<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarter ended September 30, 1997
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 October 29, 1997
---------------------------- ------------------
Common Stock, $.10 Par Value 135,764,644 shares
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AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996................ 1
Consolidated Statements of Earnings -
Three Months Ended September 30, 1997 and 1996
Nine Months Ended September 30, 1997 and 1996........... 3
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 1997 and 1996........... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996........... 5
Notes to Consolidated Financial Statements................ 7
Review by Independent Certified Public
Accountants............................................. 13
Independent Auditors' Report.............................. 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 15
Part II. Other Information:
Item 1. Legal Proceedings................................. 29
Item 6. Exhibits and Reports on Form 8-K.................. 29
Items other than those listed above are omitted because they are not
required or are not applicable.
i
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Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1997 1996
(Unaudited)
------------- -------------
ASSETS:
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$19,486,696 in 1997 and
$17,941,200 in 1996) $ 22,773,606 $ 20,327,726
Equity securities (cost, $86,824 in
1997 and $86,249 in 1996) 151,810 136,328
Mortgage loans on real estate 15,817 17,802
Other long-term investments 2,632 2,999
Short-term investments 271,106 261,680
------------ ------------
Total investments 23,214,971 20,746,535
Cash 1,866 -
Receivables, primarily premiums 231,697 226,981
Accrued investment income 237,596 253,850
Deferred policy acquisition costs 2,672,684 2,582,946
Property and equipment, net 420,292 471,907
Securities held as collateral for
loaned securities 2,929,183 573,911
Intangible assets, net - 60,933
Other 100,345 105,749
------------ ------------
Total assets $ 29,808,634 $ 25,022,812
============ ============
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)
September 30, December 31,
1997 1996
(Unaudited)
------------- -------------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 20,109,693 $ 18,697,173
Unpaid policy claims 1,074,990 1,039,257
Unearned premiums 278,577 288,976
Other policyholders' funds 240,574 208,799
------------ ------------
Total policy liabilities 21,703,834 20,234,205
Notes payable 413,511 353,533
Income taxes, primarily deferred 1,353,690 1,181,121
Payables for return of collateral on
loaned securities 2,929,183 573,911
Payables for security transactions 93,444 99,408
Other 521,197 455,065
------------ ------------
Total liabilities 27,014,859 22,897,243
------------ ------------
Shareholders' equity:
Common stock of $.10 par value. Authorized
400,000; issued 158,080 in 1997 and
157,239 in 1996 15,808 15,724
Additional paid-in capital 221,767 208,994
Unrealized foreign currency
translation gains 239,058 229,782
Unrealized gains on securities
available for sale 621,277 280,154
Retained earnings 2,361,773 1,917,794
Treasury stock, at average cost (665,094) (526,425)
Notes receivable for stock purchases (814) (454)
------------ ------------
Total shareholders' equity 2,793,775 2,125,569
------------ ------------
Total liabilities and shareholders' equity $ 29,808,634 $ 25,022,812
============ ============
Shareholders' equity per share $ 20.54 $ 15.42
============ ============
See accompanying Notes to Consolidated Financial Statements.
2
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<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except for Three Months Ended September 30, Nine Months Ended September 30,
per-share amounts - Unaudited) -------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental
health insurance $ 1,508,697 $ 1,487,234 $ 4,412,040 $ 4,405,081
Net investment income 280,316 257,709 798,946 761,993
Realized investment gains (losses) (4,568) 4,350 (5,703) 3,921
Gain on sale of television stations - - 267,223 -
Other income 5,175 26,286 33,344 76,161
----------- ----------- ----------- -----------
Total revenues 1,789,620 1,775,579 5,505,850 5,247,156
----------- ----------- ----------- -----------
Benefits and expenses:
Benefits and claims 1,241,090 1,234,584 3,632,839 3,651,644
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 45,906 40,849 133,381 123,413
Insurance commissions 198,905 195,404 582,017 579,193
Insurance expenses 120,287 106,287 350,578 316,972
Interest expense 3,101 3,637 10,548 12,676
Other operating expenses 24,521 41,857 76,597 118,872
----------- ----------- ----------- -----------
Total acquisition and
operating expenses 392,720 388,034 1,153,121 1,151,126
----------- ----------- ----------- -----------
Total benefits and expenses 1,633,810 1,622,618 4,785,960 4,802,770
----------- ----------- ----------- -----------
Earnings before income taxes 155,810 152,961 719,890 444,386
Income taxes 59,731 64,616 230,861 183,771
----------- ----------- ----------- -----------
Net earnings $ 96,079 $ 88,345 $ 489,029 $ 260,615
=========== =========== =========== ===========
Net earnings per share $ .68 $ .62 $ 3.45 $ 1.80
=========== =========== =========== ===========
Shares used in computing earnings per share 141,261 143,483 141,584 144,891
=========== =========== =========== ===========
Cash dividends per share $ .115 $ .10 $ .33 $ .287
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
</TABLE>
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands - Unaudited) Nine Months Ended September 30,
-------------------------------
1997 1996
---------- ----------
Common Stock:
Balance at beginning of year $ 15,724 $ 15,636
Exercise of stock options 84 51
---------- ----------
Balance at end of period 15,808 15,687
---------- ----------
Additional paid-in capital:
Balance at beginning of year 208,994 196,928
Exercise of stock options 4,240 4,114
Gain on treasury stock reissued 8,533 3,913
Cash in lieu of fractional shares - (83)
---------- ----------
Balance at end of period 221,767 204,872
---------- ----------
Unrealized foreign currency translation gains:
Balance at beginning of year 229,782 213,319
Change in unrealized translation gains,
net of income taxes 9,276 9,669
---------- ----------
Balance at end of period 239,058 222,988
---------- ----------
Unrealized gains on securities
available for sale:
Balance at beginning of year 280,154 482,787
Change in unrealized gains (losses),
net of income taxes 341,123 (212,946)
---------- ----------
Balance at end of period 621,277 269,841
---------- ----------
Retained earnings:
Balance at beginning of year 1,917,794 1,577,605
Net earnings 489,029 260,615
Cash dividends ($.33 per share
in 1997 and $.287 in 1996) (45,050) (40,324)
---------- ----------
Balance at end of period 2,361,773 1,797,896
---------- ----------
Treasury stock:
Balance at beginning of year (526,425) (351,117)
Purchases of treasury stock (159,479) (146,722)
Cost of shares issued to sales associates
stock bonus plan and dividend
reinvestment plan 20,810 20,729
---------- ----------
Balance at end of period (665,094) (477,110)
---------- ----------
Notes receivable for stock purchases (814) (504)
---------- ----------
Total shareholders' equity $ 2,793,775 $ 2,033,670
========== ==========
See accompanying Notes to Consolidated Financial Statements.
