<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 March 31, 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 May 4, 1999
- ---------------------------- ------------------
Common Stock, $.10 Par Value 267,201,404 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998................... 1
Consolidated Statements of Earnings -
Three Months Ended March 31, 1999 and 1998.............. 3
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 1999 and 1998.............. 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998.............. 5
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1999 and 1998.............. 7
Notes to Consolidated Financial Statements................ 8
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 4. Submission of Matters to a Vote
of Security Holders....................................... 36
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
<CAPTION>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$15,779 in 1999 and $15,658 in 1998) $ 17,873 $ 17,617
Perpetual debentures (amortized cost,
$1,826 in 1999 and $1,455 in 1998) 1,730 1,366
Equity securities (cost, $102 in 1999
and $101 in 1998) 180 177
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $3,686 in
1999 and $3,691 in 1998) 3,803 3,947
Perpetual debentures (fair value, $3,091
in 1999 and $3,131 in 1998) 3,344 3,494
Mortgage loans and other 9 9
Short-term investments 9 10
Cash and cash equivalents 269 374
-------- --------
Total investments and cash 27,217 26,994
Receivables, primarily premiums 230 229
Receivables for security transactions 25 43
Accrued investment income 279 316
Deferred policy acquisition costs 3,040 3,067
Property and equipment, at cost less
accumulated depreciation 450 427
Other 108 107
-------- --------
Total assets $ 31,349 $ 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>
March 31, December 31,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 22,119 $ 22,218
Unpaid policy claims 1,305 1,263
Unearned premiums 306 309
Other policyholders' funds 246 244
-------- --------
Total policy liabilities 23,976 24,034
Notes payable 573 596
Income taxes 1,733 1,865
Payables for security transactions 437 173
Other 771 745
-------- --------
Total liabilities 27,490 27,413
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 400,000 shares; issued 318,570
shares in 1999 and 317,971 shares in 1998 32 32
Additional paid-in capital 241 235
Retained earnings 3,040 2,862
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 214 219
Unrealized gains on investment securities 1,243 1,332
Treasury stock, at average cost (910) (910)
Notes receivable for stock purchases (1) -
-------- --------
Total shareholders' equity 3,859 3,770
-------- --------
Total liabilities and shareholders' equity $ 31,349 $ 31,183
======== ========
Shareholders' equity per share $ 14.47 $ 14.19
======== ========
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In millions, except for share and Three Months Ended March 31,
per-share amounts - Unaudited) ----------------------------
1999 1998
-------- --------
<S>
Revenues: <C> <C>
Premiums, principally supplemental
health insurance $ 1,728 $ 1,472
Net investment income 320 279
Realized investment gains (losses) (5) -
Other income 5 6
------- -------
Total revenues 2,048 1,757
------- -------
Benefits and expenses:
Benefits and claims 1,400 1,214
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 57 47
Insurance commissions 226 192
Insurance expenses 142 118
Provision for mandated policyholder
protection fund - 111
Interest expense 4 3
Other operating expenses 16 19
------- -------
Total acquisition and
operating expenses 445 490
------- -------
Total benefits and expenses 1,845 1,704
------- -------
Earnings before income taxes 203 53
Income tax expense (benefit):
Operations 74 14
Deferred tax benefit from Japanese
tax rate reductions (67) (121)
------- -------
Total income taxes 7 (107)
------- -------
Net earnings $ 196 $ 160
======= =======
Net earnings per share:
Basic $ .74 $ .60
Diluted .71 .58
======= =======
Shares used in computing
earnings per share (In thousands):
Basic 266,115 266,831
Diluted 276,769 276,294
======= =======
Cash dividends per share $ .065 $ .058
======= =======
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<CAPTION>
(In millions, except for per-share
amounts - Unaudited) Three Months Ended March 31,
----------------------------
1999 1998
------ ------
<S> <C> <C>
Common Stock:
Balance at beginning and end of period $ 32 $ 16
------ ------
Additional paid-in capital:
Balance at beginning of year 235 227
Exercise of stock options 3 3
Gain on treasury stock reissued 3 2
------ ------
Balance at end of period 241 232
------ ------
Retained earnings:
Balance at beginning of year 2,862 2,442
Net earnings 196 160
Cash dividends ($.065 per share
in 1999 and $.058 in 1998) (18) (14)
------ ------
Balance at end of period 3,040 2,588
------ ------
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 (5) (44)
Unrealized gains (losses) on investment
securities during period, net of income
taxes and reclassification adjustments (89) (83)
------ ------
Balance at end of period 1,457 1,432
------ ------
Treasury stock:
Balance at beginning of year (910) (813)
Purchases of treasury stock (11) (7)
Cost of shares issued 11 8
------ ------
Balance at end of period (910) (812)
------ ------
Notes receivable for stock purchases (1) (2)
------ ------
Total shareholders' equity $ 3,859 $ 3,454
====== ======
