<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file no. 1-7434
AFLAC INCORPORATED
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1167100
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
1932 Wynnton Road, Columbus, Georgia 31999
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 706-323-3431
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------------------ -------------------------
Common Stock, $.10 Par Value New York Stock Exchange
Pacific Exchange
Tokyo Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
--------
The number of shares of the registrant's Common Stock outstanding at March 16,
2000, with $.10 par value, was 265,087,239. The aggregate market value of the
voting stock held by non-affiliates of the registrant as of March 16, 2000 was
$11,129,693,599.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I Item 1 Exhibit 13 - pages 13-5 to 13-26 (Management's
Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)),
pages 13-38 to 13-51 (Notes 2 and 3 of the
Notes to the Consolidated Financial
Statements), and pages 13-62 to 13-64
(Note 9 of the Notes to the Consolidated
Financial Statements). The applicable
portions of the Company's Annual Report to
Shareholders for the year ended December 31,
1999, are included as Exhibit 13
Item 2 Exhibit 13 - page 13-68 (Note 12 of the Notes
to the Consolidated Financial Statements)
PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-62
(Note 9 of the Notes to the Consolidated
Financial Statements)
Item 6 Exhibit 13 - pages 13-3 and 13-4
Item 7 Exhibit 13 - pages 13-5 to 13-26
Item 7A Exhibit 13 - pages 13-7 to 13-8 and
13-15 to 13-19
Item 8 Exhibit 13 - pages 13-27 to 13-71
PART III Item 10 Incorporated by reference from the
definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 1,
2000 (the Proxy Statement)
Item 11 Incorporated by reference from the Proxy
Statement
Item 12 Incorporated by reference from the Proxy
Statement
Item 13 Incorporated by reference from the Proxy
Statement
i
<PAGE>
AFLAC Incorporated
Annual Report on Form 10-K
For the Year Ended December 31, 1999
Table of Contents
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . I- 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . I-17
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . I-17
Item 4. Submission of Matters to a Vote of Security Holders. . . I-18
Item 4A. Executive Officers of the Company. . . . . . . . . . . . I-18
PART II
Item 5. Market for Company's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . II- 1
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . II- 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . II- 1
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . II- 1
Item 8. Financial Statements and Supplementary Data. . . . . . . II- 1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . II- 1
PART III
Item 10. Directors and Executive Officers of the Company. . . . . III- 1
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . III- 1
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . III- 1
Item 13. Certain Relationships and Related Transactions . . . . . III- 1
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . IV- 1
ii
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
AFLAC Incorporated was incorporated in 1973 under the laws of the State
of Georgia. AFLAC Incorporated is a general business holding company and acts
as a management company, overseeing the operations of its subsidiaries by
providing management services and making capital available. Its primary
business is supplemental health and life insurance, which is marketed and
administered primarily through its subsidiary, American Family Life Assurance
Company of Columbus (AFLAC). Most of AFLAC's policies are individually
underwritten and marketed at worksites through independent agents with
premiums paid by the employee. Our businesses in Japan (AFLAC Japan) and the
United States (AFLAC U.S.) service the two markets for our insurance
operations.
We are authorized to conduct insurance business in all 50 states, the
District of Columbia and several U.S. territories and foreign countries. Our
only significant foreign operation is AFLAC Japan, which accounted for 81%,
80% and 79% of the company's total revenues for 1999, 1998 and 1997,
respectively, and 87% and 86% of total assets at December 31, 1999 and 1998,
respectively.
We believe AFLAC is the world's leading writer of cancer expense
insurance. We continue to diversify our product offerings to include other
types of supplemental health products in both the United States and Japan.
AFLAC Japan, in addition to cancer plans, also sells care plans, supplemental
general medical expense plans, medical/sickness riders to our cancer plan, and
a living benefit life plan. AFLAC U.S. also sells other types of supplemental
health insurance, including hospital intensive care, accident and disability,
hospital indemnity, long-term care and short-term disability plans. We also
offer several life insurance plans in the United States and Japan.
For financial information relating to our foreign and U.S. operations,
see Exhibit 13, pages 13-5 to 13-26 (Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A)) and page 13-38 (Note 2
of the Notes to the Consolidated Financial Statements), which are incorporated
herein by reference.
Several significant non-operating items affected our net earnings during
the three-year period ended December 31, 1999.
Two corporate income tax rate reductions were enacted in Japan. The
statutory tax rate for AFLAC Japan declined from 45.3% to 41.7% in 1998 and
from 41.7% to 36.2% in 1999. These tax rate declines caused reductions in our
deferred income tax liability. The deferred tax effect for the 1998 tax
reduction was recognized in the first quarter of 1998, increasing net earnings
by $121 million ($.45 per basic share and $.44 per diluted share). The
deferred tax effect for the 1999 tax reduction was recognized in the first
quarter of 1999, increasing net earnings by $67 million ($.25 per basic share
and $.24 per diluted share). For additional information on the income tax
reductions, see Exhibit 13, page 13-56, Note 7 of the Notes to the
Consolidated Financial Statements.
I-1
<PAGE>
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 new protection fund was $111
million in 1998 ($65 million after tax, or $.24 per basic and diluted shares).
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was declared
insolvent by Japanese government regulators. This insolvency is expected to
deplete most of the policyholder protection fund established in 1998. In
order to replenish the policyholder protection fund, the Japanese government
and the life insurance industry agreed to new legislation that will increase
the life insurance industry's legal obligation to the fund as well as provide
government support. Our share of the industry's obligation was recognized in
the fourth quarter of 1999 and decreased pretax earnings by $64 million ($41
million after-tax, or $.15 per basic and diluted share). For further
information regarding this policyholder protection fund, see Exhibit 13, page
13-38, Note 2 of the Notes to the Consolidated Financial Statements.
Affecting net earnings in 1997 was the sale of our television business,
which consisted of seven network-affiliated stations. The sale of one station
closed on December 31, 1996. The sale of the six remaining stations was
completed in 1997. The pretax and after-tax gains recognized during the
second quarter of 1997 on the closing of the six stations were $267 million
and $211 million, respectively. The effect of the after-tax gain on 1997
basic and diluted net earnings per share was $.77 and $.75, respectively.
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the charges for the
mandated policyholder protection fund, the deferred income tax benefits from
the Japanese income tax rate reductions and the gain from the sale of the
television business. Operating earnings per share referred to in the
following discussion are based on the diluted number of average outstanding
shares.
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 yen strengthened in relation to the dollar during 1999 after several
years of weakening. The average yen-to-dollar exchange rates were 113.96 in
1999, 130.89 in 1998 and 121.07 in 1997. The stronger yen in 1999 compared
with 1998 increased operating earnings by $.12 per share in 1999. The weaker
yen in 1998 and 1997 lowered operating earnings by $.05 per share in 1998
compared with 1997 and by $.09 in 1997 compared with 1996. Reported operating
earnings per share increased 28.2% to $2.00 in 1999, 17.3% to $1.56 in 1998
and 10.8% to $1.33 in 1997.
Our primary financial objective is to grow operating earnings per share
excluding the effect of foreign currency translations. Our goal for 1999 was
20% growth, which we exceeded. Excluding the effect of currency fluctuations,
operating earnings per share increased 20.5% in 1999 compared with 1998, 21.1%
in 1998 compared with 1997, and 18.3% in 1997 compared with 1996.
For further information regarding the impact of currency fluctuations on
our business, see Exhibit 13, pages 13-7 to 13-8 (Foreign Currency Translation
section of Management's Discussion and Analysis).
I-2
<PAGE>
Insurance premiums and investment income from insurance operations are
the major sources of revenues. Our consolidated premium income was $7.3
billion in 1999 and $5.9 billion for both 1998 and 1997. For further
information on our consolidated premiums earned by business segment, see Note
2 of the Notes to the Consolidated Financial Statements in Exhibit 13, page
13-38, incorporated herein by reference.
The following table sets forth the changes in annualized premiums in
force for AFLAC's insurance business in Japan and the United States for the
years ended December 31.
(In millions) 1999 1998 1997
-------- -------- --------
Annualized premiums in force,
at beginning of year $ 6,931 $ 5,811 $ 5,953
New issues including
policy conversions 1,320 1,061 921
Change in unprocessed
policies 21 (24) (65)
Lapses and surrenders (684) (552) (479)
Other 34 23 26
Foreign currency translation
adjustment 773 612 (545)
------- ------- -------
Annualized premiums in force,
at end of year $ 8,395 $ 6,931 $ 5,811
======= ======= =======
INVESTMENTS AND INVESTMENT RESULTS
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities to
their contractual or economic maturity dates. We have now made this our
formal policy. Accordingly, debt securities carried at a fair value of $6.4
billion were reclassified as of October 1, 1998, from the category "available
for sale" to "held to maturity." The related unrealized gain of $1.1 billion
as of October 1, 1998, on these securities is being amortized from other
comprehensive income into investment income over the remaining term of the
securities. The related premium over amortized cost in the carrying value of
the debt securities that was created when the reclassification occurred is
also being amortized as an offsetting charge to investment income.
In recent years, AFLAC Japan has purchased subordinated perpetual
debenture securities issued primarily by European and Japanese banks. These
securities are subordinated to other debt obligations of the issuer, but rank
higher than equity securities. Although these securities have no contractual
maturity, the issue-date fixed-rate interest coupons subsequently increase to
a market-interest rate plus 150 to 300 basis points and change to a variable-
interest rate basis, generally by the 10th to 25th year after issuance,
creating an economic maturity date.
I-3
<PAGE>
The following table shows an analysis of investment securities (at cost
or amortized cost) at December 31:
AFLAC Japan AFLAC U.S.
(In millions) 1999 1998 1999 1998
----------------- -----------------
Available for sale:
Fixed-maturity securities $15,491 $12,886 $ 3,405* $ 2,772
Perpetual debentures 2,411 1,344 153 111
Equity securities 45 22 92 79
------ ------ ------ ------
Total available for sale 17,947 14,252 3,650 2,962
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 4,389 3,947 - -
Perpetual debentures 3,903 3,494 - -
------ ------ ------ ------
Total held to maturity 8,292 7,441 - -
------ ------ ------ ------
Total $26,239 $21,693 $ 3,650 $ 2,962
====== ====== ====== ======
*Includes $240 of securities held by the parent company.
Net investment income was $1.4 billion in 1999 and $1.1 billion in both
1998 and 1997.
AFLAC primarily invests within the Japanese, U.S. and Euroyen debt
securities markets. When committing cash flows to new investments, we
purchase only securities that are rated investment grade by the Securities
Valuation Office of the National Association of Insurance Commissioners (SVO).
We require that all private placement issuers have an initial rating of class
1 or 2 as determined by the SVO. 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.
For information on the composition of our investment portfolio and
investment results, see Exhibit 13, pages 13-11, 13-14 and 13-15 to 13-26
(discussions relating to investments, balance sheet and cash flow) and pages
13-43 to 13-52 (Notes 3 and 4 of the Notes to the Consolidated Financial
Statements), which are incorporated herein by reference.
INVESTMENTS - JAPAN
Approximately 93.3% of the 271.8 billion yen ($2.7 billion) that AFLAC
Japan had available for investment in 1999 was invested in yen-denominated
securities at an average yield of 4.54%. We invested 90.5% in longer-dated
securities at an average rate of 4.64%. The longer-dated sector includes
purchases of dual-currency bonds (yen principal securities that pay a dollar
coupon) at an average yield of 4.74%. An additional 2.8% was invested in yen-
denominated securities of various other sectors. Dollar-denominated
securities accounted for the remaining 6.7% of the purchases in 1999 at an
average yield to maturity of 7.42%.
I-4
<PAGE>
Following is the composition of total investments and cash (at cost or
amortized cost) for AFLAC Japan as of December 31:
1999 1998
-------- --------
Debt securities:
Government and guaranteed 28.8% 31.3%
Municipalities 3.5 4.0
Public utilities 15.0 16.3
Banks/financial institutions 38.8 35.9
Other corporate 11.5 10.9
Equity securities .2 .1
Cash and cash equivalents 2.2 1.5
------ ------
100.0% 100.0%
====== ======
We use specific criteria to judge the credit quality and liquidity of our
investments, and we 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 AFLAC Japan's debt securities, at amortized cost, as of
December 31 were as follows:
1999 1998
------ ------
AAA 30.2% 41.7%
AA 24.9 16.6
A 30.5 28.0
BBB 12.4 13.7
BB 2.0 -
----- -----
100.0% 100.0%
===== =====
At December 31, 1999, we owned debt securities rated below investment
grade in the amount of $530 million at amortized cost, or 2.0% of AFLAC
Japan's debt securities. These securities were issued by two Japanese banks
that had a credit rating downgrade following our purchase of the debt
securities. Subsequent to December 31, 1999, these two banks were upgraded to
`BBB.' However, another corporate issue with an amortized cost of $210
million was downgraded to `BB.'
Japan's life insurance industry has contended with low investment yields
for the last several years. Despite a series of premium rate increases
designed to help offset the effect of lower yields, two Japanese life
insurance companies have been declared insolvent during the last three years.
As a result, more attention has been paid to the composition of the life
insurance industry's assets. Our asset allocation is much different than the
industry as a whole and, we believe, is better suited to a low interest rate
environment. Based on March 31, 1999, Japanese Financial Supervisory Agency
(FSA) data, AFLAC had the highest portfolio yield among all of Japan's major
life insurers. AFLAC earned this distinction without sacrificing the quality
of its portfolio.
Our investments in the Japanese equity and investment real estate markets
continued to be immaterial in 1999.
I-5
<PAGE>
INVESTMENTS - U.S.
Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $243 million
in 1999, compared with $154 million in 1998 and $347 million in 1997. The
profit transfer in 1997 included $125 million of a non-recurring nature.
Including profit repatriation and bond swaps, AFLAC U.S. invested $1.3 billion
in 1999. Of that amount, approximately 7.3% was invested in U.S. government
or agency securities at an average yield of 6.57%, and 89.3% was invested in
corporate fixed-maturity securities at 7.26%. The remaining 3.4% was invested
in equities.
Following is the composition of total investments and cash (at cost or
amortized cost) for AFLAC U.S. as of December 31:
1999 1998
-------- --------
Debt securities:
U.S. Government 3.7% 4.0%
Municipalities .5 -
Mortgage-backed securities 3.0 .9
Public utilities 5.0 6.2
Sovereign and Supranational 4.4 4.0
Banks/financial institutions 44.5 50.6
Other corporate 35.7 31.0
Equity securities 2.5 2.6
Cash and cash equivalents .7 .7
------ ------
100.0% 100.0%
====== ======
AFLAC U.S. debt securities, at amortized cost, as of December 31 were
rated as follows:
1999 1998
------ ------
AAA 11.3% 11.2%
AA 22.5 25.4
A 56.1 55.5
BBB 10.1 7.9
----- -----
100.0% 100.0%
===== =====
I-6
<PAGE>
INSURANCE - JAPAN
AFLAC Japan's earned premiums by product lines are included in Note 2 of
the Notes to the Consolidated Financial Statements, Exhibit 13, page 13-38.
The following table presents the changes in annualized premiums in force
for AFLAC Japan insurance for the years ended December 31:
(In millions) 1999 1998 1997
-------- -------- --------
Annualized premiums in force,
at beginning of year $ 5,538 $ 4,595 $ 4,893
New issues including
policy conversions 765 579 520
Change in unprocessed
policies 20 (25) (62)
Lapses and surrenders (281) (212) (193)
Other (12) (11) (18)
Foreign currency translation
adjustment 773 612 (545)
-------- -------- --------
Annualized premiums in force,
at end of year $ 6,803 $ 5,538 $ 4,595
======== ======== ========
We are experiencing a slight increase in lapses and surrenders due to the
poor economic conditions in Japan.
INSURANCE PLANS - JAPAN
AFLAC's insurance is designed to provide supplemental coverage for
medical and nonmedical costs that are not reimbursed under Japan's health
insurance system.
AFLAC Japan's sales mix is changing, although cancer life still accounts
for the majority of insurance in force. Cancer life sales accounted for 46.4%
of total new sales in yen in 1999, 49.4% in 1998 and 52.5% in 1997. Rider MAX
accounted for 39.8% of our sales in 1999 and 33.2% in 1998. Ordinary life
accounted for 7.8% of new sales in 1999, 3.8% in 1998 and 1.6% in 1997.
Living benefit life accounted for 2.3% of total new sales in 1999, 7.2% in
1998 and 28.3% in 1997.
The cancer life insurance plans offered for sale in Japan provide a fixed
daily indemnity benefit for hospitalization and outpatient services related to
cancer and a lump-sum benefit upon initial diagnosis of internal cancer. The
plans differ from the AFLAC U.S. cancer plans (described on page I-12) in that
the Japanese policies also provide death benefits and cash surrender values
(we estimate that approximately 27% of the premiums earned from all cancer
life plans are associated with these benefits). In 1997, AFLAC Japan
introduced a new economy cancer life policy with lower premium rates and
benefit levels. This plan was developed to mitigate the effect of premium rate
increases due to low investment yields available in Japan.
Care insurance provides periodic benefits to those who become bedridden,
demented or seriously disabled due to illness or accident. Prior to the
introduction of this care plan, we marketed a plan that primarily provided
dementia care benefits.
I-7
<PAGE>
Our medical expense policy is similar to hospital indemnity insurance
products in the United States and provides cash benefits to policyholders when
they are hospitalized. This product is widely available in the Japanese
insurance marketplace, but AFLAC's policy is very competitive. Our policy
offers a maximum hospitalization benefit of 1,000 days, which is the longest
period offered in the industry.
The living benefit life plan is a life insurance policy that provides
lump-sum benefits when policyholders experience heart attack, cancer or
stroke. We are offering this product in two forms -- as a stand-alone policy
or as a rider to the cancer life plan. The rider adds heart attack and stroke
benefits to the cancer life policy. Marketing efforts for living benefit life
primarily focus on the sale of the rider.
Rider MAX, which we began selling in 1998, adds accident and
medical/sickness benefits to our popular cancer life policy.
Due to the continued low level of available investment yields in Japan,
industry regulators have directed insurers to increase premium rates on new
policy issues from time to time in recent years. For further information, see
Exhibit 13, page 13-11 of the Management's Discussion and Analysis.
JAPANESE ECONOMY
Japan's economy has been weak for several years. The financial strength
of many Japanese financial institutions deteriorated during that time, and
some experienced bankruptcy. As we have indicated in the past, the weak
economy in Japan in recent years has resulted in a difficult marketing
environment for AFLAC Japan, continued low yields available for new
investments and decreased consumer confidence.
Many commentators believe the Japanese economy has bottomed out and is on
the way to recovery. The Japanese government has developed various economic
stimulus packages in the last few years. The time required for the Japanese
economy to recover remains uncertain.
AGENCY FORCE - JAPAN
The "corporate agency" system has been important to the growth of AFLAC
Japan. Affiliated corporate agencies are formed when companies establish
subsidiary businesses to sell AFLAC products to their employees, suppliers and
customers. These agencies help us reach the employees of almost all of
Japan's large corporations. In 1998, we purchased a small Japanese insurance
agency. Its main functions are policyholder related services and direct
marketing programs for AFLAC Japan.
Our products are also sold through independent corporate agencies and
individual agencies not affiliated with large companies. As of December 31,
1999, there were 8,283 agencies in Japan with more than 41,400 licensed
agents, compared with 7,010 agencies and 32,622 licensed agents in 1998.
Agents' activities are principally limited to insurance sales, with
policyholder service functions handled by the main office in Tokyo and 62
offices throughout Japan.
I-8
<PAGE>
COMPETITION - JAPAN
In 1974, AFLAC became the second foreign (non-Japanese) life insurance
company to gain direct access to the Japanese insurance market by obtaining a
license to do business in Japan. Through 1981, we were the only company in
Japan authorized to issue a cancer life insurance policy. Now, 18 other life
companies offer cancer insurance. However, we remain the leading provider of
cancer life insurance coverage in Japan, principally due to our lead time in
the market, unique marketing system (see Agency Force - Japan), low-cost
operations and product expertise developed in the United States. AFLAC has
been very successful in the sale of cancer life policies in Japan, with 13.4
million cancer life policies in force at December 31, 1999.
In December 1996, the governments of the United States and Japan reached
an agreement on deregulation of the Japanese insurance industry. The
agreement called for the gradual liberalization of the industry through the
year 2001 and included provisions to avoid "radical change" in the third
sector of the insurance industry, which includes our supplemental health
insurance products. AFLAC and other foreign-owned insurers, as well as many
small-to-medium-sized Japanese insurers, operate primarily in the third
sector. Beginning January 1, 2001, additional insurance companies will be
allowed to sell the type of third sector products that AFLAC Japan currently
offers. AFLAC has inherent competitive advantages through its distribution,
products, administrative efficiency and financial strength that should enable
it to grow even in a more competitive environment. We also hired an
independent firm to evaluate our progress and plans for deregulation. Their
analysis took four months to complete and affirmed that our strategies and
tactics have put us in a strong position to succeed in a more competitive
insurance market. However, the ultimate impact of deregulation is not
presently determinable.
AFLAC's strategy for future growth in Japan centers on broadening its
product line and expanding the distribution system. Although the basic plan
for growth is the same in Japan as in the United States, we have had to
formulate a strategy specifically tailored for the Japanese insurance
marketplace, which is very different from the United States market. There are
only 46 life insurance companies in Japan, compared with more than 2,000 in
the United States. In Japan, insurers have traditionally been restricted in
the types of policies they could offer. However, as Japan begins deregulating
the insurance industry, the marketplace should become more competitive, with
insurers able to offer more types of products, as they do in the United
States. When deregulation is complete, we believe we will be able to sell
more products than we are currently offering.
REGULATION AND REMITTANCE OF FUNDS - JAPAN
Payments are made from AFLAC Japan to the Parent Company for management
fees and to AFLAC U.S. for allocated expenses and remittances of earnings.
These payments totaled $282 million in 1999, $192 million in 1998 and $386
million in 1997. Management fees paid to the Parent Company are largely based
on expense allocations.
A portion of AFLAC Japan's annual earnings, as determined on a Japanese
statutory accounting basis, can be remitted each year to AFLAC U.S. after
complying with solvency margin provisions and satisfying various conditions
imposed by Japanese regulatory authorities for protecting policyholders.
Repatriated profits represent a portion of the after-tax earnings reported to
I-9
<PAGE>
the Japanese Financial Supervisory Agency (FSA) on a March 31 fiscal year
basis each year. Such regulatory basis earnings are determined using
accounting principles that differ materially from U.S. generally accepted
accounting principles. Under Japanese statutory accounting practices, policy
acquisition costs are charged off immediately, policy benefit and claim
reserving methods are different, policyholder protection fund obligations are
not accrued, deferred income tax liabilities are recognized on a different
basis, and investment securities are carried at cost less certain market value
adjustments for foreign exchange losses on dollar-denominated securities.
Additionally, accounting standards for financial instruments are in the
process of being revised in Japan. Japanese regulatory earnings and related
profit repatriations may therefore vary materially from year to year because
of these differences.
The FSA imposes solvency standards that represent a form of risk-based
capital requirements. AFLAC Japan must meet these requirements to continue
profit transfers to AFLAC U.S. At this time, AFLAC Japan is in compliance with
these standards, and we do not expect these requirements to adversely affect
the funds available for repatriation from Japan. However, we may elect to
leave a portion of the funds available for repatriation in Japan to enhance
solvency margins for competitive purposes.
During the second quarter of 1997, Nissan Mutual Life Insurance Company
was declared insolvent. All life insurers doing business in Japan had
previously agreed to contribute to a voluntary policyholder protection fund
over a 10-year period that would be used to help offset insurer insolvencies.
During the second quarter of 1997, AFLAC Japan recognized a pretax charge of
$25 million for its obligation to this policyholder protection fund. The
after-tax charge was $14 million ($.05 per basic and diluted share).
In 1998, the Japanese government enacted a mandatory policyholder
protection fund system, and subsequently established the Life Insurance
Policyholders Protection Corporation. The life insurance industry is required
to contribute to this fund semi-annually over a 10-year period. The charge
for our share of the life insurance industry's obligation under the plan
enacted in early 1998 was recognized in the first quarter of 1998 and
decreased pretax earnings by $111 million for the year ended December 31,
1998. The after-tax charge was $65 million, or $.24 per basic and diluted
share.