4
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands - Unaudited)
Nine Months Ended
September 30,
---------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net earnings $ 489,029 $ 260,615
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,750,978 1,832,406
Deferred income taxes 11,235 57,626
Change in income taxes payable 3,336 (96,132)
Increase in deferred policy
acquisition costs (174,686) (183,533)
Change in receivables and
advance premiums (11,989) (41,308)
Gain on sale of television stations (267,223) -
Other, net 156,837 158,949
---------- ----------
Net cash provided by
operating activities 1,957,517 1,988,623
---------- ----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed-maturity securities sold 1,517,566 1,515,492
Fixed-maturity securities matured 295,641 459,598
Equity securities 48,256 7,695
Mortgage loans and other investments, net 2,212 4,005
Short-term investments, net - 40,530
Costs of investments acquired:
Fixed-maturity securities (4,002,063) (3,881,926)
Equity securities (43,013) (14,480)
Short-term investments, net (13,353) -
Proceeds from sale of television stations 350,633 -
Additions to property & equipment, net (4,120) (8,997)
---------- ----------
Net cash used by investing activities $(1,848,241) $(1,878,083)
---------- ----------
(continued)
5
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands - Unaudited)
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings $ 253,833 $ 125,937
Principal payments under debt
obligations (189,570) (60,894)
Dividends paid to shareholders (45,050) (40,324)
Purchases of treasury stock (159,479) (146,722)
Treasury stock reissued 29,343 24,642
Other, net 4,324 4,083
---------- ----------
Net cash used by
financing activities (106,599) (93,278)
---------- ----------
Effect of exchange rate changes on cash (811) (1,987)
---------- ----------
Net change in cash 1,866 15,275
Cash at beginning of year - 4,139
---------- ----------
Cash at end of period $ 1,866 $ 19,414
========== ==========
Supplemental disclosures of cash
flow information:
Cash payments during the period for:
Interest on debt obligations $ 9,067 $ 10,861
Income taxes 215,198 222,113
See accompanying Notes to Consolidated Financial Statements.
6
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AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
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 September
30, 1997, and the results of operations for the three-month and nine-month
periods ended September 30, 1997 and 1996, and statements of cash flows and
shareholders' equity for the nine months ended September 30, 1997 and 1996.
Results of operations for interim periods are not necessarily indicative of
results for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, based
on the best information available, in recording transactions resulting from
business operations. The balance sheet amounts that involve a greater
extent of accounting estimates and actuarial determinations subject to
future changes are: deferred policy acquisition costs, liabilities for
future policy benefits and unpaid policy claims, accrued liabilities for
unfunded retirement plans for various officers and beneficiaries, and
contingent liabilities. As additional information becomes available (or
actual amounts are determinable), the recorded estimates may be revised and
reflected in operating results. Although some variability is inherent in
these estimates, management believes the amounts provided are adequate.
The financial statements should be read in conjunction with the
financial statements included in the Company's annual report to shareholders
for the year ended December 31, 1996.
Effective January 1, 1997, the Company changed its method of
determining the costs of investment securities sold from the first-in,
first-out (FIFO) method to the specific identification method. The specific
identification method allows the Company greater financial flexibility in
the matching of its assets and liabilities. Also, the specific
identification method is the predominant method used by the insurance
industry. This accounting change had no material effect on net earnings for
the three months and nine months ended September 30, 1997.
2. Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. This Statement was
amended by SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. SFAS No. 125 established criteria for
determining whether transfers of financial assets are sales or secured
borrowings and must be applied to all applicable transactions that occurred
after December 31, 1996. The adoption of the 1997 provisions of SFAS No.
125 had no material affect on the Company's net earnings or shareholders'
equity. SFAS No. 127 amended the effective date for those transactions
concerning secured obligations and collateral, which must now be applied
prospectively to all applicable transactions occurring after December 31,
1997. Earlier or retroactive application is not permitted. Beginning in
7
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1998, as required by these standards, the Company will no longer recognize
securities held as collateral as an asset, nor the related liability for
return of such collateral. This change will have no affect on the Company's
net earnings or shareholders' equity.
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings per Share. Effective December 31, 1997, SFAS
No. 128 will require the presentation of two earnings per share (EPS)
numbers, basic EPS and diluted EPS, in the statements of earnings. Basic
EPS is computed by dividing net earnings by the weighted-average number of
shares outstanding for the period. Diluted EPS is computed by dividing net
earnings by the weighted average number of shares outstanding for the period
plus the shares for the dilutive affect of stock options and other common
stock equivalents. The Company's present EPS calculation is the same as the
diluted method prescribed by SFAS No. 128. Net earnings per share
calculated under the new statement would be as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------ ------------------
Basic EPS $ .70 $ .63 $3.58 $1.85
Diluted EPS .68 .62 3.45 1.80
SFAS No. 129, Disclosures of Information about Capital Structure, was
also issued in February 1997 and is also effective December 31, 1997. This
Statement establishes standards for disclosing information about an entity's
capital structure. No changes in the Company's present disclosures will be
required under SFAS No. 129.
On June 30, 1997 the FASB released SFAS No. 130, Reporting
Comprehensive Income. This Statement establishes standards for reporting
and displaying comprehensive income and its components in a full set of
financial statements. SFAS No. 130 requires that all components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Examples of items
that will be included in the Company's presentation of comprehensive income,
in addition to net earnings, are unrealized foreign currency translation
adjustments and unrealized gains and losses on securities available for
sale. This Statement is effective beginning in 1998.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was also issued on June 30, 1997. This Statement requires that
companies disclose segment data on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This Statement requires that a company report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. It also requires various reconciliations of total segment
information to amounts in the consolidated financial statements. The
Company is currently evaluating the necessary changes in its reporting and
disclosures. This Statement is effective beginning in 1998.
8
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3. Broadcast Division Sale
In 1997, the Company completed the sale of its broadcast division
business which consisted of seven network-affiliated television stations.
