<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarter ended June 30, 2000
Commission File No. 1-7434
AFLAC INCORPORATED
------------------------------------------------------
GEORGIA 58-1167100
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999
-----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (706) 323-3431
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class August 1, 2000
---------------------------- ------------------
Common Stock, $.10 Par Value 265,175,340 shares
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 . . . . . . . . . . 1
Consolidated Statements of Earnings -
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999. . . . . . . . . 3
Consolidated Statements of Shareholders' Equity -
Six Months Ended June 30, 2000 and 1999. . . . . . . . . 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999. . . . . . . . . 6
Consolidated Statements of Comprehensive Income -
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999. . . . . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . 9
Review by Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . . 16
Independent Auditors' Report . . . . . . . . . . . . . . . 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 18
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . . . . . . . . 31
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 34
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 34
Items other than those listed above are omitted because they are not
required or are not applicable.
i
<PAGE>
Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
June 30, December 31,
2000 1999
(Unaudited)
----------- ------------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$20,663 in 2000 and $18,896 in 1999) $ 22,501 $ 20,859
Perpetual debentures (amortized cost,
$2,519 in 2000 and $2,564 in 1999) 2,148 2,024
Equity securities (cost, $156 in 2000
and $137 in 1999) 239 215
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $4,074 in
2000 and $4,280 in 1999) 4,020 4,389
Perpetual debentures (fair value, $3,684
in 2000 and $3,732 in 1999) 3,766 3,903
Other investments 16 18
Cash and cash equivalents 967 616
-------- --------
Total investments and cash 33,657 32,024
Receivables, primarily premiums 286 270
Accrued investment income 395 369
Deferred policy acquisition costs 3,756 3,692
Property and equipment, at cost less
accumulated depreciation 497 509
Other 203 177
-------- --------
Total assets $ 38,794 $ 37,041
======== ========
See the accompanying Notes to Consolidated Financial Statements.
(continued)
1
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions, except for share and per-share amounts)
June 30, December 31,
2000 1999
(Unaudited)
----------- -----------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 27,557 $ 27,310
Unpaid policy claims 1,726 1,618
Unearned premiums 362 361
Other policyholders' funds 322 315
-------- --------
Total policy liabilities 29,967 29,604
Notes payable 1,097 1,111
Income taxes 1,705 1,511
Payables for return of cash collateral
on loaned securities 880 -
Payables for security transactions 119 3
Other 865 944
-------- --------
Total liabilities 34,633 33,173
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 1,000,000 shares; issued 321,924
shares in 2000 and 320,349 shares in 1999 32 32
Additional paid-in capital 324 310
Retained earnings 3,672 3,356
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 182 232
Unrealized gains on investment securities 1,155 1,032
Treasury stock, at average cost (1,204) (1,094)
-------- --------
Total shareholders' equity 4,161 3,868
-------- --------
Total liabilities and shareholders' equity $ 38,794 $ 37,041
======== ========
Shareholders' equity per share $ 15.69 $ 14.56
======== ========
See the accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In millions, except for share and Three Months Ended June 30, Six Months Ended June 30,
per-share amounts - Unaudited) ---------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums, principally supplemental health insurance $ 2,054 $ 1,706 $ 4,073 $ 3,434
Net investment income 385 325 761 645
Realized investment gains (losses) (91) (5) (94) (9)
Other income 10 6 16 9
------- ------- ------- -------
Total revenues 2,358 2,032 4,756 4,079
------- ------- ------- -------
Benefits and expenses:
Benefits and claims 1,650 1,380 3,270 2,780
Acquisition and operating expenses:
Amortization of deferred policy acquisition costs 77 64 146 121
Insurance commissions 258 220 513 445
Insurance expenses 193 151 382 293
Interest expense 5 5 10 8
Release of retirement liability (101) - (101) -
Other operating expenses 17 15 33 32
------- ------- ------- -------
Total acquisition and
operating expenses 449 455 983 899
------- ------- ------- -------
Total benefits and expenses 2,099 1,835 4,253 3,679
------- ------- ------- -------
Earnings before income taxes 259 197 503 400
------- ------- ------- -------
Income tax expense (benefit):
Operations 57 67 145 141
Deferred tax benefit from Japanese tax rate reduction - - - (67)
------- ------- ------- -------
Total income taxes 57 67 145 74
------- ------- ------- -------
Net earnings $ 202 $ 130 $ 358 $ 326
======= ======= ======= =======
(continued on next page)
3
</TABLE>
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
<CAPTION>
(In millions, except for share and Three Months Ended June 30, Six Months Ended June 30,
per-share amounts - Unaudited) ---------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings per share:
Basic $ .76 $ .49 $ 1.35 $ 1.23
Diluted .74 .47 1.31 1.18
======= ======= ======= =======
Shares used in computing earnings per share (In thousands):
Basic 265,571 265,818 265,585 265,965
Diluted 272,431 275,969 272,346 276,368
======= ======= ======= =======
Cash dividends per share $ .085 $ .075 $ .16 $ .14
======= ======= ======= =======
See the accompanying Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions, except for per-share
amounts - Unaudited) Six Months Ended June 30,
----------------------------
2000 1999
------ ------
Common Stock:
Balance at beginning and end of period $ 32 $ 32
------ ------
Additional paid-in capital:
Balance at beginning of year 310 235
Exercise of stock options, including
income tax benefits 11 9
Gain on treasury stock reissued 3 8
------ ------
Balance at end of period 324 252
------ ------
Retained earnings:
Balance at beginning of year 3,356 2,862
Net earnings 358 326
Cash dividends ($.16 per share in 2000
and $.14 in 1999) (42) (37)
------ ------
Balance at end of period 3,672 3,151
------ ------
Accumulated other comprehensive income:
Balance at beginning of year 1,264 1,551
Change in unrealized foreign currency
translation gains (losses) during
period, net of income taxes (50) (12)
Change in unrealized gains (losses) on
investment securities during period, net
of income taxes 123 (291)
------ ------
Balance at end of period 1,337 1,248
------ ------
Treasury stock:
Balance at beginning of year (1,094) (910)
Purchases of treasury stock (133) (141)
Cost of shares issued 23 19
------ ------
Balance at end of period (1,204) (1,032)
------ ------
Total shareholders' equity $ 4,161 $ 3,651
====== ======
See the accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions - Unaudited)
Six Months Ended
June 30,
2000 1999
------ ------
Cash flows from operating activities:
Net earnings $ 358 $ 326
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 1,359 1,232
Deferred income taxes 47 (27)
Change in income taxes payable 103 (130)