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions - Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 196 $ 160
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 620 570
Deferred income taxes (41) (161)
Change in income taxes payable (73) (47)
Increase in deferred policy
acquisition costs (69) (53)
Change in receivables and advance premiums 2 5
Depreciation and amortization expense 7 7
Provision for mandated policyholder
protection fund - 111
Other, net 53 29
------ ------
Net cash provided by operating activities 695 621
------ ------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed-maturity securities sold 279 302
Fixed-maturity securities matured 63 162
Equity securities 16 10
Securities held to maturity:
Fixed-maturity securities matured 9 -
Mortgage loans and other investments, net - 1
Short-term investments, net 1 -
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (648) (869)
Perpetual debentures (434) (278)
Equity securities (19) (17)
Securities held to maturity:
Fixed-maturity securities (42) -
Short-term investments, net - (2)
Additions to property and equipment, net (3) (6)
------ ------
Net cash used by investing activities $ (778) $ (697)
------ ------
(continued)
</TABLE>
5
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In millions - Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Cash flows from financing activities:
Principal payments under debt obligations $ (3) $ (5)
Dividends paid to shareholders (18) (14)
Purchases of treasury stock (11) (7)
Treasury stock reissued 14 10
Other, net 5 1
------ ------
Net cash used by financing activities (13) (15)
------ ------
Effect of exchange rate changes on cash
and cash equivalents (9) -
------ ------
Net change in cash and cash equivalents (105) (91)
Cash and cash equivalents, beginning of year 374 236
------ ------
Cash and cash equivalents, end of period $ 269 $ 145
====== ======
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest on debt obligations $ 3 $ 3
Income taxes 139 103
See the accompanying Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions - Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------ ------
<S> <C> <C>
Net earnings $ 196 $ 160
------ ------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency
translation gains during the period 24 7
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses)
arising during the period (95) (48)
Reclassification adjustment for realized
(gains) losses included in net earnings 4 (1)
------ ------
Total other comprehensive income,
before income taxes (67) (42)
Income tax expense related to items
of other comprehensive income 27 85
------ ------
Other comprehensive income,
net of income taxes (94) (127)
------ ------
Total comprehensive income $ 102 $ 33
====== ======
</TABLE>
7
<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 March 31, 1999, and the results of operations and statements of cash
flows, shareholders' equity and comprehensive income for the three months
ended March 31, 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
We adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information in 1998. 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 was
effective for financial statements issued for annual periods beginning in
1998 and for interim periods beginning in 1999. The required interim period
information is presented in Note 3.
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.
8
<PAGE>
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 ended March 31, 1999.
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, 2000.
9
<PAGE>
3. Segment Information
Information regarding components of operations for the three months
ended March 31 follows:
(In millions) 1999 1998
-------- --------
Total revenues:
AFLAC Japan:
Earned premiums $ 1,398 $ 1,181
Net investment income 262 226
Other income - 1
------- -------
Total AFLAC Japan revenues 1,660 1,408
------- -------
AFLAC U.S.:
Earned premiums 330 289
Net investment income 58 51
Other income - 3
------- -------
Total AFLAC U.S. revenues 388 343
------- -------
All other business segments 7 7
------- -------
Total business segments 2,055 1,758
Realized investment gains (losses) (5) -
Corporate 7 8
Intercompany eliminations (9) (9)
------- -------
Total $ 2,048 $ 1,757
======= =======
Earnings before income taxes:
AFLAC Japan $ 158 $ 125
AFLAC U.S. 63 56
All other business segments 1 -
------- -------
Total business segments 222 181
Provision for the Japanese mandated
policyholder protection fund - (111)
Realized investment gains (losses) (5) -
Interest expense, non-insurance operations (3) (3)
Corporate (11) (14)
------- -------
Total $ 203 $ 53
======= =======
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%, which increased net earnings
for the first quarter of 1999 by $67 million ($.25 per basic share, $.24 per
diluted share) from the reduction of our consolidated deferred income tax
liability as of March 31, 1999. 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 of AFLAC Japan's assets
and liabilities reduced by the limitations in the U.S. foreign tax credit
provisions.
10
<PAGE>
At the end of March 1998, the Japanese government reduced the Japanese
corporate income tax rate from 45.3% to 41.7%, which increased net earnings
for the first quarter of 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 is 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 $4.1 billion 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 three months ended March 31, 1998. The after-tax charge was $65
million, or $.24 per basic and diluted share.