The total pretax gain from the sale of the seven stations was $327.5
million. Cash sales proceeds received, after applicable selling expenses,
were $449.1 million. Total sales proceeds also included advertising credits
to be used over a five-year period with a fair value of $6.3 million. The
Company also received cash for various current assets and liabilities.
The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on
December 31, 1996. The pretax and after-tax gains recognized on the sale of
WAFB-TV in the fourth quarter of 1996 were $60.3 million and $48.2 million
($.33 per share), respectively. The sale of the remaining six stations
closed on April 15, 1997. The pretax and after-tax gains recognized in the
second quarter of 1997 were $267.2 million and $211.2 million ($1.49 per
share), respectively. The operating results of the broadcast division
included in the 1996 and 1997 consolidated financial statements were as
follows:
Three Months Nine Months
(In thousands) Ended September 30, Ended September 30,
1997 1996 1997 1996
------------------- -------------------
Total revenues $ - $22,888 $16,107 $66,459
Earnings before interest
and income taxes - 6,434 3,532 18,101
Broadcast revenues and operating expenses prior to April 15, 1997 were
included in other income and other operating expenses, respectively, in the
Consolidated Statements of Earnings.
4. Policyholder Protection Fund
During the second quarter of 1997, Nissan Mutual Life Insurance
Company, a Japanese insurer, was declared insolvent by the Japanese Ministry
of Finance. All life insurers doing business in Japan previously agreed to
contribute to a voluntary policyholder protection fund, that would be used
to help offset insurer insolvencies. The total assessment was allocated
among the life insurance companies based on relative company size. During
the second quarter of 1997, AFLAC Japan recognized a non-recurring pretax
charge of 3.0 billion yen ($24.9 million) for this policyholder protection
fund. The after-tax amount was $13.6 million.
5. Derivative Financial Instruments
The Company has only limited activity with derivative financial
instruments and does not use them for trading purposes nor engage in
leveraged derivative transactions. In addition, the Company does not use
derivatives to hedge the foreign-currency-denominated net assets of its
foreign insurance operations, except for short-term hedges of its annual
profit repatriations. The Company currently uses two types of derivatives,
interest rate swaps and foreign currency forward contracts.
9
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Interest rate swaps are accounted for using the accrual method. The
difference between amounts paid and received under such agreements is
reported in interest expense in the Consolidated Statements of Earnings.
Changes in the fair value of the swap agreements are not recognized in the
Consolidated Balance Sheets. These swaps reduce the impact of changes in
interest rates on the Company's borrowing costs and effectively change a
portion of the Company's interest rate exposure from variable interest rates
to fixed interest rates.
The Company uses short-term foreign currency forward contracts (usually
five months or less) which are designated at inception as hedges of foreign
transaction exposures on annual profit transfers from AFLAC Japan. Such
contracts are accounted for using the deferral method. Gains and losses
during the period the contracts are outstanding and at termination of the
contracts are reflected on the Consolidated Balance Sheets, in the
unrealized foreign currency translation gains component of shareholders'
equity.
6. Notes Payable
A summary of notes payable is as follows:
September 30, December 31,
(In thousands) 1997 1996
------------- ------------
Unsecured, yen-denominated notes payable to
banks under reducing revolving credit
agreement, due annually through July 2001:
2.58% fixed interest rate $ 292,320 $ 284,238
Variable interest rate (.88% at
September 30, 1997) 82,577 -
Unsecured, yen-denominated notes payable to
banks, variable interest rate (.91% at
September 30, 1997), paid in full
October 1, 1997 7,649 17,453
9.60% to 10.72% unsecured notes payable to
bank, due semiannually, through September 1998 9,444 15,389
Obligations under capitalized leases, due
monthly through 2002, secured by computer
equipment in Japan 21,220 25,392
Short-term yen-denominated note payable to
bank under unsecured line of credit,
refinanced in 1997 - 9,850
Other 301 1,211
---------- ----------
Total notes payable $ 413,511 $ 353,533
========== ==========
The Company has a reducing revolving credit agreement that currently
provides for bank borrowings in either U.S. dollars or equivalent Japanese
yen. Under the terms of the agreement, the borrowing limits were reduced to
$400 million at July 15, 1997 and will reduce to $325 million on July 15,
1998. At September 30, 1997, bank borrowings of 45.4 billion yen ($374.9
million) were outstanding under this agreement. When any portion of the
loan is denominated in yen, the principal amount of the loan will fluctuate
due to changes in the yen-to-dollar foreign currency exchange rate.
10
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The Company has entered into interest rate swaps that effectively
change the Company's interest rate exposure on 35.4 billion yen ($292.3
million) of this loan from variable interest rates to fixed interest rates.
The fixed-rate on this portion of the loan is 2.58% after the effect of the
swaps. Interest payments are made based on variable interest rates and the
Company either pays to or receives from the counterparty an amount necessary
to equal the fixed swap rate. The three-month Tokyo Interbank Offered Rate
at September 30, 1997, plus loan costs of 25 basis points, was .83%.
The Company has designated its yen-denominated borrowings as a hedge of
its net investment in AFLAC Japan. Foreign currency translation
gains/losses are included in the unrealized foreign currency translation
gains component in shareholders' equity. Outstanding principal and related
accrued interest payable on the yen-denominated borrowings were translated
into dollars at end-of-period exchange rates. Interest expense was
translated at average monthly exchange rates for the period the interest
expense was incurred.
7. Unrealized Gains on Fixed Maturity Securities
The Company classifies all fixed-maturity securities as "available for
sale." All fixed-maturity and equity securities are carried at fair value.
The related unrealized gains and losses, less amounts applicable to policy
liabilities and deferred income taxes, are reported in a separate component
of shareholders' equity. The portion of unrealized gains credited to policy
liabilities represents gains that would not inure to the benefit of the
shareholders if such gains were actually realized. These amounts are
necessary to cover policy reserve interest requirements based on market
investment yields at these dates.
The net effect of unrealized gains and losses from securities available
for sale on shareholders' equity at the following dates was:
(In thousands) September 30, 1997 December 31, 1996
------------------ -----------------
Securities available
for sale - unrealized gains $ 3,351,896 $ 2,436,605
Less provision for:
Policy liabilities 2,400,820 2,023,107
Deferred income taxes 329,799 133,344
------------ ------------
Shareholders' equity, net
unrealized gains on securities
available for sale $ 621,277 $ 280,154
============ ============
8. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At September 30, 1997, and December 31,
1996, the Company held Japanese government bonds as collateral for loaned
securities in the amounts of $2.9 billion and $573.9 million, respectively,
at fair value. Securities received as collateral for such loans are
reported separately in assets at fair value with a corresponding liability
of the same amount for the return of such collateral at termination of the
11
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loans. (Beginning in 1998, such collateral assets and the related liability
will no longer be included on the balance sheet under the accounting
provisions of SFAS No. 125 and SFAS No. 127. Note 2.)
