<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, 2000
Commission File No. 1-7434
AFLAC INCORPORATED
------------------------------------------------------
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 1, 2000
---------------------------- ------------------
Common Stock, $.10 Par Value 265,232,935 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999. . . . . . . . 1
Consolidated Statements of Earnings -
Three Months Ended September 30, 2000 and 1999
Nine Months Ended September 30, 2000 and 1999. . . . . . 3
Consolidated Statements of Shareholders' Equity -
Nine Months Ended September 30, 2000 and 1999. . . . . . 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999. . . . . . 6
Consolidated Statements of Comprehensive Income -
Three Months Ended September 30, 2000 and 1999
Nine Months Ended September 30, 2000 and 1999. . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . 9
Review by Independent Certified Public Accountants . . . . 15
Independent Auditors' Report . . . . . . . . . . . . . . . 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . . . . . . . . 30
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 33
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 33
Items other than those listed above are omitted because they are not
required or are not applicable.
i
<PAGE>
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
September 30, December 31,
2000 1999
(Unaudited)
------------ ------------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$20,589 in 2000 and $18,896 in 1999) $ 22,094 $ 20,859
Perpetual debentures (amortized cost,
$2,473 in 2000 and $2,564 in 1999) 2,062 2,024
Equity securities (cost, $161 in 2000
and $137 in 1999) 237 215
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $3,895 in
2000 and $4,280 in 1999) 3,909 4,389
Perpetual debentures (fair value, $3,502
in 2000 and $3,732 in 1999) 3,668 3,903
Other investments 19 18
Cash and cash equivalents 808 616
-------- --------
Total investments and cash 32,797 32,024
Receivables, primarily premiums 313 270
Accrued investment income 341 369
Deferred policy acquisition costs 3,758 3,692
Property and equipment, at cost less
accumulated depreciation 491 509
Other 204 177
-------- --------
Total assets $ 37,904 $ 37,041
======== ========
See the accompanying Notes to Consolidated Financial Statements.
(continued)
1
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions, except for share and per-share amounts)
September 30, December 31,
2000 1999
(Unaudited)
------------ ------------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 27,442 $ 27,310
Unpaid policy claims 1,780 1,618
Unearned premiums 361 361
Other policyholders' funds 371 315
-------- --------
Total policy liabilities 29,954 29,604
Notes payable 914 1,111
Income taxes 1,660 1,511
Payables for return of cash collateral
on loaned securities 397 -
Other 875 947
-------- --------
Total liabilities 33,800 33,173
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 1,000,000 shares; issued 322,276
shares in 2000 and 320,349 shares in 1999 32 32
Additional paid-in capital 329 310
Retained earnings 3,812 3,356
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 184 232
Unrealized gains on investment securities 985 1,032
Treasury stock, at average cost (1,238) (1,094)
-------- --------
Total shareholders' equity 4,104 3,868
-------- --------
Total liabilities and shareholders' equity $ 37,904 $ 37,041
======== ========
Shareholders' equity per share $ 15.48 $ 14.56
======== ========
See the accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
(In millions, except for share and per-share amounts - Unaudited)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health insurance $ 2,081 $ 1,847 $ 6,154 $ 5,281
Net investment income 392 347 1,153 992
Realized investment gains (losses) (6) (3) (100) (12)
Other income 8 5 25 14
------- ------- ------- -------
Total revenues 2,475 2,196 7,232 6,275
------- ------- ------- -------
Benefits and expenses:
Benefits and claims 1,676 1,498 4,946 4,277
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs 76 62 222 183
Insurance commissions 266 235 780 680
Insurance expenses 183 160 565 453
Interest expense 5 5 14 13
Release of retirement liability - - (101) -
Other operating expenses 17 16 51 50
------- ------- ------- -------
Total acquisition and
operating expenses 547 478 1,531 1,379
------- ------- ------- -------
Total benefits and expenses 2,223 1,976 6,477 5,656
------- ------- ------- -------
Earnings before income taxes 252 220 755 619
------- ------- ------- -------
Income tax expense (benefit):
Operations 89 76 234 217
Deferred tax benefit from Japanese tax rate reduction - - - (67)
------- ------- ------- -------
Total income taxes 89 76 234 150
------- ------- ------- -------
Net earnings $ 163 $ 144 $ 521 $ 469
======= ======= ======= =======
(continued on next page)
3
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings (continued)
(In millions, except for share and per-share amounts - Unaudited)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings per share:
Basic $ .61 $ .54 $ 1.96 $ 1.77
Diluted .60 .52 1.91 1.70
======= ======= ======= =======
Shares used in computing earnings per share (In thousands):
Basic 265,090 265,540 265,419 265,822
Diluted 272,196 274,497 272,295 275,743
======= ======= ======= =======
Cash dividends per share $ .085 $ .075 $ .245 $ .215
======= ======= ======= =======
See the accompanying Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions, except for per-share amounts - Unaudited)
Nine Months Ended September 30,
------------------------------
2000 1999
------ ------
Common Stock:
Balance at beginning and end of period $ 32 $ 32
------ ------
Additional paid-in capital:
Balance at beginning of year 310 235
Exercise of stock options, including
income tax benefits 15 12
Gain on treasury stock reissued 4 53
------ ------
Balance at end of period 329 300
------ ------
Retained earnings:
Balance at beginning of year 3,356 2,862
Net earnings 521 469
Dividends to shareholders ($.245 per
share in 2000 and $.215 in 1999) (65) (57)
------ ------
Balance at end of period 3,812 3,274
------ ------
Accumulated other comprehensive income:
Balance at beginning of year 1,264 1,551
Change in unrealized foreign currency
translation gains (losses) during
period, net of income taxes (48) 6
Change in unrealized gains (losses) on
investment securities during period,
net of income taxes (47) (329)
------ ------
Balance at end of period 1,169 1,228
------ ------
Treasury stock:
Balance at beginning of year (1,094) (910)
Purchases of treasury stock (176) (181)
Cost of shares issued 32 29
------ ------
Balance at end of period (1,238) (1,062)
------ ------
Total shareholders' equity $ 4,104 $ 3,772
====== ======