Increase in deferred policy
acquisition costs (146) (133)
Change in receivables and advance premiums (6) (7)
Realized investment losses 94 9
Release of retirement liability (101) -
Other, net (30) (2)
------ ------
Net cash provided by operating activities 1,678 1,268
------ ------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed-maturity securities sold 400 718
Fixed-maturity securities matured 215 164
Equity securities 22 42
Securities held to maturity:
Fixed-maturity securities matured - 9
Other investments, net (1) -
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (2,559) (1,588)
Perpetual debentures (21) (804)
Equity securities (116) (38)
Securities held to maturity:
Fixed-maturity securities - (41)
Investment in new subsidiary (8) -
Cash received as collateral on
loaned securities 880 -
Additions to property and equipment, net (11) (9)
------ ------
Net cash used by investing activities $(1,199) $(1,547)
------ ------
(continued)
6
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In millions - Unaudited)
Six Months Ended
June 30,
2000 1999
------ ------
Cash flows from financing activities:
Proceeds from borrowings $ 15 $ 446
Principal payments under debt obligations - (3)
Dividends paid to shareholders (39) (35)
Purchases of treasury stock (133) (141)
Treasury stock reissued 19 18
Other, net 10 11
------ ------
Net cash used by financing activities (128) 296
------ ------
Effect of exchange rate changes on cash
and cash equivalents - (13)
------ ------
Net change in cash and cash equivalents 351 4
Cash and cash equivalents, beginning of year 616 374
------ ------
Cash and cash equivalents, end of period $ 967 $ 378
====== ======
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest on debt obligations $ 11 $ 6
Income taxes 78 254
Non-cash financing activities:
Capital lease obligations 4 4
Treasury shares issued for:
Dividends to shareholders 3 2
Associates stock bonus plan 4 7
See the accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
<TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions - Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 202 $ 130 $ 358 $ 326
------- ------- ------- -------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency translation
gains (losses) during the period (4) (7) 28 17
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising
during the period (135) (358) 97 (453)
Reclassification adjustment for realized (gains)
losses included in net earnings 92 5 93 9
------- ------- ------- -------
Total other comprehensive income,
before income taxes (47) (360) 218 (427)
Income tax expense (benefit) related to items of
other comprehensive income 5 (151) 145 (124)
------- ------- ------- -------
Other comprehensive income (loss), net
of income taxes (52) (209) 73 (303)
------- ------- ------- -------
Total comprehensive income (loss) $ 150 $ (79) $ 431 $ 23
======= ======= ======= =======
See the accompanying Notes to Consolidated Financial Statements.
8
</TABLE>
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements of AFLAC Incorporated and subsidiaries (the "Company")
contain all adjustments necessary to fairly present the financial position
as of June 30, 2000, and the results of operations and statements of
comprehensive income for the three and six month periods ended June 30, 2000
and 1999, and statements of cash flows and shareholders' equity for the six
months ended June 30, 2000 and 1999. Results of operations for interim
periods are not necessarily indicative of results for the entire year.
We prepare our financial statements in accordance with generally
accepted accounting principles (GAAP). These principles are established
primarily by the Financial Accounting Standards Board (FASB) and the
American Institute of Certified Public Accountants. The preparation of
financial statements in conformity with GAAP requires us to make estimates
when recording transactions resulting from business operations, based on
information currently available. The most significant items on our balance
sheet that involve a greater degree of accounting estimates and actuarial
determinations subject to changes in the future are: deferred policy
acquisition costs and liabilities for future policy benefits and unpaid
policy claims. As additional information becomes available (or actual
amounts are determinable), the recorded estimates will be revised and
reflected in operating results. Although some variability is inherent in
these estimates, we believe the amounts provided are adequate.
The financial statements should be read in conjunction with the
financial statements included in our annual report to shareholders for the
year ended December 31, 1999.
2. Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in investment securities and other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative
instrument. Currently, we do not expect a material effect on the results of
operations or financial position upon adoption of this standard on January
1, 2001.
9
<PAGE>
3. Segment Information
Information regarding components of operations for the three and six
months ended June 30 follows:
(In millions) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Total revenues:
AFLAC Japan:
Earned premiums $ 1,676 $ 1,372 $ 3,322 $ 2,770
Net investment income 314 262 621 524
Other income 6 1 5 1
------- ------- ------- -------
Total AFLAC Japan revenues 1,996 1,635 3,948 3,295
------- ------- ------- -------
AFLAC U.S.:
Earned premiums 377 334 751 664
Net investment income 68 59 135 117
Other income 2 1 2 1
------- ------- ------- -------
Total AFLAC U.S. revenues 447 394 888 782
------- ------- ------- -------
Other business segments 7 5 13 11
------- ------- ------- -------
Total business segments 2,450 2,034 4,849 4,088
Realized investment
gains (losses) (91) (5) (94) (9)
Corporate 7 11 17 17
Intercompany eliminations (8) (8) (16) (17)
------- ------- ------- -------
Total $ 2,358 $ 2,032 $ 4,756 $ 4,079
======= ======= ======= =======
Earnings before income taxes:
AFLAC Japan $ 191 $ 152 $ 379 $ 310
AFLAC U.S. 71 63 141 126
Other business segments (2) (1) (2) -
------- ------- ------- -------
Total business segments 260 214 518 436
Realized investment gains
(losses) (91) (5) (94) (9)
Release of retirement liability 101 - 101 -
Interest expense,
non-insurance operations (4) (4) (8) (7)
Corporate (7) (8) (14) (20)
------- ------- ------- -------
Total $ 259 $ 197 $ 503 $ 400
======= ======= ======= =======
10
<PAGE>
Total assets were as follows:
June 30, December 31,
(In millions) 2000 1999
---------- -----------
Total assets:
AFLAC Japan $ 33,941 $ 32,274
AFLAC U.S. 4,633 4,448
Other business segments 32 34
-------- --------
Total business segments 38,606 36,756
Corporate 5,458 5,213
Intercompany eliminations (5,270) (4,928)
-------- --------
Total $ 38,794 $ 37,041
======== ========
4. Japanese Income Taxes
At the end of March 1999, the Japanese government reduced the Japanese
corporate income tax rate from 41.7% to 36.2%, which increased net earnings
for the first six months of 1999 by $67 million ($.25 per basic share, $.24
per diluted share) from the reduction of our consolidated deferred income
tax liability as of March 31, 1999. This was the net effect of
recalculating Japanese deferred income taxes at the new 36.2% rate on the
temporary differences between the financial reporting basis of AFLAC Japan's
assets and liabilities, reduced by the limitations in the U.S. foreign tax
credit provisions.