9. Common Stock
The following is a reconciliation of the number of shares of the
Company's common stock for the nine months ended September 30:
(In thousands) 1997 1996
---------- ----------
Common stock - number of shares:
Issued:
Balance at beginning of year 157,239 156,358
Exercise of stock options 841 517
-------- --------
Balance at end of period 158,080 156,875
-------- --------
Treasury stock - number of shares:
Balance at beginning of year 19,354 14,384
Purchases of treasury stock 3,406 4,724
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (563) (737)
Exercise of stock options (163) (102)
-------- --------
Balance at end of period 22,034 18,269
-------- --------
Shares outstanding at end of period 136,046 138,606
======== ========
On May 5, 1997, the shareholders approved an increase in the number of
shares of common stock that the Company is authorized to issue from 175
million to 400 million shares.
10. Litigation
The Company is a defendant in various litigation considered to be in
the normal course of business. Some of this litigation is pending in
Alabama, where large punitive damages bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other companies,
including insurers, in recent years. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of pending litigation will not have a material adverse effect on the
financial position of the Company.
12
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REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1997 and 1996 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 14.
13
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INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of September 30, 1997, and the related consolidated
statements of earnings for the three-month and nine-month periods ended
September 30, 1997 and 1996, and the consolidated statements of cash flows
and shareholders' equity for the nine-month periods ended September 30, 1997
and 1996. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
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, 1996, 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 29, 1997,
we expressed an unqualified opinion on those consolidated financial
statements.
KPMG PEAT MARWICK LLP
October 21, 1997
Atlanta, GA
14
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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). Most of AFLAC's policies are individually underwritten in
the payroll market, with premiums paid by the employees. 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.
RESULTS OF OPERATIONS
In 1997, the Company completed the sale of its broadcast division
business which consisted of seven network-affiliated television stations.
The total pretax gain from the sale was $327.5 million. The sale of one
station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996.
The pretax and after-tax gains recognized in 1996 on the sale of WAFB-TV
were $60.3 million and $48.2 million, respectively. The pretax and after-
tax gains recognized during the second quarter of 1997 on the sale of the
six remaining stations were $267.2 million and $211.2 million, respectively.
The effect of the after-tax gain on 1997 net earnings per share was $1.49
for the nine months ended September 30, 1997. For further information, see
Note 3 of the Notes to the Consolidated Financial Statements.
15
<PAGE>
<TABLE>
The following table sets forth the results of operations 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, except for per-share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ----------------------------------------
Percentage Change Percentage Change
Over Previous Over Previous
Period 1997 1996 Period 1997 1996
-------------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Insurance operations (excluding
realized investment gains and
losses):
AFLAC Japan...................... (.4)% $ 133.6 $ 134.1 (4.3)% $ 382.3 $ 399.4
AFLAC U.S........................ 48.2 49.5 33.4 39.0 130.8 94.1
------ ------ ------ ------
Total ......................... 9.3 183.1 167.5 4.0 513.1 493.5
Broadcast division operations........ - 6.4 3.5 18.1
Interest expense,
noninsurance operations............ 16.2 (2.3) (2.7) 20.0 (8.0) (10.0)
Corporate expenses, other
operations and eliminations........ 9.5 (20.4) (22.6) 17.7 (50.2) (61.1)
------ ------ ------ ------
Pretax operating earnings.......... 7.9 160.4 148.6 4.1 458.4 440.5
Realized investment gains (losses)... (4.6) 4.4 (5.7) 3.9
Gain on sale of television stations.. - - 267.2 -
------ ------ ------ ------
Earnings before income taxes....... 1.9 155.8 153.0 62.0 719.9 444.4
Income taxes......................... (7.6) 59.7 64.7 25.6 230.9 183.8
------ ------ ------ ------
Net earnings..................... 8.8 $ 96.1 $ 88.3 87.6 $ 489.0 $ 260.6
====== ====== ====== ======
Net earnings per share........... 9.7 $ .68 $ .62 91.7 $ 3.45 $ 1.80
====== ====== ====== ======
=============================================================================================================================
16
</TABLE>
<PAGE>
The following discussion of earnings comparisons focuses on pretax
operating earnings and excludes realized investment gains/losses and the
gain of $267.2 million from the sale of the television stations on April 15,
1997.
Foreign Currency Translation
Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar
exchange rate can have a significant effect on the Company's reported
results. Throughout 1997, the yen has been weaker in relation to the dollar
compared with the yen/dollar levels in 1996. The average yen-to-dollar
exchange rates were 117.97 for the three months ended September 30, 1997,
compared with 108.99 for the third quarter of 1996, and 119.64 for the nine
months ended September 30, 1997, compared with 107.50 for the first nine
months of 1996. The weakening of the yen in 1997 lowered operating earnings
by approximately $.04 per share during the third quarter and $.14 per share
for the first nine months. This per-share amount was solely attributable to
the translation effect of the fluctuations in the yen and not to any
fundamental change in business operations. Operating earnings per share,
which were affected by the fluctuations in the value of the yen, increased
11.3% to $.69 for the three months ended September 30, 1997, compared with
the third quarter of 1996 and increased 10.0% to $1.98 for the nine months
ended September 30, 1997, compared with the nine months ended September 30,
1996.
The Company sets its growth objective for operating earnings per share
before the effect of foreign currency fluctuations. Excluding the effect of
currency fluctuations, operating earnings per share increased 17.7% for the
three months ended September 30, 1997, compared with the same period in
1996, and increased 17.8% for the nine months ended September 30, 1997,
compared with the same period in 1996.
The table below illustrates the effect of foreign currency translation
on the Company's reported results by comparing those results as if foreign
currency rates had remained unchanged. In years when the yen weakens,
translating yen into dollars causes smaller increases or negative percentage
changes for financial results in dollars. When the yen strengthens,
translating yen into dollars causes larger increases for financial results
in dollars.