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was
declared insolvent by Japanese government regulators. This insolvency is
expected to deplete most of the policyholder protection fund that was
established in 1998. In order to replenish the protection fund, the Japanese
government and the life insurance industry agreed to new legislation that will
increase the life insurance industry's legal obligation to the fund as well as
provide government support. Our share of this new obligation was recognized
in the fourth quarter of 1999 and decreased pretax earnings by $64 million
($41 million after-tax, or $.15 per basic and diluted share).
In March 1998, the Japanese government reduced the corporate income tax
rate, which lowered AFLAC Japan's rate from 45.3% to 41.7%. The tax rate was
again reduced in March 1999, from 41.7% to 36.2%. These tax rate reductions
decreased our consolidated liability for deferred income taxes. The
reductions were the net effect of applying the new tax rates to the temporary
differences that exist between the Japanese tax basis and financial reporting
basis of assets and liabilities, and the limitations imposed by the U.S.
foreign tax credit provisions.
I-10
<PAGE>
The reduction of the consolidated deferred income tax liability from the
1999 tax rate reduction increased net earnings in the first quarter of 1999 by
$67 million ($.25 per basic share, $.24 per diluted share). The 1998 tax rate
reduction reduced the deferred income tax liability in the first quarter of
1998 by $121 million ($.45 per basic share, $.44 per diluted share).
The 1999 reduction in the Japanese corporate income tax rate did not
significantly change our combined U.S./Japan effective tax rate due to the
operation of the U.S. foreign tax credit provisions.
For further information on the tax rate reductions, see Exhibit 13, page
13-56, Note 7 of the Notes to the Consolidated Financial Statements.
The insurance business in Japan, which is conducted as a branch office of
AFLAC, is subject to regulation by the FSA, similar to the regulation and
supervision in the United States as described on pages I-15 and I-16 under
"Regulation - U.S." AFLAC Japan files annual reports and financial statements
for the Japanese insurance operations based on a March 31 year-end, prepared
in accordance with Japanese regulatory accounting practices prescribed or
permitted by the FSA. Also, financial and other affairs of AFLAC Japan are
subject to examination by the FSA.
Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets
determined on a Japanese regulatory accounting basis as of December 31 are as
follows:
(In millions - unaudited) 1999 1998
-------- --------
Net assets on GAAP basis $ 3,118 $ 2,726
Elimination of deferred policy
acquisition costs (2,856) (2,340)
Elimination of unrealized gains and
other adjustments to carrying value
of debt securities (2,762) (2,856)
Adjustment to policy liabilities 1,553 1,384
Adjustment to income tax liabilities 1,503 1,478
Reduction in premiums receivable (146) (128)
Policyholder protection fund 262 175
Other, net (34) (42)
-------- --------
Net assets on Japanese regulatory
accounting basis $ 638 $ 397
======== ========
For additional information regarding AFLAC Japan's operations, see
Exhibit 13, pages 13-8 to 13-12 (AFLAC Japan section of MD&A) and pages 13-38
and 13-62 (Notes 2 and 9 of Notes to the Consolidated Financial Statements),
which are incorporated herein by reference.
EMPLOYEES - JAPAN
AFLAC Japan had 2,105 employees at December 31, 1999. AFLAC Japan
considers its employee relations to be excellent.
I-11
<PAGE>
INSURANCE - U.S.
AFLAC U.S.'s earned premiums by product line are summarized in Note 2 of
the Notes to the Consolidated Financial Statements in Exhibit 13, page 13-38.
The following table sets forth the changes in annualized premiums in
force for AFLAC U.S. insurance for the years ended December 31.
(In millions) 1999 1998 1997
------ ------ ------
Annualized premiums in force at
beginning of year $ 1,393 $ 1,216 $ 1,060
New issues including policy
conversions 555 482 401
Change in unprocessed policies 1 1 (3)
Lapses (403) (340) (286)
Other 46 34 44
------ ------ ------
Annualized premiums in force at
end of year $ 1,592 $ 1,393 $ 1,216
====== ====== ======
HEALTH INSURANCE PLANS - U.S.
AFLAC's insurance is designed to provide supplemental coverage for people
who already have major medical or primary insurance coverage. Our
supplemental health insurance plans are guaranteed renewable for the lifetime
of the policyholder (to age 70 for short-term disability policies). We cannot
cancel guaranteed-renewable coverage, but we can increase premium rates on
existing and future policies by class of policy in response to claims
experience higher than originally expected (subject to federal and state loss-
ratio guidelines) on a uniform, nondiscriminatory basis. Any premium rate
increases are subject to state regulatory approval.
AFLAC's cancer plans are designed to provide insurance benefits for
medical and nonmedical costs that are generally not reimbursed by major
medical insurance. We currently offer a series of three different cancer
plans in the United States that vary by benefit amount. All three plans
provide a first occurrence benefit that pays an initial amount when internal
cancer is first diagnosed, a fixed amount for each day an insured is
hospitalized for cancer treatment, and benefits for medical, radiation,
chemotherapy, surgery and a "wellness" benefit applicable toward certain
diagnostic tests such as mammograms, pap smears, prostate exams, flexible
sigmoidoscopy, etc. These plans also contain benefits that reimburse the
insured for certain direct expenses related to cancer treatment, up to
specified policy limits. We also issue several riders, including one that
increases the amount of the first occurrence benefit on each rider anniversary
date until the covered person reaches age 65 or until internal cancer is
diagnosed. AFLAC periodically introduces new forms of coverage, revising
benefits and related premiums based upon the anticipated needs of the
policyholders and our claim experience.
We offer an accident and disability policy to protect against losses
resulting from accidents. The accident portion of the policy includes lump-
sum benefits for accidental death, dismemberment and specific injuries. Fixed
benefits for hospital confinement, emergency treatment, follow-up treatments,
I-12
<PAGE>
ambulance, transportation, family lodging, wellness, prosthesis, medical
appliances and physical therapy are also provided. Optional disability riders
are available to the primary insured and include choices of a sickness
disability rider, on-the-job disability rider and off-the-job disability
rider. These benefits are payable up to a maximum benefit period of one year
and for one disability at a time. Short-term disability policies provide
similar disability benefits offered with a variety of elimination
period/benefit period options. The longest such benefit period offered is two
years.
AFLAC also issues other supplemental health insurance, such as intensive
care, which is a low-premium policy that provides protection against the high
cost of intensive care facilities during hospital confinement, regardless of
reimbursements from other insurers. Other types of health insurance issued
include qualified and non-qualified long-term care plans, a hospital
confinement indemnity policy, and a new specified health event policy.
LIFE INSURANCE PLANS - U.S.
AFLAC issues various ordinary life insurance policies including whole
life, term life, and limited pay life. We also issue voluntary group term
life. A large portion of ordinary term life is sold through payroll deduction
at the worksite.
AGENCY FORCE AND MARKETING - U.S.
Our sales force is comprised of independent sales agents who are licensed
to sell accident and health insurance. Many are also licensed to sell life
insurance. Most agents' efforts are directed toward selling supplemental
health insurance at the worksite. The average number of U.S. agents actively
producing business monthly during 1999 was 8,807, compared with 7,918 in 1998
and 7,376 in 1997.
Agents' activities are principally limited to sales, with policyholder
service functions, including issuance of policies, premium collection, payment
notices and claims handled by the staff at headquarters. Agents are paid
commissions based on first-year and renewal premiums from their sales of
insurance products. The state, regional and district sales coordinators are
also independent contractors, and are compensated by override commissions.
We have concentrated on the development of marketing at the worksite.
This method offers policies to individuals through common media such as
employment, trade and other associations. This manner of marketing is
distinct from "group" insurance sales in that each individual insured is
directly contacted by the sales associate. Policies are individually
underwritten, with premiums generally paid by the employee. Additionally,
AFLAC supplemental policies are portable, meaning that individuals may retain
their full insurance coverage upon separation from employment or such
affiliation, generally at the same premium. A major portion of premiums on
such sales are collected through payroll deduction or other forms of
centralized billings. Group-issued plans normally result in a lower average
age of the insured at the time of policy issuance and also result in certain
savings in administrative costs, a portion of which are passed on to the
policyholder in the form of reduced premiums. Marketing at the worksite
enables the agency force to reach a greater number of prospective
policyholders than individual solicitation and lowers distribution costs.
I-13
<PAGE>
Another valuable marketing and sales tool is the flexible benefits
program, or cafeteria plan, which allows an employee to pay for medical
insurance using pretax dollars. These programs help achieve increased
penetration as agents are required to present the program to all employees.
They also help improve overall persistency levels due to the limited changes
allowed during the plan year.
We continue to develop marketing arrangements with insurance brokers.
Insurance brokers generally have better access to larger groups than
independent agents. The core of our distribution network will remain
independent agents.
In 1999, AFLAC's U.S. premiums collected were $1.3 billion, 7.2% of which
was collected in Texas, 6.2% in Florida, 5.6% in Georgia, and 5.4% in North
Carolina. Premiums collected in all other states were individually less than
5% of AFLAC's U.S. premiums.
COMPETITION - U.S.
The accident and health and life insurance industry in the United States
is highly competitive. AFLAC competes with a large number of insurers, some
of which have been in business for a longer period of time. In the United
States, there are more than 2,000 life and accident and health insurance
companies.
Private insurers and voluntary and cooperative plans, such as Blue Cross
and Blue Shield, provide insurance for meeting basic hospitalization and
medical expenses. Much of this insurance is sold on a group basis. The
federal and state governments also pay substantial costs of medical treatment
through Medicare and Medicaid programs. Such major medical insurance
generally covers a substantial amount of the medical (but not nonmedical)
expenses incurred by an insured as a result of cancer or other major
illnesses. AFLAC's policies are designed to provide coverage that is
supplemental to coverage provided by major medical insurance. Our benefits
may also be used to defray nonmedical expenses.
Since other insurers generally do not provide full coverage of medical
expenses or any coverage of nonmedical expenses, our supplemental insurance is
not an alternative to major medical insurance, but is sold to complement
(supplement) major medical insurance by helping cover the gap between major
medical insurance reimbursements and the total costs of an individual's health
care. Thus we compete only indirectly with major medical insurers in terms of
premium rates and similar factors. However, the scope of the major medical
coverage offered by other insurers does represent a limitation on the market
for our products. Accordingly, expansion of coverage by other insurers or
governmental programs could adversely affect our business opportunities.
Conversely, any reduction of coverages, such as increased deductibles and
copayments, by other insurers or governmental programs could favorably affect
our business opportunities.
We compete directly with other insurers that offer supplemental health
insurance and believe that our policies and premium rates are generally
competitive with those offered by other companies selling similar types of
insurance.
For additional information regarding U.S. insurance operations, see
Exhibit 13, pages 13-13 to 13-14 (AFLAC U.S. section of MD&A), which is
incorporated herein by reference.
I-14
<PAGE>
REGULATION - U.S.
The Parent Company and its insurance subsidiaries are subject to state
regulations in the United States as an insurance holding company system. Such
regulations generally provide that transactions between companies within the
holding company system must be fair and equitable. In addition, transfer of
assets among such affiliated companies, certain dividend payments from
insurance subsidiaries and material transactions between companies within the
system are subject to prior notice to, or approval by, state regulatory
authorities.
AFLAC and its subsidiaries, in common with all U.S. insurance companies,
are subject to regulation and supervision in the states and other
jurisdictions in which they do business. In general, the insurance laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers relating to, among other things: granting and revoking
licenses to transact business, regulating trade practices, licensing agents,
prior approval of forms of policies and premium rate increases, standards of
solvency and maintenance of specified policy benefit reserves and minimum loss
ratio requirements, capital for the protection of policyholders, limitations
on dividends to shareholders, the nature of and limitations on investments,
deposits of securities for the benefit of policyholders, filing of financial
statements prepared in accordance with statutory insurance accounting
practices prescribed or permitted by the regulatory authorities, and periodic
examinations of the financial, market conduct, and other affairs of insurance
companies.
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 requirements are presently
planned by the NAIC to be effective for 2001. They must also be adopted by
the individual state insurance departments.
For further information concerning state regulatory and dividend
restrictions, see Exhibit 13, page 13-62 (Note 9 - Statutory Accounting and
Dividend Restrictions of Notes to the Consolidated Financial Statements),
incorporated herein by reference.
The NAIC risk-based capital formula for U.S. life insurance companies
established capital requirements based on insurance risk, business risk, asset
risk and interest rate risk. These requirements are intended to facilitate
identification by insurance regulators of inadequately capitalized insurance
companies based upon the types and mixtures of risks inherent in the insurer's
operations. The formulas for determining the amount of risk-based capital
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of the company's regulatory total adjusted
capital to its authorized control level risk-based capital as defined by the
NAIC. Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The
levels are company action, regulatory action, authorized control and mandatory
control. Our NAIC risk-based capital ratio exceeds all regulatory action
levels and continues to reflect a very strong statutory capital and surplus
position.
I-15
<PAGE>
Two states have laws, regulations or regulatory practices that either
prohibit the sale of specified disease insurance, such as our cancer expense
insurance, or make its sale impractical. These states are Massachusetts and
New Jersey. The remainder of the states do not impose prohibitions or
restrictions that prevent us from marketing cancer expense insurance. AFLAC
U.S. is marketing several of its other products in Massachusetts and New
Jersey.
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.
EMPLOYEES - U.S.
In the U.S. insurance operations, we had 2,306 employees at December 31,
1999. We consider our employee relations to be excellent.
POLICY LIABILITIES - JAPAN AND U.S.
The reserves for policy liabilities reported in the financial statements
have been computed in accordance with generally accepted accounting principles
(GAAP). These reserves differ from those reflected in the various regulatory
financial statements filed by the Company. Such differences arise from the use
of different mortality, morbidity, interest, lapse assumptions and actuarial
reserving methods as required by the laws of the various states and Japan.
OTHER OPERATIONS
The Company's other operations include the parent company and a printing
subsidiary. These operations had 262 employees at December 31, 1999.
In 1999, we invested $17 million for minor equity interests in two
companies that provide outsourcing for human resource functions. In 1998, we
purchased a small Japanese insurance agency. Its main functions are to
provide policyholder-related services and direct marketing programs for AFLAC
Japan.
YEAR 2000
We did not experience any material date-related problems with our
internal information or other systems, nor did we experience any material
disruptions in connection with external information and data exchanges in
connection with the year 2000 date rollover. Our preparations for year 2000
were completed as of the end of calendar year 1999 and it was not necessary to
implement any contingency plans prepared as part of those efforts. We have
discontinued regular meetings of our year 2000 executive steering committee.
We will continue to monitor our internal systems and external information
and data exchanges throughout the year for first date occurrence events.
Based on the information now available to us, we do not expect any material
disruptions with respect to such events during the coming year. Since the
inception of the year 2000 project, we incurred costs of approximately $35
million for system upgrades or modifications; of this amount, approximately
$11 million was capitalized.
I-16
<PAGE>
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" to encourage companies to provide prospective information, so long as
those informational statements are identified as forward-looking and are
accompanied by meaningful, cautionary statements identifying important factors
that could cause actual results to differ materially from those discussed. 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 Form 10-K 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, 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.
ITEM 2. PROPERTIES
AFLAC owns an 18-story office building, which is the worldwide
headquarters, and a five-story administrative office building, which was
completed in 1998 at a cost of $17 million, located on approximately 14 acres
of land in Columbus, Georgia. We also own a six-story parking garage, two
additional buildings located on the same property and additional
administrative office buildings. An insurance subsidiary occupies leased
office space in Albany, New York.
In Tokyo, Japan, AFLAC owns an 11-story administrative office building.
AFLAC leases office space in Tokyo along with regional sales offices located
throughout the country and owns a training facility in Tokyo.
ITEM 3. 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.
I-17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders for a vote in the
fourth quarter ended December 31, 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
NAME PRINCIPAL OCCUPATION (*) AGE
- ------------------- ------------------------------------- ---
Paul S. Amos Chairman, AFLAC Incorporated and 73
American Family Life Assurance
Company of Columbus (AFLAC)
Daniel P. Amos Chief Executive Officer, AFLAC 48
Incorporated and AFLAC; President,
AFLAC Incorporated and AFLAC;
Director, The CIT Group, Inc.,
Livingston, NJ; Director, Georgia
Power Company, Atlanta, GA
Monthon Chuaychoo Vice President, Financial Services, 56
AFLAC Incorporated and AFLAC
Kriss Cloninger III Executive Vice President, Chief 52
Financial Officer, AFLAC
Incorporated and AFLAC;
Treasurer, AFLAC Incorporated
Norman P. Foster Executive Vice President, Corporate 65
Finance, AFLAC Incorporated
and AFLAC
Kenneth S. Janke Jr. Senior Vice President, Investor 41
Relations, of AFLAC Incorporated
Akitoshi Kan Executive Vice President, Internal 52
Operations, AFLAC U.S., since January
2000 and Deputy Chief Financial Officer,
AFLAC Incorporated since April 1999;
Executive Vice President, AFLAC
International until December 1999;
Executive Vice President, AFLAC Japan
since January 1998 until March 1999 and
Deputy Chief Financial Officer, AFLAC,
Senior Vice President, AFLAC Japan,
Accounting, Information Systems, ABC and
Legal Affairs until March 1999; Senior
Vice President, AFLAC Japan, Accounting,
Corporate Planning, Audit, and Legal
Affairs until January 1997; Vice
President, AFLAC Japan Accounting
Department until 1995
I-18
<PAGE>
Nobuo Kawamura Senior Vice President, AFLAC Japan, 55
ABC Promotion, Policy Maintenance,
Premium Accounting since January 1999;
Senior Vice President, AFLAC Japan,
ABC Promotion, Policy Maintenance,
Premium Accounting, Administration
Support until January 1999
Joseph P. Kuechenmeister Senior Vice President, Director 58
of Marketing, AFLAC
Joey M. Loudermilk Senior Vice President, General Counsel 46
and Corporate Secretary, AFLAC
Incorporated and AFLAC; Director,
Legal and Governmental Relations,
AFLAC
Hidefumi Matsui President, AFLAC Japan, since January 55
1995; Executive Vice President, AFLAC
Japan until 1995
Shoichi Matsumoto Executive Vice President, Director 54
of Marketing, AFLAC Japan, since January
1998; Senior Vice President, Director of
Marketing, AFLAC Japan, until January 1998;
Senior Vice President, AFLAC Japan, until
July 1997; Vice President, Assistant
Director of Marketing, AFLAC Japan, until
January 1996
Minoru Nakai President, AFLAC International, Inc. 58
Yoshiki Otake Chairman, AFLAC Japan, since January 60
1995; President, AFLAC Japan, until
December 1994; Vice Chairman, AFLAC
International, Inc.
E. Stephen Purdom Executive Vice President, 52
AFLAC; Retired Director, Trust Company
Bank, Columbus, GA
Joseph W. Smith, Jr. Senior Vice President, Chief Investment 46
Officer, AFLAC
Gary L. Stegman Senior Vice President, Assistant Chief 50
Financial Officer, AFLAC
Incorporated and AFLAC; Treasurer
and Assistant Secretary, AFLAC
(*) Unless specifically noted, the respective executive officer has held
the occupation(s) set forth in the table for at least five years.
Each executive officer is appointed annually by the board of
directors and serves until his successor is chosen and qualified,
or until his death, resignation or removal.
I-19
<PAGE>
PART II
Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are
incorporated by reference from the Company's 1999 Annual Report to
Shareholders, the appropriate sections of which are included herein as Exhibit
13.
Exhibit 13 Annual Report
Pages Pages
---------- --------------
ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 52 (Note 9);
EQUITY AND RELATED SHAREHOLDER 13-62 56 and 59
MATTERS (Note 9)
ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 32 - 33
ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 19 - 31
ANALYSIS OF FINANCIAL CONDITION 13-26
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE 13-7 to 20 - 21;
DISCLOSURES ABOUT MARKET RISK 13-8, 13-15 25 - 27
to 13-19
ITEM 8. FINANCIAL STATEMENTS AND 13-27 to 34 - 56
SUPPLEMENTARY DATA 13-71
ITEM 9. CHANGES IN AND DISAGREEMENTS None None
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
II-1
<PAGE>
PART III
Pursuant to General Instruction G to Form 10-K, Items 10 through 13 are
incorporated by reference from the Company's definitive Proxy Statement
relating to the Company's 2000 Annual Meeting of Shareholders, which was filed
with the Securities and Exchange Commission on March 16, 2000, pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
Refer to the Information Refer to
Contained in the Proxy Printed
Statement under Captions Proxy
(filed electronically) Statement
Pages
------------------------ ---------
ITEM 10. DIRECTORS AND EXECUTIVE Security Ownership of 3 - 7
OFFICERS OF THE COMPANY Management. 1. Election
Directors of Directors
Executive Officers -
see Part I, Item 4A
herein
ITEM 11. EXECUTIVE COMPENSATION Board and Committee 8 - 19
Meetings and Directors
Compensation; Summary
Compensation Table; De-
fined Benefit Pension
Plan; Retirement Plans
for Key Executives;
Employment Contracts and
Termination of Employ-
ment Arrangements
ITEM 12. SECURITY OWNERSHIP OF Voting Securities and 2 - 7
CERTAIN BENEFICIAL Principal Holders
OWNERS AND Thereof; Security Owner-
MANAGEMENT ship of Management
1. Election of Directors
ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 19
AND RELATED and Relationships
TRANSACTIONS
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS Page(s)
-----------
Included in Part II of this report and
incorporated by reference to the following
pages of Exhibit 13:
AFLAC Incorporated and Subsidiaries:
Consolidated Statements of Earnings for 13-27
each of the years in the three-year
period ended December 31, 1999
Consolidated Balance Sheets, at 13-28 -
December 31, 1999 and 1998 13-29
Consolidated Statements of Shareholders' 13-30
Equity, for each of the years in the
three-year period ended December 31,
1999
Consolidated Statements of Cash Flows 13-31 -
for each of the years in the three-year 13-32
period ended December 31, 1999
Consolidated Statements of Comprehensive 13-33
Income for each of the years in the
three-year period ended December 31, 1999
Notes to the Consolidated Financial 13-34 to
Statements 13-68
Report of Independent Auditors 13-70
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Auditors' Report on Financial Statement Schedules IV-5
Schedule II - Condensed Financial Information of IV-6 -
Registrant at December 31, 1999 IV-11
and 1998, and for each of the
years in the three-year period
ended December 31, 1999
Schedule III - Supplementary Insurance Information IV-12
for each of the years in the three-
year period ended December 31, 1999
Schedule IV - Reinsurance for each of the IV-13
years in the three-year period
ended December 31, 1999
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto.
IV-1
<PAGE>
3. EXHIBITS
3.0 - Articles of Incorporation, as amended - incorporated by
reference from Form 10-Q for March 31, 1997,
Commission file number 1-7434, Accession No. 0000004977-
97-000011, Exhibit 3.0; and Bylaws of the Company, as
amended - incorporated by reference from
Form 10-Q for June 30, 1996, Commission file number
1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0.
4.0 - There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of AFLAC Incorporated and its subsidiaries on a
consolidated basis. We agree to furnish a copy
of any long-term debt instruments to the Securities
and Exchange Commission upon request.
10.0* - American Family Corporation Incentive Stock Option Plan
(1982) - incorporated by reference from Registration
Statement No. 33-44720 on Form S-8 with respect to the
AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and
Stock Option Plan (1985).
10.1* - American Family Corporation Stock Option Plan (1985) -
incorporated by reference from Registration Statement No.
33-44720 on Form S-8 with respect to the AFLAC Incorporated
(Formerly American Family Corporation) Incentive Stock
Option Plan (1982) and Stock Option Plan (1985).
10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan -
incorporated by reference from 1994 Shareholders' Proxy
Statement, Commission file number 1-7434, Accession No.
0000004977-94-000003, Exhibit A.
10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as
amended August 8, 1995 - incorporated by reference from
Form 10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.
10.2* - American Family Corporation Retirement Plan for Senior
Officers, as amended and restated October 1, 1989 -
incorporated by reference from 1993 Form 10-K, Commission
file number 1-7434, Accession No. 0000004977-94-000006,
Exhibit 10.2.
10.3* - AFLAC Incorporated Supplemental Executive Retirement Plan,
as amended, effective January 1, 1998 - incorporated by
reference from 1998 Form 10-K, Commission file number
1-7434, Accession No. 0000004977-99-000010, Exhibit 10.3.
10.3.1* - Amendment to the AFLAC Incorporated Supplemental Executive
Retirement Plan effective January 1, 1999, filed with the
1999 Form 10-K.
10.4* - AFLAC Incorporated Employment Agreement with Daniel P.
Amos, dated August 1, 1993 - incorporated by reference
from 1993 Form 10-K, Commission file number 1-7434,
Accession No. 0000004977-94-000006, Exhibit 10.4.