The 1999 rate reduction for AFLAC Japan was effective April 1, 1999,
for purposes of calculating income tax expense on operating earnings.
5. Notes Payable
A summary of notes payable is as follows:
June 30, December 31,
(In millions) 2000 1999
---------- ------------
1.67% yen-denominated senior notes due April 2009 $ 525 $ 541
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 215 222
Variable interest rate (.39% at June 30, 2000) 30 31
Revolving credit agreement due November 2002:
1.24% fixed interest rate 110 114
Variable interest rate (.34% at June 30, 2000) 134 138
.34% short term 44 45
7.04% unsecured short-term dollar-denominated
note payable to bank 15 -
Obligations under capitalized leases, due
monthly through 2004, secured by computer
equipment in Japan 24 20
------ ------
Total notes payable $ 1,097 $ 1,111
====== ======
11
<PAGE>
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 June 30, 2000, the outstanding principal was 55.6 billion yen ($527
million using the June 30, 2000 exchange rate), less loan discount of $2
million, for a net payable of $525 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. As of
June 30, 2000, the borrowing limit was $250 million. Under the terms of
the agreement, the borrowing limit reduced to $125 million on July 17, 2000.
At June 30, 2000, 22.7 billion yen ($215 million) was outstanding at a fixed
interest rate and 3.2 billion yen ($30 million) was outstanding at a
variable interest rate under this agreement.
On July 17, 2000 we made a principal payment in the amount of 12.9
billion yen ($119 million) related to the reducing, revolving credit
agreement. We also paid in full (4.6 billion yen, or $44 million) the .34%
short-term yen-denominated note payable.
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 June 30, 2000,
11.6 billion yen ($110 million) was outstanding at a fixed interest rate and
14.2 billion yen ($134 million) was outstanding at a variable interest rate
under this agreement.
Since these loans are denominated in yen, the principal amount of the
loans as stated in dollar terms at any date will fluctuate due to changes in
the yen/dollar exchange rate.
We have outstanding interest rate swaps on a portion of our variable
interest rate yen-denominated borrowings (34.3 billion yen). These swaps
reduce the impact of changes in interest rates on our borrowing costs and
effectively change our interest rate from variable to fixed. The interest
rate swaps have notional principal amounts that equal the anticipated unpaid
principal amounts on a portion of these loans. Under these agreements, we
make fixed rate payments at 2.29% on one loan and 1.24% on another loan and
receive floating rate payments (.23% at June 30, 2000 plus loan costs of 25
or 20 basis points, respectively) based on the three-month Tokyo Interbank
Offered Rate.
We have designated our yen-denominated borrowings as a hedge of our net
investment in AFLAC Japan. Foreign currency translation gains/losses are
included in accumulated other comprehensive income. Outstanding principal
and related accrued interest payable on the yen-denominated borrowings were
translated into dollars at end-of-period exchange rates. Interest expense
was translated at average exchange rates for the period the interest expense
was incurred.
12
<PAGE>
6. Investment Securities
Net unrealized gains and losses on investment securities, less amounts
applicable to policy liabilities and deferred income taxes, are reported in
accumulated other comprehensive income. The portion of unrealized gains
credited to policy liabilities represents gains that would not inure to the
benefit of shareholders if such gains were actually realized. These amounts
relate to policy reserve interest requirements and reflect the difference
between market investment yields and estimated minimum required interest
rates.
The net effect on shareholders' equity of unrealized gains and losses
from investment securities at the following dates was:
(In millions) June 30, December 31,
2000 1999
------------ ------------
Unrealized gains on securities
available for sale $ 1,550 $ 1,501
Unamortized unrealized gains on
securities transferred on October 1,
1998 to held to maturity 1,148 1,258
Less:
Policy liabilities 589 840
Deferred income taxes 954 887
--------- ---------
Shareholders' equity, net
unrealized gains on
investment securities $ 1,155 $ 1,032
========= =========
The issuers of two debt securities experienced significant credit
rating downgrades during the period. During the second quarter of 2000, we
sold one security carried in available-for-sale at a realized loss of $34
million. We recorded an impairment loss of $57 million on the other
security, which was carried in the held-to-maturity category. We have
reclassified this security to the available-for-sale category. These losses
decreased net earnings by $58 million ($.22 per basic share and $.21 per
diluted share) for the three months and six months ended June 30, 2000.
7. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At June 30, 2000, and December 31,
1999, we had security loans outstanding in the amounts of $851 million and
$2.4 billion at fair value, respectively. We receive cash or other
securities as collateral for such loans. At June 30, 2000, we held cash
collateral of $880 million for loaned securities in the amount of $851
million. Also at December 31, 1999, we held Japanese government bonds as
collateral for loaned securities in the amount of $2.4 billion, at fair
value. Our security lending policy requires that the fair value of the
securities received as collateral and cash received as collateral be 102%
and 100% or more, respectively, of the fair value of the loaned securities
as of the date the securities are loaned and not less than 100% thereafter.
13
<PAGE>
For loans involving unrestricted cash collateral, the collateral is recorded
as an asset with a corresponding liability for the return of the collateral.
For loans involving securities as collateral, the collateral is not recorded
as an asset or liability.
8. Common Stock
The following is a reconciliation of the number of shares of our common
stock for the six months ended June 30:
2000 1999
(In thousands of shares) ---------- ----------
Common stock - issued:
Balance at beginning of year 320,349 317,971
Exercise of stock options 1,575 1,295
-------- --------
Balance at end of period 321,924 319,266
-------- --------
Treasury stock:
Balance at beginning of year 54,608 52,287
Purchases of treasury stock:
Open market 3,105 2,550
Other 88 145
Shares issued to sales associates
stock bonus plan and AFL Stock Plan (364) (407)
Exercise of stock options (724) (751)
-------- --------
Balance at end of period 56,713 53,824
-------- --------
Shares outstanding at end of period 265,211 265,442
======== ========
For the six months ended June 30, 2000, there were approximately
937,000 weighted average shares for outstanding stock options that were not
included in the computation of diluted earnings per share because the
exercise price for these options was greater than the average market price
during the first six months of 2000.
