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 June 30, 1995
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 August 4, 1995
---------------------------- ------------------
Common Stock, $.10 Par Value 96,296,371 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994.................... 1
Consolidated Statements of Earnings -
Three Months Ended June 30, 1995 and 1994
Six Months Ended June 30, 1995 and 1994................. 3
Consolidated Statements of Shareholders' Equity -
Six Months Ended June 30, 1995 and 1994................. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994................. 5
Notes to Consolidated Financial Statements................ 7
Review by Independent Certified Public
Accountants............................................. 9
Independent Auditors' Report.............................. 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11
Part II. Other Information:
Item 1. Legal Proceedings................................. 23
Item 6. Exhibits and Reports on Form 8-K.................. 23
Items other than those listed above are omitted because they are not required
or are not applicable.
i
<PAGE>
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands - Unaudited)
June 30, December 31,
1995 1994
------------ ------------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities
(amortized cost $18,240,603 in
1995 and $14,709,820 in 1994) $ 21,385,223 $ 15,530,694
Equity securities
(cost $76,864 in 1995 and
$71,585 in 1994) 93,309 84,373
Mortgage loans on real estate 23,488 25,104
Other long-term investments 4,868 5,038
Short-term investments 454,292 330,916
------------ ------------
Total investments 21,961,180 15,976,125
Cash 11,667 17,643
Receivables, primarily premiums 356,338 298,482
Receivables for securities sold 68,892 5,266
Accrued investment income 279,929 220,757
Deferred policy acquisition costs 2,894,343 2,402,869
Property and equipment, net 659,920 580,247
Securities held as collateral for
loaned securities 1,151,189 556,937
Intangible assets, net 107,728 109,865
Other 135,988 118,888
------------ ------------
Total assets $ 27,627,174 $ 20,287,079
============ ============
See accompanying notes to consolidated financial statements.
(continued)
1
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands, except for per-share amounts - Unaudited)
June 30, December 31,
1995 1994
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $ 20,206,765 $ 14,586,171
Unpaid policy claims 1,151,562 929,350
Unearned premiums 375,131 339,514
Other policyholders' funds 186,671 151,572
------------ ------------
Total policy liabilities 21,920,129 16,006,607
Notes payable 269,521 184,901
Income taxes, primarily deferred 1,701,151 1,392,441
Payables for return of collateral on
loaned securities 1,151,189 556,937
Payables for security transactions 29,414 46,371
Other 374,376 348,055
------------ ------------
Total liabilities 25,445,780 18,535,312
------------ ------------
Shareholders' equity:
Common stock of $.10 par value. Authorized
175,000; issued 104,174 in 1995 and
104,000 in 1994 10,417 10,400
Additional paid-in capital 200,748 198,099
Unrealized foreign currency
translation gains 225,884 174,091
Unrealized gains on securities
available for sale 538,293 228,844
Retained earnings 1,431,016 1,277,487
Treasury stock (223,784) (135,776)
Notes receivable for stock purchases (1,180) (1,378)
------------ ------------
Total shareholders' equity 2,181,394 1,751,767
------------ ------------
Total liabilities and shareholders' equity $ 27,627,174 $ 20,287,079
============ ============
Shareholders' equity per share $ 22.34 $ 17.58
============ ============
Shares outstanding at end of period 97,642 99,636
============ ============
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except for Three Months Ended June 30, Six Months Ended June 30,
per-share amounts - Unaudited) --------------------------- ---------------------------
1995 1994 1995 1994
Revenues: ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums, principally supplemental
health insurance $ 1,634,094 $ 1,254,911 $ 3,085,866 $ 2,434,032
Net investment income 274,010 203,327 513,043 395,249
Realized investment gains (losses) (435) (929) 149 (97)
Other income 25,102 23,894 47,389 44,001
----------- ----------- ----------- -----------
Total revenues 1,932,771 1,481,203 3,646,447 2,873,185
----------- ----------- ----------- -----------
Benefits and expenses:
Benefits and claims 1,355,114 1,027,403 2,560,060 1,989,539
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 44,492 35,098 82,833 66,624
Insurance commissions 214,832 166,358 407,274 322,103
Insurance expenses 115,197 93,950 211,948 185,023
Interest expense 4,419 3,417 8,010 6,124
Capitalized interest on building construction - - - (2,419)
Other operating expenses 38,792 34,440 70,456 63,689
----------- ----------- ----------- -----------
Total acquisition and
operating expenses 417,732 333,263 780,521 641,144
----------- ----------- ----------- -----------
Total benefits and expenses 1,772,846 1,360,666 3,340,581 2,630,683
----------- ----------- ----------- -----------
Earnings before income taxes 159,925 120,537 305,866 242,502
Income taxes 67,009 51,159 128,077 103,167
----------- ----------- ----------- -----------
