<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarter ended September 30, 1998
Commission File No. 1-7434
AFLAC INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1167100
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999
-----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (706) 323-3431
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class October 30, 1998
- ---------------------------- ------------------
Common Stock, $.10 Par Value 265,283,460 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997................ 1
Consolidated Statements of Earnings -
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997........... 3
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 1998 and 1997........... 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997........... 6
Consolidated Statements of Comprehensive Income -
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997........... 8
Notes to Consolidated Financial Statements................ 9
Review by Independent Certified Public
Accountants............................................. 15
Independent Auditors' Report.............................. 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................... 32
Part II. Other Information:
Item 1. Legal Proceedings.................................. 36
Item 6. Exhibits and Reports on Form 8-K................... 36
Items other than those listed above are omitted because they are not
required or are not applicable.
i
<PAGE>
<TABLE>
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$20,094,739 in 1998 and
$19,121,128 in 1997) $ 24,269,830 $ 22,437,818
Equity securities (cost, $90,165 in
1998 and $80,270 in 1997) 134,737 146,326
Mortgage loans and other 7,871 16,747
Short-term investments 45,910 43,344
Cash and cash equivalents 290,178 235,675
------------ ------------
Total investments and cash 24,748,526 22,879,910
Receivables, primarily premiums 234,147 213,469
Receivables for security transactions 2,296 2,184
Accrued investment income 248,666 264,956
Deferred policy acquisition costs 2,667,441 2,581,828
Property and equipment, net 371,999 386,049
Securities held as collateral for
loaned securities - 3,034,241
Other 93,374 91,368
------------ ------------
Total assets $ 28,366,449 $ 29,454,005
============ ============
See the accompanying Notes to Consolidated Financial Statements.
(continued)
</TABLE>
1
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands, except for per-share amounts)
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 20,108,353 $ 18,398,830
Unpaid policy claims 1,091,846 1,010,519
Unearned premiums 270,593 276,673
Other policyholders' funds 212,721 199,046
------------ ------------
Total policy liabilities 21,683,513 19,885,068
Notes payable 502,083 523,209
Income taxes 1,743,224 1,827,337
Payables for return of collateral on
loaned securities - 3,034,241
Payables for security transactions 182,453 215,654
Other 683,909 538,024
------------ ------------
Total liabilities 24,795,182 26,023,533
------------ ------------
Shareholders' equity:
Common stock of $.10 par value. Authorized
400,000 shares; issued 317,572 shares in
1998 and 316,380 shares in 1997 31,757 15,819
Additional paid-in capital 228,193 227,292
Retained earnings 2,763,063 2,442,309
Accumulated other comprehensive income:
Unrealized foreign currency
translation gains 211,814 274,074
Unrealized gains on securities
available for sale 1,251,977 1,284,717
------------ ------------
Total accumulated other
comprehensive income 1,463,791 1,558,791
Treasury stock, at average cost (914,614) (812,672)
Notes receivable for stock purchases (923) (1,067)
------------ ------------
Total shareholders' equity 3,571,267 3,430,472
------------ ------------
Total liabilities and
shareholders' equity $ 28,366,449 $ 29,454,005
============ ============
Shareholders' equity per share $ 13.48 $ 12.88
============ ============
See the accompanying Notes to Consolidated Financial Statements.
Share and per-share amounts have been adjusted to reflect the two-for-one
stock split issued June 8, 1998.
</TABLE>
2
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In thousands, except for Three Months Ended September 30, Nine Months Ended September 30,
per-share amounts - Unaudited) -------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health insurance $ 1,421,280 $ 1,508,697 $ 4,317,653 $ 4,412,040
Net investment income 274,777 280,316 828,913 798,946
Realized investment gains (losses) (1,863) (4,568) (2,131) (5,703)
Gain on sale of television business - - - 267,223
Other income 5,352 5,175 15,638 33,344
---------- ---------- ---------- ----------
Total revenues 1,699,546 1,789,620 5,160,073 5,505,850
---------- ---------- ---------- ----------
Benefits and expenses:
Benefits and claims 1,159,638 1,241,090 3,544,175 3,632,839
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs 47,704 45,906 146,269 133,381
Insurance commissions 184,047 198,905 561,204 582,017
Insurance expenses 125,563 120,287 361,478 350,578
Provision for mandated policyholder protection fund - - 111,279 -
Interest expense 2,814 3,101 9,478 10,548
Other operating expenses 18,310 24,521 51,007 76,597
---------- ---------- ---------- ----------
Total acquisition and operating expenses 378,438 392,720 1,240,715 1,153,121
---------- ---------- ---------- ----------
Total benefits and expenses 1,538,076 1,633,810 4,784,890 4,785,960
---------- ---------- ---------- ----------
Earnings before income taxes 161,470 155,810 375,183 719,890
Income taxes:
Operations 53,901 59,731 125,652 230,861
Deferred tax benefit from Japan tax rate reduction - - (121,120) -
---------- ---------- ---------- ----------
Total income tax expense 53,901 59,731 4,532 230,861
---------- ---------- ---------- ----------
Net earnings $ 107,569 $ 96,079 $ 370,651 $ 489,029
========== ========== ========== ==========
(continued on next page)
3
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings (continued)
<CAPTION>
(In thousands, except for Three Months Ended September 30, Nine Months Ended September 30,
per-share amounts - Unaudited) -------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings per share:
Basic $ .40 $ .35 $ 1.39 $ 1.79
Diluted .39 .34 1.34 1.73
========== ========== ========== ==========
Shares used in computing earnings per share:
Basic 265,928 272,605 266,629 273,354
Diluted 275,287 282,450 276,048 282,979
========== ========== ========== ==========
Cash dividends per share $ .065 $ .058 $ .188 $ .166
========== ========== ========== ==========
See the accompanying Notes to Consolidated Financial Statements.
Share and per-share amounts have been adjusted to reflect the two-for-one stock split issued June 8, 1998.