6. Notes Payable
A summary of notes payable is as follows:
March 31, December 31,
(In millions) 1999 1998
---------- ------------
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate $ 282 $ 294
Variable interest rate (.93% at March 31, 1999) 32 35
Revolving credit agreement due November 2002:
1.24% fixed interest rate 129 134
Variable interest rate (.95% at March 31, 1999) 112 115
Obligations under capitalized leases, due
monthly through 2003, secured by computer
equipment in Japan 18 18
----- -----
Total notes payable $ 573 $ 596
===== =====
We have a reducing, revolving credit agreement that provides for bank
borrowings through July 2001 in either U.S. dollars or Japanese yen. The
current borrowing limit is $325 million. Under the terms of the agreement,
the borrowing limit will reduce to $250 million on July 15, 1999, and $125
million on July 15, 2000. At March 31, 1999, 34.1 billion yen ($282
million) was outstanding at a fixed interest rate and 3.8 billion yen ($32
million) was outstanding at a variable interest rate under this agreement.
11
<PAGE>
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 March 31, 1999,
15.5 billion yen ($129 million) was outstanding at a fixed interest rate and
13.5 billion yen ($112 million) was outstanding at a variable interest rate
under this agreement.
We have outstanding interest rate swaps on a portion of our variable
interest rate yen-denominated borrowings (49.6 billion yen). 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 (.19% at March 31, 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.
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 $445 million. We intend to use the
proceeds primarily to purchase shares of our common stock. Any remaining
proceeds may be used to repay indebtedness or for general corporate
purposes. We intend to swap the dollar-denominated principal and interest
to be yen-denominated.
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.
12
<PAGE>
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at the following dates was:
(In millions) March 31, December 31,
1999 1998
------------ ------------
Unrealized gains on securities
available for sale $ 2,076 $ 1,946
Unamortized unrealized gains on
securities transferred to held
to maturity 1,149 1,224
Less:
Policy liabilities 1,032 885
Deferred income taxes 950 953
--------- ---------
Shareholders' equity, net
unrealized gains on
investment securities $ 1,243 $ 1,332
========= =========
8. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At March 31, 1999 and December 31,
1998 we had security loans outstanding in the amounts of $543 million and
$3.0 billion at fair value, respectively. At March 31, 1999, and December
31, 1998, we held Japanese government bonds as collateral for loaned
securities in the amounts of $547 million and $3.1 billion, at fair value.
Our security lending policy requires that the fair value of the securities
received as collateral be 105% or more of the fair value of the loaned
securities as of the date the securities are loaned and not less than 100%
thereafter.
13
<PAGE>
9. Common Stock
The following is a reconciliation of the number of shares of our common
stock for the three months ended March 31:
(In thousands of shares) 1999 1998
---------- ----------
Common stock - issued:
Balance at beginning of year 317,971 316,380
Exercise of stock options 599 717
-------- --------
Balance at end of period 318,570 317,097
-------- --------
Treasury stock:
Balance at beginning of year 52,287 49,944
Purchases of treasury stock:
Open market 150 114
Received from employees for
taxes on stock option exercises 98 139
Shares issued to sales associates
stock bonus plan and dividend
reinvestment plan (191) (280)
Exercise of stock options (429) (201)
-------- --------
Balance at end of period 51,915 49,716
-------- --------
Shares outstanding at end of period 266,655 267,381
======== ========
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.
14
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 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 16.
15
<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 Stockholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of March 31, 1999, and the related consolidated statements
of earnings for the three-month periods ended March 31, 1999 and 1998, and
the consolidated statements of shareholders' equity, cash flows and
comprehensive income for the three-month periods ended March 31, 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
April 27, 1999
16
<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
Due to a corporate income tax rate reduction in Japan during 1999, the
statutory tax rate for AFLAC Japan declined from 41.7% to 36.2%. This tax
rate decline resulted in a reduction in our deferred income tax liability as
of March 31, 1999, which increased net earnings by $67 million ($.25 per
basic share and $.24 per diluted share) in 1999. For additional information
on the income tax reduction, see Note 4 of the Notes to the Consolidated
Financial Statements.
Also, due to a corporate income tax rate reduction in Japan during
1998, the statutory tax rate for AFLAC Japan declined from 45.3% to 41.7%.
This tax rate decline resulted in a reduction in our deferred income tax
liability as of March 31, 1998, which increased net earnings by $121 million
($.45 per basic share and $.44 per diluted share) in 1998. For additional
information on the income tax reduction, 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.