Net earnings $ 92,916 $ 69,378 $ 177,789 $ 139,335
=========== =========== =========== ===========
Net earnings per share $ .92 $ .67 $ 1.75 $ 1.34
=========== =========== =========== ===========
Shares used in computing earnings per share 101,140 102,794 101,523 103,851
=========== =========== =========== ===========
Cash dividends per share $ .13 $ .115 $ .245 $ .215
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands - Unaudited)
Six Months Ended June 30,
1995 1994
Common stock: -------------------------
Balance at beginning of year $ 10,400 $ 10,371
Exercise of stock options 17 7
--------- ---------
Balance at end of period 10,417 10,378
--------- ---------
Additional paid-in capital:
Balance at beginning of year 198,099 195,730
Exercise of stock options 1,939 568
Gain on treasury stock reissued 710 -
--------- ---------
Balance at end of period 200,748 196,298
--------- ---------
Unrealized foreign currency translation gains:
Balance at beginning of year 174,091 123,294
Change in unrealized translation gains
during year, net of income taxes 51,793 56,145
--------- ---------
Balance at end of period 225,884 179,439
--------- ---------
Unrealized gains (losses) on securities
available for sale:
Balance at beginning of year 228,844 14,811
Change in unrealized gains (losses)
during year, net of income taxes 309,449 (198,921)
Cumulative effect of accounting change
adopted January 1, 1994 (SFAS 115),
net of income taxes - 461,478
--------- ---------
Balance at end of period 538,293 277,368
--------- ---------
Retained earnings:
Balance at beginning of year 1,277,487 1,029,625
Net earnings 177,789 139,335
Cash dividends on common stock
($.245 per share in 1995, $.215 per
share in 1994) (24,260) (21,915)
--------- ---------
Balance at end of period 1,431,016 1,147,045
--------- ---------
Treasury stock:
Balance at beginning of year (135,776) (6,568)
Purchases of treasury stock (2,284 shares
in 1995 and 2,965 shares in 1994) (91,692) (89,894)
Shares issued to sales associates stock plan 3,684 -
--------- ---------
Balance at end of period (223,784) (96,462)
--------- ---------
Notes receivable for stock purchases (1,180) (1,421)
--------- ---------
Total shareholders' equity $2,181,394 $1,712,645
========= =========
See accompanying notes to consolidated financial statements.
4
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands - Unaudited)
Six Months Ended
June 30,
-----------------------------
1995 1994
------------ ------------
Cash flows from operating activities:
Net earnings $ 177,789 $ 139,335
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,259,901 987,797
Increase in deferred income taxes 35,271 38,883
Decrease in income taxes payable (44,623) (42,657)
Increase in deferred policy
acquisition costs (131,115) (118,127)
Increase in receivables (15,704) (16,965)
Other, net 99,347 78,016
----------- -----------
Net cash provided by operating
activities 1,380,866 1,066,282
----------- -----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed-maturity securities matured
or called 356,788 121,345
Fixed-maturity securities sold 353,379 451,713
Equity securities 9,316 17,153
Mortgage loans, net 2,364 30,852
Costs of investments acquired:
Fixed-maturity securities (1,980,425) (1,239,091)
Equity securities (10,394) (24,131)
Short-term, net (77,857) (202,747)
Additions to property and equipment, net (10,429) (170,026)
----------- -----------
Net cash used by investing activities (1,357,258) (1,014,932)
----------- -----------
(continued)
5
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands - Unaudited)
Six Months Ended
June 30,
-----------------------------
1995 1994
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 87,000 75,002
Principal payments under debt obligations (11,315) (8,053)
Dividends paid to shareholders (24,260) (21,915)
Purchases of treasury stock (91,692) (89,894)
Treasury stock reissued 4,394 -
Other, net 1,956 575
----------- -----------
Net cash used by financing
activities (33,917) (44,285)
----------- -----------
Effect of exchange rate changes on cash 4,333 3,441
----------- -----------
Net change in cash (5,976) 10,506
Cash at beginning of year 17,643 23,413
----------- -----------
Cash at end of period $ 11,667 $ 33,919
=========== ===========
Supplemental disclosures of cash flow information:
Cash payments during the year for:
Interest on debt obligations $ 6,962 $ 5,284
Income taxes 80,275 78,757
Non-cash financing activities included capital lease obligations incurred
for computer equipment totalling $2,166 in 1995 and $12,840 in 1994.
See accompanying notes to consolidated financial statements.
6
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. In the opinion of management, the accompanying unaudited consolidated
financial statements of AFLAC Incorporated and subsidiaries (the "Company")
contain all adjustments (none of which were other than normal recurring
accruals) necessary to fairly present the financial position as of June 30,
1995, and the results of operations for the three-month and six-month periods
ended June 30, 1995 and 1994, and changes in shareholders' equity and cash
flows for the six months ended June 30, 1995 and 1994. 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, 1994.
