<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file no. 1-7434
----------------- ------
AFLAC INCORPORATED
- ----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1167100
- ------------------------------------ ----------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1932 Wynnton Road, Columbus, Georgia 31999
- ------------------------------------ ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 706-323-3431
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
----------------------------------------------------------------------
Common Stock, $.10 Par Value New York Stock Exchange
Pacific Stock Exchange
Tokyo Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
--------
The number of shares of the registrant's Common Stock outstanding at March
17, 1997, with $.10 par value, was 136,612,572. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of March 17,
1997 was $5,355,683,873.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I Item 1 Exhibit 13 - pages 13-5 to 13-24 (Management's
Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)),
pages 13-37 to 13-46 (Notes 2 and 3 of the
Notes to the Consolidated Financial
Statements), and pages 13-57 to 13-58
(Note 10). The applicable portions of the
Company's Annual Report to Shareholders for
the year ended December 31, 1996, are
included as Exhibit 13
Item 2 Exhibit 13 - page 13-23 (Cash Flow section of
MD&A) and page 13-48 (Note 5)
PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-57
(Note 10)
Item 6 Exhibit 13 - pages 13-3 and 13-4
Item 7 Exhibit 13 - pages 13-5 to 13-24
Item 8 Exhibit 13 - pages 13-25 to 13-64
PART III Item 10 Incorporated by reference from the
definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 5,
1997 (the Proxy Statement)
Item 11 Incorporated by reference from the Proxy
Statement
Item 12 Incorporated by reference from the Proxy
Statement
Item 13 Incorporated by reference from the Proxy
Statement
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AFLAC Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 1996
Table of Contents
Page
______
PART I
Item 1. Business................................................ I- 1
Item 2. Properties.............................................. I-16
Item 3. Legal Proceedings....................................... I-17
Item 4. Submission of Matters to a Vote of Security Holders..... I-17
Item 4A. Executive Officers of the Company....................... I-18
PART II
Item 5. Market for Company's Common Equity and Related
Shareholder Matters................................... II- 1
Item 6. Selected Financial Data................................. II- 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... II- 1
Item 8. Financial Statements and Supplementary Data............. II- 1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... II- 1
PART III
Item 10. Directors and Executive Officers of the Company......... III- 1
Item 11. Executive Compensation.................................. III- 1
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ III- 1
Item 13. Certain Relationships and Related Transactions.......... III- 1
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... IV- 1
ii
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
AFLAC Incorporated (the Parent Company) was incorporated in 1973 under
the laws of the State of Georgia and acts as a general business holding
company. The Parent Company is a management company principally engaged,
through its insurance subsidiaries, in providing supplemental health
insurance products in the United States and Japan. In addition, the Parent
Company, through subsidiaries and a general partnership with American Family
Life Assurance Company of Columbus (AFLAC), operates in television
broadcasting. As a management company, the Parent Company oversees the
operations of its subsidiaries and provides capital and management services.
AFLAC Incorporated and its subsidiaries (the Company) have only one
significant industry segment - insurance. For financial information
relating to the Company's foreign and U.S. operations, see Exhibit 13, pages
13-5 to 13-24 (Management's Discussion and Analysis of Financial Condition
and Results of Operations (MD&A)) and page 13-37 (Note 2 of Notes to the
Consolidated Financial Statements), which are incorporated herein by
reference.
During 1996, the Company entered into definitive agreements for the
sale of its broadcast division business consisting of seven network-
affiliated television stations. The total pretax gain from this transaction
is estimated to be $325 million. Finalization of the transaction is subject
to approval by the Federal Communications Commission. 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 in 1996 were
$60.3 million and $48.2 million, respectively. The effect of the after-tax
gain on 1996 net earnings per share was $.33. Management expects the sale
of the six remaining stations to be finalized during the first half of 1997.
On March 12, 1997, AFLAC Incorporated sold its minor Canadian insurance
subsidiary.
The Parent Company's principal operating subsidiary is AFLAC, which
operates in the United States and Japan. AFLAC is a specialty insurer whose
dominant business is individual supplemental health insurance. Management
believes AFLAC is the world's leading writer of cancer expense insurance.
In recent years, AFLAC has diversified its product offerings to include
other types of supplemental health products in both the United States and
Japan. The Japan Branch (AFLAC Japan) also sells care plans, supplemental
general medical expense plans and a living benefit life plan. The United
States operation (AFLAC U.S.), in addition to cancer expense plans, also
sells other types of supplemental health insurance, including hospital
intensive care, accident and disability, hospital indemnity, long-term care,
short-term disability and Medicare supplement plans. AFLAC U.S. also offers
several life insurance plans.
The Company is authorized to conduct insurance business in all 50
states, the District of Columbia, and several U.S. territories and foreign
countries. The Company's only significant foreign operation is AFLAC Japan,
which accounted for 82% of the Company's total revenues in 1996.
The Company issued a three-for-two stock split on March 18, 1996.
Share and per-share amounts have been adjusted to reflect this split.
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In the fourth quarter of 1996, the Company raised its primary financial
objective for 1997 through 2000 from 13% to 15% annual growth in operating
earnings per share to 15% to 17% excluding the effect of foreign currency
translation.
During 1996, the board of directors authorized the purchase of up to an
additional 7.0 million shares of AFLAC Incorporated common stock. Including
shares remaining under a previous authorization, the Company had approval to
purchase up to 8.0 million shares as of December 31, 1996. The Company had
purchased 20.4 million shares from the inception of the plan in February
1994 through December 31, 1996.
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. During the first half of 1995, the yen strengthened substantially
versus the dollar. In the third quarter of 1995, the yen began to weaken in
relation to the dollar and continued to weaken throughout 1996. The average
yen-to-dollar exchange rates were 108.84 in 1996, 94.10 in 1995 and 102.26
in 1994.
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.
Insurance premiums and investment income from insurance operations are
the major sources of revenues. The Company's consolidated premium income
was $5.9 billion for 1996, $6.1 billion for 1995 and $5.2 billion for 1994.
The following table sets forth consolidated premiums earned by class
offered by AFLAC in Japan and the United States for the three years ended
December 31.
(In thousands) 1996 1995 1994
---------- ---------- ----------
Premiums earned:
Health insurance $ 5,690,886 $ 6,037,206 $ 5,148,406
Life and other insurance 206,480 17,937 15,149
---------- ---------- ----------
Total U.S. and Japan
premiums earned $ 5,897,366 $ 6,055,143 $ 5,163,555
========== ========== ==========
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The following table sets forth the changes in annualized premiums in
force for AFLAC health insurance for the years ended December 31.
(In thousands) 1996 1995 1994
---------- ---------- ----------
Annualized premiums in force,
at beginning of year $ 5,837,883 $ 5,578,987 $ 4,460,076
New issues including
policy conversions 763,836 965,321 922,773
Change in unprocessed
policies 18,587 (107,287) 212,058
Lapses and surrenders (414,628) (408,366) (347,020)
Other 3,284 (11,676) (129,932)
Foreign currency translation
adjustment (571,011) (179,096) 461,032
---------- ---------- ----------
Annualized premiums in force,
at end of year $ 5,637,951 $ 5,837,883 $ 5,578,987
========== ========== ==========
INVESTMENTS AND INVESTMENT RESULTS
The Company classifies all fixed-maturity securities as available for
sale. All fixed-maturity and equity securities are carried at fair value.
The fair value of fixed-maturity securities available for sale exceeded
amortized cost by $2.4 billion and $2.6 billion at December 31, 1996 and
1995, respectively.
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The following table shows an analysis of invested assets at December 31:
(In thousands) 1996 1995 % Change
------------ ------------ --------
AFLAC U.S.:
Total invested assets, at
cost or amortized cost $ 1,910,154 $ 1,543,549 23.8%
Unrealized gains
on securities available
for sale 101,258 128,697
------------ ------------
Total invested assets $ 2,011,412 $ 1,672,246 20.3%
============ ============ ======
AFLAC Japan:
Total invested assets, at
cost or amortized cost $ 16,390,997 $ 15,924,083 2.9%
Unrealized gains
on securities available
for sale 2,334,537 2,468,018
------------ ------------
Total invested assets $ 18,725,534 $ 18,392,101 1.8%
============ ============ ======
Consolidated:
Total invested assets, at
cost or amortized cost $ 18,309,930 $ 17,447,551 4.9%
Unrealized gains
on securities available
for sale 2,436,605 2,597,413
------------ ------------
Total invested assets $ 20,746,535 $ 20,044,964 3.5%
============ ============ ======
Net investment income was $1.0 billion in 1996, unchanged from 1995.
Net investment income in 1995 was $186.1 million higher than in 1994. It is
generally AFLAC's policy to invest in high-grade investments, principally in
government and high-quality public utility and corporate bonds.
AFLAC primarily operates within the investment environments of the
United States and Japan. Although aspects of these two financial markets
are slowly converging, they remain fundamentally different. For example,
differences in asset selection, liquidity, credit quality, accounting
practices, insurance regulations and taxation affect the way the Company
invests and purchases securities. The challenge is to integrate the varied
market characteristics of Japan and the United States into a unified and
coherent investment strategy. The Company has streamlined and integrated
the organizational structure of investment operations into a single
functional unit and has set specific worldwide criteria regarding credit
quality, liquidity, compliance with regulatory requirements and conformance
to product needs.
I-4
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For information on the composition of the Company's investment
portfolio and investment results, see Part IV, Schedule I, and Exhibit 13,
pages 13-16 to 13-24 (discussions relating to Balance Sheet and Cash Flow)
and pages 13-41 to 13-47 (Notes 3 and 4 of Notes to the Consolidated
Financial Statements), which are incorporated herein by reference.
INVESTMENTS - JAPAN
Approximately 96% of the 301.4 billion yen ($2.6 billion) that AFLAC
Japan had available for investment activities was invested in yen-
denominated securities at an average yield to maturity of 3.92%. The
company invested 26.6% of the total funds available in Japanese government
bonds at an average yield to maturity of 3.46% and allocated 56.6% to
longer-dated securities at an average rate of 4.29%. An additional 12.3%
was invested in yen-denominated securities of various other sectors.
Dollar-denominated securities accounted for the remaining 4.5% of the
purchases in 1996 at an average yield to maturity of 7.20%.
At year-end 1996, Japanese government bonds accounted for 37.2% of
AFLAC Japan's total investments (at amortized cost). Twenty-year government
bonds made up the majority of AFLAC Japan's government bond holdings. AFLAC
Japan continued to use longer-dated corporate instruments in 1996, which
provide a better match of asset and liability durations, and these
instruments accounted for 30.1% of total investments in Japan at year-end.
At the end of the year, municipal securities represented 3.8% of the total
investments, while utility bonds represented 15.3%. Other assorted sectors
accounted for 5.5%, and dollar-denominated securities represented 8.1% of
AFLAC Japan's total investments.
Low investment yields have posed difficulties for the entire insurance
industry in Japan for several years. To help insurers address the problem
of low rates of return, the Ministry of Finance (MOF) has required the
industry to raise premium rates on new policies for four consecutive years.
The most recent rate increase, which was implemented on all policies sold
after October 1, 1996, will benefit AFLAC Japan in the long run. In the
meantime, management believes the Company's investment approach in Japan
provides the Company with an advantage over its competitors. The Company's
asset allocation is much different than the industry as a whole, and
management believes it is better suited to a low interest rate environment.
As in 1995, the Company's portfolio yield was once again the third highest
among all life insurers in Japan based on March 31, 1996 data submitted to
the MOF.
The Company's investments in the Japanese equity and investment real
estate markets continued to be immaterial in 1996.
INVESTMENTS - U.S.
Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $217.3
million in 1996, up from $140.5 million in 1995. AFLAC U.S. in turn paid
additional dividends to the Parent Company in 1996 in the amount of $64.3
million. Repatriation has a positive effect on consolidated results 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. The Company expects future profit repatriation
to continue to have a positive impact on its consolidated net earnings.
I-5
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AFLAC U.S. continued to focus on purchasing securities that emphasize
safety and liquidity. AFLAC U.S. maintained its overall investment quality
throughout the year. Approximately 44% of the fixed-maturity portfolio was
rated "AA" or better at the end of the year.
Including profit repatriation and proceeds from bond swaps and
redemptions, AFLAC U.S. invested $977.4 million in 1996. Of that amount,
approximately 31.0% was invested in U.S. government or agency securities at
an average yield to maturity of 7.60%, 65.0% was invested in corporate
fixed-maturity securities at 7.49%, and 1.8% was allocated to various other
sectors. Approximately $21.6 million, or 2.2% of total funds available for
investment, were added to the AFLAC U.S. equity portfolio.
At the end of 1996, fixed-maturity securities continued to dominate
AFLAC U.S. total investments. Fixed-maturity securities represented 84.9%
of total investments at the end of the year. Within that category, U.S.
government and agency securities accounted for 20.6% of the holdings, while
corporate securities were 73.0%. Equity investments made up 6.0% of total
investments. Mortgage loans on real estate remained immaterial.
INSURANCE - JAPAN
The following table sets forth AFLAC Japan's premiums earned by product
line for the last three years ended December 31.
(In thousands) 1996 1995 1994
---------- ---------- ----------
Premiums earned:
Cancer expense $ 4,314,821 $ 4,752,338 $ 4,054,697
Other accident and health 445,704 440,635 316,395
Life insurance 191,035 2,378 -
---------- ---------- ----------
Total AFLAC Japan
premiums earned $ 4,951,560 $ 5,195,351 $ 4,371,092
========== ========== ==========
The following table sets forth the changes in annualized premiums in
force for AFLAC Japan health insurance for the years ended December 31:
(In thousands) 1996 1995 1994
---------- ---------- ----------
Annualized premiums in force,
at beginning of year $ 4,900,779 $ 4,718,783 $ 3,672,594
New issues including
policy conversions 442,629 690,170 680,879
Change in unprocessed
policies 23,878 (105,496) 209,392
Lapses and surrenders (181,756) (200,507) (163,047)
Other (18,103) (23,075) (142,067)
Foreign currency translation
adjustment (571,011) (179,096) 461,032
---------- ---------- ----------
Annualized premiums in force,
at end of year $ 4,596,416 $ 4,900,779 $ 4,718,783
========== ========== ==========
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INSURANCE PLANS - JAPAN
AFLAC's insurance is supplemental in nature and is designed to provide
insurance to cover the medical and nonmedical costs that are not reimbursed
by other forms of Japanese health insurance coverage.
The cancer expense insurance plans offered in Japan provide a fixed
daily indemnity benefit for hospitalization and outpatient services related
to cancer and a lump sum benefit upon initial diagnosis of internal cancer.
The plans differ from the AFLAC U.S. cancer plans (described on pages I-11
and I-12) in that the Japanese policies also provide death benefits and cash
surrender values (the Company estimates that approximately 28% of the
premiums earned are associated with these benefits). In 1997, AFLAC Japan
will offer an economy cancer plan that has lower premiums and benefits.
This new plan should appeal to those who may have postponed a purchase
decision due to the weak economy in Japan.
In 1992, AFLAC broadened its product line with the introduction of a
new care product. Care insurance provides periodic benefits to those who
become bedridden, demented or seriously disabled due to illness or accident.
This plan is offered with several riders, providing death benefits or
additional care benefits to enhance coverage. Prior to the introduction of
this care plan, AFLAC marketed a plan that primarily provided dementia care
benefits.
In 1995, the Company introduced two other products in Japan. The first
product is an improved medical expense policy. It is similar to hospital
indemnity insurance products in the United States and provides cash benefits
to policyholders when they are hospitalized. The market for medical expense
coverage in Japan is very competitive, but the Company believes the revised
policy gives AFLAC Japan's agents greater flexibility in product offerings.
AFLAC Japan also introduced a new living benefit life plan. This
product is a life insurance policy that provides lump-sum benefits when
policyholders experience heart attack, cancer or stroke. The Company is
offering this product in two forms - as a stand-alone policy or as a rider
to the cancer plan. The rider adds heart attack and stroke benefits to the
cancer policy. Marketing efforts for living benefit life primarily focus on
the sale of the rider. Introduction of the rider began in late 1995. Sales
of the rider for 1996, its first full year of availability, were $282.9
million in new annualized premium, representing 1.6 million units.
Due to the continued low level of available investment yields in Japan,
the Ministry of Finance has required insurers to increase premium rates on
new policy issues in recent years. AFLAC Japan increased premium rates by
an average of 16% on all cancer policy sales made after July 1, 1994.
Premium rates on care policy new issues were increased by an average of 16%
in September 1995. As a result of continuing low yields, the Company
increased premium rates on all new policy issues by approximately 13%
beginning in the fourth quarter of 1996.
AGENCY FORCE - JAPAN
The development of a "corporate agency" system has been important to
the growth of AFLAC Japan. Affiliated corporate agencies are formed when
companies establish subsidiary businesses to sell AFLAC products to their
I-7
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employees, suppliers and customers. These agencies help AFLAC Japan reach
the employees of almost all of Japan's large corporations. AFLAC has no
ownership interest in these corporate agencies.
AFLAC products are also sold through independent corporate agencies and
individual agencies that are not affiliated with large companies. At
December 31, 1996, there were 5,166 agencies in Japan with 20,067 licensed
agents. Agents' activities are principally limited to insurance sales, with
policyholder service functions handled by the main office in Tokyo and 50
offices located throughout Japan.
COMPETITION - JAPAN
In 1974, AFLAC became the second foreign (non-Japanese) life insurance
company to gain direct access to the Japanese insurance market by obtaining
a license to do business in Japan. Through 1981, AFLAC was the only company
in Japan authorized to issue a cancer expense insurance policy. Since that
time, several other life companies offer cancer insurance. However, AFLAC
remains the leading issuer of cancer expense insurance coverage in Japan,
principally due to its lead time in the market, unique marketing system (see
Agency Force), low-cost operations and product expertise developed in the
United States. AFLAC has been very successful in the sale of cancer expense
policies in Japan, with 12.6 million cancer policies in force at December
31, 1996.
In December 1996, the governments of the United States and Japan
reached an agreement on deregulation of the Japanese insurance industry.
The agreement calls for the gradual liberalization of the industry over the
next four years and includes provisions to avoid "radical change" in the
third sector of the insurance industry. AFLAC and other foreign-owned
insurers, as well as some small to medium-sized Japanese insurers, operate
primarily in the third sector. One of the measures for avoiding radical
change in the third sector is the prohibition of additional Japanese life
and non-life insurance companies from selling cancer or medical insurance
until January 1, 2001.
AFLAC's strategy for future growth in Japan centers on broadening the
Company's product line and expanding the distribution system. Although the
basic plan for growth is the same in Japan as in the United States,
management has had to formulate a strategy specifically tailored for the
Japanese insurance marketplace, which is very different from the U.S.
system. There are only 44 life insurance companies in Japan, compared with
more than 2,000 life insurers in the United States. In Japan, insurers have
traditionally been restricted in the types of policies they could offer.
However, as Japan begins deregulating the insurance industry, the
marketplace should become more competitive, with insurers able to offer more
types of products as they do in the United States.
REGULATION AND REMITTANCE OF FUNDS - JAPAN
Payments are made from AFLAC Japan to the Parent Company for management
fees, and to AFLAC U.S. for allocated expenses and remittances of earnings.
These payments totaled $253.6 million in 1996, $179.5 million in
1995 and $167.9 million in 1994. Management fees paid to the Parent Company
are largely based on expense allocations.
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A portion of AFLAC Japan's annual earnings, as determined on a Japan
statutory accounting basis, can be remitted each year to AFLAC U.S. after
satisfying various conditions imposed by Japanese regulatory authorities for
protecting policyholders and obtaining remittance approvals from such
authorities. These conditions include compliance with risk-based capital
guidelines for Japanese insurers. Profit remittances to the United States
can fluctuate due to changes in the amounts of Japanese regulatory earnings.
Among other items, factors affecting regulatory earnings include Japanese
regulatory accounting practices and fluctuations in currency translations of
AFLAC Japan's U.S. dollar-denominated investments into yen. It is expected
that profit remittances will continue in future years, based on projected
annual earnings of AFLAC Japan as computed on a Japanese regulatory
accounting basis.
Japan statutory accounting practices differ in many respects from U.S.
generally accepted accounting principles. Under Japan statutory accounting
practices, policy acquisition costs are charged off immediately, policy
benefit and claim reserving methods are different, deferred income tax
liabilities are not recognized, and investment securities are generally
carried at cost less certain market value adjustments.
The Japanese Ministry of Finance imposes solvency standards that
represent a form of risk-based capital requirements. AFLAC Japan must meet
these requirements to continue profit transfers to AFLAC U.S. At this time,
AFLAC Japan is in compliance with these standards, and management does not
expect these requirements to adversely affect the repatriation of funds from
Japan in the foreseeable future.
The Life Insurance Association of Japan, an industry organization, is
currently implementing a policyholder protection fund. The purpose of the
fund is to provide capital support to member companies for business assumed
from insolvent life insurers. AFLAC Japan has pledged investment securities
to the Life Insurance Association of Japan for this program. The Company
retains ownership of the securities and receives the related investment
income. The amount of securities pledged is based on premium income and
policy reserves. As of December 31, 1996, $49.5 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund.
In 1994, 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 is scheduled to increase from
the current rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently
incurs consumption tax on agents' commissions. Had the rate increase been
enacted effective January 1, 1996, pretax operating earnings would have been
reduced by approximately $16.4 million ($9.0 million after income tax) in
1996. The Company is in the process of evaluating changes in its
compensation arrangements with its agents to mitigate a portion of this tax
increase.
In late 1996, the Japanese government proposed new income tax
provisions that would increase Japan's income taxes on investment income
received by foreign companies operating in Japan from securities issued from
their home country. The government plans to finalize the proposal near the
end of March 1997. The new provisions are expected to be effective
beginning in 1998. If the proposal had been enacted in 1996 in its present
form, AFLAC Japan's income tax expense would have been increased, and net
earnings of the Company would have decreased by approximately $23.7 million
for the year 1996.
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Management is evaluating the impact of this proposal and will seek to
mitigate much of the tax impact through investment alternatives and by
restructuring portions of the existing investment portfolio. Based on a
preliminary review, management does not expect this tax change as it is
presently proposed to materially affect future net earnings of the Company.
The insurance business in Japan, which is conducted as a branch office
of AFLAC, is subject to regulation by the MOF, similar to the regulation and
supervision in the United States as described on pages I-14 and I-15 under
"Regulation - U.S." AFLAC Japan files annual reports and financial
statements for the Japanese insurance operations based on a March 31 year-
end, prepared in accordance with Japanese regulatory accounting practices
prescribed or permitted by the MOF. Also, financial and other affairs of
AFLAC Japan are subject to examination by the MOF.
Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets
determined on a Japanese regulatory accounting basis as of December 31 are
as follows:
(In thousands - unaudited) 1996 1995
---------- ----------
Net assets on GAAP basis $ 1,697,003 $ 1,817,106
Elimination of deferred policy
acquisition costs (2,022,899) (2,067,409)
Adjustment to carrying value of fixed-
maturity securities (2,561,097) (2,613,600)
Adjustment to policy liabilities 2,476,384 2,205,072
Elimination of deferred income taxes 1,006,550 1,211,187
Reduction in premiums receivable (124,829) (237,929)
Other, net (4,222) 98,378
---------- ---------
Net assets on Japanese regulatory
accounting basis $ 466,890 $ 412,805
========== =========
For additional information regarding AFLAC Japan's operations, see
Exhibit 13, pages 13-9 to 13-13 (AFLAC Japan section of MD&A) and pages 13-
37 and 13-57 (Notes 2 and 10 of Notes to the Consolidated Financial
Statements), which are incorporated herein by reference.
EMPLOYEES - JAPAN
AFLAC Japan employed 1,584 full-time and 236 part-time employees at
December 31, 1996. AFLAC Japan considers its employee relations to be
excellent.
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INSURANCE - U.S.
The following table sets forth AFLAC U.S. premiums earned by product
line for the last three years ended December 31.
(In thousands) 1996 1995 1994
-------- -------- --------
Premiums earned:
Cancer expense $ 429,006 $ 402,789 $ 384,943
Other accident and health 501,355 441,444 392,371
Life insurance 15,445 15,559 15,149
-------- -------- --------
Total AFLAC U.S.
premiums earned $ 945,806 $ 859,792 $ 792,463
======== ======== ========
The following table sets forth the changes in annualized premiums in
force for AFLAC U.S. health insurance for the years ended December 31.
(In thousands) 1996 1995 1994
--------- --------- ---------
Annualized premiums in force, at
beginning of year $ 937,104 $ 860,204 $ 787,482
New issues including policy
conversions 321,207 275,151 241,894
Change in unprocessed policies (5,291) (1,791) 2,666
Lapses (232,872) (207,859) (183,973)
Other 21,387 11,399 12,135
--------- --------- ---------
Annualized premiums in force, at
end of year $1,041,535 $ 937,104 $ 860,204
========= ========= =========
HEALTH INSURANCE PLANS - U.S.
AFLAC's insurance is supplemental in nature and is designed for people
who already have major medical or primary insurance coverage. AFLAC's
supplemental health insurance plans are guaranteed renewable for the
lifetime of the policyholder. Guaranteed-renewable coverage may not be
cancelled by the insurer, but premium rates on existing and future policies
may be increased by class of policy in response to claims experience higher
than originally expected (subject to federal and state loss-ratio
guidelines) on a uniform, nondiscriminatory basis subject to state
regulatory approval.
AFLAC's cancer plans are designed to provide insurance benefits for
medical and nonmedical costs that are generally not reimbursed by major
medical insurance. AFLAC currently offers a series of four different cancer
plans in the United States that vary by benefit amount and type. All four
plans provide a first occurrence benefit that pays an initial amount when
internal cancer is first diagnosed, a fixed amount for each day an insured
is hospitalized for cancer treatment, and benefits for medical, radiation,
chemotherapy, surgery and a "wellness" benefit applicable toward certain
diagnostic tests such as mammograms, pap smears, flexible sigmoidoscopy,
etc. Two of the plans currently offered contain benefits that reimburse the
insured for nursing services, anesthesia, prosthesis, blood, plasma, second
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<PAGE>
surgical opinion, ambulance, transportation, family lodging, extended care
facility, bone marrow transplant and hospice. The remaining two plans make
these benefits available as an optional schedule of benefits rider. AFLAC
also issues several riders, including one that increases the amount of the
first occurrence benefit on each rider anniversary date until the covered
person reaches age 65 or until internal cancer is diagnosed. AFLAC
periodically introduces new forms of coverage, revising benefits and related
premiums based upon the anticipated needs of the policyholders and AFLAC's
claim experience.
AFLAC offers an accident and disability policy to protect against
losses resulting from accidents. The accident portion of the policy
includes lump sum benefits for accidental death, dismemberment and specific
injuries. Fixed benefits for hospital confinement, emergency treatment,
follow-up treatments, ambulance, transportation, family lodging, wellness,
prosthesis, medical appliances and physical therapy are also provided.
Optional disability riders are available to the primary insured only and
include choices of a sickness disability rider, on-the-job disability rider
and off-the-job disability rider. These benefits are payable up to a
maximum benefit period of one year and for one disability at a time.
AFLAC currently markets five of the Medicare Supplement Standardized
Plans, with the majority of sales coming from Plans F and C. The plans are
priced on an issue-age basis. Under this method, rates are revised due to
changes in the Medicare program and medical inflation. There is no
automatic rate increase due to the aging of the insured. Premium rates are
determined based on zip code groupings, which are adjusted for increases in
costs for each area. The benefits provided range from the basic plan,
covering Part A and B coinsurance, to plans with more extensive coverage,
including Part A and B deductibles, skilled nursing coinsurance, Part B
excess and other benefits. AFLAC U.S. does not market the standardized
plans covering prescription drug benefits.
AFLAC also issues other supplemental health insurance, such as
intensive care, which is a low-premium policy that provides protection
against the high cost of intensive care facilities during hospital
confinement, regardless of reimbursements from other insurers. Other types
of health insurance issued by AFLAC include a long-term convalescent care
policy, long- and short-term disability, and a hospital confinement
indemnity policy.
LIFE INSURANCE PLANS - U.S.
AFLAC issues various life insurance policies including whole life,
limited pay life, voluntary group term life and term life coverage.
AGENCY FORCE AND MARKETING - U.S.
AFLAC's sales force comprises independent sales agents who are licensed
to sell accident and health insurance. Many are also licensed to sell life
insurance. Most agents' efforts are directed toward selling supplemental
health insurance. The 1996 monthly average number of U.S. agents actively
producing business was 6,665, compared with 6,121 in 1995 and 5,489 in 1994.
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<PAGE>
Agents' activities are principally limited to sales, with policyholder
service functions, including issuance of policies, premium collection,
payment notices and claims handled by the staff at headquarters. Agents are
paid commissions based on first-year and renewal premiums from their sales
of health and life insurance products. AFLAC's state, regional and district
sales coordinators, who are independent contractors, are compensated by
override commissions.
AFLAC has concentrated on the development of "payroll marketing" in
marketing its policies. Payroll marketing offers policies to individuals
through common media such as trade and other associations or at the work
site. This manner of marketing is distinct from "group" insurance sales in
that each individual insured is directly contacted by the sales associate.
Policies are individually underwritten in the payroll market, with premiums
generally paid by the employee. Additionally, AFLAC supplemental policies
are portable in that individuals may retain their full insurance coverage
upon separation from employment or such affiliation, generally at the same
premium. A major portion of premiums on such sales are collected through
payroll deduction or other forms of group billings. Group-issued plans
normally result in a lower average age of the insured at the time of policy
issuance and also result in certain savings in administrative costs, a
portion of which are passed on to the policyholder in the form of reduced
premiums. Management believes that payroll marketing enables the agency
force to reach a greater number of prospective policyholders than individual
solicitation and that this method lowers distribution costs.
Another valuable marketing and sales tool is the flexible benefits
program, or cafeteria plan, which allows an employee to pay for medical
insurance using pretax dollars. These programs help achieve increased
penetration as agents are required to present the program to all employees.
They also help improve overall persistency levels due to the limited changes
allowed during the plan year.
During 1996 and 1995, AFLAC continued to develop marketing arrangements
with insurance brokers. Insurance brokers generally have better access to
larger payroll groups than independent agents. The core of the Company's
distribution network will remain independent agents.
In 1996, AFLAC's U.S. premiums collected were $934.5 million, 7.0% of
which was collected in Georgia, 6.8% in Texas, 6.7% in Florida, 5.6% in
North Carolina and 5.0% in Tennessee. Premiums collected in all other
states were individually less than 5% of AFLAC's U.S. premiums.
COMPETITION - U.S.
The accident and health and life insurance industry in the United
States is highly competitive. AFLAC competes with a large number of other
insurers, some of which have been in business for a longer period of time or
have greater financial resources. In the United States, there are more than
2,000 life and accident and health insurance companies, most of which
operate in the states AFLAC conducts business.
Private insurers and voluntary and cooperative plans, such as Blue
Cross and Blue Shield, provide insurance for meeting basic hospitalization
and medical expenses. Much of this insurance is sold on a group basis. The
federal and state governments also pay substantial costs of medical
I-13
<PAGE>
treatment through Medicare and Medicaid programs. Such major medical
insurance generally covers a substantial amount of the medical (but not
nonmedical) expenses incurred by an insured as a result of cancer or other
major illnesses. AFLAC's policies are designed to provide coverage that is
supplemental to coverage provided by major medical insurance. AFLAC's
benefits may also be used to defray nonmedical expenses.
Since other insurers generally do not provide full coverage of medical
expenses or any coverage of nonmedical expenses, AFLAC's supplemental
insurance is not an alternative to major medical insurance, but is sold to
complement (supplement) major medical insurance by helping cover the gap
between major medical insurance reimbursements and the total costs of an
individual's health care. AFLAC thus competes only indirectly with major
medical insurers in terms of premium rates and similar factors. However,
the scope of the major medical coverage offered by other insurers does
represent a limitation on the market for AFLAC's products. Accordingly,
expansion of coverage by other insurers or governmental programs could
adversely affect AFLAC's business opportunities. Conversely, any reduction
of coverages, such as increased deductibles and copayments, by other
insurers or governmental programs could favorably affect AFLAC's business
opportunities.
AFLAC competes directly with other insurers offering supplemental
health insurance and believes that its current policies and premium rates
are generally competitive with those offered by other companies selling
similar types of insurance.
For additional information regarding U.S. insurance operations, see
Exhibit 13, page 13-13 to 13-15 (AFLAC U.S. section of MD&A), which is
incorporated herein by reference.
REGULATION - U.S.
The Parent Company and its insurance subsidiaries are subject to state
regulations in the United States as an insurance holding company system.
Such regulations generally provide that transactions between companies
within the holding company system must be fair and equitable. In addition,
transfer of assets among such affiliated companies, certain dividend
payments from insurance subsidiaries and material transactions between
companies within the system are subject to prior notice to, or approval by,
state regulatory authorities.
AFLAC and its insurance subsidiaries, in common with all U.S. insurance
companies, are subject to regulation and supervision in the states and other
jurisdictions in which they do business. In general, the insurance laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers relating to, among other things: granting and revoking
licenses to transact business, regulating trade practices, licensing agents,
prior approval of forms of policies and premium rate increases, standards of
solvency and maintenance of specified policy benefit reserves and minimum
loss ratio requirements, capital for the protection of policyholders,
limitations on dividends to shareholders, the nature of and limitations on
investments, deposits of securities for the benefit of policyholders, filing
of annual reports and financial statements prepared in accordance with
statutory insurance accounting practices prescribed or permitted by the
regulatory authorities, and periodic examinations of the
I-14
<PAGE>
financial, market conduct, and other affairs of insurance companies. In
addition, the National Association of Insurance Commissioners (NAIC) is
currently working on regulatory initiatives relating to investments,
reinsurance, dividend restrictions, revision of the risk-based capital
formula and other matters.
Currently, prescribed or permitted statutory accounting principles
(SAP) may vary between states and between companies. The NAIC is in the
process of recodifying SAP to promote standardization throughout the
industry. Completion of this project will result in changes in statutory
accounting practices for the Company. The impact on the Company's statutory
capital and surplus is not presently determinable.
For further information concerning state regulatory and dividend
restrictions, see Exhibit 13, page 13-57 (Note 10 - Statutory Accounting and
Dividend Restrictions of Notes to the Consolidated Financial Statements),
incorporated herein by reference.
The NAIC risk-based capital formula for U.S. life insurance companies
established capital requirements relating to insurance risk, business risk,
asset risk and interest rate risk. These requirements are intended to
facilitate identification by insurance regulators of inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formulas for determining the
amount of risk-based capital specify various weighting factors that are
applied to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio of
the company's regulatory total adjusted capital to its authorized control
level risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of which
requires specified corrective action. The levels are company action,
regulatory action, authorized control and mandatory control. AFLAC's NAIC
risk-based capital ratio continues to reflect a very strong statutory
capital and surplus position.
Currently, three states have laws, regulations or regulatory practices
that either prohibit the sale of specified disease insurance, such as
AFLAC's cancer expense insurance, or make its sale impractical. These
states are Massachusetts, New Jersey and New York. Regulations in
Connecticut were recently changed to allow the sale of specified disease
insurance beginning in June 1997. The remainder of the states do not impose
prohibitions or restrictions that prevent AFLAC from marketing cancer
expense insurance. AFLAC U.S. is marketing several of its other products in
these states, directly or through a subsidiary.
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business therein can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies with similar lines of
business. Such assessments have not been material to the Company in recent
years. The Company believes that future assessments relating to companies
currently involved in insolvency proceedings will not materially impact the
consolidated financial statements.
I-15
<PAGE>
EMPLOYEES - U.S.
In its U.S. insurance operations, the Company employed 1,697 full-time
and 32 part-time employees at December 31, 1996. The Company considers its
employee relations to be excellent.
RESERVES - JAPAN AND U.S.
The reserves reported in the financial statements have been computed in
accordance with generally accepted accounting principles (GAAP). These
reserves differ from those reflected in the various regulatory financial
statements filed by the Company. Such differences arise from the use of
different mortality, morbidity, interest, lapse assumptions and actuarial
reserving methods as required by the laws of the various states and Japan.
OTHER OPERATIONS
The Company's other operations primarily include seven network-
affiliated television stations located in small to mid-size U.S. markets.
Broadcast revenues increased 13.3% in 1996 and 5.1% in 1995 primarily due to
increased advertising revenues from an improved U.S. economy and from the
political elections in 1996.
As previously mentioned, the Company entered into definitive agreements
for the sale of its broadcast division business. The sale of one station,
WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. Management
expects the sale of the remaining six stations will close during the first
half of 1997.
The Broadcast Division employed 477 full-time and 87 part-time
employees at December 31, 1996. The Broadcast Division considers its
employee relations to be excellent. The Company's other operations, in
addition to Broadcast, had 308 employees at December 31, 1996; employee
relations are considered to be excellent.
For additional information regarding other operations, see Exhibit 13,
page 13-15 (Other Operations section of MD&A), which is incorporated herein
by reference.
ITEM 2. PROPERTIES
AFLAC owns an 18-story office building, which is the worldwide
headquarters of the Parent Company and AFLAC, along with a six-story parking
garage. These structures are located on approximately 14 acres of land in
Columbus, Georgia. The Company also owns two additional buildings located
on the same property. AFLAC also owns administrative office buildings
located nearby. AFLAC New York occupies leased office space in Albany, New
York.
In Tokyo, Japan, AFLAC owns an 11-story administrative office building,
which was completed in April 1994. AFLAC also leases office space in Tokyo
along with regional sales offices located throughout the country, and owns a
training facility in Tokyo.
I-16
<PAGE>
The Broadcast Division owns land, buildings, transmission towers and
other broadcast equipment in the cities where its six television stations
are located. These properties will be sold in conjunction with the sale of
the Broadcast Division during the first half of 1997.
ITEM 3. 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. During 1995, the Company settled
certain litigation in Alabama related to an ancillary line of business.
However, the settlement was not material to the Company's consolidated net
earnings for the year. Although the final results of any litigation cannot
be predicted with certainty, the Company believes the outcome of the
litigation still pending will not have a material adverse effect on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders for a vote in
the fourth quarter ended December 31, 1996.
I-17
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
NAME PRINCIPAL OCCUPATION (*) AGE
- ------------------- ------------------------------------- ---
Daniel P. Amos President; Chief Executive Officer of 45
AFLAC Incorporated and AFLAC, Vice
Chairman of AFLAC Incorporated
Paul S. Amos Chairman of the Board of AFLAC 70
Incorporated and AFLAC
William J. Bugg, Jr. Senior Vice President, Corporate 57
Actuary of AFLAC
Monthon Chuaychoo Vice President, Financial Services, of 53
AFLAC Incorporated and AFLAC since
September 1993; Second Vice President,
Assistant Controller of AFLAC
Incorporated and AFLAC to
September 1993
Kriss Cloninger III Executive Vice President, Chief 49
Financial Officer of AFLAC Incorporated
and AFLAC, and Treasurer of AFLAC
Incorporated since March 1993; Senior
Vice President, Chief Financial Officer
of AFLAC Incorporated and AFLAC and
Treasurer of AFLAC Incorporated from
March 1992 until March 1993; Principal,
KPMG Peat Marwick LLP, Atlanta, GA until
March 1992
Martin A. Durant, III Senior Vice President, Corporate Services, 48
of AFLAC Incorporated and AFLAC since
August 1993; Vice President and
Controller of AFLAC Incorporated and
AFLAC to August 1993
Norman P. Foster Executive Vice President, Corporate 62
Finance, of AFLAC Incorporated
and AFLAC since March 1992; Senior Vice
President, Chief Financial Officer
of AFLAC Incorporated, and AFLAC and
Treasurer of AFLAC Incorporated until
March 1992
I-18
<PAGE>
David Halmrast Senior Vice President, Director of 57
Corporate and Market Development of
AFLAC Incorporated since September
1996; Senior Vice President, Corporate
Development, of AFLAC until
September 1996; Senior Vice President,
Corporate Development of AFLAC
Incorporated until December 1993;
Senior Vice President and Chief
Financial Officer of Colonial
Companies, Inc. until July 1992
Kenneth S. Janke Jr. Senior Vice President, Investor 38
Relations, of AFLAC Incorporated
since August 1993; Vice President,
Investor Relations, of AFLAC
Incorporated until August 1993
Akitoshi Kan Deputy Chief Financial Officer of AFLAC, 49
Senior Vice President, AFLAC Japan,
Accounting, Information Systems, ABC
and Legal affairs since January 1997;
Senior Vice President, AFLAC Japan,
Accounting, Corporate Planning, Audit,
and Legal Affairs until January 1997;
Vice President, AFLAC Japan Accounting
Department until 1995
Kyoichi Kasuya Vice President, Chief Actuary, AFLAC 59
Japan
Nobuo Kawamura Senior Vice President, AFLAC Japan, 52
Underwriting, Policy Maintenance,
Premium Accounting, Customer Service,
Administration Support
Joseph P. Kuechenmeister Senior Vice President, Director 55
of Marketing of AFLAC
Joey M. Loudermilk Senior Vice President, General Counsel 43
and Corporate Secretary of AFLAC
Incorporated and AFLAC, and Director,
Legal and Governmental Relations of
AFLAC since May 1992; Senior Vice
President, Corporate Counsel and
Assistant Secretary of AFLAC
Incorporated and AFLAC and Director,
Legal and Governmental Affairs of AFLAC
until May 1992
I-19
<PAGE>
Hidefumi Matsui President, AFLAC Japan, since January 52
1995, Executive Vice President of AFLAC
Japan until 1995
Minoru Nakai President of AFLAC International, Inc. 55
Yoshiki Otake Chairman, AFLAC Japan, since January 57
1995, Vice Chairman of AFLAC
International Inc., President of
AFLAC Japan until 1995
E. Stephen Purdom Executive Vice President, U.S. Operations, 49
of AFLAC since October 1994; Senior Vice
President, Medical Director of AFLAC
until October 1994, and also Medical
Director, Columbus Clinic, Columbus,
GA until September 1994
Joseph W. Smith, Jr. Senior Vice President, Chief Investment 43
Officer of AFLAC
Gary L. Stegman Senior Vice President, Assistant Chief 47
Financial Officer of AFLAC
Incorporated and AFLAC; Treasurer
and Assistant Secretary of AFLAC
(*) Unless specifically noted, the respective executive officer has held
the occupation(s) set forth in the table for at least five years.
Each executive officer is appointed annually by the board of
directors and serves until his successor is chosen and qualified,
or until his death, resignation or removal.
I-20
<PAGE>
PART II
Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are
incorporated by reference from the Company's 1996 Annual Report to
Shareholders, the appropriate sections of which are included herein as
Exhibit 13.
Exhibit 13 Annual Report
Pages Pages
__________ _______________
ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 50 (Note 10);
EQUITY AND RELATED SHAREHOLDER 13-57 and 53-54
MATTERS (Note 10)
ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 26 - 27
ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 28 - 36
ANALYSIS OF FINANCIAL CONDITION 13-24
AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND 13-25 to 37 - 52
SUPPLEMENTARY DATA 13-64
ITEM 9. CHANGES IN AND DISAGREEMENTS None None
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
II-1
<PAGE>
PART III
Pursuant to General Instruction G to Form 10-K, Items 10 through 13 are
incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 1997 Annual Meeting of Shareholders, which was
filed with the Securities and Exchange Commission on March 14, 1997,
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Refer to the Information Refer to
Contained in the Proxy Printed
Statement under Captions Proxy
(filed electronically) Statement
Pages
________________________ _________
ITEM 10. DIRECTORS AND EXECUTIVE Security Ownership of 3 - 7
OFFICERS OF THE COMPANY Management. 1. Election
Directors of Directors
Executive Officers -
see Part I, Item 4A
herein
ITEM 11. EXECUTIVE COMPENSATION Board and Committee 8 - 19
Meetings and Directors
Compensation; Summary
Compensation Table; De-
fined Benefit Pension
Plan; Retirement Plans
for Key Executives;
Employment Contracts and
Termination of Employ-
ment Arrangements
ITEM 12. SECURITY OWNERSHIP OF Voting Securities and 2 - 7
CERTAIN BENEFICIAL Principal Holders
OWNERS AND Thereof. Security Owner-
MANAGEMENT ship of Management.
1. Election of Directors
ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 19
AND RELATED and Relationships
TRANSACTIONS
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS Page(s)
-----------
Included in Part II of this report and
incorporated by reference to the following
pages of Exhibit 13:
AFLAC Incorporated and Subsidiaries:
Consolidated Statements of Earnings, for 13-25
each of the years in the three-year
period ended December 31, 1996
Consolidated Balance Sheets, at December 13-26
31, 1996 and 1995 13-27
Consolidated Statements of Shareholders' 13-28 -
Equity, for each of the years in the 13-29
three-year period ended December 31,
1996
Consolidated Statements of Cash Flows, 13-30 -
for each of the years in the three-year 13-31
period ended December 31, 1996
Notes to the Consolidated Financial 13-32 to
Statements 13-61
Report of Independent Auditors 13-63
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Auditors' Report on Financial Statement Schedules IV-5
Schedule I - Summary of Investments - Other IV-6
Than Investments in Related
Parties, at December 31, 1996
Schedule II - Condensed Financial Information of IV-7 -
Registrant, at December 31, 1996 IV-11
and 1995 and for each of the
years in the three-year period
ended December 31, 1996
Schedule IV - Reinsurance, for each of the IV-12
years in the three-year period
ended December 31, 1996
Schedules other than those listed above are omitted because they are
not required or are not applicable, or the required information is shown in
the financial statements or notes thereto.