See the accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions - Unaudited)
Nine Months Ended
September 30,
2000 1999
------ ------
Cash flows from operating activities:
Net earnings $ 521 $ 469
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 2,055 1,900
Deferred income taxes 86 (1)
Change in income taxes payable 229 (224)
Increase in deferred policy
acquisition costs (215) (215)
Change in receivables and advance premiums (24) (10)
Realized investment losses 100 12
Release of retirement liability (101) -
Other, net (38) 262
------ ------
Net cash provided by operating activities 2,613 2,193
------ ------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed-maturity securities sold 572 985
Fixed-maturity securities matured 301 177
Equity securities 30 67
Securities held to maturity:
Fixed-maturity securities matured - 18
Other investments, net (3) -
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (3,234) (2,587)
Perpetual debentures (26) (819)
Equity securities (54) (61)
Securities held to maturity:
Fixed-maturity securities - (42)
Investment in new subsidiary (9) -
Cash received as collateral on
loaned securities 397 44
Additions to property and equipment, net (14) (15)
------ ------
Net cash used by investing activities $(2,040) $(2,233)
------ ------
(continued)
6
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In millions - Unaudited)
Nine Months Ended
September 30,
2000 1999
------ ------
Cash flows from financing activities:
Proceeds from borrowings $ 15 $ 446
Principal payments under debt obligations (169) (78)
Dividends paid to shareholders (61) (53)
Purchases of treasury stock (176) (181)
Treasury stock reissued 27 30
Other, net 14 10
------ ------
Net cash provided (used)
by financing activities (350) 174
------ ------
Effect of exchange rate changes on cash
and cash equivalents (31) 26
------ ------
Net change in cash and cash equivalents 192 160
Cash and cash equivalents, beginning of year 616 374
------ ------
Cash and cash equivalents, end of period $ 808 $ 534
====== ======
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest on debt obligations $ 14 $ 9
Income taxes 97 261
Non-cash financing activities:
Capital lease obligations 15 4
Treasury shares issued for:
Dividends to shareholders 4 4
Associates stock bonus plan 5 50
See the accompanying Notes to Consolidated Financial Statements.
7
<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,
---------------------------- ----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 163 $ 144 $ 521 $ 469
------- ------- ------- -------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency translation
gains (losses) during the period 17 (104) 45 (87)
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising
during the period (306) 36 (209) (418)
Reclassification adjustment for realized (gains)
losses included in net earnings 7 3 100 13
------- ------- ------- -------
Total other comprehensive income,
before income taxes (282) (65) (64) (492)
Income tax expense (benefit) related to items of
other comprehensive income (114) (45) 31 (169)
------- ------- ------- -------
Other comprehensive income (loss), net
of income taxes (168) (20) (95) (323)
------- ------- ------- -------
Total comprehensive income (loss) $ (5) $ 124 $ 426 $ 146
======= ======= ======= =======
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 consolidated balance
sheet as of September 30, 2000, and the consolidated statements of earnings
and comprehensive income for the three and nine month periods ended
September 30, 2000 and 1999, and the consolidated statements of cash flows
and shareholders' equity for the nine months ended September 30, 2000 and
1999. 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 estimates and actuarial
determinations subject to changes in the future are: deferred policy
acquisition costs and liabilities for future policy benefits and unpaid
policy claims. As additional information becomes available (or actual
amounts are determinable), the recorded estimates will 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, 1999.
2. Accounting Pronouncements
Statement of Financial Accounting Standards (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. According to SFAS No. 133, we will be
required to recognize in net earnings the unrealized gains/losses on the
interest rate components of our cross currency swaps (see Note 5). If we
had adopted SFAS No. 133 on January 1, 2000, we would have recorded a pretax
gain of $14 million for the nine months ended September 30, 2000 related to
the change in fair value of the interest rate components of these cross
currency swaps. We are continuing our review of SFAS No. 133 in
anticipation of additional guidance and interpretation of this standard
which we will adopt effective January 1, 2001.
9
<PAGE>
3. Segment Information
Information regarding components of operations is as follows:
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
AFLAC Japan:
Earned premiums $ 1,685 $ 1,501 $ 5,008 $ 4,271
Net investment income 320 280 940 804
Other income 1 2 7 3
------- ------- ------- -------
Total AFLAC Japan revenues 2,006 1,783 5,955 5,078
------- ------- ------- -------
AFLAC U.S.:
Earned premiums 395 346 1,146 1,010
Net investment income 70 62 205 179
Other income 2 1 4 2
------- ------- ------- -------
Total AFLAC U.S. revenues 467 409 1,355 1,191
------- ------- ------- -------
Other business segments 7 5 20 16
------- ------- ------- -------
Total business segments 2,480 2,197 7,330 6,285
Realized investment
gains (losses) (6) (3) (100) (12)
Corporate 7 11 24 28
Intercompany eliminations (6) (9) (22) (26)
------- ------- ------- -------
Total revenues $ 2,475 $ 2,196 $ 7,232 $ 6,275
======= ======= ======= =======
Earnings before income taxes:
AFLAC Japan $ 195 $ 171 $ 574 $ 481
AFLAC U.S. 75 65 216 191
Other business segments - (2) (2) (2)
------- ------- ------- -------
Total business segments 270 234 788 670
Realized investment gains
(losses) (6) (3) (100) (12)
Release of retirement liability - - 101 -
Interest expense,
non-insurance operations (4) (4) (12) (10)
Corporate (8) (7) (22) (29)
------- ------- ------- -------
Total earnings before
income taxes $ 252 $ 220 $ 755 $ 619
======= ======= ======= =======
10
<PAGE>
Assets were as follows:
September 30, December 31,
(In millions) 2000 1999
------------ -----------
Assets:
AFLAC Japan $ 32,917 $ 32,274
AFLAC U.S. 4,806 4,448
Other business segments 38 34
-------- --------
Total business segments 37,761 36,756
Corporate 5,209 5,213
Intercompany eliminations (5,066) (4,928)
-------- --------
Total assets $ 37,904 $ 37,041
======== ========
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 nine months 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.