10.5* - American Family Life Assurance Company of Columbus
Employment Agreement with Yoshiki Otake, dated January 1,
1995 - incorporated by reference from 1994 Form 10-K,
Commission file number 1-7434, Accession No.
0000004977-95-000006, Exhibit 10.5.
10.6* - AFLAC Incorporated Employment Agreement with Kriss
Cloninger, III, dated February 14, 1992, and as amended
November 12, 1993 - incorporated by reference from 1993
IV-2
<PAGE>
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-94-000006, Exhibit 10.6.
10.7* - American Family Life Assurance Company of Columbus
Employment Agreement with Dr. E. Stephen Purdom, dated
October 25, 1994 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.9.
10.8* - AFLAC Incorporated Employment Agreement with Paul S. Amos,
dated August 1, 1995 - incorporated by reference from Form
10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1.
10.9* - AFLAC Incorporated Deferred Compensation Agreement with
Paul S. Amos, dated July 15, 1997 - incorporated by
reference from 1997 Form 10-K, Commission file number
1-7434, Accession No. 0000004977-98-000006, Exhibit 10.11.
10.10* - AFLAC Incorporated 1997 Stock Option Plan, incorporated
by reference from the 1997 Shareholders' Proxy Statement,
Commission file number 1-7434, Accession No. 0000004977-
97-000007, Appendix B.
10.11* - AFLAC Incorporated Executive Deferred Compensation Plan,
effective January 1, 1999 - incorporated by reference
from Form S-8 Registration Statement No. 333-69333,
Accession No. 0000004977-98-00024, Exhibit 4.
10.12* - AFLAC Incorporated Amended and Restated Management
Incentive Plan, effective January 1, 1999 - incorporated
by reference from the 1999 Shareholders' Proxy Statement,
Commission file number 1-7434, Accession No. 0000004977-
99-000007, Exhibit A.
12.0 - Statement regarding the computation of ratio of earnings
to fixed charges for the Registrant.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1999.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-44720 with respect to the
AFLAC Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-01243 with respect to the
AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-41552 with respect to the
AFLAC Incorporated 401(k) Retirement Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
IV-3
<PAGE>
- Consent of independent auditor, KPMG LLP, to Form S-4
Registration Statement No. 333-78403 with respect to the
Senior Notes.
27.0** - Financial Data Schedule for December 31, 1999.
* Management contract or compensatory plan or agreement.
** All Financial Data Schedules are submitted in the electronic filing only.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended
December 31, 1999.
(c) EXHIBITS FILED WITH CURRENT FORM 10-K
10.3.1* - Amendment to the AFLAC Incorporated Supplemental Executive
Retirement Plan effective January 1, 1999.
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges for the Registrant.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1999.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-44720 with respect to the
AFLAC Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-01243 with respect to the
AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-41552 with respect to the
AFLAC Incorporated 401(k) Retirement Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
- Consent of independent auditor, KPMG LLP, to Form S-4
Registration Statement No. 333-78403 with respect to the
Senior Notes.
27.0** - Financial Data Schedule for December 31, 1999.
* Management contract or compensatory plan or agreement.
** All Financial Data Schedules are submitted in the electronic filing only.
IV-4
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Shareholders and Board of Directors
AFLAC Incorporated:
Under date of January 27, 2000, we reported on the consolidated balance sheets
of AFLAC Incorporated and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of earnings, shareholders' equity, cash
flows, and comprehensive income for each of the years in the three-year period
ended December 31, 1999, as contained in the 1999 annual report to
shareholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement
schedules as listed in Item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Atlanta, Georgia
January 27, 2000
IV-5
<TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
AFLAC Incorporated (Parent Only)
(In millions, except for share amounts)
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Investments and cash:
Fixed maturity securities available
for sale (amortized cost $240) $ 232 $ -
Investments in subsidiaries* 4,898 4,614
Other investments 9 3
Cash and cash equivalents 17 15
------- -------
Total investments and cash 5,156 4,632
Due from subsidiaries* 29 29
Other receivables 3 3
Property and equipment, net 6 7
Other assets 47 6
------- -------
Total assets $ 5,241 $ 4,677
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Due to subsidiaries* $ 1 $ 1
Notes payable 1,091 578
Employee and beneficiary benefit plans 250 235
Income taxes, primarily deferred 11 68
Other liabilities 20 25
------- -------
Total liabilities 1,373 907
------- -------
Shareholders' equity:
Common stock of $.10 par value: (In thousands)
Authorized 400,000 shares; issued
320,349 shares in 1999 and 317,971
shares in 1998 32 32
Additional paid-in capital 310 235
Retained earnings 3,356 2,862
Accumulated other comprehensive income:
Unrealized foreign currency
translation gains 232 219
Unrealized gains on investment securities 1,032 1,332
Treasury stock, at average cost (1,094) (910)
------- -------
Total shareholders' equity 3,868 3,770
------- -------
Total liabilities and
shareholders' equity $ 5,241 $ 4,677
======= =======
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
</TABLE>
IV-6
<PAGE>
<TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Earnings
AFLAC Incorporated (Parent Only)
(In millions)
<CAPTION>
Years ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries* $ 162 $ 173 $ 118
Management and service fees
from subsidiaries* 26 28 32
Investment income 13 1 2
Interest from subsidiaries* 2 - -
Other income - 1 1
------ ------ ------
Total revenues 203 203 153
------ ------ ------
Operating expenses:
Interest expense 15 10 10
Other operating expenses 45 61 83
------ ------ ------
Total operating expenses 60 71 93
------ ------ ------
Earnings before income taxes and
equity in undistributed earnings
of subsidiaries 143 132 60
Income tax expense:
Current 2 9 1
Deferred - - 14
------ ------ ------
Total income taxes 2 9 15
------ ------ ------
Earnings before equity in
undistributed earnings of
subsidiaries 141 123 45
Equity in undistributed earnings
of subsidiaries 430 364 540
------ ------ ------
Net earnings $ 571 $ 487 $ 585
====== ====== ======
*Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
</TABLE>
IV-7
<PAGE>
<TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Cash Flows
AFLAC Incorporated (Parent Only)
<CAPTION>
Years ended December 31,
(In millions) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 571 $ 487 $ 585
Adjustments to reconcile net
earnings to net cash provided
from operating activities:
Equity in undistributed
earnings of subsidiaries* (430) (364) (540)
Deferred income taxes - - 14
Change in income taxes payable 2 9 -
Increase in employee and
beneficiary benefit plans 15 27 24
Other, net (20) (2) 30
----- ----- -----
Net cash provided by
operating activities 138 157 113
----- ----- -----
Cash flows from investing activities:
Fixed maturity securities sold 100 - -
Fixed maturity securities purchased (341) - -
Other investments (acquired) disposed of (6) 10 -
Purchase of mortgage loans from subsidiary* - - (10)
Purchase of investees and subsidiary (note B) (17) (8) -
----- ----- -----
Net cash provided (used) by
investing activities (264) 2 (10)
----- ----- -----
Cash flows from financing activities:
Proceeds from borrowings 446 124 409
Principal payments under debt obligations (89) (115) (191)
Dividends paid to shareholders (72) (63) (57)
Net change in amount due to/from subsidiaries* - (21) (4)
Purchases of treasury stock (224) (125) (314)
Treasury stock reissued 51 40 36
Proceeds from exercise of stock options 16 7 5
----- ----- -----
Net cash provided (used) by
financing activities 128 (153) (116)
----- ----- -----
Net change in cash and cash equivalents 2 6 (13)
Cash and cash equivalents at beginning of year 15 9 22
----- ----- -----
Cash and cash equivalents at end of year $ 17 $ 15 $ 9
===== ===== =====
*Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
</TABLE>
IV-8
<PAGE>
<TABLE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Comprehensive Income
AFLAC Incorporated (Parent Only)
(In millions)
<CAPTION>
Years ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings $ 571 $ 487 $ 585
------- ------- -------
Other comprehensive income,
before income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains (losses)
during year - Parent only (151) (64) 44
Equity in change in unrealized
foreign currency translation
gains (losses) of subsidiaries
during year 23 (20) -
Unrealized gains (losses) on
securities available for sale:
Unrealized holding gains (losses)
arising during the year - parent only (8) - -
Equity in unrealized gains (losses)
on investment securities held
by subsidiaries (371) 171 1,693
Equity in reclassification adjustment
for realized (gains) losses of
subsidiaries included in net earnings 13 3 4
------ ------ ------
Total other comprehensive
income (loss) before income taxes (494) 90 1,741
Income tax expense (benefit) related to
items of other comprehensive income (207) 98 692
------ ------ ------
Other comprehensive income (loss),
net of income taxes (287) (8) 1,049
------ ------ ------
Total comprehensive income $ 284 $ 479 $ 1,634
====== ====== ======
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
</TABLE>
IV-9
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Statements
AFLAC Incorporated (Parent Only)
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
AFLAC Incorporated and Subsidiaries (see Part II - Item 8).
(A) NOTES PAYABLE
A summary of notes payable at December 31, 1999 and 1998 follows:
(In millions) 1999 1998
------ ------
1.67% yen-denominated senior notes due April 2009. . $ 541 $ -
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate. . . . . . . . . . . . 222 294
Variable interest rate (.55% at
December 31, 1999) . . . . . . . . . . . . . . 31 35
Revolving credit agreement due November 2002:
1.24% fixed interest rate. . . . . . . . . . . . 114 134
Variable interest rate (.50% at
December 31, 1999) . . . . . . . . . . . . . . 138 115
.50% short term. . . . . . . . . . . . . . . . . . 45 -
------ ------
Total notes payable. . . . . . . . . . . . . . . $ 1,091 $ 578
====== ======
The aggregate contractual maturities of the notes payable for each of the
years after December 31, 1999, are as follows:
(In millions)
2000 . . . . . . . . . . . . . . . . . . . . . . $ 173
2001 . . . . . . . . . . . . . . . . . . . . . . 125
2002 . . . . . . . . . . . . . . . . . . . . . . 252
2009 . . . . . . . . . . . . . . . . . . . . . . 541
For further information regarding notes payable, see Exhibit 13, page 13-
55 (Note 6 of the Notes to the Consolidated Financial Statements).
(B) PURCHASES OF SUBSIDIARIES
In 1999, we purchased minor equity interests in two companies that
provide outsourcing for human resource functions. In 1998, we purchased a
small Japanese insurance agency. Its main functions are policyholder-related
services and direct marketing programs for AFLAC Japan.
IV-10
<PAGE>
(C) INCOME TAXES
The Company and its eligible U.S. subsidiaries file a consolidated U.S.
federal income tax return. Income tax liabilities or benefits are recorded by
each principal subsidiary based upon separate return calculations, and any
difference between the consolidated provision and the aggregate amounts
recorded by the subsidiaries is reflected in the Parent Company financial
statements.
For further information on income taxes, see Exhibit 13, page 13-56, Note
7 of the Notes to the Consolidated Financial Statements.
(D) DIVIDEND RESTRICTIONS
See Exhibit 13, page 13-62 (Note 9, Statutory Accounting and Dividend
Restrictions, of Notes to the Consolidated Financial Statements) for
information regarding dividend restrictions.
(E) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(In millions) 1999 1998 1997
-------- -------- --------
Interest paid $ 13 $ 10 $ 10
Non-cash financing activities:
Treasury shares issued for:
Dividends to shareholders 5 4 4
Associate stock bonus plan 42 - -
(F) ACCOUNTING CHANGES
For information concerning new accounting standards recently adopted, see
page 13-38 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of
Notes to the Consolidated Financial Statements.
IV-11
<PAGE>
<TABLE>
SCHEDULE III
AFLAC INCORPORATED AND SUBSIDIARIES
Supplementary Insurance Information
Years Ended December 31,
<CAPTION>
Amorti-
Future zation of
Deferred Policy Deferred
Policy Benefits Other Net Policy Other
Acqui- & Unpaid Policy- Invest- Benefits Acquisi- Opera-
sition Policy Unearned holders' Premium ment and tion ting Premiums
(In millions) Costs Claims Premiums Funds Revenue Income Claims Costs Expenses Written
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
AFLAC Japan $ 2,856 $ 26,734 $ 268 $ 296 $ 5,906 $ 1,111 $ 5,040 $ 151 $ 1,179 $ 5,942
AFLAC U.S. 836 2,194 93 19 1,358 245 845 106 400 1,360
All other - - - - - 13 - - 141 -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 3,692 $ 28,928 $ 361 $ 315 $ 7,264 $ 1,369 $ 5,885 $ 257 $ 1,720 $ 7,302
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
1998:
AFLAC Japan $ 2,340 $ 21,507 $ 217 $ 229 $ 4,738 $ 917 $ 4,119 $ 111 $ 924 $ 4,756
AFLAC U.S. 727 1,974 92 15 1,198 216 749 90 349 1,197
All other - - - - 7 5 9 - 202 8
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 3,067 $ 23,481 $ 309 $ 244 $ 5,943 $ 1,138 $ 4,877 $ 201 $ 1,475 $ 5,961
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
1997:
AFLAC Japan $ 1,940 $ 17,589 $ 181 $ 187 $ 4,803 $ 893 $ 4,156 $ 103 $ 934 $ 4,818
AFLAC U.S. 641 1,773 92 11 1,062 180 667 77 315 1,065
All other 1 48 4 - 9 5 10 - 124 9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 2,582 $ 19,410 $ 277 $ 198 $ 5,874 $ 1,078 $ 4,833 $ 180 $ 1,373 $ 5,892
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
See the accompanying Auditors' Report.
IV-12
</TABLE>
<TABLE>
SCHEDULE IV
AFLAC INCORPORATED AND SUBSIDIARIES
Reinsurance
Years Ended December 31, 1999, 1998, and 1997
(In millions)
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other assumed
Amount companies companies Net amount to net
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Life insurance in force $ 44,993 $ 707 $ - $ 44,286 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 6,639 $ - $ - $ 6,639 -
Life insurance 627 2 - 625 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 7,266 $ 2 $ - $ 7,264 -
=========== =========== =========== ========== ==========
Year ended December 31, 1998:
Life insurance in force $ 28,182 $ 566 $ - $ 27,616 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 5,435 $ - $ - $ 5,435 -
Life insurance 510 2 - 508 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 5,945 $ 2 $ - $ 5,943 -
=========== =========== =========== ========== ==========
Year ended December 31, 1997:
Life insurance in force $ 26,382 $ 511 $ - $ 25,871 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 5,401 $ 1 $ - $ 5,400 -
Life insurance 475 1 - 474 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 5,876 $ 2 $ - $ 5,874 -
=========== =========== =========== ========== ==========
See the accompanying Auditors' Report.
IV-13
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AFLAC Incorporated
Date MARCH 27, 2000 By /s/ PAUL S. AMOS
----------------------- ---------------------------------
(Paul S. Amos)
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ DANIEL P. AMOS Chief Executive Officer, MARCH 27, 2000
- ------------------------ President and Vice ----------------
(Daniel P. Amos) Chairman of the Board
of Directors
/s/ KRISS CLONINGER, III Executive Vice President, MARCH 27, 2000
- ------------------------ Chief Financial Officer ----------------
(Kriss Cloninger, III) and Treasurer
/s/ NORMAN P. FOSTER Executive Vice President, MARCH 27, 2000
- ------------------------ Corporate Finance ----------------
(Norman P. Foster)
IV-14
<PAGE>
/s/ J. SHELBY AMOS, II Director MARCH 27, 2000
- ----------------------------- ----------------
(J. Shelby Amos, II)
/s/ MICHAEL H. ARMACOST Director MARCH 27, 2000
- ----------------------------- ----------------
(Michael H. Armacost)
/s/ M. DELMAR EDWARDS, M.D. Director MARCH 27, 2000
- ------------------------------ ----------------
(M. Delmar Edwards, M.D.)
/s/ JOE FRANK HARRIS Director MARCH 27, 2000
- ------------------------------ ----------------
(Joe Frank Harris)
/s/ ELIZABETH J. HUDSON MARCH 27, 2000
- ------------------------------ Director ----------------
(Elizabeth J. Hudson)
/s/ KENNETH S. JANKE, SR. Director MARCH 27, 2000
- ------------------------------ ----------------
(Kenneth S. Janke, Sr.)
/s/ CHARLES B. KNAPP Director MARCH 27, 2000
- ------------------------------ ----------------
(Charles B. Knapp)
/s/ HISAO KOBAYASHI Director MARCH 27, 2000
- ------------------------------ ----------------
(Hisao Kobayashi)
/s/ YOSHIKI OTAKE Director MARCH 27, 2000
- ------------------------------ ----------------
(Yoshiki Otake)
IV-15
<PAGE>
/s/ E. STEPHEN PURDOM Director MARCH 27, 2000
- ------------------------------- ----------------
(E. Stephen Purdom)
/s/ BARBARA K. RIMER Director MARCH 27, 2000
- ------------------------------- ----------------
(Barbara K. Rimer)
/s/ HENRY C. SCHWOB Director MARCH 27, 2000
- ------------------------------ ----------------
(Henry C. Schwob)
/s/ J. KYLE SPENCER Director MARCH 27, 2000
- ------------------------------ ----------------
(J. Kyle Spencer)
/s/ GLENN VAUGHN, JR. Director MARCH 27, 2000
- ------------------------------ ----------------
(Glenn Vaughn, Jr.)
/s/ ROBERT L. WRIGHT Director MARCH 27, 2000
- ------------------------------ ----------------
(Robert L. Wright)
IV-16
<PAGE>
3. EXHIBITS
3.0 - Articles of Incorporation, as amended - incorporated by
reference from Form 10-Q for March 31, 1997,
Commission file number 1-7434, Accession No. 0000004977-
97-000011, Exhibit 3.0; and Bylaws of the Company, as
amended - incorporated by reference from
Form 10-Q for June 30, 1996, Commission file number
1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0.
4.0 - There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of AFLAC Incorporated and its subsidiaries on a
consolidated basis. We agree to furnish a copy of any
long-term debt instruments to the Securities and Exchange
Commission upon request.
10.0* - American Family Corporation Incentive Stock Option Plan
(1982) - incorporated by reference from Registration
Statement No. 33-44720 on Form S-8 with respect to the
AFLAC Incorporated (Formerly American Family
Corporation) Incentive Stock Option Plan (1982) and
Stock Option Plan (1985).
10.1* - American Family Corporation Stock Option Plan (1985) -
incorporated by reference from Registration Statement No.
33-44720 on Form S-8 with respect to the AFLAC Incorporated
(Formerly American Family Corporation) Incentive Stock
Option Plan (1982) and Stock Option Plan (1985).
10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan -
incorporated by reference from 1994 Shareholders' Proxy
Statement, Commission file number 1-7434, Accession No.
0000004977-94-000003, Exhibit A.
10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as
amended August 8, 1995 - incorporated by reference from
Form 10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.
10.2* - American Family Corporation Retirement Plan for Senior
Officers, as amended and restated October 1, 1989 -
incorporated by reference from 1993 Form 10-K, Commission
file number 1-7434, Accession No. 0000004977-94-000006,
Exhibit 10.2.
10.3* - AFLAC Incorporated Supplemental Executive Retirement
Plan, as amended, effective January 1, 1998 - incorporated
by reference from 1998 Form 10-K, Commission file number
1-7434, Accession No. 0000004977-99-000010, Exhibit 10.3.
10.3.1* - Amendment to the AFLAC Incorporated Supplemental Executive
Retirement Plan effective January 1, 1999, filed with the
1999 Form 10-K.
10.4* - AFLAC Incorporated Employment Agreement with Daniel P.
Amos, dated August 1, 1993 - incorporated by reference
from 1993 Form 10-K, Commission file number 1-7434,
Accession No. 0000004977-94-000006, Exhibit 10.4.
10.5* - American Family Life Assurance Company of Columbus
Employment Agreement with Yoshiki Otake, dated January 1,
1995 - incorporated by reference from 1994 Form 10-K,
Commission file number 1-7434, Accession No.
0000004977-95-000006, Exhibit 10.5.
10.6* - AFLAC Incorporated Employment Agreement with Kriss
Cloninger, III, dated February 14, 1992, and as amended
November 12, 1993 - incorporated by reference from 1993
IV-17
<PAGE>
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-94-000006, Exhibit 10.6.
10.7* - American Family Life Assurance Company of Columbus
Employment Agreement with Dr. E. Stephen Purdom, dated
October 25, 1994 - incorporated by reference from 1994
Form 10-K, Commission file number 1-7434, Accession
No. 0000004977-95-000006, Exhibit 10.9.
10.8* - AFLAC Incorporated Employment Agreement with Paul S. Amos,
dated August 1, 1995 - incorporated by reference from Form
10-Q for September 30, 1995, Commission file number
1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1.
10.9* - AFLAC Incorporated Deferred Compensation Agreement with
Paul S. Amos, dated July 15, 1997 - incorporated by
reference from 1997 Form 10-K, Commission file number
1-7434, Accession No. 0000004977-98-000006, Exhibit 10.11.
10.10* - AFLAC Incorporated 1997 Stock Option Plan, incorporated
by reference from the 1997 Shareholders' Proxy Statement,
Commission file number 1-7434, Accession No. 0000004977-
97-000007, Appendix B.
10.11* - AFLAC Incorporated Executive Deferred Compensation Plan,
effective January 1, 1999 - incorporated by reference
from Form S-8 Registration Statement No. 333-69333,
Accession No. 0000004977-98-00024, Exhibit 4.
10.12* - AFLAC Incorporated Amended and Restated Management
Incentive Plan, effective January 1, 1999 - incorporated
by reference from the 1999 Shareholders' Proxy Statement,
Commission file number 1-7434, Accession No. 0000004977-
99-000007, Exhibit A.
12.0 - Statement regarding the computation of ratio of earnings
to fixed charges for the Registrant.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1999.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-44720 with respect to the
AFLAC Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-01243 with respect to the
AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-41552 with respect to the
AFLAC Incorporated 401(k) Retirement Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
IV-18
<PAGE>
- Consent of independent auditor, KPMG LLP, to Form S-4
Registration Statement No. 333-78403 with respect to the
Senior Notes.
27.0** - Financial Data Schedule for December 31, 1999.
* Management contract or compensatory plan or agreement.
** All Financial Data Schedules are submitted in the electronic filing only.
EXHIBITS FILED WITH CURRENT FORM 10-K
10.3.1* - Amendment to the AFLAC Incorporated Supplemental Executive
Retirement Plan effective January 1, 1999.
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges for the Registrant.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1999.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-44720 with respect to the
AFLAC Incorporated (Formerly American Family Corporation)
Incentive Stock Option Plan (1982) and Stock Option Plan
(1985).
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-01243 with respect to the
AFLAC Incorporated Amended 1985 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 33-41552 with respect to the
AFLAC Incorporated 401(k) Retirement Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
- Consent of independent auditor, KPMG LLP, to Form S-4
Registration Statement No. 333-78403 with respect to the
Senior Notes.
27.0** - Financial Data Schedule for December 31, 1999.
* Management contract or compensatory plan or agreement.
** All Financial Data Schedules are submitted in the electronic filing only.
IV-19
<PAGE>
EXHIBIT 10.3.1
EXH 10.3.1
<PAGE>
FIRST AMENDMENT TO THE
AFLAC INCORPORATED
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
THIS FIRST AMENDMENT to the AFLAC Incorporated Supplemental Executive
Retirement Plan (the "Plan") is hereby adopted by AFLAC Incorporated (the
"Company") effective as of the date indicated herein.
WITNESSETH:
WHEREAS, the Company currently maintains the Plan as an unfunded,
nonqualified deferred compensation plan; and
WHEREAS, pursuant to Section 7.1 of the Plan, the Compensation
Committee of the Board of Directors of the Company (the "Committee") has the
right to amend the Plan at any time; and
WHEREAS, the Committee desires to coordinate the provisions of the Plan
with the provisions of the AFLAC Incorporated Executive Deferred
Compensation Plan (the "Deferred Compensation Plan") to ensure that the
benefit payable to eligible employees under the provisions of the Plan is
not diminished as a result of any deferrals of compensation made under the
Deferred Compensation Plan by such eligible employees.
NOW THEREFORE, the Committee hereby amends the Plan effective, as of
January 1, 1999 as follows:
1. Section 1.4 is hereby amended by deleting said section in its entirety
and by substituting in lieu thereof the following:
1.4 ANNUAL COMPENSATION means the amount actually paid to a
Participant during a relevant calendar year as wages, salaries for
professional services, and cash bonuses. Annual Compensation for a
relevant calendar year shall also include compensation (i) contributed
by the Company on behalf of a Participant pursuant to a salary
reduction agreement which is not includable in the gross income of the
Participant under Code Sections 125, 402(a)(8) and 402(h), or (ii)
deferred by the Company on behalf of a Participant pursuant to a salary
reduction agreement under the AFLAC Incorporated Executive Deferred
Compensation Plan.