IV-1
<PAGE>
3. EXHIBITS
3.0 - Articles of Incorporation, as amended - incorporated by
reference from 1991 Form 10-K, Commission file number
1-7434, Exhibit 3.0; and Bylaws of the Company, as
amended - incorporated by reference from
Form 10-Q for June 30, 1996, Commission file number
1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0.
4.0 - There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of AFLAC Incorporated and its subsidiaries on a
consolidated basis. The Company agrees to furnish a copy
of any of its long-term debt instruments to the Securities
and Exchange Commission upon request.
10.0* - American Family Corporation Incentive Stock Option Plan
(1982) - incorporated by reference from Registration
Statement No. 33-44720 on Form S-8 with respect to the
AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and
Stock Option Plan (1985).
10.1* - American Family Corporation Stock Option Plan (1985) -
incorporated by reference from Registration Statement
No. 33-44720 on Form S-8 with respect to the AFLAC
Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan -
incorporated by reference from 1994 Shareholders' Proxy
Statement, Commission file number 1-7434, Accession No.
0000004977-94-000003, Exhibit A.
10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as
amended August 8, 1995 - incorporated by reference from
Form 10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.
10.2* - American Family Corporation Retirement Plan for Senior
Officers, as amended and restated October 1, 1989 -
incorporated by reference from 1993 Form 10-K, Commission
file number 1-7434, Accession No. 0000004977-94-000006,
Exhibit 10.2.
10.3* - American Family Corporation Supplemental Executive
Retirement Plan - incorporated by reference from 1989
Form 10-K, Commission file number 1-7434, Exhibit 10.9.
10.3.1* - AFLAC Incorporated Supplemental Executive Retirement
Plan, as amended, effective September 1, 1993 -
incorporated by reference from 1994 Form 10-K, Commission
file number 1-7434, Accession No. 0000004977-95-000006,
Exhibit 10.3.1.
10.4* - AFLAC Incorporated Employment Agreement with Daniel P.
Amos, dated August 1, 1993 - incorporated by reference
from 1993 Form 10-K, Commission file number 1-7434,
Accession No. 0000004977-94-000006, Exhibit 10.4.
10.5* - American Family Life Assurance Company of Columbus
Employment Agreement with Yoshiki Otake, dated January 1,
1995 - incorporated by reference from 1994 Form 10-K,
Commission file number 1-7434, Accession No.
0000004977-95-000006, Exhibit 10.5.
IV-2
<PAGE>
10.6* - AFLAC Incorporated Employment Agreement with Kriss
Cloninger, III, dated February 14, 1992, and as amended
November 12, 1993 - incorporated by reference from 1993
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-94-000006, Exhibit 10.6.
10.7* - AFLAC Incorporated Management Incentive Plan -
incorporated by reference from 1994 Shareholders' Proxy
Statement, Commission file number 1-7434, Accession
No. 0000004977-94-000003, Exhibit B.
10.8* - American Family Life Assurance Company of Columbus
Employment Agreement with Hidefumi Matsui, dated
January 1, 1995 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.8.
10.9* - American Family Life Assurance Company of Columbus
Employment Agreement with Dr. E. Stephen Purdom, dated
October 25, 1994 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.9.
10.10* - AFLAC Incorporated Employment Agreement with Paul S.
Amos, dated August 1, 1995 - incorporated by reference
from form 10-Q for September 30, 1995, Commission file
number 1-7434, Accession No. 0000004977-95-000023,
Exhibit 10.1.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1996.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-44720 with
respect to the AFLAC Incorporated (Formerly American
Family Corporation) Incentive Stock Option Plan (1982)
and Stock Option Plan (1985).
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-53737 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 333-01243 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-41926 with
respect to the AFLAC Associate Stock Bonus Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-41552 with
respect to the AFLAC Incorporated 401(k) Retirement
Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-64535 with respect
to the AFL Stock Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 333-16533 with respect
to the AFLAC Associate Stock Bonus Plan.
27.0 - Financial Data Schedule (electronic filing only).
*Management contract or compensatory plan or agreement.
IV-3
<PAGE>
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended
December 31, 1996.
(c) EXHIBITS FILED WITH CURRENT FORM 10-K
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1996.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-44720 with respect
to the AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and Stock
Option Plan (1985).
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-53737 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 333-01243 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-41926 with respect
to the AFLAC Associate Stock Bonus Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-41552 with respect
to the AFLAC Incorporated 401(k) Retirement Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-64535 with respect
to the AFL Stock Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 333-16533 with respect
to the AFLAC Associate Stock Bonus Plan.
27.0 - Financial Data Schedule (electronic filing only).
IV-4
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Shareholders and Board of Directors
AFLAC Incorporated:
Under date of January 29, 1997, we reported on the consolidated balance
sheets of AFLAC Incorporated and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the 1996 annual report to shareholders.
These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement
schedules as listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 29, 1997
IV-5
<PAGE>
SCHEDULE I
AFLAC INCORPORATED AND SUBSIDIARIES
Summary of Investments - Other than Investments in Related Parties
December 31, 1996
(In thousands) Amount in
Fair Balance
Type of Investment Cost Value Sheet
----------------------- ----------- ----------- ----------
Securities available for sale:
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities $ 687,556 $ 707,510 $ 707,510
States, municipalities and
political subdivisions 6,840 6,477 6,477
Foreign governments 7,523,637 8,954,473 8,954,473
Public utilities 2,865,634 3,263,311 3,263,311
Convertibles 27,005 29,544 29,544
All other corporate bonds 6,830,528 7,366,411 7,366,411
---------- ---------- ----------
Total fixed maturities
available for sale 17,941,200 20,327,726 20,327,726
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 3,665 4,395 4,395
Banks, trusts and insurance
companies 6,628 11,685 11,685
Industrial, miscellaneous
and all other 75,956 120,248 120,248
---------- ---------- ----------
Total equity securities 86,249 136,328 136,328
---------- ---------- ----------
Total securities
available for sale 18,027,449 20,464,054 20,464,054
Mortgage loans on real estate 17,802 21,151 17,802
Policy loans 1,273 1,273 1,273
Other long-term investments 1,726 1,726 1,726
Short-term investments 261,680 261,680 261,680
---------- ---------- ----------
Total investments $18,309,930 $20,749,884 $20,746,535
========== ========== ==========
IV-6
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
AFLAC Incorporated (Parent Only)
(In thousands)
December 31,
1996 1995
---------- ----------
ASSETS:
Investments:
Investments in subsidiaries* $ 2,677,304 $ 2,573,606
Other investments:
Money market funds 22,458 17,346
Mortgage loans and other 2,350 2,548
---------- ----------
Total investments 2,702,112 2,593,500
Due from subsidiaries* 3,947 3,910
Other receivables 2,523 4,478
Property and equipment, net 8,428 9,231
Other 3,288 1,291
---------- ----------
Total assets 2,720,298 2,612,410
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Cash overdraft 286 160
Due to subsidiaries* 869 1,237
Notes payable (note A) 327,408 272,158
Employee and beneficiary benefit plans 183,807 147,319
Income taxes, primarily deferred 45,948 33,577
Other 36,411 23,818
Commitments and contingencies (note B)
---------- ----------
Total liabilities 594,729 478,269
---------- ----------
Shareholders' equity:
Common stock of $.10 par value:
Authorized 175,000; issued 157,239
shares in 1996 and 156,358 shares
in 1995 15,724 15,636
Additional paid-in capital 208,994 196,928
Unrealized foreign currency
translation gains 229,782 213,319
Unrealized gains on securities
available for sale 280,154 482,787
Retained earnings (note D) 1,917,794 1,577,605
Treasury stock, at average cost (526,425) (351,117)
Notes receivable for stock purchases (454) (1,017)
---------- ----------
Total shareholders' equity 2,125,569 2,134,141
---------- ----------
Total liabilities and
shareholders' equity $ 2,720,298 $ 2,612,410
========== ==========
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
IV-7
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Earnings
AFLAC Incorporated (Parent Only)
(In thousands)
Years ended December 31,
1996 1995 1994
---------- ---------- ----------
Revenues:
Dividends from subsidiaries* $ 137,692 $ 82,343 $ 109,533
Management and service fees
from subsidiaries* 30,470 30,509 26,391
Other income from subsidiaries,
principally rental and interest* 6 196 683
Other income 4,041 1,069 1,327
--------- --------- ---------
Total revenues 172,209 114,117 137,934
--------- --------- ---------
Operating expenses:
Interest expense - subsidiaries* 16 30 22
Interest expense - others 10,512 8,419 6,070
Capitalized interest - - (2,419)
Other operating expenses 84,055 70,921 65,635
--------- --------- ---------
Total operating expenses 94,583 79,370 69,308
--------- --------- ---------
Earnings before income taxes and
equity in undistributed earnings
of subsidiaries 77,626 34,747 68,626
Income tax expense (note C) 12,410 8,583 874
--------- --------- ---------
Earnings before equity in
undistributed earnings of
subsidiaries 65,216 26,164 67,752
Equity in undistributed earnings
of subsidiaries 329,147 322,893 225,038
--------- --------- ---------
Net earnings $ 394,363 $ 349,057 $ 292,790
========= ========= =========
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
IV-8
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Cash Flows
AFLAC Incorporated (Parent Only)
(In thousands)
Years ended December 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 394,363 $ 349,057 $ 292,790
Adjustments to reconcile net
earnings to net cash provided
from operating activities:
Equity in undistributed
earnings of subsidiaries (329,147) (322,893) (225,038)
Deferred income taxes 12,371 8,178 (578)
Employee and beneficiary
benefit plans 36,488 30,174 32,700
Other, net 14,814 17,017 4,307
--------- --------- ---------
Net cash provided by
operating activities 128,889 81,533 104,181
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in
other investments (4,914) (14,325) 18,998
Additional capitalization
of subsidiaries - - (3,592)
--------- --------- ---------
Net cash (used)/provided by
investing activities (4,914) (14,325) 15,406
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings 135,914 198,250 84,000
Assumption of debt from affiliate 15,389 - -
Principal payments under debt
obligations (57,671) (11,507) (26,541)
Proceeds from exercise of
stock options 6,549 3,235 2,163
Dividends paid to shareholders (54,174) (48,939) (44,928)
Purchases of treasury stock (204,169) (224,204) (131,734)
Treasury stock reissued 34,549 9,693 2,761
Net change in amount due
to/from subsidiaries (405) 6,186 (5,331)
Other, net (83) - -
--------- --------- ---------
Net cash used by
financing activities (124,101) (67,286) (119,610)
--------- --------- ---------
Net change in cash (126) (78) (23)
Cash (overdraft) at beginning of year (160) (82) (59)
--------- --------- ---------
Cash (overdraft) at end of year $ (286) $ (160) $ (82)
========= ========= =========
See the accompanying Notes to Condensed Financial Statements.
IV-9
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Statements
AFLAC Incorporated (Parent Only)
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
AFLAC Incorporated and Subsidiaries (see Part II - Item 8).
(A) NOTES PAYABLE
A summary of notes payable serviced by the Parent Company at
December 31, 1996 and 1995 follows:
(In thousands) 1996 1995
-------- --------
2.74% unsecured, yen-denominated notes payable
to banks under reducing revolving credit
agreement, due annually through July 2001........ $ 284,238 $ 230,695
Unsecured, yen-denominated notes payable
to banks, due semiannually, through October
1997, variable interest rate (.88% at
December 31, 1996)............................... 17,453 -
9.60% to 10.72% unsecured notes payable to bank,
due semiannually, through 1998, assumed from
broadcast affiliates in 1996..................... 15,389 -
8.3% note payable, due monthly through March 1997,
secured by equipment............................. 478 2,296
5.965% unsecured notes payable to banks,
refinanced in 1996............................... - 39,167
Short-term yen-denominated note payable to
bank under unsecured line of credit, variable
interest rate (.76% at December 31, 1996)........ 9,850 -
-------- --------
Total notes payable............................ $ 327,408 $ 272,158
======== ========
The aggregate maturities of the notes payable for each of the five
years after December 31, 1996, are as follows:
(In thousands)
1997............................................ $ 93,074
1998............................................ 63,792
1999............................................ 56,848
2000............................................ 56,848
2001............................................ 56,846
IV-10
<PAGE>
(B) CONTINGENCIES
In prior years, the Parent Company executed promissory notes to banks
and transferred the proceeds to its broadcast affiliates for the acquisition
of television broadcasting stations. On December 31, 1996, the Parent
Company assumed the remaining debt from the broadcast affiliates. The
amount of such debt assumed was $15.4 million.
(C) INCOME TAXES
The Company and its eligible U.S. subsidiaries file a consolidated U.S.
federal income tax return. Income tax liabilities or benefits are recorded
by each principal subsidiary based upon separate return calculations, and
any difference between the consolidated provision and the aggregate amounts
recorded by the subsidiaries is reflected in the Parent Company financial
statements.
For further information on income taxes, see Exhibit 13, page 13-51,
Note 8 of the Notes to the Consolidated Financial Statements.
(D) DIVIDEND RESTRICTIONS
See Exhibit 13, pages 13-57 and 13-58 (Note 10, Statutory Accounting
and Dividend Restrictions, of Notes to the Consolidated Financial
Statements) for information regarding dividend restrictions.
(E) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(In thousands) 1996 1995 1994
-------- -------- --------
Cash payments during the year for:
Interest on debt obligations $ 9,805 $ 7,807 $ 6,302
Income taxes - 406 400
(F) ACCOUNTING CHANGES
For information concerning the cumulative effect of new accounting
standards adopted in 1996, 1995, and 1994, see page 13-35 of Exhibit 13,
Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated
Financial Statements.
IV-11
<PAGE>
<TABLE>
SCHEDULE IV
AFLAC INCORPORATED AND SUBSIDIARIES
Reinsurance
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
<CAPTION>
Percentage
Ceded to Assumed from of amount
Gross other other assumed
Amount companies companies Net amount to net
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Life insurance in force $ 16,329,749 $ 416,295 $ - $ 15,913,454 -
============= ============= ============= ============= ============
Premiums:
Health insurance $ 5,704,213 $ 657 $ - $ 5,703,556 -
Life insurance 207,232 752 - 206,480 -
------------- ------------- ------------- ------------- ------------
Total premiums $ 5,911,445 $ 1,409 $ - $ 5,910,036 -
============= ============= ============= ============= ============
Year ended December 31, 1995:
Life insurance in force $ 3,461,944 $ 230,238 $ - $ 3,231,706 -
============= ============= ============= ============= ============
Premiums:
Health insurance $ 6,053,137 $ 304 $ - $ 6,052,833 -
Life insurance 18,371 374 - 17,997 -
------------- ------------- ------------- ------------- ------------
Total premiums $ 6,071,508 $ 678 $ - $ 6,070,830 -
============= ============= ============= ============= ============
Year ended December 31, 1994:
Life insurance in force $ 2,715,954 $ 101,863 $ - $ 2,614,091 -
============= ============= ============= ============= ============
Premiums:
Health insurance $ 5,165,557 $ 171 $ - $ 5,165,386 -
Life insurance 15,713 367 - 15,346 -
------------- ------------- ------------- ------------- ------------
Total premiums $ 5,181,270 $ 538 $ - $ 5,180,732 -
============= ============= ============= ============= ============
IV-12
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 MARCH 26, 1997 By /s/ PAUL S. AMOS
------------------------ ----------------------------------
(Paul S. Amos)
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ DANIEL P. AMOS Chief Executive Officer, MARCH 26, 1997
- ------------------------ President and Vice -----------------
(Daniel P. Amos) Chairman of the Board
of Directors
/s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1997
- ------------------------ Chief Financial Officer -----------------
(Kriss Cloninger, III) and Treasurer
/s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1997
- ------------------------ Corporate Finance -----------------
(Norman P. Foster)
IV-13
<PAGE>
/s/ J. SHELBY AMOS, II Director MARCH 26, 1997
- ------------------------------ -----------------
(J. Shelby Amos, II)
/s/ MICHAEL H. ARMACOST Director MARCH 26, 1997
- ------------------------------ -----------------
(Michael H. Armacost)
/s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1997
- ------------------------------ -----------------
(M. Delmar Edwards, M.D.)
/s/ GEORGE W. FORD, JR. Director MARCH 26, 1997
- ------------------------------ -----------------
(George W. Ford, Jr.)
/s/ JOE FRANK HARRIS Director MARCH 26, 1997
- ------------------------------ -----------------
(Joe Frank Harris)
/s/ ELIZABETH J. HUDSON Director MARCH 26, 1997
- ------------------------------ -----------------
(Elizabeth J. Hudson)
/s/ KENNETH S. JANKE, SR. Director MARCH 26, 1997
- ------------------------------ -----------------
(Kenneth S. Janke, Sr.)
/s/ CHARLES B. KNAPP Director MARCH 26, 1997
- ------------------------------ -----------------
(Charles B. Knapp)
IV-14
<PAGE>
/s/ HISAO KOBAYASHI Director MARCH 26, 1997
- ------------------------------ -----------------
(Hisao Kobayashi)
/s/ YOSHIKI OTAKE Director MARCH 26, 1997
- ------------------------------ -----------------
(Yoshiki Otake)
/s/ E. STEPHEN PURDOM Director MARCH 26, 1997
- ------------------------------ -----------------
(E. Stephen Purdom)
/s/ BARBARA K. RIMER Director MARCH 26, 1997
- ------------------------------ -----------------
(Barbara K. Rimer)
/s/ HENRY C. SCHWOB Director MARCH 26, 1997
- ------------------------------ -----------------
(Henry C. Schwob)
/s/ J. KYLE SPENCER Director MARCH 26, 1997
- ------------------------------ -----------------
(J. Kyle Spencer)
/s/ GLENN VAUGHN, JR. Director MARCH 26, 1997
- ------------------------------ -----------------
(Glenn Vaughn, Jr.)
IV-15
<PAGE>
Exhibit Index
3.0 - Articles of Incorporation, as amended - incorporated by
reference from 1991 Form 10-K, Commission file number
1-7434, Exhibit 3.0; and Bylaws of the Company, as
amended - incorporated by reference from Form 10-Q for
June 30, 1996, Commission file number 1-7434,
Accession No. 0000004977-96-000012, Exhibit 3.0.
4.0 - There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of AFLAC Incorporated and its subsidiaries on a
consolidated basis. The Company agrees to furnish a copy
of any of its long-term debt instruments to the Securities
and Exchange Commission upon request.
10.0* - American Family Corporation Incentive Stock Option Plan
(1982) - incorporated by reference from Registration
Statement No. 33-44720 on Form S-8 with respect to the
AFLAC Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
10.1* - American Family Corporation Stock Option Plan (1985) -
incorporated by reference from Registration Statement No.
33-44720 on Form S-8 with respect to the AFLAC
Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan -
incorporated by reference from 1994 Shareholders' Proxy
Statement, Commission file number 1-7434, Accession No.
0000004977-94-000003, Exhibit A.
10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as
amended August 8, 1995 - incorporated by reference from
Form 10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.
10.2* - American Family Corporation Retirement Plan for Senior
Officers, as amended and restated October 1, 1989 -
incorporated by reference from 1993 Form 10-K, Commission
file number 1-7434, Accession No. 0000004977-94-000006,
Exhibit 10.2.
10.3* - American Family Corporation Supplemental Executive
Retirement Plan - incorporated by reference from 1989
Form 10-K, Commission file number 1-7434, Exhibit 10.9.
10.3.1* - AFLAC Incorporated Supplemental Executive Retirement
Plan, as amended, effective September 1, 1993 - incorporated
by reference from 1994 Form 10-K, Commission file number
1-7434, Accession No. 0000004977-95-000006, Exhibit 10.3.1.
10.4* - AFLAC Incorporated Employment Agreement with Daniel P.
Amos, dated August 1, 1993 - incorporated by reference
from 1993 Form 10-K, Commission file number 1-7434,
Accession No. 0000004977-94-000006, Exhibit 10.4.
10.5* - American Family Life Assurance Company of Columbus
Employment Agreement with Yoshiki Otake, dated January 1,
1995 - incorporated by reference from 1994 Form 10-K,
Commission file number 1-7434, Accession No.
0000004977-95-000006, Exhibit 10.5.
i
<PAGE>
10.6* - AFLAC Incorporated Employment Agreement with Kriss
Cloninger, III, dated February 14, 1992, and as amended
November 12, 1993 - incorporated by reference from 1993
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-94-000006, Exhibit 10.6.
10.7* - AFLAC Incorporated Management Incentive Plan - incorporated
by reference from 1994 Shareholders' Proxy Statement,
Commission file number 1-7434, Accession
No. 0000004977-94-000003, Exhibit B.
10.8* - American Family Life Assurance Company of Columbus
Employment Agreement with Hidefumi Matsui, dated
January 1, 1995 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.8.
10.9* - American Family Life Assurance Company of Columbus
Employment Agreement with Dr. E. Stephen Purdom, dated
October 25, 1994 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.9.
10.10* - AFLAC Incorporated Employment Agreement with Paul S. Amos,
dated August 1, 1995 - incorporated by reference from
Form 10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1996.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-44720 with respect
to the AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and Stock
Option Plan (1985).
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-53737 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 333-01243 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-41926 with respect
to the AFLAC Associate Stock Bonus Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-41552 with respect
to the AFLAC Incorporated 401(K) Retirement Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-64535 with respect
to the AFL Stock Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 333-16533 with respect
to the AFLAC Associate Stock Bonus Plan.
27.0 - Financial Data Schedule (electronic filing only).
*Management contract or compensatory plan or agreement.
ii
<PAGE>
Exhibits Filed with Current Form 10-K:
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1996.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-44720 with respect
to the AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and Stock
Option Plan (1985).
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-53737 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 333-01243 with respect
to the AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-41926 with respect
to the AFLAC Associate Stock Bonus Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-8 Registration Statement No. 33-41552 with respect
to the AFLAC Incorporated 401(K) Retirement Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 33-64535 with respect
to the AFL Stock Plan.
- Consent of independent auditor, KPMG Peat Marwick LLP, to
Form S-3 Registration Statement No. 333-16533 with respect
to the AFLAC Associate Stock Bonus Plan.
27.0 - Financial Data Schedule (electronic filing only).
iii
<PAGE>
EXHIBIT 13
EXH 13
<PAGE>
EXHIBIT 13
The following information is contained in the 1996 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 1996 Form 10-K have been reproduced herein as
Exhibit 13 for purposes of electronic filing of this Form 10-K.
PART II
ITEM 5. (a) Market Information:
The Company's common stock is principally traded on the New York Stock
Exchange. The Company is also listed on the Pacific Stock Exchange and the
Tokyo Stock Exchange.