This tax rate reduction was effective April 1, 1999 for AFLAC Japan,
for purposes of calculating income tax expense on operating earnings.
5. Notes Payable
A summary of notes payable is as follows:
September 30, December 31,
(In millions) 2000 1999
------------ -----------
1.67% yen-denominated senior notes due April 2009 $ 513 $ 541
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 105 222
Variable interest rate (.55% at
September 30, 2000) 15 31
Revolving credit agreement due November 2002:
1.24% fixed interest rate 72 114
Variable interest rate (.50% at
September 30, 2000) 167 138
Short term (.50% at December 31, 1999) - 45
6.89% unsecured short-term dollar-denominated
note payable to bank (paid in October 2000) 15 -
Obligations under capitalized leases, due
monthly through 2005, secured by computer
equipment in Japan 27 20
------ ------
Total notes payable $ 914 $ 1,111
====== ======
11
<PAGE>
In September 2000, we filed a shelf registration statement with the
Japanese regulatory authorities to issue up to 100 billion yen of yen-
denominated Samurai notes. These securities are not for sale in the United
States. On October 25, 2000, we issued in Japan 30 billion yen ($278
million) of Samurai notes with a 1.55% coupon payable semiannually, due
October 25, 2005. These notes are redeemable at our option and at any time
with a redemption price equal to the principal amount of the notes being
redeemed plus a premium. We received net proceeds of 29.9 billion yen ($277
million) after issue costs. We temporarily invested the proceeds in short-
duration dollar-denominated securities and they will be used to purchase
shares of our common stock.
In April 1999, we issued $450 million of senior notes with a 6.50%
coupon, payable semiannually, due April 15, 2009. The notes are redeemable
at our option at any time with a redemption price equal to the principal
amount of the notes being redeemed plus a make-whole amount. We have
entered into cross currency swaps that have the effect of converting the
dollar-denominated principal and interest into yen-denominated obligations.
At September 30, 2000, the outstanding principal was 55.6 billion yen ($515
million using the September 30, 2000 exchange rate), less loan discount of
$2 million, for a net payable of $513 million at an interest rate of 1.67%.
We have a reducing, revolving credit agreement that provides for bank
borrowings through July 2001 in either U.S. dollars or Japanese yen. Under
the terms of the agreement, the borrowing limit reduced to $125 million on
July 17, 2000. At September 30, 2000, 11.3 billion yen ($105 million) was
outstanding at a fixed interest rate and 1.6 billion yen ($15 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,
2000, 7.8 billion yen ($72 million) was outstanding at a fixed interest rate
and 18.0 billion yen ($167 million) was outstanding at a variable interest
rate under this agreement.
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/dollar exchange rate.
We have outstanding interest rate swaps on a portion of our variable
interest rate yen-denominated borrowings (19.1 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 on a portion of
these loans. 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
(.54% at September 30, 2000, plus loan costs of 25 or 20 basis points,
respectively) based on three-month Japanese yen LIBOR.
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.
12
<PAGE>
6. Investment Securities
Net unrealized gains and losses on investment securities, 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,
2000 1999
------------ ------------
Unrealized gains on securities
available for sale $ 1,170 $ 1,501
Unamortized unrealized gains on
securities transferred to held
to maturity 1,092 1,258
Less:
Policy liabilities 452 840
Deferred income taxes 825 887
--------- ---------
Shareholders' equity, net
unrealized gains on
investment securities $ 985 $ 1,032
========= =========
The issuers of two debt securities held in our portfolio experienced
significant credit rating downgrades during the first half of 2000. During
the second quarter of 2000, we sold one security carried in available-for-
sale at a realized loss of $34 million. We recorded an impairment loss of
$57 million on the other security, which was carried in the held-to-maturity
category. We have reclassified this security to the available-for-sale
category. These losses decreased net earnings by $58 million ($.22 per
basic share and $.21 per diluted share) for the nine months ended September
30, 2000.
7. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At September 30, 2000, and December
31, 1999, we had security loans outstanding in the amounts of $386 million
and $2.4 billion at fair value, respectively. We receive cash or other
securities as collateral for such loans. At September 30, 2000, we held
cash collateral of $397 million for loaned securities in the amount of $386
million. Also at December 31, 1999, we held Japanese government bonds as
collateral for loaned securities in the amount of $2.4 billion at fair
value. 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.
13
<PAGE>
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.