2. In February 1995, the Company's board of directors authorized the
purchase of up to an additional 4.6 million shares of the Company's common
stock. In total, the board of directors has authorized the purchase of up to
9.2 million shares. There were 2.3 million shares and 3.0 million shares
purchased during the six months ended June 30, 1995 and 1994, respectively.
Through June 30, 1995, 6.5 million shares had been purchased under the
repurchase authorizations. At June 30, 1995, 6.5 million shares were held in
the treasury at a cost of $223.8 million.
The shares purchased during the first half of 1995 were financed with
available cash and borrowings under an outstanding revolving credit and term
note agreement. The terms of the revolving credit and term note agreement
were for up to $150 million with interest at LIBOR plus 50 basis points. On
June 30, 1995 the revolving credit and term note agreement was amended to $250
million with interest at LIBOR plus 27.5 basis points. Principal payments on
the amended loan are payable over five years beginning in June 1996. The loan
agreement contains various covenants, one of which requires the Company to
maintain a minimum consolidated shareholders' equity of $1.0 billion.
As of June 30, 1995, bank borrowings of $146 million were outstanding in
connection with the share purchase program at the current interest rate of
6.4%. Interest expense related to the stock repurchase program for the six
months ended June 30, 1995 and 1994 was $2.8 million and $1.0 million,
respectively.
3. AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. The securities are loaned to major
securities firms. At June 30, 1995, the Company held Japanese government
bonds as collateral for loaned securities in the amount of $1.2 billion at
market value. The Company's security lending policy requires that the fair
value of the securities received as collateral be greater than or equal to
105% 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 (carrying value) of the collateral asset and
related liability.
4. 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 damage awards bearing little relation to the actual
7
<PAGE>
damages sustained by plaintiffs have been awarded against other insurers in
recent years. Although the final results of any litigation cannot be
predicted with certainty, the Company does not believe the outcome of any
pending litigation will have a material adverse effect on the financial
position of the Company.
The Internal Revenue Service has proposed adjustments to the Company's
U.S. consolidated federal income tax returns for the years 1989 through 1991.
The proposed adjustments relate primarily to the computation of foreign source
income for purposes of the foreign tax credit that, if upheld, would have a
significant effect on the Company's operating results. Management does not
agree with the proposed tax issues and is vigorously contesting them.
Although the final outcome is uncertain, the Company believes its position
will prevail and that the ultimate liability will not materially impact the
consolidated financial statements.
8
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 30, 1995 and 1994 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 10.
9
<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' REPORT
The Stockholders and Board of Directors
AFLAC Incorporated:
We have reviewed the accompanying consolidated balance sheet of AFLAC
Incorporated and subsidiaries as of June 30, 1995, and the related
consolidated statements of earnings for the three-month and six-month periods
ended June 30, 1995 and 1994, and the consolidated statements of cash flows
and shareholders' equity for the six-month periods ended June 30, 1995 and
1994. 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 any 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.
KPMG PEAT MARWICK LLP
July 24, 1995
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The primary business activity of AFLAC Incorporated and subsidiaries (the
"Company") is supplemental health insurance, which is marketed and
administered primarily through American Family Life Assurance Company of
Columbus (AFLAC). The Company's operations in Japan (AFLAC Japan) and the
United States (AFLAC U.S.) service the two principal markets for the Company's
insurance operations. AFLAC Japan and AFLAC U.S. are the primary components
for this discussion and analysis, due to their significance to the Company's
consolidated financial condition and results of operations.
11
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth the pretax operating earnings by business component for the periods shown and the
percentage change from the prior period.
<CAPTION>
SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT
(In millions)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
Percentage Change Percentage Change
Over Previous Over Previous
Period 1995 1994 Period 1995 1994
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Insurance operations (excluding
realized investment gains and losses):
AFLAC Japan..................... 30.6% $152.0 $116.4 26.0% $285.8 $226.9
AFLAC U.S....................... 20.1 25.9 21.6 21.9 51.2 42.0
Other foreign................... .1 (.9) (.1) (1.1)
------ ------ ------ ------
Total insurance................ 29.8 178.0 137.1 25.8 336.9 267.8
Realized investment
gains (losses)................... (.4) (.9) .1 (.1)
Broadcast division................ 8.3 6.5 6.0 13.1 10.5 9.2
Interest expense,
noninsurance operations.......... (3.3) (2.5) (5.9) (4.5)
Capitalized interest,
building construction............ - - - 2.4
Parent company, other operations
and eliminations................. (8.8) (20.9) (19.2) (10.6) (35.7) (32.3)
------ ------ ------ ------
Earnings before income taxes... 32.7 159.9 120.5 26.1 305.9 242.5
Income taxes...................... 67.0 51.1 128.1 103.2
------ ------ ------ ------
Net earnings................... 33.9 $ 92.9 $ 69.4 27.6 $ 177.8 $ 139.3
====== ====== ====== ======
12
</TABLE>
<PAGE>
Net earnings increased 33.9% for the three months ended June 30, 1995 and
27.6% for the six months ended June 30, 1995, compared with the respective
periods in 1994. The increases primarily resulted from strong earnings from
our core insurance operations in Japan and the United States and improved
results by the Broadcast Division. Partially offsetting the increases were
additional interest expense primarily related to the Company's stock
repurchase program and higher corporate expenses. Also partially offsetting
the increase for the six months was the absence of capitalized interest in
1995 due to completion in early 1994 of the Company's administrative office
building in Japan.