4
</TABLE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<CAPTION>
Nine Months Ended September 30,
(In thousands - Unaudited) 1998 1997
---------- ----------
<S> <C> <C>
Common stock:
Balance at beginning of year $ 15,819 $ 15,724
Exercise of stock options 74 84
Two-for-one stock split 15,864 -
---------- ----------
Balance at end of period 31,757 15,808
---------- ----------
Additional paid-in capital:
Balance at beginning of year 227,292 208,994
Exercise of stock options 5,049 4,240
Gain on treasury stock reissued 11,716 8,533
Two-for-one stock split (15,864) -
---------- ----------
Balance at end of period 228,193 221,767
---------- ----------
Retained earnings:
Balance at beginning of year 2,442,309 1,917,794
Net earnings 370,651 489,029
Cash dividends ($.188 per share
in 1998 and $.166 in 1997) (49,897) (45,050)
---------- ----------
Balance at end of period 2,763,063 2,361,773
---------- ----------
Accumulated other comprehensive income:
Balance at beginning of year 1,558,791 509,936
Change in unrealized foreign currency
translation gains (losses) during
period, net of income taxes (62,260) 9,276
Unrealized gains (losses) on securities
available for sale during period, net
of income taxes and reclassification
adjustments (32,740) 341,123
---------- ----------
Balance at end of period 1,463,791 860,335
---------- ----------
Treasury stock:
Balance at beginning of year (812,672) (526,425)
Purchases of treasury stock (122,556) (159,479)
Cost of shares issued to sales associates
stock bonus plan and dividend
reinvestment plan 20,614 20,810
---------- ----------
Balance at end of period (914,614) (665,094)
---------- ----------
Notes receivable for stock purchases (923) (814)
---------- ----------
Total shareholders' equity $ 3,571,267 $ 2,793,775
========== ==========
See the accompanying Notes to Consolidated Financial Statements. Per-share
amounts have been adjusted to reflect the two-for-one stock split issued
June 8, 1998. 5
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands - Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 370,651 $ 489,029
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,623,713 1,750,978
Deferred income taxes (174,445) 11,235
Change in income taxes payable 63,978 3,336
Increase in deferred policy
acquisition costs (161,446) (174,686)
Change in receivables and
advance premiums (18,447) (11,989)
Gain on sale of television business - (267,223)
Provision for mandated policyholder
protection fund 111,279 -
Other, net 19,304 158,267
---------- ----------
Net cash provided by operating
activities 1,834,587 1,958,947
---------- ----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed-maturity securities sold 647,231 1,517,566
Fixed-maturity securities matured 511,649 295,641
Equity securities 49,284 48,256
Mortgage loans and other investments, net 8,762 2,212
Short-term investments, net - 2,546
Costs of investments acquired:
Fixed-maturity securities (2,773,852) (4,002,063)
Equity securities (44,133) (43,013)
Short-term investments, net (2,791) -
Proceeds from sale of television business - 350,633
Additions to property and equipment, net (25,929) (4,120)
---------- ----------
Net cash used by
investing activities $(1,629,779) $(1,832,342)
---------- ----------
(continued)
</TABLE>
6
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands - Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 113,758 $ 253,833
Principal payments under debt
obligations (122,437) (189,570)
Dividends paid to shareholders (49,897) (45,050)
Purchases of treasury stock (122,556) (159,479)
Treasury stock reissued 32,330 29,343
Other, net 5,123 4,324
---------- ----------
Net cash provided/(used) by
financing activities (143,679) (106,599)
---------- ----------
Effect of exchange rate changes on cash
and cash equivalents (6,626) (4,318)
---------- ----------
Net change in cash and cash equivalents 54,503 15,688
Cash and cash equivalents, beginning of year 235,675 209,095
---------- ----------
Cash and cash equivalents, end of period $ 290,178 $ 224,783
========== ==========
Supplemental disclosures of cash
flow information:
Cash payments during the period for:
Interest on debt obligations $ 9,190 $ 9,067
Income taxes 196,523 215,198
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
7
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands - Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings $ 107,569 $ 96,079 $ 370,651 $ 489,029
---------- ---------- ---------- ----------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency
translation gains (losses) during
the period (25,319) 22,631 14,923 8,767
Reclassification adjustment for realized
currency loss on sale of subsidiary
included in net earnings - - - 509
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses)
occurring during the period 35,784 100,520 24,849 532,285
Reclassification adjustment for realized
(gains) losses included in net earnings 2,560 4,243 2,050 5,293
----------- ----------- ----------- -----------
Total other comprehensive income,
before income taxes 13,025 127,394 41,822 546,854
Deferred income tax expense related to items
of other comprehensive income 7,735 (1,230) 136,822 196,455
----------- ----------- ----------- -----------
Other comprehensive income (loss),
net of income taxes 5,290 128,624 (95,000) 350,399
----------- ----------- ----------- -----------
Total comprehensive income $ 112,859 $ 224,703 $ 275,651 $ 839,428
=========== =========== =========== ===========
See the accompanying Notes to Consolidated Financial Statements.
8
</TABLE>
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements of AFLAC Incorporated and subsidiaries (the "Company")
contain all adjustments necessary to fairly present the financial position
as of September 30, 1998, and the results of operations and comprehensive
income for the three-month and nine-month periods ended September 30, 1998
and 1997, and statements of cash flows and shareholders' equity for the nine
months ended September 30, 1998 and 1997. Results of operations for interim
periods are not necessarily indicative of results for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, based
on the best information available, in recording transactions resulting from
business operations. The balance sheet amounts that involve a greater
extent of accounting estimates and actuarial determinations subject to
future changes are: deferred policy acquisition costs, liabilities for
future policy benefits and unpaid policy claims, accrued liabilities for
unfunded retirement plans for various officers and beneficiaries, and
contingent liabilities. As additional information becomes available (or
actual amounts are determinable), the recorded estimates may be revised and
reflected in operating results. Although some variability is inherent in
these estimates, management believes the amounts provided are adequate.
The financial statements should be read in conjunction with the
financial statements included in the Company's annual report to shareholders
for the year ended December 31, 1997.
2. Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. This Statement was
amended by SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. These statements established criteria
for those transactions concerning secured obligations and collateral, which
must be applied prospectively to all applicable transactions that occurred
after December 31, 1997. Beginning in 1998, as required by these standards,
the Company no longer recognizes securities held as collateral as an asset,
nor the related liability for the return of such collateral for loan
agreements entered into after December 31, 1997. The adoption of SFAS No.
125 and No. 127 had no material effect on the Company's net earnings or
shareholders' equity.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997. This Statement requires that
companies disclose segment data on the basis that is used internally by
management for evaluating segment performance and allocating resources to
segments. This Statement requires that a company report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. It also requires various reconciliations of total segment
information to amounts in the consolidated financial statements. SFAS No.
131 is effective for financial statements issued for annual periods
beginning in 1998 and for interim periods beginning in 1999. The Company's
current definition of its business segments will not change.
9
<PAGE>
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, Employer's Disclosures about Pensions and Other Postretirement
Benefits. This Statement revises disclosures about pension and other
postretirement benefit plans, but does not change the measurement or
recognition of these plans. This Statement is effective for 1998, and the
new disclosures will be included in the year-end financial statements.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a derivative
will be included in either earnings or other comprehensive income depending
on the intended use of the derivative instrument. The Company is currently
evaluating this standard, which is effective January 1, 2000.
The Accounting Standards Executive Committee issued Statement of
Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments, in December 1997. This SOP provides guidance
for determining when an entity should recognize a liability for guaranty
fund and other insurance-related assessments. It also provides guidance on
how to measure the liability. This SOP is effective for 1999. The
Company's present accounting method for guaranty fund and other insurance-
related assessments substantially conforms to the requirements of this SOP.
In March 1998, SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, was issued. This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past,
the Company has expensed all such costs as they were incurred. This SOP is
effective beginning in 1999.
3. Japanese Income Taxes
At the end of March 1998, the Japanese government reduced the Japanese
corporate income tax rate. The tax rate for AFLAC Japan declined from 45.3%
to 41.7%. For the Company, this rate change reduced income tax expense on
operating earnings beginning May 1, 1998. The effect of this tax rate
reduction was to lower 1998 income tax expense on operating earnings and
increase net operating earnings by approximately $7.2 million for the nine
months ended September 30, 1998.
Under generally accepted accounting principles, the effect of the rate
reduction on the deferred income tax liability must be recognized in income
tax expense in the period the tax law was enacted. This tax rate reduction
was recognized as of March 31, 1998 and lowered income tax expense and
increased net earnings by $121.1 million. The tax rate reduction increased
basic and diluted earnings per share by $.45 and $.44, respectively, for the
nine months ended September 30, 1998.
Effective January 1, 1998, the Japanese government changed the income
tax provisions to increase income taxes on investment income and realized
gains received by foreign companies operating in Japan from securities
issued from their home country. This tax change decreased net operating
earnings for the nine months ended September 30, 1998 by $15.7 million.
10
<PAGE>
As a result of this Japanese tax change, the provision for deferred
income taxes in the statements of comprehensive income for the nine months
ended September 30, 1998, includes $58.7 million, for Japanese income taxes
on unrealized gains existing as of January 1, 1998, on AFLAC Japan's dollar-
denominated securities available for sale. Also, the provision for deferred
income taxes on comprehensive income for the nine months ended September 30,
1998, includes Japanese income taxes of $74.6 million on certain unrealized
foreign currency gains that arise for Japan tax purposes on translation of
its dollar-denominated investments into yen.