8. Common Stock
The following is a reconciliation of the number of shares of our common
stock for the nine months ended September 30:
2000 1999
(In thousands of shares) ---------- ----------
Common stock - issued:
Balance at beginning of year 320,349 317,971
Exercise of stock options 1,927 1,789
-------- --------
Balance at end of period 322,276 319,760
-------- --------
Treasury stock:
Balance at beginning of year 54,608 52,287
Purchases of treasury stock:
Open market 3,892 3,394
Other 134 183
Shares issued to sales associates
stock bonus plan and AFL Stock Plan (468) (609)
Exercise of stock options (1,048) (1,006)
-------- --------
Balance at end of period 57,118 54,249
-------- --------
Shares outstanding at end of period 265,158 265,511
======== ========
9. 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.
10. Release of Retirement Liability
The surviving spouse of the Company's former chairman of the board,
John B. Amos, had been receiving lifetime spousal retirement benefits under
a shareholder approved employment contract. The benefits were payable at
.5% of the Company's pretax earnings, for the previous year, as defined in
the agreement.
In May 2000, the former chairman's spouse unexpectedly passed away.
The Company had accrued an unfunded liability for projected retirement
payments based on a normal life expectancy. The release of the remaining
accrued liability increased net earnings by $99 million ($.37 per basic
share, $.36 per diluted share) for the nine months ended September 30, 2000.
14
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REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 2000, and 1999, 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' REVIEW 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, 2000, and the related consolidated
statements of earnings and comprehensive income for the three-month and
nine-month periods ended September 30, 2000, and 1999, and the consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the
United States of America, 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 accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the accompanying consolidated
balance sheet of AFLAC Incorporated and subsidiaries as of December 31,
1999, 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 27, 2000, we expressed an
unqualified opinion on those financial statements.
KPMG LLP
Atlanta, GA
November 9, 2000
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 business.
RESULTS OF OPERATIONS
Several significant non-operating items affected our net earnings
during 2000 and 1999.
In the second quarter of 2000, a release of an accrued unfunded
liability for projected retirement payments increased net earnings by $99
million ($.37 per basic share, $.36 per diluted share) for the nine months
ended September 30, 2000. (See Note 10 of the Notes to the Consolidated
Financial Statements.)
Also during the second quarter of 2000, we recorded investment losses
on two debt securities associated with significant credit downgrades, which
decreased net earnings by $58 million ($.22 per basic share, $.21 per
diluted share) for the nine months ended September 30, 2000. (See Note 6 of
the Notes to the Consolidated Financial Statements.)
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) for the nine months ended September
30, 1999.
17
<PAGE>
<TABLE>
The following table sets forth the results of operations by business segment for the periods shown.
<CAPTION>
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -----------------------------------------
Percentage Change 2000 1999 Percentage Change 2000 1999
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 13.9% $ 195 $ 171 19.4% $ 574 $ 481
AFLAC U.S. . . . . . . . . . . . . 15.4 75 65 13.1 216 191
All other business segments. . . . - (2) (2) (2)
----- ----- ----- -----
Total business segments. . . . . 15.2 270 234 17.6 788 670
Interest expense,
non-insurance operations . . . . 1.0 (4) (4) (13.7) (12) (10)
Corporate and eliminations . . . . 6.8 (7) (7) 20.9 (22) (28)
----- ----- ----- -----
Pretax operating earnings. . . . 16.2 259 223 19.4 754 632
Income taxes . . . . . . . . . . . 12.6 90 80 17.2 265 227
----- ----- ----- -----
Operating earnings . . . . . . . 18.2 169 143 20.6 489 405
Non-operating items:
Realized investment gains
(losses), net of tax . . . . . . (6) 1 (67) (3)
Release of retirement liability,
net of tax . . . . . . . . . . . - - 99 -
Deferred tax benefit from Japanese
tax rate reduction . . . . . . . - - - 67
----- ----- ----- -----
Net earnings . . . . . . . . . . 13.5% $ 163 $ 144 11.0% $ 521 $ 469
===== ===== ===== =====
Operating earnings per basic share . 18.5% $ .64 $ .54 21.1% $ 1.84 $ 1.52
Operating earnings per diluted share 19.2 .62 .52 21.8 1.79 1.47
===== ===== ===== =====
Net earnings per basic share . . . . 13.0% $ .61 $ .54 10.7% $ 1.96 $ 1.77
Net earnings per diluted share . . . 15.4 .60 .52 12.4 1.91 1.70
===== ===== ===== =====
===========================================================================================================================
18
</TABLE>
<PAGE>
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the gain from the
release of the retirement accrual in 2000, and the deferred income tax
benefit from the Japanese tax rate reduction in 1999. Operating earnings
per share amounts referenced 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 Supplemental Consolidated Data
(For the periods ended September 30, 2000)
Three Months Nine Months
Operating Results Operating Results
--------------------- ---------------------
Including Excluding Including Excluding
Currency Currency Currency Currency
Changes Changes* Changes Changes*
--------- --------- --------- ---------
Premium income 12.7% 7.7% 16.5% 8.5%
Net investment income 12.9 9.2 16.2 10.4
Operating revenues 12.9 8.1 16.6 8.9
Total benefits and expenses 12.5 7.5 16.3 8.2
Operating earnings 18.2 15.8 20.6 16.4
Operating earnings per
diluted share 19.2 17.3 21.8 17.7
----------------------------------------------------------------------------
*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 107.65 and 113.68 for the three months ended September 30, 2000
and 1999, and 107.16 and 117.09 for the nine months ended September 30, 2000
and 1999, respectively. The strengthening of the yen in 2000 increased
operating earnings by approximately $.01 per share for the three months
ended September 30, 2000, and $.06 per share for the nine months ended
September 30, 2000. Operating earnings per share increased 19.2% to $.62
for the three-month period ended September 30, 2000, compared with the same
period in 1999 and increased 21.8% to $1.79 for the nine-month period ended
September 30, 2000, compared with the same period in 1999. Operating
earnings per share, excluding the effect of foreign currency translation,
increased 17.3% for the quarter and 17.7% for the nine months ended
September 30, 2000.