17
<PAGE>
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)
Percentage Change Three Months
Over Previous Ended March 31,
Period 1999 1998
----------------- ------------------
Operating earnings:
AFLAC Japan....................... 26.2% $ 158 $ 125
AFLAC U.S......................... 11.4 63 56
All other business segments....... 1 -
----- -----
Total business segments......... 22.3 222 181
Interest expense,
non-insurance operations........ 2.4 (3) (3)
Corporate and eliminations........ 16.5 (12) (13)
----- -----
Pretax operating earnings....... 26.0 207 165
Income taxes...................... 23.8 75 61
----- -----
Operating earnings.............. 27.3 132 104
Non-operating items:
Deferred tax benefit from Japan
tax rate reduction.............. 67 121
Provision for the Japanese
mandated policyholder
protection fund, net of tax..... - (65)
Realized investment gains
(losses), net of tax............ (3) -
----- -----
Net earnings.................... 21.9 $ 196 $ 160
===== =====
Operating earnings per basic share.. 28.2 $ .50 $ .39
Operating earnings per diluted share 26.3 .48 .38
===== =====
Net earnings per basic share........ 23.3 $ .74 $ .60
Net earnings per diluted share...... 22.4 .71 .58
===== =====
============================================================================
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 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.
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<PAGE>
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 Supplemental Consolidated Data*
Three Months Ended March 31, 1999
Including Excluding
Currency Currency
Changes Changes**
----------- -----------
Premium income 17.4% 8.8%
Net investment income 14.8 8.1
Operating revenues 16.8 8.6
Total benefits and expenses 15.9 7.4
Operating earnings 27.3 22.2
Operating earnings per share 26.3 21.1
- ----------------------------------------------------------------------------
* The numbers in this table are presented on an operating basis and there-
fore exclude: the deferred income tax benefit from the tax rate
reductions, the charge for a mandated policyholder protection fund, 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 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 116.58 and 128.09 for the three months ended March 31, 1999 and
1998, respectively. The 9.9% strengthening of the yen in 1999 increased
operating earnings by approximately $.02 per share for the three months
ended March 31, 1999. Operating earnings per share increased 26.3% to $.48
for the three-month period ended March 31, 1999 compared with the same
period in 1998.
Our primary financial objective is the growth of operating earnings per
share before the effect of foreign currency fluctuations. In 1996, we set
this objective at an annual growth rate of 15% to 17% through the year 2000.
In 1998, we raised our 1999 objective for growth in operating earnings per
share to 20% before the effect of currency translation.
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<PAGE>
If that 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 @ 115.00 $ 2.00 28.2% $ .13
1999 @ 120.00 1.95 25.0 .08
1999 @ 125.00 1.91 22.4 .04
1999 @ 130.89* 1.87 19.9 -
1999 @ 135.00 1.84 17.9 (.03)
1999 @ 140.00 1.82 16.7 (.05)
1999 @ 145.00 1.79 14.7 (.08)
*Actual exchange rate for the year ended December 31, 1998.
If the exchange rate as of March 31, 1999, would remain constant for
the remainder of 1999, the cumulative average rate would be approximately
119.56 and the annual operating diluted earnings per share would approximate
$1.96, assuming our earnings objective is met.
PROFIT REPATRIATION
AFLAC Japan repatriated profits to AFLAC U.S. of $154 million in 1998
and $347 million in 1997. The profit transfer in 1997 included $125 million
of a non-recurring nature. Since the first repatriation in 1989, AFLAC
Japan has repatriated $1.2 billion, which has enhanced our flexibility and
profitability. We expect to repatriate approximately 19 billion yen ($160
million using the March 31, 1999 exchange rate) from AFLAC Japan to AFLAC
U.S. in July 1999.
SHARE REPURCHASE PROGRAM
During the first quarter of 1999, we purchased 150,000 shares of our
common stock. At the end of the first quarter of 1999, we had approximately
7.2 million shares still available for purchase under current repurchase
authorizations. We have purchased 57.5 million shares (through March 31,
1999) since the inception of the share repurchase program. The difference
in percentage increases in net earnings and net earnings per share primarily
reflects the impact of the share repurchase program.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings for the three months ended March 31, 1999 and 1998 were 36.4% and
37.0%, 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 our
income tax expense. The decline in the effective tax rate in 1999 resulted
primarily from the 1998 Japanese tax rate reduction.
Income tax expense for the first quarter of 1999 also 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 first quarter was 35.4%, the same as the rate for
the full year 1998.
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<PAGE>
The 1999 reduction in the statutory tax rate in Japan, which is
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
provisions. We expect our effective income tax rate 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.
