); and in our report dated January 31, 1994,
we expressed an unqualified opinion on those consolidated financial
statements.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
October 21, 1994
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1993, the financial condition of AFLAC Incorporated
and subsidiaries (the "Company") has remained strong. Investments have
continued to increase in their functional currencies and continue to consist
of high-quality securities.
Since AFLAC Japan, our largest operating unit, conducts its business in
yen, changes in the yen/dollar exchange rate can have a significant effect on
the Company's financial statements when reported in U.S. dollars. The
yen/dollar exchange rate at the end of each reporting period is used to
convert balance sheet items. The exchange rate at September 30, 1994, of
98.45 yen to one U.S. dollar was 13.8% stronger than the exchange rate of
112.00 as of December 31, 1993. The stronger yen rate increased reported
invested assets by $1.7 billion, total assets by $2.1 billion, and total
liabilities by $2.0 billion over the amounts that would have been reported
based on the exchange rate as of December 31, 1993.
Excluding the market value effect of SFAS 115, total investments
(including cash) have increased by $2.7 billion, or 21.9%, since December 31,
1993, with AFLAC Japan increasing $2.5 billion, or 22.0% (7.3% in yen), and
AFLAC U.S. increasing $217.2 million, or 19.9%. The growth in invested
assets reflects the continued strong cash flows from AFLAC Japan and the
effect of the stronger yen/dollar exchange rate as of September 30, 1994,
compared with the exchange rate as of December 31, 1993. Under the
provisions of SFAS 115, which was adopted effective January 1, 1994, fixed-
maturity securities available for sale are carried at market value rather
than amortized cost. Including the market value effect of SFAS 115, total
investments have increased by $3.7 billion, or 29.8%, with AFLAC Japan
increasing $3.5 billion, or 31.0% (15.2% in yen), and AFLAC U.S. increasing
$182.2 million, or 16.7%. See Note 2 to the accompanying Notes to
Consolidated Financial Statements for the nine months ended September 30,
1994 ("Note 2").
Deferred policy acquisition costs increased $410.9 million, or 21.0%,
during the first nine months of 1994. AFLAC Japan increased $383.3 million,
or 24.9% (9.8% in yen), with approximately $150.9 million relating to
operations of AFLAC Japan and $232.4 million of the increase relating to the
stronger yen rate at September 30, 1994. AFLAC U.S. increased $27.7 million,
or 6.7%, during the same period.
The Company held securities as collateral for loaned securities in the
amount of $663.9 million, at market value, as of September 30, 1994. The
collateral consists of Japan Government Bonds and the agreement requires that
the market value of the collateral be greater than or equal to 105% of the
market value of the loaned securities as of the date the securities are
loaned, and not be less than 100% thereafter. AFLAC Japan uses these
arrangements to increase investment income with minimal risk.
Policy liabilities increased $3.6 billion, or 30.2%, during the first
nine months of 1994. AFLAC Japan increased $3.5 billion, or 32.6% (16.6% in
yen), and AFLAC U.S. increased $116.3 million, or 9.6%. The stronger yen
rate increased reported policy liabilities by $1.7 billion. Other increases
in policy liabilities are due to the addition of new business, the aging of
policies in force and the effect of SFAS No. 115 (see Note 2).
10
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The Company has negotiated new unsecured notes payable to banks. As of
September 30, 1994, the additional notes payable amounted to $83 million.
See Note 4 to the accompanying Notes to Consolidated Financial Statements for
the nine months ended September 30, 1994. This amount, together with capital
lease obligations for new computer equipment and foreign exchange gains, less
principal payments, accounted for the net increase of $88.1 million in notes
payable since December 31, 1993.
Under insurance guaranty fund laws in the U.S., insurance companies
doing business in a participating state can be assessed up to prescribed
limits for policyholder losses incurred by insolvent companies. Such
assessments have not been material to the Company in recent years. The
Company does not believe that future assessments relating to currently
insolvent companies will be materially different from amounts already
provided for in the financial statements.
The liability for income taxes has increased by $409.3 million, or
43.1%, since December 31, 1993. The increase is primarily due to the
recognition of deferred income taxes of $289.9 million on unrealized gains on
securities available for sale due to the implementation of SFAS No. 115 (see
Note 2).
Shareholders' equity increased $373.5 million during the first nine
months of 1994. This increase was principally due to the increase in net
earnings, less the purchase of treasury stock, plus the implementation of
SFAS No. 115. For further information on the changes in shareholders'
equity, see Notes 2 and 5 of the accompanying Notes to Consolidated Financial
Statements for the nine months ended September 30, 1994.