19
<PAGE>
Our primary financial objective is the growth of operating earnings per
share excluding the effect of foreign currency fluctuations. Our objective
for 2000 through 2002 is to increase operating earnings per share growth by
15% to 17%, excluding the impact of currency translation.
If we achieve a 17% increase, the following table shows the likely
results for operating earnings per share for the year 2000 when the
estimated impact from various foreign currency translations are included.
2000 Operating EPS Scenarios
----------------------------
Annual
Average Yen Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1999 on EPS
------------- ---------------- --------- ----------
100.00 $ 2.48 24.0% $ .14
105.00 2.42 21.0 .08
110.00 2.38 19.0 .04
113.96* 2.34 17.0 -
115.00 2.33 16.5 (.01)
120.00 2.29 14.5 (.05)
125.00 2.25 12.5 (.09)
*Actual exchange rate for the year ended December 31, 1999.
We believe we will achieve the high end of our earnings objective for
the fourth quarter. If we reach that target and the yen averages 107 to 110
to the dollar for the fourth quarter, we would expect operating earnings for
the full year to be approximately $2.40 per share.
SHARE REPURCHASE PROGRAM
During the third quarter, we acquired approximately 787,000 shares of
our stock, bringing the total number of shares purchased in the first nine
months to 3.9 million. At the end of September 2000, we had available
approximately 9.2 million shares authorized by the board of directors for
repurchase.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings for the nine months ended September 30, 2000 and 1999 were 35.2%
and 35.9%, respectively. Income tax expense for 1999 included approximately
$2 million of additional taxes from an income tax audit in Japan. Excluding
that amount, the effective income tax rate on operating earnings for 1999
was 35.4%.
The 1999 reduction in the statutory tax rate in Japan did not
significantly change our combined U.S./Japan effective tax rate as it
shifted a portion of our income tax expense from Japan operations to U.S.
operations as a result of the U.S. foreign tax credit provisions.
20
<PAGE>
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 ranked second in
terms of individual policies in force and 14th in terms of assets according
to Financial Services Agency (FSA) data as of March 31, 2000.
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) 2000 1999 2000 1999
------------------ ------------------
Premium income. . . . . . . . . $ 1,685 $ 1,501 $ 5,008 $ 4,271
Investment income . . . . . . . 320 280 940 804
Other income. . . . . . . . . . 1 2 7 3
------ ------ ------ ------
Total revenues. . . . . . . . 2,006 1,783 5,955 5,078
------ ------ ------ ------
Benefits and claims . . . . . . 1,428 1,280 4,226 3,648
Operating expenses. . . . . . . 383 332 1,155 949
------ ------ ------ ------
Total benefits and expenses . 1,811 1,612 5,381 4,597
------ ------ ------ ------
Pretax operating earnings . $ 195 $ 171 $ 574 $ 481
====== ====== ====== ======
----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income. . . . . . . . 12.3% 34.6% 17.3% 24.7%
Investment income . . . . . . 14.0 28.3 17.0 20.8
Total revenues. . . . . . . . 12.6 33.6 17.3 24.1
Pretax operating earnings . . 13.9 40.4 19.4 31.5
----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income. . . . . . . . 6.1% 9.4% 7.3% 8.5%
Investment income . . . . . . 8.6 3.7 7.3 4.9
Total revenues. . . . . . . . 6.5 8.5 7.4 7.9
Pretax operating earnings . . 9.0 13.1 9.6 13.9
----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . 71.2% 71.8% 71.0% 71.8%
Operating expenses. . . . . . 19.1 18.6 19.4 18.7
Pretax operating earnings . . 9.7 9.6 9.6 9.5
============================================================================
21
<PAGE>
AFLAC JAPAN SALES
AFLAC Japan's new annualized premium sales in the third quarter rose
21.5% to 24.6 billion yen, or $241 million. Sales were led by Rider MAX,
the popular rider to our cancer life coverage. Rider MAX sales were at
record levels during the third quarter and accounted for approximately 46%
of total sales. Ordinary life insurance sales also showed solid gains,
representing 9.8% of sales during the quarter. For the first nine months of
2000, new sales increased 14.1% to 72.3 billion yen, or $682 million.
In addition to strong sales, we are also seeing continued growth of our
distribution system in Japan. During the third quarter, we recruited 500
new agencies, bringing the total number of agencies representing AFLAC to
approximately 9,000 at the end of September. We believe that new agencies
will continue to be attracted to AFLAC Japan's high commissions and its
superior products, customer service and brand image.
In 2001, Japan's insurance market will further deregulate. As a
result, we expect competition to increase. We also expect increased
opportunities for AFLAC Japan.
In preparation for deregulation, AFLAC Japan and Dai-ichi Mutual Life
Insurance Company (Dai-ichi Life) agreed to a major marketing alliance that
anticipates the sale of each company's products through their respective
distribution systems. The initial focus will be the sale of AFLAC Japan's
supplemental insurance products through Dai-ichi Life's sales force of
50,000 people. These sales are expected to commence in the first half of
2001, pending approval by regulatory authorities. In addition, the
companies will use their expertise to develop new products and sales
methods. The alliance will also explore the opportunities for shared know-
how in the areas of information technology and customer service.
