<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, 1999
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 November 3, 1999
- ---------------------------- ------------------
Common Stock, $.10 Par Value 266,118,105 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998................ 1
Consolidated Statements of Earnings -
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998........... 3
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 1999 and 1998........... 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998........... 6
Consolidated Statements of Comprehensive Income -
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998........... 8
Notes to Consolidated Financial Statements................ 9
Review by Independent Certified Public
Accountants............................................. 17
Independent Auditors' Report.............................. 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk......................................... 34
Part II. Other Information:
Item 1. Legal Proceedings.................................. 37
Item 6. Exhibits and Reports on Form 8-K................... 37
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 millions)
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$17,788 in 1999 and $15,658 in 1998) $ 19,694 $ 17,617
Perpetual debentures (amortized cost,
$2,458 in 1999 and $1,455 in 1998) 1,994 1,366
Equity securities (cost, $120 in 1999
and $101 in 1998) 181 177
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $4,137 in
1999 and $3,691 in 1998) 4,240 3,947
Perpetual debentures (fair value, $3,509
in 1999 and $3,131 in 1998) 3,747 3,494
Other investments 19 19
Cash and cash equivalents 534 374
-------- --------
Total investments and cash 30,409 26,994
Receivables, primarily premiums 262 229
Receivables for security transactions 136 43
Accrued investment income 313 316
Deferred policy acquisition costs 3,486 3,067
Property and equipment, at cost less
accumulated depreciation 493 427
Other 126 107
-------- --------
Total assets $ 35,225 $ 31,183
======== ========
See the accompanying Notes to Consolidated Financial Statements.
(continued)
</TABLE>
1
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions, except for share and per share amounts)
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
------------- ------------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 25,644 $ 22,218
Unpaid policy claims 1,555 1,263
Unearned premiums 335 309
Other policyholders' funds 292 244
-------- --------
Total policy liabilities 27,826 24,034
Notes payable 1,079 596
Income taxes 1,624 1,865
Payables for return of cash collateral
on loaned securities 44 -
Payables for security transactions 31 173
Other 849 745
-------- --------
Total liabilities 31,453 27,413
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 400,000 shares; issued 319,760
shares in 1999 and 317,971 shares in 1998 32 32
Additional paid-in capital 300 235
Retained earnings 3,274 2,862
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 226 219
Unrealized gains on investment securities 1,002 1,332
Treasury stock, at average cost (1,062) (910)
-------- --------
Total shareholders' equity 3,772 3,770
-------- --------
Total liabilities and shareholders' equity $ 35,225 $ 31,183
======== ========
Shareholders' equity per share $ 14.21 $ 14.19
======== ========
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
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<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In millions, except for share and Three Months Ended September 30, Nine Months Ended September 30,
per share amounts - Unaudited) ------------------------------- -----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health insurance $ 1,847 $ 1,421 $ 5,281 $ 4,318
Net investment income 347 275 992 829
Realized investment gains (losses) (3) (2) (12) (2)
Other income 5 6 14 15
------- ------- ------- -------
Total revenues 2,196 1,700 6,275 5,160
------- ------- ------- -------
Benefits and expenses:
Benefits and claims 1,498 1,160 4,277 3,544
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs 62 48 183 146
Insurance commissions 235 184 680 561
Insurance expenses 160 126 453 361
Provision for mandated policyholder protection fund - - - 111
Interest expense 5 3 13 9
Other operating expenses 16 18 50 53
------- ------- ------- -------
Total acquisition and operating expenses 478 379 1,379 1,241
------- ------- ------- -------
Total benefits and expenses 1,976 1,539 5,656 4,785
------- ------- ------- -------
Earnings before income taxes 220 161 619 375
Income tax expense (benefit):
Operations 76 53 217 125
Deferred tax benefit from Japanese tax rate reductions - - (67) (121)
------- ------- ------- -------
Total income taxes 76 53 150 4
------- ------- ------- -------
Net earnings $ 144 $ 108 $ 469 $ 371
======= ======= ======= =======
(continued on next page)
3
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings (continued)
<CAPTION>
(In millions, except for share and Three Months Ended September 30, Nine Months Ended September 30,
per share amounts - Unaudited) ------------------------------- -----------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings per share:
Basic $ .54 $ .40 $ 1.77 $ 1.39
Diluted .52 .39 1.70 1.34
======= ======= ======= =======
Shares used in computing
earnings per share (In thousands):
Basic 265,540 265,928 265,822 266,629
Diluted 274,497 275,287 275,743 276,048
======= ======= ======= =======
Cash dividends per share $ .075 $ .065 $ .215 $ .188
======= ======= ======= =======
See the accompanying Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<CAPTION>
(In millions, except for per share Nine Months Ended September 30,
amounts - Unaudited) ------------------------------
1999 1998
------ ------
<S> <C> <C>
Common Stock:
Balance at beginning of year $ 32 $ 16
Two-for-one stock split - 16
------ ------
Balance at end of period 32 32
------ ------
Additional paid-in capital:
Balance at beginning of year 235 227
Exercise of stock options 12 5
Gain on treasury stock reissued 53 12
Two-for-one stock split - (16)
------ ------
Balance at end of period 300 228
------ ------
Retained earnings:
Balance at beginning of year 2,862 2,442
Net earnings 469 371
Cash dividends ($.215 per share
in 1999 and $.188 in 1998) (57) (50)
------ ------
Balance at end of period 3,274 2,763
------ ------
Accumulated other comprehensive income:
Balance at beginning of year 1,551 1,559
Change in unrealized foreign currency
translation gains during period,
net of income taxes 6 (62)
Unrealized gains (losses) on investment
securities during period, net of income
taxes and reclassification adjustments (329) (33)
------ ------
Balance at end of period 1,228 1,464
------ ------
Treasury stock:
Balance at beginning of year (910) (813)
Purchases of treasury stock (181) (123)
Cost of shares issued 29 20
------ ------
Balance at end of period (1,062) (916)
------ ------
Total shareholders' equity $ 3,772 $ 3,571
====== ======
See the accompanying Notes to Consolidated Financial Statements.
5
</TABLE
<PAGE>
</TABLE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions - Unaudited)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 469 $ 371
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,900 1,624
Deferred income taxes (1) (174)
Change in income taxes payable (224) 64
Increase in deferred policy
acquisition costs (215) (161)
Change in receivables and advance premiums (10) (18)
Depreciation and amortization expense 20 34
Provision for mandated policyholder
protection fund - 111
Other, net 205 (16)
------ ------
Net cash provided by operating activities 2,144 1,835
------ ------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed-maturity securities sold 985 647
Fixed-maturity securities matured 177 512
Equity securities 67 49
Securities held to maturity:
Fixed-maturity securities matured 18 -
Other investments, net 1 9
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (2,587) (2,103)
Perpetual debentures (819) (671)
Equity securities (61) (44)
Fixed-maturity securities held to maturity (42) -
Other investments, net (1) (3)
Cash received as collateral on loaned securities 44 -
Additions to property and equipment, net (15) (26)
------ ------
Net cash used by investing activities $(2,233) $(1,630)
------ ------
(continued)
6
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In millions - Unaudited)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 446 $ 114
Principal payments under debt obligations (78) (122)
Dividends paid to shareholders (57) (50)
Purchases of treasury stock (181) (123)
Treasury stock reissued 82 32
Other, net 11 5
------ ------
Net cash provided (used) by
financing activities 223 (144)
------ ------
Effect of exchange rate changes on cash
and cash equivalents 26 (7)
------ ------
Net change in cash and cash equivalents 160 54
Cash and cash equivalents, beginning of year 374 236
------ ------
Cash and cash equivalents, end of period $ 534 $ 290
====== ======
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest on debt obligations $ 9 $ 9
Income taxes 261 197
Non-cash financing activities:
Capital lease obligations 4 6
See the accompanying Notes to Consolidated Financial Statements.