The increases in reported results in U.S. dollars for AFLAC Japan and
consolidated earnings for both the three months and six months ended June 30,
1995 were aided by favorable currency translations from yen to dollars. The
continued strength of the Japanese yen caused our yen-based earnings to be
translated for reporting purposes into a greater amount of dollars when
compared with the results for each preceding period. The strengthening of the
yen benefited operating earnings (excluding realized investment gains/losses)
by approximately $.14 per share for the three months ended June 30, 1995, and
$.21 per share for the six months ended June 30, 1995. Excluding the benefit
of the stronger yen, operating earnings per share increased 14.7% for the
three months ended June 30, 1995, and increased 14.9% for the six months ended
June 30, 1995, compared with the respective periods in 1994.
AFLAC Japan's pretax operating earnings (excluding realized investment
gains/losses) in yen increased 7.6% for the three months ended June 30, 1995,
compared with the second quarter of 1994 and increased 8.0% for the six months
ended June 30, 1995, compared with the six months ended June 30, 1994. The
reported U.S. dollar results for AFLAC Japan were affected by the favorable
average yen-to-dollar exchange rate of 90.39 for the six months ended June 30,
1995, compared with 105.54 for the first six months of 1994. As a result,
percentage increases in U.S. dollars for AFLAC Japan's pretax operating
earnings were 30.6% for the three months ended June 30, 1995, compared with
the second quarter of 1994 and 26.0% for the six months ended June 30, 1995,
compared with the six months ended June 30, 1994.
AFLAC Japan repatriated profits to AFLAC U.S. of $132.9 million in 1994,
$97.9 million in 1993, and $33.4 million in 1992. The profit transfers to
AFLAC U.S. adversely impact AFLAC Japan's investment income. However,
repatriations benefit consolidated operations because higher investment yields
can be earned on funds invested in the United States. Also, income tax
expense is presently lower on investment income earned in the United States.
Management estimates these transfers have benefited consolidated net earnings
by $2.4 million and $1.2 million for the three months ended June 30, 1995 and
1994, respectively and $5.0 million and $2.5 million for the six months ended
June 30, 1995 and 1994, respectively.
In July 1995, AFLAC Japan repatriated profits to AFLAC U.S. of $140.5
million (11.9 billion yen). At June 30, 1995 the Company had approximately
$135.7 million in short-term forward foreign exchange contracts outstanding
related to this profit transfer. These contracts closed in July with an
immaterial gain.
During the second quarter, AFLAC purchased 1.8 million shares of its
common stock. The Company has bought a total of 6.5 million shares (through
June 30, 1995) since the inception of the share repurchase program in February
1994. The program increased earnings per share for the first six months and
second quarter of 1995 by an immaterial amount.
13
<PAGE>
AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to the
Company's earnings, is the fourth largest life insurance company in Japan in
terms of individual policies in force.
The transfer of profits from 1992 through 1994 from AFLAC Japan to AFLAC
U.S. distorted comparisons of operating results between periods. The
following AFLAC Japan summary of operations tables present investment income,
total revenues and pretax operating earnings calculated on a pro forma basis
in order to improve comparability between periods. The pro forma adjustment
represents cumulative investment income foregone by AFLAC Japan on funds
repatriated to AFLAC U.S. during 1992 through 1994.