17
<PAGE>
AFLAC Incorporated and Subsidiaries
Supplemental Consolidated Data
Selected Percentage Changes
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
---------------------- ---------------------
Adjusted to Adjusted to
Exclude Exclude
Foreign Foreign
As Currency As Currency
Reported Changes(a) Reported Changes(a)
-------- ----------- -------- -----------
Premium income 1.4% 8.3% .2% 9.4%
Net investment income 8.8 15.4 4.8 13.6
Total revenues .8 7.5 4.9(b) 14.0(b)
Total benefits and expenses .7 7.5 (.4) 8.8
Operating earnings(c) 10.6 16.1 7.4(d) 15.0(d)
Operating earnings per share(c) 11.3 17.7 10.0(d) 17.8(d)
- ----------------------------------------------------------------------------
(a) Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current period as the comparable
period in the prior year.
(b) Includes a $267.2 million gain from the sale of the television
stations in the second quarter of 1997.
(c) Excludes realized investment gains/losses.
(d) Excludes a $211.2 million after-tax gain, or $1.49 per share, from the
sale of the television stations in the second quarter of 1997.
============================================================================
The Company's objective for 1997 is to increase operating earnings per
share by 17% for the year, excluding the effect of currency translation.
However, if that objective is achieved and the yen/dollar exchange rate
averages 120.00 for the full year 1997, compared with the 1996 average rate
of 108.84, operating earnings per share including foreign currency
translation would increase by approximately 10% for the year 1997.
Despite the weaker yen in 1997 compared with 1996, operating earnings
per share increased for the three-month period ended September 30, 1997,
compared with the third quarter of 1996 and increased for the nine months
ended September 30, 1997, compared with the nine months ended September 30,
1996. The increases reflected strong earnings in the functional currencies
of AFLAC's core insurance operations in Japan and the United States,
additional investment income on the proceeds from the sale of the television
stations, and a consolidated benefit from additional investment income
associated with profit repatriations from AFLAC Japan to AFLAC U.S.
Profit Repatriation
AFLAC Japan repatriated 40.9 billion yen ($347.0 million) to AFLAC U.S.
in July 1997, which included $124.8 million of a non-recurring nature
related to gains realized from the valuation of investments as determined on
a Japanese statutory accounting basis. AFLAC Japan repatriated profits to
AFLAC U.S. of $217.3 million in 1996. Since the first repatriation in 1989,
AFLAC Japan has repatriated $1.0 billion to the United States, which has
enhanced the Company's flexibility and profitability. The profit transfers
18
<PAGE>
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 $17.0 million and $10.2 million for the three months ended
September 30, 1997 and 1996, respectively, and $28.5 million and $17.6
million for the nine months ended September 30, 1997 and 1996, respectively.
In 1997, the Company entered into short-term forward exchange contracts
with a notional amount of $75.2 million related to the profit transfer in
July 1997. Such contracts were designated as a hedge of the Company's
investment in AFLAC Japan. The contracts terminated in July, coinciding
with the transfer of funds. The loss of $2.4 million at the termination of
the contracts was included in the unrealized foreign currency translation
gains component of shareholders' equity.
Share Repurchase Program
During the third quarter, the Company purchased 1.3 million shares of
its common stock. The Company has purchased 23.6 million shares (through
September 30, 1997) since the inception of the share repurchase program in
February 1994. The difference in percentage increases in net earnings and
net earnings per share primarily reflects the impact of the share repurchase
program.
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to the
Company's earnings, ranks number one in terms of premium income and profits
among all foreign life and non-life insurance companies operating in Japan.
Among all life insurance companies operating in Japan, AFLAC Japan ranks
fourth in terms of individual policies in force and 17th in terms of assets.
The transfer of profits from AFLAC Japan to AFLAC U.S. distorts
comparisons of operating results between years. Therefore, the AFLAC Japan
summary of operations table on the following page presents investment
income, total revenues and pretax operating earnings calculated on a pro
forma basis in order to improve comparability between years. The pro forma
adjustment represents cumulative investment income foregone by AFLAC Japan
on funds repatriated to AFLAC U.S. during 1992 through 1997.
19
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
------------------ ------------------
Premium income................... $1,237.5 $1,245.1 $3,618.6 $3,694.6
Investment income, as adjusted*.. 241.1 231.8 690.6 686.7
Other income..................... .4 .5 1.8 1.0
------- ------- ------- -------
Total revenues, as adjusted*... 1,479.0 1,477.4 4,311.0 4,382.3
------- ------- ------- -------
Benefits and claims.............. 1,070.1 1,082.5 3,131.4 3,205.8
Operating expenses............... 264.6 253.5 773.2 759.4
------- ------- ------- -------
Total benefits and expenses.... 1,334.7 1,336.0 3,904.6 3,965.2
------- ------- ------- -------
Pretax operating earnings,
as adjusted*................ 144.3 141.4 406.4 417.1
Investment income applicable to
profit repatriations............ (10.7) (7.3) (24.1) (17.7)
------- ------ ------- -------
Pretax operating earnings.... $ 133.6 $ 134.1 $ 382.3 $ 399.4
======= ====== ======= =======
- ----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income................. (.6)% (5.0)% (2.1)% (6.9)%
Investment income*............. 4.0 (2.5) .6 (3.5)
Total revenues*................ .1 (4.5) (1.6) (6.3)
Pretax operating earnings*..... 2.1 (3.1) (2.6) (5.4)
Pretax operating earnings...... (.4) (4.3) (4.3) (6.2)
- ----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income................. 7.6% 10.0% 9.0% 9.3%
Investment income*............. 12.6 13.0 12.0 13.3
Total revenues*................ 8.4 10.6 9.5 9.9
Pretax operating earnings*..... 10.5 12.4 8.5 11.0
Pretax operating earnings...... 7.8 11.0 6.6 10.0
- ----------------------------------------------------------------------------
Ratios to total revenues, as adjusted:*
Benefits and claims............ 72.3% 73.2% 72.7% 73.2%
Operating expenses............. 17.9 17.2 17.9 17.3
Pretax operating earnings...... 9.8 9.6 9.4 9.5
Ratio of pretax operating earnings
to total reported revenues..... 9.1 9.1 8.9 9.2
- ----------------------------------------------------------------------------
*Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income for the three months ended
September 30, 1997 and 1996 of $10.7 million and $7.3 million, respectively,
and for the nine months ended September 30, 1997 and 1996, of $24.1 million
and $17.7 million, respectively, foregone due to profit repatriations.