4. Policyholder Protection Fund
During the first quarter of 1998, the Japanese government enacted a
mandatory policyholder protection fund system. The life insurance industry
will be required to contribute 490 billion yen ($3.6 billion using the
September 30, 1998, exchange rate) over a 10-year period. Individual
company contributions are to be based on relative company size. The charge
for the Company's share of the total contribution obligation was recognized
in the first quarter of 1998 and decreased pretax earnings by $111.3 million
for the nine months ended September 30, 1998. The after-tax charge was
$64.9 million, or $.24 for both basic and diluted earnings per share.
5. Notes Payable
A summary of notes payable is as follows:
September 30, December 31,
(In thousands) 1998 1997
------------- ------------
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement,
due annually through July 2001:
2.29% fixed interest rate $ 251,570 $ 348,962
Variable interest rate (1.06% at
September 30, 1998) 44,330 -
Revolving credit agreement due October 2002:
1.24% fixed interest rate 114,666 149,116
Variable interest rate (1.01% at
September 30, 1998) 74,621 -
Obligations under capitalized leases, due
monthly through 2002, secured by computer
equipment in Japan 16,896 17,986
Other - 7,145
--------- ---------
Total notes payable $ 502,083 $ 523,209
========= =========
The Company has a reducing, revolving credit agreement that provides
for bank borrowings through July 2001 in either U.S. dollars or Japanese
yen. Under the terms of the agreement, the borrowing limit was reduced to
$325 million on July 15, 1998, and will reduce to $250 million on July 15,
1999, and $125 million on July 15, 2000. At September 30, 1998, 34.1
billion yen ($251.6 million) was outstanding at a fixed interest rate and
6.0 billion yen ($44.3 million) was outstanding at a variable interest rate.
11
<PAGE>
The Company also has an unsecured revolving credit agreement that
provides for bank borrowings through October 2002 with a borrowing limit of
$250 million, payable in either Japanese yen or U.S. dollars. At September
30, 1998, 15.5 billion yen ($114.7 million) was outstanding at a fixed
interest rate and 10.1 billion yen ($74.6 million) was outstanding at a
variable interest rate.
The Company has outstanding interest rate swaps on 49.6 billion yen of
its variable-interest-rate yen-denominated borrowings. These swaps reduce
the impact of changes in interest rates on the Company's borrowing costs and
effectively change the Company's interest rate from variable to fixed. The
interest rate swaps have notional principal amounts that equal the
anticipated unpaid principal amounts. Under these agreements, the Company
makes fixed-rate payments at 2.29% on one loan and 1.24% on another loan and
receives floating-rate payments (.65% at September 30, 1998, plus loan costs
of 25 or 20 basis points, respectively) based on the three-month Tokyo
Interbank Offered Rate. Since most of these loans are with Japanese banks,
the Company also pays the premium that Japanese banks are charged for short-
term money. This is commonly referred to as the "Japan premium."
The Company has designated its yen-denominated borrowings as a hedge of
its net investment in AFLAC Japan. Foreign currency translation
gains/losses are included in the accumulated other comprehensive income
component in shareholders' equity. Outstanding principal and related
accrued interest payable on the yen-denominated borrowings were translated
into dollars at end-of-period exchange rates. Interest expense was
translated at average exchange rates for the period the interest expense was
incurred.
6. Unrealized Gains on Securities Available for Sale
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 the accumulated other
comprehensive income 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 relate to policy reserve interest requirements and
reflect the difference between market investment yields and estimated
minimum required interest rates at these dates.
The net effect of unrealized gains and losses from securities available
for sale on accumulated other comprehensive income at the following dates
was:
(In thousands) September 30, 1998 December 31, 1997
------------------ -----------------
Securities available
for sale - unrealized gains $ 4,219,663 $ 3,382,746
Less amounts related to:
Policy liabilities 2,081,718 1,271,701
Deferred income taxes 885,968 826,328
------------ ------------
Accumulated other comprehensive
income, net unrealized gains on
securities available for sale $ 1,251,977 $ 1,284,717
============ ============
12
<PAGE>
7. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At September 30, 1998, and December
31, 1997, the Company held Japanese government bonds as collateral for
loaned securities in the amount of $3.4 billion and $3.0 billion,
respectively, at fair value. The securities received as collateral in the
amount of $3.4 billion at September 30, 1998, are for transactions that
occurred after December 31, 1997. This collateral, and the related
liability for the return of such collateral, are no longer included on the
balance sheet at September 30, 1998, under the accounting provisions of SFAS
No. 125 and SFAS No. 127. (See Note 2 of the Notes to the Consolidated
Financial Statements.)
8. Common Stock
On May 4, 1998, the board of directors declared a two-for-one stock
split. This split was payable to shareholders of record as of May 22, 1998,
and the additional shares were issued on June 8, 1998. All share and per-
share amounts in the accompanying financial statements have been restated
for this split.
The following is a reconciliation of the number of shares of the
Company's common stock for the nine months ended September 30:
(In thousands) 1998 1997
---------- ----------
Common stock - issued:
Balance at beginning of year 316,380 314,478
Exercise of stock options 1,192 1,682
-------- --------
Balance at end of period 317,572 316,160
-------- --------
Treasury stock:
Balance at beginning of year 49,944 38,708
Purchases of treasury stock:
Open market 3,706 6,417
Received from employees for
taxes on option exercises 212 384
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (940) (1,126)
Exercise of stock options (302) (314)
-------- --------
Balance at end of period 52,620 44,069
-------- --------
Shares outstanding at end of period 264,952 272,091
======== ========
13
<PAGE>
9. Litigation
The Company is a defendant in various litigation considered to be in
the normal course of business. Some of this litigation is pending in
Alabama, where large punitive damages bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other companies,
including insurers, in recent years. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of pending litigation will not have a material adverse effect on the
financial position of the Company.
14
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 1998 and 1997 financial statements included in this
filing have been reviewed by KPMG Peat Marwick LLP, independent certified
public accountants, in accordance with established professional standards
and procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review is
included on page 16.
15
<PAGE>
KPMG PEAT MARWICK LLP
Certified Public Accountants
303 Peachtree Street, N.E. Telephone: (404) 222-3000
Suite 2000 Telefax: (404) 222-3050
Atlanta, GA 30308
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of September 30, 1998, and the related consolidated
statements of earnings and comprehensive income for the three-month and
nine-month periods ended September 30, 1998 and 1997, and the consolidated
statements of cash flows and shareholders' equity for the nine-month periods
ended September 30, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the accompanying consolidated balance sheet of AFLAC Incorporated
and subsidiaries as of December 31, 1997, and the related consolidated
statements of earnings, shareholders' equity, cash flows and comprehensive
income for the year then ended (not presented herein); and in our report
dated January 29, 1998, we expressed an unqualified opinion on those
consolidated financial statements.
KPMG PEAT MARWICK LLP
Atlanta, GA
October 26, 1998
16
<PAGE>
ITEM 2. 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 and its subsidiary (AFLAC). Most of AFLAC's policies
are individually underwritten and marketed at the work site, 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.
RESULTS OF OPERATIONS
The Company paid a two-for-one stock split on June 8, 1998. All share
and per-share amounts in this report have been restated for this split.
As a result of a Japanese tax rate reduction in 1998, net earnings
increased $121.1 million due to a reduction in the deferred income tax
liability. Also, the tax rate reduction increased net operating earnings by
approximately $7.2 million for the nine months ended September 30, 1998.