7
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions - Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings $ 144 $ 108 $ 469 $ 371
------ ------ ------ ------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency
translation gains (losses) during
the period (104) (25) (87) 15
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses)
arising during the period 36 36 (418) 25
Reclassification adjustment for realized
(gains) losses included in net earnings 3 2 13 2
------ ------ ------ ------
Total other comprehensive income,
before income taxes (65) 13 (492) 42
Income tax expense (benefit) related to
items of other comprehensive income (45) 8 (169) 137
------ ------ ------ ------
Other comprehensive income,
net of income taxes (20) 5 (323) (95)
------ ------ ------ ------
Total comprehensive income $ 124 $ 113 $ 146 $ 276
====== ====== ====== ======
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, 1999, and the results of operations and comprehensive
income for the three-month and nine-month periods ended September 30, 1999
and 1998, and statements of cash flows and shareholders' equity for the nine
months ended September 30, 1999 and 1998. Results of operations for interim
periods are not necessarily indicative of results for the entire year.
We prepare our financial statements in accordance with generally
accepted accounting principles (GAAP). 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 GAAP requires us to make estimates
when recording transactions resulting from business operations, based on
information currently available. The most significant items on our balance
sheet that involve a greater degree of accounting and actuarial estimates
subject to changes in the future are: deferred policy acquisition costs,
liabilities for future policy benefits and unpaid policy claims, accrued
liabilities for unfunded retirement plans 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, we believe the amounts provided are adequate.
The financial statements should be read in conjunction with the
financial statements included in our annual report to shareholders for the
year ended December 31, 1998.
2. Accounting Pronouncements
On January 1, 1999, we adopted Statement of Position (SOP) 97-3,
Accounting by Insurance and Other Enterprises for Insurance Related
Assessments. 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.
There was no effect on net earnings or shareholders' equity due to our
adoption of this SOP since our previous accounting method for guaranty fund
and other insurance related assessments conformed to the requirements of
this SOP.
We also adopted SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, on January 1, 1999. 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, we have expensed all such costs as they were incurred. The
adoption of this SOP had no material effect on net earnings for the three
months and nine months ended September 30, 1999.
9
<PAGE>
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 investment securities and 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. We are currently evaluating this standard, which is effective
January 1, 2001.
10
<PAGE>
3. Segment Information
Information regarding components of operations follows:
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Total revenues:
AFLAC Japan:
Earned premiums $ 1,501 $ 1,115 $ 4,271 $ 3,425
Net investment income 280 218 804 666
Other income 2 1 3 2
------- ------- ------- -------
Total AFLAC Japan revenues 1,783 1,334 5,078 4,093
------- ------- ------- -------
AFLAC U.S.:
Earned premiums 346 304 1,010 887
Net investment income 62 55 179 160
Other income 1 1 2 3
------- ------- ------- -------
Total AFLAC U.S. revenues 409 360 1,191 1,050
------- ------- ------- -------
All other business segments 5 10 16 24
------- ------- ------- -------
Total business segments 2,197 1,704 6,285 5,167
Realized investment
gains (losses) (3) (2) (12) (2)
Corporate 11 8 28 24
Intercompany eliminations (9) (10) (26) (29)
------- ------- ------- -------
Total $ 2,196 $ 1,700 $ 6,275 $ 5,160
======= ======= ======= =======
Earnings before income taxes:
AFLAC Japan $ 171 $ 122 $ 481 $ 366
AFLAC U.S. 65 59 191 171
All other business segments (2) (1) (2) -
------- ------- ------- -------
Total business segments 234 180 670 537
Provision for the Japanese
mandated policyholder
protection fund - - - (111)
Realized investment gains
(losses) (3) (2) (12) (2)
Interest expense, non-insurance
operations (4) (2) (10) (8)
Corporate (7) (15) (29) (41)
------- ------- ------- -------
Total $ 220 $ 161 $ 619 $ 375
======= ======= ======= =======
11
<PAGE>
Total assets were as follows:
September 30, December 31,
(In millions) 1999 1998
------------- ------------
Total assets:
AFLAC Japan $ 30,445 $ 26,912
AFLAC U.S. 4,424 4,212
All other business segments 31 59
------- -------
Total business segments 34,900 31,183
Corporate 5,094 4,674
Intercompany eliminations (4,769) (4,674)
------- -------
Total $ 35,225 $ 31,183
======= =======
4. Japanese Income Taxes
At the end of March 1999, the Japanese government reduced the Japanese
corporate income tax rate from 41.7% to 36.2%. This tax rate reduction was
recognized in the first quarter of 1999, and increased net earnings for the
nine months ended September 30, 1999 by $67 million ($.25 per basic share,
$.24 per diluted share) from the reduction of our consolidated deferred
income tax liability. This was the net effect of recalculating Japanese
deferred income taxes at the new 36.2% rate on the temporary differences
between the financial reporting basis and the Japanese income tax basis of
AFLAC Japan's assets and liabilities, reduced by the limitations in the U.S.
foreign tax credit provisions.
At the end of March 1998, the Japanese government reduced the Japanese
corporate income tax rate from 45.3% to 41.7%. This tax rate reduction was
recognized in the first quarter of 1998 and increased net earnings for the
nine months ended September 30, 1998, by $121 million ($.45 per basic share,
$.44 per diluted share) from the reduction of AFLAC Japan's deferred income
tax liability. The deferred tax reduction represented the effect of
recalculating Japanese deferred income taxes at the 41.7% rate on the
temporary differences between the financial reporting basis and the Japanese
income tax basis of AFLAC Japan's assets and liabilities.
The 1998 rate reduction for AFLAC Japan was effective May 1, 1998, for
purposes of calculating income tax expense on operating earnings and the
1999 rate reduction was effective April 1, 1999.
5. Policyholder Protection Fund
During the first quarter of 1998, the Japanese government enacted a
mandatory policyholder protection fund system. The life insurance industry
is required to contribute to this fund over a 10-year period. The total
charge for our share of the contribution obligation was recognized in the
first quarter of 1998 and decreased pretax earnings by $111 million for the
nine months ended September 30, 1998. The after-tax charge was $65 million,
or $.24 per basic and diluted share.