To further prepare for deregulation, we will continue building on our
competitive strengths. To that end, we plan on improving the products we
offer and introducing new ones. We will continue to expand our distribution
system through the addition of new agencies as well as alternative sales
channels like the Internet. And we will also invest in new technologies to
maintain our cost and service advantages and aggressively promote our brand
through advertising.
In July 2000, we began offering a new optional commission contract
which pays a higher first year commission, but limits renewal commissions to
nine years rather than the life of the contract. Other changes we have made
to our business recently, including our laptop computer sales aid, new
products and aggressive recruiting, are all part of our plan for competing
in a deregulated environment. We recognize that we will face more
competition in the future, and we continue to look for ways to improve. At
the same time, companies will find it difficult to compete with us because
of our low-cost structure.
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. Our objective is for AFLAC Japan's sales to increase
approximately 15% for the years 2000 and 2001.
22
<PAGE>
AFLAC JAPAN INVESTMENTS
Despite a modest rise in Japanese interest rates in August, investment
yields remained at very low levels during the third quarter. For example,
the yield of a composite index of 20-year Japanese government bonds averaged
2.28% during the third quarter, up from an average of 2.11% in the second
quarter. AFLAC Japan invested in sectors other than government bonds and
thereby purchased yen-denominated securities at an average yield of 3.38% in
the quarter. Including dollar-denominated investments, the blended new
money yield was 3.75% for the quarter.
At the end of the third quarter, the yield on AFLAC Japan's fixed-
maturity portfolio was 5.06%, compared with 5.21% a year ago. The return on
average invested assets, net of investment expenses, was 4.83% for the nine
months, compared with 5.02% a year ago.
AFLAC JAPAN OTHER
The operating expense ratio has increased slightly due to expenditures
for additional marketing programs, including advertising and direct response
efforts. The benefit 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.
In July 2000, we initiated an internal compliance review to determine
the extent to which inappropriate premium discounts, if any, may have been
given to customers, and to put in place any corrective measures necessary to
ensure full regulatory compliance in the future. We also informed the FSA
at the time the review was initiated. At this time the review has not been
completed and we cannot speculate about any actions the FSA might take.
However, we believe the outcome of our voluntary review and response by the
FSA will not have an adverse material impact on our operations or financial
condition.
23
<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) 2000 1999 2000 1999
------------------ ------------------
Premium income. . . . . . . . . $ 395 $ 346 $1,146 $1,010
Investment income . . . . . . . 70 62 205 179
Other income. . . . . . . . . . 2 1 4 2
----- ----- ----- -----
Total revenues. . . . . . . . 467 409 1,355 1,191
----- ----- ----- -----
Benefits and claims . . . . . . 248 218 719 630
Operating expenses. . . . . . . 144 126 420 370
----- ----- ----- -----
Total benefits and expenses . 392 344 1,139 1,000
----- ----- ----- -----
Pretax operating earnings . $ 75 $ 65 $ 216 $ 191
===== ===== ===== =====
----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income. . . . . . . . 14.2% 13.7% 13.5% 13.9%
Investment income . . . . . . 13.5 12.6 14.4 12.2
Total revenues. . . . . . . . 14.3 13.4 13.8 13.4
Pretax operating earnings . . 15.4 10.6 13.1 11.9
----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . 53.1% 53.2% 53.1% 52.9%
Operating expenses. . . . . . 30.9 30.9 31.0 31.1
Pretax operating earnings . . 16.0 15.9 15.9 16.0
============================================================================
AFLAC U.S. SALES
New annualized premium sales rose 30.4% in the third quarter to a record
$174 million. For the nine months, new sales were up 26.5% to $492 million.
Accident/disability insurance again led our sales for the quarter,
accounting for more than 54% of total sales. However, we also produced
strong results for other products including our founding product, cancer
expense insurance. AFLAC's payroll life products continued to sell well,
accounting for more than 5% of sales for the first nine months of the year.
We are also pleased with the initial reception to recently introduced
products such as dental insurance and specified event coverage. We believe
AFLAC U.S. will achieve or exceed our upwardly revised sales objective of
20% growth in new sales for the full year 2000.
AFLAC U.S. continued to rapidly expand its sales force. During the
third quarter, the number of producing sales associates on a monthly average
basis increased 24.7%, compared with the three months ended September 30,
1999, to more than 11,000 agents. We believe the expansion of our
distribution system has benefited from our current advertising campaign,
which has dramatically increased awareness of AFLAC and its products.
24
<PAGE>
Technology continues to play an important role at AFLAC U.S. In
addition to the continued success of our electronic sales system, SmartApp,
we are also pursuing additional technological initiatives. We have claims
forms available for download from our Web site for each product we offer in
every state. The combination of downloadable claims forms and facsimile
claims submission greatly enhances service to our customers and efficiency
of our administration. Savings from new electronic work processes have
allowed us to invest heavily in national advertising, which has benefited
our name recognition, recruiting and sales results.
AFLAC U.S. INVESTMENTS
During the first nine months of 2000, available cash flow was invested
at an average yield-to-maturity of 8.31% compared with 7.88% during the
first nine months of 1999. The overall return on average invested assets,
net of investment expenses, was 7.60% for the first nine months of 2000
compared with 7.50% for the first nine months of 1999.
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 to be
approximately 16% for the full year 2000.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in 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
instruments. According to SFAS No. 133, we will be required to recognize in
net earnings the unrealized gains/losses on the interest rate components of
our cross currency swaps (see Note 5). However, we will exclude gains and
losses on derivative instruments, as well as realized investment gains and
losses from operating earnings. If we had adopted SFAS No. 133 on January
1, 2000, we would have recorded a pretax gain of $14 million for the nine
months ended September 30, 2000 related to the change in fair value of the
interest rate components of these cross currency swaps. We are continuing
our review of SFAS No. 133 in anticipation of additional guidance and
interpretation of this standard which we will adopt effective January 1,
2001.