For further information, see Note 3 of the Notes to the Consolidated
Financial Statements.
Also, effective January 1, 1998, the Japanese government changed the
income tax provisions to increase income tax on investment income and
realized gains received by foreign companies operating in Japan from
securities issued from their home country. This tax change decreased net
operating earnings by $15.7 million for the nine months ended September 30,
1998. For further information, see Note 3 of the Notes to the Consolidated
Financial Statements.
During the first quarter of 1998, the Japanese government enacted a
mandatory policyholder protection fund system. The pretax charge for the
Company's share of the contribution obligation was $111.3 million. The
after tax charge was $64.9 million. For further information regarding this
policyholder protection fund, see Note 4 of the Notes to the Consolidated
Financial Statements.
The table on the following page sets forth the results of operations by
business segment for the periods shown and the percentage change from the
prior period.
17
<PAGE>
<TABLE>
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
Percentage Change 1998 1997 Percentage Change 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings:
Insurance operations:
AFLAC Japan................... (8.9)% $ 121.7 $ 133.6 (4.3)% $ 365.8 $ 382.3
AFLAC U.S..................... 18.5 58.7 49.5 30.5 170.6 130.8
------ ------ ------ ------
Total ...................... (1.5) 180.4 183.1 4.6 536.4 513.1
Broadcast division operations..... - - - - - 3.5
Interest expense,
noninsurance operations......... 3.2 (2.2) (2.3) 3.8 (7.7) (8.0)
Corporate expenses, other
operations and eliminations..... 27.6 (14.9) (20.4) 20.1 (40.1) (50.2)
------ ------ ------ ------
Pretax operating earnings....... 1.8 163.3 160.4 6.6 488.6 458.4
Income taxes.................... (11.7) 54.9 62.2 (2.3) 173.7 177.9
------ ------ ------ ------
Operating earnings.............. 10.4 108.4 98.2 12.3 314.9 280.5
Non-operating items:
Realized investment gains (losses),
net of tax...................... (.8) (2.1) (.4) (2.7)
Provision for the mandated
policyholder protection fund,
net of tax...................... - - (64.9) -
Deferred tax benefit from Japan
tax rate reduction.............. - - 121.1 -
Gain on sale of television
business, net of tax............ - - - 211.2
------ ------ ------ ------
Net earnings.................... 12.0 $ 107.6 $ 96.1 (24.2) $ 370.7 $ 489.0
====== ====== ====== ======
Net earnings per share:
Basic......................... 14.3 $ .40 $ .35 (22.3) $ 1.39 $ 1.79
Diluted....................... 14.7 .39 .34 (22.5) 1.34 1.73
====== ====== ====== ======
============================================================================================================================
18
</TABLE>
<PAGE>
The table on the previous page reclassifies non-operating items to
facilitate the following discussion in line with how management views the
business.
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the charge for the
mandated policyholder protection system, the benefit of the Japan tax rate
reduction, and in 1997, the gain from the sale of the television business.
Operating earnings per share referred to in the following discussion are
based on the diluted number of average outstanding shares.
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.
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 from the comparable period
in the prior year. In periods when the yen weakens, translating yen into
dollars causes fewer dollars to be reported. When the yen strengthens,
translating yen into dollars causes more dollars to be reported.
AFLAC Incorporated and Subsidiaries
Selected Percentage Changes*
(For the periods ended September 30, 1998)
Three Months Nine Months
Operating Results Operating Results
--------------------- ---------------------
Including Excluding Including Excluding
Currency Currency Currency Currency
Changes Changes** Changes Changes**
--------- --------- --------- ---------
Premium income (5.8)% 8.0% (2.1)% 7.5%
Net investment income (2.0) 9.6 3.8 12.1
Total revenues (5.2) 8.3 (1.6) 7.9
Total benefits and expenses (5.9) 8.0 (2.3) 7.4
Operating earnings 10.4 18.6 12.3 18.2
Operating earnings per share 11.4 20.0 15.2 21.2
- ----------------------------------------------------------------------------
* The numbers in this table are presented on an operating basis and there-
fore exclude: the benefit of the Japan tax rate reduction, the charge
for the mandated policyholder protection fund, the sale of the television
business, and realized investment gains and losses.
** Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current period as the comparable
period in the prior year.
============================================================================
The yen weakened in relation to the dollar throughout 1997 and the
first three quarters of 1998. The average yen-to-dollar exchange rates were
139.92 for the three months ended September 30, 1998, compared with 117.97
for the third quarter of 1997, and 134.57 and 119.64 for the nine months
ended September 30, 1998 and 1997, respectively. Despite the weakening of
19
<PAGE>
the yen during 1998, operating earnings per share increased 11.4% to $.39
for the three months ended September 30, 1998, compared with the third
quarter of 1997, and increased 15.2% to $1.14 per share for the nine months
ended September 30, 1998, compared with the same period in 1997. The
weakening of the yen in 1998 lowered operating earnings by approximately
$.03 per share for the third quarter and $.06 per share for the nine months
ended September 30, 1998, which was solely attributable to the translation
effect of the fluctuations in the yen. The increases in operating earnings
per share reflected earnings contributions in the functional currencies of
AFLAC's core insurance operations in Japan and the United States, and lower
income tax expense due to the tax rate reduction in Japan. The Company's
share repurchase program also benefited earnings on a per-share basis.
The Company's primary financial objective is the growth of operating
earnings per share before the effect of foreign currency fluctuations. In
1996, the Company set this objective at an annual growth rate of 15% to 17%
through the year 2000. In early 1998, the Company raised its 1998 objective
for growth in operating earnings per share from a 17% increase to a 20%
increase before the effect of currency translation.
In April 1998, the Company raised its 1999 objective for growth in
operating earnings per share to 20% from a range of 15% to 17% excluding the
impact of currency fluctuations, primarily due to the benefit of the tax
rate reduction in Japan.
Assuming that the objective for 1998 is achieved, the following table
shows various results for operating earnings per share for the year 1998
when the estimated impact of foreign currency translation is included.
Annual Yen
Average Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1997 on EPS
------------- ---------------- --------- ----------
1998 @ 115.00 $ 1.64 23.3% $ .04
1998 @ 120.00 1.61 21.1 .01
1998 @ 121.07* 1.60 20.3 -
1998 @ 125.00 1.58 18.8 (.02)
1998 @ 130.00 1.55 16.5 (.05)
1998 @ 135.00 1.53 15.0 (.07)
1998 @ 140.00 1.50 12.8 (.10)
*Actual exchange rate for the year ended December 31, 1997.
If the exchange rate as of September 30, 1998, remained constant for
the remainder of 1998, the cumulative average rate would be approximately
134.77 and the annual operating diluted earnings per share would approximate
$1.53, assuming the Company's earnings objective is met.
PROFIT REPATRIATION
AFLAC Japan repatriated profits to AFLAC U.S. of $154.2 million in 1998
and $347.0 million in 1997. The profit transfer in 1997 included $124.8
million of a non-recurring nature. The profit transfers to AFLAC U.S.
adversely impact AFLAC Japan's investment income. However, repatriations
benefit AFLAC U.S. investment income and consolidated operations because
higher investment yields can be obtained on funds
20
<PAGE>
invested in the United States. Also, income tax expense is lower on
investment income earned in the United States. Management estimates that
cumulative profit transfers from 1992 through 1998 have benefited
consolidated net earnings by $23.7 million and $17.0 million for the three
months ended September 30, 1998 and 1997, respectively, and $41.9 million
and $28.5 million for the nine months ended September 30, 1998 and 1997,
respectively. Since the first repatriation in 1989, AFLAC Japan has
repatriated $1.2 billion, which has enhanced the Company's flexibility and
profitability.