============================================================================
20
<PAGE>
AFLAC Japan Sales
The increase in premium income in yen was due to sales of new policies
and continued excellent policy persistency.
During the third quarter of 1997, AFLAC Japan's new annualized premium
sales were 15.2 billion yen ($129.0 million). Although that represented a
34.0% decrease compared with the same period last year, sales during the
third quarter of 1997 were 8.4% above second quarter 1997 sales results.
For the first nine months of 1997, sales were 43.2 billion yen ($362.4
million), or 28.3% lower than the first nine months of 1996. AFLAC Japan's
new policy sales in 1997 have been affected by a lingering weak economy,
lower consumer confidence in the life insurance industry following the April
1997 collapse of Nissan Mutual Life, and a series of premium rate increases
that AFLAC and the insurance industry have implemented since 1993, including
the most recent one in the fourth quarter of 1996. In addition, sales in
the third quarter of 1996 were exceptionally strong, rising 51.7% over the
sales of the third quarter of 1995, which made comparisons of 1997 sales to
last year difficult. Annualized premiums in force were 589.3 billion yen
($4.9 billion) at September 30, 1997, increasing 6.7%, or 37.2 billion yen
($307.5 million) over September 30, 1996.
Management believes there is still a strong need for the types of
quality supplemental insurance products AFLAC sells in Japan. In September
1997, the co-payment for the employer-sponsored health care program
increased from 10% to 20% for the primary insured, thereby increasing the
portion of the costs the insured has to pay. Approximately 60% of the
population is covered under this plan. The out-of-pocket expenses that
Japanese consumers must pay for health care continue to rise, and AFLAC is
the undisputed leader at helping fill those gaps in insurance coverage.
Management has taken several actions to help mitigate the impact of the
weak sales environment in Japan. First, a new economy cancer life policy
was introduced in January 1997. This new plan has lower premium rates and
benefit levels and was developed to combat the impact of increased premium
rates for new issues. In addition, the Company has increased the use of
direct-mail marketing for its products as a supplemental distribution method
and will continue its popular television advertising program. The Company
has also revised the incentive pay system for AFLAC Japan's employed sales
managers to improve compensation for sales performance. The Company will
make additional expenditures during the remainder of 1997 for expanded sales
promotion efforts in Japan. A new supplemental medical rider to the cancer
life policy will be introduced in 1998, subject to approval of the Japanese
Ministry of Finance. Management expects sales to increase 5% to 7% in the
fourth quarter of 1997, compared with the fourth quarter of 1996 and improve
further in 1998.
AFLAC Japan Investments
Investment yields declined in the third quarter of 1997, also
reflecting Japan's weak economy. The Company purchased yen-denominated
securities at an average yield of 4.82% during the quarter. This new money
yield compares very favorably with the 3.5% interest rate in the Company's
policy liability reserving assumptions for new business. In fact,
investment margins on new business continue to be the highest produced in
several years. Including dollar-denominated purchases, the blended new
21
<PAGE>
money yield was 5.28% for the third quarter of 1997. The yield on AFLAC
Japan's fixed-maturity portfolio was 5.49% at the end of the third quarter
of 1997, compared with 5.66% a year ago.
The yield on AFLAC Japan's fixed-maturity portfolio declined from 5.58%
at year-end 1996 to 5.49% at the end of the third quarter of 1997. The
return on average invested assets was 5.36% for the first nine months of
1997, compared with 5.56% for the first nine months of 1996 and 5.54% for
the full year 1996.
AFLAC Japan Other
During the second quarter of 1997, Nissan Mutual Life Insurance
Company, a Japanese insurer, was declared insolvent by the Japanese Ministry
of Finance. All life insurers doing business in Japan previously agreed to
contribute to a voluntary policyholder protection fund that would be used to
help offset insurer insolvencies. The total assessment was allocated among
the life insurance companies based on relative company size. During the
second quarter of 1997, AFLAC Japan recognized a non-recurring pretax charge
of 3.0 billion yen ($24.9 million) for this policyholder protection fund.
The after-tax amount was $13.6 million or $.10 per share.
The Japanese government passed a package of tax reform bills centering
on an increase in the consumption tax, which is similar to a sales tax in
the United States. The consumption tax increased from the rate of 3% to 5%
effective April 1, 1997. AFLAC Japan currently incurs consumption tax on
agents' commissions. The Company implemented changes in its compensation
arrangements with its agents to mitigate a portion of this tax increase.
In March 1997, the Japanese government ratified new income tax
provisions that increase income taxes on investment income received by
foreign companies operating in Japan from securities issued from their home
country. The new provisions are effective beginning in 1998. If the new
income tax provisions had been effective January 1, 1997, AFLAC Japan's
income tax expense, without any offsets or mitigation, would have been
increased, and net earnings of the Company would have decreased by
approximately $14.6 million for the nine months ended September 30, 1997.
Management has mitigated much of the tax impact through investment
alternatives and by restructuring portions of the existing investment
portfolio. Management does not expect this tax change to materially affect
future net earnings of the Company.
INSURANCE OPERATIONS, AFLAC U.S.
AFLAC U.S. pretax operating earnings continued to benefit from
additional investment income earned on profit transfers received from AFLAC
Japan. Estimated investment income earned from profits repatriated to and
retained by AFLAC U.S. from 1992 through 1997, along with estimated
investment income earned from proceeds from the sale of the television
stations, have been reclassified in the following presentation in order to
improve comparability between periods.
