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 March 31, 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 May 2, 1995
---------------------------- ------------------
Common Stock, $.10 Par Value 98,855,564 shares
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AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994................... 1
Consolidated Statements of Earnings -
Three Months Ended March 31, 1995 and 1994.............. 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994.............. 4
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 1. Legal Proceedings................................. 20
Item 4. Submission of Matters to a Vote
of Security Holders.............................. 20
Item 6. Exhibits and Reports on Form 8-K.................. 21
i
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Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands - Unaudited)
March 31, December 31,
1995 1994
------------- -------------
ASSETS
Investments:
Securities available for sale, at market:
Fixed maturities (amortized cost,
$17,034,170 in 1995 and
$14,709,820 in 1994) $ 18,793,048 $ 15,530,694
Equity securities (cost, $74,688 in
1995 and $71,585 in 1994) 89,352 84,373
Mortgage loans on real estate 24,055 25,104
Other long-term investments 4,900 5,038
Short-term investments 285,180 330,916
------------- -------------
Total investments 19,196,535 15,976,125
Cash 16,561 17,643
Receivables, primarily premiums 333,577 303,748
Accrued investment income 214,728 220,757
Deferred policy acquisition costs 2,703,033 2,402,869
Property and equipment, net 634,480 580,247
Securities held as collateral for
loaned securities 1,166,317 556,937
Intangible assets, net 108,796 109,865
Other 132,629 118,888
------------- -------------
Total assets $ 24,506,656 $ 20,287,079
============= =============
See accompanying Notes to Consolidated Financial Statements.
(continued)
1
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands, except for per-share amounts - Unaudited)
March 31, December 31,
1995 1994
------------- -------------
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities:
Future policy benefits $ 17,517,326 $ 14,586,171
Unpaid policy claims 1,058,673 929,350
Unearned premiums 369,086 339,514
Other policyholders' funds 169,371 151,572
------------- -------------
Total policy liabilities 19,114,456 16,006,607
Notes payable 189,270 184,901
Income taxes, primarily deferred 1,550,984 1,392,441
Payables for return of collateral on
loaned securities 1,166,317 556,937
Payables for security transactions 136,554 46,371
Other 363,898 348,055
------------- -------------
Total liabilities 22,521,479 18,535,312
------------- -------------
Shareholders' equity:
Common stock of $.10 par value. Authorized
175,000; issued 104,107 in 1995 and
104,000 in 1994 10,411 10,400
Additional paid-in capital 199,572 198,099
Unrealized foreign currency
translation gains 207,520 174,091
Unrealized gains on securities
available for sale 369,785 228,844
Retained earnings 1,350,915 1,277,487
Treasury stock (151,568) (135,776)
Notes receivable for stock purchases (1,458) (1,378)
------------- -------------
Total shareholders' equity 1,985,177 1,751,767
------------- -------------
Total liabilities and shareholders' equity $ 24,506,656 $ 20,287,079
============= =============
Shareholders' equity per share $ 19.99 $ 17.58
============= =============
Shares outstanding at end of period 99,329 99,636
============= =============
See accompanying Notes to Consolidated Financial Statements.