12
<PAGE>
6. Notes Payable
A summary of notes payable after giving effect to interest rate swaps
and currency swaps is as follows:
September 30, December 31,
(In millions) 1999 1998
------------ ------------
1.67% yen-denominated senior notes due April 2009 $ 518 $ -
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 212 294
Variable interest rate (.38% at Sept. 30, 1999) 58 35
Revolving credit agreement due November 2002:
1.24% fixed interest rate 109 134
Variable interest rate (.33% at Sept. 30, 1999) 163 115
Obligations under capitalized leases, due
monthly through 2003, secured by computer
equipment in Japan 19 18
------ ------
Total notes payable $ 1,079 $ 596
====== ======
On April 21, 1999, we issued $450 million of senior notes with a 6.50%
coupon, paid semiannually, due April 15, 2009. The notes are redeemable at
our option and at any time at a redemption price equal to the principal
amount of the notes being redeemed plus a make-whole amount. We have
swapped the dollar-denominated principal and interest into yen-denominated
obligations. At September 30, 1999, the principal was 55.6 billion yen at
an interest rate of 1.67% less a loan discount of 140 million yen, for a net
payable of 55.4 billion yen ($518 million using the September 30, 1999
exchange rate).
We have a reducing, revolving credit agreement that provides for bank
borrowings through July 2001 in either U.S. dollars or Japanese yen. At
September 30, 1999, the borrowing limit was $250 million. Under the terms
of the agreement, the borrowing limit will reduce to $125 million on July
15, 2000. At September 30, 1999, 22.7 billion yen ($212 million) was
outstanding at a fixed interest rate, and 6.2 billion yen ($58 million) was
outstanding at a variable interest rate under this agreement.
We also have an unsecured revolving credit agreement that provides for
bank borrowings through November 2002, with a borrowing limit of $250
million, payable in either U.S. dollars or Japanese yen. At September 30,
1999, 11.7 billion yen ($109 million) was outstanding at a fixed interest
rate, and 17.4 billion yen ($163 million) was outstanding at a variable
interest rate under this agreement.
Notes payable were reduced by cash payments of 1.6 billion yen ($15
million) in October 1999.
Since these loans are denominated in yen, the principal amount of the
loans as stated in dollar terms at any date will fluctuate due to changes in
the yen-to-dollar foreign currency exchange rate.
13
<PAGE>
We have outstanding interest rate swaps on a portion of our variable
interest rate yen-denominated borrowings. These swaps reduce the impact of
changes in interest rates on our borrowing costs and effectively change our
interest rate from variable to fixed. The interest rate swaps have notional
principal amounts that equal the anticipated unpaid principal amounts.
Under these agreements, we make fixed rate payments at 2.29% on one loan and
1.24% on another loan and receive floating rate payments (.29% at September
30, 1999, plus loan costs of 25 or 20 basis points, respectively) based on
the three-month Tokyo Interbank Offered Rate.
We have designated our yen-denominated borrowings as a hedge of our net
investment in AFLAC Japan. Foreign currency translation gains/losses are
included in accumulated other comprehensive income. 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.
7. Unrealized Gains on Investment Securities
On October 1, 1998, we reclassified certain debt securities from
"available for sale" to "held to maturity." The related net unrealized
gains and losses at the date of transfer on these securities are being
amortized over the remaining term of the securities. These unamortized net
unrealized gains and losses, plus the net unrealized gains and losses on
securities available for sale, less amounts applicable to policy liabilities
and deferred income taxes, are reported in accumulated other comprehensive
income. The portion of unrealized gains credited to policy liabilities
represents gains that would not inure to the benefit of 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.
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at the following dates was:
(In millions) September 30, December 31,
1999 1998
------------ ------------
Unrealized gains on securities
available for sale $ 1,503 $ 1,946
Unamortized unrealized gains on
securities transferred to held
to maturity 1,235 1,224
Less:
Policy liabilities 858 885
Deferred income taxes 878 953
--------- ---------
Shareholders' equity, net
unrealized gains on
investment securities $ 1,002 $ 1,332
========= =========
We own perpetual debentures that we have classified as held-to-
maturity. Although these securities have no contractual maturity, the
issue-date, fixed-rate interest coupons subsequently increase to a market-
14
<PAGE>
interest rate plus 150 to 300 basis points and change to a variable-interest
rate basis, generally by the 25th year after issuance, creating an economic
maturity date.
8. Security Lending
We loan fixed-maturity securities to financial institutions in short-
term security lending transactions. These securities continue to be carried
as investment assets on our balance sheet during the term of the loans and
are not recorded as sales. We receive cash or other securities as
collateral for such loans. These short-term security lending arrangements
increase investment income with minimal risk. At September 30, 1999, and
December 31, 1998, we had security loans outstanding in the amounts of $3.2
billion and $3.0 billion at fair value, respectively. At September 30,
1999, and December 31, 1998, we held Japanese government bonds as collateral
for loaned securities in the amounts of $3.2 billion and $3.1 billion, at
fair value. At September 30, 1999, we also held $44 million of cash
collateral for loaned securities in the amount of $43 million, at fair
value. For loans involving unrestricted cash collateral, the collateral is
recorded as an asset with a corresponding liability for the return of the
collateral. For loans involving securities as collateral, the collateral is
not recorded as an asset or liability under generally accepted accounting
principles.
Our security lending policy requires that the fair value of the
securities received as collateral and cash received as collateral be 102%
and 100% or more, respectively, of the fair value of the loaned securities
as of the date the securities are loaned and not less than 100% thereafter.
9. Common Stock
The following is a reconciliation of the number of shares of our common
stock for the nine months ended September 30:
(In thousands of shares) 1999 1998
---------- ----------
Common stock - issued:
Balance at beginning of year 317,971 316,380
Exercise of stock options 1,789 1,192
-------- --------
Balance at end of period 319,760 317,572
-------- --------
Treasury stock:
Balance at beginning of year 52,287 49,944
Purchases of treasury stock:
Open market 3,394 3,706
Other 183 212
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (609) (940)
Exercise of stock options (1,006) (302)
-------- --------
Balance at end of period 54,249 52,620
-------- --------
Shares outstanding at end of period 265,511 264,952
======== ========
15
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10. Litigation
We are 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, we believe the outcome of pending
litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
16
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1999 and 1998 financial statements included in this
filing have been reviewed by KPMG LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG LLP commenting upon their review is included on page
18.
17
<PAGE>
KPMG 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, 1999, and the related consolidated
statements of earnings and comprehensive income for the three-month and
nine-month periods ended September 30, 1999 and 1998, and the consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 1999 and 1998. 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, 1998, 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 28, 1999, we expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Atlanta, GA
October 26, 1999
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AFLAC Incorporated is the parent company of American Family Life
Assurance Company of Columbus, AFLAC. Our principal business is
supplemental health insurance, which is marketed and administered through
AFLAC. Most of AFLAC's policies are individually underwritten and marketed
at worksites through independent agents, with premiums paid by the employee.
Our operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.)
service the two markets for our insurance operations.
RESULTS OF OPERATIONS
Three significant items affected our net earnings during 1998 and 1999.
Due to a corporate income tax rate reduction enacted in Japan during
1999, the statutory tax rate for AFLAC Japan declined from 41.7% to 36.2%.