On May 1, 2000 the shareholders approved an increase in the number of
authorized shares from 400 million to 1 billion.
9. Litigation
We are a defendant in various litigation considered to be in the normal
course of business. Some of this litigation is pending in Alabama, where
large punitive damages bearing little relation to the actual damages
sustained by plaintiffs have been awarded against other companies, including
insurers, in recent years. Although the final results of any litigation
cannot be predicted with certainty, we believe the outcome of pending
litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
14
<PAGE>
10. Release of Retirement Liability
The surviving spouse of the Company's former chairman of the board,
John B. Amos, had been receiving lifetime spousal retirement benefits under
a shareholder approved employment contract. The benefits were payable at
.5% of the Company's pretax earnings, for the previous year, as defined in
the agreement.
On May 3, 2000, the former chairman's spouse unexpectedly passed away.
The Company had accrued an unfunded liability for projected retirement
payments based on a normal life expectancy. The release of the remaining
accrued liability increased net earnings by $99 million ($.37 per basic
share, $.36 per diluted share) for the three months and six months ended
June 30, 2000.
15
<PAGE>
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 30, 2000 and 1999 financial statements included in this filing
have been reviewed by KPMG LLP, independent certified public accountants, in
accordance with established professional standards and procedures for such a
review.
The report of KPMG LLP commenting upon their review is included on page
17.
16
<PAGE>
KPMG LLP
Certified Public Accountants
303 Peachtree Street, N.E. Telephone: (404) 222-3000
Suite 2000 Telefax: (404) 222-3050
Atlanta, GA 30308
INDEPENDENT AUDITORS' REVIEW REPORT
The Shareholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of June 30, 2000, and the related consolidated statements of
earnings and comprehensive income for the three-month and six-month periods
ended June 30, 2000 and 1999, and the consolidated statements of
shareholders' equity and cash flows for the six-month periods ended June 30,
2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the accompanying consolidated
balance sheet of AFLAC Incorporated and subsidiaries as of December 31,
1999, and the related consolidated statements of earnings, shareholders'
equity, cash flows and comprehensive income for the year then ended (not
presented herein); and in our report dated January 27, 2000, we expressed an
unqualified opinion on those financial statements.
KPMG LLP
Atlanta, GA
July 25, 2000
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AFLAC Incorporated is the parent company of American Family Life
Assurance Company of Columbus, AFLAC. Our principal business is
supplemental health insurance, which is marketed and administered through
AFLAC. Most of AFLAC's policies are individually underwritten, and marketed
at worksites through independent agents, with premiums paid by the employee.
Our business 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 2000 and 1999.
In the second quarter of 2000, a release of an accrued unfunded
liability for projected retirement payments increased net earnings by $99
million ($.37 per basic share, $.36 per diluted share) for the three months
and six months ended June 30, 2000. (See Note 10 of the Notes to the
Consolidated Financial Statements.)
Also during the second quarter of 2000, realized investment losses on
two debt securities from significant credit downgrades decreased net
earnings by $58 million ($.22 per basic share, $.21 per diluted share) for
the three months and six months ended June 30, 2000. (See Note 6 of the
Notes to the Consolidated Financial Statements.)
Due to a corporate income tax rate reduction in Japan during 1999, the
statutory tax rate for AFLAC Japan declined from 41.7% to 36.2%. This tax
rate decline resulted in a reduction in our deferred income tax liability as
of March 31, 1999, which increased net earnings by $67 million ($.25 per
basic share and $.24 per diluted share) for the six months ended June 30,
1999.
18
<PAGE>
<TABLE>
The following table sets forth the results of operations by business segment for the periods shown.
<CAPTION>
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- -----------------------------------------
Percentage Change 2000 1999 Percentage Change 2000 1999
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 25.7% $ 191 $ 152 22.3% $ 379 $ 310
AFLAC U.S. . . . . . . . . . . . . 12.3 71 63 11.9 141 126
Other business segments. . . . . . (2) (1) (2) -
----- ----- ----- -----
Total business segments. . . . . 21.7 260 214 18.9 518 436
Interest expense,
non-insurance operations . . . . (1.8) (4) (4) (22.2) (8) (7)
Corporate and eliminations . . . . 22.7 (6) (9) 26.0 (15) (20)
----- ----- ----- -----
Pretax operating earnings. . . . 23.9 250 201 21.1 495 409
Income taxes . . . . . . . . . . . 24.3 89 71 19.7 175 147
----- ----- ----- -----
Operating earnings . . . . . . . 23.7 161 130 21.9 320 262
Non-operating items:
Realized investment gains
(losses), net of tax . . . . . . (58) - (61) (3)
Release of retirement liability,
net of tax . . . . . . . . . . . 99 - 99 -
Deferred tax benefit from Japanese
tax rate reduction . . . . . . . - - - 67
----- ----- ----- -----
Net earnings . . . . . . . . . . 54.8% $ 202 $ 130 9.9% $ 358 $ 326
===== ===== ===== =====
Operating earnings per basic share . 24.5% $ .61 $ .49 21.2% $ 1.20 $ .99
Operating earnings per diluted share 25.5 .59 .47 23.2 1.17 .95
===== ===== ===== =====
Net earnings per basic share . . . . 55.1% $ .76 $ .49 9.8% $ 1.35 $ 1.23
Net earnings per diluted share . . . 57.4 .74 .47 11.0 1.31 1.18
===== ===== ===== =====
===========================================================================================================================
19
</TABLE>
<PAGE>
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, the gain from the
release of the retirement accrual in 2000, and the deferred income tax
benefit from the Japanese tax rate reduction in 1999. Operating earnings
per share referred to in the following discussion are based on the diluted
number of average outstanding shares.
FOREIGN CURRENCY TRANSLATION
Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar
exchange rate can have a significant effect on our reported results. In
years when the yen weakens, translating yen into dollars causes fewer
dollars to be reported. When the yen strengthens, translating yen into
dollars causes more dollars to be reported.