21
<PAGE>
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31,
(In millions) 1999 1998
---------------------------
Premium income......................... $ 1,398 $ 1,181
Investment income...................... 262 226
Other income........................... - 1
-------- --------
Total revenues....................... 1,660 1,408
-------- --------
Benefits and claims.................... 1,196 1,029
Operating expenses..................... 306 254
-------- --------
Total benefits and expenses.......... 1,502 1,283
-------- --------
Pretax operating earnings.......... $ 158 $ 125
======== ========
- ----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income....................... 18.4% .4%
Investment income.................... 15.8 5.1
Total revenues....................... 17.9 1.1
Pretax operating earnings............ 26.2 (1.5)
- ----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income....................... 7.8% 6.0%
Investment income.................... 5.5 10.9
Total revenues....................... 7.3 6.8
Pretax operating earnings............ 15.0 3.9
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims.................. 72.0% 73.1%
Operating expenses................... 18.5 18.0
Pretax operating earnings............ 9.5 8.9
============================================================================
AFLAC JAPAN SALES
The increase in premium income in yen was due to sales of new policies
and excellent policy persistency.
AFLAC Japan's new annualized premium sales were up sharply in the
quarter, rising 22.3% to 18.8 billion yen, or $161 million. These strong
sales resulted from the popularity of our latest product offering, Rider
MAX, which has broadened the appeal of our founding product, cancer life
22
<PAGE>
insurance. During the quarter, we sold nearly 282,000 of these riders and
about 50% of our cancer life sales were with Rider MAX. Rider MAX accounted
for approximately 40% of sales during the first quarter.
New sales also benefited from the timing of sales campaigns in advance
of a scheduled mid-year premium rate increase on new policy issues. All
life insurance companies are raising premium rates in 1999 to compensate for
the low level of investment yields. We anticipate that many of our
insurance agencies will aggressively market our policies before the new
rates become effective. Therefore, sales increases will likely be greater
in the first half of the year than in the second half of the year when the
new premium rates take effect. However, our new pricing assumptions will
have virtually no impact on the cost of Rider MAX and term life plans, and
the premium increases to other lines of business will be less than in
previous years. As a result, we believe that the rate increase in July of
this year should be less disruptive to our future sales results than
previous rate increases.
We continue to make strides toward increasing the breadth of our
distribution system. We are adding more individual agencies to complement
our large network of corporate agencies. The individual agencies will give
us better access to Japan's substantial market of small businesses and
individual customers. During the first quarter, we recruited about 360 new
agencies. Our objective is to recruit 3,000 new agencies for the full year
and we expect our recruiting to increase in the second quarter.
Although Japan's economy remains weak, we continue to believe it is one
of the best insurance markets in the world and one of great opportunities
for growth. We have set an objective for AFLAC Japan's sales to increase
approximately 10% to 15% for the year 1999 compared with 1998.
AFLAC JAPAN INVESTMENTS
Over the last several years, Japan's weak economy has produced an
extremely challenging investment environment. Investment yields available
to us in the first quarter improved over the fourth quarter of last year.
However, they still remain at historically depressed levels. For instance,
the yield on a composite index of 20-year Japanese government bonds averaged
2.52% during the first quarter, compared with 4.10% in the first quarter of
1995. By purchasing reverse dual-currency bonds (bonds with yen principal
and a dollar coupon), we were able to invest in yen-denominated securities
at an average yield of 4.36% during the quarter. Including dollar-
denominated investments, our blended new money yield was 4.49% for the
quarter. As of April 16, we had invested or committed to invest
approximately 60% of our expected 1999 cash flow at an average yield of
4.69%. Not only do these yields compare very favorably with the yield of
Japanese government bonds, they also provide a significant spread over our
reserving assumptions for new business.
At the end of the first quarter, the yield on AFLAC Japan's debt
securities portfolio was 5.22%, compared with 5.24% at the end of 1998. The
return on average invested assets, net of investment expenses, was 5.01% for
the quarter, compared with 5.30% a year ago.
Investment income in yen increased 5.5% in 1999 compared with 10.9% in
1998. This is due to the effect of translating dollar-denominated
investment income into yen. The yen/dollar exchange rate was 128.09 yen to
23
<PAGE>
one U.S. dollar for the first three months of 1998 compared with 116.58 for
the first three months of 1999.
AFLAC JAPAN OTHER
The operating expense ratio has increased slightly due to investments
in additional marketing programs including advertising and direct response
efforts. The benefits ratio has declined 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 15.0% for the
three months ended March 31, 1999. This increase was largely due to the
lower loss ratio during the quarter.