2
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except for
per-share amounts - Unaudited) Three Months Ended March 31,
----------------------------------
1995 1994 % Change
Revenues: ----------- ----------- ----------
Premiums, principally supplemental
health insurance $1,451,772 $1,179,121 23.1
Net investment income 239,033 191,922 24.5
Realized investment gains 584 832
Other income 22,287 20,107
----------- -----------
Total revenues 1,713,676 1,391,982 23.1
----------- -----------
Benefits and expenses:
Benefits and claims 1,204,946 962,136 25.2
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 38,341 31,526
Insurance commissions 192,442 155,745
Insurance expenses 96,751 91,073
Interest expense 3,591 2,707
Capitalized interest on
building construction - (2,419)
Other operating expenses 31,664 29,249
----------- -----------
Total acquisition and
operating expenses 362,789 307,881 17.8
----------- -----------
Total benefits and expenses 1,567,735 1,270,017 23.4
----------- -----------
Earnings before income taxes 145,941 121,965 19.7
Income taxes 61,068 52,008
----------- -----------
Net earnings $ 84,873 $ 69,957 21.3
=========== ===========
Net earnings per share $ .83 $ .67 23.9
=========== ===========
Shares used in computing
earnings per share 101,885 104,913
=========== ===========
Cash dividends per share $ .115 $ .10 15.0
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands - Unaudited)
Three Months Ended
March 31,
----------------------------
1995 1994
------------ ------------
Cash flows from operating activities:
Net earnings $ 84,873 $ 69,957
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 594,027 484,932
Increase in deferred income taxes 16,817 17,066
Decrease in income taxes payable (57,723) (56,808)
Increase in deferred policy
acquisition costs (66,521) (52,787)
Change in receivables 369 (11,436)
Other, net 91,792 74,796
---------- ----------
Net cash provided by operating
activities 663,634 525,720
---------- ----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed-maturity securities matured
or called 216,680 27,747
Fixed-maturity securities sold 81,724 278,169
Equity securities 3,482 15,679
Mortgage loans, net 1,539 31,115
Other long-term, net 138 -
Short-term, net 67,559 -
Costs of investments acquired:
Fixed-maturity securities (1,002,533) (568,224)
Equity securities (4,541) (3,614)
Other long-term, net - (2,408)
Short-term investments, net - (246,641)
Additions to property & equipment, net (5,745) (11,333)
----------- -----------
Net cash used by investing activities $ (641,697) $ (479,510)
----------- -----------
(continued)
4
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands - Unaudited)
Three Months Ended
March 31,
----------------------------
1995 1994
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings $ 5,000 $ 45,619
Principal payments under debt
obligations (5,535) (3,456)
Dividends paid to stockholders (11,445) (10,351)
Purchases of treasury stock (17,664) (68,730)
Treasury stock reissued 2,165 -
Other, net 1,191 248
----------- -----------
Net cash used by financing activities (26,288) (36,670)
----------- -----------
Effect of exchange rate changes on cash 3,269 2,407
----------- -----------
Net change in cash (1,082) 11,947
Cash at beginning of year 17,643 23,413
----------- -----------
Cash at end of period $ 16,561 $ 35,360
========== ==========
See accompanying Notes to Consolidated Condensed 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 of AFLAC Incorporated and subsidiaries (the "Company")
contain all adjustments (none of which were other than normal recurring
accruals with the exception of the adjustments required for the adoption of a
new accounting standard discussed in Note 2) necessary to fairly present the
financial position as of March 31, 1995, and the results of operations and
cash flows for the three months ended March 31, 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. 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 classifies
all fixed-maturity securities as "available for sale." Such securities are
carried at fair 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. 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) March 31, 1995 December 31, 1994 January 1, 1994
---------------- ----------------- ---------------
Investments $ 1,758,878 $ 820,874 $ 1,851,141
Policy liabilities (1,057,617) (315,599) (1,088,633)
Deferred income taxes (347,312) (289,089) (301,030)
------------ ------------ ------------
Shareholders' equity,
net unrealized gains $ 353,949 $ 216,186 $ 461,478
============ ============ ============
The portion of unrealized gains credited to policy liabilities
represents gains that would not inure to the benefit of the shareholders if
such gains were actually realized. These amounts are necessary to cover
policy reserve interest requirements based on market investment yields at
these dates.
6
<PAGE>
3. The changes in shareholders' equity during the three months ended March
31, 1995, are as follows:
(In thousands)
Shareholders' equity, beginning of year $ 1,751,767
----------
Net earnings 84,873
Change in unrealized gains on securities
available for sale 140,941
Change in unrealized foreign currency
translation gains 33,429
Shares issued for exercises of stock options 1,191
Purchases of treasury stock (17,664)
Proceeds from treasury stock reissued 2,165
Dividends to shareholders ($.115 per share) (11,445)
Other (80)
----------
Net change for the period 233,410
----------
Shareholders' equity at March 31, 1995 $ 1,985,177
==========
At March 31, 1995, 4.5 million shares were held in the treasury at a cost
of $151.6 million. During the first quarter of 1995, the Company purchased
475,000 shares of its common stock. The purchases were financed with
$5.0 million from an existing revolving credit and term note agreement and
available cash. As of March 31, 1995, bank borrowings of $64.0 million were
outstanding under this agreement at the current interest rate of 6.625%.