The following table illustrates the effect of foreign currency
translation on our reported results by comparing those results as if foreign
currency rates had remained unchanged from the comparable period in the
prior year.
AFLAC Incorporated and Subsidiaries
Selected Percentage Changes for Supplemental Consolidated Data
(For the periods ended June 30, 2000)
Three Months Six Months
Operating Results Operating Results
--------------------- ---------------------
Including Excluding Including Excluding
Currency Currency Currency Currency
Changes Changes* Changes Changes*
--------- --------- --------- ---------
Premium income 20.4% 8.7% 18.6% 8.9%
Net investment income 18.4 10.0 18.0 11.0
Operating revenues 20.3 9.2 18.6 9.4
Total benefits and expenses 19.9 8.3 18.3 8.7
Operating earnings 23.7 17.6 21.9 16.7
Operating earnings per share 25.5 19.1 23.2 17.9
----------------------------------------------------------------------------
*Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current period as the comparable
period in the prior year.
============================================================================
The yen began to strengthen in relation to the dollar at the end of
1998 after several years of weakening. The average yen-to-dollar exchange
rates were 106.69 and 121.01 for the three months ended June 30, 2000 and
1999, and 106.91 and 118.80 for the six months ended June 30, 2000 and 1999,
respectively. The strengthening of the yen in 2000 increased operating
earnings by approximately $.03 per share for the three months ended June 30,
2000, and $.05 per share for the six months ended June 30, 2000. Operating
earnings per share increased 25.5% to $.59 for the three-month period ended
June 30, 2000, compared with the same period in 1999 and increased 23.2% to
$1.17 for the six-month period ended June 30, 2000, compared with the same
period in 1999. Operating earnings per share, excluding the effect of
foreign currency translation, increased 19.1% for the quarter and 17.9% for
the six months ended June 30, 2000.
20
<PAGE>
Our primary financial objective is the growth of operating earnings per
share before the effect of foreign currency fluctuations. Our objective for
2000 through 2002 is to increase operating earnings per share growth by 15%
to 17%, excluding the impact of currency translation.
If we achieve a 17% increase, the following table shows the likely
results for operating earnings per share for the year 2000 when the
estimated impact from various foreign currency translations are included.
2000 Operating EPS Scenarios
----------------------------
Annual
Average Yen Annual Operating % Growth Yen Impact
Exchange Rate Diluted EPS Over 1999 on EPS
------------- ---------------- --------- ----------
100.00 $ 2.48 24.0% $ .14
105.00 2.42 21.0 .08
110.00 2.38 19.0 .04
113.96* 2.34 17.0 -
115.00 2.33 16.5 (.01)
120.00 2.29 14.5 (.05)
125.00 2.25 12.5 (.09)
*Actual exchange rate for the year ended December 31, 1999.
If the exchange rate as of June 30, 2000, remains constant for the rest
of 2000, the cumulative average rate would be approximately 106.21 and the
annual diluted operating earnings per share would approximate $2.41,
assuming we achieve the high end of our earnings objective.
SHARE REPURCHASE PROGRAM
During the second quarter, we acquired 1.1 million shares of AFLAC
stock, bringing the total number of shares purchased in the first six months
to 3.1 million. On May 1, 2000, the board of directors authorized the
repurchase of up to an additional 10 million shares. At the end of June, we
had approximately 10 million shares available for repurchase.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings for the six months ended June 30, 2000 and 1999 were 35.4% and
35.9%, respectively. Income tax expense for 1999 included approximately $2
million of additional taxes from an income tax audit in Japan. Excluding
that amount, the effective income tax rate on operating earnings for 1999
was 35.4%.
The 1999 reduction in the statutory tax rate in Japan did not
significantly change our combined U.S./Japan effective tax rate as it
shifted a portion of our income tax expense from Japan operations to U.S.
operations as a result of the U.S. foreign tax credit provisions.
21
<PAGE>
INSURANCE OPERATIONS, AFLAC JAPAN
AFLAC Japan, a branch of AFLAC and the principal contributor to our
earnings, ranks number one in terms of premium income and profits among all
foreign life and non-life insurance companies operating in Japan. Among all
life insurance companies operating in Japan, AFLAC Japan ranks second in
terms of individual policies in force and 14th based on assets.
The following table presents a summary of AFLAC Japan's operating
results.
AFLAC JAPAN
SUMMARY OF OPERATING RESULTS
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
------------------ ------------------
Premium income. . . . . . . . . $ 1,676 $ 1,372 $ 3,322 $ 2,770
Investment income . . . . . . . 314 262 621 524
Other income. . . . . . . . . . 6 1 5 1
------ ------ ------ ------
Total revenues. . . . . . . . 1,996 1,635 3,948 3,295
------ ------ ------ ------
Benefits and claims . . . . . . 1,414 1,172 2,799 2,367
Operating expenses. . . . . . . 391 311 770 618
------ ------ ------ ------
Total benefits and expenses . 1,805 1,483 3,569 2,985
------ ------ ------ ------
Pretax operating earnings . $ 191 $ 152 $ 379 $ 310
====== ====== ====== ======
----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income. . . . . . . . 22.2% 21.5% 19.9% 19.9%
Investment income . . . . . . 20.0 18.6 18.5 17.2
Total revenues. . . . . . . . 22.1 21.1 19.8 19.5
Pretax operating earnings . . 25.7 27.9 22.3 27.0
----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income. . . . . . . . 7.7% 8.3% 7.9% 8.0%
Investment income . . . . . . 5.8 5.5 6.6 5.5
Total revenues. . . . . . . . 7.6 7.9 7.8 7.6
Pretax operating earnings . . 10.8 13.6 10.0 14.3
----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . 70.9% 71.7% 70.9% 71.8%
Operating expenses. . . . . . 19.5 19.0 19.5 18.8
Pretax operating earnings . . 9.6 9.3 9.6 9.4
============================================================================
22
<PAGE>
AFLAC JAPAN SALES
AFLAC Japan's new annualized premium sales in 2000 were strong and
exceeded our expectations. New sales in the second quarter rose 5.1% to a
record 25.4 billion yen, or $233 million. Comparisons to last year were
difficult due to the 30.6% surge we experienced in 1999 second-quarter
sales. The year-ago results benefited from additional sales campaigns that
were conducted in advance of a premium rate increase. For the first half of
2000, new sales increased 10.6% to 47.7 billion yen, or $441 million. Rider
MAX continued to sell very well. During the second quarter, we sold 371,600
of these popular riders to our cancer life policy and 59% of new cancer life
insurance customers also purchased Rider MAX. We were also pleased with the
sales of our ordinary life products, which accounted for 9.6% of sales
during the quarter.