2. Except as amended herein, the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, the Company has caused its authorized officer to
execute this Amendment as of the date shown below, but effective as of the
date indicated herein.
AFLAC INCORPORATED
By: /s/ Joey M. Loudermilk
-------------------------------
Title: Senior Vice President
-----------------------------
Date: February 9, 1999
-----------------------------
EXH 10.3.1-1
<PAGE>
EXHIBIT 12
EXH 12
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Ratio of Earnings to Fixed Charges
Years Ended December 31,
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $ 18,233 $ 13,152 $ 13,709 $ 16,186 $ 15,611
Rental expense
deemed interest 549 378 439 563 757
------- ------- ------- ------- -------
Total fixed charges $ 18,782 $ 13,530 $ 14,148 $ 16,749 $ 16,368
======= ======= ======= ======= =======
Earnings before
income tax $778,367 $550,793 $864,820 $650,001 $600,995
Add back:
Fixed charges 18,782 13,530 14,148 16,749 16,368
------- ------- ------- ------- -------
Total earnings
before income tax
and fixed charges 797,149 564,323 878,968 666,750 617,363
Adjustments:
Realized gains/(losses) (13,496) (2,077) (5,440) 1,980 (270)
Gain on sale of
television business - - 267,223 60,264 -
------- ------- ------- ------- -------
Total realized
gains/(losses) (13,496) (2,077) 261,783 62,244 (270)
------- ------- ------- ------- -------
Total earnings before
income tax and fixed
charges and realized
gains/(losses) $810,645 $566,400 $617,185 $604,506 $617,633
======= ======= ======= ======= =======
Earnings excluding
realized gains/
(losses) to fixed
charges 43.2x 41.9x 43.6x 36.1x 37.7x
</TABLE>
EXH 12-1
<PAGE>
EXHIBIT 13
EXH 13
<PAGE>
EXHIBIT 13
The following information is contained in the 1999 Annual Report to
Shareholders. The required information incorporated by reference to the
preceding pages of this 1999 Form 10-K have been reproduced herein as Exhibit
13 for purposes of electronic filing of this Form 10-K.
PART II
ITEM 5. (a) Market Information:
The Company's common stock is principally traded on the New York Stock
Exchange. The Company is also listed on the Pacific Stock Exchange and the
Tokyo Stock Exchange.
The high, low and closing quarterly sales prices for the Company's common
stock, as published in the U.S. consolidated transaction reporting system, for
the last three fiscal years ended December 31, 1999, are as follows:
Quarterly Common Stock Prices
1999 High Low Close
---------------------------------------------------------------------
4th Quarter $ 54.25 $ 41.88 $ 47.19
3rd Quarter 49.38 40.81 41.88
2nd Quarter 56.75 44.50 47.88
1st Quarter 54.50 39.00 54.44
1998 High Low Close
--------------------------------------------------------------------
4th Quarter $ 45.31 $ 25.50 $ 43.88
3rd Quarter 38.25 25.13 28.56
2nd Quarter 34.50 29.50 30.31
1st Quarter 33.62 22.69 31.63
1997 High Low Close
--------------------------------------------------------------------
4th Quarter $ 28.16 $ 22.13 $ 25.56
3rd Quarter 28.94 24.25 27.13
2nd Quarter 25.69 19.19 23.63
1st Quarter 21.75 18.75 18.75
EXH 13-1
<PAGE>
ITEM 5. (b) Holders:
1999 1998 1997
- ---------------------------------------------------------------------------
Number of common
shares outstanding 265,740,816 265,684,034 266,436,020
Number of registered
common shareholders 69,899 62,525 57,788
Approximate number of
common shareholders 155,900 145,500 128,900
ITEM 5. (c) Quarterly cash dividends:
1999 1998
------ ------
4th Quarter $.075 $.065
3rd Quarter .075 .065
2nd Quarter .075 .065
1st Quarter .065 .058
For information concerning dividend restrictions, see Management's
Discussion and Analysis of Financial Condition, the section concerning
shareholders' equity, presented in this Exhibit 13 on page 13-23, and Note 9,
Statutory Accounting and Dividend Restrictions, of the Notes to the
Consolidated Financial Statements, also presented in this Exhibit 13 on page
13-62.
EXH 13-2
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except for share and per-share amounts):
<CAPTION>
AFLAC INCORPORATED AND SUBSIDIARIES
For the Year 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental
health insurance $ 7,264 $ 5,943 $ 5,874 $ 5,910 $ 6,071
Net investment income 1,369 1,138 1,078 1,022 1,025
Realized investment gains (losses) (13) (2) (5) 2 -
Gain on sale of television business - - 267 60 -
Other income 20 25 37 106 95
-------- -------- -------- -------- --------
Total revenues 8,640 7,104 7,251 7,100 7,191
-------- -------- -------- -------- --------
Benefits and expenses:
Benefits and claims 5,885 4,877 4,833 4,896 5,034
Expenses 1,977 1,676 1,553 1,554 1,556
-------- -------- -------- -------- --------
Total benefits and expenses 7,862 6,553 6,386 6,450 6,590
-------- -------- -------- -------- --------
Pretax earnings 778 551 865 650 601
Income taxes 207 64 280 256 252
-------- -------- -------- -------- --------
Net earnings $ 571(1) $ 487(2) $ 585(3) $ 394(4) $ 349
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (basic) $ 2.15(1) $ 1.83(2) $ 2.15(3) $ 1.41(4) $ 1.20
Net earnings (diluted) 2.07(1) 1.76(2) 2.08(3) 1.36(4) 1.17
Cash dividends .29 .253 .224 .194 .169
Shareholders' equity 14.56 14.19 12.88 7.71 7.53
Price range: High 56.75 45.31 28.94 22.00 14.92
Low 39.00 22.69 18.75 14.13 10.63
Close 47.19 43.88 25.56 21.38 14.50
Price/earnings ratio:* High 28.4x 29.0x 21.8x 18.3x 12.8x
Low 19.5 14.5 14.1 11.8 9.1
Common shares used for basic EPS (In thousands) 265,869 266,305 272,110 280,352 291,355
Common shares used for diluted EPS (In thousands) 275,423 275,872 281,596 288,922 298,984
- ---------------------------------------------------------------------------------------------------------------------------
EXH 13-3
</TABLE>
<TABLE>
(In millions, except for share and per-share amounts):
<CAPTION>
AFLAC INCORPORATED AND SUBSIDIARIES
At Year-End 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Investments and cash $ 32,024 $ 26,994 $ 22,880 $ 20,744 $ 20,045
Other 5,017 4,228 6,590 4,286 5,172
-------- -------- -------- -------- --------
Total assets $ 37,041 $ 31,222 $ 29,470 $ 25,030 $ 25,217
======== ======== ======== ======== ========
Liabilities and shareholders' equity:
Policy liabilities $ 29,604 $ 24,034 $ 19,885 $ 20,234 $ 19,514
Notes payable 1,111 596 523 354 327
Income taxes 1,511 1,865 1,827 1,181 1,398
Other liabilities 947 957 3,805 1,135 1,844
Shareholders' equity 3,868 3,770 3,430 2,126 2,134
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity $ 37,041 $ 31,222 $ 29,470 $ 25,030 $ 25,217
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings** $ 550 $ 429 $ 374 $ 347 $ 349
Operating earnings per share (basic)** 2.07 1.61 1.38 1.24 1.20
Operating earnings per share (diluted)** 2.00 1.56 1.33 1.20 1.17
Pretax profit margin*** 9.9% 9.3% 8.6% 8.4% 8.4%
After-tax profit margin*** 6.4% 6.0% 5.4% 4.9% 4.8%
Operating return on equity**** 20.9% 18.7% 18.8% 19.9% 22.0%
Yen/dollar exchange rate at year-end (yen) 102.40 115.70 130.10 116.10 102.95
Average yen/dollar exchange rate (yen) 113.96 130.89 121.07 108.84 94.10
Notes: (1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in deferred tax
liabilities from a tax rate cut in Japan and a charge of $41 ($.15 per basic and diluted share) for a mandated
policyholder protection fund in 1999.
(2) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in deferred income tax
liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated
policyholder protection fund in Japan in 1998.
(3) Includes gain of $211 ($.77 per basic share, $.75 per diluted share) from the sale of the broadcast business
in 1997.
(4) Includes gain of $48 ($.17 per basic share, $.16 per diluted share) from the sale of the broadcast business
in 1996.
(*) Based on diluted operating earnings per share. (**) Excludes realized investment gains/losses and in 1996 and
1997, the gains from the sale of the television business; excludes charges for the policyholder protection fund
and benefits of tax rate reductions in 1998 and 1999. (***) Operating basis. (****) Based on operating earnings
and excluding unrealized gains on investment securities, net.
EXH 13-4
</TABLE>
<PAGE>
ITEM 7. 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 and life 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
businesses in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service
the two markets for our insurance operations.
RESULTS OF OPERATIONS
Several significant non-operating items affected our net earnings during
the three-year period ended December 31, 1999.
Two corporate income tax rate reductions were enacted in Japan. The
statutory tax rate for AFLAC Japan declined from 45.3% to 41.7% in 1998 and
from 41.7% to 36.2% in 1999. These tax rate declines caused reductions in our
deferred income tax liability. The deferred tax effect for the 1998 tax
reduction was recognized in the first quarter of 1998, increasing net earnings
by $121 million ($.45 per basic share and $.44 per diluted share). The
deferred tax effect for the 1999 tax reduction was recognized in the first
quarter of 1999, increasing net earnings by $67 million ($.25 per basic share
and $.24 per diluted share).
Another factor affecting net earnings was a policyholder protection
system mandated by the Japanese government during the first quarter of 1998.
The pretax charge for our obligation to the new protection fund was $111
million ($65 million after tax, or $.24 per basic and diluted share). In
1999, Toho Mutual Life Insurance Company, a Japanese insurer, was declared
insolvent by Japanese government regulators. This insolvency is expected to
deplete most of the policyholder protection fund established in 1998. In
order to replenish the policyholder protection fund, the Japanese government
and the life insurance industry agreed to new legislation that will increase
the life insurance industry's legal obligation to the fund. Our share of the
industry's obligation was recognized in the fourth quarter of 1999 and
decreased pretax earnings by $64 million ($41 million after-tax, or $.15 per
basic and diluted share). For further information regarding this policyholder
protection fund, see Note 2 of the Notes to the Consolidated Financial
Statements.
Affecting net earnings in 1997 was the sale of our television business,
which consisted of seven network-affiliated stations. The sale of one station
closed on December 31, 1996. The sale of the six remaining stations was
completed in 1997. The pretax and after-tax gains recognized during the
second quarter of 1997 on the closing of these six stations were $267 million
and $211 million, respectively. The effect of the after-tax gain on 1997
basic and diluted net earnings per share was $.77 and $.75, respectively.
EXH 13-5
<PAGE>
The results of operations by business segment, together with non-
operating items, for the three-year period ended December 31, 1999, were as
follows.
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Percentage change Years ended
over previous year December 31,
------------------ ---------------------
1999 1998 1999 1998 1997
------------------ ---------------------
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 29.6% (.4)% $ 651 $ 502 $ 504
AFLAC U.S. . . . . . . . . . . . . 11.4 24.9 256 230 184
Television operations. . . . . . . - - 4
Other business segments. . . . . . (4) 2 (2)
---- ---- ----
Total business segments . . . . 23.2 6.3 903 734 690
Interest expense, non-insurance
operations . . . . . . . . . . . (40.9) 1.2 (15) (10) (10)
Corporate and eliminations . . . . 45.0 23.4 (32) (60) (77)
---- ---- ----
Pretax operating earnings. . . . 28.9 10.1 856 664 603
Income taxes . . . . . . . . . . . 30.4 2.8 306 235 229
---- ---- ----
Operating earnings . . . . . . . 28.1 14.6 550 429 374
Non-operating items:
Deferred income tax benefit from
Japanese tax rate reductions . . 67 121 -
Provisions for the Japanese
mandated policyholder
protection fund, net of tax. . . (41) (65) -
Gain on sale of television
business, net of tax. . . . . . . - - 211
Realized investment gains
(losses), net of tax. . . . . . . (5) 2 -
---- ---- ----
Net earnings . . . . . . . . . . 17.4% (16.8)% $ 571 $ 487 $ 585
==== ==== ==== ==== ====
Operating earnings per basic share . 28.6% 16.7% $2.07 $1.61 $1.38
Operating earnings per diluted share 28.2 17.3 2.00 1.56 1.33
==== ==== ==== ==== ====
Net earnings per basic share . . . . 17.5% (14.9)% $2.15 $1.83 $2.15
Net earnings per diluted share . . . 17.6 (15.4) 2.07 1.76 2.08
==== ==== ==== ==== ====
==============================================================================
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the charges for the
mandated policyholder protection fund, the deferred income tax benefits from
the Japanese income tax rate reductions and the gain from the sale of the
television business. Operating earnings per share referred to in the
following discussion are based on the diluted number of average outstanding
shares.
EXH 13-6
<PAGE>
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 operating results by comparing these results as if
foreign currency rates had remained unchanged from the previous year.
SELECTED PERCENTAGE CHANGES FOR SUPPLEMENTAL CONSOLIDATED DATA
(YEARS ENDED DECEMBER 31)
Including Foreign Excluding Foreign
Currency Changes Currency Changes*
------------------------ ------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
Premium income 22.2% 1.2% (.6)% 9.4% 7.7% 8.5%
Net investment income 20.3 5.6 5.5 10.7 11.1 14.0
Operating revenues 21.8 1.7 (.7) 9.5 8.0 8.2
Total benefits and
expenses 21.0 .9 (1.0) 8.3 7.4 8.0
Operating earnings 28.1 14.6 7.8 20.6 18.6 15.2
Operating earnings
per share 28.2 17.3 10.8 20.5 21.1 18.3
- -----------------------------------------------------------------------------
* Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current year as each respective
prior year.
=============================================================================
The yen strengthened in relation to the dollar during 1999 after several
years of weakening. The average yen/dollar exchange rates were 113.96 in
1999, 130.89 in 1998, and 121.07 in 1997. The stronger yen in 1999 compared
with 1998 increased operating earnings by $.12 per share in 1999. The weaker
yen in 1998 and 1997 lowered operating earnings per share by $.05 in 1998
compared with 1997, and by $.09 in 1997 compared with 1996. Reported
operating earnings per share increased 28.2% to $2.00 in 1999, 17.3% to $1.56
in 1998 and 10.8% to $1.33 in 1997.
Our primary financial objective is to grow operating earnings per share
before the effect of foreign currency translations. Our goal for 1999 was 20%
growth, which we exceeded. Excluding the effect of currency fluctuations,
operating earnings per share increased 20.5% in 1999 compared with 1998, 21.1%
in 1998 compared with 1997, and 18.3% in 1997 compared with 1996.
Our objective for 2000 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 in 2000 when the impact from various foreign currency
translations is included.
EXH 13-7
<PAGE>
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 1999 average exchange rate
INTEREST EXPENSE
The shares purchased under our share repurchase program were financed
with bank borrowings, available cash, and in 1999, proceeds from an offering
of senior notes. Interest expense related to the share repurchase program was
$15 million in 1999, $10 million in 1998, and $9 million in 1997. Consolidated
interest expense, including interest expense from insurance operations, was
$18 million in 1999, $13 million in 1998 and $14 million in 1997.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings were 35.8% in 1999, 35.4% in 1998 and 37.9% in 1997. Japanese income
taxes on AFLAC Japan's operating results accounted for most of our income tax
expense. The higher effective tax rate in 1997 primarily resulted from U.S.
alternative minimum tax incurred. The 1999 reduction in the statutory tax
rate in Japan did not significantly change our combined U.S./Japan effective
tax rate as it largely shifted income tax expense from our Japanese to our
U.S. business due to the operation of the U.S. foreign tax credit provisions.
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan is a branch of AFLAC and the principal contributor to our
earnings. AFLAC Japan ranks number one in terms of premium income and profits
among all foreign life and non-life insurance companies operating in Japan.
AFLAC Japan ranks second in terms of individual policies in force and 14th in
assets among all life insurance companies operating in Japan.
EXH 13-8
<PAGE>
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
(In millions) 1999 1998 1997
---------------------------------
Premium income . . . . . . . . . . . . $ 5,906 $ 4,738 $ 4,803
Investment income. . . . . . . . . . . 1,111 917 893
Other income . . . . . . . . . . . . . 4 2 1
------ ------ ------
Total revenues . . . . . . . . . . . 7,021 5,657 5,697
------ ------ ------
Benefits and claims. . . . . . . . . . 5,039 4,119 4,156
Operating expenses . . . . . . . . . . 1,331 1,036 1,037
------ ------ ------
Total benefits and expenses. . . . . 6,370 5,155 5,193
------ ------ ------
Pretax operating earnings. . . . . . $ 651 $ 502 $ 504
====== ====== ======
- ------------------------------------------------------------------------------
Percentage changes in dollars
over previous year:
Premium income . . . . . . . . . . . 24.6% (1.4)% (3.0)%
Investment income. . . . . . . . . . 21.2 2.7 (.3)
Total revenues . . . . . . . . . . . 24.1 (.7) (2.6)
Pretax operating earnings. . . . . . 29.6 (.4) (5.4)
- ------------------------------------------------------------------------------
Percentage changes in yen
over previous year:
Premium income . . . . . . . . . . . 8.5% 6.6% 7.9%
Investment income. . . . . . . . . . 5.2 11.0 11.0
Total revenues . . . . . . . . . . . 8.0 7.3 8.4
Pretax operating earnings. . . . . . 12.3 7.5 5.4
- ------------------------------------------------------------------------------
Ratios to total revenues in dollars:
Benefits and claims. . . . . . . . . 71.8% 72.8% 73.0%
Operating expenses . . . . . . . . . 18.9 18.3 18.2
Pretax operating earnings. . . . . . 9.3 8.9 8.8
==============================================================================
JAPANESE ECONOMY
Japan's economy has been weak for several years. The financial strength
of many Japanese financial institutions deteriorated during that time, and
some experienced bankruptcy. As we have indicated in the past, the weak
economy in Japan in recent years has resulted in a difficult marketing
environment for AFLAC Japan, continued low yields available for new
investments and decreased consumer confidence.
Many commentators believe the Japanese economy has bottomed out and is on
the way to recovery. The Japanese government has developed various economic
stimulus packages in the last few years. The time required for the Japanese
economy to fully recover remains uncertain.
EXH 13-9
<PAGE>
AFLAC JAPAN SALES
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force in yen of 8.7% in
1999, 7.2% in 1998 and 5.2% in 1997 reflect the high persistency of AFLAC
Japan's business and the sales of new policies. Annualized premiums in force
were: 696.6 billion yen ($6.8 billion) at December 31, 1999; 640.8 billion yen
($5.5 billion) at December 31, 1998; and 597.8 billion yen ($4.6 billion) at
December 31, 1997.
AFLAC Japan produced strong sales results in 1999, despite the weak
Japanese economy. New annualized premiums from sales were: $761 million in
1999, up 32.4%; $575 million in 1998, up 11.5%; and $515 million in 1997, down
28.5%. New annualized premiums from sales in yen were: 86.6 billion yen in
1999, up 15.6%; 74.9 billion yen in 1998, up 20.1%; and 62.4 billion yen in
1997, down 20.4%.
Although consumer confidence continued to lag because of the economic
worries, AFLAC products remained popular. Our reputation for financial
strength, combined with a diverse product line and aggressive sales and
marketing, helped guide us through the difficult economy. We reported an
increase in new annualized premium sales, while the life insurance market as a
whole declined in 1999.
New product development is one of several actions we have taken to help
mitigate the impact of the weak sales environment in Japan. One of our new
products, Rider MAX, was one of our most popular products in 1999. This
product, which was introduced in 1998, provides accident and medical/sickness
benefits as a rider to our cancer life policy. We began test-marketing a
fixed-annuity product in 1999. We introduced ordinary life and an economy
cancer life policy in 1997. The economy plan, which has lower premium rates
and benefit levels, was developed to combat the impact of increased premium
rates for new issues.
We continue to invest in marketing to improve sales. The incentive pay
system for AFLAC Japan's employed sales managers was revised in 1997 to better
reward them for improved sales performance. We increased expenditures during
the last three years for expanded sales promotion efforts in Japan and will
continue to do so in 2000. In addition, we will continue our popular
television advertising program that was initiated in 1997. We have also
emphasized our financial strength ratings in Japan and are recruiting more
individual agencies.
AFLAC Japan's sales mix is changing, although cancer life still accounts
for the majority of insurance in force. Cancer life sales accounted for 46.4%
of total new sales in yen in 1999, 49.4% in 1998 and 52.5% in 1997. Rider MAX
accounted for 39.8% of our sales in 1999 and 33.2% in 1998. Ordinary life
accounted for 7.8% of new sales in 1999, 3.8% in 1998 and 1.6% in 1997.
Living benefit life accounted for 2.3% of total new sales in 1999, 7.2% in
1998 and 28.3% in 1997.
Our objectives for 2000 are to increase sales in yen by 10% to 15%
compared with 1999 and to improve the profit margin.
EXH 13-10
<PAGE>
AFLAC JAPAN INVESTMENTS
Investment income is affected by available cash flow from operations,
investment yields achievable on new investments and foreign currency exchange
rates. Investment income in yen increased 5.2% in 1999, compared with 11.0%
in 1998. This is due primarily to the effect of translating AFLAC Japan's
dollar-denominated investment income into yen. The stronger yen has the
effect of reducing dollar-denominated investment income as reported in yen.
Also, rates of return on yen-denominated debt securities in Japan remained low
in 1999. For instance, the yield on 10-year Japanese government bonds, as
measured by a composite index, fluctuated from a high of 2.45% in February
1999 to a low of 1.23% in May 1999 and closed the year at 1.64%.
AFLAC Japan's new money rates for investments in debt securities
(including dollar-denominated) were 4.74% for 1999, 4.19% for 1998 and 5.20%
for 1997. The overall rate of return (net of investment expenses) on AFLAC
Japan's average investments and cash at amortized cost has declined. These
returns, which were 5.01% in 1999, 5.26% in 1998 and 5.37% in 1997, reflect
the cumulative effect of lower investment yields available in Japan since the
early 1990s.
AFLAC Japan has made investments in reverse dual currency bonds and the
private placement market to secure higher yields than Japanese government
bonds would have provided while still adhering to conservative standards for
credit quality. We believe that we can invest new money in the near term at an
adequate spread over policy premium pricing assumptions for new business and
assumed interest rates for policy liabilities. The premium rate increases
recently implemented, including one in 1999, have a positive impact on
investment margins and therefore should contribute to stability in the pretax
operating profit margin.
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. This program produced investment income
for AFLAC Japan of approximately $1 million in each of the years 1997 through
1999. For further information regarding such arrangements, see Note 4 of the
Notes to the Consolidated Financial Statements.
INSURANCE DEREGULATION IN JAPAN
In December 1996, the governments of the United States and Japan reached
an agreement on deregulation of the Japanese insurance industry. The
agreement called for the gradual liberalization of the industry through the
year 2001 and included provisions to avoid "radical change" in the third
sector of the insurance industry, which includes our supplemental health
insurance products. AFLAC and other foreign-owned insurers, as well as many
small to medium-sized Japanese insurers, operate primarily in the third
sector. Beginning January 1, 2001, additional insurance companies will be
allowed to sell the type of third sector products that AFLAC Japan currently
offers. AFLAC has inherent competitive advantages through its distribution,
products, administrative efficiency and financial strength that should enable
it to grow even in a more competitive environment. However, the ultimate
impact of deregulation is not known.
EXH 13-11
<PAGE>
AFLAC JAPAN - OTHER
The increase in the expense ratio in 1999 was primarily due to increased
expenditures for sales promotion, marketing and advertising.
The benefits ratio has declined primarily due to the mix of business
shifting to newer products that have a lower loss ratio than the traditional
cancer life insurance and also due to favorable claims experience on cancer
life insurance. Pretax operating earnings in yen increased 12.3% for 1999.
This increase was largely due to the lower benefit ratio during 1999.