7
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REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 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 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' REPORT
The Stockholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of March 31, 1995, and the related consolidated statements of
earnings for the three-month periods ended March 31, 1995 and 1994, and the
consolidated statements of cash flows for the three-month periods ended March
31, 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.
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, 1994, 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 30, 1995, we
expressed an unqualified opinion on those consolidated financial statements.
KPMG PEAT MARWICK LLP
April 25, 1995
9
<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.
10
<PAGE>
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.
SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT
(In millions)
Percentage Change Three-Month Period
Over Previous Ended March 31,
Period 1995 1994
-------------------- ------------------
Insurance operations (excluding
realized investment gains):
AFLAC Japan..................... 21.1% $ 133.8 $ 110.5
AFLAC U.S....................... 23.7 25.3 20.5
Other foreign................... (.2) (.3)
------- -------
Total insurance................ 21.7 158.9 130.7
Realized investment
gains............................ .6 .8
Broadcast division................ 21.9 3.9 3.2
Interest expense,
noninsurance operations.......... (2.6) (2.0)
Capitalized interest,
building construction............ - 2.4
Parent company, other operations
and eliminations................. (13.1) (14.9) (13.1)
------- -------
Earnings before income taxes... 19.7 145.9 122.0
Income taxes...................... 61.0 52.0
------- -------
Net earnings................... 21.3 $ 84.9 $ 70.0
======= =======
Net earnings increased for the quarter ended March 31, 1995, compared
with the quarter ended March 31, 1994. The increase 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 higher corporate expenses, additional interest expense
related to the Company's stock repurchase program and no capitalized interest
due to completion 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 the quarters ended March 31, 1995 and 1994 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
11
<PAGE>
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 $.07 per share for the quarter ended March 31, 1995. Excluding
the benefit of the stronger yen, operating earnings per share increased 15.2%
for the quarter ended March 31, 1995, compared with the quarter ended March
31, 1994.
AFLAC Japan's pretax operating earnings (excluding realized investment
gains/losses) in yen increased 8.5% for the quarter ended March 31, 1995,
compared with the first quarter of 1994. The reported U.S. dollar results for
AFLAC Japan were affected by the favorable average yen-to-dollar exchange rate
of 96.32 for the quarter ended March 31, 1995, compared with 107.65 for the
first quarter of 1994. As a result, percentage increases in U.S. dollars for
AFLAC Japan's pretax operating earnings were 21.1% for the quarter ended March
31, 1995, compared with the first quarter of 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 $2.7 million and $1.3 million for the quarters ended March 31, 1995 and
1994, respectively.
During the first quarter, AFLAC purchased 475,000 shares of its common
stock. On February 14, 1995, the board of directors authorized the purchase
of up to an additional 4.6 million shares. The Company has bought a total of
4,649,725 shares (through March 31, 1995) since the inception of the share
repurchase program in February 1994. The program increased earnings per share
for the first quarter of 1995 by an immaterial amount.
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 table presents 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.
12
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31,
In Dollars
(In millions) 1995 1994
--------------------------
Premium income...................... $ 1,237.9 $ 981.6
Investment income, as adjusted*..... 219.5 174.5
Other income........................ 1.2 1.1
---------- ----------
Total revenues, as adjusted*...... 1,458.6 1,157.2
---------- ----------
Benefits and claims................. 1,071.7 838.1
Operating expenses.................. 248.8 206.5
---------- ----------
Total benefits and expenses....... 1,320.5 1,044.6
---------- ----------
Pretax operating earnings,
as adjusted*................... 138.1 112.6
Investment income applicable to
profit repatriations............... (4.3) (2.1)
---------- ----------
Pretax operating earnings....... $ 133.8 $ 110.5
========== ==========
- -----------------------------------------------------------------------------
In Dollars In Yen
1995 1994 1995 1994
---------------- ----------------
Percentage increases
over previous period:
Premium income.............. 26.1% 27.5% 12.8% 13.3%
Investment income*.......... 25.8 27.9 12.7 13.6
Total revenues*............. 26.0 27.6 12.8 13.4
Pretax operating earnings*.. 22.6 23.7 9.9 9.8
Pretax operating earnings... 21.1 22.1 8.5 8.4
- -----------------------------------------------------------------------------
In Dollars
1995 1994
------------------
Ratios to total revenues, as adjusted:*
Benefits and claims................ 73.4% 72.5%
Operating expenses................. 17.1 17.8
Pretax operating earnings.......... 9.5 9.7
Ratio of pretax operating earnings
to total reported revenues......... 9.2 9.5
- -----------------------------------------------------------------------------
*Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $4.3 million in 1995 and
$2.1 million in 1994, foregone due to profit repatriations.