22
<PAGE>
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1997 1996 1997 1996
------------------ ------------------
Premium income................... $ 268.9 $ 238.9 $ 786.2 $ 700.9
Investment income, as adjusted*.. 26.3 22.0 77.1 64.3
Other income..................... .6 .4 1.4 1.1
------ ------ ------ ------
Total revenues, as adjusted*... 295.8 261.3 864.7 766.3
------ ------ ------ ------
Benefits and claims.............. 168.6 149.2 493.7 437.5
Operating expenses............... 100.3 88.2 291.6 257.6
------ ------ ------ ------
Total benefits and expenses.... 268.9 237.4 785.3 695.1
------ ------ ------ ------
Pretax operating earnings,
as adjusted*................ 26.9 23.9 79.4 71.2
Investment income applicable to
profit repatriations and in 1997,
proceeds from the sale of the
television stations............. 22.6 9.5 51.4 22.9
------ ------ ------ ------
Pretax operating earnings.... $ 49.5 $ 33.4 $ 130.8 $ 94.1
====== ====== ====== ======
- ----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income................. 12.5% 10.1% 12.2% 9.8%
Investment income*............. 19.6 11.9 20.0 11.4
Total revenues*................ 13.2 10.5 12.8 10.0
Pretax operating earnings*..... 12.5 33.8 11.4 17.0
Pretax operating earnings...... 48.2 37.7 39.0 24.6
- ----------------------------------------------------------------------------
Ratios to total revenues, as
adjusted:*
Benefits and claims............ 57.0% 57.0% 57.1% 57.1%
Operating expenses............. 33.9 33.8 33.7 33.6
Pretax operating earnings...... 9.1 9.2 9.2 9.3
Ratio of pretax operating earnings
to total reported revenues..... 15.5 12.3 14.3 11.9
- ----------------------------------------------------------------------------
*Excludes estimated investment income for the three months and nine months
ended September 30, 1997, of $22.6 million and $51.4 million, respectively,
related to investment of profit repatriation funds retained by AFLAC U.S.
and investment of proceeds from the sale of the television stations, and for
the three months and nine months ended September 30, 1996, of $9.5 million
and $22.9 million, respectively, related to investment of profit
repatriation funds retained by AFLAC U.S.
============================================================================
23
<PAGE>
AFLAC U.S. Sales
The increase in premium income was primarily due to an increase in new
sales over the last 12 months. New annualized premium sales were a record
$99.7 million, an increase of 22.2%, in the third quarter of 1997, compared
with the third quarter of 1996. For the first nine months of 1997, new
sales were $287.7 million, also an increase of 22.2%, compared with the same
period of 1996. Although accident/disability coverage continues to be the
Company's best-selling product, management is also pleased with the strong
contributions from other payroll-deduction products. Management intends to
maintain the Company's leading position of providing supplemental insurance
at the work site. Management believes AFLAC has tremendous market
opportunities in the United States and expects new policy sales to increase
by approximately 20% for the year 1997.
AFLAC U.S. Investments
The increase in investment income was primarily due to the continued
cash flow from operations. Also, AFLAC has paid less dividends to the
Parent Company during the first nine months of 1997 than in the first nine
months of 1996. During the third quarter, available cash flow was invested
at an average yield of 7.46% compared with 7.76% during the third quarter of
1996. The overall return on average invested assets, net of investment
expenses, was 7.62% for the first nine months of 1997 compared with 7.30%
for the same period of 1996.
AFLAC U.S. Other
Management expects the operating expense ratio, excluding discretionary
advertising expenses, to decline slightly in the future due to continued
improvements in operating efficiencies. By improving administrative systems
and controlling other costs, management has been able to redirect funds to
national advertising programs without significantly affecting the operating
expense ratio. Management expects the pretax operating profit margin, which
was 9.3% for the year 1996 excluding the effect of repatriation, to remain
approximately the same in 1997, excluding the effect of repatriation and the
earnings generated by investing the broadcast sale proceeds.
The operating results reflect slightly higher benefit ratios due to the
Company's ongoing efforts to improve policy persistency by enhancing
policyholder benefits. In addition, potential minimum benefit ratio
requirements by insurance regulators may also result in an increase to these
ratios. However, the aggregate benefit ratio has been relatively stable due
to the mix of business shifting towards accident and hospital indemnity
policies, which have lower benefit ratios than other products.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards, see Note 2 of the Notes to the Consolidated Financial Statements.
24
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1996, the financial condition of the Company has
remained strong in the functional currencies of its operations. The
investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow
and consist of high-quality securities.
Due to the significance of yen-denominated items in the balance sheet,
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 September 30, 1997,
was 121.10 yen to one U.S. dollar, 4.1% weaker than the exchange rate of
116.10 as of December 31, 1996. Management estimates that the weaker yen
rate decreased invested assets by $812.5 million, total assets by $1.1
billion and total liabilities by $1.0 billion versus the amounts that would
have been reported based on the exchange rate as of December 31, 1996.
Invested Assets
Securities available for sale are carried at fair value. The following
table shows an analysis of invested assets (including cash):
September 30, December 31,
(In thousands) 1997 1996 % Change
------------- ------------ --------
AFLAC U.S.:
Total invested assets, at cost
or amortized cost $ 2,608,007 $ 1,910,154 36.5%
Unrealized gains on securities
available for sale 181,343 101,258
----------- -----------
Total invested assets $ 2,789,350 $ 2,011,412 38.7%
=========== =========== =======
AFLAC Japan:
Total invested assets, at cost
or amortized cost $ 17,156,859 $ 16,390,997 4.7%
Unrealized gains on securities
available for sale 3,170,553 2,334,537
----------- -----------
Total invested assets $ 20,327,412 $ 18,725,534 8.6%
=========== =========== =======
Consolidated:
Total invested assets, at cost
or amortized cost $ 19,864,941 $ 18,309,930 8.5%
Unrealized gains on securities
available for sale 3,351,896 2,436,605
----------- -----------
Total invested assets $ 23,216,837 $ 20,746,535 11.9%
=========== =========== =======
Net unrealized gains of $3.4 billion on securities available for sale
at September 30, 1997, consisted of $3.4 billion in gross unrealized gains
and $19.3 million in gross unrealized losses.
25
<PAGE>
The continued growth of invested assets in their functional currencies
reflects the strength of the Company's primary business, the substantial
cash flows from operations, strong new annualized premium sales by AFLAC
U.S., and the substantial renewal premiums collected by AFLAC Japan. In
addition, the Company received $350.6 million in cash in the second quarter
of 1997 in conjunction with the sale of the television stations.
AFLAC invests primarily within the Japanese and U.S. fixed-maturity
markets. The Company uses specific criteria to judge the credit quality and
liquidity of its investments and utilizes a variety of credit rating
services to monitor this criteria. Applying those various credit ratings to
a standardized rating system based on a nationally recognized service's
categories, the percentages of the Company's fixed-maturity securities
available for sale, at amortized cost, were as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
AAA 40.0% 46.2%
AA 20.9 19.6
A 28.8 26.0
BBB 10.3 8.2
------ ------
100.0% 100.0%
Private placement investments accounted for 34.1% and 28.8% of the
Company's total fixed-maturity securities available for sale as of September
30, 1997, and December 31, 1996, respectively. AFLAC Japan has made
investments in the private sector to secure higher yields than those
available from Japanese government bonds. At the same time, the Company has
adhered to its conservative standards for credit quality.