The high, low and closing quarterly sales prices for the Company's
common stock, as published in the U.S. consolidated transaction reporting
system, for the last three fiscal years ended December 31, 1996, are as
follows:
Quarterly Common Stock Prices
1996 High Low Close
---------------------------------------------------------------------
4th Quarter $ 44.00 $ 35.75 $ 42.75
3rd Quarter 37.38 28.25 35.50
2nd Quarter 32.88 29.00 29.88
1st Quarter 32.88 28.83 31.25
1995
--------------------------------------------------------------------
4th Quarter $ 29.42 $ 26.33 $ 29.00
3rd Quarter 29.25 24.33 27.67
2nd Quarter 29.83 26.00 29.17
1st Quarter 28.50 21.25 27.33
1994
--------------------------------------------------------------------
4th Quarter $ 22.92 $ 21.33 $ 21.33
3rd Quarter 24.08 21.67 22.75
2nd Quarter 23.25 19.33 22.50
1st Quarter 21.25 16.83 20.50
EXH 13-1
<PAGE>
ITEM 5. (b) Holders:
1996 1995 1994
- ---------------------------------------------------------------------------
Number of common
shares outstanding 137,884,887 141,974,309 149,454,647
Number of registered
common shareholders 49,474 39,317 34,628
Approximate number of
common shareholders 113,300 88,700 67,500
ITEM 5. (c) Quarterly cash dividends:
1996 1995
------ ------
4th Quarter $.10 $.087
3rd Quarter .10 .087
2nd Quarter .10 .087
1st Quarter .087 .077
For information concerning dividend restrictions, see Management's
Discussion and Analysis of Financial Condition, the section concerning
shareholders' equity, presented in this Exhibit 13 on page 13-21, and Note
10, Statutory Accounting and Dividend Restrictions, of the Notes to the
Consolidated Financial Statements, also presented in this Exhibit 13 on page
13-57.
EXH 13-2
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except for per-share amounts):
<CAPTION>
For the Year 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health $ 5,910,036 $ 6,070,830 $ 5,180,732 $ 4,225,390 $ 3,369,201
Net investment income 1,021,955 1,024,960 838,825 689,272 533,166
Realized investment gains (losses) 1,980 (270) (58) 2,937 (3,264)
Gain on sale of television station 60,264 - - - -
Other income 105,968 95,100 91,259 83,019 87,369
---------- ---------- ---------- ---------- ----------
Total revenues 7,100,203 7,190,620 6,110,758 5,000,618 3,986,472
---------- ---------- ---------- ---------- ----------
Benefits and expenses:
Benefits and claims 4,895,522 5,034,266 4,256,541 3,423,297 2,692,353
Expenses 1,554,680 1,555,359 1,349,881 1,148,937 969,575
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 6,450,202 6,589,625 5,606,422 4,572,234 3,661,928
---------- ---------- ---------- ---------- ----------
Pretax earnings 650,001 600,995 504,336 428,384 324,544
Income taxes 255,638 251,938 211,546 184,495 141,177
---------- ---------- ---------- ---------- ----------
Net earnings $ 394,363 $ 349,057 $ 292,790 $ 243,889(1) $ 183,367
========== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net earnings $ 2.73 $ 2.33 $ 1.89 $ 1.55(1) $ 1.19
Cash dividends .387 .338 .298 .26 .23
Shareholders' equity 15.42 15.03 11.72 8.80 7.00
Price range: High $ 44.00 $ 29.83 $ 24.08 $ 22.67 $ 18.60
Low 28.25 21.25 16.83 16.50 12.80
Close 42.75 29.00 21.33 19.00 18.40
Price/earnings ratio:* High 18.3x 12.8x 12.7x 14.8x 15.6x
Low 11.8 9.1 8.9 10.8 10.8
Common shares used for EPS 144,512 149,540 154,652 157,801 153,815
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
At Year-End
Assets:
Investments and cash $20,746,535 $20,044,964 $15,993,768 $12,469,140 $ 9,461,341
Other 4,276,277 5,171,545 4,293,311 2,973,546 2,440,033
---------- ---------- ---------- ---------- ----------
Total assets $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374
========== ========== ========== ========== ==========
Liabilities and shareholders' equity:
Policy liabilities $20,234,205 $19,513,504 $16,006,607 $12,065,471 $ 9,350,241
Notes payable 353,533 327,268 184,901 122,062 125,800
Income taxes, primarily deferred 1,181,121 1,397,709 1,392,441 950,278 848,514
Other liabilities 1,128,384 1,843,887 951,363 939,251 494,937
Shareholders' equity 2,125,569 2,134,141 1,751,767 1,365,624 1,081,882
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
Operating earnings** $ 347,425 $ 348,734 $ 293,053 $ 241,654(1) $ 183,426
Operating earnings per share** $ 2.40 $ 2.33 $ 1.89 $ 1.53(1) $ 1.19
Pretax profit margin** 8.4% 8.4% 8.3% 8.5% 8.2%
After-tax profit margin** 4.9% 4.8% 4.8% 4.8%(1) 4.6%
Operating return on equity*** 19.9% 22.0% 20.4% 19.9%(1) 18.4%
Yen/dollar exchange rate at year-end 116.10 102.95 99.85 112.00 124.70
Average yen/dollar exchange rate 108.84 94.10 102.26 111.21 126.67
Notes: (1) Excludes gain of $11,438 ($.07 per share) from cumulative effect of accounting changes in 1993.
(*) Based on operating earnings per share.
(**) Excludes realized investment gains/losses, net of tax, and in 1996, the gain from the sale of a
television station.
(***)Excludes realized investment gains/losses and unrealized gains on securities available for sale, net.
For segment and foreign information, see Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Note 2 of Notes to the Consolidated Financial Statements.
EXH 13-4
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The primary business of AFLAC Incorporated (the Parent Company) and
subsidiaries (the Company) is supplemental health insurance, which is
marketed and administered primarily through American Family Life Assurance
Company of Columbus (AFLAC). Most of AFLAC's policies are individually
underwritten in the payroll market, with premiums paid by the employee. The
Company's operations in Japan (AFLAC Japan) and the United States (AFLAC
U.S.) service the two markets for the Company's insurance operations. 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.
The Company paid a three-for-two stock split on March 18, 1996. All
share and per-share amounts have been restated for the stock split.
RESULTS OF OPERATIONS
During 1996, the Company entered into definitive agreements for the
sale of its broadcast division business consisting of seven network-
affiliated television stations. The total pretax gain from this transaction
is estimated to be $325 million. Finalization of the transaction is subject
to approval by the Federal Communications Commission. 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 1996
were $60.3 million and $48.2 million, respectively. The effect of the after-
tax gain on 1996 net earnings per share was $.33. Management expects the
sale of the six remaining stations to be finalized during the first half of
1997. For further information, see Note 2 of the Notes to the Consolidated
Financial Statements.
Net earnings (including realized investment gains/losses and the gain
on the sale of the television station in 1996) were $394.4 million, or $2.73
per share, in 1996, compared with $349.1 million, or $2.33 per share, in
1995, and $292.8 million, or $1.89 per share, in 1994.
Operating earnings per share (excluding realized investment gains/losses
and the gain on the sale of the television station in 1996) increased 3.0%
to $2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994.
Operating earnings were $347.4 million in 1996, $348.7 million in 1995 and
$293.1 million in 1994.
EXH 13-5
<PAGE>
The following table sets forth the results of operations by business
component for the years shown and the percentage changes from the previous
year.
SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT
(In millions, except for per-share amounts)
Percentage change Years ended
over previous year December 31,
------------------ ------------------------
1996 1995 1996 1995 1994
------------------ ------------------------
Insurance operations (excluding
realized investment gains and
losses):
AFLAC Japan................. (5.1)% 19.1% $532.8 $561.4 $471.4
AFLAC U.S................... 23.0 15.8 128.5 104.5 90.2
----- ----- -----
Total (.7) 18.6 661.3 665.9 561.6
Broadcast division operations.. 35.0 10.4 25.6 19.0 17.2
Interest expense, noninsurance
operations................... (10.8) (14.7) (12.5) (11.3) (9.9)
Capitalized interest,
building construction........ - - 2.4
Corporate expenses, other
operations and eliminations.. (20.0) (7.9) (86.6) (72.3) (66.9)
----- ----- -----
Pretax operating earnings.. (2.2) 19.2 587.8 601.3 504.4
Realized investment
gains (losses)............... 1.9 (.3) (.1)
Gain on sale of television
station...................... 60.3 - -
----- ----- -----
Earnings before income
taxes.................... 8.2 19.2 650.0 601.0 504.3
Income taxes................... 1.5 19.1 255.6 251.9 211.5
----- ----- -----
Net earnings............... 13.0% 19.2% $394.4 $349.1 $292.8
==== ==== ===== ===== =====
Net earnings per share..... 17.2% 23.3% $ 2.73 $ 2.33 $ 1.89
==== ==== ===== ===== =====
============================================================================
The following discussion of earnings comparisons focuses on pretax
operating earnings and excludes realized investment gains/losses and the
gain of $60.3 million from the sale of one television station in 1996.
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. During the first half of 1995, the yen strengthened substantially
versus the dollar. In the third quarter of 1995, the yen began to weaken in
relation to the dollar and continued to weaken throughout 1996. The average
yen-to-dollar exchange rates were 108.84 in 1996, 94.10 in 1995 and 102.26
in 1994. Operating earnings per share, which were
EXH 13-6
<PAGE>
affected by the fluctuations in the value of the yen, increased 3.0% to
$2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994. The
weakening of the yen in 1996 lowered operating earnings by approximately
$.29 per share in 1996 compared with 1995, and the strengthening of the yen
in 1995 and 1994 benefited operating earnings by $.15 per share in 1995
compared with 1994 and $.12 per share in 1994 compared with 1993. These
per-share amounts were solely attributable to the translation effect of the
fluctuations in the yen and not to any fundamental change in business
operations.
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 15.5%, 15.3%
and 15.7% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The goal for 1996 was 15% growth in operating earnings per share
excluding the effect of foreign currency translation. In the fourth quarter
of 1996, the Company raised its primary financial objective for 1997 through
2000 from 13%-15% annual growth in operating earnings per share to 15%-17%,
excluding the effect of foreign currency translation.
The following table 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.
Supplemental Consolidated Data
Selected Percentage Changes
Years Ended December 31,
Adjusted to
As Exclude Foreign
Reported Currency Changes*
---------------------- ----------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------
Premium income (2.6)% 17.2% 22.6% 10.1% 9.2% 14.3%
Net investment income (.3) 22.2 21.7 11.9 14.2 13.6
Total revenues** (1.3) 17.7 22.2 11.3 9.8 14.0
Total benefits and
expenses (2.1) 17.5 22.6 10.5 9.7 14.5
Operating earnings*** (.4) 19.0 21.3 11.5 11.3 13.1
Operating earnings per
share*** 3.0 23.3 23.5 15.5 15.3 15.7
- ----------------------------------------------------------------------------
* Amounts excluding foreign currency changes for each year shown above
were determined using the average yen/dollar exchange rate for each
respective prior year.
** Includes the gain from the sale of the television station in 1996.
***Excludes realized investment gains/losses and, in 1996, the gain on the
sale of the television station.
============================================================================
EXH 13-7
<PAGE>
The Company's objective for 1997 is to increase operating earnings per
share by 17% excluding the effect of currency translation. However, if that
objective is achieved and the yen/dollar exchange rate averages 120.00
compared with the 1996 average rate of 108.84, operating earnings per share
including foreign currency translation would increase by approximately 10%
in 1997.
Despite the weakening of the yen during 1996, operating earnings per
share increased in each year of the three-year period ended December 31,
1996. The increases reflected strong earnings in the functional currencies
of AFLAC's core insurance operations in Japan and the United States,
improved operating earnings by the AFLAC Broadcast Division, and a
consolidated benefit from additional investment income associated with
profit repatriations from AFLAC Japan to AFLAC U.S. Partially offsetting the
increases were higher corporate expenses and increased interest expense
associated with the Company's share repurchase program. However, the share
repurchase program benefited earnings per share.
Profit Repatriation
AFLAC Japan repatriated profits to AFLAC U.S. of $217.3 million in
1996, $140.5 million in 1995, $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, profit repatriations
benefit AFLAC U.S. investment income and consolidated operations because
higher investment yields can be obtained on funds invested in the United
States. Also, income tax expense is presently lower on investment income
earned in the United States. Management estimates that cumulative profit
transfers from 1992 through 1996 have benefited consolidated net earnings by
$25.7 million in 1996, $13.9 million in 1995 and $7.4 million in 1994.
Repatriated profits represent a portion of the after-tax earnings
reported to the Japanese Ministry of Finance as of March 31 each year. Such
regulatory basis earnings are based on accounting principles that differ
materially from generally accepted accounting principles. Such differences
relate primarily to valuation of investments, policy benefit and claim
reserves, acquisition costs and deferred income taxes. Japanese regulatory
earnings and related profit repatriations may therefore vary materially from
year to year because of these differences. Management currently expects
that the 1997 profit repatriation amount will fall between the amounts
transferred in 1995 and 1996.
Share Repurchase Program
During 1996, the board of directors authorized the purchase of up to an
additional 7.0 million shares of AFLAC Incorporated common stock. Including
shares remaining under a previous authorization, the Company had approval to
purchase up to 8.0 million shares as of December 31, 1996. The Company had
purchased 20.4 million shares from the inception of the plan in February
1994 through December 31, 1996. The difference in the percentage increases
of net earnings and net earnings per share primarily reflects the impact of
the share repurchase program.
The shares purchased were financed with available cash and bank
borrowings. Interest expense related to the share repurchase program was
$9.4 million in 1996, $5.3 million in 1995 and $2.6 million in 1994.
Consolidated interest expense, including interest expense from insurance
EXH 13-8
<PAGE>
operations, was $16.2 million in 1996, $15.6 million in 1995 and $13.5
million in 1994.
Income Taxes
The Company's effective income tax rates were 39.3% in 1996, and 41.9%
in both 1995 and 1994. Japanese income taxes on AFLAC Japan's operating
results, which were taxed at Japan's corporate income tax rate of 45.3%,
made up most of the Company's income tax expense. The decrease in the
effective tax rate in 1996 resulted from changes in the contributions from
the Company's business components, primarily the gain on the sale of the
television station.
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 1996.
EXH 13-9
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
In Dollars
(In millions) 1996 1995 1994
----------------------------------
Premium income.................... $4,951.6 $5,195.4 $4,370.7
Investment income, as adjusted*... 920.5 941.3 766.0
Other income 1.6 (.5) 2.8
------- ------- -------
Total revenues, as adjusted*.... 5,873.7 6,136.2 5,139.5
------- ------- -------
Benefits and claims............... 4,293.7 4,486.3 3,752.8
Operating expenses................ 1,022.3 1,068.0 902.9
------- ------- -------
Total benefits and expenses 5,316.0 5,554.3 4,655.7
------- ------- -------
Pretax operating earnings, as
adjusted*..................... 557.7 581.9 483.8
Investment income applicable to
profit repatriations............ (24.9) (20.5) (12.4)
------- ------- -------
Pretax operating earnings....... $ 532.8 $ 561.4 $ 471.4
======= ======= =======
- ---------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income.................. (4.7)% 18.9% 25.5%
Investment income*.............. (2.2) 22.9 23.1
Total revenues*................. (4.3) 19.4 25.1
Pretax operating earnings*...... (4.2) 20.3 19.7
Pretax operating earnings....... (5.1) 19.1 18.2
- ---------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income.................. 10.2% 9.4% 15.4%
Investment income*.............. 13.1 13.1 13.1
Total revenues*................. 10.7 9.9 15.0
Pretax operating earnings*...... 10.9 10.7 10.0
Pretax operating earnings....... 9.8 9.7 8.5
- ---------------------------------------------------------------------------
Ratios to total revenues, as adjusted*:
Benefits and claims............. 73.1% 73.1% 73.0%
Operating expenses.............. 17.4 17.4 17.6
Pretax operating earnings....... 9.5 9.5 9.4
Ratio of pretax operating earnings
to total reported revenues...... 9.1 9.2 9.2
============================================================================
* Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income of $24.9 million in 1996,
$20.5 million in 1995 and $12.4 million in 1994 foregone due to profit
repatriations.
============================================================================
EXH 13-10
<PAGE>
Japan Sales
The percentage increases in premium income in yen reflect the growth of
premiums in force. The increases in annualized premiums in force of 12.2%
in 1996, 7.5% in 1995 and 14.5% in 1994 reflect the high persistency of our
business, premium rate increases during the last three years, sales of new
policies, and conversions of existing policies to policies with higher
benefits and premiums. New annualized premiums from sales and conversions
were: $728.9 million in 1996, down 5.6% (up 9.1% in yen); $772.0 million in
1995, up 13.4% (4.3% in yen); and $680.9 million in 1994, up 18.2% (10.0%
in yen).
Sales growth, excluding conversions, has been positively affected by
product broadening. AFLAC Japan's sales mix is changing, although cancer
insurance still accounts for the majority of insurance in force. Cancer
insurance sales accounted for 46.7% of total new sales in yen in 1996, 71.2%
in 1995 and 81.3% in 1994. Sales of AFLAC Japan's living benefit life
product were very strong in 1996. Living benefit life, which was introduced
in the fourth quarter of 1995, accounted for 39.5% of total new sales in
1996. Care product sales represented 10.6% of total new sales in 1996,
15.6% in 1995 and 17.9% in 1994. Management believes that the sale of newly
introduced products will continue to be important to AFLAC Japan's new sales
growth.
Japan Investments
Due to the continued low level of available investment yields in Japan,
the Ministry of Finance has required insurers to increase premium rates on
new policy issues in recent years. AFLAC Japan increased premium rates by
an average of 16% on all cancer policy sales made after July 1, 1994.
Premium rates on new care policy issues were increased by an average of 16%
in September 1995. As a result of continuing low yields, the Company
increased premium rates by approximately 13% on all new policy issues
beginning in the fourth quarter of 1996.
Investment income, which is affected by available cash flow from
operations and investment yields achievable on new investments, continually
increased in 1994 and 1995, despite a general decline in available
investment yields. Investment income declined in 1996 due to the weaker yen
(increased 13.1% in yen). Funds available for investment during the three-
year period 1994 through 1996 were reduced by the annual profit
repatriations previously discussed and expenditures of $173.5 million in
1994 for the final construction phase of the administrative office building
in Tokyo. Rates of return on fixed-maturity securities in Japan remained low
in 1996 compared with historical levels. For instance, the yield on 10-year
Japanese government bonds, as measured by a composite index, declined from a
high of 3.54% in February 1996 to a low of 2.51% in November 1996, closing
the year at 2.77%. AFLAC Japan's new money rates for investments were 4.07%
for 1996, 4.71% for 1995 and 5.17% for 1994. The cumulative effect of lower
investment yields is reflected in the overall rate of return (net of
investment expenses) on AFLAC Japan's average invested assets, at amortized
cost. This return was 5.54% in 1996, compared with 5.81% in 1995 and 6.00%
in 1994.
For AFLAC Japan, the duration of policy benefit liabilities is longer
than that of the related assets. Therefore, there is a risk that
reinvestment of the proceeds at maturity of such investments will be at a
EXH 13-11
<PAGE>
yield below that of the interest required for the accretion of policy
liabilities. At December 31, 1996, the average duration of the policy
liabilities was approximately 13 years, unchanged from 1995. The average
duration of the yen-denominated invested assets was approximately nine years
in both 1996 and 1995. The weighted-average period to maturity of fixed-
maturity securities at December 31, 1996, was 12.2 years, compared with 11.3
years at December 31, 1995. Over the next five years, $2.4 billion, at
amortized cost, or 14.8%, of AFLAC Japan's fixed-maturity securities are
scheduled to mature.
By concentrating on selected sectors, AFLAC Japan has secured higher
yields than 10-year Japanese government bonds would have provided while
still adhering to conservative standards for credit quality. Management
believes that it can maintain an overall return on invested assets with an
adequate spread over premium pricing assumptions and assumed interest rates
for policy liabilities for the near term. The premium increases implemented
during the past three years will have a positive impact on these spreads and
therefore contribute to stability in the pretax operating profit margin.
Japan Deregulation
In December 1996, the governments of the United States and Japan
reached an agreement on deregulation of the Japanese insurance industry.
The agreement calls for the gradual liberalization of the industry over the
next four years and includes provisions to avoid "radical change" in the
third sector of the insurance industry. AFLAC and other foreign-owned
insurers, as well as some small to medium-sized Japanese insurers, operate
primarily in the third sector. One of the measures for avoiding radical
change in the third sector is the prohibition of additional Japanese life
and non-life insurance companies from selling cancer or medical insurance
until January 1, 2001.
Japan Other
During the three-year period ended December 31, 1996, the benefit ratio
and the operating expense ratio have been stable. Annual claims experience
and persistency studies continue to support the current reserving
assumptions.
In 1994, 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 is scheduled to increase from
the current rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently
incurs consumption tax on agents' commissions. Had the rate increase been
enacted effective January 1, 1996, pretax operating earnings would have been
reduced by approximately $16.4 million ($9.0 million after income tax) in
1996.
In late 1996, the Japanese government proposed new income tax
provisions that would increase Japan's income taxes on investment income
received by foreign companies operating in Japan from securities issued from
their home country. The government plans to finalize the proposal in March
1997. The new provisions are expected to be effective beginning in 1998.
If the proposal had been enacted in 1996 in its present form, AFLAC Japan's
income tax expense would have been increased, and net earnings of the
Company would have decreased by approximately $23.7 million for the year
1996.
EXH 13-12
<PAGE>
Management is evaluating the impact of this proposal and will seek to
mitigate much of the tax impact through investment alternatives and by
restructuring portions of the existing investment portfolio. Based on a
preliminary review, management does not expect this tax change as it is
presently proposed to materially affect future net earnings of the Company.
Even with Japan's economic slowdown, the Company believes the market
for supplemental insurance remains bright. Demand for the Company's
products in Japan has continued, and the Company remains optimistic about
increasing penetration within existing groups, selling new products, opening
new accounts and developing additional supplemental products for the
Japanese market.
INSURANCE OPERATIONS, AFLAC U.S.
AFLAC U.S. pretax operating earnings continued to benefit from
additional investment income earned on profit transfers received from AFLAC
Japan. AFLAC U.S. received profit transfers in the amounts of $217.3
million in 1996, $140.5 million in 1995, $132.9 million in 1994, $97.9
million in 1993 and $33.4 million in 1992. AFLAC U.S. in turn increased
dividend payments to the Parent Company in the amounts of $64.3 million in
1996, $21.2 million in 1995, $51.9 million in 1994 and $10.1 million in
1993. Estimated investment income earned from profits repatriated to and
retained by AFLAC U.S. from 1992 through 1996 has been reclassified in the
presentation on the following page in order to improve comparability between
years.