=============================================================================
The yen continued to appreciate against the dollar in the first quarter.
The average exchange rate for the first three months of 1995 was 96.32, which
was 11.8% stronger than the average rate of 107.65 a year ago. As a result,
13
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growth rates for AFLAC Japan continued to be higher in dollars than in yen.
The average exchange rate for the full year of 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.
Total new sales, including conversions of older policies to newer policies,
increased 14.6% in dollars (1.8% in yen) for the first three months of 1995.
Care sales were strong in the quarter, rising 63.2% over the first
quarter of 1994 and accounted for 14.1% of new sales. The Company anticipates
implementing a 10% average rate increase on Super Care policies in the fourth
quarter of 1995. Sales in the first half of 1994 were especially strong due
to sales associates' efforts to sell cancer policies prior to the rate
increase on July 1, 1994. Sales for the first quarter of 1994, including
conversions, increased 25.5% in yen compared with the first quarter of 1993.
As anticipated, 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 by 10% in yen for the year 1995.
During the quarter, the Ministry of Finance approved two new products,
which will be sold beginning mid-year. The first product is a living benefit
life plan, which pays a lump-sum benefit upon the occurrence of cancer, heart
attack, stroke or death. The second product is a supplemental medical policy,
which is similar to a hospital indemnity plan.
Investment income, which is affected by available cash flow from
operations and investment yields achievable on new investments, increased
during the quarter ended March 31, 1995, compared with the quarter ended March
31, 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 declined in Japan. For
example, the yield on a composite of 10-year Japanese government bonds
declined from a high of 4.72% in January 1995 to a low of 3.67% at the end of
March. Because of the low interest rate environment in Japan, investing our
huge cash flows at attractive investment yields remains our greatest
challenge.
During the first quarter, we invested approximately 85% of our funds
available for investment activities in yen-denominated securities at an
average yield to maturity of 4.88%. Including dollar-denominated purchases,
our blended new money yield for the quarter was 5.34%. As of April 14, 1995,
we had invested or arranged to invest approximately 46% of our estimated 1995
cash flow at an average yield to maturity of 5.24%.
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. The return
on average invested assets was 5.90% for the first quarter, compared with
6.05% for the first quarter of 1994 and 6.00% for the full year 1994.
The benefit ratio increased, and the operating expense ratio declined.
The increase in the benefit ratio reflects the strengthening of policy
liabilities to provide for lower assumed interest rates and the continued
increase in claims experience due to fewer policy lapses.
14
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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.
AFLAC U.S.
AFLAC U.S. pretax operating results improved substantially, due to
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 $6.1 million in the first quarter 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.