This tax rate decline caused a reduction in our deferred income tax
liability which was recognized in the first quarter of 1999 and increased
net earnings by $67 million ($.25 per basic share and $.24 per diluted
share) for the nine months ended September 30, 1999.
Also, due to a similar corporate income tax rate reduction in Japan
enacted during 1998, the statutory tax rate for AFLAC Japan declined from
45.3% to 41.7%. The related deferred tax effect was recognized in the first
quarter of 1998 and increased net earnings by $121 million ($.45 per basic
share and $.44 per diluted share) for the nine months ended September 30,
1998.
For additional information on these income tax reductions, see Note 4
of the Notes to the Consolidated Financial Statements.
Another factor affecting net earnings was a policyholder protection
fund system mandated by the Japanese government during the first quarter of
1998. The pretax charge for our obligation to the protection fund was $111
million ($65 million after tax, or $.24 per both basic and diluted shares).
For further information regarding this policyholder protection fund, see
Note 5 of the Notes to the Consolidated Financial Statements.
19
<PAGE>
<TABLE>
The following table sets forth the results of operations by business segment for the periods shown.
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 1999 1998 Percentage Change 1999 1998
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings:
AFLAC Japan....................... 40.4% $ 171 $ 122 31.5% $ 481 $ 366
AFLAC U.S......................... 10.6 65 59 11.9 191 171
All other business segments....... (2) (1) (2) -
----- ----- ----- -----
Total business segments......... 29.8 234 180 24.8 670 537
Interest expense,
non-insurance operations........ (71.3) (4) (2) (34.2) (10) (8)
Corporate and eliminations........ 49.5 (7) (15) 31.5 (28) (40)
----- ----- ----- -----
Pretax operating earnings....... 36.4 223 163 29.3 632 489
Income taxes...................... 45.4 80 55 30.4 227 174
----- ----- ----- -----
Operating earnings.............. 31.8 143 108 28.7 405 315
Non-operating items:
Deferred tax benefit from Japanese
tax rate reductions............. - - 67 121
Provision for the Japanese
mandated policyholder
protection fund, net of tax..... - - - (65)
Realized investment gains
(losses), net of tax............ 1 - (3) -
----- ----- ----- -----
Net earnings.................... 33.5 $ 144 $ 108 26.7 $ 469 $ 371
===== ===== ===== =====
Operating earnings per basic share.. 31.7 $ .54 $ .41 28.8 $ 1.52 $ 1.18
Operating earnings per diluted share 33.3 .52 .39 28.9 1.47 1.14
===== ===== ===== =====
Net earnings per basic share........ 35.0 $ .54 $ .40 27.3 $ 1.77 $ 1.39
Net earnings per diluted share...... 33.3 .52 .39 26.9 1.70 1.34
===== ===== ===== =====
==========================================================================================================================
20
</TABLE>
<PAGE>
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the charge for the
mandated policyholder protection fund and the deferred income tax benefit
from the Japanese income tax rate reductions. 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 our reported results. In
years 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.
The following table illustrates the effect of foreign currency
translation on our reported results by comparing those results as if foreign
currency rates had remained unchanged from the comparable period in the
prior year.
AFLAC Incorporated and Subsidiaries
Selected Percentage Changes for Consolidated Supplemental Data
(For the periods ended September 30, 1999)
Three Months Nine Months
Operating Results Operating Results
--------------------- ---------------------
Including Excluding Including Excluding
Currency Currency Currency Currency
Changes Changes* Changes Changes*
--------- --------- --------- ---------
Premium income 29.9% 10.3% 22.3% 9.5%
Net investment income 26.3 11.8 19.7 10.0
Operating revenues 29.2 10.5 21.8 9.5
Total benefits and expenses 28.5 9.0 21.0 8.3
Operating earnings 31.8 20.1 28.7 20.9
Operating earnings per share 33.3 20.5 28.9 21.1
- ----------------------------------------------------------------------------
* 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 began to strengthen in relation to the dollar at the end of
1998 after several years of weakening. The average yen-to-dollar exchange
rates were 113.68 and 139.92 for the three months ended September 30, 1999
and 1998, and 117.09 and 134.57 for the nine months ended September 30, 1999
and 1998, respectively. The strengthening of the yen in 1999 increased
operating earnings per share by approximately $.05 for the three months
ended September 30, 1999, and $.09 for the nine months ended September 30,
1999. Operating earnings per share as reported increased 33.3% to $.52 for
the three-month period ended September 30, 1999, compared with the same
period in 1998 and increased 28.9% to $1.47 for the nine-month period ended
September 30, 1999, compared with the same period in 1998. Operating
earnings per share, excluding the effect of foreign currency translation,
increased 20.5% for the quarter and 21.1% for the nine months ended
September 30, 1999.
21
<PAGE>
Our primary financial objective is the growth of operating earnings per
share before the effect of foreign currency fluctuations. Our 1999
objective for growth in operating earnings per share is 20% before the
effect of currency translation. Our objective for 2000 and 2001 is to
increase operating earnings-per-share growth by 15% to 17%, excluding
currency fluctuation. As we look to the next year, we will strive to
perform at the high end of that range.
If our 1999 objective is achieved, the following table shows the likely
results for operating earnings per share for the year 1999 when the
estimated impact from various foreign currency translations are included.
Annual
Average Yen Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1998 on EPS
------------- ---------------- --------- ----------
1999 @ 110.00 $ 2.03 30.1% $ .16
1999 @ 115.00 1.98 26.9 .11
1999 @ 120.00 1.94 24.4 .07
1999 @ 125.00 1.91 22.4 .04
1999 @ 130.89* 1.87 19.9 -
1999 @ 135.00 1.85 18.6 (.02)
1999 @ 140.00 1.82 16.7 (.05)
1999 @ 145.00 1.80 15.4 (.07)
*Actual exchange rate for the year ended December 31, 1998.
If the exchange rate as of September 30, 1999, remains constant for the
rest of 1999, the cumulative average rate would be approximately 114.56 and
the annual operating diluted earnings per share would approximate $1.98,
assuming our earnings objective is met.
SHARE REPURCHASE PROGRAM
During the third quarter of 1999, we purchased 844,400 shares of our
common stock. At the end of the third quarter of 1999, we had approximately
4.0 million shares still available for purchase under current repurchase
authorizations. We have purchased 60.7 million shares (through September
30, 1999) since the inception of the share repurchase program.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings for the nine months ended September 30, 1999 and 1998, were 35.9%
and 35.5%, respectively.
Income tax expense for 1999 includes approximately $2 million of
additional taxes from our recent income tax audit in Japan. Excluding that
amount the effective income tax rate on operating earnings for the nine
months ended September 30, 1999, was 35.5%.
The 1999 reduction in the statutory tax rate in Japan, which was
effective April 1, 1999, will not significantly change our combined
U.S./Japan effective tax rate, as it will largely shift income tax expense
from Japan operations to U.S. operations due to the U.S. foreign tax credit
22
<PAGE>
provisions. We expect our effective income tax rate on operating earnings
for financial statement purposes will be in the range of 35% to 36% for the
full year 1999.
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to our
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 second in
terms of individual policies in force and 16th in assets.