The board of directors declared a fourth quarter cash dividend of $.115
per share. The dividend is payable on December 1, 1994, to shareholders of
record at the close of business on November 18, 1994.
11
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<TABLE>
RESULTS OF OPERATIONS
The following tables set forth the pretax operating earnings by business components for the periods shown and the percentage
change from the prior periods.
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(in millions) 1994 1993 % Change 1994 1993 % Change
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
AFLAC Japan $122.2 $103.8 17.8 % $349.1 $293.8 18.8 %
AFLAC U.S. 23.6 19.8 19.1 65.6 54.7 19.9
Other foreign insurance (0.1) (3.2) (1.2) (5.8)
Realized investment gains (losses) (0.2) 0.5 (0.3) 1.3
Broadcast division 3.9 2.6 47.7 13.1 9.0 46.1
Interest expense, non-insurance operations (2.9) (1.9) (7.4) (5.9)
Capitalized interest on building construction - 2.5 2.4 6.5
Parent company, other operations and
eliminations (17.0) (12.8) (31.6) (49.3) (40.2) (22.8)
----- ----- ----- -----
Earnings before income taxes and cumulative
effect of accounting changes 129.5 111.3 16.4 372.0 313.4 18.7
Income taxes 53.4 46.8 14.4 156.6 136.3 14.9
----- ----- ----- -----
Earnings before cumulative effect of
accounting changes 76.1 64.5 17.8 215.4 177.1 21.7
Cumulative effect of accounting changes - - - 11.4
----- ----- ----- -----
Net earnings $ 76.1 $ 64.5 $215.4 $188.5
===== ===== ===== =====
</TABLE>
12
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<PAGE>
The following discussion of earnings comparisons for the nine months
excludes the gain of $11.4 million, or $.11 per share, from the cumulative
effect of accounting changes adopted in the first quarter of 1993. See Note
3 to the accompanying Notes to Consolidated Financial Statements for the nine
months ended September 30, 1994.
For the first nine months of 1994, net earnings increased 21.7%, up
$38.4 million from the comparable period of 1993. Operating earnings
(excluding realized investment gains/losses, net of income taxes) increased
21.8%, up $38.6 million. Net earnings per share and operating earnings per
share both increased 23.8%, from $1.68 to $2.08 per share.
Third quarter net earnings increased 17.8%, up $11.5 million compared
with the respective period of 1993. Net earnings per share and operating
earnings per share both increased 21.3%, from $.61 to $.74 per share.
The increases in consolidated earnings and the earnings of AFLAC Japan
continued to be aided by favorable translations from yen to U.S. dollars for
both the first nine months and the third quarter of 1994, compared with the
exchange rates used in the comparable periods of 1993. The yen/dollar
exchange rates used to translate the statements of earnings are the
year-to-date cumulative-average exchange rates for the period. The
cumulative-average yen/dollar exchange rate of 103.39 for the first nine
months of 1994 strengthened 8.6% compared with the rate of 112.23 for the
first nine months of 1993. For the nine-month period ending September 30,
1994, the stronger yen/dollar exchange rate increased total operating
revenues by $291.3 million, net earnings by $14.2 million and operating
earnings by $14.3 million. The foreign exchange effect was $.14 per share
for both net earnings and operating earnings. Excluding the benefit from the
stronger yen, net earnings per share and operating earnings per share both
increased 15.5% for the first nine months of 1994 compared with the first
nine months of 1993.
For the third quarter of 1994, the exchange effect increased net
earnings by $3.6 million and operating earnings by $3.5 million. The foreign
exchange effect was $.03 per share for both net earnings and operating
earnings. Excluding the benefit from the stronger yen, net earnings per
share and operating earnings per share both increased 16.4% for the third
quarter of 1994 compared with the third quarter of 1993.
Premium income for the first nine months of 1994 increased 22.4% to $3.8
billion. Net investment income increased 21.5% to $612.5 million. Total
revenues increased 22.0% to $4.5 billion. The ratio of benefits and claims
to total revenues (benefit ratio) increased to 69.5% for the first nine
months of 1994, up from 68.3%, continuing the upward trend experienced during
the last several years due to lower investment yields and the aging of
policies in force. The ratio of expenses to total revenues (expense ratio)
decreased to 22.2% from 23.1%, which continues the downward trend experienced
during the last several years due to effective cost controls and the growth
of total revenues. The pretax operating profit margin was 8.3%, compared
with 8.5% for the first nine months of 1993. Interest expense in 1994
associated with the share purchase program somewhat decreased the operating
profit margin, while operating earnings per share were slightly increased.
Premium income for the third quarter of 1994 increased 23.1% to $1.4
billion, compared with the third quarter of 1993. Net investment income
increased 19.5% to $217.3 million. Total revenues increased 22.4% to $1.6
billion. The pretax profit margin was 8.1%, compared with 8.5% for the third
quarter of 1993.