25
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1999, 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 substantial amounts 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, 2000,
was 108.00 yen to one U.S. dollar, 5.2% weaker than the exchange rate of
102.40 as of December 31, 1999. Management estimates that the weaker yen
rate decreased reported investments and cash by $1.5 billion, total assets
by $1.7 billion, and total liabilities by $1.7 billion compared with the
amounts that would have been reported for 2000 if the exchange rate had
remained unchanged from year-end 1999.
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 $991 million on investment securities at September 30, 2000,
consisted of $2.5 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 require that all securities have an initial rating
of Class 1 or 2 as determined by the Securities Valuation Office of the
National Association of Insurance Commissioners (NAIC). 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,
2000 1999
------------ ------------
AAA 25.6% 28.0%
AA 22.8 24.6
A 36.0 33.5
BBB 15.2 12.1
BB .4 1.8
----- -----
100.0% 100.0%
===== =====
The issuers of two debt securities experienced significant credit
rating downgrades during the first half of 2000. During the second quarter
of 2000, we sold one security carried in available-for-sale at a realized
loss of $34 million. We recorded an impairment loss of $57 million on the
other security, which was carried in the held-to-maturity category. We have
reclassified this security to the available-for-sale category. These losses
decreased net earnings by $58 million ($.22 per basic share and $.21 per
diluted share) for the nine months ended September 30, 2000.
26
<PAGE>
Private placement investments accounted for 51.1% and 49.0% of our
total debt securities at amortized cost as of September 30, 2000 and
December 31, 1999, respectively. AFLAC Japan has made investments in the
private placement market to secure higher yields than those available from
Japanese government bonds. Most of AFLAC's private placements 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.
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) 2000 1999 2000 1999
------------------------- -------------------------
Available for sale:
Fixed-maturity
securities $17,184 $15,491 $ 3,405* $ 3,405*
Perpetual debentures 2,299 2,411 174 153
Equity securities 60 45 101 92
------ ------ ------ ------
Total available
for sale 19,543 17,947 3,680 3,650
------ ------ ------ ------
Held to maturity:
Fixed-maturity
securities 3,909 4,389 - -
Perpetual debentures 3,668 3,903 - -
------ ------ ------ ------
Total held to
maturity 7,577 8,292 - -
------ ------ ------ ------
Total $27,120 $26,239 $ 3,680 $ 3,650
====== ====== ====== ======
*Includes securities held by the parent company of $69 at September 30,
2000, and $240 at December 31, 1999
POLICY LIABILITIES
Policy liabilities increased $350 million, or 1.2%, during the first
nine months of 2000. AFLAC Japan increased $166 million, or .6% (6.1%
increase in yen), and AFLAC U.S. increased $184 million, or 8.0%. 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 6 of the Notes
to the Consolidated Financial Statements). The weaker yen at September 30,
2000, compared with December 31, 1999, decreased reported policy liabilities
by $1.5 billion.
27
<PAGE>
DEBT
In September 2000, we filed a shelf registration statement with the
Japanese regulatory authorities to issue up to 100 billion yen of yen-
denominated Samurai notes. These securities are not for sale in the United
States. On October 25, 2000, we issued in Japan 30 billion yen ($278
million) of Samurai notes with a 1.55% coupon payable semiannually, due
October 25, 2005. These notes are redeemable at our option and at any time
with a redemption price equal to the principal amount of the notes being
redeemed plus a premium. We received net proceeds of 29.9 billion yen ($277
million) after issue costs. We temporarily invested the proceeds in short-
duration dollar-denominated securities and they will be used to purchase
shares of our common stock.
In April 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-duration
securities and are being used primarily to purchase shares of our common
stock. The net proceeds may also be used to repay indebtedness or for
general corporate purposes. We entered into cross-currency swaps that had
the effect of converting the dollar-denominated principal and interest into
yen-denominated obligations. At September 30, 2000, the outstanding
principal was 55.6 billion yen ($515 million) at an interest rate of 1.67%
after the effect of the cross-currency swaps.
See Note 5 of the Notes to the Consolidated Financial Statements for
information on other debt outstanding at September 30, 2000.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 22.7%
and 28.1% as of September 30, 2000 and December 31, 1999, respectively. If
we include the Samurai debt issued in October 2000, the ratio would have
been 27.6% at September 30, 2000.
SECURITY LENDING
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. For further information regarding such
arrangements, see Note 7 of the Notes to the Consolidated Financial
Statements.
POLICYHOLDER GUARANTY FUNDS
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business in those states can be assessed for policyholder
losses up to prescribed limits that are incurred by insolvent companies with
similar lines of business. Such assessments have not been material to 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.
28
<PAGE>
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 under this program. A
separate, mandatory policyholder protection system was enacted by the
Japanese government during 1998. The life insurance industry is making
contributions to these funds over a 10-year period. Our obligation to the
mandated policyholder protection system was increased in 1999 due to the
insolvency of Toho Mutual Life Insurance Company. We have recorded a
liability for our share of these obligations. For further information
regarding policyholder protection funds, see Note 2 of the Notes to the
Consolidated Financial Statements in our annual report to shareholders for
the year ended December 31, 1999.
In October 2000, two Japanese life insurance companies, Chiyoda Mutual
Life Insurance Company and Kyoei Life Insurance Company, filed an
application with the court for protection under a special reorganization law
for financial institutions. At this time, we do not expect additional
assessments from the policyholder protection fund.