Even with Japan's depressed economic conditions, we believe the market
for supplemental insurance remains bright. The need for our products in Japan
has continued, and we remain optimistic about increasing penetration within
existing groups, selling new products, opening new accounts and developing
additional supplemental products for the Japanese market.
EXH 13-12
<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
(In millions) 1999 1998 1997
----------------------------------
Premium income . . . . . . . . . . . . . $ 1,358 $ 1,198 $ 1,062
Investment income. . . . . . . . . . . . 245 216 180
Other income . . . . . . . . . . . . . . 3 4 1
------ ------ ------
Total revenues . . . . . . . . . . . . 1,606 1,418 1,243
------ ------ ------
Benefits and claims. . . . . . . . . . . 845 749 667
Operating expenses . . . . . . . . . . . 505 439 392
------ ------ ------
Total benefits and expenses. . . . . . 1,350 1,188 1,059
------ ------ ------
Pretax operating earnings. . . . . . $ 256 $ 230 $ 184
====== ====== ======
- -----------------------------------------------------------------------------
Percentage increases over previous year:
Premium income . . . . . . . . . . . . 13.4% 12.8% 12.2%
Investment income. . . . . . . . . . . 13.1 20.3 51.0
Total revenues . . . . . . . . . . . . 13.2 14.1 16.6
Pretax operating earnings. . . . . . . 11.4 24.9 43.4
- -----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims. . . . . . . . . . 52.6% 52.8% 53.7%
Operating expenses . . . . . . . . . . 31.4 31.0 31.5
Pretax operating earnings. . . . . . . 16.0 16.2 14.8
==============================================================================
AFLAC U.S. SALES
The percentage increases in premium income reflect the growth of premiums
in force. The increases in annualized premiums in force of 14.3% in 1999,
14.6% in 1998 and 14.7% in 1997 were favorably affected by increased sales at
the worksite primarily through cafeteria plans and an improvement in the
persistency of several products. Annualized premiums in force were: $1.6
billion at December 31, 1999; $1.4 billion at December 31, 1998; and $1.2
billion at December 31, 1997.
New annualized premiums from sales and policy conversions were: $555
million in 1999, up 15.1%; $482 million in 1998, up 20.3%; and $401 million in
1997, up 22.7%. Accident/disability coverage was the best-selling product for
the sixth year in a row, accounting for more than 56% of new sales in both
1999 and 1998, and 54% of new sales in 1997. Cancer expense insurance
accounted for 24% to 25% of new sales during the three-year period ending
December 31, 1999.
EXH 13-13
<PAGE>
AFLAC U.S. INVESTMENTS
Investment income increased 13.1% in 1999 compared with 20.3% in 1998,
and 51.0% in 1997. The larger increases in 1997 and 1998 are the result of
investment income received from investing the proceeds received in 1997 from
the sale of the television business and investing the majority of the annual
profit repatriation funds. Profit repatriation in 1997 was $347 million,
including $125 million of a nonrecurring nature. During 1999, available cash
flow was invested at an average yield of 7.93% compared with 7.71% during 1998
and 7.64% during 1997. The overall return on average invested assets, net of
investment expenses, was 7.51% for 1999, compared with 7.44% for 1998 and
7.61% for 1997.
AFLAC U.S. - OTHER
We expect the operating expense ratio, excluding discretionary
advertising expenses, to benefit in the future from continued improvements in
operating efficiencies. State-of-the-art technology is one way we can control
expense growth, and SmartApp, a laptop-based, point-of-sale system, is a good
example. In 1999, SmartApp enabled us to process approximately 70% of our
business electronically. About half of these policies required no human
intervention. The electronic imaging of our claims and correspondence is
also benefiting our expense ratio. By improving administrative systems and
controlling other costs, we have been able to redirect funds in recent years
to national advertising programs without significantly affecting the operating
expense ratio.
The aggregate benefit ratio has been relatively stable. The mix of
business has shifted towards accident and hospital indemnity policies, which
have lower benefit ratios than other products.
We expect the pretax operating profit margin to remain approximately the
same in 2000.
We continue to believe that there are significant opportunities to market
high-quality, affordable supplemental insurance products in the U.S.
marketplace.
OTHER OPERATIONS
Corporate expenses are net of investment income of $13 million in 1999
and $2 million in both 1998 and 1997. Corporate operating expenses consist
primarily of salary, retirement, litigation and consulting expenses.
Corporate expenses excluding investment income were $45 million in 1999, $60
million in 1998 and $78 million in 1997. The reduction in corporate expenses
primarily reflects lower retirement and litigation expenses.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards (SFAS), see Note 1 of the Notes to the Consolidated Financial
Statements.
EXH 13-14
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET
During the last two years, 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.
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 December 31, 1999, was 102.40 yen to one U.S.
dollar, 13.0% stronger than the December 31, 1998, exchange rate of 115.70.
The stronger yen rate increased reported investments and cash by $3.1 billion,
total assets by $3.5 billion and total liabilities by $3.5 billion, compared
with the amounts that would have been reported for 1999 if the exchange rate
had remained unchanged from year-end 1998. For additional information on
exchange rates, see Note 2 of the Notes to the Consolidated Financial
Statements.
MARKET RISKS OF FINANCIAL INSTRUMENTS
Our financial instruments are exposed primarily to three types of market
risks: interest rate, equity price and foreign currency exchange rate.
INTEREST RATE RISK
Our primary interest rate exposure results from 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. For example, if the current duration of a debt security
is five, then the market value of that security will increase by approximately
5% if market interest rates decrease by 100 basis points. Likewise, the value
of the debt security will decrease by approximately 5% if market interest
rates increase by 100 basis points.
EXH 13-15
<PAGE>
The estimated effect of potential increases in interest rates on the fair
values of our debt security investments and notes payable follows:
SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS
TO INTEREST RATE CHANGES
DECEMBER 31
1999 1998
------------------- -------------------
+100 +100
Market Basis Market Basis
(In millions) Value Points Value Points
------------------- -------------------
Debt securities:
Fixed-maturity securities:
Yen-denominated $ 20,379 $ 18,613 $ 16,748 $ 15,317
Dollar-denominated 4,760 4,400 4,560 4,232
Perpetual debentures:
Yen-denominated 5,450 4,917 4,250 3,816
Dollar-denominated 306 285 247 232
------- ------- ------- -------
Total $ 30,895 $ 28,215 $ 25,805 $ 23,597
======= ======= ======= =======
Notes payable* $ 1,077 $ 1,044 $ 585 $ 576
======= ======= ======= =======
*Includes cross currency and interest rate swaps; excludes capitalized leases
Should significant amounts of unrealized losses occur because of
increases in market yields, we would not expect to realize significant losses
because we have the ability to hold such securities to maturity.
The unrealized gains and losses on debt 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 our shareholders if such gains were actually realized. For further
information, see Note 3 of the Notes to the Consolidated Financial Statements.
EXH 13-16
<PAGE>
The following is a comparison of the actuarially assumed interest rates
for policy reserves and investment yields, based on amortized cost, for the
years ended December 31:
COMPARISON OF INTEREST RATES FOR POLICY RESERVES
AND INVESTMENT YIELDS
(Net of investment expenses)
1999 1998 1997
------------ ------------ ------------
U.S. Japan* U.S. Japan* U.S. Japan*
----- ----- ----- ----- ----- -----
Policies issued during year:
Required interest on
policy reserves 6.59% 3.42% 6.81% 3.50% 6.80% 3.50%
New money yield on
investments 7.85 4.48 7.62 3.76 7.53 4.29
Policies in force at end
of year:
Required interest on
policy reserves 6.42 5.29 6.41 5.38 6.40 5.46
Investment yield 7.51 4.94 7.44 5.17 7.61 5.34
*Represents yen-denominated investments for Japan
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable long-duration yen-denominated securities. At December 31, 1999,
the average duration of policy liabilities was approximately 12 years,
compared with 13 years in 1998. The average duration of the yen-denominated
debt securities was approximately nine years in 1999 and 1998. Currently,
when our debt securities mature, the proceeds are reinvested at a yield below
that of the interest required for the accretion of policy benefit liabilities
on policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent years.
Since 1994, premium rates on new business have been increased several times
(the latest occurred in July 1999) to help offset the lower investment yields
available. Over the next five years, $3.4 billion at amortized cost (with an
average yield of 6.04%), of AFLAC Japan's yen-denominated debt securities are
scheduled to mature.
We have outstanding interest rate swaps on 34.3 billion yen ($336
million) of variable-interest-rate yen-denominated bank borrowings. These
swaps reduce the impact of fluctuations in interest rates on 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 December 31, 1999, we also had yen-denominated bank borrowings in the
amount of 21.9 billion yen ($214 million) with a variable interest rate of
.51%. 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.
EXH 13-17
<PAGE>
EQUITY PRICE RISK
Equity securities at December 31, 1999, totaled $215 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 1.20. 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 12%, or
$26 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.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, AFLAC Incorporated has yen-denominated bank borrowings that have been
designated as a hedge of our investment in AFLAC Japan. The unrealized foreign
currency translation gains and losses related to these borrowings are reported
in accumulated other comprehensive income.
AFLAC Incorporated has 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
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.
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.
EXH 13-18
<PAGE>
The following table compares the dollar values of yen-denominated assets
and liabilities at various exchange rates.
DOLLAR VALUE OF YEN-DENOMINATED ASSETS AND LIABILITIES
AT SELECTED EXCHANGE RATES
DECEMBER 31
1999 1998
(In millions) ------------------------- -------------------------
87.40 102.40* 117.40 100.70 115.70* 130.70
Yen Yen Yen Yen Yen Yen
------------------------- -------------------------
Yen-denominated
financial instruments:
Assets:
Securities available
for sale:
Fixed maturities $18,857 $16,099 $14,039 $15,001 $13,057 $11,558
Perpetual debentures 2,015 1,718 1,500 1,286 1,119 991
Equity securities 66 56 49 26 23 20
Securities held to
maturity:
Fixed maturities 5,143 4,389 3,829 4,534 3,947 3,494
Perpetual debentures 4,572 3,903 3,404 4,014 3,494 3,093
Cash and cash
equivalents 659 563 491 354 308 272
Other financial
instruments 5 2 2 12 8 8
------ ------ ------ ------ ------ ------
Total 31,317 26,730 23,314 25,227 21,956 19,436
------ ------ ------ ------ ------ ------
Liabilities:
Notes payable 1,278 1,091 951 664 578 511
------ ------ ------ ------ ------ ------
Total 1,278 1,091 951 664 578 511
------ ------ ------ ------ ------ ------
Net yen-denominated
financial instruments 30,039 25,639 22,363 24,563 21,378 18,925
Other yen-denominated
assets 4,412 3,766 3,285 3,655 3,181 2,816
Other yen-denominated
liabilities (34,142) (29,142) (25,418) (27,815) (24,208) (21,430)
------ ------ ------ ------ ------ ------
Consolidated yen-
denominated net
assets subject to
foreign currency
fluctuation $ 309 $ 263 $ 230 $ 403 $ 351 $ 311
====== ====== ====== ====== ====== ======
* Actual year-end rates
For information regarding the effect of foreign currency translation on
operating earnings per share, see Results of Operations on pages 13-7 through
13-8 and Note 2 of the Notes to the Consolidated Financial Statements.
EXH 13-19
<PAGE>
INVESTMENTS AND CASH
The continued growth in investments and cash reflects the substantial
cash flows from operations. Net unrealized gains of $1.2 billion on
investment securities at December 31, 1999, consisted of $2.8 billion in gross
unrealized gains and $1.6 billion in gross unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen debt
securities markets. We use specific criteria to judge the credit quality and
liquidity of our investments and use a variety of credit rating services to
monitor these criteria. Applying those various credit ratings to a
standardized rating system based on the categories of a nationally recognized
rating service, the percentages of our debt securities, at amortized cost, as
of December 31 were as follows:
1999 1998
------ ------
AAA 28.0% 38.1%
AA 24.6 17.6
A 33.5 31.2
BBB 12.1 13.1
BB 1.8 -
----- -----
100.0% 100.0%
===== =====
At December 31, 1999, we owned debt securities rated below investment
grade in the amount of $530 million at amortized cost, or 1.8% of total debt
securities. These securities were issued by two Japanese banks that had
credit rating downgrades following our purchase of the debt securities.
Subsequent to December 31, 1999, these two banks were upgraded to `BBB.'
However, another corporate issue with an amortized cost of $210 million was
downgraded to `BB.'
Private placement investments accounted for 49.0% and 43.9% of our total
debt securities as of December 31, 1999 and 1998, respectively. AFLAC Japan
has made investments in the private placement market to secure higher yields
than those available from Japanese government bonds. At the same time, we
have adhered to historically conservative standards for credit quality. We
require that all private placement issuers have an initial rating of Class 1
or 2 as determined by the Securities Valuation Office of the National
Association of Insurance Commissioners (NAIC). Most of AFLAC's private
placement issues are issued under medium-term note programs and have standard
covenants commensurate with credit rankings, except when internal credit
analysis indicates that additional protective and/or event-risk covenants are
required.
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities to
their contractual or economic maturity dates. We have 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 for
sale" to "held to maturity." The related unrealized gain of $1.1 billion as
of October 1, 1998, on these securities is being amortized over the remaining
term of the securities.
EXH 13-20
<PAGE>
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) at December 31:
AFLAC Japan AFLAC U.S.
------------------- -------------------
(In millions) 1999 1998 1999 1998
------------------- -------------------
Available for sale:
Fixed-maturity securities $15,491 $12,886 $ 3,405* $ 2,772
Perpetual debentures 2,411 1,344 153 111
Equity securities 45 22 92 79
------ ------ ------ ------
Total available for sale 17,947 14,252 3,650 2,962
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 4,389 3,947 - -
Perpetual debentures 3,903 3,494 - -
------ ------ ------ ------
Total held to maturity 8,292 7,441 - -
------ ------ ------ ------
Total $26,239 $21,693 $ 3,650 $ 2,962
====== ====== ====== ======
*Includes $240 of securities held by the parent company
Mortgage loans on real estate and other long-term investments remained
immaterial at both December 31, 1999 and 1998. Cash, cash equivalents and
short-term investments totaled $617 million, or 1.9% of total investments and
cash, as of December 31, 1999, compared with $384 million, or 1.4% of total
investments and cash, at December 31, 1998.
For additional information concerning investments and fair values, see
Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
POLICY LIABILITIES
Policy liabilities increased $5.6 billion, or 23.2%, during 1999. AFLAC
Japan policy liabilities increased $5.3 billion, or 24.3%, and AFLAC U.S.
policy liabilities increased $224 million, or 10.8%. Changes in policy
liabilities were primarily due to the addition of new business, the aging of
policies in force, the stronger yen and the effect of the market value
adjustment for securities available for sale (see Note 3 of the Notes to the
Consolidated Financial Statements). The stronger yen at year-end 1999
compared with 1998 increased reported policy liabilities by $3.1 billion.
DEBT
In April 1999, we issued $450 million of senior notes with a 6.50%
interest coupon, payable semiannually, due April 15, 2009. The notes are
redeemable at our option at any time with a redemption price equal to the
EXH 13-21
<PAGE>
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 were 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 have
entered into cross currency swaps that had the effect of converting the
dollar-denominated principal and interest into yen-denominated obligations.
At December 31, 1999, the outstanding principal was 55.6 billion yen ($543
million) at an interest rate of 1.67% after the effect of the cross currency
swap.
AFLAC Incorporated has an unsecured reducing revolving credit agreement
that provides for bank borrowings through July 2001 in either U.S. dollars or
Japanese yen. At December 31, 1999, 25.9 billion yen ($253 million) were
outstanding under this agreement.
AFLAC Incorporated also has an unsecured revolving credit agreement that
provides for bank borrowings through November 2002 in either U.S. dollars or
Japanese yen. At December 31, 1999, 25.8 billion yen ($252 million) were
outstanding.
We have entered into interest rate swaps that effectively change the
interest rates on a portion of these loans from variable to fixed. We make
interest payments to the bank based on variable interest rates, and we pay to,
or receive from, the swap counterparty an amount necessary to equal the fixed
rate.
We also had a .50% short-term yen-denominated note payable in the amount
of $45 million at December 31, 1999, which was due January 18, 2000. This
loan was renewed until April 17, 2000.
The proceeds from these loans were primarily used to fund our share
repurchase program. When any portion of these loans is denominated in yen,
the principal amounts of the loans as stated in dollars will fluctuate due to
changes in the yen/dollar exchange rate.
We have designated these yen-denominated borrowings and the cross
currency swaps 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 these yen-denominated items are translated into dollars at end-of-
period exchange rates.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the net unrealized gains on investment securities) was 28.1%
as of December 31, 1999 and 19.6% as of December 31, 1998. For further
information concerning swaps and notes payable, see Notes 4 and 6 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.
EXH 13-22
<PAGE>
The Life Insurance Association of Japan, an industry organization,
implemented a 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. We have recorded a liability for our share of these
obligations.
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was
declared insolvent by Japanese government regulators. Most of the mandatory
policyholder protection fund that was established in 1998 is expected to be
used to satisfy the industry's share of the policyholder obligations in this
new insolvency. The Japanese government and the life insurance industry
agreed to new legislation that will increase the life insurance industry's
legal obligation to the fund. See Note 2 of the Notes to the Consolidated
Financial Statements.
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 April 1999, AFLAC Incorporated received
net proceeds of $446 million from an issuance of $450 million of senior notes
which increased our capital resources. We believe outside sources for
additional debt and equity capital, if needed, will continue to be available
for capital expenditures, business expansion and the funding of our share
repurchase program.
AFLAC Incorporated capital resources are largely dependent upon the
ability of AFLAC to pay management fees and dividends. The Georgia Insurance
Department imposes certain limitations and restrictions on payments of
dividends, management fees, loans and advances by AFLAC to AFLAC Incorporated.
The Georgia Insurance Statutes require prior approval for dividend
distributions that exceed the greater of statutory earnings for the previous
year or 10% of statutory capital and surplus as of the previous year-end. In
addition, the Georgia Insurance Department must approve service arrangements
and other transactions within the affiliated group. These regulatory
limitations are not expected to affect the level of management fees or
dividends paid by AFLAC to AFLAC Incorporated. A life insurance company's
EXH 13-23
<PAGE>
statutory capital and surplus is computed according to rules prescribed by the
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 for 2001.
The NAIC uses a risk-based capital formula relating to insurance risk,
business risk, asset risk and interest rate risk to facilitate identification
by insurance regulators of inadequately capitalized insurance companies based
upon the types and mixtures of risks inherent in the insurer's operations.
AFLAC's NAIC risk-based capital ratio remains high and reflects a very strong
capital and surplus position. Also, there are various ongoing regulatory
initiatives by the NAIC relating to insurance products, investments, revisions
to the risk-based capital formula and other actuarial and accounting matters.
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 $282
million in 1999, $192 million in 1998 and $386 million in 1997. These amounts
include annual profit transfers from AFLAC Japan of $243 million in 1999, $154
million in 1998 and $347 million in 1997. The FSA 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 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.
RATING AGENCIES
AFLAC is rated `AA' by Standard & Poor's and `Aa3' by Moody's for
financial strength. Duff & Phelps rates AFLAC `AA' in claims-paying ability.
A.M. Best, an independent rating service that analyzes the financial condition
and operating performance of insurance companies, gives AFLAC an `A+' or
superior rating. AFLAC Incorporated's credit rating for senior debt is `A' by
both Standard & Poor's and Duff & Phelps, and `A2' by Moody's.
OTHER
In 2000, AFLAC Japan will begin developing a new computerized policy
administration system at an estimated cost in excess of $100 million. The
project is scheduled to be completed in 2002. The project will be financed
with operating cash flow.
For information regarding pending litigation, see Note 11 of the Notes to
the Consolidated Financial Statements.
EXH 13-24
<PAGE>
CASH FLOW
Operating cash flows for AFLAC Japan's yen-denominated items are
translated into dollars using average monthly exchange rates for the year. 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.
For additional information, see the Consolidated Statements of Cash Flows
on pages 13-31 and 13-32.
OPERATING ACTIVITIES
In 1999, consolidated cash flow from operations increased 12.3% to $2.8
billion, compared with $2.5 billion in 1998 and $2.6 billion in 1997. Net
cash flow from operations for AFLAC Japan increased 11.7% (decreased 2.7% in
yen) to $2.5 billion in 1999, compared with $2.2 billion in 1998 and $2.3
billion in 1997. AFLAC Japan represented 88% of the consolidated net cash
flow from operations in 1999, 89% in 1998 and 90% in 1997. The decrease in
cash flow from operations in 1998 was due to the weaker yen.
INVESTING ACTIVITIES
Consolidated cash flow used by investing activities increased 22.1% to
$2.7 billion in 1999, compared with $2.2 billion in 1998 and $2.4 billion in
1997. The sale of the television business generated cash flow of $351 million
in 1997. AFLAC Japan accounted for 74% of the consolidated net cash used by
investing activities in 1999, compared with 86% in 1998 and 81% in 1997.
Operating cash flow is primarily used to purchase debt securities. When
market opportunities arise, we dispose of selected debt securities available
for sale to improve future investment yields or lengthen maturities.
Therefore, dispositions before maturity can vary significantly from year to
year. Dispositions before maturity ranged between 4% and 8% of the annual
average investment portfolio of debt securities available for sale during the
three years ended December 31, 1999.
In 1999, we paid $17 million for minor equity interests in two companies
that provide outsourcing for human resource functions. In 1998, we purchased
a small Japanese insurance agency. Its main functions are to provide
policyholder-related services and direct marketing programs for AFLAC Japan.
FINANCING ACTIVITIES
In 1999, net cash provided by financing activities was $113 million,
compared with net cash used by financing activities of $151 million in 1998
and $132 million in 1997. We received net proceeds of $446 million in
connection with the issuance of 6.50% senior notes due 2009. Treasury stock
purchases of $224 million in 1999, $125 million in 1998 and $314 million in
1997 were funded by proceeds from new borrowings.
Dividends to shareholders in 1999 were $77 million ($72 million paid in
cash; $5 million through issuance of treasury shares). Dividends to
EXH 13-25
<PAGE>
shareholders in 1998 were $67 million ($63 million paid in cash; $4 million
through issuance of treasury shares). Dividends to shareholders in 1997 were
$61 million ($57 million paid in cash; $4 million through issuance of treasury
shares). The 1999 dividend of $.29 per share increased 14.6% over 1998. The
1998 dividend of $.253 per share represented an increase of 12.9% over the
1997 dividend of $.224 per share.
In addition to issuing treasury shares for dividends to shareholders,
we also issue treasury shares for AFLAC stock options, AFL Stock Plan and
the AFLAC Associate Stock Bonus Plan (see Note 10).
YEAR 2000
We did not experience any material date-related problems with our
internal information or other systems and have not experienced any material
disruptions in connection with external information and data exchanges. We
will continue to monitor our internal systems and external information and
data exchanges throughout the year for first-date occurrence events. Based on
the information now available to us, we do not expect any material disruptions
with respect to such events.
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 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, 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.