In addition to strong sales, we are also seeing continued growth of our
distribution system in Japan. During the second quarter, we recruited 581
new agencies, bringing the total number of agencies representing AFLAC to
more than 8,800 at the end of the quarter. We believe that new agencies
will continue to be attracted to AFLAC Japan's high commissions and its
superior products, customer service and brand image.
In 2001, Japan's insurance market will further deregulate. As a
result, we expect competition to increase. At the same time, we also expect
increased opportunities for AFLAC Japan. To prepare for deregulation, we
will continue building on our competitive strengths. To that end, we plan
on improving the products we offer, while adding new policies to our product
line. We will continue to expand our distribution system through the
addition of new agencies as well as alternative sales channels like the
Internet. And we will also invest in new technologies to maintain our cost
advantages and aggressively promote our brand through advertising.
In July 2000, we began offering a new optional commission contract
which pays a higher first year commission, but limits renewal commissions to
nine years rather than the life of the contract. Other changes we have
made to our business recently, including our laptop computer sales aid, new
products and aggressive recruiting, are all part of our plan for helping us
succeed in a deregulated environment. We recognize that we will face more
competition in the future, and we continue to look for ways to improve. At
the same time, companies that enter the third sector will find it difficult
to compete with us because of our low-cost structure.
Although Japan's economy remains weak, we continue to believe it is one
of the best insurance markets in the world and one of great opportunities
for growth. We have set an objective for AFLAC Japan's sales to increase
approximately 12% to 15% for the year 2000 compared with 1999.
AFLAC JAPAN INVESTMENTS
With investment yields remaining at very depressed levels, Japan's
investment environment continued to present challenges. During the second
quarter, the yield of a composite index of 20-year Japanese government bonds
averaged only 2.11%. However, by focusing on other sectors, we purchased
yen-denominated securities at an average yield of 3.37% in the quarter.
Including dollar-denominated investments, our blended new money yield was
23
<PAGE>
3.56% for the quarter. As of July 14, we had invested or committed to
invest approximately 70% of our estimated cash flow for the year 2000 at an
average yield of 3.85%, which is significantly greater than our reserving
assumptions for new business.
At the end of the second quarter, the yield on AFLAC Japan's fixed-
maturity portfolio was 5.07%, compared with 5.24% at the end of 1999. The
return on average invested assets, net of investment expenses, was 4.83% for
the six months, compared with 5.04% a year ago.
AFLAC JAPAN OTHER
The operating expense ratio has increased slightly due to expenditures
for additional marketing programs, including advertising and direct response
efforts. The benefit ratio has declined due to the mix of business shifting
to newer products that have a lower loss ratio than the traditional cancer
life insurance.
24
<PAGE>
INSURANCE OPERATIONS, AFLAC U.S.
The following table presents a summary of AFLAC U.S. operating results.
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
Three Months Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
------------------ ------------------
Premium income. . . . . . . . . $ 377 $ 334 $ 751 $ 664
Investment income . . . . . . . 68 59 135 117
Other income. . . . . . . . . . 2 1 2 1
----- ----- ----- -----
Total revenues. . . . . . . . 447 394 888 782
----- ----- ----- -----
Benefits and claims . . . . . . 236 208 471 413
Operating expenses. . . . . . . 140 123 276 243
----- ----- ----- -----
Total benefits and expenses . 376 331 747 656
----- ----- ----- -----
Pretax operating earnings . $ 71 $ 63 $ 141 $ 126
===== ===== ===== =====
----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income. . . . . . . . 13.0% 14.0% 13.2% 13.9%
Investment income . . . . . . 14.4 11.2 14.8 12.0
Total revenues. . . . . . . . 13.3 13.5 13.5 13.4
Pretax operating earnings . . 12.3 13.8 11.9 12.6
----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . 52.8% 52.7% 53.0% 52.7%
Operating expenses. . . . . . 31.3 31.2 31.1 31.2
Pretax operating earnings . . 15.9 16.1 15.9 16.1
============================================================================
AFLAC U.S. SALES
New annualized premium sales rose 28.5% in the second quarter to a
record $168 million. For the six months, new sales were up 24.5% to $318
million. Accident/disability insurance was again the dominant contributor
to sales, as it has been for the past six years. In addition,
accident/disability insurance surpassed our founding product, cancer expense
insurance, in the quarter to become our number one product category in terms
of premiums in force. We also experienced strong sales contributions from
other product lines, including cancer expense insurance. Our payroll life
products continued to sell very well, accounting for more than 5% of sales
for the first six months of the year. Based on our strong sales for the
first half of the year, we have raised our new sales target for 2000 from a
12% to 15% increase to a 17% to 20% increase for the year.
AFLAC U.S. also experienced strong sales force growth. During the
second quarter, the monthly average number of producing sales associates
increased 18.1%, to 10,170 agents. We believe the rapid growth in our
distribution system and sales demonstrates the effectiveness of our
marketing approach and our most recent advertising campaign.
25
<PAGE>
Technology continues to play an important role at AFLAC U.S. In
addition to the continued success of our electronic sales system, SmartApp,
we are also pursuing additional technological initiatives. Internet billing
provides our small- to medium-sized payroll accounts with access to their
own payroll billing in a secured Internet platform. They can complete
administrative tasks such as deleting individuals or making address changes
online, which are our most requested items. In July 2000, we introduced
Internet billing in California. The initial rollout began with the training
of more than 500 sales associates and coordinators in that area. We believe
that Internet billing will accomplish our goals of improving service while
lowering our expenses through technology. Savings from new electronic work
processes have allowed us to invest heavily in national advertising, which
has benefited our name recognition, recruiting and sales results.
AFLAC U.S. INVESTMENTS
During the first six months of 2000, available cash flow was invested
at an average yield-to-maturity of 8.44% compared with 7.84% during the
first half of 1999. The overall return on average invested assets, net of
investment expenses, was 7.58% for the first six months of 2000 compared
with 7.52% for the first six months of 1999.