Policy Liabilities
Policy liabilities increased $1.5 billion, or 7.3%, during the first
nine months of 1997. AFLAC Japan increased $1.3 billion, or 7.2% (11.8%
increase in yen), and AFLAC U.S. increased $138.7 million, or 8.2%. The
weaker yen rate decreased reported policy liabilities by $853.2 million.
Debt
The increase in notes payable is primarily due to the financing for the
share repurchase program. See Note 6 of the Notes to the Consolidated
Financial Statements for further information on debt outstanding at
September 30, 1997.
The Company's ratio of debt to total capitalization (debt plus
shareholders' equity, excluding the unrealized gains on securities available
for sale) was 16.0% and 16.1% as of September 30, 1997, and December 31,
1996, respectively.
26
<PAGE>
Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At September 30, 1997, the Company
held Japanese government bonds as collateral for loaned securities in the
amount of $2.9 billion at fair value. For further information regarding
such arrangements, see Note 8 of the Notes to the Consolidated Financial
Statements.
Shareholders' Equity
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. The Company's investment
objectives provide for liquidity through the ownership of high-quality
investment securities. AFLAC insurance policies are generally not
interest-sensitive and therefore are not subject to unexpected policyholder
redemptions due to investment yield changes. Also, the majority of AFLAC
policies provide indemnity benefits rather than reimbursement for actual medical
costs and therefore are not subject to the risks of medical cost inflation.
The achievement of continued long-term growth will require growth in the
statutory capital and surplus of the Company's insurance subsidiaries. AFLAC
may secure additional statutory capital through various sources, such as
internally generated statutory earnings or equity contributions by the Parent
Company from funds generated through debt or equity offerings. The disposition
of the AFLAC Broadcast Division has increased the Company's capital resources.
Management believes outside sources for additional debt and equity capital will
continue to be available for capital expenditures, business expansion and the
Company's share repurchase program.
Parent Company capital resources are largely dependent upon the ability of
the subsidiaries to pay management fees and dividends. The Georgia Insurance
Department imposes certain limitations and restrictions on payments of
dividends, management fees, loans and advances by AFLAC to the Parent Company.
In addition to restrictions by U.S. insurance regulators, the Japanese Ministry
of Finance (MOF) imposes restrictions on, and requires approval for, the
remittances of earnings from AFLAC Japan to AFLAC U.S. Payments are made from
AFLAC Japan to the Parent Company for management fees, and to AFLAC U.S. for
allocated expenses and remittances of earnings. Total funds received from AFLAC
Japan were $374.9 million and $244.1 million in the first nine months of 1997
and 1996, respectively, and $253.6 million in the full year 1996. AFLAC Japan
repatriated profits to AFLAC U.S. in the amount of $347.0 million in July 1997,
including $124.8 million of a non-recurring nature. AFLAC U.S. then paid a
dividend of $66.5 million to the Parent Company, which was used to reduce debt.
During the last few years, the MOF has developed solvency standards, a version
of risk-based capital requirements. For additional information on regulatory
restrictions on dividends, profit transfers and other remittances, see Note 10
of the Notes to the Consolidated Financial Statements in the Company's annual
report to shareholders for the year ended December 31, 1996.
27
<PAGE>
Other
During the third quarter of 1997, Duff & Phelps Credit Rating Company
assigned AFLAC a claims-paying ability rating of "AA." AFLAC is also rated
"AA" for its claims-paying ability by Standard & Poor's Corporation and "A+"
by A.M. Best Company.
For information regarding pending litigation, see Note 10 of the Notes
to the Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information about
their companies, so long as those statements are identified as forward-
looking and are accompanied by meaningful, cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed. The Company desires to take advantage of these provisions.
This report contains cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
this discussion and analysis, and in any other statements made by officers
of the Company in oral discussions with analysts and contained in documents
filed with the Securities and Exchange Commission (the SEC). Forward-
looking statements are not based on historical information and relate to
future operations, strategies, financial results or other developments. In
particular, statements containing words such as "expect," "anticipate,"
"believe," "goal," "objective" or similar words generally qualify as
forward-looking. The Company undertakes no obligation to update such
forward-looking statements.
The Company cautions that the following factors, in addition to other
factors mentioned from time to time in the Company's reports filed with the
SEC, could cause the Company's actual results to differ materially:
regulatory developments, competitive conditions, new products, Japanese
Ministry of Finance approval of profit repatriations to the United States,
general economic conditions in the United States and Japan, changes in U.S.
and/or Japan tax laws, adequacy of reserves, credit and other risks
associated with the Company's investment portfolio, significant changes in
interest rates and fluctuations in foreign currency exchange rates.
28
<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. Some of this litigation is pending in
Alabama, where large punitive damages bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other companies,
including insurers, in recent years. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of pending litigation will not 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:
27.0 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
Items other than those listed above are omitted because they are not
required or are not applicable.
29
<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 November 3, 1997 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date November 3, 1997 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
30
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
27.0 - Financial Data Schedule (for SEC use only).
31
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended September 30, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 22,773,606
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 151,810
<MORTGAGE> 15,817
<REAL-ESTATE> 0
<TOTAL-INVEST> 23,214,971
<CASH> 1,866
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,672,684
<TOTAL-ASSETS> 29,808,634
<POLICY-LOSSES> 21,184,683
<UNEARNED-PREMIUMS> 278,577
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 240,574
<NOTES-PAYABLE> 413,511
0
0
<COMMON> 15,808
<OTHER-SE> 2,777,967
<TOTAL-LIABILITY-AND-EQUITY> 29,808,634
4,412,040
<INVESTMENT-INCOME> 798,946
<INVESTMENT-GAINS> (5,703)
<OTHER-INCOME> 300,567<F1>
<BENEFITS> 3,632,839
<UNDERWRITING-AMORTIZATION> 133,381
<UNDERWRITING-OTHER> 1,019,740
<INCOME-PRETAX> 719,890<F1>
<INCOME-TAX> 230,861
<INCOME-CONTINUING> 489,029<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 489,029<F2>
<EPS-PRIMARY> 3.45<F2>
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $267,223 gain from the sale of the television stations
in 1997.
<F2>Includes $211,190 after-tax gain ($1.49 per share) on the sale of
the television stations in 1997.
</FN>
</TABLE>