14
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
THREE MONTHS ENDED JUNE 30,
In Dollars
(In millions) 1995 1994
--------------------------
Premium income...................... $ 1,418.2 $ 1,054.2
Investment income, as adjusted*..... 254.1 185.3
Other income........................ .5 .5
--------- ---------
Total revenues, as adjusted*...... 1,672.8 1,240.0
--------- ---------
Benefits and claims................. 1,220.2 900.3
Operating expenses.................. 295.7 221.1
--------- ---------
Total benefits and expenses....... 1,515.9 1,121.4
--------- ---------
Pretax operating earnings,
as adjusted*................... 156.9 118.6
Investment income applicable to
profit repatriations............... (4.9) (2.2)
--------- ---------
Pretax operating earnings....... $ 152.0 $ 116.4
========= =========
-----------------------------------------------------------------------------
In Dollars In Yen
1995 1994 1995 1994
---------------- ----------------
Percentage increases
over previous period:
Premium income.............. 34.5% 22.3% 10.7% 14.6%
Investment income*.......... 37.1 21.1 13.0 13.3
Total revenues*............. 34.9 22.1 11.0 14.3
Pretax operating earnings*.. 32.3 18.5 9.0 10.9
Pretax operating earnings... 30.6 17.0 7.6 9.5
-----------------------------------------------------------------------------
In Dollars
1995 1994
------------------
Ratios to total revenues, as adjusted:*
Benefits and claims................ 72.9% 72.6%
Operating expenses................. 17.7 17.8
Pretax operating earnings.......... 9.4 9.6
Ratio of pretax operating earnings
to total reported revenues......... 9.1 9.4
------------------------------------------------------------------------------
*Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $4.9 million in 1995 and
$2.2 million in 1994, foregone due to profit repatriations.
==============================================================================
15
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
SIX MONTHS ENDED JUNE 30,
In Dollars
(In millions) 1995 1994
--------------------------
Premium income...................... $ 2,656.1 $ 2,035.8
Investment income, as adjusted*..... 473.6 359.8
Other income........................ 1.7 1.7
--------- ---------
Total revenues, as adjusted*...... 3,131.4 2,397.3
--------- ---------
Benefits and claims................. 2,291.9 1,738.4
Operating expenses.................. 544.5 427.7
--------- ---------
Total benefits and expenses....... 2,836.4 2,166.1
--------- ---------
Pretax operating earnings,
as adjusted*................... 295.0 231.2
Investment income applicable to
profit repatriations............... (9.2) (4.3)
--------- ---------
Pretax operating earnings....... $ 285.8 $ 226.9
========= =========
-----------------------------------------------------------------------------
In Dollars In Yen
1995 1994 1995 1994
---------------- ----------------
Percentage increases
over previous period:
Premium income.............. 30.5% 24.8% 11.7% 14.0%
Investment income*.......... 31.6 24.3 12.8 13.5
Total revenues*............. 30.6 24.7 11.9 13.9
Pretax operating earnings*.. 27.6 21.0 9.4 10.4
Pretax operating earnings... 26.0 19.4 8.0 9.0
-----------------------------------------------------------------------------
In Dollars
1995 1994
------------------
Ratios to total revenues, as adjusted:*
Benefits and claims................ 73.2% 72.6%
Operating expenses................. 17.4 17.8
Pretax operating earnings.......... 9.4 9.6
Ratio of pretax operating earnings
to total reported revenues......... 9.1 9.5
------------------------------------------------------------------------------
*Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $9.2 million in 1995 and
$4.3 million in 1994, foregone due to profit repatriations.
==============================================================================
The yen continued to appreciate against the dollar in the second quarter.
The average exchange rate for the first six months of 1995 was 90.39, which
16
<PAGE>
was 16.8% stronger than the average rate of 105.54 for the first six months of
1994. As a result, growth rates for AFLAC Japan continued to be higher in
dollars than in yen. The average exchange rate for the full year 1994 was
102.26.
The increase in premium income was due to sales of new policies, the
conversion of existing policies to policies with higher benefits and premiums,
continued excellent policy persistency and, in dollars, the stronger yen rate.
New annualized premium sales, excluding conversions, increased 18.9% in yen
for the three months ended June 30, 1995 and 14.2% in yen for the six months
ended June 30, 1995 compared with the respective periods in 1994. Total new
sales, including conversions of older policies to newer policies, increased
21.5% in dollars (3.2% in yen) for the first six months of 1995 and 28.3% in
dollars (4.6% in yen) for the quarter ended June 30, 1995. Total sales in the
first half of 1994 were especially strong due to sales associates' efforts to
sell cancer policies prior to the rate increase after July 1, 1994. Sales for
the first half of 1994, including conversions, increased 30.6% in yen compared
with the first half of 1993. Sales leveled out in the second half of 1994 and
increased 10% for the year compared with the year 1993. Management's goal is
to increase new sales, excluding conversions, by 10% in yen for the year 1995.
Care sales for the first half of 1995 were especially strong, almost
double the sales volume of the same period a year ago, due to sales
associates' efforts to sell care policies prior to an anticipated 10% rate
increase in the fourth quarter of 1995. During the second quarter, we began
initial sales efforts for our two new products - a living benefit life plan
and a supplemental medical policy. However, we do not expect significant
results from these products until the larger payroll groups begin their sales
campaigns in the fourth quarter.
Investment income, which is affected by available cash flow from
operations and investment yields achievable on new investments, increased
during both the three months and six months ended June 30, 1995, compared with
the respective periods of 1994, despite investment yields that have generally
decreased.
Following the sharp rise in the value of the yen, the level of available
investment yields on yen-denominated securities experienced a steep decline.