24
<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-MONTH PERIOD ENDED MARCH 31,
(In millions) 1999 1998
--------------------------
Premium income......................... $ 330 $ 289
Investment income...................... 58 51
Other income........................... - 3
----- -----
Total revenues....................... 388 343
----- -----
Benefits and claims.................... 205 183
Operating expenses..................... 120 104
----- -----
Total benefits and expenses.......... 325 287
----- -----
Pretax operating earnings.......... $ 63 $ 56
===== =====
- ----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income....................... 13.9% 12.7%
Investment income.................... 12.8 44.1
Total revenues....................... 13.3 17.1
Pretax operating earnings............ 11.4 50.3
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims.................. 52.8% 53.4%
Operating expenses................... 31.1 30.2
Pretax operating earnings............ 16.1 16.4
============================================================================
AFLAC U.S. SALES
New annualized premium sales in the United States continued to grow at
a rapid pace. New sales topped $100 million for the seventh consecutive
quarter, rising 15.8% to $125 million. Accident/disability insurance was
once again our best selling product. However, sales of our founding
product, cancer expense insurance, were extremely robust. Cancer expense
sales rose 28.5% for the quarter.
In addition to strong sales growth, we continue to see increased use of
our electronic sales system, SmartApp. In the first quarter, we processed
more than 60% of our new business electronically. With savings from
innovative work processes like SmartApp, we have increased our commitment to
our national television advertising. We believe that growing name
recognition through advertising is one of the factors that has contributed
to our strong sales growth and expanding distribution system. We have set
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<PAGE>
an objective for AFLAC U.S. sales to increase by 12% to 15% for the year
1999.
AFLAC U.S. INVESTMENTS
Investment income increased 12.8% in the first three months of 1999
compared with 44.1% 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 which
included $125 million of a non-recurring nature. During the first quarter
of 1999, available cash flow was invested at an average yield-to-maturity of
8.08% compared with 7.47% during the first quarter of 1998. The overall
return on average invested assets, net of investment expenses, was 7.52% for
the first three months of 1999 compared with 7.37% for the first quarter 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 tended to decline slightly. 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 March 31, 1999, was
120.55 yen to one U.S. dollar, 4.0% weaker than the exchange rate of 115.70
as of December 31, 1998. Management estimates that the weaker yen rate
decreased reported investments and cash by $932 million, total assets by
26
<PAGE>
$1.1 billion, and total liabilities by $1.0 billion compared with the
amounts that would have been reported for 1999 if the exchange rate had
remained unchanged from year-end 1998.
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 $1.7 billion on investment securities at March 31, 1999, consisted
of $2.5 billion in gross unrealized gains and $818 million in gross
unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen fixed-
maturity 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:
March 31, December 31,
1999 1998
----------- ------------
AAA 36.3% 38.1%
AA 18.3 17.6
A 30.8 31.2
BBB 12.8 13.1
BB 1.8 -
----- -----
100.0% 100.0%
===== =====
As of December 31, 1998, we held no debt securities rated below `BBB.'
However, in January 1999, the credit ratings of several major Japanese
financial institutions were downgraded. We owned debt securities issued by
a major Japanese bank in the amount of $436 million, or 1.8% of total debt
securities at March 31, 1999. Following the downgrade, these securities
were rated `Ba1' by Moody's and `BB+' by Standard & Poor's.
Private placement investments accounted for 46.5% and 43.9% of our
total debt securities as of March 31, 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
27
<PAGE>
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.
The following table shows an analysis of investment securities (at cost
or amortized cost):
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
March 31, December 31, March 31, December 31,
(In millions) 1999 1998 1999 1998
---------------------- ----------------------
Available for sale:
Fixed-maturity securities $12,950 $12,886 $ 2,829 $ 2,772
Perpetual debentures 1,710 1,344 116 111
Equity securities 28 22 74 79
------ ------ ------ ------
Total available for sale 14,688 14,252 3,019 2,962
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 3,803 3,947 - -
Perpetual debentures 3,344 3,494 - -
------ ------ ------ ------
Total held to maturity 7,147 7,441 - -
------ ------ ------ ------
Total $21,835 $21,693 $ 3,019 $ 2,962
====== ====== ====== ======
POLICY LIABILITIES
Policy liabilities decreased $58 million, or .2%, during the first
three months of 1999. AFLAC Japan decreased $126 million, or .6% (3.6%
increase in yen), and AFLAC U.S. increased $68 million, or 3.2%. Changes in
policy liabilities were primarily due to the addition of new business, the
aging of policies in force, the weaker yen and the effect of the market
value adjustment for securities available for sale (see Note 7 of the Notes
to the Consolidated Financial Statements). The weaker yen at March 31, 1999
compared with December 31, 1998 decreased reported policy liabilities by
$915 million.