23
<PAGE>
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
------------------ ------------------
Premium income................. $ 1,501 $ 1,115 $ 4,271 $ 3,425
Investment income.............. 280 218 804 666
Other income................... 2 1 3 2
------ ------ ------ ------
Total revenues............... 1,783 1,334 5,078 4,093
------ ------ ------ ------
Benefits and claims............ 1,280 969 3,648 2,983
Operating expenses............. 332 243 949 744
------ ------ ------ ------
Total benefits and expenses.. 1,612 1,212 4,597 3,727
------ ------ ------ ------
Pretax operating earnings.. $ 171 $ 122 $ 481 $ 366
====== ====== ====== ======
- ----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income............... 34.6% (9.9)% 24.7% (5.3)%
Investment income............ 28.4 (5.2) 20.8 (.2)
Total revenues............... 33.6 (9.1) 24.1 (4.5)
Pretax operating earnings.... 40.3 (8.9) 31.5 (4.3)
- ----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income............... 9.4% 7.0% 8.5% 6.5%
Investment income............ 3.7 12.5 4.9 12.3
Total revenues............... 8.5 7.9 7.9 7.4
Pretax operating earnings.... 13.0 7.9 13.8 7.7
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims.......... 71.9% 72.6% 71.8% 72.9%
Operating expenses........... 18.6 18.3 18.7 18.2
Pretax operating earnings.... 9.5 9.1 9.5 8.9
============================================================================
AFLAC JAPAN SALES AND MARKETING
The increase in premium income in yen was due to sales of new policies
and strong policy persistency.
AFLAC Japan's sales results exceeded our expectations during the
quarter. New annualized premium sales during the third quarter were 20.2
billion yen ($177 million), or 2.0% higher than a year ago. The 2.0%
24
<PAGE>
increase in new business follows an exceptionally strong second quarter
during which sales increased 30.6%. Our record second quarter sales results
benefited from intensified sales campaigns in advance of a July premium rate
increase on new business. Rider MAX, which provides accident and
supplemental benefits to our cancer life plans, continued to sell very well,
accounting for approximately 42% of sales during the quarter. Our ordinary
life products also sold well in the quarter, increasing 129% over the third
quarter of 1998. For the nine months, new sales were up 17.6% to 63.0
billion yen, or $537 million.
We also stayed very focused on expanding our distribution system in
Japan. Specifically, we have been aggressively recruiting new individual
agencies to complement our vast channel of corporate agencies. Individual
agencies allow us to better serve Japan's small businesses and individual
customers, which we believe is a vast and under-penetrated market. During
the first nine months of 1999, we recruited approximately 2,000 new
agencies. Our target is to add 3,000 new agencies this year.
Management set an objective for AFLAC Japan sales to increase 10% to
15% for the year 1999 compared with 1998. We believe our sales results will
reflect the high end of the stated target for the full year.
AFLAC JAPAN INVESTMENTS
To combat the low level of investment yields in Japan, we continued to
invest the majority of AFLAC Japan's investable cash flow in reverse dual-
currency bonds (bonds with yen principal and paying interest in dollars).
By doing so, we were able to invest at yields that provided a significant
spread over our reserving assumptions for new business. During the third
quarter, we purchased yen-denominated securities at an average yield of
4.90%. Including dollar-denominated investments, our blended new money
yield was 5.02% for the quarter.
At the end of the third quarter, the yield on AFLAC Japan's debt
securities portfolio was 5.21%, compared with 5.24% at the end of 1998. The
return on average invested assets, net of investment expenses, was 5.02% for
the nine months, compared with 5.30% for the first nine months of 1998.
Investment income in yen increased 4.9% for the first nine months of
1999 compared with 12.3% in the same period of 1998. This is due primarily
to the effect of translating AFLAC Japan's dollar-denominated investment
income into yen. The yen/dollar exchange rate was 117.09 yen to one U.S.
dollar for the first nine months of 1999 compared with 134.57 for the first
nine months of 1998. The stronger yen has the effect of reducing the
dollar-denominated investment income as reported in yen.
AFLAC JAPAN OTHER
The operating expense ratio has increased due to investments in
additional marketing programs including advertising and direct response
efforts. The benefits ratio has declined primarily due to the mix of
business shifting to newer products that have a lower loss ratio than the
traditional cancer life insurance and also due to favorable claims
experience on cancer life insurance. Pretax operating earnings in yen
increased 13.0% and 13.8% for the three months and nine months ended
September 30, 1999, respectively. This increase was largely due to the
lower loss ratio during 1999.
25
<PAGE>
INSURANCE OPERATIONS, AFLAC U.S.
The following table presents a summary of AFLAC U.S. operating results.
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1999 1998 1999 1998
------------------ ------------------
Premium income................. $ 346 $ 304 $1,010 $ 887
Investment income.............. 62 55 179 160
Other income................... 1 1 2 3
----- ----- ----- -----
Total revenues............... 409 360 1,191 1,050
----- ----- ----- -----
Benefits and claims............ 217 189 630 555
Operating expenses............. 127 112 370 324
----- ----- ----- -----
Total benefits and expenses.. 344 301 1,000 879
----- ----- ----- -----
Pretax operating earnings.. $ 65 $ 59 $ 191 $ 171
===== ===== ===== =====
- ----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income............... 13.7% 13.2% 13.9% 12.8%
Investment income............ 12.6 12.6 12.2 24.3
Total revenues............... 13.4 13.2 13.4 14.6
Pretax operating earnings.... 10.6 18.5 11.9 30.5
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims.......... 53.2% 52.3% 52.9% 52.9%
Operating expenses........... 30.9 31.4 31.1 30.9
Pretax operating earnings.... 15.9 16.3 16.0 16.2
============================================================================
AFLAC U.S. SALES
As we expected, new annualized premium sales increased at a single-
digit rate in the third quarter of 1999. Comparisons to last year's third
quarter were difficult due to the enrollment of the largest payroll account
in our history a year ago. New annualized premium sales rose 7.6% in the
third quarter to $133 million. For the nine months, new sales were up 13.4%
to $389 million. Accident/disability insurance continued to be the
strongest contributor to our sales although we also experienced solid
results from other products. We are very pleased with our latest product
introduction -- life insurance for the worksite. These new life products
have only been available for nine months, yet they already represent the
best product introduction in our history.
Management has set an objective for new policy sales to increase by 12%
to 15% for the year 1999 compared with 1998.
26
<PAGE>
AFLAC U.S. INVESTMENTS
Investment income increased 12.2% in the first nine months of 1999
compared with 24.3% in the same period of 1998. The large increase in 1998
is the result of investment income received from investment of the proceeds
from the sale of the television business in the second quarter of 1997 and
from investment of profit repatriation funds of $347 million in 1997 that
included $125 million of a non-recurring nature. During the first nine
months of 1999, available cash flow was invested at an average yield of
7.88% compared with 7.34% during the first nine months of 1998. The overall
return on average invested assets, net of investment expenses, was 7.50% for
the first nine months of 1999 compared with 7.43% for the first nine months
of 1998.