For example, the yield on a composite of 10-year Japanese government bonds
declined from a high of 3.72% in April 1995 to a low of 2.71% in June.
Despite a slight rise in yields since the end of the quarter, the depressed
interest rate environment in Japan currently makes it very difficult to invest
AFLAC Japan's huge cash flows at attractive yields.
During the second quarter, we invested approximately 93% of our funds
available for investment activities in yen-denominated securities at an
average yield to maturity of 4.12%. Including dollar-denominated purchases,
the blended new money yield to maturity for the quarter was 4.35%. As of July
10, 1995, the Company had invested or committed to invest approximately 66% of
the estimated 1995 annual cash flow at an average yield to maturity of 4.98%.
The yield to maturity on AFLAC Japan's fixed income portfolio declined
from 6.14% at year-end to 6.06% at the end of the first quarter and 6.00% at
the end of the second quarter. The return on average invested assets was
5.87% for the first six months, compared with 6.03% for the first six months
of 1994 and 6.00% for the full year 1994.
17
<PAGE>
AFLAC Japan's results continue to reflect the pattern that has developed
during the last several years of slightly higher benefit ratios somewhat
offset by lower expense ratios. The increase in the benefit ratio reflects
the strengthening of policy liabilities to provide for lower assumed interest
rates and the increase in claims experience due to fewer policy lapses.
AFLAC U.S.
AFLAC U.S. pretax operating results improved substantially, assisted by
additional investment income earned on profit transfers received from AFLAC
Japan. AFLAC U.S. in turn increased dividend payments to the Parent Company
in the amounts of $10.8 million in the first six months of 1995, and $51.9
million and $10.1 million for the full years 1994 and 1993, respectively.
Estimated investment income earned from profits repatriated to and retained by
AFLAC U.S. from 1992 through 1994 has been reclassified in the following
presentation in order to improve comparability between periods.
18
<PAGE>
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 1995 1994 1995 1994
------------------ ------------------
Premium income................... $ 211.8 $ 196.3 $ 421.5 $ 389.3
Investment income, as adjusted*.. 19.4 17.0 38.0 33.4
Other income..................... .2 1.3 .6 1.6
------ ------ ------ ------
Total revenues, as adjusted*... 231.4 214.6 460.1 424.3
------ ------ ------ ------
Benefits and claims.............. 131.9 123.3 261.9 244.1
Operating expenses............... 77.7 72.0 155.2 142.7
------ ------ ------ ------
Total benefits and expenses.... 209.6 195.3 417.1 386.8
------ ------ ------ ------
Pretax operating earnings,
as adjusted*................ 21.8 19.3 43.0 37.5
Investment income applicable to
profit repatriations............ 4.1 2.3 8.2 4.5
------ ------ ------ ------
Pretax operating earnings.... $ 25.9 $ 21.6 $ 51.2 $ 42.0
====== ====== ====== ======
-----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income................. 7.9% 9.9% 8.3% 10.3%
Investment income*............. 14.4 9.3 14.0 9.0
Total revenues*................ 7.8 10.2 8.4 10.2
Pretax operating earnings*..... 12.9 12.3 14.7 11.9
Pretax operating earnings...... 20.1 20.4 21.9 20.4
-----------------------------------------------------------------------------
Ratios to total revenues,
as adjusted:*
Benefits and claims............ 57.0% 57.5% 56.9% 57.6%
Operating expenses............. 33.6 33.5 33.7 33.6
Pretax operating earnings...... 9.4 9.0 9.4 8.8
Ratio of pretax operating earnings
to total reported revenues...... 11.2 10.0 11.1 9.9
------------------------------------------------------------------------------
*Excludes estimated investment income for the three months ended June 30, 1995
and 1994 of $4.1 million and $2.3 million, respectively, and for the six
months ended June 30, 1995 and 1994 of $8.2 million and $4.5 million,
respectively, related to investment of profit repatriation funds retained by
AFLAC U.S.
==============================================================================
19
<PAGE>
The results continue to reflect slightly lower benefit ratios, which are
principally due to the mix of business shifting towards accident policies.
Accident policies have a lower benefit ratio compared with other products.
Management expects future benefit ratios for some of the Company's
supplemental products to increase slightly due to the Company's ongoing
efforts to enhance policyholder benefits. In addition, potential minimum
benefit ratio requirements by insurance regulators may also increase the
ratio.
At the same time, management expects the operating expense ratio,
excluding discretionary advertising, to decline in the future due to continued
improvements in policy persistency and operating efficiencies. By improving
administrative systems and controlling other costs, management has been able
to redirect funds to discretionary national advertising programs without
significantly affecting the operating expense ratio. The Company's
advertising expense was $7.5 million and $6.0 million for the six months ended
June 30, 1995 and 1994, respectively, or 1.6% of revenues in 1995 and 1.4% of
revenues in 1994. Management expects the pretax operating profit margin,
which was 9.0% for the year 1994 excluding the effect of repatriation, to
range between 9.0% and 9.5% for the year 1995.