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 $445 million. We intend to use the
proceeds primarily to purchase shares of our common stock. Any remaining
proceeds may be used to repay indebtedness or for general corporate
purposes. We intend to swap the dollar-denominated principal and interest
to be yen-denominated.
28
<PAGE>
See Note 6 of the Notes to the Consolidated Financial Statements for
information on other debt outstanding at March 31, 1999.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 18.0%
and 19.6% as of March 31, 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 $.3 million for the three months ended
March 31, 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.
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.
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
29
<PAGE>
earnings or equity contributions by AFLAC Incorporated from funds generated
through debt or equity offerings. In April 1999 we received net proceeds of
$445 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 $11 million in the first quarter of 1999 and $192 million and $386
million in the full years 1998 and 1997, respectively. Profit repatriations
have been remitted annually from AFLAC Japan to AFLAC U.S. in July. 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 March 31, 1999
under the provisions of the recodified SAP. AFLAC's capital and surplus, as
determined on the present U.S. statutory accounting basis, was $1.7 billion
at March 31, 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
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
30
<PAGE>
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 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 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 substantially all of our critical production systems
in both the United States and Japan. Verification that the critical
production systems have been correctly remediated will continue through the
third quarter of 1999 in a year 2000 test environment. The additional
testing may raise new issues that require further remediation and
implementation activities, all of which are scheduled to be completed in the
third quarter of 1999. Testing and any further remediation and
implementation activities required for non-critical systems will continue
through the end of 1999.
Currently, we are in the process of developing and refining contingency
plans for our business systems and processes. These plans will be
periodically updated throughout 1999 based on currently available
information and the perceived business risk.
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. We randomly surveyed
group accounts in the United States to determine their year 2000 readiness.
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 our more significant customers in Japan to
determine whether such customers expect their ability to pay premiums or
transmit policy and claims data in this fashion to be impacted by year 2000
issues. We will be conducting tests with our key external customers and
suppliers during the second quarter of 1999. Any adverse results from this
testing will be incorporated into our ongoing contingency planning process.
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 could have a material adverse effect on our
financial condition or results of operations. It is not currently possible
to predict the probability of any delays occurring or the extent of such
delays.
AFLAC owns publicly traded 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, our investment portfolio may also be adversely impacted.
31
<PAGE>
Since the inception of the year 2000 project, we had incurred costs of
approximately $25 million for system upgrades or modifications through March
31, 1999. Of this amount, approximately $10 million was capitalized. The
remaining cost to complete the various projects is currently estimated to be
$7 million, of which $1 million is expected to be capitalized. We may
determine that additional expenditures are necessary as testing continues.
Company personnel have spent considerable time and effort on the project,
and we intend to continue to devote additional internal resources and
personnel to work on the project. However, 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.
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
In April 1999, Standard & Poor's announced that AFLAC Incorporated will
be added to the Standard & Poor's 500 index.
On May 3, 1999, the board of directors approved an increase in the
quarterly cash dividend from $.065 to $.075 per share. The increase is
effective with the second quarter dividend, which is payable on June 1,
1999, to shareholders of record at the close of business on May 20, 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
32
<PAGE>
longer than that of the related invested assets due to the unavailability of
acceptable yen-denominated long-duration securities. When our debt
securities mature, there is a risk that the proceeds will be reinvested at a
yield below that of the interest required for the accretion of policy
liabilities.
At March 31, 1999 we had $1.6 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 $2.3 billion based on our portfolio as of March 31,
1999. The effect on yen-denominated debt securities is approximately $2.0
billion and the effect on dollar-denominated debt securities is
approximately $352 million.
We have outstanding interest rate swaps on 49.6 billion yen ($411
million) of our variable-interest-rate yen-denominated borrowings. These
swaps 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 March 31, 1999, we also had yen-denominated bank borrowings in the
amount of 17.3 billion yen ($144 million) with a variable interest rate of
.95%. 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 March 31, 1999, totaled $180 million, or .7% 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 1.03.
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
10.3%, or $19 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.