AFLAC U.S. OTHER
Management expects the operating expense ratio, including discretionary
television advertising expenses, to remain approximately level in the
future. By improving administrative systems and controlling other costs, we
have been able to redirect funds to national television advertising programs
without significantly affecting the operating expense ratio.
The aggregate benefit ratio has remained relatively stable. The mix of
business has shifted toward accident and hospital indemnity policies, which
have lower benefit ratios than other products. We expect future benefit
ratios for some of our supplemental products to increase slightly due to our
ongoing efforts to improve policy persistency and enhance policyholder
benefits. Management expects the pretax operating profit margin, which was
16.2% for the year 1998, to remain approximately the same in 1999.
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.
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1998, our financial condition has remained strong in
the functional currencies of our operations. The investment portfolios of
AFLAC Japan and AFLAC U.S. have continued to grow and primarily consist of
investment grade 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 our
financial statements. The yen/dollar exchange rate at the end of each
period is used to translate yen-denominated balance sheet items to U.S.
dollars for reporting purposes. The exchange rate at September 30, 1999,
was 106.95 yen to one U.S. dollar, 8.2% stronger than the exchange rate of
115.70 as of December 31, 1998. Management estimates that the stronger yen
rate increased reported investments and cash by $1.9 billion, total assets
by $2.2 billion, and total liabilities by $2.2 billion compared with the
amounts that would have been reported for 1999 if the exchange rate had
remained unchanged from year-end 1998.
27
<PAGE>
INVESTMENTS AND CASH
The continued growth in investments and cash reflects the substantial
cash flows in the functional currencies of our operations. Net unrealized
gains of $1.2 billion on investment securities at September 30, 1999,
consisted of $2.6 billion in gross unrealized gains and $1.5 billion in
gross unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen debt
securities markets. We use specific criteria to judge the credit quality
and liquidity of our investments and use a variety of credit rating services
to monitor these criteria. Applying those various credit ratings to a
standardized rating system based on the categories of a nationally
recognized rating service, the percentages of our debt securities, at
amortized cost, were as follows:
September 30, December 31,
1999 1998
------------- ------------
AAA 28.8% 38.1%
AA 24.4 17.6
A 32.7 31.2
BBB 12.2 13.1
BB 1.9 -
----- -----
100.0% 100.0%
===== =====
At September 30, 1999, we owned debt securities rated below investment
grade in the amount of $554 million at amortized cost, or 1.9% of total debt
securities. These securities were issued by entities that had a credit
rating downgrade following our purchase of the debt securities.
Private placement investments accounted for 48.2% and 43.9% of our
total debt securities as of September 30, 1999 and December 31, 1998,
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, we have adhered to historically conservative
standards for credit quality. We require 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
(NAIC). 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.
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these
securities to their contractual or economic maturity dates. We have now
made this our formal policy. Accordingly, debt securities carried at a fair
value of $6.4 billion were reclassified as of October 1, 1998, from the
category "available of sale" to "held to maturity." The related unrealized
gains of $1.1 billion as of October 1, 1998, on these securities are being
amortized over the remaining term of the securities. Securities that are
available for sale are reported in the balance sheet at fair value, and
securities that are held to maturity are reported at amortized cost.
28
<PAGE>
The following table shows an analysis of investment securities (at cost
or amortized cost):
AFLAC Japan AFLAC U.S.
------------------------- -------------------------
September 30, December 31, September 30, December 31,
(In millions) 1999 1998 1999 1998
------------------------- -------------------------
Available for sale:
Fixed-maturity
securities $14,472 $12,886 $ 3,316 $ 2,772
Perpetual debentures 2,315 1,344 143 111
Equity securities 38 22 82 79
------ ------ ------ ------
Total available
for sale 16,825 14,252 3,541 2,962
------ ------ ------ ------
Held to maturity:
Fixed-maturity
securities 4,240 3,947 - -
Perpetual debentures 3,747 3,494 - -
------ ------ ------ ------
Total held to
maturity 7,987 7,441 - -
------ ------ ------ ------
Total $24,812 $21,693 $ 3,541 $ 2,962
====== ====== ====== ======
POLICY LIABILITIES
The stronger yen at September 30, 1999, compared with December 31,
1998, increased reported policy liabilities by $1.9 billion. Other
increases in policy liabilities were due to the addition of new business and
the aging of policies in force.
DEBT
On April 21, 1999, we issued $450 million of senior notes with a 6.50%
coupon, paid semiannually, due April 15, 2009. The notes are redeemable at
our option and at any time at a redemption price equal to the principal
amount of the notes being redeemed plus a make-whole amount. We received
net proceeds of $446 million after discount and issue costs. These proceeds
have been temporarily invested in short-term securities and are being used
to primarily purchase shares of our common stock. Any remaining net
proceeds may be used to repay indebtedness or for general corporate
purposes. We have swapped the dollar-denominated principal and interest
into yen-denominated obligations. At September 30, 1999, the principal was
55.6 billion yen at an interest rate of 1.67%. See Note 6 of the Notes to
the Consolidated Financial Statements for information on other debt
outstanding at September 30, 1999.
All of our debt is yen-denominated. The stronger yen increased
reported debt by $82 million, compared with the amounts that would have been
reported for 1999 if the exchange rate had remained unchanged from year-end
1998.
29
<PAGE>
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 28.0%
and 19.6% as of September 30, 1999, and December 31, 1998, respectively.
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 $.7 million for the nine months ended
September 30, 1999, and by approximately $1 million for the year 1998. For
further information regarding such arrangements, see Note 8 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 us in
the past. We believe 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
is making contributions to these funds over a 10-year period. We have
recorded a liability for our share of these obligations.
In the second quarter of 1999, Toho Life Insurance Company was declared
insolvent by Japanese government regulators. The policyholder protection
fund, established last year, may be used to satisfy Toho's policyholder
obligations. Although we cannot be certain, at this time we do not expect
another assessment.
SHAREHOLDERS' EQUITY
Our insurance operations continue to provide the 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
AFLAC Incorporated for management fees and dividends. Both the sources and
uses of cash are reasonably predictable. Our investment objectives provide
for liquidity through the ownership of high-quality investment securities.
AFLAC insurance policies are generally not interest-sensitive and therefore
are not subject to unexpected policyholder redemptions due to investment
yield changes. Also, the majority of AFLAC policies provide indemnity
benefits rather than reimbursement for actual medical costs and therefore
are not subject to the risks of medical cost inflation.
30
<PAGE>
The achievement of continued long-term growth will require growth in
AFLAC's statutory capital and surplus. We may secure additional statutory
capital through various sources, such as internally generated statutory
earnings or equity contributions by AFLAC Incorporated from funds generated
through debt or equity offerings. In April 1999, we received net proceeds
of $446 million from an issuance of $450 million of senior notes, which
increased our capital resources. We believe outside sources for additional
debt and equity capital, if needed, will continue to be available for
capital expenditures, business expansion, and the funding of our share
repurchase program.