EXH 13-13
<PAGE>
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
(In millions) 1996 1995 1994
--------------------------------
Premium income......................... $ 945.8 $ 859.8 $ 792.5
Investment income, as adjusted*........ 86.3 78.3 68.5
Other income........................... 1.5 1.2 1.9
------- ------- -------
Total revenues, as adjusted*......... 1,033.6 939.3 862.9
------- ------- -------
Benefits and claims.................... 590.4 533.1 490.2
Operating expenses..................... 347.4 322.9 295.3
------- ------- -------
Total benefits and expenses.......... 937.8 856.0 785.5
------- ------- -------
Pretax operating earnings, as
adjusted*........................ 95.8 83.3 77.4
Investment income applicable to
profit repatriations................. 32.7 21.2 12.8
------- ------- -------
Pretax operating earnings.......... $ 128.5 $ 104.5 $ 90.2
====== ====== ======
- ----------------------------------------------------------------------------
Percentage increases over previous year:
Premium income....................... 10.0% 8.5% 9.7%
Investment income* ................. 10.2 14.3 10.0
Total revenues*...................... 10.0 8.9 9.6
Pretax operating earnings*........... 15.0 7.7 12.2
Pretax operating earnings............ 23.0 15.8 20.1
- ----------------------------------------------------------------------------
Ratios to total revenues, as adjusted*:
Benefits and claims.................. 57.1% 56.7% 56.8%
Operating expenses................... 33.6 34.4 34.2
Pretax operating earnings............ 9.3 8.9 9.0
Ratio of pretax operating earnings to
total reported revenues.............. 12.1 10.9 10.3
============================================================================
*Excludes estimated investment income of $32.7 million in 1996, $21.2
million in 1995 and $12.8 million in 1994 related to investment of profit
repatriation funds retained by AFLAC U.S.
============================================================================
U.S. Sales
The percentage increases in premium income reflect the growth of
premiums in force. The increases in annualized premiums in force of 11.1%
in 1996, 8.8% in 1995 and 9.1% in 1994 were favorably affected by an
improvement in the persistency for several lines of business and increased
sales at the work site through cafeteria plans (Internal Revenue Code
Section 125).
EXH 13-14
<PAGE>
New annualized premiums from sales and policy conversions were: $326.6
million in 1996, up 17.0%; $279.1 million in 1995, up 13.6%; and $245.8
million in 1994, up 7.3%. Product lines developed since 1986 have
contributed greatly to new sales growth, accounting for 66.2% of total sales
in 1996.
U.S. Other
Management expects the operating expense ratio, excluding discretionary
advertising expenses, to decline in the future due to continued improvements
in operating efficiencies. By improving administrative systems and
controlling other costs, management has been able to redirect funds to a
national advertising program without significantly affecting the operating
expense ratio. For more information regarding advertising expenses, see
Note 2 of the Notes to the Consolidated Financial Statements.
At the same time, the operating results continue to reflect relatively
stable benefit ratios. Management expects future benefit ratios for some of
the Company's supplemental products to increase slightly due to the
Company's ongoing efforts to improve policy persistency by enhancing
policyholder benefits. In addition, potential minimum benefit ratio
requirements by insurance regulators may also result in an increase to these
ratios. However, the aggregate benefit ratio has been relatively stable due
to the mix of business shifting towards accident and hospital indemnity
policies, which have lower benefit ratios than other products.
Management expects the pretax operating profit margin, which was 9.3%
excluding the effect of repatriation in 1996, to remain approximately the
same in 1997.
Management continues to believe that there are significant
opportunities to market high-quality, affordable supplemental insurance
products in the U.S. marketplace.
BROADCAST OPERATIONS
The Company's broadcast operations include seven network-affiliated
television stations located in small to mid-size U.S. markets. Broadcast
revenues increased 13.3% in 1996 and 5.1% in 1995 primarily due to increased
advertising revenues from an improved U.S. economy and from the political
elections in 1996.
As previously mentioned, the Company entered into definitive agreements
during 1996 for the sale of its broadcast division business. The sale of
one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996.
Management expects the sale of the remaining six stations will close during
the first half of 1997.
OTHER OPERATIONS
The Parent Company's operating expenses consist primarily of corporate
overhead expenses such as salary costs, retirement provisions, professional
fees and litigation expenses. These expenses have increased in recent
years, principally due to the growth in corporate service activities,
EXH 13-15
<PAGE>
changes in the legal environment in certain states, and to greater
retirement accruals for certain senior officers and beneficiaries due to
enhanced benefits, early retirements and revisions in actuarial assumptions.
Other operations include minor insurance operations in Taiwan and
Canada. As of December 31, 1996, the Company was in the process of selling
its Canadian operation. Additional expense charges were recognized in 1996
for estimated termination costs and fair value adjustments related to these
operations.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding Statements of Financial Accounting Standards
(SFAS) adopted during 1996 and those to be adopted in 1997, see Note 1 of
the Notes to the Consolidated Financial Statements.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET
During the last two years, the financial condition of the Company has
remained strong in the functional currencies of its operations. The
investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow
and consist of high-quality securities.
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 to U.S. dollars for reporting
purposes. The exchange rate at December 31, 1996, was 116.10 yen to one
U.S. dollar, 11.3% weaker than the December 31, 1995, exchange rate of
102.95. Management estimates that the weaker yen rate decreased invested
assets, including cash, by $2.2 billion, total assets by $2.6 billion and
total liabilities by $2.6 billion compared with the amounts that would have
been reported using the previous year-end exchange rate. For additional
information on exchange rates, see Note 2 of the Notes to the Consolidated
Financial Statements.
EXH 13-16
<PAGE>
Invested Assets
Fixed-maturity securities available for sale are carried at fair value.
The following table shows an analysis of invested assets at December 31:
(In thousands) 1996 1995 % Change
------------ ------------ --------
AFLAC U.S.:
Total invested assets, at
cost or amortized cost $ 1,910,154 $ 1,543,549 23.8%
Unrealized gains
on securities available
for sale 101,258 128,697
------------ ------------
Total invested assets $ 2,011,412 $ 1,672,246 20.3%
============ ============ ======
AFLAC Japan:
Total invested assets, at
cost or amortized cost $ 16,390,997 $ 15,924,083 2.9%
Unrealized gains
on securities available
for sale 2,334,537 2,468,018
------------ ------------
Total invested assets $ 18,725,534 $ 18,392,101 1.8%
============ ============ ======
Consolidated:
Total invested assets, at
cost or amortized cost $ 18,309,930 $ 17,447,551 4.9%
Unrealized gains
on securities available
for sale 2,436,605 2,597,413
------------ ------------
Total invested assets $ 20,746,535 $ 20,044,964 3.5%
============ ============ ======
The continued growth in invested assets reflects the strength of the
Company's primary business, substantial cash flows from operations, strong
new annualized premium sales and significant premium income growth in both
AFLAC U.S. and AFLAC Japan. In addition, AFLAC U.S. received $94.5 million
in cash in conjunction with the sale of a television station on December 31,
1996. Offsetting these positive factors was a decrease in unrealized
investment gains due in part to the weaker yen/dollar exchange rate. Net
unrealized gains of $2.4 billion on investments in fixed-maturity securities
at December 31, 1996, consisted of $2.4 billion in gross unrealized gains
and $27.7 million in gross unrealized losses.
EXH 13-17
<PAGE>
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, as of December 31 were as follows:
1996 1995
------ ------
AAA 46.2% 49.2%
AA 19.6 22.2
A 26.0 24.6
BBB 8.2 4.0
------ ------
100.0% 100.0%
====== ======
Private placement investments accounted for 28.8% and 23.1% of the
Company's total fixed-maturity securities available for sale as of December
31, 1996 and 1995, 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.
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 1996 and 1995. Cash and short-term
investments totaled $261.7 million as of December 31, 1996, or 1.3% of total
invested assets, compared with $236.3 million, or 1.2% of total invested
assets, at December 31, 1995. For additional information concerning
investments and fair values, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements.
Policy Liabilities
Policy liabilities increased $720.7 million, or 3.7%, during 1996.
AFLAC Japan policy liabilities increased $536.0 million, or 3.0%, and AFLAC
U.S. policy liabilities increased $177.0 million, or 11.6%. These increases
were primarily due to the addition of new business, the aging of policies in
force and the effect of the market value adjustment for securities available
for sale (see Note 3 of the Notes to the Consolidated Financial Statements).
The weaker yen decreased reported policy liabilities by $2.4 billion in
1996. During 1995, policy liabilities increased $3.4 billion, or 23.2%.
The weaker yen in 1995 compared with 1994 decreased reported policy
liabilities by $557.0 million.
Debt
The Company has a reducing, revolving credit agreement that currently
provides for bank borrowings of up to $450 million in either U.S. dollars or
equivalent Japanese yen. At December 31, 1996, borrowings of 33.0 billion
yen ($284.2 million) were outstanding under this agreement. The Company has
entered into interest rate swaps with notional amounts equal to the unpaid
principal amount during the six-year term of the loan. These transactions
effectively change the Company's interest rate exposure on this loan from
variable rates to fixed interest rates. The fixed rate is 2.74% after the
effect of the swaps. Interest payments are made based on variable interest
EXH 13-18
<PAGE>
rates, and the Company either pays to or receives from the counterparty an
amount necessary to equal the fixed swap rate. At December 31, 1996, the
floating rate, based on the three-month Tokyo Interbank Offered Rate (TIBOR)
plus loan costs of 25 basis points, was .79%.
In the second quarter of 1996, the Company converted another loan with
outstanding principal of $29.3 million and a 5.965% fixed rate from dollar-
denominated to yen-denominated amounts with a variable interest rate based
on TIBOR plus loan costs of 25 basis points. At December 31, 1996, bank
borrowings of 2.0 billion yen ($17.5 million) were outstanding under this
agreement at a variable interest rate of .88%. Also at December 31, 1996,
the Company had 1.1 billion yen ($9.9 million) of short-term borrowings
outstanding under a line of credit at an interest rate of .76%.
The Company has designated these 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 are translated
into dollars at end-of-period exchange rates. Interest expense is
translated at average monthly exchange rates for the period the interest
expense is incurred.
The Company's ratio of debt to total capitalization (debt plus
shareholders' equity, excluding the unrealized market gains on securities
available for sale) was 16.1% and 16.5% as of December 31, 1996 and 1995,
respectively. For further information concerning notes payable, see Note 7
of the Notes to the Consolidated Financial Statements.
The following table provides information about the Company's debt
obligations and related contracts that are sensitive to changes in interest
rates. For debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates.
Weighted-average variable rates are based on implied forward rates in the
yield curve at the reporting date. For interest rate swaps, the table
presents notional amounts and weighted-average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. The information is
presented in U.S. dollar equivalents, which is the Company's reporting
currency. The instrument's actual cash flows are denominated in both U.S.
dollars and Japanese yen. The table on the following page assumes a
constant foreign currency exchange rate.
EXH 13-19
<PAGE>
DEBT OBLIGATIONS AND RELATED CONTRACTS
Total Maturity Schedule
at ------------------------------------------
Dec. 31,
(In thousands) 1996 1997 1998 1999 2000 2001
------- ------ ------ ------ ------ ------
Debt obligations:
Payable in U.S.
dollars:
Fixed interest
rate $ 16,467 $ 9,322 $ 7,145
Weighted-average
interest rate 10.16% 10.23% 10.32%
- ----------------------------------------------------------------------------
Payable in
Japanese yen:
Variable interest
rate $ 27,303 $27,303
Weighted-average
interest rate .83% 1.13%
Variable interest
rate with swap
contracts $284,238 $56,848 $56,848 $56,848 $56,848 $56,846
Interest rate .78% 1.13% 1.96% 2.62% 3.45% 3.71%
- ----------------------------------------------------------------------------
Weighted-average
interest rate of
all debt 1.26% 1.49% 2.08% 2.62% 3.45% 3.71%
- ----------------------------------------------------------------------------
Interest rate swaps:
Payable in Japanese
yen:
Notional amount $284,238 $56,848 $56,848 $56,848 $56,848 $56,846
Weighted-average
pay fixed
interest rate 2.74% 2.74% 2.74% 2.74% 2.74% 2.74%
Weighted-average
receive variable
interest rate .78 1.13 1.96 2.62 3.45 3.71
There are no principal payments scheduled after 2001.
============================================================================
Security Lending
AFLAC Japan uses short-term (usually seven days) security lending
arrangements to increase investment income with minimal risk. This program
increased AFLAC Japan's investment income by approximately $1.1 million in
1996 and $.9 million in 1995. For further information regarding such
arrangements, see Note 4 of the Notes to the Consolidated Financial
Statements.
EXH 13-20
<PAGE>
Policyholder Protection Funds
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business in those states can be assessed for policyholder
losses up to prescribed limits that are incurred by insolvent companies with
similar lines of business. Such assessments have not been material to the
Company in the past. The Company believes that future assessments relating
to companies currently involved in insolvency proceedings will not
materially impact the consolidated financial statements.
The Life Insurance Association of Japan, an industry organization, is
currently implementing a policyholder protection fund. The purpose of the
fund is to provide capital support to member companies for business assumed
from insolvent life insurers. AFLAC Japan has pledged investment securities
to the Life Insurance Association of Japan for this program. The Company
retains ownership of the securities and receives the related investment
income. The amount of securities pledged is based on premium income and
policy reserves. As of December 31, 1996, $49.5 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund.
Shareholders' Equity
Shareholders' equity decreased $8.6 million from December 31, 1995, to
December 31, 1996. This was primarily due to a decrease in net unrealized
gains on securities available for sale of $202.6 million, net treasury stock
purchases of $175.3 million and dividends paid of $54.2 million. Offsetting
these decreases were net earnings of $394.4 million and an increase in
unrealized foreign exchange gains of $16.5 million.
The Company's insurance operations continue to provide its primary
sources of liquidity. Capital needs can also be supplemented by borrowed
funds. The principal sources of cash from insurance operations are premiums
and investment income. Primary uses of cash in the insurance operations are
policy claims, commissions, operating expenses, income taxes and payments to
the Parent Company for management fees and dividends. Both the sources and
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 increasing risks of
medical cost inflation.
The achievement of continued long-term growth will require growth in
AFLAC's statutory capital and surplus. AFLAC may secure additional
statutory capital through various sources, such as internally generated
statutory earnings or equity contributions by the Parent Company from funds
generated through debt or equity offerings. The disposition of the AFLAC
Broadcast Division will increase the Company's capital resources upon
closing of the transaction. 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
EXH 13-21
<PAGE>
payments of dividends, management fees, loans and advances by AFLAC to the
Parent Company. The Georgia Insurance Statutes require prior approval for
dividend distributions that exceed the greater of statutory earnings for the
previous year or 10% of statutory capital and surplus as of the previous
year-end. In addition, the Georgia Insurance Department must approve
service arrangements and other transactions within the affiliated group.
These regulatory limitations are not expected to affect the level of
management fees or dividends paid by AFLAC to the Parent Company. A life
insurance company's statutory capital and surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners
(NAIC), as modified by the insurance company's state of domicile. Statutory
accounting rules are different from generally accepted accounting principles
and are intended to emphasize policyholder protection and company solvency.
Currently, prescribed or permitted statutory accounting principles
(SAP) may vary between states and between companies. The NAIC is in the
process of recodifying SAP to promote standardization throughout the
industry. Completion of this project will result in changes in statutory
accounting practices for the Company. The impact on the Company's statutory
capital and surplus is not presently determinable.
A risk-based capital formula that establishes capital requirements
relating to insurance risk, business risk, asset risk and interest rate risk
was adopted by the NAIC in 1992 for U.S. life insurance companies. These
requirements are intended to facilitate identification by insurance
regulators of inadequately capitalized insurance companies based upon the
types and mixtures of risks inherent in the insurer's operations. AFLAC's
NAIC risk-based capital ratio continues to reflect a very strong capital and
surplus position. Also, there are various ongoing regulatory initiatives by
the NAIC relating to investments, reinsurance, limited benefit insurance
policies, dividend restrictions, revisions to the risk-based capital formula
and other related matters.
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 $253.6 million in 1996, $179.5 million in
1995 and $167.9 million in 1994. 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.
Other
For information regarding pending litigation, see Note 12 of the Notes
to the Consolidated Financial Statements.
CASH FLOW
Operating cash flows for AFLAC Japan are translated using average
monthly exchange rates for the year. The average yen/dollar exchange rate,
which is used to convert revenues, expenses and cash flows, weakened 13.5%
in 1996 compared with 1995, strengthened 8.7% in 1995 compared with 1994,
EXH 13-22
<PAGE>
and strengthened 8.8% in 1994 compared with 1993. The average exchange
rates for 1996, 1995 and 1994 were 108.84, 94.10 and 102.26, respectively.
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.
For additional information, reference should be made to the
Consolidated Statements of Cash Flows on pages 13-30 and 13-31.
Operating Activities
In 1996, consolidated cash flow from operations decreased 8.4% to $2.7
billion, compared with $2.9 billion in 1995 and $2.4 billion in 1994. Net
cash flow from operations for AFLAC Japan decreased 10.6% to $2.5 billion in
1996, compared with $2.7 billion in 1995 and $2.1 billion in 1994. AFLAC
Japan represented 91% of the consolidated net cash flow from operations in
1996, 93% in 1995 and 90% in 1994. The decrease in cash flow from
operations in 1996 was due to the weaker yen. Cash flow from operations in
1995 was favorably affected by an acceleration of remittances from premium
collection agencies to AFLAC Japan in the amount of $121.5 million. This
cash flow change did not affect premium income.
Investing Activities
Consolidated cash flow used by investing activities decreased 11.3% to
$2.5 billion in 1996, compared with $2.9 billion in 1995 and $2.2 billion in
1994. The sale of one television station in 1996 generated $98.5 million in
cash flow. AFLAC Japan accounted for 91% of the consolidated net cash used
by investing activities in 1996, compared with 90% in 1995 and 89% in 1994.
Included in AFLAC Japan's portion for 1994 were expenditures of $173.5
million for the final construction phase of an administrative office
building in Tokyo.
Operating cash flow is primarily used to purchase high-quality fixed-
maturity securities. When market opportunities arise, the Company disposes
of certain fixed-maturity securities to improve future investment yields or
lengthen maturities by reinvesting in securities of similar or higher
quality. Therefore, dispositions before maturity can vary significantly
from year to year. Dispositions before maturity ranged between 4% and 9% of
the annual average investment portfolio of fixed-maturity securities for the
three years ended December 31, 1996.
Financing Activities
In 1996, net cash used by financing activities was $157.9 million,
compared with $93.4 million in 1995 and $130.4 million in 1994. Treasury
stock purchases of $204.2 million in 1996 were funded by proceeds from new
borrowings in the amount of $135.9 million and available cash. In 1995,
treasury stock purchases of $224.2 million were funded by proceeds from new
borrowings of $198.3 million and available cash. Treasury stock purchases
of $131.7 million in 1994 were funded by proceeds from new borrowings in the
amount of $84.0 million and available cash. The Company has sold treasury
shares to the sales associate stock bonus plan and its dividend reinvestment
plan. These dispositions have generated proceeds in the amounts of $34.5
million, $9.7 million and $2.8 million for the years 1996, 1995 and 1994,
respectively. All cash dividends paid by the Parent Company were funded by
EXH 13-23
<PAGE>
dividends received from its subsidiaries. Cash dividends paid to
shareholders amounted to $54.2 million in 1996, an increase of 10.7% over
1995. Cash dividends paid to shareholders in 1995 were $48.9 million, an
increase of 8.9% over the 1994 cash dividends of $44.9 million. The 1996
cash dividend of $.387 per share increased 14.5% over 1995. The 1995 cash
dividend of $.338 per share represented an increase of 13.4% over the 1994
cash dividend of $.298 per share.
SAFE HARBOR PROVISIONS
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.