SHARE REPURCHASE PROGRAM
During the third quarter of 1998, the Company purchased 2.3 million
shares of its common stock. As of September 30, 1998, the Company had
approximately 7.5 million shares still available for purchase under current
repurchase authorizations from the board of directors. The Company has
purchased 57.3 million shares (through September 30, 1998) since the
inception of the share repurchase program in February 1994. The difference
in percentage increases in net earnings and net earnings per share primarily
reflects the impact of the share repurchase program.
INCOME TAXES
The Company's effective income tax rates on operating earnings for the
nine months ended September 30, 1998 and 1997 were 35.5% and 38.8%,
respectively. Japanese income taxes on AFLAC Japan's operating results,
which were taxed at Japan's corporate income tax rate of 45.3% through April
30, 1998, and 41.7% thereafter, accounted for most of the Company's income
tax expense. The decline in the effective tax rates in 1998 and 1997
resulted primarily from the weakening of the yen and increased contributions
in earnings from the Company's U.S. business segment and, in 1998, the Japan
tax rate reduction.
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
third in terms of individual policies in force and 16th in 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 1998.
21
<PAGE>
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
------------------ ------------------
Premium income................... $1,115.1 $1,237.5 $3,425.2 $3,618.6
Investment income, as adjusted*.. 230.6 241.1 699.6 690.6
Other income..................... .7 .4 2.0 1.8
------- ------- ------- -------
Total revenues, as adjusted*... 1,346.4 1,479.0 4,126.8 4,311.0
------- ------- ------- -------
Benefits and claims.............. 968.9 1,070.1 2,982.6 3,131.4
Operating expenses............... 243.7 264.6 744.1 773.2
------- ------- ------- -------
Total benefits and expenses.... 1,212.6 1,334.7 3,726.7 3,904.6
------- ------- ------- -------
Pretax operating earnings,
as adjusted*................ 133.8 144.3 400.1 406.4
Investment income applicable to
profit repatriations............ (12.1) (10.7) (34.3) (24.1)
------- ------- ------- -------
Pretax operating earnings.... $ 121.7 $ 133.6 $ 365.8 $ 382.3
======= ======= ======= =======
- ----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income................. (9.9)% (.6)% (5.3)% (2.1)%
Investment income*............. (4.4) 4.0 1.3 .6
Total revenues*................ (9.0) .1 (4.3) (1.6)
Pretax operating earnings*..... (7.3) 2.1 (1.6) (2.6)
Pretax operating earnings...... (8.9) (.4) (4.3) (4.3)
- ----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income................. 7.0% 7.6% 6.5% 9.0%
Investment income*............. 13.4 12.6 14.0 12.0
Total revenues*................ 8.0 8.4 7.7 9.5
Pretax operating earnings*..... 9.7 10.5 10.7 8.5
Pretax operating earnings...... 7.9 7.8 7.7 6.6
- ----------------------------------------------------------------------------
Ratios to total revenues, as adjusted:*
Benefits and claims............ 72.0% 72.3% 72.3% 72.7%
Operating expenses............. 18.1 17.9 18.0 17.9
Pretax operating earnings...... 9.9 9.8 9.7 9.4
Ratio of pretax operating earnings
to total reported revenues..... 9.1 9.1 8.9 8.9
- ----------------------------------------------------------------------------
*Adjusted investment income, total revenues and pretax operating earnings
include estimates of additional investment income for the three months ended
September 30, 1998 and 1997 of $12.1 million and $10.7 million,
respectively, and for the nine months ended September 30, 1998 and 1997 of
$34.3 million and $24.1 million, respectively, foregone due to profit
repatriations.
============================================================================
22
<PAGE>
AFLAC JAPAN SALES
The increase in premium income in yen was due to sales of new policies
and excellent policy persistency. During the third quarter, new annualized
premium sales rose sharply, increasing 30.0% to 19.8 billion yen, or $141.4
million. Although comparisons to last year benefited from relatively weak
sales in 1997, the volume of new business produced during the quarter was
the largest since the third quarter of 1996. For the nine months, new sales
were up 24.0% to 53.6 billion yen, or $398.0 million. These strong sales
results have benefited throughout the year from existing products as well as
our latest product offering - Rider MAX. Rider MAX has proven to be a very
popular product among consumers and agents, accounting for approximately 30%
of sales for the first nine months of 1998. In addition to product
broadening, we are also committed to expanding our sales force in Japan.
Through September, we have recruited more than 1,800 new agents, compared
with fewer than 700 for the entire year of 1997. We believe our strategy of
adding new products, increasing distribution, and emphasizing our financial
strength will allow us to continue tapping into Japan's vast insurance
market. Management has set an objective for AFLAC Japan's sales to increase
approximately 15% to 20% for the year 1998 compared with 1997.
AFLAC JAPAN INVESTMENTS
Historically low Japanese investment yields declined further in the
third quarter, making the difficult task of investing substantial cash flows
even more challenging. During the quarter, we purchased yen-denominated
securities at an average yield of 3.34%. Including dollar-denominated
investments, our blended new money yield was 3.78%. AFLAC Japan's
investment portfolio remains conservatively positioned and comprises high-
quality securities. We believe AFLAC Japan's financial strength is one of
our greatest competitive advantages in the current environment.
At the end of the third quarter, the yield on AFLAC Japan's fixed-
maturity portfolio was 5.31%, compared with 5.46% at the end of 1997. The
return on average invested assets, after investment expenses, was 5.30% for
the first nine months of 1998, compared with 5.36% for the first nine months
of 1997.
INSURANCE OPERATIONS, AFLAC U.S.
AFLAC U.S. pretax operating earnings continued to benefit from
additional investment income earned on profit transfers received from AFLAC
Japan. Estimated investment income earned from profits repatriated to and
retained by AFLAC U.S. from 1992 through 1998, along with estimated
investment income earned by AFLAC U.S. from the sales proceeds of the
television business, have been reclassified in the following presentation in
order to improve comparability between periods.
23
<PAGE>
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
------------------ ------------------
Premium income................... $ 304.3 $ 268.9 $ 886.7 $ 786.2
Investment income, as adjusted*.. 28.5 26.3 82.7 77.1
Other income..................... 1.0 .6 3.7 1.4
------- ------- ------- -------
Total revenues, as adjusted*... 333.8 295.8 973.1 864.7
------- ------- ------- -------
Benefits and claims.............. 188.6 168.6 555.4 493.7
Operating expenses............... 113.0 100.3 324.1 291.6
------- ------- ------- -------
Total benefits and expenses.... 301.6 268.9 879.5 785.3
------- ------- ------- -------
Pretax operating earnings,
as adjusted*................ 32.2 26.9 93.6 79.4
Investment income applicable to
profit repatriations and proceeds
from the sale of the television
business........................ 26.5 22.6 77.0 51.4
------- ------- ------- -------
Pretax operating earnings.... $ 58.7 $ 49.5 $ 170.6 $ 130.8
======= ======= ======= =======
- ----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income................. 13.2% 12.5% 12.8% 12.2%
Investment income*............. 8.3 19.6 7.3 20.0
Total revenues*................ 12.9 13.2 12.5 12.8
Pretax operating earnings*..... 19.4 12.5 17.9 11.4
Pretax operating earnings...... 18.5 48.2 30.5 39.0
- ----------------------------------------------------------------------------
Ratios to total revenues, as
adjusted:*
Benefits and claims............ 56.5% 57.0% 57.1% 57.1%
Operating expenses............. 33.9 33.9 33.3 33.7
Pretax operating earnings...... 9.6 9.1 9.6 9.2
Ratio of pretax operating earnings
to total reported revenues..... 16.3 15.5 16.2 14.3
- ----------------------------------------------------------------------------
*Excludes estimated investment income for the three months ended September
30, 1998 and 1997 of $26.5 million and $22.6 million, respectively, and for
the nine months ended September 30, 1998 and 1997 of $77.0 million and $51.4
million, respectively, related to investment of profit repatriation funds
retained by AFLAC U.S. and investment of proceeds from the sale of the
television business.