15
<PAGE>
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31,
In Dollars
(In millions) 1995 1994
--------------------------
Premium income...................... $ 209.6 $ 193.0
Investment income, as adjusted*..... 18.6 16.4
Other income........................ .4 .3
-------- --------
Total revenues, as adjusted*...... 228.6 209.7
-------- --------
Benefits and claims................. 130.0 120.8
Operating expenses.................. 77.4 70.7
-------- --------
Total benefits and expenses....... 207.4 191.5
-------- --------
Pretax operating earnings,
as adjusted*................... 21.2 18.2
Investment income applicable to
profit repatriations............... 4.1 2.3
-------- --------
Pretax operating earnings....... $ 25.3 $ 20.5
======== ========
- -----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income.................... 8.6% 10.6%
Investment income*................ 13.6 8.6
Total revenues*................... 9.0 10.2
Pretax operating earnings*........ 16.5 11.5
Pretax operating earnings......... 23.7 20.4
- -----------------------------------------------------------------------------
Ratios to total revenues, as adjusted:*
Benefits and claims............... 56.9% 57.6%
Operating expenses................ 33.8 33.7
Pretax operating earnings......... 9.3 8.7
Ratio of pretax operating earnings
to total reported revenues........ 11.1 9.8
- -----------------------------------------------------------------------------
*Excludes estimated investment income of $4.1 million in 1995 and $2.3 million
in 1994 related to investment of profit repatriation funds retained by AFLAC
U.S.
=============================================================================
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.
16
<PAGE>
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 $3.8 million and $3.0 million for the quarters ended
March 31, 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
remain approximately the same in 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. New annualized premium sales rose significantly in the
first quarter, setting a quarterly record for new business. New sales
increased 12.8% to $67.4 million, surpassing the record we set in the fourth
quarter of 1994 of $65.2 million. We were able to produce these excellent
sales results despite a continued decline in sales of our Medicare supplement
policy, our lowest margin product. Medicare supplement sales declined 37.5%
in the first quarter, following a sharp decline throughout 1994. Excluding
sales of Medicare supplement, new sales were up 21.6% for the quarter.
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 first quarter, available cash
flow was invested at an average yield-to-maturity of 8.34% compared with 7.08%
during the first quarter of 1994. The overall return on average invested
assets, net of investment expenses, was down slightly for the first three
months of 1995 over 1994, decreasing to 7.35% from 7.37%.
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 March 31, 1995, of 89.35 yen to one U.S.
dollar, strengthened 12.2% compared to the exchange rate of 99.85 as of
December 31, 1994. Management estimates that the stronger yen rate increased
invested assets by $1.8 billion and total assets by $2.2 billion, while
increasing total liabilities by $2.2 billion over the amounts that would have
been reported based on the exchange rate as of December 31, 1994.
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 $3.2 billion, or 20.1%. AFLAC Japan invested
assets increased $3.1 billion (21.3%), while AFLAC U.S. invested assets
increased $82.0 million (6.5%). Since December 31, 1994, total invested
17
<PAGE>
assets, excluding the effect of SFAS No. 115, have increased $2.3 billion, or
15.0%. AFLAC Japan invested assets increased $2.2 billion (16.1%), while
AFLAC U.S. invested assets increased $45.9 million (3.5%). The continued
growth in assets reflects the strength of the Company's primary business, the
substantial cash flows from operations, the record-breaking 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 $1.8 billion on investments in fixed-maturity
securities at March 31, 1995, consisted of $1.9 billion in gross unrealized
gains and $110 million in gross unrealized losses. During 1995, net
unrealized gains increased by $938 million, which was primarily due to the
decrease in general-market interest rates in Japan.
Deferred policy acquisition costs increased $300.2 million, or 12.5%
during the first three months of 1995. AFLAC Japan deferred policy
acquisition costs increased $288.8 million, or 14.8% (2.7% in yen), with
approximately $53.2 million related to operations and $235.6 million related
to the stronger yen rate at March 31, 1995. AFLAC U.S. deferred policy
acquisition costs increased $11.3 million, or 2.5%, during the same period.
Policy liabilities increased $3.2 billion, or 19.4%, during the first
three months of 1995. AFLAC Japan increased $3.1 billion, or 21.2% (8.4% in
yen), and AFLAC U.S. increased $25.1 million, or 1.8%. The stronger yen rate
increased reported policy liabilities by $1.9 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).
The income tax liability increased by $158.5 million, or 11.4%, 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 quarter, less payments for current
taxes.
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. The securities are loaned to major
brokerage firms. At March 31, 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.
Shareholders' equity increased $233.4 million during the first three
months of 1995. The increase is primarily due to net earnings of $84.9
million and an increase in unrealized gains on securities available for sale
of $140.9 million. For further information on the changes in shareholders'
equity, see Note 3 of the accompanying Notes to Consolidated Financial
Statements for the three months ended March 31, 1995.