EXH 13-26
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<CAPTION>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31,
(In millions, except for share 1999 1998 1997
and per-share amounts) -------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums, principally supplemental
health insurance $ 7,264 $ 5,943 $ 5,874
Net investment income 1,369 1,138 1,078
Realized investment losses (13) (2) (5)
Gain on sale of television business - - 267
Other income 20 25 37
------- ------- -------
Total revenues 8,640 7,104 7,251
------- ------- -------
Benefits and expenses:
Benefits and claims 5,885 4,877 4,833
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 257 201 180
Insurance commissions 931 773 773
Insurance expenses 641 504 479
Provision for mandated policyholder
protection fund 64 111 -
Interest expense 18 13 14
Other operating expenses 66 74 107
------- ------- -------
Total acquisition and
operating expenses 1,977 1,676 1,553
------- ------- -------
Total benefits and expenses 7,862 6,553 6,386
------- ------- -------
Earnings before income taxes 778 551 865
------- ------- -------
Income tax expense (benefit):
Current 230 277 292
Deferred -- operations 44 (92) (12)
Deferred tax benefit from
Japanese tax rate reductions (67) (121) -
------- ------- -------
Total income taxes 207 64 280
------- ------- -------
Net earnings $ 571 $ 487 $ 585
======= ======= =======
Net earnings per share:
Basic $ 2.15 $ 1.83 $ 2.15
Diluted 2.07 1.76 2.08
======= ======= =======
Common shares used in computing
earnings per share (In thousands):
Basic 265,869 266,305 272,110
Diluted 275,423 275,872 281,596
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
</TABLE>
EXH 13-27
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<CAPTION>
(In millions) 1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost
$18,896 in 1999 and $15,658 in 1998) $ 20,859 $ 17,617
Perpetual debentures (amortized cost
$2,564 in 1999 and $1,455 in 1998) 2,024 1,366
Equity securities (cost $137 in 1999
and $101 in 1998) 215 177
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $4,280 in
1999 and $3,691 in 1998) 4,389 3,947
Perpetual debentures (fair value, $3,732 in
1999 and $3,131 in 1998) 3,903 3,494
Other investments 18 19
Cash and cash equivalents 616 374
-------- --------
Total investments and cash 32,024 26,994
Receivables, primarily premiums 270 272
Accrued investment income 369 316
Deferred policy acquisition costs 3,692 3,067
Property and equipment, at cost less
accumulated depreciation 509 466
Other 177 107
-------- --------
Total assets $ 37,041 $ 31,222
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
(continued)
</TABLE>
EXH 13-28
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
<CAPTION>
(In millions, except for share amounts) 1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities:
Future policy benefits $ 27,310 $ 22,218
Unpaid policy claims 1,618 1,263
Unearned premiums 361 309
Other policyholders' funds 315 244
-------- --------
Total policy liabilities 29,604 24,034
Notes payable 1,111 596
Income taxes 1,511 1,865
Other 947 957
Commitments and contingencies
(Notes 10 and 11)
-------- --------
Total liabilities 33,173 27,452
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 400,000 shares; issued 320,349
shares in 1999 and 317,971 shares in 1998 32 32
Additional paid-in capital 310 235
Retained earnings 3,356 2,862
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 232 219
Unrealized gains on investment securities 1,032 1,332
Treasury stock, at average cost (1,094) (910)
-------- --------
Total shareholders' equity 3,868 3,770
-------- --------
Total liabilities and
shareholders' equity $ 37,041 $ 31,222
======== ========
See the accompanying Notes to the Consolidated Financial Statements.
</TABLE>
EXH 13-29
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
<CAPTION>
(In millions, except for 1999 1998 1997
per-share amounts) -------- -------- --------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 32 $ 16 $ 16
Two-for-one stock split - 16 -
------- ------- -------
Balance at end of year 32 32 16
------- ------- -------
Additional paid-in capital:
Balance at beginning of year 235 227 209
Exercise of stock options 17 8 6
Gain on treasury stock reissued 58 16 12
Two-for-one stock split - (16) -
------- ------- -------
Balance at end of year 310 235 227
------- ------- -------
Retained earnings:
Balance at beginning of year 2,862 2,442 1,918
Net earnings 571 487 585
Dividends to shareholders ($.29 per
share in 1999, $.253 in 1998 and
$.224 in 1997) (77) (67) (61)
------- ------- -------
Balance at end of year 3,356 2,862 2,442
------- ------- -------
Accumulated other comprehensive income:
Balance at beginning of year 1,551 1,559 510
Change in unrealized foreign
currency translation gains during
year, net of income taxes 13 (55) 44
Change in unrealized gains (losses)
on investment securities during
year, net of income taxes (300) 47 1,005
------- ------- -------
Balance at end of year 1,264 1,551 1,559
------- ------- -------
Treasury stock:
Balance at beginning of year (910) (814) (527)
Purchases of treasury stock (224) (125) (314)
Cost of shares issued 40 29 27
------- ------- -------
Balance at end of year (1,094) (910) (814)
------- ------- -------
Total shareholders' equity $ 3,868 $ 3,770 $ 3,430
======= ======= =======
See the accompanying Notes to the Consolidated Financial Statements.
</TABLE>
EXH 13-30
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
<CAPTION>
(In millions) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 571 $ 487 $ 585
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Increase in policy liabilities 2,570 2,173 2,310
Deferred income taxes (23) (213) (12)
Change in income taxes payable (364) 16 68
Increase in deferred policy
acquisition costs (299) (226) (227)
Gain on sale of television business - - (267)
Provision for mandated policyholder
protection fund 64 111 -
Other, net 288 152 152
-------- -------- --------
Net cash provided by
operating activities 2,807 2,500 2,609
-------- -------- --------
Cash flows from investing activities:
Proceeds from investments sold
or matured:
Securities available for sale:
Fixed-maturity securities sold 1,311 941 1,722
Fixed-maturity securities
matured 164 698 422
Perpetual debentures sold 14 - -
Equity securities 73 57 64
Securities held to maturity:
Fixed-maturity securities matured
or called 36 8 -
Other investments, net 4 42 10
Proceeds from sale of television business - - 351
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (3,322) (2,966) (4,141)
Perpetual debentures (862) (917) (798)
Equity securities (82) (60) (55)
Securities held to maturity:
Fixed maturity securities (43) - -
Additions to property and
equipment, net (14) (40) (9)
Purchase of investees and subsidiary (17) (8) -
-------- -------- --------
Net cash used by investing
activities $ (2,738) $ (2,245) $ (2,434)
-------- -------- --------
(continued)
</TABLE>
EXH 13-31
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31,
<CAPTION>
(In millions) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings $ 446 $ 124 $ 409
Principal payments under debt
obligations (94) (125) (203)
Dividends paid to shareholders (72) (63) (57)
Purchases of treasury stock (224) (125) (314)
Treasury stock reissued 39 30 25
Other, net 18 8 8
-------- -------- --------
Net cash provided (used) by
financing activities 113 (151) (132)
-------- -------- --------
Effect of exchange rate changes
on cash and cash equivalents 60 34 (16)
-------- -------- --------
Net change in cash and
cash equivalents 242 138 27
Cash and cash equivalents,
beginning of year 374 236 209
-------- -------- --------
Cash and cash equivalents,
end of year $ 616 $ 374 $ 236
======== ======== ========
Supplemental disclosures of cash
flow information - See Note 12
See the accompanying Notes to the Consolidated Financial Statements.
</TABLE>
EXH 13-32
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
<CAPTION>
(In millions) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Earnings $ 571 $ 487 $ 585
-------- -------- --------
Other comprehensive income, before
income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains
during year (128) (84) 44
Unrealized gains (losses) on
investment securities:
Unrealized holding gains (losses)
arising during year (379) 171 1,693
Reclassification adjustment for
realized (gains) losses included
in net earnings 13 3 4
-------- -------- --------
Total other comprehensive
income, before income taxes (494) 90 1,741
Income tax expense (benefit)
related to items of other
comprehensive income (207) 98 692
-------- -------- --------
Other comprehensive income,
net of income taxes (287) (8) 1,049
-------- -------- --------
Total comprehensive income $ 284 $ 479 $ 1,634
======== ======== ========
See the accompanying Notes to the Consolidated Financial Statements.
</TABLE>
EXH 13-33
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: AFLAC Incorporated (the Parent Company) and its
subsidiaries (the Company) primarily sell supplemental health insurance in
Japan and the United States. The Company's insurance operations are conducted
through American Family Life Assurance Company of Columbus (AFLAC), which
operates in the United States (AFLAC U.S.) and as a branch in Japan (AFLAC
Japan). Most of our insurance policies are individually underwritten and
marketed at worksites through independent agents, with premiums paid by the
employee. AFLAC Japan, which conducts its insurance operations in Japanese
yen, accounted for 81%, 80% and 79% of the Company's total revenues for 1999,
1998 and 1997, respectively, and 87% and 86% of total assets at December 31,
1999 and 1998, respectively.
BASIS OF PRESENTATION: 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 extent of accounting estimates and actuarial
determinations subject to changes in the future are: deferred policy
acquisition costs, liabilities for future policy benefits and unpaid policy
claims and accrued liabilities for unfunded retirement plans. 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.
TRANSLATION OF FOREIGN CURRENCIES: The functional currency of AFLAC
Japan's insurance operations is the Japanese yen. We translate financial
statement accounts that are maintained in foreign currencies into U.S. dollars
as follows. Assets and liabilities denominated in foreign currencies are
translated at end-of-period exchange rates. Realized gains and losses on
security transactions are translated at the exchange rate on the trade dates
of the transactions. Other revenues, expenses and cash flows are translated
from Japanese yen into U.S. dollars using average exchange rates for the year.
The resulting currency translation adjustments are reported in accumulated
other comprehensive income. We include in earnings realized currency exchange
gains and losses resulting from transactions. Realized currency exchange
gains and losses were immaterial during the three-year period 1997 through
1999.
AFLAC Japan maintains an investment portfolio of dollar-denominated
securities on behalf of AFLAC U.S. The functional currency for these
investments is the dollar. The related investment income and
realized/unrealized investment gains and losses are also denominated in
dollars.
We have designated the cross currency swaps and the yen-denominated notes
payable (Note 6) held by the Parent Company as a hedge of our net investment
in AFLAC Japan. Outstanding principal and related accrued interest payable on
these items are translated into dollars at end-of-period exchange rates.
Currency translation adjustments are reported in accumulated other
comprehensive income.
EXH 13-34
<PAGE>
INSURANCE REVENUE AND EXPENSE RECOGNITION: The supplemental health and
life insurance policies we issue are classified as long-duration contracts.
The contract provisions generally cannot be changed or canceled during the
contract period; however, we may adjust premiums for supplemental health
policies issued in the United States within prescribed guidelines and with the
approval of state insurance regulatory authorities.
Insurance premiums for health and life policies are recognized as earned
income ratably over the premium payment periods of the policies. When
revenues are recorded, the related amounts of benefits and expenses are
charged against such revenues, so as to result in recognition of profits in
proportion to premium revenues during the period the policies are expected to
remain in force. This association is accomplished by means of annual
additions to the liability for future policy benefits and the deferral and
subsequent amortization of policy acquisition costs.
The calculation of deferred policy acquisition costs and the liability
for future policy benefits requires the use of estimates consistent with sound
actuarial valuation techniques. For new policy issues, we review our
actuarial assumptions and deferrable acquisition costs each year and revise
them when necessary to more closely reflect recent experience and studies of
actual acquisition costs. For policies in force, we evaluate deferred policy
acquisition costs by major product groupings to determine that they are
recoverable from future revenues. We charge against earnings costs that are
not recoverable.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on
hand, money market instruments and other debt instruments with a maturity of
90 days or less when purchased.
INVESTMENTS: Our fixed-maturity securities and perpetual debentures
(debt securities) are classified as either held to maturity or available for
sale. Securities classified as held to maturity are securities that we have
the ability and intent to hold to maturity or redemption and are carried at
amortized cost. All other debt securities and our equity securities are
classified as available for sale and are carried at fair value. If the fair
value is higher than the amortized cost for debt securities or the purchase
cost for equity securities, the excess is an unrealized gain; and if lower
than cost, the difference is an unrealized loss.
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities to
their contractual or economic maturity dates. We have now made this our
formal policy. Accordingly, debt securities carried at a fair value of $6.4
billion were reclassified as of October 1, 1998, from the category "available
for sale" to "held to maturity." The related unrealized gain of $1.1 billion
as of October 1, 1998, on these securities is being amortized from other
comprehensive income into investment income over the remaining term of the
securities. The related premium over amortized cost in the carrying value of
the debt securities that was created when the reclassification occurred is
also being amortized as an offsetting charge to investment income.
These unamortized 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
EXH 13-35
<PAGE>
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 on policy
reserves.
Amortized cost of debt securities is based on the purchase price adjusted
for accrual of discount or amortization of premium. The amortized cost of
debt securities purchased at a discount will equal the face or par value at
maturity. Debt securities purchased at a premium will have an amortized cost
equal to face or par value at the earlier of a call date or maturity.
Interest is recorded as income when earned and is adjusted for
amortization of any premium or discount. Dividends on equity securities are
recorded as income on the ex-dividend dates.
For the collateralized mortgage obligations held in our fixed-maturity
securities portfolio, we recognize income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied at the time of
acquisition. This adjustment is reflected in net investment income.
We identify the cost of each individual investment so that when any are
sold, we are able to record the gain or loss on that transaction in our
Consolidated Statements of Earnings.
We continually monitor the difference between the cost and estimated fair
value of our investments. If any of our investments experience a decline in
value that is other than temporary, we establish a valuation allowance for the
decline and record a realized loss in the Consolidated Statements of Earnings.
We lend fixed-maturity securities to financial institutions in short-term
security lending transactions. These securities continue to be carried as
investment assets on our balance sheet during the term of the loans and are
not recorded as sales. We receive cash or other securities as collateral for
such loans. 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.
DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business
and converting existing policies are deferred and amortized, with interest,
over the premium payment periods in proportion to the ratio of annual premium
income to total anticipated premium income. Anticipated premium income is
estimated by using the same mortality and withdrawal assumptions used in
computing liabilities for future policy benefits. In this manner, the related
acquisition expenses are matched with revenues. Costs deferred include first-
year commissions in excess of renewal year commissions and certain direct and
allocated policy issue, underwriting and marketing expenses, all of which vary
with and are primarily related to the production of new business.
EXH 13-36
<PAGE>
INSURANCE LIABILITIES: The liabilities for future policy benefits are
computed by a net level premium method using estimated future investment
yields, withdrawals and recognized morbidity and mortality tables modified to
reflect our experience, with reasonable provision for possible future adverse
deviations in experience.
Unpaid policy claims are estimates computed on an undiscounted basis
using statistical analyses of historical claim experience adjusted for current
trends and changed conditions. The ultimate liability may vary significantly
from such estimates. We regularly adjust these estimates as new experience
data emerges and reflect the changes in operating results in the year such
adjustments are made.
INCOME TAXES: Income tax provisions are generally based on pretax
earnings reported for financial statement purposes which differ from those
amounts used in preparing the Company's income tax returns. Deferred income
taxes are recognized for temporary differences between the financial reporting
basis and income tax basis of assets and liabilities, based on enacted tax
laws and statutory tax rates applicable to the periods in which the temporary
differences are expected to reverse.
DERIVATIVES: We have only limited activity with derivative financial
instruments. We do not use them for trading purposes nor do we engage in
leveraged derivative transactions. We currently use three types of
derivatives -- interest rate swaps, cross currency swaps and foreign currency
forward contracts.
We use the accrual method to account for the interest rate swaps in
connection with our bank borrowings. The difference between amounts paid and
received under such agreements is reported in interest expense in the
Consolidated Statements of Earnings. Changes in the fair value of these swap
agreements are not recognized in the financial statements. These swaps reduce
the impact of changes in interest rates on our borrowing costs and effectively
change our related interest exposure from variable to fixed.
We use cross currency swaps in connection with our $450 million senior
notes, which in effect converts the dollar-denominated principal and interest
into yen-denominated obligations. These swaps have been designated as hedges
of our investment in AFLAC Japan. The cross currency swaps are recorded as a
portion of the notes payable. Changes in the fair value of the swaps are
recorded in accumulated other comprehensive income.
We occasionally use short-term foreign currency forward contracts
(usually five months or less) in connection with annual profit transfers from
AFLAC Japan. These contracts are designated at inception as hedges of our
investment in AFLAC Japan and are accounted for using the deferral method. We
record the gains and losses during the period that the contracts are
outstanding and at termination of the contracts as unrealized foreign currency
translation gains in accumulated other comprehensive income.
EMPLOYEE STOCK OPTIONS: We use the intrinsic value method to value
employee stock options. Under this method, compensation cost is recognized
only for the excess, if any, of the market price of the stock at the grant
date over the amount an employee must pay upon exercise to acquire the stock.
Our stock option plan requires that the exercise price be equal to 100% of the
fair market value at the date of grant; therefore, no compensation expense is
recognized.
EXH 13-37
<PAGE>
TREASURY SHARES: We record treasury shares purchased at cost, which is
the market value at the time of the transaction, and as a reduction of
shareholders' equity. We use the weighted-average purchase cost to determine
the cost of treasury shares that are reissued. We record realized gains and
losses as additional paid-in capital when treasury shares are reissued.
EARNINGS PER SHARE: We present two earnings per share (EPS) calculations
- -- basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings
by the weighted-average number of shares outstanding for the period. Diluted
EPS is computed by dividing net earnings by the weighted-average number of
shares outstanding for the period plus the shares representing the dilutive
effect of stock options and other common stock equivalents.
ACCOUNTING CHANGES ADOPTED: 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, and how to measure the liability. There was no
effect on net earnings or shareholders' equity due to our adoption of this SOP
since our previous accounting method for guaranty fund and other insurance
related assessments conformed to the requirements of this SOP.
We also adopted SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, on January 1, 1999. This SOP provides
guidance for determining whether costs of software developed or obtained for
internal use should be capitalized or expensed as incurred. In the past, we
expensed all such costs as they were incurred. The adoption of this SOP had
no material effect on net earnings for the year ended December 31, 1999.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: SFAS No. 133 as amended,
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 for us becomes effective January 1, 2001.
RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to
conform to the current year presentation.
(2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company consists of two reportable business segments: AFLAC Japan
insurance and AFLAC U.S. insurance. Prior to April 15, 1997, AFLAC Broadcast
Division (the Company's television business in the United States) was included
as a reportable business segment. We sell supplemental health and life
insurance through our AFLAC Japan and AFLAC U.S. operations. Most of our
policies are individually underwritten and marketed at worksites through
independent agents, with premiums paid by the employee.
EXH 13-38
<PAGE>
Operating business segments that are not individually reportable are
included in the "Other" category, which includes minor insurance operations in
foreign countries other than Japan and our printing subsidiary.
We evaluate our business segments based on GAAP pretax operating
earnings. We do not allocate corporate overhead expenses to business
segments.
Information regarding components of operations and lines of business for
the years ended December 31 follows:
(In millions) 1999 1998 1997
-------- -------- --------
Total revenues:
AFLAC Japan:
Earned premiums:
Cancer life $ 4,582 $ 3,839 $ 4,011
Other accident and health 730 413 336
Life insurance and annuities 594 486 456
Net investment income 1,111 917 893
Other income 4 2 1
------- ------- -------
Total AFLAC Japan revenues 7,021 5,657 5,697
------- ------- -------
AFLAC U.S.:
Earned premiums:
Cancer expense 535 489 456
Accident/disability 447 345 252
Other health 344 341 334
Life insurance 32 23 20
Net investment income 245 216 180
Other income 3 4 1
------- ------- -------
Total AFLAC U.S. revenues 1,606 1,418 1,243
------- ------- -------
Television operations - U.S. - - 16
Other business segments 23 39 34
------- ------- -------
Total business segments 8,650 7,114 6,990
Realized investment
gains (losses) (13) (2) (5)
Gain on sale of television
business - - 267
Corporate* 39 30 40
Intercompany eliminations (36) (38) (41)
------- ------- -------
Total $ 8,640 $ 7,104 $ 7,251
======= ======= =======
*Includes investment income of $13 in 1999 and $2 in both 1998 and 1997.
EXH 13-39
<PAGE>
(In millions) 1999 1998 1997
-------- -------- --------
Earnings before income taxes:
AFLAC Japan $ 651 $ 502 $ 504
AFLAC U.S. 256 230 184
Television operations - U.S. - - 4
Other business segments (4) 2 (2)
------- ------- -------
Total business segments 903 734 690
Provision for the Japanese mandated
policyholder protection fund (64) (111) -
Realized investment
gains (losses) (13) (2) (5)
Gain on sale of television
business - - 267
Interest expense, non-insurance
operations (15) (10) (10)
Corporate* (33) (60) (77)
------- ------- -------
Total $ 778 $ 551 $ 865
======= ======= =======
Advertising expense:
AFLAC Japan $ 46 $ 21 $ 24
AFLAC U.S. 33 34 23
------- ------- -------
Total $ 79 $ 55 $ 47
======= ======= =======
*Includes investment income of $13 in 1999 and $2 in both 1998 and 1997.
Total assets at December 31 were as follows:
(In millions) 1999 1998
-------- --------
Total assets:
AFLAC Japan $ 32,274 $ 26,950
AFLAC U.S. 4,448 4,212
Other business segments 34 59
-------- --------
Total business segments 36,756 31,221
Corporate 5,213 4,636
Intercompany eliminations (4,928) (4,635)
-------- --------
Total $ 37,041 $ 31,222
======== ========
Total depreciation and amortization expense was $33 million in 1999, $29
million in 1998 and $33 million in 1997. AFLAC Japan accounted for $20
million in 1999, $17 million in 1998 and $20 million in 1997.
Advertising and depreciation expenses are included in insurance expenses.
EXH 13-40
<PAGE>
Total expenditures for long-lived assets were $22 million in 1999, $47
million in 1998 and $11 million in 1997. The increase in 1998 primarily
relates to the construction of an administrative office building for AFLAC
U.S.
Receivables consisted primarily of monthly insurance premiums due from
individual policyholders or their employers for payroll deduction of premiums.
At December 31, 1999, $157 million, or 57.9% of total receivables were related
to AFLAC Japan's operations ($139 million at December 31, 1998).
SALE OF TELEVISION BUSINESS: In 1997, we completed the sale of our
television business, which consisted of seven network-affiliated television
stations. The sale of one station closed in 1996. The sale of the remaining
six stations closed on April 15, 1997. The pretax and after-tax gains
recognized in the second quarter of 1997 were $267 million and $211 million,
respectively. The 1997 after-tax gain was $.77 per basic share and $.75 per
diluted share.
POLICYHOLDER PROTECTION FUND: During the second quarter of 1997, Nissan
Mutual Life Insurance Company, was declared insolvent. All life insurers
doing business in Japan had previously agreed to contribute to a voluntary
policyholder protection fund over a 10-year period that would be used to help
offset insurer insolvencies. During the second quarter of 1997, AFLAC Japan
recognized a pretax charge of $25 million for its obligation to this
policyholder protection fund. The after-tax charge was $14 million ($.05 per
basic and diluted share).
In 1998, the Japanese government created a mandatory policyholder
protection system, and subsequently established the Life Insurance
Policyholders Protection Corporation. The life insurance industry is required
to contribute to this fund semiannually over a 10 year period. The charge for
our share of the life insurance industry's obligation under the plan enacted
in early 1998 was recognized in the first quarter of 1998 and decreased pretax
earnings by $111 million for the year ended December 31, 1998. The after-tax
charge was $65 million, or $.24 per basic and diluted share.
In 1999, Toho Mutual Life Insurance Company, a Japanese insurer, was
declared insolvent by Japanese government regulators. This insolvency is
expected to deplete most of the policyholder protection fund that was
established in 1998. In order to replenish the protection fund, the Japanese
government and the life insurance industry agreed to new legislation that will
increase the life insurance industry's legal obligation to the fund. Our
share of this new obligation was recognized in the fourth quarter of 1999 and
decreased pretax earnings by $64 million ($41 million after-tax, or $.15 per
basic and diluted share).
The total liability accrued for our remaining obligations to Japanese
policyholder protection funds was $262 million at December 31, 1999.
EXH 13-41
<PAGE>
YEN-TRANSLATION EFFECTS: AFLAC Japan owns U.S. dollar-denominated
securities, which we have designated as an economic currency hedge of a
portion of our investment in AFLAC Japan. In addition, we have designated the
Parent Company's yen-denominated notes payable (Note 6) as a hedge of our net
investment in AFLAC Japan. The dollar values of our yen-denominated net
assets subject to foreign currency translation fluctuations for financial
reporting purposes are summarized as follows at December 31 (translated at
end-of-year exchange rates):
(In millions) 1999 1998
-------- --------
AFLAC Japan net assets $ 3,129 $ 2,735
Less:
AFLAC Japan dollar-denominated
net assets 1,772 1,805
Parent Company yen-denominated
net liabilities 1,094 579
------- -------
Consolidated yen-denominated net assets
subject to foreign currency
translation fluctuations $ 263 $ 351
======= =======
The following table shows the yen/dollar exchange rates used for the
three-year period ended December 31, 1999, and their effect on selected
financial data.
1999 1998 1997
------ ------ ------
Balance Sheets:
Yen/dollar exchange rate at
December 31 102.40 115.70 130.10
Yen percent weakening (strengthening) (13.0)% (12.4)% 10.8%
Exchange effect on total assets (billions)* $ 3.5 $ 2.8 $ (2.9)
Exchange effect on total
liabilities (billions)* $ 3.5 $ 2.7 $ (2.8)
Statements of Earnings:
Average exchange rate for the year 113.96 130.89 121.07
Yen percent weakening (strengthening) (14.9)% 7.5% 10.1%
Exchange effect on net earnings (millions)* $ 54 $ (20) $ (24)
Exchange effect on diluted net EPS* $ .20 $ (.07) $ (.08)
*Exchange effect amounts were determined using the same yen/dollar exchange
rate for the current year as each respective prior year.