AFLAC Incorporated 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 AFLAC
Incorporated. In addition to restrictions by U.S. insurance regulators, the
Japanese Financial Supervisory Agency (FSA) may impose restrictions on
transfers of funds from AFLAC Japan. Payments are made from AFLAC Japan to
AFLAC Incorporated for management fees, and to AFLAC U.S. for allocated
expenses and remittances of earnings. Total funds received from AFLAC Japan
were $272 million in the first nine months of 1999, and $192 million and
$386 million in the full years 1998 and 1997, respectively. These amounts
include annual profit transfers from AFLAC Japan of $243 million in 1999,
$154 million in 1998 and $347 million in 1997. The FSA maintains solvency
standards, a version of risk-based capital requirements. AFLAC Japan's
solvency margin remains high and reflects a strong capital and surplus
position. 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 our annual report to
shareholders for the year ended December 31, 1998.
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
throughout the industry. These new accounting principles are presently
planned by the NAIC to be effective for 2001. The most significant change
to AFLAC is the requirement that insurance companies establish a deferred
income tax liability for statutory accounting purposes. We estimate AFLAC's
deferred tax liability would be approximately $142 million at September 30,
1999, under the provisions of the recodified SAP. AFLAC's capital and
surplus, as determined on the present U.S. statutory accounting basis, was
$1.6 billion at September 30, 1999.
YEAR 2000
The term "year 2000 issue" generally refers to incorrect date
calculations that might occur in computer software and hardware as the year
2000 approaches. 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.
Our efforts to address year 2000 issues began in 1997. We established a
Year 2000 Executive Steering Committee, made up of senior management and
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representatives of our information technology, financial, legal, internal
audit and various operational areas to identify and address year 2000 issues
throughout our U.S. and Japanese operations. We also established a Year 2000
Project Office consisting of department coordinators from Information
Technology, 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. We also engaged third party consultants to assist AFLAC U.S. and
AFLAC Japan with their year 2000 efforts.
The plans contained 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 our efforts to become year 2000
ready; (3) the testing phase, which includes the testing of systems that have
been updated or modified; (4) the implementation phase, which includes placing
systems into the production environment, as well as additional comprehensive
testing to identify and resolve any remaining year 2000 issues; and (5)
contingency planning.
We have remediated, tested and internally certified as year 2000 ready
substantially all of our critical production systems in both the United States
and Japan. This certification process involved remediation of code and
extensive testing in our dedicated test environments. We will continue to
test these systems through the end of 1999 as a quality control measure.
Implementation and internal certification activities for substantially all
non-critical systems has also been completed. Based on the facts currently
known to us, we do not anticipate significant year 2000 related problems with
respect to our critical production or other internal systems.
We continue to develop and refine year 2000 contingency plans for our
business systems and processes. These plans have been prepared by personnel
representing a wide spectrum of the company. While these plans will continue
to be periodically updated throughout 1999 based on then current information
and the perceived business risk in order to promote a stable technological
platform, both our United States and Japanese operations ceased installation
of any new significant information technology systems effective October 1999.
We have also scheduled "Year 2000 Assurance Weekend" on January 1 - 3, 2000.
On these days, AFLAC will use a streamlined team from throughout the company
to close year-end books and process actual data from the year 2000. While we
do not anticipate that there will be significant internal operational problems
related to year 2000, Assurance Weekend is designed to allow us to quickly and
effectively respond to any internal or external issues which arise in an
actual production environment after January 1, 2000. It is presently
anticipated that the workforce will return to normal levels on January 4,
2000, and that any operational problems will have been remedied or effectively
addressed from a management and operational perspective. These and other
activities undertaken through the contingency planning process will hopefully
allow us to effectively respond to material internal or external year 2000
related issues.
We rely on a widely distributed customer base in the United States and
Japan for continued payment of premiums. Many of the systems utilized by our
group accounts are automated and date dependent. If a large number of
customers (in the U.S. and/or Japan) are unable to submit premium payments in
a timely or accurate manner due to year 2000 issues, the resulting delays
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<PAGE>
could have a material adverse effect on our financial condition or results of
operations. We have randomly surveyed certain group accounts in the United
States to determine their year 2000 readiness. The results of these survey
efforts have not disclosed any year 2000 related issues in our U.S. group
account customer base that, either taken individually or as a group,
reasonably indicate that we will experience major disruptions in premium
payments in the United States. AFLAC Japan depends heavily on substantial
premium payments that are electronically transmitted by third party payment
agents from employers of the insured. We have surveyed certain of our more
significant customers and payment agents in Japan to determine whether they
expect their ability to pay premiums or transmit policy and claims data to be
impacted by year 2000 issues. The results of our survey efforts in Japan have
not disclosed any significant year 2000 related issues with our Japanese
payment agents or our more significant customers that, either taken
individually or as a group, reasonably indicate that we will experience major
disruptions in premium payments in Japan. The reliability of the U.S. and
Japanese surveys depends on the extent to which responses are accurate and
complete and that our conclusions from these responses accurately represent
the year 2000 readiness of our customers and Japanese payment agents. In
addition to our survey efforts, testing with our key external customers and
suppliers began during the second quarter of 1999 and is now substantially
complete. While this testing currently has not revealed any widespread year
2000 related problems that would reasonably be expected to have a material
impact on our ability to conduct business in the normal course, any adverse
results from this testing will be addressed to the extent reasonably possible
and incorporated into our ongoing contingency planning process.
AFLAC owns publicly traded and privately placed debt 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, our
investment portfolio may also be adversely impacted.
Since the inception of the year 2000 project, we had incurred costs of
approximately $30 million for system upgrades or modifications through
September 30, 1999. Of this amount, approximately $11 million was
capitalized. The remaining cost to complete the various projects is currently
estimated to be $4 million. We may determine that additional expenditures are
necessary as the program continues to evolve. We believe that any deferral
of information technology projects due to the year 2000 effort will not have a
material adverse effect on our operations or financial condition.
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 we depend in both the United States and Japan, we are
unable to determine at this time whether the consequences of external year
2000 failures will have a material impact on our 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
AFLAC, the failure of multiple systems may cause a material disruption to our
business which may have a material adverse effect on our operations or
financial condition. Moreover, while we have attempted to gather as much
information as reasonably possible with respect to the manner in which year
2000 related issues may impact our operations in Japan, it should be noted
that there have been widespread reports that Japan will not, in general, be as
well prepared for year 2000 events as the United States. We are unable to
validate these reports, except through our survey and testing efforts
discussed herein.
33
<PAGE>
All statements made herein regarding our year 2000 efforts are "Year 2000
Readiness Disclosures" made pursuant to the Year 2000 Information and
Readiness Disclosure Act, and to the extent applicable, are entitled to the
protections of such act.
OTHER
AFLAC Incorporated is part of an investment group that acquired
NovaCare Employee Services, Inc. AFLAC Incorporated paid $14 million for an
approximate 19% equity interest in NovaCare Employee Services, Inc. which is
a national professional employer organization that provides small- to
medium-sized businesses with human resource services.
In May 1999, AFLAC Incorporated was added to the Standard & Poor's 500
index.
On October 25, 1999, the board of directors approved a quarterly cash
dividend of $.075 per share. The dividend is payable on December 1, 1999,
to shareholders of record at the close of business on November 18, 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our 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
Our primary interest rate exposure is a result of the effect of changes
in interest rates on the fair value of our investments in debt securities.