EXH 13-24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In thousands, except for per 1996 1995 1994
share amounts) ---------- ---------- ----------
Revenues:
Premiums, principally supplemental
health insurance $5,910,036 $6,070,830 $5,180,732
Net investment income 1,021,955 1,024,960 838,825
Realized investment gains (losses) 1,980 (270) (58)
Gain on sale of television station 60,264 - -
Other income 105,968 95,100 91,259
--------- --------- ---------
Total revenues 7,100,203 7,190,620 6,110,758
--------- --------- ---------
Benefits and expenses:
Benefits and claims 4,895,522 5,034,266 4,256,541
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 162,475 168,779 153,503
Insurance commissions 778,082 802,176 689,096
Insurance expenses 437,265 424,974 361,881
Interest expense 16,186 15,611 13,496
Capitalized interest on
building construction - - (2,419)
Other operating expenses 160,672 143,819 134,324
--------- --------- ---------
Total acquisition and
operating expenses 1,554,680 1,555,359 1,349,881
--------- --------- ---------
Total benefits and expenses 6,450,202 6,589,625 5,606,422
--------- --------- ---------
Earnings before income taxes 650,001 600,995 504,336
Income taxes:
Current 239,682 233,662 146,472
Deferred 15,956 18,276 65,074
--------- --------- ---------
Total income taxes 255,638 251,938 211,546
--------- --------- ---------
Net earnings $ 394,363 $ 349,057 $ 292,790
========= ========= =========
Net earnings per share $ 2.73 $ 2.33 $ 1.89
========= ========= =========
Common shares used in computing
earnings per share (In thousands) 144,512 149,540 154,652
========= ========= =========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-25
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 1996 1995
---------- ----------
ASSETS:
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$17,941,200 in 1996 and
$17,104,743 in 1995) $ 20,327,726 $ 19,675,006
Equity securities (cost $86,249 in
1996 and $80,912 in 1995) 136,328 108,062
Mortgage loans on real estate 17,802 22,213
Other long-term investments 2,999 3,343
Short-term investments 261,680 232,201
----------- -----------
Total investments 20,746,535 20,040,825
Cash - 4,139
Receivables, primarily premiums 226,981 199,634
Accrued investment income 253,850 256,659
Deferred policy acquisition costs 2,582,946 2,565,027
Property and equipment, at cost less
accumulated depreciation 471,907 552,061
Securities held as collateral for
loaned securities 573,911 1,378,197
Intangible assets, at cost less
accumulated amortization of $27,122
in 1996 and $37,263 in 1995 60,933 104,546
Other 105,749 115,421
----------- -----------
Total assets $ 25,022,812 $ 25,216,509
=========== ===========
(continued)
EXH 13-26
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In thousands) 1996 1995
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 18,697,173 $ 18,000,296
Unpaid policy claims 1,039,257 1,016,295
Unearned premiums 288,976 301,452
Other policyholders' funds 208,799 195,461
----------- -----------
Total policy liabilities 20,234,205 19,513,504
Notes payable 353,533 327,268
Income taxes, primarily deferred 1,181,121 1,397,709
Payables for return of collateral
on loaned securities 573,911 1,378,197
Payables for security transactions 99,408 80,014
Other 455,065 385,676
Commitments and contingencies
(Notes 11 and 12)
----------- -----------
Total liabilities 22,897,243 23,082,368
----------- -----------
Shareholders' equity:
Common stock of $.10 par value. Authorized
175,000; issued 157,239 shares in 1996
and 156,358 in 1995 15,724 15,636
Additional paid-in capital 208,994 196,928
Unrealized foreign currency translation
gains 229,782 213,319
Unrealized gains on securities available
for sale 280,154 482,787
Retained earnings 1,917,794 1,577,605
Treasury stock, at average cost (526,425) (351,117)
Notes receivable for stock purchases (454) (1,017)
----------- -----------
Total shareholders' equity 2,125,569 2,134,141
----------- -----------
Total liabilities and
shareholders' equity $ 25,022,812 $ 25,216,509
=========== ===========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-27
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Common stock:
Balance at beginning of year $ 15,636 $ 15,600 $ 15,556
Exercise of stock options 88 36 44
---------- ---------- ----------
Balance at end of year 15,724 15,636 15,600
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year 196,928 192,899 190,545
Exercise of stock options 6,461 3,199 2,119
Gain on treasury stock reissued 5,688 830 235
Cash in lieu of fractional shares (83) - -
---------- ---------- ----------
Balance at end of year 208,994 196,928 192,899
---------- ---------- ----------
Unrealized foreign currency
translation gains:
Balance at beginning of year 213,319 174,091 123,294
Change in unrealized translation
gains during year, net of
income taxes 16,463 39,228 50,797
---------- ---------- ----------
Balance at end of year 229,782 213,319 174,091
---------- ---------- ----------
Unrealized gains on
securities available for sale:
Balance at beginning of year 482,787 228,844 14,811
Cumulative effect of accounting
change, net of income taxes - - 461,478
Change in unrealized gains (losses)
during year, net of income taxes (202,633) 253,943 (247,445)
---------- ---------- ----------
Balance at end of year 280,154 482,787 228,844
---------- ---------- ----------
Retained earnings:
Balance at beginning of year 1,577,605 1,277,487 1,029,625
Net earnings 394,363 349,057 292,790
Cash dividends ($.387 per share
in 1996, $.338 in 1995 and
$.298 in 1994) (54,174) (48,939) (44,928)
---------- ---------- ----------
Balance at end of year $ 1,917,794 $ 1,577,605 $ 1,277,487
---------- ---------- ----------
(continued)
EXH 13-28
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Treasury stock:
Balance at beginning of year $ (351,117) $ (135,776) $ (6,568)
Purchases of treasury stock (204,169) (224,204) (131,734)
Cost of shares issued to sales
associates stock bonus plan
and dividend reinvestment plan 28,861 8,863 2,526
---------- ---------- ----------
Balance at end of year (526,425) (351,117) (135,776)
---------- ---------- ----------
Notes receivable for stock purchases (454) (1,017) (1,378)
---------- ---------- ----------
Total shareholders' equity $ 2,125,569 $ 2,134,141 $ 1,751,767
========== ========== ==========
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-29
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 394,363 $ 349,057 $ 292,790
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,482,615 2,539,406 2,236,198
Deferred income taxes 15,956 18,276 65,074
Change in income taxes payable 14,915 79,785 (9,666)
Increase in deferred policy
acquisition costs (264,734) (248,522) (262,696)
Change in receivables and
advance premiums (32,083) 124,882 (44,984)
Gain on sale of television station (60,264) - -
Other, net 145,982 81,214 92,530
---------- ---------- ----------
Net cash provided by
operating activities 2,696,750 2,944,098 2,369,246
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Fixed-maturity securities sold 1,707,537 626,938 1,125,179
Fixed-maturity securities
matured 560,305 506,043 353,422
Equity securities 17,057 42,247 42,208
Mortgage loans, net 3,970 2,775 35,395
Other long-term investments, net 344 1,695 -
Short-term investments, net - 100,634 -
Costs of investments acquired:
Fixed-maturity securities (4,854,398) (4,082,021) (3,425,922)
Equity securities (23,473) (44,459) (40,632)
Other long-term investments, net - - (3,312)
Short-term investments, net (41,130) - (147,849)
Additions to property and
equipment, net (9,183) (17,391) (185,395)
Proceeds from sale of television
station 98,500 - -
---------- ---------- ----------
Net cash used by investing
activities $(2,540,471) $(2,863,539) $(2,246,906)
---------- ---------- ----------
(continued)
EXH 13-30
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
(In thousands) 1996 1995 1994
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from borrowings $ 135,940 $ 198,291 $ 84,000
Principal payments under debt
obligations (76,492) (31,442) (42,681)
Dividends paid to shareholders (54,174) (48,939) (44,928)
Purchases of treasury stock (204,169) (224,204) (131,734)
Treasury stock reissued 34,549 9,693 2,761
Other, net 6,466 3,235 2,163
---------- ---------- ----------
Net cash used by
financing activities (157,880) (93,366) (130,419)
---------- ---------- ----------
Effect of exchange rate changes
on cash (2,538) (697) 2,309
---------- ---------- ----------
Net change in cash (4,139) (13,504) (5,770)
Cash at beginning of year 4,139 17,643 23,413
---------- ---------- ----------
Cash at end of year $ - $ 4,139 $ 17,643
========== ========== ==========
Supplemental disclosures of cash
flow information:
Cash payments during the year for:
Interest on debt obligations $ 14,286 $ 12,764 $ 13,742
Income taxes 223,851 154,011 154,826
Noncash financing activities included capital lease obligations incurred for
computer equipment totaling $8,524 in 1996, $2,517 in 1995 and $18,210 in
1994.
Noncash operating activities included future advertising credits received
from the sale of a television station totaling $1.4 million at fair value in
1996.
See the accompanying Notes to the Consolidated Financial Statements.
EXH 13-31
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: AFLAC Incorporated (the Parent Company) and
subsidiaries (the Company) operate predominantly in the insurance industry
and primarily sell supplemental health insurance in Japan and the United
States. The Company's insurance operations are conducted through American
Family Life Assurance Company of Columbus (AFLAC), which operates in the
United States (AFLAC U.S.) and as a branch in Japan (AFLAC Japan). Most of
AFLAC's insurance policies are individually underwritten in the payroll
market, with premiums paid by the employee. AFLAC Japan accounted for 82%,
85% and 84% of the Company's total revenues for 1996, 1995 and 1994,
respectively, and 88% and 90% of total assets at December 31, 1996 and 1995,
respectively.
BASIS OF PRESENTATION: The accompanying consolidated financial
statements of the Company are prepared in accordance with generally accepted
accounting principles. These principles are established primarily by the
Financial Accounting Standards Board (FASB) and the American Institute of
Certified Public Accountants. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates, based on 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.
TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts
maintained in foreign currencies, principally Japanese yen (the functional
currency of AFLAC Japan), are translated into U.S. dollars as follows.
Assets and liabilities denominated in foreign currencies are translated at
end-of-period exchange rates. Realized gains and losses on securities
transactions are translated at the spot rate on the trade dates of the
transactions. Other revenues, expenses and cash flows are translated from
foreign currencies into U.S. dollars using average monthly exchange rates
for the year. The resulting currency translation adjustments are
accumulated and reported as a separate component of shareholders' equity.
Realized currency exchange gains and losses resulting from foreign currency
transactions are included in earnings. Such amounts were immaterial during
the three-year period 1994 through 1996.
The Parent Company has designated its yen-denominated notes payable
(Note 7) as a hedge of its net investment in AFLAC Japan. Outstanding
principal and related accrued interest payable on the yen-denominated
borrowings are translated into dollars at end-of-period exchange rates.
Currency translation adjustments are accumulated and reported as a separate
component of shareholders' equity. Interest expense is translated at
average monthly exchange rates for the period the borrowings are
outstanding.
EXH 13-32
<PAGE>
INSURANCE REVENUE AND EXPENSE RECOGNITION: Supplemental health
insurance policies issued by the Company are classified as long-duration
contracts. The contract provisions generally cannot be changed or canceled
during the contract period; however, premiums for policies issued in the
United States may be adjusted within prescribed guidelines and subject to
approval by state insurance regulatory authorities.
Insurance premiums for health policies are recognized as earned income
ratably over the terms of the policies. When revenues are recorded, the
related amounts of benefits and expenses are charged against such revenues,
so as to result in recognition of profits in proportion to premium revenues
over the period the policies are expected to be renewed. This association
is accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and future policy
benefits requires management's use of estimates consistent with sound
actuarial valuation techniques. For new policy issues, actuarial
assumptions and deferrable acquisition costs are reviewed each year and
revised when necessary to more closely reflect recent experience and studies
of actual acquisition costs. For all policies in force, deferred policy
acquisition costs are evaluated to determine that they are recoverable from
future revenues. Costs not recoverable would be charged against earnings.
INVESTMENTS: The Company classifies all fixed-maturity securities and
equity securities as "available for sale." Such securities are reported at
fair value. If the fair value is higher than amortized cost for fixed-
maturity securities or purchase cost for equity securities, the excess is an
unrealized gain; and if lower than cost, the difference is an unrealized
loss. The net unrealized gains and losses on securities available for sale,
less amounts applicable to policy liabilities and deferred income taxes, are
reported in a separate component of shareholders' equity. Amortized cost of
fixed-maturity securities is based on the purchase price adjusted for
accrual of discount or amortization of premium. The amortized cost of
fixed-maturity securities purchased at a discount will equal the face or par
value at maturity. Fixed-maturity securities purchased at a premium will
have an amortized cost equal to face or par value at the earlier of a call
date or maturity.
For investments that have experienced a decline in value below their
cost which is considered to be other than temporary, the decline is recorded
as a realized investment loss in the statement of earnings. Costs of
securities sold are determined on the first-in, first-out method. Purchases
and sales of securities are recorded on the trade dates of the transactions.
Fixed-maturity securities loaned to financial institutions in short-
term security lending transactions are not recorded as sales of securities,
but continue to be carried as investment assets during the term of the
loans. Securities received as collateral for such loans are reported
separately in assets at fair value with a corresponding liability of the
same amount for the return of such collateral at termination of the loans.
Interest is recorded as income when earned and is adjusted for
amortization of any premium or discount. Dividends on equity securities are
recorded as income on the ex-dividend dates.
EXH 13-33
<PAGE>
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business
and converting existing policies are deferred and amortized, with interest,
over the premium payment periods in proportion to the ratio of annual
premium income to total anticipated premium income. Anticipated premium
income is estimated by using the same mortality and withdrawal assumptions
used in computing liabilities for future policy benefits. In this manner,
the related acquisition expenses are matched with revenues. Costs deferred
include commissions and certain direct and allocated policy issue,
underwriting and marketing expenses, all of which vary with and are
primarily related to the production of new business. Policy acquisition
costs deferred were $427.2 million in 1996, $413.5 million in 1995 and
$416.2 million in 1994. Of the policy acquisition costs deferred,
commissions represented 67.3% in 1996, 63.8% in 1995 and 66.6% in 1994.
INSURANCE LIABILITIES: The liabilities for future policy benefits are
computed by a net level premium method using estimated future investment
yields, withdrawals and recognized morbidity and mortality tables modified
to reflect the Company's experience, with reasonable provision for possible
future adverse deviations in experience.
Unpaid policy claims are estimates computed on an undiscounted basis
using statistical analyses of historical claim experience adjusted for
current trends and changed conditions. The ultimate liability may vary
significantly from such estimates. These estimates are regularly adjusted
in subsequent reporting periods as new experience data emerges and are
reflected in operating results in the year such adjustments are made.
INCOME TAXES: Different rules are used in computing U.S. and foreign
income tax expense presented in the accompanying financial statements from
those used in preparing the Company's income tax returns. Deferred income
taxes are recognized for temporary differences between the financial
reporting basis and income tax basis of assets and liabilities, based on
enacted tax laws and statutory tax rates applicable to the periods in which
the temporary differences are expected to reverse.
The Parent Company and its U.S. subsidiaries, including foreign
branches, file a consolidated U.S. income tax return. Additionally, AFLAC
Japan is subject to Japanese corporate income taxes.
DERIVATIVES: 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.
INTANGIBLES: Television network affiliations and FCC licenses of
broadcast businesses acquired are amortized using the straight-line method
over 40 years. Unamortized intangibles are periodically reviewed to assess
recoverability using estimates of undiscounted future cash flows from the
related business.
TREASURY SHARES: Shares purchased are recorded at cost as a reduction
of shareholders' equity. The weighted-average purchase cost is used to
determine the cost of treasury shares sold to the AFLAC Associate Stock
Bonus Plan and the Company's dividend reinvestment plan. Any realized gains
or losses on the disposition of treasury shares are recorded in additional
paid-in capital.
EXH 13-34
<PAGE>
EARNINGS PER SHARE: Earnings per share are based on the weighted-
average number of common shares outstanding during the periods, including
the dilutive effect of shares issuable under the stock option plans. All
share and per-share amounts have been adjusted to reflect the three-for-two
stock split paid March 18, 1996.
ACCOUNTING CHANGES ADOPTED: Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the
asset. Long-lived assets and certain identifiable intangibles to be
disposed of must be reported at the lower of carrying amount or fair value
less related selling costs. The primary assets of the Company that are
subject to SFAS No. 121 are investment real estate, and property and
equipment used in the Company's daily operations. There was no material
effect on the financial statements from the adoption of this new accounting
standard.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
1996. This Statement provides a choice of accounting methods for employee
stock compensation plans, including stock option plans. This accounting
standard had no effect on earnings as the Company has elected to use the
intrinsic value method. Under this method, compensation cost is recognized
only for the excess, if any, of the market price of stock over the amount an
employee must pay upon exercise to acquire the stock at the grant date. For
further information regarding SFAS No. 123, see Note 9.
On January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures.
These accounting standards require impaired mortgage loans to be measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate, or at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. The
implementation of these standards by the Company had no material effect.
Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. As required, the
financial information for prior years was not restated. This accounting
change had no effect on earnings. For further information, see Note 3.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: The Financial Accounting
Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, in June 1996. This
Statement was amended by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125. SFAS No. 125 establishes
criteria for determining whether transfers of financial assets are sales or
secured borrowings and must be applied prospectively to all applicable
transactions occurring after December 31, 1996. SFAS No. 127 amended the
EXH 13-35
<PAGE>
effective date for those transactions concerning secured obligations and
collateral, which must now be applied prospectively to all applicable
transactions occurring after December 31, 1997. Earlier or retroactive
application is not permitted. Beginning in 1998, as required by these
standards, the Company will no longer recognize securities held as
collateral as an asset, nor the related liability for return of such
collateral, based on the Company's current security lending agreements (see
Note 4). This change will have no affect on the Company's net earnings or
shareholders' equity.
RECLASSIFICATIONS: Certain prior-year amounts have been reclassified
to conform to the current year presentation.
EXH 13-36
<PAGE>
(2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company's only reportable industry segment is insurance. The
Company's principal foreign operations are conducted in Japan. The
components of operations for the years ended December 31 were as follows:
(In thousands) 1996 1995 1994
--------- --------- ---------
Total revenues:
Insurance:
Japan $5,848,751 $6,115,689 $5,127,418
U.S. 1,066,364 960,443 875,729
Realized investment
gains (losses) 1,759 (270) 17
--------- --------- ---------
Total U.S. and
Japan insurance 6,916,874 7,075,862 6,003,164
Broadcast operations - U.S. 92,380 81,569 77,596
Gain on sale of television
station 60,264 - -
Corporate and other operations 69,611 74,392 67,334
Intercompany eliminations (38,926) (41,203) (37,336)
--------- --------- ---------
Total $7,100,203 $7,190,620 $6,110,758
========= ========= =========
Earnings before income taxes:
Insurance:
Japan $ 532,798 $ 561,361 $ 471,364
U.S. 128,532 104,459 90,216
Realized investment
gains (losses) 1,759 (270) 17
--------- --------- ---------
Total U.S. and
Japan insurance 663,089 665,550 561,597
Broadcast operations - U.S. 25,591 18,953 17,164
Gain on sale of television
station 60,264 - -
Corporate and other operations (86,399) (72,189) (64,552)
Interest expense
(noninsurance operations) (12,544) (11,319) (9,873)
--------- --------- ---------
Total $ 650,001 $ 600,995 $ 504,336
========= ========= =========
EXH 13-37
<PAGE>
(In thousands) 1996 1995 1994
--------- --------- ---------
Depreciation and amortization
expense:
Insurance:
Japan $ 26,405 $ 21,353 $ 16,072
U.S. 12,780 10,656 9,403
--------- --------- ---------
Total U.S. and
Japan insurance 39,185 32,009 25,475
Broadcast operations - U.S. 8,198 8,725 7,397
Corporate and other operations 2,354 2,547 3,162
--------- --------- ---------
Total $ 49,737 $ 43,281 $ 36,034
========= ========= =========
Advertising expense - insurance:
Japan $ 13,580 19,883 9,417
U.S. 22,038 15,044 14,058
--------- --------- ---------
Total $ 35,618 34,927 23,475
========= ========= =========
Total expenditures for long-lived
assets:
Insurance:
Japan $ 2,806 $ 2,009 $ 175,464
U.S. 9,093 12,150 11,663
---------- ---------- ----------
Total U.S. and
Japan insurance 11,899 14,159 187,127
Broadcast operations - U.S. 3,864 5,851 5,485
Corporate and other operations 2,730 1,200 1,548
---------- ---------- ----------
Total $ 18,493 $ 21,210 $ 194,160
========== ========== ==========
Total assets at December 31 were as follows:
(In thousands) 1996 1995
---------- ----------
Total assets:
Insurance:
Japan $22,117,213 $22,715,138
U.S. 2,673,678 2,239,324
---------- ----------
Total U.S. and
Japan insurance 24,790,891 24,954,462
Broadcast operations - U.S. 115,709 159,627
Corporate and other operations 2,834,343 2,726,366
Intercompany eliminations (2,718,131) (2,623,946)
---------- ----------
Total $25,022,812 $25,216,509
========== ==========
EXH 13-38
<PAGE>
During 1996, the Company entered into definitive agreements for the
sale of the AFLAC Broadcast Division consisting of seven network-affiliated
television stations. Cash sales proceeds, after applicable selling
expenses, will approximate $449.2 million. Total sales proceeds also
include future advertising credits over a five-year period with a fair value
of $6.3 million. The Company will also receive cash for an adjustment of
various current assets and liabilities. The pretax gain for the entire
transaction is estimated to be $325 million. Finalization of the
transaction is subject to approval by the Federal Communications Commission.
The sale of one station (WAFB-TV in Baton Rouge, Louisiana) closed on
December 31, 1996, with a pretax gain of $60.3 million and an after-tax gain
of $48.2 million ($.33 per share). The operating results of WAFB-TV
included in the consolidated financial statements were revenues of $18.6
million in 1996 and earnings before interest and income taxes of $7.8
million. Management expects the sale of the six remaining stations to be
finalized during the first half of 1997.
Net assets of AFLAC Japan totaled $1.7 billion at December 31, 1996,
and $1.8 billion at December 31, 1995. U.S. dollar-denominated securities
(including accrued investment income) are owned by AFLAC Japan. Such
securities amounted to $1.4 billion and $1.3 billion at December 31, 1996,
and December 31, 1995, respectively. AFLAC Japan's investments in dollar-
denominated securities constitute an economic currency hedge of a portion of
the Company's investment in its foreign branch. In addition, the Parent
Company has designated its yen-denominated bank borrowings of $311.5 million
at December 31, 1996, and $230.7 million at December 31, 1995, (Note 7) as a
hedge of its net investment in AFLAC Japan. The Company's yen-denominated
net assets subject to foreign currency translation fluctuations for
financial reporting purposes were $15.9 million and $284.4 million at
December 31, 1996 and 1995, respectively. Such amounts consist of AFLAC
Japan's net assets, less its dollar-denominated investments and the Parent
Company's yen-denominated borrowings.
The 1996 year-end yen-to-dollar exchange rate, which was used to
convert balance sheet items to U.S. dollars, weakened 11.3% compared with
1995, while the 1995 year-end exchange rate weakened 3.0% compared with
1994, based on the yen/dollar rates of 116.10, 102.95 and 99.85 at December
31, 1996, 1995 and 1994, respectively. If the exchange rates had remained
unchanged from the respective prior year-end rates, the Company's total
assets would have been higher by approximately $2.6 billion in 1996 and
approximately $664.6 million in 1995. Total liabilities would have been
higher by approximately $2.6 billion in 1996 and approximately $648.5
million in 1995.
The average yen/dollar exchange rate, which was used to convert
revenues, expenses and cash flows, weakened 13.5% in 1996 compared with
1995, strengthened 8.7% in 1995 compared with 1994, and strengthened 8.8% in
1994 compared with 1993. The average exchange rates for 1996, 1995 and 1994
were 108.84, 94.10 and 102.26, respectively. The fluctuations decreased net
earnings by approximately $42.7 million in 1996 compared with 1995, and
increased net earnings by approximately $23.0 million in 1995 and $19.7
million in 1994, compared with the respective prior years.
Payments are made from AFLAC Japan to the Parent Company for management
fees and to AFLAC U.S. for allocated expenses and remittances of earnings.
These payments totaled $253.6 million in 1996, $179.5 million in
EXH 13-39
<PAGE>
1995 and $167.9 million in 1994. See Note 10 for information concerning
restrictions on remittances from AFLAC Japan.
The Company's receivables consisted primarily of monthly insurance
premiums due from individual policyholders or their employers for payroll
deduction of premiums. At December 31, 1996, $126.3 million, or 55.7% of
total receivables, were receivables for AFLAC Japan ($119.0 million at
December 31, 1995).