13
<PAGE>
Parent company expenses for 1994 include increased retirement accruals
for certain senior officers and beneficiaries due to expected early
retirements and other revisions in actuarial assumptions.
During the first quarter, the Japanese government enacted new tax
legislation that terminated an extension of the temporary Special Corporate
Tax of .9% of Japan's taxable income. This tax was scheduled to expire at
December 31, 1994. This tax rate reduction decreased income tax expense for
the nine months ended September 30, 1994, by approximately $2.7 million.
AFLAC JAPAN
The yen continued to appreciate against the dollar in the third quarter.
The cumulative-average exchange rate for the first nine months of 1994 was
103.39, or 8.6% stronger than the average rate of 112.23 a year ago. As a
result, growth rates for AFLAC Japan continued to be higher in dollars than
in yen. The cumulative average exchange rate for the full year of 1993 was
111.21.
Premium income translated into dollars increased 25.3% (15.4% in yen) to
$3.2 billion for the first nine months of 1994 and increased 26.1% (18.1% in
yen) to $1.2 billion for the third quarter compared with the 1993 nine-month
and third-quarter totals, respectively. The increase in premium income was
due to premiums from new policies, the continued excellent policy persistency
of older policies and, in dollars, the stronger yen rate.
New sales continued to meet expectations and rose 14.0% in yen for the
nine months. AFLAC Japan's new sales were exceptionally strong in the first
half of the year due to the sales associates' heightened efforts to sell the
cancer policy before a mid-year rate increase. As a result, management
anticipated that new sales would not be as strong in the second half of the
year. For the third quarter, new annualized premium sales in yen were level
with last year. The full-year objective for new annualized sales in yen
remains 10%, which management expects to achieve.
Investment income increased 22.0% (12.3% in yen) to $550.3 million for
the first nine months of 1994 and increased 19.6% (11.9% in yen) to $194.8
million for the third quarter, compared with the respective periods of 1993.
The increase in investment income was due to the continued strong cash flow
from operations, offset by the increasing amounts of profit transfers to
AFLAC U.S., construction expenditures for AFLAC Japan's new administrative
office building and lower investment yields. AFLAC Japan repatriated profits
to AFLAC U.S. of $97.9 million in July 1993 and $132.9 million in July 1994.
Management estimates that these transfers have decreased AFLAC Japan's
investment income by $6.4 million for the first nine months of 1994 and $3.3
million for the third quarter of 1994. Profit transfers will continue to
reduce investment income growth in Japan. However, the profit transfers to
AFLAC U.S. benefit consolidated operations because higher investment yields
can be earned on funds invested in the U.S. rather than in Japan, and income
tax expense is presently lower on investment income earned in the U.S.
Available investment yields in Japan continued to rise in the third
quarter. The yield on a composite of 10-year Japanese government bonds rose
to a high of 4.96% in August from a quarterly low of 4.34% in July, averaging
4.67% for the quarter.
During the third quarter, the Company purchased yen-denominated
securities at an average yield to maturity of 5.06%. Including investments
in dollar-denominated securities, cash flow for the quarter was invested at
an average yield to maturity of 5.17%. At the end of the quarter, the yield
14
<PAGE>
to maturity on AFLAC Japan's portfolio was 6.19%, compared with 6.25% at the
end of June 1994. The return on AFLAC Japan's average invested assets (at
amortized cost) for the nine months was 6.01%, compared with 6.17% a year
ago.
AFLAC Japan's pretax operating earnings in dollars for the first nine
months of 1994 increased 18.8% (9.4% in yen) to $349.1 million. The pretax
operating profit margins for the first nine months of 1994 decreased from
9.8% to 9.3%. The reduction in pretax operating profit margins was
principally caused by an increase in future policy benefits due to fewer
policy lapses and reduced investment income due to profit transfers to AFLAC
U.S., lower investment yields, and construction expenditures for the new
building. AFLAC Japan's results continue to reflect the pattern that has
developed during the last several years - slightly higher benefit ratios
somewhat offset by lower expense ratios.
Excluding the impact of 1993 and 1994 profit repatriation on investment
income, pretax operating earnings in yen increased 10.9% for the first nine
months and 11.9% for the third quarter compared with the respective periods
of 1993.
AFLAC U.S.