The increase in premium income was due to an increase in new sales over
the last 12 months and some improvement in persistency for several of our
lines of business. Total new annualized premium sales continued to grow at a
double-digit pace, increasing 10.8% for the quarter. For the six months, new
sales increased 11.8%. These results reflect strong sales of new products and
the de-emphasis of Medicare supplement sales, our lowest margin product.
Excluding Medicare supplement sales, total new annualized premium sales rose
19.3% for the first six months of the year. Management expects new policy
sales to increase by 10% to 15% for the year.
The increase in investment income was primarily due to the continued
strong cash flow from operations. During the second quarter, available cash
flow was invested at an average yield-to-maturity of 7.67% compared with 7.71%
during the second quarter of 1994. The overall return on average invested
assets, net of investment expenses, was flat for the first six months of 1995
over 1994, 7.38% versus 7.39%.
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1994, the financial condition of the Company has
remained strong. Investments have continued to grow and consist of
high-quality securities.
Due to the relative size of AFLAC Japan, changes in the yen/dollar
exchange rate can have a significant effect on the Company's financial
statements. The yen/dollar exchange rate at the end of each period is used to
convert yen-denominated balance sheet items into U.S. dollars for reporting
purposes. The exchange rate at June 30, 1995, of 84.65 yen to one U.S.
dollar, strengthened 18.0% compared to the exchange rate of 99.85 as of
December 31, 1994. Management estimates that the stronger yen rate increased
invested assets by $3.0 billion and total assets by $3.7 billion, while
increasing total liabilities by $3.6 billion over the amounts that would have
been reported based on the exchange rate as of December 31, 1994.
20
<PAGE>
Under the provisions of SFAS No. 115, which was adopted January 1, 1994,
fixed-maturity securities available for sale are carried at fair value.
Previously, fixed-maturity securities were carried at amortized cost.
Since December 31, 1994, total invested assets, including the effect of
SFAS No. 115, have increased $6.0 billion, or 37.4%. AFLAC Japan invested
assets increased $5.8 billion (39.3%), while AFLAC U.S. invested assets
increased $174.0 million (13.9%). Since December 31, 1994, total invested
assets, excluding the effect of SFAS No. 115, have increased $3.7 billion, or
24.1%. AFLAC Japan invested assets increased $3.6 billion (25.7%), while
AFLAC U.S. invested assets increased $75.7 million (5.8%). The continued
growth in assets reflects the strength of the Company's primary business, the
substantial cash flows from operations, the strong new annualized premium
sales by AFLAC U.S., the substantial renewal premiums collected by AFLAC Japan
and the stronger yen.
The net unrealized gains of $3.1 billion on investments in fixed-maturity
securities at June 30, 1995, consisted of $3.2 billion in gross unrealized
gains and $20.0 million in gross unrealized losses. During 1995, net
unrealized gains increased by $2.3 billion, which was primarily due to the
decrease in general-market interest rates in Japan and the United States.
AFLAC Japan unrealized gains increased $2.2 billion with $465.5 million
related to the stronger yen rate at June 30, 1995. AFLAC U.S. unrealized
gains increased $98.3 million since December 31, 1994.
Deferred policy acquisition costs increased $491.5 million, or 20.5%
during the first six months of 1995. AFLAC Japan deferred policy acquisition
costs increased $472.2 million, or 24.2% (5.3% in yen), with approximately
$103.2 million related to operations and $369.0 million related to the
stronger yen rate at June 30, 1995. AFLAC U.S. deferred policy acquisition
costs increased $19.2 million, or 4.3%, during the same period.
Policy liabilities increased $5.9 billion, or 36.9%, during the first six
months of 1995. AFLAC Japan increased $5.8 billion, or 40.1% (18.8% in yen),
and AFLAC U.S. increased $61.4 million, or 4.4%. The stronger yen rate
increased reported policy liabilities by $3.1 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.
Under SFAS No. 115, a portion of the unrealized gains on fixed-maturity
securities available for sale has been credited to policy liabilities at June
30, 1995. At June 30, 1995 this amount is $2.2 billion, an increase of $1.9
billion (including $341.7 million of unrealized foreign exchange) since
December 31, 1994. The amount credited to policy liabilities represents gains
that would not inure to the benefit of the shareholders, if such gains were
actually realized.
The income tax liability increased by $308.7 million, or 22.2%, since
December 31, 1994. The increase is due to the stronger yen, plus the
recognition of income taxes on unrealized gains on securities available for
sale, plus income taxes on earnings for the six months, less payments for
current taxes.