EXH 13-40
<PAGE>
(3) INVESTMENTS
The amortized cost for fixed-maturity securities, purchase cost for
equity securities and the fair values of investments in securities available
for sale at December 31 were as follows:
December 31, 1996
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Fixed-maturity securities:
Yen-denominated:
Japan national government
direct obligations $ 5,787.7 $ 1,201.6 $ 1.4 $ 6,987.9
Japan government guaranteed 310.2 40.5 - 350.7
Japan municipalities 618.3 78.8 - 697.1
Corporate obligations:
Public utilities 2,501.2 366.0 - 2,867.2
Banks and other financial
institutions 400.1 36.7 - 436.8
Foreign issuers:
Euroyen 4,738.8 507.7 7.7 5,238.8
Samurai 194.3 22.4 - 216.7
Other foreign 43.1 .5 - 43.6
Other corporate 353.7 64.4 - 418.1
-------- -------- -------- --------
Total yen-denominated 14,947.4 2,318.6 9.1 17,256.9
-------- -------- -------- --------
U.S. dollar-denominated:
U.S. government direct
obligations 81.4 1.2 - 82.6
U.S. agencies (FNMA, etc.) 291.5 7.4 .7 298.2
U.S. mortgage-backed
securities 235.8 3.3 2.4 236.7
Sovereign and Supranational 121.5 6.6 - 128.1
Corporate obligations:
Public utilities 157.4 2.4 3.7 156.1
Asset-backed securities 148.8 5.2 - 154.0
Banks and other financial
institutions 907.7 35.0 4.0 938.7
Other corporate 1,031.8 33.8 7.8 1,057.8
-------- -------- -------- --------
Total dollar-denominated 2,975.9 94.9 18.6 3,052.2
-------- -------- -------- --------
Other foreign securities 17.9 .8 - 18.7
-------- -------- -------- --------
Total fixed-maturity
securities available
for sale 17,941.2 2,414.3 27.7 20,327.8
Equity securities 86.2 52.6 2.5 136.3
-------- -------- -------- --------
Total securities
available for sale $18,027.4 $ 2,466.9 $ 30.2 $20,464.1
======== ======== ======== ========
EXH 13-41
<PAGE>
December 31, 1995
------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- --------
Fixed-maturity securities:
Yen-denominated:
Japan national government
direct obligations $ 5,504.9 $ 1,239.1 $ .6 $ 6,743.4
Japan government guaranteed 492.6 51.2 .1 543.7
Japan municipalities 845.7 89.9 .4 935.2
Corporate obligations:
Public utilities 2,882.9 408.4 .1 3,291.2
Banks and other financial
institutions 421.4 35.6 - 457.0
Foreign issuers:
Euroyen 3,931.4 484.8 15.4 4,400.8
Samurai 243.5 28.7 - 272.2
Other corporate 242.8 62.2 - 305.0
-------- -------- ------- --------
Total yen-denominated 14,565.2 2,399.9 16.6 16,948.5
-------- -------- ------- --------
U.S. dollar-denominated:
U.S. government direct
obligations 107.6 4.1 - 111.7
U.S. agencies (FNMA, etc.) 200.0 10.8 - 210.8
U.S. mortgage-backed
securities 189.8 7.7 .3 197.2
Sovereign and Supranational 155.4 12.9 .1 168.2
Corporate obligations:
Public utilities 150.1 8.3 .5 157.9
Asset-backed securities 114.6 7.3 .7 121.2
Banks and other financial
institutions 794.8 70.0 .3 864.5
Other corporate 809.3 67.5 .4 876.4
-------- -------- ------- --------
Total dollar-denominated 2,521.6 188.6 2.3 2,707.9
-------- -------- ------- --------
Other foreign securities 17.9 .7 - 18.6
-------- -------- ------- --------
Total fixed-maturity
securities available
for sale 17,104.7 2,589.2 18.9 19,675.0
Equity securities 80.9 29.3 2.1 108.1
-------- -------- ------- --------
Total securities available
for sale $17,185.6 $ 2,618.5 $ 21.0 $19,783.1
======== ======== ======= ========
EXH 13-42
<PAGE>
The amortized cost and fair values of investments in fixed-maturity
securities available for sale at December 31, 1996, by contractual maturity
are shown below. This table excludes fixed-maturity securities in the
amount of $18.7 million, at fair value, held by minor foreign operations.
(In millions) AFLAC Japan AFLAC U.S.
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 383.4 $ 396.2 $ 7.5 $ 7.7
Due after one year through
five years 2,017.7 2,242.8 249.2 265.5
Due after five years through
10 years 2,878.1 3,318.1 278.8 292.9
Due after 10 years 10,883.4 12,538.9 989.2 1,010.3
U.S. mortgage-backed
securities 95.4 97.2 140.6 139.4
--------- --------- --------- ---------
Total fixed-maturity
securities available
for sale $16,258.0 $18,593.2 $ 1,665.3 $ 1,715.8
========= ========= ========= =========
Expected maturities will differ from contractual maturities because
some issuers have the right to call or prepay obligations with or without
call or prepayment penalties.
For AFLAC Japan, the duration of policy benefit liabilities is longer
than that of the related assets. Therefore, there is a risk that the
reinvestment of the proceeds at the maturity of such investments will be at
a yield below that of the interest required for the accretion of policy
liabilities. At December 31, 1996, the average duration of the yen-
denominated policy liabilities was approximately 13 years, unchanged from
1995. The average duration of the yen-denominated invested assets was
approximately nine years at both December 31, 1996 and 1995. The weighted-
average period to maturity of fixed-maturity securities of AFLAC Japan at
December 31, 1996, was 12.2 years, compared with 11.3 years at December 31,
1995.
Fair values for fixed-maturity securities were provided by outside
securities consultants using market quotations, prices provided by market
makers or estimates of fair values obtained from yield data relating to
investment securities with similar characteristics. The fair values for
equity securities were determined using market quotations as of the end of
the year on the principal public exchange markets.
EXH 13-43
<PAGE>
Realized and unrealized gains and losses from investments for the years
ended December 31 were as follows:
(In thousands) 1996 1995 1994
---------- ---------- ----------
Realized gains (losses) on sale
or redemption of investments:
Fixed-maturity securities:
Gross gains from sales $ 20,994 $ 7,561 $ 19,054
Gross losses from sales (17,508) (16,293) (24,761)
Net gains from redemptions 112 924 2,416
---------- ---------- ----------
3,598 (7,808) (3,291)
Equity securities:
Gross gains from sales 2,529 9,471 5,346
Gross losses from sales (1,339) (1,662) (1,587)
Other long-term assets, net (2,808) (271) (526)
---------- ---------- ----------
Net realized gains (losses) $ 1,980 $ (270) $ (58)
========== ========== ==========
Changes in unrealized gains (losses):
Fixed-maturity securities $ (183,737) $ 1,749,389 $(1,030,290)
Equity securities 22,929 14,362 (1,585)
---------- ---------- ----------
Net unrealized gains (losses) $ (160,808) $ 1,763,751 $(1,031,875)
========== ========== ==========
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 December 31 was:
(In thousands) 1996 1995
------------ ------------
Securities available
for sale -
unrealized gains $ 2,436,605 $ 2,597,413
Less:
Policy liabilities 2,023,107 1,865,077
Deferred income taxes 133,344 249,549
------------ ------------
Shareholders' equity,
net unrealized gains
on securities
available for sale $ 280,154 $ 482,787
============ ============
EXH 13-44
<PAGE>
The following fixed-maturity securities individually exceeded 10% of
shareholders' equity at December 31:
1996 1995
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $5,787.7 $6,987.9 $5,504.9 $6,743.4
Tokyo Electric Power
Company, Ltd. 850.3 974.1 976.8 1,111.4
Chubu Electric Power 552.8 621.9 614.1 694.0
Province De Quebec 299.5 323.3 277.7 299.4
Tohoku Electric Power 223.7 254.7 251.9 286.2
ASLK-CGER IFICO 215.3 224.3 * *
BIL Asia Group 215.3 221.5 * *
Generale Bank N.V. 215.3 219.4 242.8 239.5
Abbey National PLC 215.3 249.5 * *
Societe Generale 214.6 236.5 * *
Tokyo Metropolitan
Government 211.5 237.5 324.9 356.2
Kyushu Electric Power
Company, Ltd. 211.3 245.6 250.5 289.5
Kansai Electric Power
Company, Ltd. * * 224.2 259.0
Chugoku Electric Power * * 211.2 238.1
Goldman Sachs Group * * 208.9 241.3
Finance Corp. of Local
Enterprise * * 208.7 233.4
*Less than 10%
The Company's investments in Japanese government bonds (at amortized
cost) constituted 34.0% and 35.1% of total fixed-maturity securities
available for sale at December 31, 1996 and 1995, respectively.
The components of net investment income for the years ended December 31
were as follows:
(In thousands) 1996 1995 1994
--------- --------- ---------
Fixed-maturity securities $1,026,611 $1,030,224 $ 841,917
Equity securities 1,705 1,466 1,255
Mortgage loans on real estate 1,693 1,893 3,193
Other long-term investments 93 130 146
Short-term investments 9,543 13,472 11,668
--------- --------- ---------
Gross investment income 1,039,645 1,047,185 858,179
Less investment expenses 17,690 22,225 19,354
--------- --------- ---------
Net investment income $1,021,955 $1,024,960 $ 838,825
========= ========= =========
The Life Insurance Association of Japan, an industry organization, is
currently implementing a policyholder protection fund. The purpose of the
fund is to provide capital support to member companies for business assumed
EXH 13-45
<PAGE>
from insolvent life insurers. AFLAC Japan has pledged investment securities
to the Life Insurance Association of Japan for this program. The Company
retains ownership of the securities and receives the related investment
income. The amount of securities pledged is based on premium income and
policy reserves. As of December 31, 1996, $49.5 million, at fair value, of
AFLAC Japan's investment securities had been pledged to this fund.
At December 31, 1996, fixed-maturity securities with a market value of
$4.4 million were on deposit with regulatory authorities in the United
States. Also, fixed-maturity securities with a market value of $9.7 million
were on deposit with the Central Bank of China, R.O.C., as required by the
Ministry of Finance in Taiwan.
(4) FINANCIAL INSTRUMENTS
NONDERIVATIVES: The carrying amounts for cash, receivables, accrued
investment income, accounts payable and payables for security transactions
approximated their fair values due to the short-term maturity of these
instruments. Consequently, such instruments are not included in the table
presented on the following page.
The methods of determining the fair values of the Company's fixed-
maturity and equity securities are described in Note 3. The fair values for
mortgage loans are estimated using discounted cash flow analyses and
interest rates being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of these calculations. At December 31, 1996, 72.7% of mortgage
loans were commercial and 27.3% were residential (at December 31, 1995,
74.5% and 25.5%, respectively).
The fair values for notes payable are estimated using discounted cash
flow analyses based on the Company's current borrowing rates for similar
types of borrowings.
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At December 31, 1996 and 1995, the
Company held Japanese government bonds as collateral for loaned securities.
Securities received as collateral for such loans are reported separately in
assets at fair value with a corresponding liability of the same amount for
the return of such collateral at termination of the loans. (Beginning in
1998, such collateral assets and the related liability will no longer be
included on the balance sheet under the new accounting provisions of SFAS
No. 125 and SFAS No. 127. Note 1.) The Company's security lending policy
requires that the fair value of the securities received as collateral be
105% or more of the fair value of the loaned securities as of the date the
securities are loaned and not less than 100% thereafter. Bond market
quotations are used to determine the fair value and carrying value of the
collateral asset and related liability.
DERIVATIVES: The Company has only limited activity with derivative
financial instruments and does not use them for trading purposes nor engage
in leveraged derivative transactions. In addition, the Company does not use
derivatives to hedge the foreign-currency-denominated net assets of its
foreign insurance operations. See Note 2 for additional information on the
Company's yen-denominated net assets.
EXH 13-46
<PAGE>
The Company has outstanding interest rate swaps on certain of its
variable interest rate yen-denominated borrowings (Note 7). These swaps
reduce the impact of changes in interest rates on the Company's borrowing
costs and effectively change a portion of the Company's interest rate
exposure from variable interest rates to fixed interest rates. The interest
rate swaps have notional principal amounts that equal the unpaid principal
amount during the remaining five-year term of the loan (33.0 billion yen or
$284.2 million at December 31, 1996). Under these agreements, the Company
makes fixed-rate payments at 2.74% and receives floating-rate payments in
return (.78% at December 31, 1996, and .81% at December 31, 1995) based on
the three-month Tokyo Interbank Offered Rate.
The fair value of interest rate swaps is the estimated amount that the
Company would receive or pay to terminate the swap agreements at the
reporting date. The Company is exposed to nominal credit risk in the event
of nonperformance by counterparts to these interest rate swap agreements.
The counterparts are credit-worthy financial institutions.
The carrying values and estimated fair values of the Company's
financial instruments as of December 31 were as follows:
1996 1995
------------------------ -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $20,327,726 $20,327,726 $19,675,006 $19,675,006
Equity securities 136,328 136,328 108,062 108,062
Mortgage loans 17,802 21,151 22,213 26,151
Policy loans 1,273 1,273 1,230 1,230
Short-term investments 261,680 261,680 232,201 232,201
Securities held as
collateral for
loaned securities 573,911 573,911 1,378,197 1,378,197
Liabilities:
Notes payable (excluding
capitalized leases) 328,141 328,825 297,103 298,522
Derivatives - interest
rate swaps - 8,802 - 4,876
Payables for return of
collateral on loaned
securities 573,911 573,911 1,378,197 1,378,197
EXH 13-47
<PAGE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
(In thousands) 1996 1995
-------- --------
Land $124,264 $138,765
Buildings 327,757 360,949
Equipment 188,272 190,833
------- -------
640,293 690,547
Less accumulated depreciation 168,386 138,486
------- -------
Net property and equipment $471,907 $552,061
======= =======
(6) POLICY LIABILITIES
The liability for future policy benefits at December 31 consisted of
the following:
(In millions) Liability Amounts Interest Rates
---------------------------- -------------------
Policy Year
Issue of In 20
Year 1996 1995 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Foreign: 1995-96 $ 152.5 $ 17.4 4.0% 4.0%
1994-95 1,025.8 429.3 4.5 4.5
1990-95 7,457.7 7,399.9 5.5 5.5
1988-93 1,103.5 1,132.8 5.25 5.25
1987-88 1,203.9 1,269.6 5.5 5.5
1985-87 189.5 211.1 5.65 5.65
1985-86 936.5 999.5 6.75 5.5
1978-84 2,565.8 2,795.7 6.5 5.0
1974-79 597.0 603.1 7.0 5.0
Other 46.3 35.9
U.S.: 1988-96 481.5 368.4 8.0 6.0
1986-96 440.0 390.9 6.0 6.0
1985-86 25.4 24.8 6.5 6.5
1981-86 264.4 267.0 7.0 5.5
Other 157.4 164.6
Life insurance 1956-96 26.9 25.2 4.0-6.75 5.5
Adjustment for
market value of
securities (Note 3) 2,023.1 1,865.1
-------- --------
Total $18,697.2 $18,000.3
======== ========
EXH 13-48
<PAGE>
The weighted-average interest rates reflected in the statements of
earnings for health insurance future policy benefits for Japan policies were
5.5% in 1996, 5.6% in 1995 and 5.7% in 1994, and for U.S. policies, 6.4% in
1996 and 6.3% in both 1995 and 1994.
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In thousands) 1996 1995 1994
--------- --------- ---------
Unpaid supplemental health claims -
beginning of year $1,014,736 $ 916,139 $ 699,395
--------- --------- ---------
Add claims incurred during the year
related to:
Current year 2,378,211 2,411,025 1,986,125
Prior years (158,418) (130,882) (63,552)
--------- --------- ---------
Total incurred 2,219,793 2,280,143 1,922,573
--------- --------- ---------
Less claims paid during the year:
On claims incurred during
current year 1,478,673 1,503,922 1,241,882
On claims incurred during
prior years 618,340 632,267 533,502
--------- --------- ---------
Total paid 2,097,013 2,136,189 1,775,384
--------- --------- ---------
Effect of foreign exchange rate
changes on unpaid claims (107,808) (45,357) 69,555
--------- --------- ---------
Unpaid supplemental health claims -
end of year 1,029,708 1,014,736 916,139
Unpaid claims for life and
other business 9,549 1,559 13,211
--------- --------- ---------
Total liability for
unpaid policy claims $1,039,257 $1,016,295 $ 929,350
========= ========= =========
EXH 13-49
<PAGE>
(7) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In thousands) 1996 1995
--------- ---------
2.74% unsecured, yen-denominated notes payable
to banks under reducing revolving credit
agreement, due annually through July 2001 $ 284,238 $ 230,695
Unsecured, yen-denominated notes payable
to banks, due semiannually, through October
1997, variable interest rate (.88% at
December 31, 1996) 17,453 -
9.60% to 10.72% unsecured notes payable to
bank, due semiannually, through 1998 15,389 23,833
Obligations under capitalized leases, due
monthly through 2001, secured by computer
equipment in Japan 25,392 30,165
5.965% unsecured notes payable to banks,
refinanced in 1996 - 39,167
Short-term yen-denominated note payable to
bank under unsecured line of credit, variable
interest rate (.76% at December 31, 1996) 9,850 -
Other 1,211 3,408
-------- --------
Total notes payable $ 353,533 $ 327,268
======== ========
The 5.965% fixed rate notes payable that were outstanding at December
31, 1995, were converted in April 1996 from dollar-denominated to yen-
denominated amounts with a variable interest rate based on the Tokyo
Interbank Offered Rate plus loan costs of 25 basis points. At December 31,
1996, bank borrowings of 2.0 billion yen ($17.5 million) were outstanding
under this agreement.
Interest rate swaps related to the 2.74% (fixed rate after swaps) loan
are described in Note 4.
The aggregate maturities of notes payable during each of the five years
after December 31, 1996, are: 1997, $104.5 million; 1998, $72.0 million;
1999, $60.9 million; 2000, $58.8 million; and 2001, $57.2 million.
Certain of the Company's loan agreements contain financial covenants.
The most restrictive covenant requires the Company to maintain a minimum
consolidated shareholders' equity, as defined in the agreement, of
$1.0 billion. The Company was in compliance with the covenants at December
31, 1996.
EXH 13-50
<PAGE>
(8) INCOME TAXES
The income tax effects of the temporary differences that give rise to
deferred income tax assets and liabilities as of December 31 were as
follows:
(In thousands) 1996 1995
---------- ----------
Deferred income tax liabilities:
Deferred acquisition costs $ 972,678 $ 982,239
Unrealized gains on securities
available for sale 949,978 1,103,153
Premiums receivable 73,353 122,974
--------- ---------
Total deferred income
tax liabilities 1,996,009 2,208,366
--------- ---------
Deferred income tax assets:
Difference in tax basis of
investment in Japan branch 2,354 87,096
Foreign tax credit carryforwards 116,607 122,203
Policy benefit reserves 720,755 729,638
Unfunded retirement benefits 63,292 53,334
Other accrued expenses 66,824 62,933
Other 187,975 94,060
--------- ---------
Total gross deferred tax assets 1,157,807 1,149,264
Less valuation allowance 162,903 151,398
--------- ---------
Total deferred income tax assets 994,904 997,866
--------- ---------
Deferred income tax liability 1,001,105 1,210,500
Current income tax liability 180,016 187,209
--------- ---------
Total income tax liability $1,181,121 $1,397,709
========= =========
A valuation allowance is provided when it is more likely than not that
deferred tax assets will not be realized. The Company has established
valuation allowances primarily for foreign tax credit and noninsurance loss
carryforwards that exceed projected future offsets. Only 35% of
noninsurance losses can be offset against life insurance taxable income each
year. During 1996, the valuation allowance for deferred tax assets
increased by $11.5 million ($59.8 million in 1995) due to changes in
carryforwards of foreign tax credits and noninsurance losses.
Foreign tax credit carryforwards available at December 31, 1996, expire
as follows: $25.9 million in 1997, $33.6 million in 1998, $16.5 million in
1999 and $40.6 million in 2000.
EXH 13-51
<PAGE>
The components of income tax expense applicable to pretax earnings for
the years ended December 31 were as follows:
(In thousands) Japan U.S. Total
----------- --------- -----------
Income tax expense (benefit):
1996:
Current $ 206,716 $ 32,966 $ 239,682
Deferred 14,153 1,803 15,956
---------- -------- ----------
Total $ 220,869 $ 34,769 $ 255,638
========== ======== ==========
1995:
Current $ 213,784 $ 19,878 $ 233,662
Deferred 17,781 495 18,276
---------- -------- ----------
Total $ 231,565 $ 20,373 $ 251,938
========== ======== ==========
1994:
Current $ 133,885 $ 12,587 $ 146,472
Deferred 65,225 (151) 65,074
---------- -------- ----------
Total $ 199,110 $ 12,436 $ 211,546
========== ======== ==========
Income tax expense in the accompanying consolidated financial
statements is greater than the amount computed by applying the expected U.S.
tax rate of 35% to pretax earnings. The principal reasons for the
differences and the related tax effects for the years ended December 31 are
summarized as follows:
(In thousands) 1996 1995 1994
--------- --------- ---------
Income taxes based on U.S.
statutory rates $ 227,500 $ 210,348 $ 176,518
U.S. alternative minimum tax 26,333 12,558 10,712
Unrecognized foreign tax credits (11,331) 11,992 12,473
Noninsurance losses generating
no current tax benefit 12,344 7,010 5,561
Other, net 792 10,030 6,282
-------- -------- --------
Income tax expense $ 255,638 $ 251,938 $ 211,546
======== ======== ========
Most of the Company's income tax expense represents Japanese income
taxes on AFLAC Japan operating results calculated at Japan's corporate tax
rate of 45.3%.
EXH 13-52
<PAGE>
Income taxes are recorded in the statements of earnings and directly in
certain shareholders' equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
(In thousands) 1996 1995 1994
-------- -------- --------
Statements of earnings $255,638 251,938 211,546
Shareholders' equity:
Unrealized gains and losses on
securities available for sale (116,205) (39,670) 289,658
Unrealized foreign currency
translation gains - (2,177) (1,980)
------- ------- -------
Total income taxes $139,433 $210,091 $499,224
======= ======= =======
Realized investment losses incurred by AFLAC Japan are generally
deductible for Japan income tax purposes. Accordingly, the income tax
effects recognized for realized and unrealized investment gains and losses
reflect such tax benefit of any losses related to AFLAC Japan operations.
Also, AFLAC Japan receives certain Japanese income tax benefits from foreign
exchange translation losses on its dollar-denominated investments. These
tax benefits are included directly in the shareholders' equity component of
unrealized foreign currency translation gains.
Deferred income tax expense, which results from differences in the
timing of reporting various income and expense items between the financial
statements and the income tax returns for the years ended December 31, is
summarized as follows:
(In thousands) 1996 1995 1994
--------- --------- --------
Recognition of deferred policy
acquisition costs $ 30,551 $ 22,753 $ 71,701
Adjustments to liability for
future policy benefits (8,678) (5,605) (11,417)
Noninsurance losses generating
no tax benefit 4,800 2,130 8,377
Unfunded retirement benefits (5,003) (3,351) (3,627)
Other, net (5,714) 2,349 40
------- ------- -------
Deferred income tax expense $ 15,956 $ 18,276 $ 65,074
======= ======= =======
In 1994, the Internal Revenue Service (IRS) proposed adjustments to the
Company's U.S. consolidated federal income tax returns for the years 1989
through 1991. The primary proposed adjustment related to the computation of
foreign-source income for purposes of utilizing foreign tax credits. These
issues were settled during 1996 with no material adjustments to the income
tax returns as originally filed. The IRS is currently examining the
Company's U.S. consolidated income tax returns for the years 1992 through
1994.