AFLAC U.S. OTHER
Management expects the operating expense ratio, including discretionary
television advertising expenses, to remain approximately level in the
future. By improving administrative systems and controlling other costs, we
have been able to redirect funds to national television advertising programs
without significantly affecting the operating expense ratio.
The aggregate benefit ratio has remained relatively stable. The mix of
business has shifted toward accident and hospital indemnity policies, which
have lower benefit ratios than other products. We expect future benefit
ratios for some of our supplemental products to increase slightly due to our
ongoing efforts to improve policy persistency and enhance policyholder
benefits. Management expects the pretax operating profit margin to be
approximately 16% for the full year 2000.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
For information regarding new Statements of Financial Accounting
Standards see Note 2 of the Notes to the Consolidated Financial Statements.
ANALYSIS OF FINANCIAL CONDITION
Since December 31, 1999, our financial condition has remained strong in
the functional currencies of our operations. The investment portfolios of
AFLAC Japan and AFLAC U.S. have continued to grow and primarily consist of
investment grade securities.
Due to the significance of yen-denominated items in the balance sheet,
changes in the yen/dollar exchange rate can have a significant effect on our
financial statements. The yen/dollar exchange rate at the end of each
26
<PAGE>
period is used to translate yen-denominated balance sheet items to U.S.
dollars for reporting purposes. The exchange rate at June 30, 2000, was
105.50 yen to one U.S. dollar, 2.9% weaker than the exchange rate of 102.40
as of December 31, 1999. Management estimates that the weaker yen rate
decreased reported investments and cash by $857 million, total assets by
$971 million, and total liabilities by $955 million compared with the
amounts that would have been reported for 2000 if the exchange rate had
remained unchanged from year-end 1999.
INVESTMENTS AND CASH
The continued growth in investments and cash reflects the substantial
cash flows in the functional currencies of our operations. Net unrealized
gains of $1.5 billion on investment securities at June 30, 2000, consisted
of $2.8 billion in gross unrealized gains and $1.3 billion in gross
unrealized losses.
AFLAC invests primarily within the Japanese, U.S. and Euroyen debt
securities markets. We use specific criteria to judge the credit quality
and liquidity of our investments and use a variety of credit rating services
to monitor these criteria. Applying those various credit ratings to a
standardized rating system based on the categories of a nationally
recognized rating service, the percentages of our debt securities, at
amortized cost, were as follows:
June 30, December 31,
2000 1999
----------- ------------
AAA 26.1% 28.0%
AA 22.6 24.6
A 35.6 33.5
BBB 15.3 12.1
BB .4 1.8
----- -----
100.0% 100.0%
===== =====
The issuers of two debt securities experienced significant credit
rating downgrades during the period. During the second quarter of 2000, we
sold one security carried in available-for-sale at a realized loss of $34
million. We recorded an impairment loss of $57 million on the other
security, which was carried in the held-to-maturity category. We have
reclassified this security to the available-for-sale category. These losses
decreased net earnings by $58 million ($.22 per basic share and $.21 per
diluted share) for the three months and six months ended June 30, 2000.
Private placement investments accounted for 51.2% and 49.0% of our
total debt securities at amortized cost as of June 30, 2000 and December 31,
1999, respectively. AFLAC Japan has made investments in the private
placement market to secure higher yields than those available from Japanese
government bonds. 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
27
<PAGE>
under medium-term note programs and have standard covenants commensurate
with credit rankings, except when internal credit analysis indicates that
additional protective and/or event-risk covenants are required.
The following table shows an analysis of investment securities (at cost
or amortized cost):
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
June 30, December 31, June 30, December 31,
(In millions) 2000 1999 2000 1999
---------------------- ----------------------
Available for sale:
Fixed-maturity securities $17,268 $15,491 $ 3,395* $ 3,405*
Perpetual debentures 2,345 2,411 174 153
Equity securities 58 45 98 92
------ ------ ------ ------
Total available for sale 19,671 17,947 3,667 3,650
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 4,020 4,389 - -
Perpetual debentures 3,766 3,903 - -
------ ------ ------ ------
Total held to maturity 7,786 8,292 - -
------ ------ ------ ------
Total $27,457 $26,239 $ 3,667 $ 3,650
====== ====== ====== ======
*Includes securities held by the parent company of $116 at June 30,
2000, and $240 at December 31, 1999
POLICY LIABILITIES
Policy liabilities increased $363 million, or 1.2%, during the first
six months of 2000. AFLAC Japan increased $243 million, or .9% (3.9%
increase in yen), and AFLAC U.S. increased $120 million, or 5.2%. Changes
in policy liabilities were primarily due to the addition of new business,
the aging of policies in force, the weaker yen and the effect of the market
value adjustment for securities available for sale (see Note 6 of the Notes
to the Consolidated Financial Statements). The weaker yen at June 30, 2000,
compared with December 31, 1999, decreased reported policy liabilities by
$834 million.
DEBT
In April 1999, we issued $450 million of senior notes with a 6.50%
coupon, paid semiannually, due April 15, 2009. The notes are redeemable at
our option and at any time at a redemption price equal to the principal
amount of the notes being redeemed plus a make-whole amount.
We received net proceeds of $446 million after discount and issue
costs. These proceeds 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
28
<PAGE>
had the effect of converting the dollar-denominated principal and interest
into yen-denominated obligations. At June 30, 2000, the outstanding
principal was 55.6 billion yen ($527 million) at an interest rate of 1.67%
after the effect of the cross-currency swaps.
See Note 5 of the Notes to the Consolidated Financial Statements for
information on other debt outstanding at June 30, 2000.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 26.7%
and 28.1% as of June 30, 2000 and December 31, 1999, respectively. After
giving effect to the July 2000 principal payments, the ratio was 23.7%.
SECURITY LENDING
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. For further information regarding such
arrangements, see Note 7 of the Notes to the Consolidated Financial
Statements.
POLICYHOLDER GUARANTY FUNDS
Under insurance guaranty fund laws in most U.S. states, insurance
companies doing business in those states can be assessed for policyholder
losses up to prescribed limits that are incurred by insolvent companies with
similar lines of business. Such assessments have not been material to us in
the past. We believe that future assessments relating to companies in the
U.S. currently involved in insolvency proceedings will not materially impact
the consolidated financial statements.