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
18
<PAGE>
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.
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 $9.7 million in the first quarter
of 1995 and $167.9 million and $133.4 million in the full years 1994 and
1993, respectively. Profit repatriations have been remitted annually from
AFLAC Japan to AFLAC U.S. in July. 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.
The board of directors approved a 13% increase in the quarterly cash
dividend from $.115 to $.13 per share. The second quarter cash dividend of
$.13 per share is payable on June 1, 1995, to shareholders of record at the
close of business on May 19, 1995.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in various litigation considered to be in the
normal course of business. Management does not believe the outcome of any
pending litigation in which it is a defendant will have a material effect on
the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held on May 1, 1995. Matters
submitted to the shareholders were: (1) Election of 18 members to the board
of directors; (2) Ratification of the selection of auditors for 1995. The two
proposals were approved by the shareholders.
A summary of each vote cast for, against or withheld, as well as the
number of abstention and broker non-votes, as to each such matter, including a
separate tabulation with respect to each nominee for office is as follows:
VOTES
-------------------------------------------------
Absten- With- Broker
For Against tions held Non-Votes
--------------------------------------------------
(1) Election of 18
members to the board of
directors:
Paul S. Amos 205,078,304 N/A N/A 1,134,786 None
Daniel P. Amos 205,144,077 N/A N/A 1,069,013 None
J. Shelby Amos, II 205,157,594 N/A N/A 1,055,496 None
Michael H. Armacost 205,798,972 N/A N/A 414,118 None
M. Delmar Edwards, M.D. 205,840,114 N/A N/A 372,976 None
George W. Ford, Jr. 205,657,339 N/A N/A 555,751 None
Cesar E. Garcia 205,740,957 N/A N/A 472,133 None
Joe Frank Harris 205,402,416 N/A N/A 810,674 None
Elizabeth J. Hudson 205,877,060 N/A N/A 336,030 None
Kenneth S. Janke, Sr. 205,184,980 N/A N/A 1,028,110 None
Charles B. Knapp 205,843,318 N/A N/A 369,771 None
Hisao Kobayashi 205,908,819 N/A N/A 304,271 None
Yoshiki Otake 205,180,725 N/A N/A 1,032,365 None
E. Stephen Purdom 205,155,798 N/A N/A 1,057,292 None
Barbara K. Rimer 205,594,971 N/A N/A 618,119 None
Henry C. Schwob 205,723,228 N/A N/A 489,862 None
J. Kyle Spencer 205,741,092 N/A N/A 471,998 None
Glenn Vaughn, Jr. 205,910,605 N/A N/A 302,485 None
(2) Ratification of
appointment of KPMG Peat
Marwick LLP as independent
auditors 200,949,658 1,187,217 4,076,214 N/A None
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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
March 31, 1995.
21
<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 May 9, 1995 /s/ KRISS CLONINGER,III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date May 9, 1995 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
22
<PAGE>
Exhibits Filed with Current Form 10-Q:
27 - Financial Data Schedule
<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 March 31, 1995, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 18,793,048
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 89,352
<MORTGAGE> 24,055
<REAL-ESTATE> 0
<TOTAL-INVEST> 19,196,535
<CASH> 16,561
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,703,033
<TOTAL-ASSETS> 24,506,656
<POLICY-LOSSES> 18,575,999
<UNEARNED-PREMIUMS> 369,086
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 169,371
<NOTES-PAYABLE> 189,270
<COMMON> 10,411
0
0
<OTHER-SE> 1,974,766
<TOTAL-LIABILITY-AND-EQUITY> 24,506,656
1,451,772
<INVESTMENT-INCOME> 239,033
<INVESTMENT-GAINS> 584
<OTHER-INCOME> 22,287
<BENEFITS> 1,204,946
<UNDERWRITING-AMORTIZATION> 38,341
<UNDERWRITING-OTHER> 324,448
<INCOME-PRETAX> 145,941
<INCOME-TAX> 61,068
<INCOME-CONTINUING> 84,873
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,873
<EPS-PRIMARY> .83
<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>