EXH 13-53
<PAGE>
(9) SHAREHOLDERS' EQUITY
The following is a reconciliation of the number of shares of the
Company's common stock for the years ended December 31:
(In thousands) 1996 1995 1994
-------- -------- --------
Common stock - number of shares:
Issued:
Balance at beginning of year 156,358 155,999 155,565
Exercise of stock options 881 359 434
-------- -------- --------
Balance at end of year 157,239 156,358 155,999
-------- -------- --------
Treasury stock - number of shares:
Balance at beginning of year 14,384 6,544 358
Purchases of treasury stock 6,095 8,223 6,309
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (925) (311) (123)
Exercise of stock options (200) (72) -
-------- -------- --------
Balance at end of year 19,354 14,384 6,544
-------- -------- --------
Shares outstanding at end of year 137,885 141,974 149,455
======== ======== ========
STOCK SPLIT: The Company paid a three-for-two stock split on March 18,
1996. Share and per-share amounts have been adjusted to reflect this split.
SHARE REPURCHASE PROGRAM: During 1996, the Company's board of
directors authorized the purchase of up to an additional 7.0 million shares
of the Company's common stock. In total, the board of directors has
authorized the purchase of up to 28.4 million shares since the inception of
the repurchase program in February 1994. The Company purchased 5.9 million
shares during 1996, 8.2 million shares during 1995 and 6.3 million shares
during 1994 under this share repurchase program. The differences in
percentage increases in net earnings and net earnings per share primarily
reflect the impact of the share repurchase program.
STOCK OPTIONS: The Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, on January 1, 1996. This statement provides a choice of
accounting methods for employee stock compensation plans. A company can
elect to use the new fair-value-based method of accounting for employee
stock compensation plans, under which compensation cost is measured and
recognized in results of operations, or continue to account for these plans
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 (APB No. 25). Companies electing to remain with the method
prescribed by APB No. 25 must make disclosures of what net income and
earnings per share would have been if the fair-value-based method of
accounting had been applied. The Company has elected to continue to account
for employee stock options using the method prescribed by APB No. 25 and
include the required disclosures.
EXH 13-54
<PAGE>
The Company's stock option plan allows grants for both incentive stock
options (ISO) and non-qualifying stock options (NQSO) to employees and NQSO
to members of the board of directors. The option period runs for 10 years
unless provided for otherwise in the individual option agreement. The
option price for an ISO must be equal to 100% of the fair market value at
the date of grant and at least 50% of the fair market value for a NQSO. The
options are exercisable immediately unless they are placed under a vesting
schedule which is determined by the compensation committee. No compensation
expense is recognized by the Company for ISO grants. For NQSO, the Company
incurs a compensation expense for the difference between the grant price and
market value at date of grant for all discounted NQSO. No discounted
options were granted during the three-year period ending December 31, 1996.
In August 1995, the board of directors made an additional 1,042,500
shares available for future grants. This represents 10% of the shares
previously approved for stock options by the shareholders. The board of
directors also approved 750,000 shares of non-qualified stock options to be
granted to managers of AFLAC Japan. At December 31, 1996, shares available
for future grants amounted to 6,045.
The following table summarizes stock option activity:
Option Weighted-Average
Shares Exercise Price
--------- ----------------
Outstanding at January 1, 1994 4,586,410 $ 8.04
Granted 4,108,523 19.01
Expired (938) -
Canceled (114,001) 18.41
Exercised (431,630) 5.95
----------
Outstanding at December 31, 1994 8,148,364 13.53
Granted 549,377 28.08
Canceled (25,313) 18.65
Exercised (470,047) 11.32
---------
Outstanding at December 31, 1995 8,202,381 14.62
Granted 1,830,085 32.79
Canceled (61,976) 24.96
Exercised (1,166,419) 10.56
---------
Outstanding at December 31, 1996 8,804,071 $18.86
=========
1996 1995 1994
--------- --------- ---------
Shares exercisable at
end of year 6,776,583 7,676,624 6,631,838
========= ========= =========
Weighted-average fair value
per share of shares granted
during the year $ 32.79 $ 28.08 $ 19.01
========= ========= =========
EXH 13-55
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Wgtd. Avg.
Remaining Wgtd. Avg. Wgtd. Avg.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ------------ ---------- ----------- ----------
$ 3.57 - $ 7.13 760,630 3.01 $ 4.52 760,630 $ 4.52
7.33 - 8.00 1,083,804 3.17 7.93 1,083,804 7.93
8.07 - 16.13 1,089,823 4.07 11.57 1,089,823 11.57
18.83 3,182,380 6.49 18.83 3,182,380 18.83
19.20 - 28.21 886,074 7.94 25.24 659,946 24.72
31.67 1,371,610 9.12 31.67 - -
33.94 - 42.94 429,750 9.69 36.47 - -
--------- ---------
$ 3.57 - $42.94 8,804,071 6.19 $ 18.86 6,776,583 $ 14.89
========= =========
Had compensation cost for the Company's stock options granted in 1996
and 1995 been determined using the fair-value-based method as described in
SFAS No. 123, the Company's net earnings and earnings per share would
approximate the pro forma amounts indicated below:
(In thousands, except for 1996 1995
per-share amounts) --------- ---------
Net earnings:
As reported $ 394,363 $ 349,057
Effect of stock options (8,479) (1,786)
--------- ---------
Pro forma net earnings $ 385,884 $ 347,271
========= =========
Earnings per share:
As reported $ 2.73 $ 2.33
Effect of stock options (.06) (.01)
--------- ---------
Pro forma net earnings per share $ 2.67 $ 2.32
========= =========
The fair value of each option granted during 1996 and 1995 was
estimated on the date of grant using the Black-Scholes multiple option
approach with the following assumptions: dividend yield of 1.0% for both
1996 and 1995, expected volatility of 19% for 1996 and 21% for 1995, risk-
free interest rate of 7.0% for 1996 and 6.5% for 1995, and expected life
from the vesting dates ranging from 3.65 years to 6.10 years for 1996 and
2.52 years to 7.10 years for 1995.
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. The provisions of SFAS No. 123 are
applicable prospectively and the above pro forma disclosures therefore do
not include amortization of the fair value of awards prior to 1995. Also,
the Company expects to grant additional awards in future years.
EXH 13-56
<PAGE>
OTHER: In accordance with the Parent Company's Articles of
Incorporation, shares of common stock are generally entitled to one vote per
share until they have been held by the same beneficial owner for a
continuous period of 48 months, at which time they become entitled to 10
votes per share.
(10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Net assets of the insurance subsidiaries aggregated $2.6 billion at
December 31, 1996, on a generally accepted accounting principles basis.
AFLAC Japan accounted for $1.7 billion of these net assets.
The Company's insurance subsidiaries are required to report their
results of operations and financial position to state insurance regulatory
authorities, and in the case of AFLAC Japan, to the Japanese Ministry of
Finance, on the basis of statutory accounting practices prescribed or
permitted by such authorities. As determined on a U.S. statutory accounting
basis, net income of AFLAC was $256.6 million in 1996, $194.3 million in
1995 and $252.5 million in 1994, and capital and surplus was $1.4 billion
and $1.2 billion at December 31, 1996 and 1995, respectively.
Reconciliations of AFLAC's net assets on a generally accepted
accounting principles basis to net assets determined on a U.S. statutory
accounting basis as of December 31 were as follows:
(In thousands) 1996 1995
----------- -----------
Net assets on generally accepted
accounting principles basis $ 2,644,408 $ 2,536,112
Adjustment of fixed-maturity securities
from fair value to amortized cost (2,385,328) (2,568,498)
Elimination of deferred policy
acquisition costs (2,580,682) (2,563,759)
Adjustment to liability for future
policy benefits 3,006,909 2,892,499
Adjustment to income tax liability 1,030,111 1,236,452
Reduction in premiums receivable (83,946) (65,107)
Establishment of asset valuation reserve (188,131) (185,180)
Elimination of statutory non-admitted assets (73,321) (63,098)
Difference in foreign currency translation (477) (51,423)
Other, net 35,977 78,398
----------- -----------
Net assets on U.S. statutory
accounting basis $ 1,405,520 $ 1,246,396
=========== ===========
The Parent Company depends on its subsidiaries for cash flow, primarily
in the form of dividends and management fees. Consolidated retained
earnings in the accompanying financial statements largely represent
undistributed earnings of the insurance subsidiaries. Dividends, management
fees (see Note 2) and other payments to the Parent Company by its insurance
subsidiaries are subject to various regulatory restrictions and approvals
related to safeguarding the interests of insurance policyholders. The
maximum amount of dividends that can be paid by insurance companies
domiciled in the State of Georgia to shareholders without prior approval of
EXH 13-57
<PAGE>
the Commissioner of Insurance is the greater of the net gain from operations
for the previous year determined under statutory accounting principles or
10% of statutory surplus as of the previous year-end. Dividend payments by
AFLAC during 1997 in excess of $259.6 million would require such approval.
A portion of AFLAC Japan annual earnings, as determined on a Japan
statutory accounting basis, can be remitted each year to AFLAC U.S. after
satisfying various conditions imposed by Japanese regulatory authorities for
protecting policyholders and obtaining remittance approvals from such
authorities. These conditions include compliance with risk-based capital
guidelines for Japanese insurers. Profit remittances to the United States
can fluctuate due to changes in the amounts of Japanese regulatory earnings.
Among other items, factors affecting regulatory earnings include Japanese
regulatory accounting practices and fluctuations in currency translations of
AFLAC Japan's U.S. dollar-denominated investments into yen. Earnings were
remitted from AFLAC Japan to AFLAC U.S. in the amount of $217.3 million in
1996, $140.5 million in 1995 and $132.9 million in 1994. Management expects
to continue to obtain approvals from Japanese regulatory authorities for
annual profit transfers.
Net assets (unaudited) of AFLAC Japan, based on Japanese statutory
accounting practices, aggregated $466.9 million and $412.8 million at
December 31, 1996 and 1995, respectively. Japanese statutory accounting
practices differ in many respects from U.S. generally accepted accounting
principles. Under Japanese statutory accounting practices, policy
acquisition costs are charged off immediately, policy benefit and claim
reserving methods are different, deferred income tax liabilities are not
recognized, and investment securities are carried at cost less certain
market value adjustments.
(11) BENEFIT PLANS
RETIREMENT PLANS: The Company sponsors several defined-benefit
retirement plans covering substantially all employees. The retirement
benefits for employees are generally based on years of service and formula-
determined salaries at retirement for AFLAC Japan employees, and salary
during the five highest consecutive years out of the last 10 years preceding
retirement for U.S. employees.
It is the Company's general policy to annually fund through a trust the
accrued costs for the U.S. employee plans to the extent deductible for U.S.
federal income tax purposes (such accrued costs are calculated under the
frozen entry-age actuarial cost method). A portion of the AFLAC Japan
employee retirement program is funded under a group annuity arrangement with
another insurance company. An accrued liability is included in the
consolidated financial statements for the unfunded portion of the AFLAC
Japan program and supplemental plans for certain Japan and U.S. officers.
EXH 13-58
<PAGE>
The components of retirement expense and significant actuarial
assumptions for the years ended December 31 are shown below.
1996 1995 1994
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Basic employee plans:
Service cost for
benefits earned
during the year $2,169 $ 2,591 $2,610 $ 1,880 $2,269 $ 2,166
Interest cost on
projected benefit
obligations 1,031 3,142 1,148 2,686 999 2,569
Less actual investment
return on plan assets (1,117) (4,429) (518) (6,344) (1,135) 28
Net amortization
and deferral 702 1,861 696 4,370 278 (1,530)
----- ----- ----- ----- ----- -----
Total retirement
expense for basic
employee plans 2,785 3,165 3,936 2,592 2,411 3,233
Officers, retirees and
beneficiaries unfunded
supplemental plans 1,369 35,806 1,395 35,634 1,203 33,468
----- ------ ----- ------ ----- ------
Total retirement
expense $4,154 $38,971 $5,331 $38,226 $3,614 $36,701
===== ====== ===== ====== ===== ======
Significant actuarial
assumptions:
Discount rate for:
Net periodic pension
costs 4.0% 7.0% 4.0% 8.0% 4.4% 7.0%
Benefit obligations 4.0-5.5 7.0 4.0 7.0 4.0 8.0
Projected increase in
salary levels 3.5 5.0 3.5 5.0 4.5 5.0
Expected long-term
return on plan assets 2.5 9.0 4.5 9.0 5.5 9.0
EXH 13-59
<PAGE>
Reconciliations of the funded status of the basic employee plans with
amounts recognized in the accompanying consolidated balance sheets as of
December 31 were as follows:
1996 1995
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Plan assets, at fair value
(primarily bonds, stocks
and insurance contracts) $18,445 $37,574 $18,769 $31,557
------ ------ ------ ------
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
based on employee service to
date and present salary levels:
Vested benefits 15,768 32,557 16,677 28,373
Non-vested benefits 94 1,167 128 1,455
Effect of assumed future
salary increases 8,789 13,945 10,187 12,696
------ ------ ------ ------
Projected benefit obligations 24,651 47,669 26,992 42,524
------ ------ ------ ------
Projected benefit obligations
in excess of plan assets (6,206) (10,095) (8,223) (10,967)
Unamortized net losses (gains) from
plan experience variations and
changes in actuarial assumptions (170) 9,731 1,029 11,486
Unrecognized prior service
cost (credit) 1,119 (222) 1,347 (249)
Unamortized net transition
(gain) loss 673 (1,083) 857 (1,205)
------ ------ ------ ------
Prepaid retirement cost
(liability) recognized in
consolidated balance sheets $(4,584) $(1,669) $(4,990) $ (935)
====== ====== ====== ======
In addition to the funded benefit obligations for basic employee plans,
the accrued retirement liability for unfunded supplemental retirement plans
for various officers and beneficiaries at December 31, 1996 and 1995, was
$165.7 million and $134.6 million, respectively. The actuarial present
value of projected benefit obligations for these plans was $170.2 million
and $161.2 million at December 31, 1996 and 1995, respectively. The
discount rates used were 4.0% in both 1996 and 1995 for AFLAC Japan, and
7.0% for AFLAC U.S. for both 1996 and 1995. Such supplemental retirement
plans include a lifetime obligation to the surviving spouse of the Company's
former chairman of the board. Benefits are payable at .5% of the Company's
"net earnings" for the previous year as defined in the agreement.
POSTRETIREMENT BENEFITS: In addition to pension benefits,
substantially all U.S. employees of the Company participate in health care
benefit plans. Employees become eligible for these benefits, up to age 65,
if they terminate employment after age 55 with 15 years of service. Certain
employees are eligible for nonmedical benefits. The accumulated benefit
obligation as of December 31, 1996 and 1995, was $9.4 million and $8.9
million, respectively, based on an assumed discount rate of 7.0% for both
years.
EXH 13-60
<PAGE>
Net postretirement benefit cost for the years ended December 31
included the following components:
(In thousands) 1996 1995 1994
------ ------ ------
Service cost $ 296 $ 229 $ 251
Interest cost 630 536 743
Amortization of unrecognized gains (41) (207) -
----- ----- -----
Postretirement benefit cost $ 885 $ 558 $ 994
===== ===== =====
Actuarial assumptions used were:
Discount rate - periodic cost 7% 8% 7%
Projected health care cost
trend rate 12% 13% 14%
Ultimate trend rate 7% 7% 7%
Effect of a 1% point increase in the
health care cost trend rate on the:
Postretirement benefit obligation $ 466 $ 675 $ 487
Aggregate of service and
interest cost $ 86 $ 89 $ 94
STOCK BONUS PLAN: AFLAC U.S. maintains a stock bonus plan for eligible
U.S. sales associates. Contributions to the plan, which are determined
based on sales of insurance policies, are made by AFLAC U.S. to a trust and
are used to purchase the Parent Company's common stock for later
distribution to the participants. The participants are subject to vesting
requirements based on years of service. Any shares forfeited reduce future
contributions of AFLAC U.S. The net costs of this plan, which are included
in deferred policy acquisition costs, amounted to $8.9 million in 1996, $8.0
million in 1995 and $6.9 million in 1994.
(12) COMMITMENTS AND CONTINGENCIES
LITIGATION: The Company is a defendant in various litigation
considered to be in the normal course of business. Some of this litigation
is pending in Alabama, where large punitive damages bearing little relation
to the actual damages sustained by plaintiffs have been awarded against
other companies, including insurers, in recent years. During 1995, the
Company settled certain litigation in Alabama related to an ancillary line
of business. However, the settlement was not material to the Company's
consolidated net earnings for the year. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of the litigation still pending will not have a material adverse
effect on the financial position of the Company.
LAND PURCHASE COMMITMENT: AFLAC Japan's administrative office building
is located on partially leased land. Under the terms of an agreement
entered into in 1991, the Company is committed to purchase the leased land,
at fair value, upon the demand of the owner. As of December 31, 1996, the
fair value of the leased land was estimated to be 2.1 billion yen ($18.4
million).
EXH 13-61
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements of
AFLAC Incorporated and subsidiaries. The statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon management's best estimates and judgments. Informed judgments
and estimates are used for those transactions not yet complete or for which
the ultimate effects cannot be measured precisely. Financial information
elsewhere in this annual report is consistent with the information in the
financial statements.
The Company's internal controls are designed to reasonably assure that
AFLAC Incorporated's books and records reflect the transactions of the
Company, that assets are safeguarded, and that the Company's established
policies and procedures are followed. The effectiveness of the controls
system is supported by the selection and training of qualified personnel, an
organizational structure that provides an appropriate division of
responsibility, and a comprehensive internal audit program.
The Company engages KPMG Peat Marwick LLP as independent auditors to
audit its financial statements and express their opinion thereon. Their
audits include reviews and tests of the Company's internal controls to the
extent they believe necessary to determine and conduct the audit procedures
that support their opinion. Members of that firm also have the right of
full access to each member of management in conducting their audits. The
report of KPMG Peat Marwick LLP appears on the following page.
The Audit Committee of the board of directors, which is composed of
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The committee
meets periodically with representatives of management, as well as the
independent and internal auditors, to review matters of a material nature
related to financial reporting and the planning, results and recommendations
of audits. The independent and internal auditors have free access to the
Audit Committee, without management present, to discuss any matter they
believe should be brought to the attention of the committee. The committee
is also responsible for making recommendations to the board of directors
concerning the selection of the independent auditors.
/s/ Daniel P. Amos
- ---------------------------------
Daniel P. Amos
President and Chief Executive Officer
/s/ Kriss Cloninger III
- ---------------------------------
Kriss Cloninger III
Executive Vice President and Chief Financial Officer
EXH 13-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AFLAC
Incorporated and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 29, 1997
EXH 13-63
<PAGE>
<TABLE>
Unaudited Consolidated Quarterly Financial Data
(In thousands, except per-share amounts)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------
1996 Amount % Change Amount % Change Amount % Change Amount % Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,729,920 .9% $ 1,741,657 (9.9)% $ 1,775,579 (2.0)% $ 1,853,047 7.0%
Net earnings 86,523 1.9 85,747 (7.7) 88,345 .4 133,748 60.5
- ------------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings $ .59 5.4 $ .59 (3.3) $ .62 3.3 $ .93 63.2
Cash dividends $ .087 $ .10 $ .10 $ .10
- -----------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------
1995 Amount % Change Amount % Change Amount % Change Amount % Change
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,713,676 23.1% $ 1,932,771 30.5% $ 1,811,718 13.1% $ 1,732,455 5.9%
Net earnings 84,873 21.3 92,916 33.9 87,960 15.6 83,308 7.6
- -----------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings $ .56 27.3 $ .61 35.6 $ .60 22.4 $ .57 11.8
Cash dividends $ .077 $ .087 $ .087 $ .087
- -----------------------------------------------------------------------------------------------------------------------------
EXH 13-64
</TABLE>
<PAGE>
EXHIBIT 21
EXH 21.0
<PAGE>
AFLAC INCORPORATED
SUBSIDIARIES
The following list sets forth the subsidiaries of the Company:
Company Jurisdiction
------- ------------
AFLAC Broadcast Partners ("ABP") Georgia
AFLAC International, Inc. ("AI") Georgia
AFLAC Broadcast Group, Inc. ("ABG") Georgia
AFLAC Real Estate Holdings, Inc. ("AREH") Georgia
American Family Life Assurance Company of
Columbus ("AFLAC") Georgia
American Family Life Assurance Company
of New York ("AFLAC-NY") New York
Communicorp, Inc. ("COMM") Georgia
WITN-TV, Inc. ("WITN") North Carolina
The above subsidiaries are 100% directly owned by the Company, except:
WITN is 100% directly owned by ABG.
AFLAC-NY is 100% directly owned by AFLAC.
ABP is 99% owned by AFLAC and 1% owned by ABG.
EXH 21.0-1
<PAGE>
Exhibit 23.0
EXH 23.0
<PAGE>
KPMG PEAT MARWICK LLP
Certified Public Accountants
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
INDEPENDENT AUDITORS' CONSENT
The Shareholders and The Board of Directors
AFLAC Incorporated
We consent to incorporation by reference in Registration Statement Nos.
33-41926, 33-64535 and 333-16533 on Form S-3, and 33-41552, 33-44720,
33-53737 and 333-01243 on Form S-8 of AFLAC Incorporated of our report dated
January 29, 1997, relating to the consolidated balance sheets of AFLAC
Incorporated and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31,
1996, which report appears in the 1996 annual report to shareholders and is
incorporated by reference in the December 31, 1996, annual report on Form
10-K of AFLAC Incorporated.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 26, 1997
EXH 23.0-1
<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-K for the
year ended December 31, 1996, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 20,327,726
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 136,328
<MORTGAGE> 17,802
<REAL-ESTATE> 0
<TOTAL-INVEST> 20,746,535
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,582,946
<TOTAL-ASSETS> 25,022,812
<POLICY-LOSSES> 19,736,430
<UNEARNED-PREMIUMS> 288,976
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 208,799
<NOTES-PAYABLE> 353,533
0
0
<COMMON> 15,724
<OTHER-SE> 2,109,845
<TOTAL-LIABILITY-AND-EQUITY> 25,022,812
5,910,036
<INVESTMENT-INCOME> 1,021,955
<INVESTMENT-GAINS> 1,980
<OTHER-INCOME> 166,232<F1>
<BENEFITS> 4,895,522
<UNDERWRITING-AMORTIZATION> 162,475
<UNDERWRITING-OTHER> 1,392,205
<INCOME-PRETAX> 650,001
<INCOME-TAX> 255,638
<INCOME-CONTINUING> 394,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,363
<EPS-PRIMARY> 2.73
<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 $60.3 million gain from the sale of a television station on
December 31, 1996.
</FN>
</TABLE>