33
<PAGE>
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
(March 31, 1999)
105.55 120.55* 135.55
(In millions) Yen Yen Yen
- ----------------------------------------------------------------------------
Yen-denominated financial
instruments:
Assets:
Securities available for sale:
Fixed maturities $15,122 $13,240 $11,775
Perpetual debentures 1,838 1,609 1,431
Equity securities 37 33 29
Securities held to maturity:
Fixed maturities 4,343 3,803 3,382
Perpetual debentures 3,819 3,344 2,973
Cash and cash equivalents 235 205 183
Other financial instruments 11 9 9
------ ------ ------
Total 25,405 22,243 19,782
------ ------ ------
Liabilities - notes payable 634 555 493
------ ------ ------
Net yen-denominated financial
instruments 24,771 21,688 19,289
Other yen-denominated assets 3,474 3,042 2,705
Other yen-denominated liabilities (27,467) (24,049) (21,388)
------ ------ ------
Total yen-denominated net assets
subject to foreign currency
fluctuation $ 778 $ 681 $ 606
====== ====== ======
* Actual March 31, 1999 exchange rate
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation on page 18.
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 any other statements made by company
34
<PAGE>
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.
35
<PAGE>
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held on May 3, 1999.
Matters submitted to the shareholders were: (1) Election of 17 members to
the board of directors; (2) Adopt an amended and restated Management
Incentive Plan; (3) Ratification of the selection of auditors for 1999.
The proposals were approved by the shareholders.
Following is a summary of each vote cast for, against or withheld, as
well as the number of abstention and broker non-votes, as to each such
matter, including a separate tabulation with respect to each nominee for
office.
VOTES
---------------------------------------------------
Absten- With- Broker
For Against tions held Non-Votes
----------------------------------------------------
(1) Election of 17
members to the board
of directors:
Paul S. Amos 521,390,429 N/A N/A 1,351,642 6,604,760
Daniel P. Amos 521,729,418 N/A N/A 1,012,653 6,604,760
J. Shelby Amos, II 521,336,681 N/A N/A 1,405,390 6,604,760
Michael H. Armacost 481,838,356 N/A N/A 40,903,715 6,604,760
M. Delmar Edwards, M.D. 521,144,743 N/A N/A 1,597,328 6,604,760
Joe Frank Harris 521,008,378 N/A N/A 1,733,693 6,604,760
Elizabeth J. Hudson 521,629,248 N/A N/A 1,112,823 6,604,760
Kenneth S. Janke, Sr. 521,959,982 N/A N/A 782,089 6,604,760
Charles B. Knapp 521,699,403 N/A N/A 1,042,668 6,604,760
Hisao Kobayashi 521,945,848 N/A N/A 796,223 6,604,760
Yoshiki Otake 521,960,985 N/A N/A 781,086 6,604,760
E. Stephen Purdom 521,637,995 N/A N/A 1,104,076 6,604,760
Barbara K. Rimer 521,294,474 N/A N/A 1,447,597 6,604,760
Henry C. Schwob 521,471,257 N/A N/A 1,270,814 6,604,760
J. Kyle Spencer 521,403,448 N/A N/A 1,338,623 6,604,760
Glenn Vaughn, Jr. 521,275,212 N/A N/A 1,466,859 6,604,760
Robert L. Wright 521,280,154 N/A N/A 1,461,917 6,604,760
36
<PAGE>
VOTES
---------------------------------------------------
Absten- With- Broker
For Against tions held Non-Votes
----------------------------------------------------
(2) Adopt an Amended
and Restated Management
Incentive Plan 519,301,427 7,578,832 2,466,572 N/A None
(3) Ratification of
appointment of KPMG
LLP as independent
auditors 526,866,723 662,923 1,817,185 N/A None
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
March 31, 1999. We filed a report on Form 8-K on April 7, 1999
regarding our issuance of $450 million of senior notes.
Items other than those listed above are omitted because they are not
required or are not applicable.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFLAC INCORPORATED
Date May 12, 1999 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date May 12, 1999 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
38
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
27.0 - Financial Data Schedule (for SEC use only).
39
1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended March 31, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 19,603
<DEBT-CARRYING-VALUE> 7,147
<DEBT-MARKET-VALUE> 6,777
<EQUITIES> 180
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,948
<CASH> 269
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,040
<TOTAL-ASSETS> 31,349
<POLICY-LOSSES> 23,424
<UNEARNED-PREMIUMS> 306
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 246
<NOTES-PAYABLE> 573
0
0
<COMMON> 32
<OTHER-SE> 3,827
<TOTAL-LIABILITY-AND-EQUITY> 31,349
1,728
<INVESTMENT-INCOME> 320
<INVESTMENT-GAINS> (5)
<OTHER-INCOME> 5
<BENEFITS> 1,400
<UNDERWRITING-AMORTIZATION> 57
<UNDERWRITING-OTHER> 388
<INCOME-PRETAX> 203
<INCOME-TAX> 7<F1>
<INCOME-CONTINUING> 196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196
<EPS-PRIMARY> .74
<EPS-DILUTED> .71
<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 income tax rate reduction.
</FN>
</TABLE>