============================================================================
24
<PAGE>
AFLAC U.S. SALES
The increase in premium income was primarily due to an increase in new
sales over the last 12 months. New annualized premium sales surged 24.1% in
the third quarter to $123.7 million. These results represent the best
quarterly sales in the company's history, surpassing our previous record by
more than $10 million. For the nine months, new sales were up 19.2% to
$342.9 million. Accident/disability insurance remains our best selling
product. However, we are pleased to see strong sales contributions from our
cancer and hospital indemnity coverages as well. We attribute our strong
U.S. growth in recent years to product broadening, distribution expansion
and improved brand awareness. We believe these strengths will continue to
benefit AFLAC U.S. in the future. Management has set an objective for new
policy sales to increase by 12% to 15% for the year 1998.
AFLAC U.S. INVESTMENTS
During the third quarter, available cash flow was invested at an
average yield of 7.19%, compared with 7.46% during the third quarter of
1997. The return on average invested assets, net of investment expenses,
was 7.43% for the first nine months of 1998, compared with 7.62% for the
first nine months of 1997.
AFLAC U.S. OTHER
During 1998, the Company began selling cancer expense insurance in New
York and Connecticut. Massachusetts and New Jersey still 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. AFLAC U.S. is marketing several of its other
products in these states.
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, the Company has been able to redirect funds to
national advertising programs without significantly affecting the operating
expense ratio.
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 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. Management expects the pretax operating profit margin to
remain largely unchanged for the rest of the year.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards, see Note 2 of the Notes to the Consolidated Financial Statements.
25
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1997, the financial condition of the Company has
remained strong in the functional currencies of its operations. The
investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow
and consist of high-quality securities.
Due to the significance of yen-denominated items in the balance sheet,
changes in the yen/dollar exchange rate can have a significant effect on the
Company's financial statements. The yen/dollar exchange rate at the end of
each period is used to convert yen-denominated balance sheet items into U.S.
dollars for reporting purposes. The exchange rate at September 30, 1998,
was 135.35 yen to one U.S. dollar, 3.9% weaker than the exchange rate of
130.10 as of December 31, 1997. Management estimates that the weaker yen
rate decreased reported investments and cash by $797 million, total assets
by $901 million and total liabilities by $873 million compared with the
amounts that would have been reported for 1998 if the exchange rate had
remained unchanged from year-end 1997.
INVESTMENTS AND CASH
Securities available for sale are carried at fair value. The following
table shows an analysis of investments and cash:
September 30, December 31,
(In millions) 1998 1997 % Change
------------ ------------ --------
AFLAC U.S.:
Total investments and cash, at
cost or amortized cost $ 2,932 $ 2,678 9.5%
Unrealized gains on securities
available for sale 254 228
---------- ----------
Total investments and cash $ 3,186 $ 2,906 9.6%
========== ========== ========
AFLAC Japan:
Total investments and cash, at
cost or amortized cost $ 17,531 $ 16,743 4.7%
Unrealized gains on securities
available for sale 3,965 3,155
---------- ----------
Total investments and cash $ 21,496 $ 19,898 8.0%
========== ========== =========
Consolidated:
Total investments and cash, at
cost or amortized cost $ 20,529 $ 19,497 5.3%
Unrealized gains on securities
available for sale 4,220 3,383
---------- ----------
Total investments and cash $ 24,749 $ 22,880 8.2%
========== ========== =========
Net unrealized gains of $4.2 billion on securities available for sale
at September 30, 1998, consisted of $4.5 billion in gross unrealized gains
and $263.4 million in gross unrealized losses.
26
<PAGE>
AFLAC invests primarily within the Japanese, U.S. and Euroyen fixed-
maturity markets. The Company uses specific criteria to judge the credit
quality and liquidity of its investments and utilizes a variety of credit
rating services to monitor this criteria. Applying those various credit
ratings to a standardized rating system based on a nationally recognized
service's categories, the percentages of the Company's fixed-maturity
securities available for sale, at amortized cost, were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
AAA 33.6% 38.3%
AA 19.9 20.5
A 31.2 28.9
BBB 15.2 12.3
BB or lower .1 -
----- -----
100.0% 100.0%
Private placement investments accounted for 39.7% and 36.3% of the
Company's total fixed-maturity securities available for sale as of September
30, 1998, and December 31, 1997, respectively. AFLAC Japan has made
investments in the private placement market 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. AFLAC
requires that all private placement issuers have an initial rating of class
1 or 2 as determined by the Securities Valuation Office of the National
Association of Insurance Commissioners. Most of AFLAC's private placement
issues are issued under medium term note programs and have standard
covenants commensurate with credit rankings except when internal credit
analysis indicates that additional protective and/or event risk covenants
are required.
POLICY LIABILITIES
Policy liabilities increased $1.8 billion, or 9.0%, during the first
nine months of 1998. AFLAC Japan increased $1.6 billion, or 9.2% (13.6%
increase in yen), and AFLAC U.S. increased $151.3 million, or 8.1%.
Management estimates the weaker yen rate decreased reported policy
liabilities by $791.0 million. Increases in policy liabilities are caused
by the addition of new business, the aging of policies in force and the
effect of market value adjustments on fixed-maturity securities. (See Note
6 of the Notes to the Consolidated Financial Statements.)
DEBT
See Note 5 of the Notes to the Consolidated Financial Statements for
information on debt outstanding at September 30, 1998.
The Company's ratio of debt to total capitalization (debt plus
shareholders' equity, excluding the unrealized gains on securities available
for sale) was 17.8% and 19.6% as of September 30, 1998, and December 31,
1997, respectively.
27
<PAGE>
SECURITY LENDING
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. This program increased AFLAC Japan's
investment income by approximately $1.1 million for both the nine months
ended September 30, 1998 and 1997. For further information regarding such
arrangements, see Note 7 of the Notes to the Consolidated Financial
Statements.
POLICYHOLDER GUARANTY 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 in the U.S. currently involved in insolvency proceedings will
not materially impact the consolidated financial statements.
The Life Insurance Association of Japan, an industry organization,
implemented a voluntary policyholder protection fund in 1996 to provide
capital support to insolvent life insurers. AFLAC Japan pledged investment
securities to the Life Insurance Association of Japan for this program.
During the first quarter of 1998, the Japanese government enacted a
mandatory policyholder protection fund system. The life insurance industry
will contribute 690 billion yen ($5.1 billion using the September 30, 1998,
exchange rate) over a 10-year period for these two funds. The Company has
recorded a liability for its share of these obligations. (See Note 4 of the
Notes to the Consolidated Financial Statements.)
SHAREHOLDERS' EQUITY
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
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 television business increased the
Company's capital resources. Management believes outside sources for additional
debt and equity capital, if needed, will continue to be available for capital
expenditures, business expansion and funding the Company's share repurchase
program.