We use modified duration analysis to estimate the sensitivity to interest
rate changes in our debt securities. Modified duration analysis provides a
measure of price percentage volatility.
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable yen-denominated long-duration securities. Currently, when our
debt securities mature, the proceeds are reinvested at a yield below that of
the interest required for the accretion of policy benefit liabilities on
policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent
years. Since 1994, premium rates have been increased several times to help
offset the lower investment yields available.
At September 30, 1999 we had $1.1 billion of net unrealized gains on
debt securities. The hypothetical reduction in the fair value of our debt
securities resulting from a 100 basis point increase in market interest
rates is estimated to be $2.5 billion based on our portfolio as of September
30, 1999. The effect on yen-denominated debt securities is approximately
$2.2 billion and the effect on dollar-denominated debt securities is
approximately $373 million.
We had outstanding interest rate swaps on a portion of our variable-
interest-rate yen-denominated borrowings at September 30, 1999. These swaps
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reduce the impact of fluctuations in interest rates on our borrowing costs
and effectively change our interest rates from variable to fixed.
Therefore, movements in market interest rates should have no material effect
on earnings. For further information on our notes payable, see Note 6 of
the Notes to the Consolidated Financial Statements.
At September 30, 1999, we also had yen-denominated bank borrowings in
the amount of 23.5 billion yen ($221 million) with a variable interest rate
of .34%. The effect on net earnings in 1999 due to changes in market
interest rates was immaterial. For further information on our notes
payable, see Note 6 of the Notes to the Consolidated Financial Statements.
EQUITY PRICE RISK
Equity securities at September 30, 1999, totaled $181 million, or .6%
of total investments and cash on a consolidated basis. We use beta analysis
to measure the sensitivity of our equity securities portfolio to
fluctuations in the broad market. The beta of our equity securities
portfolio is 1.0. 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%, or $18 million.
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 foreign currency transaction
risk.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, AFLAC Incorporated has yen-denominated borrowings that have been
designated as a hedge of our investment in AFLAC Japan. The unrealized
foreign currency translation gains and losses related to these borrowings
are reported in accumulated other comprehensive income.
AFLAC Incorporated has a currency swap on its $450 million senior
notes. We have swapped the dollar-denominated principal and interest into
yen-denominated obligations. This swap has been designated as a hedge of
our investment in AFLAC Japan. The unrealized foreign currency translation
gains and losses related to this swap are reported in accumulated other
comprehensive income.
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We attempt to match our yen-denominated assets to our yen-denominated
liabilities on a consolidated basis in order to minimize the exposure of our
shareholders' equity to foreign currency translation fluctuations. The
table below compares the U.S. dollar values of our yen-denominated assets
and liabilities at various exchange rates.
Dollar Value of Yen-Denominated Assets and Liabilities
At Selected Exchange Rates
(September 30, 1999)
91.95 106.95* 121.95
(In millions) Yen Yen Yen
--------- --------- --------
Yen-denominated financial
instruments:
Assets:
Securities available for sale:
Fixed maturities $ 16,994 $ 14,611 $ 12,814
Perpetual debentures 2,366 2,034 1,784
Equity securities 55 47 42
Securities held to maturity:
Fixed maturities 4,931 4,240 3,718
Perpetual debentures 4,359 3,747 3,286
Cash and cash equivalents 398 342 300
Other financial instruments 15 13 11
------- ------- -------
Total 29,118 25,034 21,955
------- ------- -------
Liabilities - notes payable 1,232 1,059 929
------- ------- -------
Net yen-denominated financial
instruments 27,886 23,975 21,026
Other yen-denominated assets 4,230 3,638 3,190
Other yen-denominated liabilities (31,942) (27,463) (24,085)
------- ------- -------
Total yen-denominated net assets
subject to foreign currency
fluctuation $ 174 $ 150 $ 131
======= ======= =======
* Actual September 30, 1999 exchange rate
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation on page 21.
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. We
desire 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
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<PAGE>
any other statements made by company officers in oral discussions with
analysts and contained in documents filed with the Securities and Exchange
Commission (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. AFLAC undertakes no obligation to update such forward-looking
statements.
We caution readers that the following factors, in addition to other
factors mentioned from time to time in our reports filed with the SEC, could
cause actual results to differ materially: regulatory developments,
assessments for insurance company insolvencies, competitive conditions, new
products, ability to repatriate profits from Japan, 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 AFLAC's
investment activities, significant changes in interest rates, fluctuations in
foreign currency exchange rates, and the ability of AFLAC and third parties
with whom it does business to achieve year 2000 readiness for significant
systems on a timely basis.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are 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, we believe the outcome of pending
litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12.0 - Ratio of Earnings to Fixed Charges
27.0 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
Items other than those listed above are omitted because they are not
required or are not applicable.
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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 10, 1999 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date November 10, 1999 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
38
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EXHIBITS FILED WITH CURRENT FORM 10-Q:
12.0 - Ratio of Earnings to Fixed Charges
27.0 - Financial Data Schedule (for SEC use only).
39
39
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EXHIBIT 12.0
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Ratio of Earnings to Fixed Charges
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Fixed charges:
Interest expense $ 5,036 $ 2,814 $ 13,220 $ 9,478
Rental expense deemed interest 143 91 385 289
------- ------- ------- -------
Total fixed charges $ 5,179 $ 2,905 $ 13,605 $ 9,767
======= ======= ======= =======
Earnings before income tax $219,711 $161,470 $619,302 $375,183
Add back:
Fixed charges 5,179 2,905 13,605 9,767
------- ------- ------- -------
Total earnings before income
tax and fixed charges 224,890 164,375 632,907 384,950
Adjustments:
Realized gains/(losses) (3,056) (1,863) (12,375) (2,131)
------- ------- ------- -------
Total earnings before income
tax and fixed charges and
realized gains/(losses) $227,946 $166,238 $645,282 $387,081
======= ======= ======= =======
Earnings excluding realized
gains/(losses) to fixed
charges 44.0x 57.2x 47.4x 39.6x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended September 30, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 21,688
<DEBT-CARRYING-VALUE> 7,987
<DEBT-MARKET-VALUE> 7,646
<EQUITIES> 181
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 29,875
<CASH> 534
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,486
<TOTAL-ASSETS> 35,225
<POLICY-LOSSES> 27,199
<UNEARNED-PREMIUMS> 335
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 292
<NOTES-PAYABLE> 1,079
0
0
<COMMON> 32
<OTHER-SE> 3,740
<TOTAL-LIABILITY-AND-EQUITY> 35,225
5,281
<INVESTMENT-INCOME> 992
<INVESTMENT-GAINS> (12)
<OTHER-INCOME> 14
<BENEFITS> 4,277
<UNDERWRITING-AMORTIZATION> 183
<UNDERWRITING-OTHER> 1,196
<INCOME-PRETAX> 619
<INCOME-TAX> 150<F1>
<INCOME-CONTINUING> 469<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469<F1>
<EPS-BASIC> 1.77<F1>
<EPS-DILUTED> 1.70<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $67 benefit from Japanese tax rate reduction, $.25 per
basic share and $.24 per diluted share.
</FN>
</TABLE>