Premium income increased 9.8% to $588.7 million for the first nine
months of 1994 compared with the first nine months of 1993. For the third
quarter of 1994, premium income increased 8.8% to $199.4 million compared
with the third quarter of 1993. The increase in premium income was primarily
due to an increase in new sales over the last 12 months. New annualized
premium sales increased 7.9% to $62.0 million during the third quarter,
marking the second best quarter in the history of AFLAC U.S. Sales results
for the nine months reflect stronger payroll deduction sales, especially of
accident/disability insurance, and weaker Medicare supplement sales.
Excluding sales of the lower-margin Medicare supplement product, new sales
rose 14.4% for the nine months. Sales of AFLAC's new products continued to
dominate new business results, accounting for 64% of total new sales for the
nine months. Based on sales results to date, management is optimistic that
new sales will increase by approximately 10% for the full year.
The Company is monitoring developments in the U.S. Congress concerning
possible changes to the U.S. health care system. No action on health care
reform by the U.S. Congress is expected in 1994. Some of the 1994 proposals
included provisions that could have unfavorably affected the Company's taxes,
product design and marketing techniques in the United States, which could
have had a negative impact on earnings. Management believes health care
reform will be an issue for the legislative calendar in 1995. The future of
health care reform and its impact on AFLAC U.S. cannot be readily determined
at this time. Even with changes to the U.S. health care system, the Company
believes that opportunities for marketing high-quality, affordable
supplemental insurance policies in the United States will continue.
Investment income increased 18.7% to $59.4 million for the first nine
months of 1994 compared with the first nine months of 1993. For the third
quarter of 1994, investment income increased 19.2% to $21.5 million compared
with the third quarter of 1993. This increase was primarily due to the
increase in invested assets associated with repatriation of profits from
AFLAC Japan and the continued strong cash flow from operations. The increase
in investment income related to 1993 and 1994 profit repatriation was $6.5
million for the first nine months of 1994 and $3.5 million for the third
quarter. The increase in investment income, excluding the investment income
from profit repatriation, was 9.4% for the first nine months of 1994 and
10.2% for the third quarter compared with the respective periods of 1993.
15
<PAGE>
During the third quarter, available cash flow was invested at an average
yield to maturity of 7.96%, compared with 6.71% during the third quarter of
1993. The overall return on average invested assets (at amortized cost), net
of investment expenses, was down slightly for the first nine months, from
7.57% in 1993 to 7.46% in 1994.
Pretax operating earnings for AFLAC U.S. increased 19.9% to $65.6
million for the first nine months of the year compared with the first nine
months of 1993. For the third quarter of 1994, pretax operating earnings
increased 19.1% to $23.6 million compared with the third quarter of 1993.
Pretax operating earnings, excluding the investment income from profit
repatriation, increased 11.5% for the first nine months of 1994 and increased
11.0% for the third quarter compared with the respective 1993 periods. The
results continue to reflect slightly lower benefit ratios, principally due to
the mix of business shifting toward accident policies, which have a lower
benefit ratio compared with other products, and investment income on profits
transferred from AFLAC Japan. The expense ratios remained unchanged during
the first nine months and increased slightly for the third quarter. As a
result, the pretax operating profit margins for the first nine months
increased to 10.1%, up from 9.3% for the first nine months of 1993, and the
third quarter increased to 10.7%, compared with 9.8 % for the third quarter
of 1993. Excluding the benefits from profit repatriation, the pretax
operating profit margins were 9.2% compared with 9.0% and 9.2% compared with
9.1% for the nine-month and three-month periods ended September 30, 1994,
respectively.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 Financial Data Schedule (included only with the electronic
filing via EDGAR)
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the quarter ended
September 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFLAC INCORPORATED
Date November 9, 1994 /s/ KRISS CLONINGER,III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date November 9, 1994 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
17
<PAGE>
Exhibits Filed with Current Form 10-Q:
27 - Financial Data Schedule
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended September 30, 1994, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 15,729,938
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 79,635
<MORTGAGE> 25,951
<REAL-ESTATE> 0
<TOTAL-INVEST> 16,152,239
<CASH> 36,862
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,364,103
<TOTAL-ASSETS> 20,528,378
<POLICY-LOSSES> 14,327,151
<UNEARNED-PREMIUMS> 322,578
<POLICY-OTHER> 905,072
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 210,151
<COMMON> 10,390
0
0
<OTHER-SE> 1,728,691
<TOTAL-LIABILITY-AND-EQUITY> 20,528,378
3,796,341
<INVESTMENT-INCOME> 612,547
<INVESTMENT-GAINS> (345)
<OTHER-INCOME> 66,153
<BENEFITS> 3,109,235
<UNDERWRITING-AMORTIZATION> 107,762
<UNDERWRITING-OTHER> 885,685
<INCOME-PRETAX> 372,014
<INCOME-TAX> 156,620
<INCOME-CONTINUING> 215,394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215,394
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.08
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