28
<PAGE>
Parent Company capital resources are largely dependent upon the ability of
AFLAC to pay management fees and dividends. The Georgia Insurance Department
imposes certain limitations and restrictions on payments of dividends,
management fees, loans and advances by AFLAC to the Parent Company. In addition
to restrictions by U.S. insurance regulators, the Japanese Ministry of Finance
(MOF) imposes restrictions on, and requires approval for, the remittances of
earnings from AFLAC Japan to AFLAC U.S. Payments are made from AFLAC Japan to
the Parent Company for management fees, and to AFLAC U.S. for allocated expenses
and remittances of earnings. Total funds received from AFLAC Japan were $183.7
million in the first nine months of 1998 and $386.0 million and $253.6 million
in the full years 1997 and 1996, respectively. AFLAC Japan repatriated profits
to AFLAC U.S. in the amount of $154.2 million in July 1998. The MOF has
developed solvency standards, a version of risk-based capital requirements.
Management believes the solvency margin of AFLAC Japan is very strong compared
with other Japanese insurers. For additional information on regulatory
restrictions on dividends, profit transfers and other remittances, see Note 10
of the Notes to the Consolidated Financial Statements in the Company's annual
report to shareholders for the year ended December 31, 1997.
Currently, prescribed or permitted statutory accounting principles
(SAP) used by insurers for financial reporting to state insurance regulators
may vary between states and between companies. The National Association of
Insurance Commissioners (NAIC) has recodified SAP to promote standardization
of accounting principles throughout the industry. These new accounting
principles are presently planned by the NAIC to be effective for 2001. The
most significant change is the requirement that insurance companies
establish a deferred income tax liability for statutory accounting purposes.
Management estimates AFLAC's deferred tax liability would be approximately
$145 million at September 30, 1998, under the provisions of the recodified
SAP. The capital and surplus of AFLAC, as determined on the present U.S.
statutory accounting basis, was $1.8 billion at September 30, 1998.
YEAR 2000
The term "year 2000 issue" generally refers to the improper processing
of dates and incorrect date calculations that might occur in computer
software and hardware and embedded systems as the year 2000 is approached.
The use of computer programs that rely on two-digit date fields to perform
computations and decision-making functions may cause systems to malfunction
when processing information involving dates after 1999. For example, any
computer software that has date-sensitive coding might recognize a code of
"00" as the year 1900 rather than the year 2000.
The Company's efforts to address year 2000 issues began in 1997. The
Company has established a Year 2000 Executive Steering Committee, comprised
of senior management and representatives of its information technology,
financial, legal, internal audit and various operational areas to identify
and address the Company's year 2000 issues throughout its U.S. and Japanese
operations. The Company has also established a Year 2000 Project Office
comprised of coordinators from each of the Information Technology division,
Worldwide Headquarters business operations and AFLAC Japan. The Project
Office established both domestic and Japanese plans to address year 2000
readiness and minimize the risk of business disruption caused by year 2000
issues. The Company has also engaged third party consultants to assist the
U.S. and Japan in the year 2000 efforts.
29
<PAGE>
The plans contain five phases: (1) the assessment phase, which
includes creating awareness of the issue throughout the Company and
assessment of all systems, significant business processes, facilities and
third party dependencies; (2) the remediation phase, which includes updating
or modifying systems which are identified as critical to the Company's
efforts to become Year 2000 ready; (3) the testing phase, which includes the
testing of systems which have been updated or modified; (4) the
implementation phase, which includes placing systems into the production
environment. Additional comprehensive testing is then conducted to identify
and resolve any remaining year 2000 issues; and (5) contingency planning.
The Company's U.S. based financial and administrative systems, which
include its policy processing and claims administration functions, are
centralized at its Worldwide Headquarters. The assessment phase for each of
these functions has been completed. The assessment of the year 2000 issues
for its non-financial and administrative systems in the United States, such
as systems found in printers, mail processing equipment and automated
building systems has also been completed. The Company has substantially
completed the remediation of all critical systems in these areas except for:
(i) the software system that supports the domestic forms inventory,
purchasing and accounts payable functions, which is scheduled to be
completed early in the second quarter of 1999; (ii) its field sales software
product that permits the Company's agents to electronically process new
policy applications; and (iii) the imaging systems which are used for
electronic recording, storage, and retrieval of documents. Remediation for
these systems is scheduled to be completed in the first quarter of 1999.
Initial testing and implementation of the upgrades and modifications
for the critical U.S. based systems, other than the three systems identified
above, are scheduled to be completed by December 31, 1998. Follow-up
testing and verification of all critical domestic systems will continue
throughout 1999 as an additional precaution. Contingency planning for any
critical systems for which the Company believes it is reasonably at risk for
business disruption due to year 2000 issues is scheduled to take place in
the first and second quarters of 1999 following the completion of testing.
The Company relies on its widely distributed customer base for
continued payment of premiums. Many of the systems utilized by customers
are automated and date dependent. A survey of customers was initiated to
determine their year 2000 readiness. If a large number of customers are
unable to submit premium payments in a timely or accurate manner due to year
2000 issues, the resulting delays could have a material adverse effect on
the financial condition or results of operations of the Company. It is not
currently possible to predict the probability of any delays occurring or the
extent of such delays.
The Company has completed the assessment phase for its critical
information and business systems, as well as embedded systems, in Japan and
currently is in the remediation, testing and implementation phases. Each of
these phases is scheduled to be completed by December 31, 1998. Follow-up
testing and verification of all critical Japanese systems will continue
throughout 1999 as an additional precaution. The additional testing may
raise new year 2000 issues that require further remediation and
implementation activities, all of which are scheduled to be completed in the
second quarter of 1999. Contingency planning is scheduled to take place in
1999.
30
<PAGE>
AFLAC Japan depends heavily on premium payments that are electronically
transmitted by employers of the insured and third party payment agents. A
survey of its more significant customers in Japan was recently initiated to
determine whether such customers expect their ability to pay premiums in
this fashion to be impacted by year 2000 issues. If a number of customers
experience disruptions in their payroll or accounting systems due to year
2000 issues or if they are unable to transmit such information or payments
to the Company in a timely fashion, it could cause delays in the Company's
receipt of premium payments or information necessary to initiate new
policies which in turn could have a material adverse effect on the Company's
financial condition and results of operations. It is not currently possible
to predict the probability of such delays occurring or their extent.
The Company owns investments in publicly and privately placed fixed-
maturity and equity securities in the U.S. and Japan, and other foreign
countries. If a material portion of such securities are adversely impacted
by year 2000 issues, the Company's investment portfolio may also be
adversely impacted.
Since the inception of the year 2000 project, the Company has incurred
costs of approximately $15 million for upgrades or modifications to address
year 2000 issues through September 30, 1998. Of this amount, approximately
$4 million was capitalized. The remaining cost to complete the various
projects is currently estimated to be $17 million, of which $5 million is
expected to be capitalized. These estimates have increased from amounts
reflected in the past due to refinements in the calculations. The Company,
however, may determine that additional expenditures are necessary following
the completion of the testing and implementation phases. The Company's
Information Technology personnel have spent considerable time and effort on
the project. Consequently, the prioritization of non-year 2000 related
projects has been more closely reviewed by management. However, management
believes that any deferral of Information Technology projects due to the
year 2000 effort will not have a material adverse effect on the Company's
operations or financial condition.
The actions taken by management under the year 2000 plans in the U.S.
and Japan are intended to significantly reduce the Company's risk of a
material business interruption based on year 2000 issues. Based on the
facts currently known to it, the Company believes that such activities
should significantly reduce the occurrence of year 2000 related business
disruptions arising from its internal systems. Due to the uncertainty
inherent in year 2000 issues, particularly with regard to Japanese
customers' year 2000 readiness, and the various governmental functions,
public utilities, financial infrastructures and similar outside facilities
on which the Company depends in both the U.S. and Japan, the Company is
unable to determine at this time whether the consequences of external year
2000 failures will have a material impact on the Company's financial
condition or results of operations. Although a year 2000 failure with
respect to any single internal or external system may not have a material
adverse effect on the Company, the failure of multiple systems may cause a
material disruption to the Company's business.