SHAREHOLDERS' EQUITY
Our insurance operations continue to provide the primary sources of
liquidity. Capital needs are also 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 our policies provide indemnity benefits
rather than reimbursement for actual medical costs and thus 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
earnings or equity contributions by AFLAC Incorporated from funds generated
through debt or equity offerings. In October 2000, we received $277 million
from the issuance of Samurai notes in Japan. 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. The Georgia Insurance Statutes require prior approval for
dividend distributions that exceed the greater of statutory earnings for the
previous year or 10% of statutory capital and surplus as of the previous
year-end. In addition, the Georgia Insurance Department must approve
service arrangements and other transactions within the affiliated group.
These regulatory limitations are not expected to affect the level of
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management fees or dividends paid by AFLAC to AFLAC Incorporated. A life
insurance company's statutory capital and surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners
(NAIC), as modified by the insurance department in the insurance company's
state of domicile. Statutory accounting rules are different from generally
accepted accounting principles and are intended to emphasize policyholder
protection and company solvency.
Currently, prescribed or permitted statutory accounting principles
(SAP) used by insurers for financial reporting to state insurance regulators
may vary among states and among companies. The NAIC has recodified SAP to
promote standardization throughout the industry. The NAIC has scheduled
these new accounting principles to become effective January 1, 2001. They
must also be adopted by the individual state insurance departments.
In addition to restrictions by U.S. insurance regulators, the Japanese
Financial Services 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
$189 million in the first nine months of 2000 and $272 million for the same
period in 1999. AFLAC Japan repatriated profits in the amount of 17 billion
yen ($157 million) to AFLAC U.S. in July 2000. The FSA may not allow
transfers of funds if the payment would cause AFLAC Japan to lack sufficient
financial strength for the protection of policyholders. The FSA maintains
its own solvency standards, a version of risk-based capital requirements.
AFLAC Japan's solvency margin significantly exceeds regulatory minimums.
For additional information on regulatory restrictions on dividends, profit
transfers and other remittances, see Note 9 of the Notes to the Consolidated
Financial Statements in our annual report to shareholders for the year ended
December 31, 1999.
OTHER
The board of directors approved a quarterly cash dividend of $.085 per
share. The dividend is payable on December 1, 2000, to shareholders of
record at the close of business on November 16, 2000.
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, which provides a measure of price
percentage volatility, to estimate the amount of sensitivity to interest
rate changes in our debt securities.
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
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longer than that of the related invested assets due to the unavailability of
acceptable long-duration yen-denominated 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.
At September 30, 2000, we had $915 million 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 $2.8 billion based on our portfolio as of September
30, 2000. The effect on yen-denominated debt securities is approximately
$2.4 billion and the effect on dollar-denominated debt securities is
approximately $396 million.
We have outstanding interest rate swaps on 19.1 billion yen ($177
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.
At September 30, 2000, we also had yen-denominated bank borrowings in
the amount of 19.6 billion yen ($182 million) with a variable interest rate
of .50%. The effect on net earnings in 2000 due to changes in market
interest rates was immaterial. For further information on our notes
payable, see Note 5 of the Notes to the Consolidated Financial Statements.
EQUITY PRICE RISK
Equity securities at September 30, 2000, totaled $237 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 .99. 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 9.9%, or $23 million.
CURRENCY RISK
Most of AFLAC Japan's investments and cash are denominated in yen.
When 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.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, AFLAC Incorporated has yen-denominated bank borrowings and notes
payable 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 cross currency swaps on its $450 million senior
notes. We have entered into cross currency swaps to convert the dollar-
denominated principal and interest into yen-denominated obligations. These
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swaps have been designated as a hedge of our investment in AFLAC Japan. The
unrealized foreign currency translation gains and losses related to these
swaps are reported in accumulated other comprehensive income. For
information regarding future changes, see Financial Accounting Standards
Board Statements on page 25.
We attempt to match yen-denominated assets to 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, 2000)
93.00 108.00* 123.00
(In millions) Yen Yen Yen
----------------------------------------------------------------------------
Yen-denominated financial instruments:
Assets:
Securities available for sale:
Fixed maturities $ 19,961 $ 17,188 $ 15,092
Perpetual debentures 2,010 1,731 1,520
Equity securities 79 68 60
Securities held to maturity:
Fixed maturities 4,539 3,909 3,432
Perpetual debentures 4,260 3,668 3,221
Cash and cash equivalents 837 721 633
Other financial instruments 7 6 5
------- ------- -------
Total 31,693 27,291 23,963
------- ------- -------
Liabilities - notes payable 1,044 899 789
------- ------- -------
Net yen-denominated financial
instruments 30,649 26,392 23,174
Other yen-denominated assets 4,324 3,723 3,269
Other yen-denominated liabilities (34,530) (29,733) (26,108)
------- ------- -------
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation $ 443 $ 382 $ 335
======= ======= =======
*Actual September 30, 2000 exchange rate
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation beginning on
page 19.
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
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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
officials in oral discussions with the financial community 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 or accounting requirements, adequacy of reserves, credit and other
risks associated with AFLAC's investment activities, significant changes in
interest rates, and fluctuations in foreign currency exchange rates.
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:
4.0 - There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of AFLAC Incorporated and its subsidiaries on a
consolidated basis. We agree to furnish a copy of any
long-term debt instruments to the Securities and Exchange
Commission upon request.
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges
27.0 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
We filed a Form 8-K on September 19, 2000 regarding our issuance of
Samurai notes in Japan.
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 9, 2000 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date November 9, 2000 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges
27.0 - Financial Data Schedule (for SEC use only).
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