OTHER: Payments are made from AFLAC Japan to the Parent Company for
management fees and to AFLAC U.S. for allocated expenses and remittances of
earnings. These payments totaled $282 million in 1999, $192 million in 1998
and $386 million in 1997. See Note 9 for information concerning restrictions
on remittances from AFLAC Japan.
EXH 13-42
<PAGE>
(3) INVESTMENTS
The amortized cost for debt securities, cost for equity securities and
the fair values of these investments at December 31 are shown in the following
tables:
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale securities,
carried at fair value:
Fixed-maturity securities:
Yen-denominated:
Government and guaranteed $ 6,771 $ 1,995 $ 6 $ 8,760
Municipalities 558 53 - 611
Public utilities 3,363 457 44 3,776
Banks/financial institutions 2,290 13 242 2,061
Other corporate 923 41 73 891
------- ------- ------- -------
Total yen-denominated 13,905 2,559 365 16,099
------- ------- ------- -------
Dollar-denominated:
Government 251 1 8 244
Municipalities 30 - 1 29
Mortgage-backed securities 187 1 4 184
Sovereign and Supranational 203 1 3 201
Banks/financial institutions 2,028 12 115 1,925
Other corporate 2,292 10 125 2,177
------- ------- ------- -------
Total dollar-denominated 4,991 25 256 4,760
------- ------- ------- -------
Total fixed-maturity
securities 18,896 2,584 621 20,859
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Primarily banks/financial
institutions 2,253 1 536 1,718
Dollar-denominated:
Banks/financial institutions 311 5 10 306
------- ------- ------- -------
Total perpetual debentures 2,564 6 546 2,024
------- ------- ------- -------
Equity securities 137 91 13 215
------- ------- ------- -------
Total securities
available for sale $ 21,597 $ 2,681 $ 1,180 $ 23,098
======= ======= ======= =======
EXH 13-43
<PAGE>
December 31, 1999
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity securities,
carried at amortized cost:
Fixed-maturity securities:
Yen-denominated:
Government $ 829 $ 5 $ 14 $ 820
Municipalities 372 14 - 386
Public utilities 665 2 57 610
Banks/financial institutions 1,273 36 31 1,278
Other corporate 1,250 30 94 1,186
------- ------- ------- -------
Total fixed-maturity
securities 4,389 87 196 4,280
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 3,903 73 244 3,732
------- ------- ------- -------
Total perpetual debentures 3,903 73 244 3,732
------- ------- ------- -------
Total securities held
to maturity $ 8,292 $ 160 $ 440 $ 8,012
======= ======= ======= =======
EXH 13-44
<PAGE>
December 31, 1998
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale securities,
carried at fair value:
Fixed-maturity securities:
Yen-denominated:
Government and guaranteed $ 6,018 $ 1,515 $ 17 $ 7,516
Municipalities 541 55 - 596
Public utilities 2,884 336 104 3,116
Banks/financial institutions 1,447 30 140 1,337
Other corporate 518 11 37 492
------- ------- ------- ------
Total yen-denominated 11,408 1,947 298 13,057
------- ------- ------- ------
Dollar-denominated:
Government 221 14 - 235
Municipalities 10 1 - 11
Mortgage-backed securities 95 4 - 99
Sovereign and Supranational 161 14 - 175
Banks/financial institutions 1,881 157 3 2,035
Other corporate 1,882 145 22 2,005
------- ------- ------- -------
Total dollar-denominated 4,250 335 25 4,560
------- ------- ------- -------
Total fixed-maturity
securities 15,658 2,282 323 17,617
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 1,216 1 98 1,119
Dollar-denominated:
Banks/financial institutions 239 8 - 247
------- ------- ------- -------
Total perpetual debentures 1,455 9 98 1,366
------- ------- ------- -------
Equity securities 101 82 6 177
------- ------- ------- -------
Total securities
available for sale $ 17,214 $ 2,373 $ 427 $ 19,160
======= ======= ======= =======
EXH 13-45
<PAGE>
December 31, 1998
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
(In millions) Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity securities,
carried at amortized cost:
Fixed-maturity securities:
Yen-denominated:
Government $ 769 $ - $ 51 $ 718
Municipalities 334 - 24 310
Public utilities 598 - 62 536
Banks/financial institutions 1,148 2 66 1,084
Other corporate 1,098 7 62 1,043
------- ------- ------- -------
Total fixed-maturity
securities 3,947 9 265 3,691
------- ------- ------- -------
Perpetual debentures:
Yen-denominated:
Banks/financial institutions 3,494 12 375 3,131
------- ------- ------- -------
Total perpetual debentures 3,494 12 375 3,131
------- ------- ------- -------
Total securities held
to maturity $ 7,441 $ 21 $ 640 $ 6,822
======= ======= ======= =======
EXH 13-46
<PAGE>
Fair values for debt securities were provided by outside securities
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The fair values for equity
securities were determined using market quotations on the principal public
exchange markets.
The amortized cost and fair values of our investments in fixed-maturity
securities at December 31, 1999, by contractual maturity are shown below:
AFLAC Japan AFLAC U.S.
-------------------- ---------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
--------- --------- --------- ---------
Available for sale:
Due in one year or less $ 406 $ 420 $ 127 $ 127
Due after one year through
five years 2,545 2,911 392 389
Due after five years through
10 years 2,119 2,661 275 272
Due after 10 years 10,343 11,547 2,502 2,348
U.S. mortgage-backed
securities 78 78 109 106
-------- -------- -------- --------
Total fixed-maturity
securities available
for sale $ 15,491 $ 17,617 $ 3,405 $ 3,242
======== ======== ======== ========
Held to maturity:
Due in one year or less $ 20 $ 20 $ - $ -
Due after one year through
five years 365 366 - -
Due after five years through
10 years 850 869 - -
Due after 10 years 3,154 3,025 - -
-------- -------- -------- --------
Total fixed-maturity
securities held
to maturity $ 4,389 $ 4,280 $ - $ -
======== ======== ======== ========
Expected maturities may differ from contractual maturities because some
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
EXH 13-47
<PAGE>
In recent years, AFLAC Japan has purchased subordinated perpetual
debenture securities issued primarily by European and Japanese banks. These
securities are subordinated to other debt obligations of the issuer, but rank
higher than equity securities. Although these securities have no contractual
maturity, the issue-date fixed-rate interest coupons subsequently increase to
a market-interest rate plus 150 to 300 basis points and change to a variable-
interest rate basis, generally by the 25th year after issuance, creating an
economic maturity date. The economic maturities of the perpetual debentures
owned at December 31, 1999, were as follows:
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
--------- --------- --------- ---------
Available for sale:
Due after five years
through 10 years $ 183 $ 187 $ 81 $ 79
Due after 15 years 2,228 1,691 72 67
------- ------- ------- -------
Total perpetual
debentures available
for sale $ 2,411 $ 1,878 $ 153 $ 146
======= ======= ======= =======
Held to maturity:
Due after one year
through five years $ 173 $ 177 $ - $ -
Due after five years
through 10 years 762 729 - -
Due after 10 years
through 15 years 1,136 1,131 - -
Due after 15 years 1,832 1,695 - -
------- ------- ------- -------
Total perpetual
debentures held
to maturity $ 3,903 $ 3,732 $ - $ -
======= ======= ======= =======
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable yen-denominated long-duration securities. At December 31, 1999,
the average duration of policy liabilities was approximately 12 years,
compared with 13 years in 1998. The average duration of the yen-denominated
debt securities was approximately nine years in 1999 and 1998. Currently,
when our debt securities mature, the proceeds are reinvested at a yield below
that of the interest required for the accretion of policy benefit liabilities
on policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent years.
Since 1994, premium rates on new policies issued in Japan have been increased
several times to help offset the lower investment yields available. Over the
next five years, $3.4 billion at amortized cost (with an average yield of
6.04%) of AFLAC Japan's yen-denominated debt securities are scheduled to
mature.
EXH 13-48
<PAGE>
Realized and unrealized gains and losses from investments for the years
ended December 31 were as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Realized gains (losses) on sale
or redemption of securities:
Debt securities:
Available for sale:
Gross gains from sales $ 12 $ 16 $ 24
Gross losses from sales (39) (35) (32)
Net gains from redemptions (8) 1 -
Held to maturity:
Gross gains from redemptions 1 - -
------ ------ ------
(34) (18) (8)
Equity securities:
Gross gains from sales 27 20 16
Gross losses from sales (6) (5) (12)
Other long-term assets, net - 1 (1)
------ ------ ------
Net realized gains (losses) $ (13) $ (2) $ (5)
====== ====== ======
Changes in unrealized gains (losses):
Debt securities:
Available for sale $ (447) $ (377) $ 930
Held to maturity 34 154 -
Equity securities 2 10 16
------ ------ ------
Net unrealized gains (losses) $ (411) $ (213) $ 946
====== ====== ======
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at December 31 was:
(In millions) 1999 1998
-------- --------
Unrealized gains on securities available
for sale $ 1,501 $ 1,946
Unamortized unrealized gains on securities
transferred in 1998 to held to maturity 1,258 1,224
Less:
Policy liabilities 840 885
Deferred income taxes 887 953
-------- --------
Shareholders' equity, net unrealized gains
on investment securities $ 1,032 $ 1,332
======== ========
EXH 13-49
<PAGE>
The following debt securities individually exceeded 10% of shareholders'
equity at December 31:
1999 1998
------------------- -------------------
Amortized Fair Amortized Fair
(In millions) Cost Value Cost Value
------------------- -------------------
Japan National Government $ 6,403 $ 8,368 $ 5,675 $ 7,157
The Tokyo Electric Power Co., Inc. 898 1,057 811 927
Chubu Electric Power Co., Inc. 695 764 698 714
Dai-Ichi Kangyo Bank 512 522 454 420
Sumitomo Bank 452 462 404 348
The Israel Electric Corporation
Limited 429 371 * *
Credit Suisse First Boston 427 398 393 394
Province of Quebec 394 407 * *
Deutsche Bank 387 313 * *
*Less than 10%
AFLAC Japan's investments in Japanese government bonds (at amortized
cost) constituted 22.2% and 23.9% of total debt securities at December 31,
1999 and 1998, respectively. Private placement investments held by AFLAC
Japan at amortized cost accounted for 45.8% and 41.2% of total debt securities
at December 31, 1999 and 1998, respectively. Most of the securities
classified as held to maturity and perpetual debentures classified as
available for sale constitute private placement investments.
At December 31, 1999, we owned debt securities rated below investment
grade (`BB') in the amount of $530 million at amortized cost ($541 million at
fair value), or 1.8% of total debt securities. These securities were issued
by two Japanese banks that had credit rating downgrades following our purchase
of the securities. Subsequent to December 31, 1999, these two banks were
upgraded to `BBB.' However, another corporate issue with an amortized cost of
$210 million was downgraded to `BB.'
The components of net investment income for the years ended December 31
were as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Fixed-maturity securities $ 1,129 $ 985 $ 942
Perpetual debentures 248 158 134
Short-term investments and
cash equivalents 7 8 15
Equity securities and other 2 3 4
------- ------- -------
Gross investment income 1,386 1,154 1,095
Less investment expenses 17 16 17
------- ------- -------
Net investment income $ 1,369 $ 1,138 $ 1,078
======= ======= =======
EXH 13-50
<PAGE>
At December 31, 1999, debt securities with a fair value of $13 million
were on deposit with regulatory authorities. As of December 31, 1999, $64
million, at fair value, of AFLAC Japan's investment securities had been
pledged to Japan's policyholder protection fund. The Company retains
ownership of all securities on deposit and receives the related investment
income.
(4) FINANCIAL INSTRUMENTS
NONDERIVATIVES: The carrying amounts for cash and cash equivalents,
receivables, accrued investment income, accounts payable and payables for
security transactions approximated their fair values due to the short-term
nature of these instruments. Consequently, such instruments are not included
in the table presented in this note.
The methods of determining the fair values of our investments in debt and
equity securities are described in Note 3. The fair values for notes payable
with fixed interest rates were estimated using discounted cash flow analyses
based on current rates for similar loans and borrowings.
We lend fixed-maturity securities to financial institutions in short-term
security lending transactions. These securities continue to be carried as
investment assets on our balance sheet during the term of the loans and are
not recorded as sales. We receive cash or other securities as collateral for
such loans. These short-term security lending arrangements increase
investment income with minimal risk. At December 31, 1999 and 1998, we had
security loans outstanding in the amounts of $2.4 billion and $3.0 billion at
fair value, respectively. At December 31, 1999 and 1998, we held Japanese
government bonds as collateral for loaned securities in the amounts of $2.4
billion and $3.1 billion, at fair value. See Note 1 for a description of our
accounting policies for loaned securities.
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.
DERIVATIVES: We have only limited activity with derivative financial
instruments and do not use them for trading purposes nor engage in leveraged
derivative transactions. See Note 1 for a description of our accounting
policies for derivative financial instruments. See Note 2 for additional
information on our yen-denominated net assets.
We have cross currency swaps outstanding related to our $450 million
senior notes. These cross currency swaps had the effect of converting the
dollar-denominated principal and interest into yen-denominated obligations.
The notional amount and terms of the swaps match the principal amount and
terms of the senior notes. These swaps have been designated as a hedge of our
net investment in AFLAC Japan.
We have outstanding interest rate swaps on 34.3 billion yen ($336
million) of our variable-interest-rate yen-denominated borrowings (Note 6).
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 on a portion of these loans. Under these agreements,
EXH 13-51
<PAGE>
we make fixed-rate payments at 2.29% on one loan and 1.24% on another loan and
receive floating-rate payments (.21% at December 31, 1999, plus loan costs of
25 or 20 basis points, respectively) based on the three-month Tokyo Interbank
Offered Rate.
The fair value of the currency and the interest rate swaps is the
estimated amount that we would receive or pay to terminate the swap agreements
at the reporting date. We are exposed to credit risk in the event of
nonperformance by counterparties to these contracts. The counterparties are
U.S. and Japanese financial institutions with the following credit ratings as
of December 31, 1999.
Counterparty Notional Amount
Credit Rating (In millions)
------------------- ---------------------
AA $ 124
A 536
BBB 223
-------
Total $ 883
=======
The carrying values and estimated fair values of the Company's financial
instruments as of December 31 were as follows:
1999 1998
------------------------ -----------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
------------------------ -----------------------
Assets:
Fixed-maturity
securities $ 25,248 $ 25,139 $ 21,564 $ 21,308
Perpetual debentures 5,927 5,756 4,860 4,497
Equity securities 215 215 177 177
Securities held as
collateral for
loaned securities * 2,398 * 3,101
Liabilities:
Notes payable (excluding
capitalized leases) 1,000 962 578 578
Derivatives:
Cross currency swaps 91 108 - -
Interest rate swaps * 7 * 7
Payables for return of
collateral on loaned
securities * 2,398 * 3,101
* Off-balance sheet financial instrument
The above table excludes our liabilities for future policy benefits as
these liabilities are not considered financial instruments.
EXH 13-52
<PAGE>
(5) POLICY LIABILITIES
The liability for future policy benefits at December 31 consisted of the
following:
Liability Amounts Interest Rates
------------------- -------------------
Policy Year
Issue of In 20
(In millions) Year 1999 1998 Issue Years
------ -------- -------- -------- ---------
Health insurance:
Japan: 1999 $ 29 $ - 3.0% 3.0%
1997-99 993 409 3.5 3.5
1995-96 159 111 4.0 4.0
1994-96 2,383 1,763 4.5 4.5
1990-94 11,459 9,392 5.5 5.5
1988-91 841 711 5.25 5.25
1987-88 1,462 1,238 5.5 5.5
1985-86 1,231 1,051 6.75 5.5
1978-84 3,024 2,757 6.5 5.5
1974-79 934 698 7.0 5.0
U.S.: 1998-99 107 32 7.0 7.0
1988-99 730 673 8.0 6.0
1986-99 597 542 6.0 6.0
1981-86 280 258 7.0 5.5
Other 150 182
Life insurance
and annuities:
Japan: 1999 7 - 3.0 3.0
1997-99 235 114 3.5 3.5
1994-96 544 373 4.0 4.0
1988-93 842 652 5.25 5.25
1987-88 173 136 5.5 5.5
1985-87 253 210 5.65 5.65
U.S.: 1956-99 37 31 4.0-6.0 4.0-6.0
Adjustment for
unrealized gains on
investments (Note 3) 840 885
------ ------
Total $27,310 $22,218
====== ======
The weighted-average interest rates reflected in the Consolidated
Statements of Earnings for future policy benefits for Japanese policies were
5.3% in 1999, 5.4% in 1998, and 5.5% in 1997; and for U.S. policies, 6.4% for
each year in the three-year period ended December 31, 1999.
EXH 13-53
<PAGE>
Changes in the liability for unpaid policy claims are summarized as
follows for the years ended December 31:
(In millions) 1999 1998 1997
-------- -------- --------
Unpaid supplemental health claims -
beginning of year $ 1,222 $ 987 $ 1,025
------- ------- -------
Add claims incurred during the year
related to:
Current year 3,081 2,460 2,346
Prior years (212) (136) (159)
------- ------- -------
Total incurred 2,869 2,324 2,187
------- ------- -------
Less claims paid during the year:
On claims incurred during
current year 1,969 1,579 1,507
On claims incurred during
prior years 709 617 626
------- ------- -------
Total paid 2,678 2,196 2,133
------- ------- -------
Effect of foreign exchange rate
changes on unpaid claims 145 107 (92)
------- ------- -------
Unpaid supplemental health claims -
end of year 1,558 1,222 987
Unpaid life claims - end of year 60 41 24
------- ------- -------
Total liability for
unpaid policy claims $ 1,618 $ 1,263 $ 1,011
======= ======= =======
Amounts shown for prior-year claims incurred during the year primarily
result from actual claim settlements at less than the original estimates,
which included a provision for adverse deviation.
EXH 13-54
<PAGE>
(6) NOTES PAYABLE
A summary of notes payable at December 31 follows:
(In millions) 1999 1998
-------- --------
1.67% yen-denominated senior notes due April 2009 $ 541 $ -
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 222 294
Variable interest rate (.55% at December 31, 1999) 31 35
Revolving credit agreement due November 2002:
1.24% fixed interest rate 114 134
Variable interest rate (.50% at December 31, 1999) 138 115
.50% short term 45 -
Obligations under capitalized leases, due
monthly through 2004, secured by computer
equipment in Japan 20 18
------- -------
Total notes payable $ 1,111 $ 596
======= =======
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 December 31,
1999, the outstanding principal was 55.6 billion yen ($543 million using the
December 31, 1999 exchange rate), less loan discount of $2 million, for a net
payable of $541 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. The
current borrowing limit is $250 million. Under the terms of the agreement,
the borrowing limit will reduce to $125 million on July 15, 2000. At December
31, 1999, 22.7 billion yen ($222 million) was outstanding at a fixed interest
rate and 3.2 billion yen ($31 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 December 31, 1999, 11.6
billion yen ($114 million) was outstanding at a fixed interest rate and 14.2
billion yen ($138 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.
Interest rate swaps related to the 2.29% and 1.24% (fixed rates after
swaps) loans are described in Note 4.
EXH 13-55
<PAGE>
The aggregate contractual maturities of notes payable during each of the
years after December 31, 1999, are: 2000, $180 million; 2001, $131 million;
2002, $256 million; 2003, $2 million; 2004, $1 million; and 2009, $541
million.
We were in compliance with all of the covenants of the credit agreements
at December 31, 1999.
(7) INCOME TAXES
The components of income tax expense (benefit) applicable to pretax
earnings for the years ended December 31 were as follows:
(In millions) Japan U.S. Total
------- ------- -------
1999:
Current $ 211 $ 19 $ 230
Deferred - operations (1) 45 44
Deferred tax benefit from
Japanese tax rate reduction (185) 118 (67)
------- ------- -------
Total $ 25 $ 182 $ 207
======= ======= =======
1998:
Current $ 252 $ 25 $ 277
Deferred - operations (88) (4) (92)
Deferred tax benefit from
Japanese tax rate reduction (121) - (121)
------- ------- -------
Total $ 43 $ 21 $ 64
======= ======= =======
1997:
Current $ 203 $ 89 $ 292
Deferred - operations (6) (6) (12)
------- ------- -------
Total $ 197 $ 83 $ 280
======= ======= =======
EXH 13-56
<PAGE>
Income tax expense in the accompanying consolidated financial statements
varies from the amount computed by applying the expected U.S. tax rate of 35%
to pretax earnings. The principal reasons for the differences and the related
tax effects for the years ended December 31 are summarized as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Income taxes based on U.S.
statutory rates $ 272 $ 193 $ 303
Deferred tax benefit from Japanese
tax rate reductions (67) (121) -
U.S. alternative minimum tax - 12 50
Utilization of foreign tax credit
carryforwards (20) (47) (91)
Non-insurance losses generating
no current tax benefit 3 9 -
Other, net 19 18 18
------ ------ ------
Income tax expense $ 207 $ 64 $ 280
====== ====== ======
Income taxes are recorded in the Statements of Earnings and directly in
certain shareholders' equity accounts. Income tax expense (benefit) for the
years ended December 31 was allocated as follows:
(In millions) 1999 1998 1997
-------- -------- --------
Statements of Earnings $ 207 $ 64 $ 280
------ ------ ------
Other comprehensive income:
Change in unrealized foreign currency
translation gains (141) (29) -
Unrealized gains on investment securities:
Unrealized holding gains (losses)
arising during the year (75) 125 688
Reclassification adjustment
for realized (gains) losses
included in net earnings 9 2 4
------ ------ ------
Total income taxes allocated to
other comprehensive income (207) 98 692
------ ------ ------
Additional paid-in capital(exercise
of stock options) (2) (1) (1)
------ ------ ------
Total income taxes $ (2) $ 161 $ 971
====== ====== ======
In March 1998, the Japanese government reduced the corporate income tax
rate, which lowered AFLAC Japan's rate from 45.3% to 41.7%. The tax rate was
again reduced in March 1999, from 41.7% to 36.2%. These tax rate reductions
decreased our consolidated liability for deferred income taxes. The
reductions were the net effect of applying the new tax rates to the temporary
differences that exist between the Japanese tax basis and financial reporting
basis of assets and liabilities, and the limitations imposed by the U.S.
foreign tax credit provisions.
EXH 13-57
<PAGE>
The reduction of the consolidated deferred income tax liability from the
1999 tax rate reduction increased net earnings in the first quarter of 1999 by
$67 million ($.25 per basic share, $.24 per diluted share). The 1998 tax rate
reduction reduced the deferred income tax liability in the first quarter of
1998 by $121 million ($.45 per basic share, $.44 per diluted share).
The 1999 reduction in the Japanese corporate income tax rate did not
significantly change our combined U.S./Japan effective tax rate due to the
operation of the U.S. foreign tax credit provisions.
Effective January 1, 1998, the Japanese government changed the income tax
provisions for foreign companies operating in Japan, increasing income taxes
on investment income and realized gains/losses from securities issued by
entities located in their home country. This change impacted income tax
expense applicable to comprehensive income beginning in 1998. Deferred income
tax of $129 million on unrealized gains/losses for 1998 on debt securities
includes $59 million related to accumulated unrealized gains existing as of
January 1, 1998, the effective date of the tax law change. Also, deferred
income tax benefits on changes in unrealized foreign currency translation
gains includes $80 million in 1999 and $29 million in 1998 that represent
Japanese income taxes on currency translation losses in 1998 that arise for
Japanese tax purposes from conversion of AFLAC Japan's dollar-denominated
investments into yen. This tax benefit for 1998 is net of a deferred income
tax expense in 1998 of $51 million for similar accumulated currency
translation gains existing as of January 1, 1998.