OTHER
The board of directors declared the fourth quarter cash dividend of
$.065 per share. The dividend is payable on December 1, 1998, to
shareholders of record at the close of business on November 19, 1998.
31
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments are exposed to primarily three
types of market risks. These are interest rate, equity price and foreign
currency exchange rate risk.
INTEREST RATE RISK
The primary interest rate exposure is the effect of changes in interest
rates on the fair value of the Company's investments in fixed-maturity
securities. The Company uses modified duration analysis to estimate the
sensitivity to interest rate changes in its fixed-maturity securities.
Modified duration analysis provides a measure of price percentage
volatility.
The Company attempts to match the duration of its assets with the
duration of its liabilities. For AFLAC Japan, the duration of policy
liabilities is longer than that of the related assets due to the
unavailability of qualified long-duration securities. Therefore, there is a
risk that reinvestment of the proceeds at maturity of such investments will
be at a yield below that of the interest required for the accretion of
policy liabilities.
The hypothetical reduction in the fair value of the Company's total
portfolio of fixed-maturity securities resulting from a 100 basis point
increase in market interest rates is estimated to be $2.2 billion based on
the Company's portfolio as of September 30, 1998. The effect on yen-
denominated fixed-maturity securities is approximately $1.8 billion and the
effect on dollar-denominated fixed-maturity securities is approximately
$341.1 million. The Company does not expect to realize security holding
gains and losses because it has the ability to hold such securities to
maturity.
The Company has outstanding interest rate swaps on 49.6 billion yen of
its variable-interest-rate yen-denominated borrowings. These swaps reduce
the impact of changes in interest rates on the Company's borrowing costs and
effectively change the Company's interest rate on these yen-denominated
borrowings from variable to fixed. Therefore, changes in market interest
rates should have no material effect on earnings.
At September 30, 1998, the Company also had yen-denominated borrowings
in the amount of 16.1 billion yen ($119.0 million) with a variable interest
rate of 1.03%. The effect on net earnings due to changes in market interest
rates was immaterial. For further information on the Company's notes
payable, see Note 5 of the Notes to the Consolidated Financial Statements.
EQUITY PRICE RISK
Equity securities at September 30, 1998, totaled $134.7 million, or .5%
of total investments and cash on a consolidated basis. The Company uses
beta analysis to measure the sensitivity of its equity securities portfolio
to fluctuations in the broad market. The beta of the Company's equity
securities portfolio is 1.01. For example, if the overall stock market
value changed by 10%, the value of AFLAC's equity securities would be
expected to change by approximately 10.1%, or $13.6 million.
32
<PAGE>
CURRENCY RISK
Most of AFLAC Japan's investments and cash are denominated in yen.
When the yen-denominated financial instruments mature or are sold, the
proceeds are generally reinvested in yen-denominated securities and are held
to fund yen-denominated policy obligations rather than converted into
dollars. Therefore, there is no significant economic or foreign currency
transaction risk.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, the Parent Company has yen-denominated borrowings that have been
designated as a hedge of the Company's investment in AFLAC Japan. The
unrealized foreign currency translation gains and losses are reported in
accumulated other comprehensive income in shareholders' equity.
33
<PAGE>
The Company attempts to match its yen-denominated assets to its yen-
denominated liabilities on a consolidated basis in order to minimize the
exposure of its shareholders' equity to foreign currency translation
fluctuations. The table below compares the U.S. dollar values of the
Company's yen-denominated assets and liabilities at various exchange rates.
Dollar Value of Yen-Denominated Assets and Liabilities
At Selected Exchange Rates
(September 30, 1998)
120.35 135.35* 150.35
(In millions) Yen Yen Yen
- ----------------------------------------------------------------------------
Yen-denominated financial
instruments:
Assets:
Fixed-maturity
securities $ 21,944.6 $ 19,512.6 $ 17,565.9
Cash and cash
equivalents 230.8 205.2 184.7
Securities held as
collateral** 3,770.0 3,352.2 3,017.7
Other financial
instruments 25.1 22.4 20.1
--------- --------- ---------
Total 25,970.5 23,092.4 20,788.4
--------- --------- ---------
Liabilities:
Securities held as
collateral** 3,770.0 3,352.2 3,017.7
Notes payable 545.7 485.2 436.8
--------- --------- ---------
Total 4,315.7 3,837.4 3,454.5
--------- --------- ---------
Net yen-denominated
financial instruments 21,654.8 19,255.0 17,333.9
Other yen-denominated
assets 2,908.1 2,585.8 2,327.8
Other yen-denominated
liabilities (primarily
policy and claim reserves) (24,319.6) (21,624.4) (19,467.0)
--------- --------- ---------
Total yen-denominated
net assets subject
to foreign currency
fluctuation $ 243.3 $ 216.4 $ 194.7
========= ========= =========
* Actual September 30, 1998, exchange rate.
**Off balance sheet financial instruments.
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation on page 19.
34
<PAGE>
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information, so long
as those informational 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
Form 10-Q, 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 as well as specific projections of
future results 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 requirements, assessments for insurance company insolvencies,
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 Japanese tax laws,
adequacy of reserves, credit and other risks associated with the Company's
investment activities, significant changes in interest rates, fluctuations
in foreign currency exchange rates and the ability of the Company, and third
parties with whom the Company does business, to achieve year 2000 readiness
for significant systems on a timely basis.
35
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various litigation considered to be in
the normal course of business. Some of this litigation is pending in
Alabama, where large punitive damages bearing little relation to the actual
damages sustained by plaintiffs have been awarded against other companies,
including insurers, in recent years. Although the final results of any
litigation cannot be predicted with certainty, the Company believes the
outcome of pending litigation will not have a material adverse effect on the
financial position of the Company.
ITEMS 2, 3, 4 and 5
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
Items other than those listed above are omitted because they are not
required or are not applicable.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFLAC INCORPORATED
Date November 9, 1998 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date November 9, 1998 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
37
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
27.0 - Financial Data Schedule (for SEC use only).
38
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
period ended September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 24,269,830
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 134,737
<MORTGAGE> 5,220
<REAL-ESTATE> 0
<TOTAL-INVEST> 24,458,348
<CASH> 290,178
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,667,441
<TOTAL-ASSETS> 28,366,449
<POLICY-LOSSES> 21,200,199
<UNEARNED-PREMIUMS> 270,593
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 212,721
<NOTES-PAYABLE> 502,083
0
0
<COMMON> 31,757
<OTHER-SE> 3,539,510
<TOTAL-LIABILITY-AND-EQUITY> 28,366,449
4,317,653
<INVESTMENT-INCOME> 828,913
<INVESTMENT-GAINS> (2,131)
<OTHER-INCOME> 15,638
<BENEFITS> 3,544,175
<UNDERWRITING-AMORTIZATION> 146,269
<UNDERWRITING-OTHER> 1,094,446<F1>
<INCOME-PRETAX> 375,183
<INCOME-TAX> 4,532<F2>
<INCOME-CONTINUING> 370,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370,651
<EPS-PRIMARY> 1.39<F3>
<EPS-DILUTED> 1.34<F3>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes provision of $111,279 for mandated policyholder protection fund.
<F2>Includes ($121,120) deferred tax benefit from Japan tax rate reduction.
<F3>Adjusted for the two-for-one stock split issued June 8, 1998. Prior year
financial data schedules have not been restated.
</FN>
</TABLE>