Shareholders' equity increased $429.6 million during the first six months
of 1995. The increase is primarily due to an increase in unrealized gains on
securities available for sale of $309.4 million and net earnings of $177.8
million. For further information on the changes in shareholders' equity, see
the accompanying consolidated statements of shareholders' equity.
21
<PAGE>
The Company's insurance operations continue to provide the primary sources
of liquidity for the Company. Capital needs can also be supplemented by
borrowed funds. The principal sources of cash from insurance operations are
premiums and investment income. Primary uses of cash in the insurance
operations are policy claims, commissions, operating expenses, income taxes
and payments to the Parent Company for management fees and dividends. Both
the sources and uses of cash are reasonably predictable. Our investment
objectives provide for liquidity through the ownership of high-quality
investment securities. AFLAC insurance policies are generally not
interest-sensitive and therefore are not subject to unexpected policyholder
redemptions due to investment yield changes. Also, the majority of AFLAC
policies provide indemnity benefits rather than reimbursement for actual
medical costs and therefore are not subject to the increasing risks of medical
cost inflation.
The achievement of continued long-term growth will require growth in the
statutory capital and surplus of the Company's insurance subsidiaries. The
subsidiaries may secure additional statutory capital through various sources,
such as internally generated statutory earnings or equity contributions by the
Company from funds generated through debt or equity offerings. Management
believes outside sources for additional debt and equity capital, if needed,
will continue to be available for capital expenditures and business expansion.
Parent Company capital resources are largely dependent upon the ability of
the subsidiaries to pay management fees and dividends. The Georgia Insurance
Department imposes certain limitations and restrictions on payments of
dividends, management fees, loans and advances by AFLAC to the Parent Company.
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. Annual payments are
made from AFLAC Japan for management fees to the Parent Company, and
allocated expenses and remittances of earnings to AFLAC U.S. Total funds
received from AFLAC Japan were $18.1 million in the first six months of 1995
and $167.9 million and $133.4 million in the full years 1994 and 1993,
respectively. In July, 1995, AFLAC Japan repatriated profits to AFLAC U.S.
in the amount of $140.5 million. During the last two years, the MOF has
developed solvency standards, a version of risk-based capital requirements,
as part of its long-term deregulation process. For additional information on
regulatory restrictions on dividends, profit transfers and other remittances,
see Note 10 of the notes to the consolidated financial statements in the
Company's annual report to shareholders for the year ended December 31, 1994.
For information regarding proposed tax adjustments by the Internal
Revenue Service and pending litigation, see Note 4 of the accompanying notes
to the consolidated financial statements.
The board of directors has declared a third quarter cash dividend of $.13
per share. The dividend is payable on September 1, 1995, to shareholders of
record at the close of business on August 18, 1995.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A number of civil jury verdicts have been returned against life and
health insurers in the jurisdictions in which the Company does business in the
United States involving insurance sales practices and other matters. Some of
the lawsuits have resulted in the award of substantial judgments against the
insurers, including material amounts of punitive damages. In some states,
juries have substantial discretion in awarding punitive damages in these
circumstances.
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 damage awards bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other insurers in
recent years. Although the final results of any litigation cannot be
predicted with certainty, the Company does not believe the outcome of any
pending litigation will have a material adverse effect on the financial
position of the Company.
ITEMS 2, 3, 4 and 5
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.0 - The registrant is not filing one instrument evidencing
indebtedness since the total amount of securities authorized
under any single instrument does not exceed 10% of the total
assets of the registrant and its subsidiaries on a
consolidated basis. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
27 - Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
June 30, 1995.
23
<PAGE>
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: August 8, 1995 /s/ KRISS CLONINGER, III
------------------------ ---------------------------------
KRISS CLONINGER, III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date: August 8, 1995 /s/ NORMAN P. FOSTER
------------------------ ---------------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
24
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
27 - Financial Data Schedule (electronic filing only)
<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 June 30, 1995, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 21,385,223
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 93,309
<MORTGAGE> 23,488
<REAL-ESTATE> 0
<TOTAL-INVEST> 21,961,180
<CASH> 11,667
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,894,343
<TOTAL-ASSETS> 27,627,174
<POLICY-LOSSES> 21,358,327
<UNEARNED-PREMIUMS> 375,131
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 186,671
<NOTES-PAYABLE> 269,521
<COMMON> 10,417
0
0
<OTHER-SE> 2,170,977
<TOTAL-LIABILITY-AND-EQUITY> 27,627,174
3,085,866
<INVESTMENT-INCOME> 513,043
<INVESTMENT-GAINS> 149
<OTHER-INCOME> 47,389
<BENEFITS> 2,560,060
<UNDERWRITING-AMORTIZATION> 82,833
<UNDERWRITING-OTHER> 697,688
<INCOME-PRETAX> 305,866
<INCOME-TAX> 128,077
<INCOME-CONTINUING> 177,789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,789
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