EXH 13-58
<PAGE>
The income tax effects of the temporary differences that give rise to
deferred income tax assets and liabilities as of December 31 were as follows:
(In millions) 1999 1998
-------- --------
Deferred income tax liabilities:
Deferred acquisition costs $ 1,204 $ 1,023
Unrealized gains on investment securities 415 461
Other basis differences in investment
securities 725 792
Premiums receivable 79 67
------ ------
Total deferred income tax liabilities 2,423 2,343
------ ------
Deferred income tax assets:
Difference in tax basis of investment in
AFLAC Japan 227 61
Unrealized exchange loss on yen-denominated
notes payable 58 -
Policy benefit reserves 405 440
Policyholder protection fund 67 49
Unfunded retirement benefits 71 71
Other accrued expenses 80 33
Tax credit carryforwards 96 10
Other 211 223
------ ------
Total gross deferred tax assets 1,215 887
Less valuation allowance 157 89
------ ------
Total deferred income tax assets 1,058 798
------ ------
Net deferred income tax liability 1,365 1,545
Current income tax liability 146 320
------ ------
Total income tax liability $ 1,511 $ 1,865
====== ======
A valuation allowance is provided when it is more likely than not that
deferred tax assets will not be realized. We have established valuation
allowances primarily for foreign tax credit and non-insurance loss
carryforwards that exceed projected future offsets. Under U.S. income tax
rules, only 35% of non-insurance losses can be offset against life insurance
taxable income each year. During 1999, the valuation allowance for deferred
tax assets increased by $68 million (decreased by $44 million in 1998) due to
changes in carryforwards of foreign tax credits, alternative minimum tax
credits and non-insurance losses. For current U.S. income tax purposes,
foreign tax credit carryforwards of $46 million and alternative minimum tax
credits of $50 million were available at December 31, 1999. The foreign tax
credit carryforwards expire in 2004.
EXH 13-59
<PAGE>
(8) SHAREHOLDERS' EQUITY
The following is a reconciliation of the number of shares of the
Company's common stock for the years ended December 31:
(In thousands of shares) 1999 1998 1997
-------- -------- --------
Common stock - issued:
Balance at beginning of year 317,971 316,380 314,478
Exercise of stock options 2,378 1,591 1,902
-------- -------- --------
Balance at end of year 320,349 317,971 316,380
-------- -------- --------
Treasury stock:
Balance at beginning of year 52,287 49,944 38,708
Purchases of treasury stock:
Open market 4,316 3,806 12,737
Other 188 212 390
Shares issued to sales associates
stock bonus plan and AFL
Stock Plan (832) (1,218) (1,526)
Exercise of stock options (1,351) (457) (365)
-------- -------- --------
Balance at end of year 54,608 52,287 49,944
-------- -------- --------
Shares outstanding at end of year 265,741 265,684 266,436
======== ======== ========
In February 1994, the board of directors authorized a share repurchase
program. As of December 31, 1999, approximately three million shares were
available for purchase under current authorizations.
STOCK OPTIONS: The Company's stock option plan allows grants for both
incentive stock options (ISO) and non-qualifying stock options (NQSO) to
employees and NQSO to members of the board of directors. The option period
runs for a maximum of 10 years. The exercise price must be equal to 100% of
the fair market value at the date of grant; therefore, no compensation expense
is recognized. The options are exercisable immediately unless they are placed
under a vesting schedule that is determined by the compensation committee of
the board of directors at the time of the grant. At December 31, 1999, 9.4
million shares were available for future grants.
EXH 13-60
<PAGE>
The following table summarizes stock option activity:
Weighted-Average
Option Exercise Price
(In thousands of shares) Shares per Share
---------- ----------------
Outstanding at December 31, 1996 17,602 $ 9.43
Granted in 1997 1,451 26.73
Canceled in 1997 (40) 15.44
Exercised in 1997 (2,542) 5.78
-------
Outstanding at December 31, 1997 16,471 11.50
Granted in 1998 1,953 30.18
Canceled in 1998 (31) 23.74
Exercised in 1998 (2,148) 6.92
-------
Outstanding at December 31, 1998 16,245 14.33
Granted in 1999 1,244 46.78
Canceled in 1999 (75) 31.37
Exercised in 1999 (3,833) 9.33
-------
Outstanding at December 31, 1999 13,581 $ 18.61
=======
(In thousands of shares) 1999 1998 1997
---------- ---------- ----------
Shares exercisable at
end of year 11,084 12,946 13,256
======= ======= =======
The following table summarizes information about stock options
outstanding at December 31, 1999:
(In thousands Options Outstanding Options Exercisable
of shares) ----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs) Price Exercisable Price
- --------------- ----------- ------------ ---------- ----------- ----------
$ 2.00 - $ 8.07 1,494 1.2 $ 4.56 1,494 $ 4.56
9.42 3,629 3.4 9.42 3,629 9.42
9.60 - 14.10 1,104 4.9 12.75 1,104 12.75
15.83 2,080 6.1 15.83 2,080 15.83
16.97 - 26.63 1,934 7.2 22.94 1,934 22.94
27.31 - 30.09 2,059 8.4 29.74 683 29.42
30.44 - 54.31 1,281 9.7 46.14 160 43.06
------ ------
$ 2.00 - $54.31 13,581 5.6 $ 18.61 11,084 $ 14.37
====== ======
EXH 13-61
<PAGE>
As permitted by Statement of Financial Accounting Standard No. 123, we do
not recognize compensation cost in the Consolidated Statements of Earnings for
employee stock options. Had compensation cost for stock options granted after
1994 been determined using the alternative fair-value-based method, the effect
on our net earnings and net earnings per share would approximate the following
pro forma amounts:
1999 1998 1997
-------- -------- --------
Decrease to:
Net earnings (in millions) $ 14 $ 13 $ 12
Net earnings per share - basic .05 .05 .04
Net earnings per share - diluted .05 .05 .04
For the above pro forma information, the fair value of each option
granted after 1994 was estimated on the date of grant using the Black-Scholes
multiple option approach with the following assumptions for options granted
during the three-year period ended December 31, 1999:
1999 1998 1997
--------- --------- ---------
Expected life from vesting
date (years) 3.7-4.7 3.5-4.4 3.4-6.1
Dividend yield .6% .6% 1.0%
Expected volatility 30.3% 27.3% 20.2%
Risk-free interest rate 6.0% 5.5% 6.0%
These fair value amounts were then amortized over the vesting periods of
the related options.
The pro forma information presented above is not indicative of future
amounts. The provisions of SFAS No. 123 were applicable prospectively, and
the above pro forma disclosures therefore do not include amortization of the
fair value of awards prior to 1995. Also, we expect that additional options
will be granted in future years.
VOTING RIGHTS: In accordance with the Parent Company's Articles of
Incorporation, shares of common stock are generally entitled to one vote per
share until they have been held by the same beneficial owner for a continuous
period of 48 months, at which time they become entitled to 10 votes per share.
(9) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Net assets of the insurance subsidiaries aggregated $4.9 billion at
December 31, 1999, on a GAAP basis. AFLAC Japan accounted for $3.1 billion,
or 64.0%, of these net assets.
Our insurance subsidiaries are required to report their results of
operations and financial position to state insurance regulatory authorities,
and in the case of AFLAC Japan, to the Japanese Financial Supervisory Agency,
on the basis of statutory accounting practices prescribed or permitted by such
authorities. As determined on a U.S. statutory accounting basis, AFLAC's net
income was $344 million in 1999, $231 million in 1998 and $335 million in
1997, and capital and surplus was $1.6 billion at both December 31, 1999 and
1998. The sale of our television business generated $231 million of statutory
net income in 1997.
EXH 13-62
<PAGE>
Reconciliations of AFLAC's net assets on a GAAP basis to net assets
determined on a U.S. statutory accounting basis as of December 31 were as
follows:
(In millions) 1999 1998
-------- --------
Net assets on GAAP basis $ 4,874 $ 4,591
Adjustment of debt securities from fair value
to amortized cost (2,691) (3,094)
Elimination of deferred policy acquisition costs (3,677) (3,059)
Adjustment to policy liabilities 1,801 1,788
Elimination of deferred income taxes 1,463 1,578
Reduction in premiums receivable (106) (77)
Establishment of asset valuation reserve (175) (147)
Elimination of statutory non-admitted assets (130) (110)
Difference in accrued expenses 260 139
Other, net (13) 39
------- -------
Net assets on U.S. statutory
accounting basis $ 1,606 $ 1,648
======= =======
The Parent Company depends on its subsidiaries for cash flow, primarily
in the form of dividends and management fees. Consolidated retained earnings
in the accompanying financial statements largely represent undistributed
earnings of our insurance subsidiary. Dividends, management fees (see Note 2)
and other payments to the Parent Company by its insurance subsidiary are
subject to various regulatory restrictions and approvals related to
safeguarding the interests of insurance policyholders. One of the primary
considerations is that our insurance subsidiary must maintain adequate risk-
based capital for the U.S. regulatory authorities and adequate solvency
margins for Japanese regulatory authorities. Also, the maximum amount of
dividends that can be paid to shareholders by insurance companies domiciled in
the State of Georgia without prior approval of the Commissioner of Insurance
is the greater of the net gain from operations for the previous year
determined under statutory accounting principles or 10% of statutory equity as
of the previous year-end. Dividend payments by AFLAC during 2000 in excess of
$333 million would require such approval. Dividends paid by AFLAC during 1999
were $162 million.
A portion of AFLAC Japan annual earnings, as determined on a Japanese
statutory accounting basis, can be remitted each year to AFLAC U.S. after
complying with solvency margin provisions and satisfying various conditions
imposed by Japanese regulatory authorities for protecting policyholders.
Profit remittances to the United States can fluctuate due to changes in the
amounts of Japanese regulatory earnings. Among other items, factors affecting
regulatory earnings include Japanese regulatory accounting practices and
fluctuations in currency translations of AFLAC Japan's dollar-denominated
investments into yen. Earnings were remitted from AFLAC Japan to AFLAC U.S.
in the amount of $243 million in 1999, $154 million in 1998 and $347 million
in 1997.
Net assets (unaudited) of AFLAC Japan, based on Japanese statutory
accounting practices, aggregated $638 million and $397 million at December 31,
1999 and 1998, respectively. Japanese statutory accounting practices differ
in many respects from U.S. GAAP. Under Japanese statutory accounting
EXH 13-63
<PAGE>
practices, policy acquisition costs are charged off immediately, policy
benefit and claim reserving methods are different, policyholder protection
fund obligations are not accrued, deferred income tax liabilities are
recognized on a different basis, and investment securities are carried at cost
less certain market value adjustments for foreign exchange losses on dollar-
denominated securities. Accounting standards for financial instruments are in
the process of being revised in Japan.
(10) BENEFIT PLANS
Reconciliations of the funded status of the basic employee defined
benefit pension plans with amounts recognized in the accompanying consolidated
balance sheets as of December 31 were as follows:
1999 1998
---------------- ----------------
(In thousands) Japan U.S. Japan U.S.
------- ------- ------- -------
Projected benefit obligation:
Benefit obligation at
beginning of year $49,063 $60,420 $25,627 $50,465
Service cost 4,675 2,938 2,940 2,362
Interest cost 1,658 4,311 1,018 3,491
Actuarial loss (gain) (2,498) (5,799) 9,393 5,559
Benefits paid (554) (1,376) (440) (1,457)
Effect of foreign exchange
rate changes 370 - 10,525 -
Plan amendments - 1,864 - -
Benefit obligations assumed
from government plan 21,472 - - -
------ ------ ------ ------
Benefit obligation at
end of year 74,186 62,358 49,063 60,420
------ ------ ------ ------
Plan assets:
Fair value of plan assets at
beginning of year 26,486 48,541 18,547 45,530
Actual return on plan assets 727 9,260 465 2,878
Employer contribution 5,429 - 2,260 1,590
Benefits paid (554) (1,376) (440) (1,457)
Effect of foreign exchange
rate changes 632 - 5,654 -
Assets transferred from
government plan 17,110 - - -
------ ------ ------ ------
Fair value of plan assets at
end of year 49,830 56,425 26,486 48,541
------ ------ ------ ------
Funded status (24,356) (5,933) (22,577) (11,879)
Unrecognized net actuarial
loss (gain) 8,755 (703) 14,548 10,308
Unrecognized transition
obligation (asset) 4,578 (718) 567 (840)
Unrecognized prior service cost 1,013 1,890 1,098 165
------ ------ ------ ------
(Accrued) prepaid benefit cost $(10,010) $(5,464) $(6,364) $(2,246)
====== ====== ====== ======
EXH 13-64
<PAGE>
In 1999 we transferred most of the assets of the AFLAC Japan employee
retirement plan from an insured arrangement to a trust managing a portfolio of
investment securities. In 1999, we also assumed a pension benefit program
together with the related assets for AFLAC Japan employees that was previously
administered by the Japanese government.
The components of retirement expense and actuarial assumptions for the
years ended December 31 are as follows:
1999 1998 1997
-------------- -------------- --------------
(In thousands) Japan U.S. Japan U.S. Japan U.S.
------ ------ ------ ------ ------ ------
Components of net periodic
benefit cost:
Service cost $4,675 $2,938 $2,940 $2,362 $2,224 $2,450
Interest cost 1,658 4,311 1,018 3,491 982 3,132
Expected return on plan
assets (1,516) (4,313) (451) (4,086) (429) (3,366)
Recognized net actuarial
loss 363 265 218 - - 405
Amortization of transition
obligation (asset) 258 (122) 77 (122) 83 (122)
Amortization of prior
service cost 77 138 67 16 72 (26)
Net curtailment gain - - - - - (377)
----- ----- ----- ----- ----- -----
Net periodic benefit cost $5,515 $3,217 $3,869 $1,661 $2,932 $2,096
===== ===== ===== ===== ===== =====
Weighted-average actuarial
assumptions as of fiscal
year-end:
Discount rate-net periodic
benefit cost 3.0% 6.5% 3.0% 7.0% 4.0% 7.0%
Discount rate-benefit
obligations 3.0 7.0 3.0 6.5 4.0 7.0
Expected return on plan
assets 4.5 9.0 2.5 9.0 2.5 9.0
Rate of compensation
increase 3.5 4.0 3.5 4.0 3.5 4.0
In addition to the benefit obligations for funded employee plans, we also
maintain unfunded supplemental retirement plans for certain officers and
beneficiaries. The expense recognized for these plans was $39 million in
1999, $30 million in 1998 and $35 million in 1997. The accrued retirement
liability for the unfunded supplemental retirement plans at December 31, 1999
and 1998, was $260 million and $223 million, respectively. The actuarial
present value of projected benefit obligations was $260 million and $236
million at December 31, 1999 and 1998, respectively. The discount rates used
were the same as for the funded plans. Such supplemental retirement plans
include a lifetime obligation to the surviving spouse of the Company's former
chairman of the board. Benefits are payable at .5% of the Company's pretax
earnings, as defined in the agreement, for the previous year.
EXH 13-65
<PAGE>
Reconciliation of the benefit obligation of the unfunded retiree medical
program and other postretirement benefits for U.S. employees with amounts
recognized in the accompanying consolidated balance sheets as of December 31
were as follows:
(In thousands) 1999 1998
-------- --------
Benefit obligation:
Benefit obligation at beginning of year $ 10,822 $ 10,062
Service cost 361 320
Interest cost 752 684
Actuarial loss 503 95
Plan amendments 393 -
Benefits paid (343) (339)
------- -------
Unfunded benefit obligation at end of year 12,488 10,822
Unrecognized net actuarial gain 530 1,032
Unrecognized prior service cost (368) -
------- -------
Accrued benefit cost $ 12,650 $ 11,854
======= =======
The components of expenses for the retiree medical program and actuarial
assumptions are as follows:
(In thousands) 1999 1998 1997
-------- -------- --------
Service cost $ 361 $ 320 $ 313
Interest cost 752 684 674
Recognized net actuarial loss (gain) - (30) (34)
Amortization of prior service cost 26 - -
------- ------- -------
Net periodic benefit cost $ 1,139 $ 974 $ 953
======= ======= =======
Discount rate:
Net periodic cost 6.5% 7.0% 7.0%
Benefit obligations 7.0 6.5 7.0
Effect of 1-percentage point increase
in health care cost trend rate:
On total of service and interest
cost components $ 119 $ 102 $ 93
On postretirement benefit obligation 991 791 704
Effect of 1-percentage point decrease
in health care cost trend rate:
On total of service and interest
cost components (101) (97) (80)
On postretirement benefit obligation (846) (743) (650)
The projected health care cost trend rate used in 1999 was 9%, graded to
7% over four years.
STOCK BONUS PLAN: AFLAC U.S. maintains a stock bonus plan for eligible
U.S. sales associates. Plan participants are awarded rights on a monthly
basis to shares of AFLAC Incorporated common stock, based on their sales of
EXH 13-66
<PAGE>
insurance policies. The cost of these awards, which are included in deferred
policy acquisition costs, amounted to $18 million in 1999, and $10 million in
both 1998 and 1997. Prior to July 1999, participants received the shares of
stock after satisfying various vesting requirements and other conditions.
This stock bonus program was revised effective July 1, 1999, to substantially
eliminate the vesting requirements and to make various other modifications.
As a result of this change, plan participants became 100% vested in their
accumulated share rights under the original program and the related shares of
stock held in a trust were distributed. The market value of the distributed
shares was charged against a liability for accrued stock compensation and the
excess of market value over share cost ($42 million) was recognized as
additional paid-in capital.
(11) CONTINGENCIES
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.
EXH 13-67
<PAGE>
(12) SUPPLEMENTARY INFORMATION
1999 1998 1997
-------- -------- --------
Weighted-average shares used in
calculating earnings per share
(in thousands):
Average outstanding shares used
for calculating basic EPS 265,869 266,305 272,110
Effect of stock options 9,554 9,567 9,486
-------- -------- --------
Average outstanding shares used
for calculating diluted EPS 275,423 275,872 281,596
======== ======== ========
- ----------------------------------------------------------------------------
Other:
Policy acquisition costs deferred
during the year (in millions) $ 556 $ 436 $ 408
Commission deferred as a
percentage of total acquisition
costs deferred 72% 69% 70%
Personnel compensation and
benefits as a percentage
of insurance expenses 40% 37% 35%
- ----------------------------------------------------------------------------
Supplemental disclosures of cash
flow information (in millions):
Income taxes paid $ 411 $ 210 $ 222
Interest paid 17 12 12
Non-cash financing activities:
Capital lease obligations 4 7 6
Treasury shares issued for:
Dividends to shareholders 5 4 4
Associate stock bonus plan 54 10 10
- ----------------------------------------------------------------------------
Property and equipment (in millions):
Land $ 147 $ 131 $ 111
Buildings 374 335 290
Equipment 156 159 147
-------- -------- --------
677 625 548
Less accumulated depreciation 168 159 146
-------- -------- --------
Net property and equipment $ 509 $ 466 $ 402
======== ======== ========
- ----------------------------------------------------------------------------
EXH 13-68
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements of
AFLAC Incorporated and subsidiaries. The statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon management's best estimates and judgments. Informed judgments
and estimates are used for those transactions not yet complete or for which
the ultimate effects cannot be measured precisely. Financial information
elsewhere in this annual report is consistent with the information in the
financial statements.
The Company's internal controls are designed to reasonably assure that
AFLAC Incorporated's books and records reflect the transactions of the
Company, that assets are safeguarded, and that the Company's established
policies and procedures are followed. The effectiveness of the controls
system is supported by the selection and training of qualified personnel, an
organizational structure that provides an appropriate division of
responsibility, and a comprehensive internal audit program.
The Company engages KPMG LLP as independent auditors to audit its
financial statements and express their opinion thereon. Their audits
include reviews and tests of the Company's internal controls to the extent
they believe necessary to determine the audit procedures to be performed
that will support their opinion. Members of that firm also have the right
of full access to each member of management in conducting their audits. The
report of KPMG LLP appears on the following page.
The audit committee of the board of directors, which is composed of
outside directors, serves in an oversight role to assure the integrity and
objectivity of the Company's financial reporting process. The committee
meets periodically with representatives of management, as well as the
independent and internal auditors, to review matters of a material nature
related to financial reporting and the planning, results and recommendations
of audits. The independent and internal auditors have free access to the
audit committee, without management present, to discuss any matter they
believe should be brought to the attention of the committee. The committee
is also responsible for making recommendations to the board of directors
concerning the selection of the independent auditors.
/s/ Daniel P. Amos
- ---------------------------------------
Daniel P. Amos
President and Chief Executive Officer
/s/ Kriss Cloninger III
- ---------------------------------------
Kriss Cloninger III
Executive Vice President and Chief Financial Officer
EXH 13-69
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
AFLAC Incorporated
We have audited the accompanying consolidated balance sheets of AFLAC
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, shareholders' equity, cash
flows and comprehensive income for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AFLAC
Incorporated and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Atlanta, Georgia
January 27, 2000
EXH 13-70
<PAGE>
<TABLE>
Unaudited Consolidated Quarterly Financial Data
(In millions, except for per-share amounts)
<CAPTION>
Three Months ended, March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,048 16.5% $ 2,032 19.3% $ 2,196 29.2% $ 2,365 21.6%
Net earnings 196(1) 21.9 130 26.9 144 33.5 102(2) (12.2)
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .74(1) 23.3% $ .49 28.9% $ .54 35.0% $ .38(2) (13.6)%
Net earnings (diluted) .71(1) 22.4 .47 27.0 .52 33.3 .37(2) (11.9)
Cash dividends .065 .075 .075 .075
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Three Months ended, March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amount % Change Amount % Change Amount % Change Amount % Change
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,757 2.9% $ 1,704 (15.2)% $ 1,700 (5.0)% $ 1,944 11.4%
Net earnings 160(3) 77.9 103 (66.1) 108 12.0 116 21.0
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Net earnings (basic) $ .60(3) 81.8% $ .38 (65.8)% $ .40 14.3% $ .44 22.2%
Net earnings (diluted) .58(3) 81.3 .37 (65.4) .39 14.7 .42 20.0
Cash dividends .058 .065 .065 .065
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes gain of $67 ($.25 per basic share, $.24 per diluted share) due to a reduction in deferred tax liabilities from a
tax rate cut in Japan; (2) Includes a charge of $41 ($.15 per basic and diluted share) for a mandated policyholder protection
fund in Japan; (3) Includes gain of $121 ($.45 per basic share, $.44 per diluted share) due to a reduction in deferred tax
liabilities from a tax rate cut in Japan and a charge of $65 ($.24 per basic and diluted share) for a mandated policyholder
protection fund in Japan.
EXH 13-71
</TABLE>
21
<PAGE>
EXHIBIT 21
EXH 21
<PAGE>
AFLAC INCORPORATED
SUBSIDIARIES
The following list sets forth the subsidiaries of AFLAC Incorporated:
Company Jurisdiction
------- ------------
AFLAC Insurance Service Japan
AFLAC International, Inc. Georgia
AFLAC Payment Service Japan
AFLAC Real Estate Holdings, Inc. Georgia
American Family Life Assurance Company of
Columbus (AFLAC) Georgia
American Family Life Assurance Company
of New York (AFLAC-NY) New York
Communicorp, Inc. Georgia
The above subsidiaries are 100% directly owned by AFLAC Incorporated,
except:
AFLAC-NY is 100% directly owned by AFLAC.
AFLAC Insurance Service and AFLAC Payment Service
are 100% directly owned by AFLAC International, Inc.
EXH 21-1
<PAGE>
EXHIBIT 23
EXH 23
<PAGE>
KPMG LLP
Certified Public Accountants
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
INDEPENDENT AUDITORS' CONSENT
The Shareholders and The Board of Directors
AFLAC Incorporated:
We consent to incorporation by reference in Registration Statement Nos.
33-64535 and 333-16533 on Form S-3; 33-41552, 33-44720, 333-01243, 333-69333
and 333-27883 on Form S-8 and 333-78403 on Form S-4 of AFLAC Incorporated of
our report dated January 27, 2000, relating to the consolidated balance sheets
of AFLAC Incorporated and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of earnings, shareholders' equity, cash
flows and comprehensive income for each of the years in the three-year period
ended December 31, 1999, which report appears in the December 31, 1999, annual
report on Form 10-K of AFLAC Incorporated.
KPMG LLP
Atlanta, Georgia
March 27, 2000
EXH 23-1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-K for the
year ended December 31, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 22,883
<DEBT-CARRYING-VALUE> 8,292
<DEBT-MARKET-VALUE> 8,012
<EQUITIES> 215
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 31,408
<CASH> 616
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,692
<TOTAL-ASSETS> 37,041
<POLICY-LOSSES> 28,928
<UNEARNED-PREMIUMS> 361
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 315
<NOTES-PAYABLE> 1,111
0
0
<COMMON> 32
<OTHER-SE> 3,836
<TOTAL-LIABILITY-AND-EQUITY> 37,041
7,264
<INVESTMENT-INCOME> 1,369
<INVESTMENT-GAINS> (13)
<OTHER-INCOME> 20
<BENEFITS> 5,885
<UNDERWRITING-AMORTIZATION> 257
<UNDERWRITING-OTHER> 1,720
<INCOME-PRETAX> 778
<INCOME-TAX> 207
<INCOME-CONTINUING> 571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 571
<EPS-BASIC> 2.15
<EPS-DILUTED> 2.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