The Life Insurance Association of Japan, an industry organization,
implemented a voluntary policyholder protection fund in 1996 to provide
capital support to insolvent life insurers. AFLAC Japan pledged investment
securities to the Life Insurance Association of Japan under this program. A
separate, mandatory policyholder protection system was enacted by the
Japanese government during 1998. The life insurance industry is making
contributions to these funds over a 10-year period. Our obligation to the
mandated policyholder protection system was increased in 1999 due to the
insolvency of Toho Mutual Life Insurance Company. We have recorded a
liability for our share of these obligations. For further information
regarding policyholder protection funds, see Note 2 of the Notes to the
Consolidated Financial Statements in our annual report to shareholders for
the year ended December 31, 1999.
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.
29
<PAGE>
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. 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 statutory capital and surplus is computed according to
rules prescribed by the National Association of Insurance Commissioners
(NAIC), as modified by the insurance department in the insurance company's
state of domicile. Statutory accounting rules are different from generally
accepted accounting principles and are intended to emphasize policyholder
protection and company solvency.
Currently, prescribed or permitted statutory accounting principles
(SAP) used by insurers for financial reporting to state insurance regulators
may vary among states and among companies. The NAIC has recodified SAP to
promote standardization throughout the industry. The NAIC has scheduled
these new accounting principles to become effective January 1, 2001. They
must also be adopted by the individual state insurance departments.
In addition to restrictions by U.S. insurance regulators, the Japanese
Financial 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 $23
million in the first six months of 2000 and $20 million for the same period
in 1999. AFLAC Japan repatriated profits in the amount of 17 billion yen
($157 million) to AFLAC U.S. in July 2000. The FSA may not allow transfers
of funds if the payment would cause AFLAC Japan to lack sufficient financial
strength for the protection of policyholders. The FSA maintains solvency
standards, a version of risk-based capital requirements. AFLAC Japan's
solvency margin significantly exceeds regulatory minimums. For additional
information on regulatory restrictions on dividends, profit transfers and
other remittances, see Note 9 of the Notes to the Consolidated Financial
Statements in our annual report to shareholders for the year ended December
31, 1999.
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OTHER
In July 2000, the board of directors approved a quarterly cash dividend
of $.085 per share. The dividend is payable on September 1, 2000, to
shareholders of record at the close of business on August 17, 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments are exposed to primarily three types of
market risks. These are interest rate, equity price, and foreign currency
exchange rate risk.
INTEREST RATE RISK
Our primary interest rate exposure is a result of the effect of changes
in interest rates on the fair value of our investments in debt securities.
We use modified duration analysis, which provides a measure of price
percentage volatility, to estimate the amount of sensitivity to interest
rate changes in our debt securities.
We attempt to match the duration of our assets with the duration of our
liabilities. For AFLAC Japan, the duration of policy benefit liabilities is
longer than that of the related invested assets due to the unavailability of
acceptable long-duration yen-denominated securities. Currently, when our
debt securities mature, the proceeds are reinvested at a yield below that of
the interest required for the accretion of policy benefit liabilities on
policies issued in earlier years. However, the investment yield on new
investments exceeds interest requirements on policies issued in recent
years.
At June 30, 2000, we had $1.4 billion of net unrealized gains on debt
securities. The hypothetical reduction in the fair value of our debt
securities resulting from a 100 basis point increase in market interest
rates is estimated to be $2.9 billion based on our portfolio as of June 30,
2000. The effect on yen-denominated debt securities is approximately $2.5
billion and the effect on dollar-denominated debt securities is
approximately $386 million.
We have outstanding interest rate swaps on 34.3 billion yen ($325
million) of our variable-interest-rate yen-denominated borrowings. These
swaps reduce the impact of fluctuations in interest rates on our borrowing
costs and effectively change our interest rates from variable to fixed.
Therefore, movements in market interest rates should have no material effect
on earnings.
At June 30, 2000, we also had yen-denominated bank borrowings in the
amount of 21.9 billion yen ($208 million) with a variable interest rate of
.35%. The effect on net earnings in 2000 due to changes in market interest
rates was immaterial. For further information on our notes payable, see
Note 5 of the Notes to the Consolidated Financial Statements.
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EQUITY PRICE RISK
Equity securities at June 30, 2000, totaled $239 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 1.07.
For example, if the overall stock market value changed by 10%, the value of
AFLAC's equity securities would be expected to change by approximately
10.7%, 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 rather than converted into dollars.
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. The
table on the following page compares the U.S. dollar values of our yen-
denominated assets and liabilities at various exchange rates.
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Dollar Value of Yen-Denominated Assets and Liabilities
At Selected Exchange Rates
(June 30, 2000)
90.50 105.50* 120.50
(In millions) Yen Yen Yen
----------------------------------------------------------------------------
Yen-denominated financial instruments:
Assets:
Securities available for sale:
Fixed maturities $ 20,622 $ 17,690 $ 15,488
Perpetual debentures 2,130 1,827 1,599
Equity securities 85 73 64
Securities held to maturity:
Fixed maturities 4,686 4,020 3,519
Perpetual debentures 4,390 3,766 3,297
Cash and cash equivalents 1,063 912 799
Other financial instruments 6 4 5
------- ------- -------
Total 32,982 28,292 24,771
------- ------- -------
Liabilities - notes payable 1,235 1,059 927
------- ------- -------
Net yen-denominated financial
instruments 31,747 27,233 23,844
Other yen-denominated assets 4,419 3,791 3,319
Other yen-denominated liabilities (35,553) (30,498) (26,703)
------- ------- -------
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation $ 613 $ 526 $ 460
======= ======= =======
* Actual June 30, 2000 exchange rate
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation beginning on
page 20.
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.
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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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a defendant in various litigation considered to be in the normal
course of business. Some of this litigation is pending in Alabama, where
large punitive damages bearing little relation to the actual damages
sustained by plaintiffs have been awarded against other companies, including
insurers, in recent years. Although the final results of any litigation
cannot be predicted with certainty, we believe the outcome of pending
litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.0 - Articles of Incorporation - as amended
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges
27.0 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June
30, 2000.
Items other than those listed above are omitted because they are not
required or are not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFLAC INCORPORATED
Date August 9, 2000 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date August 9, 2000 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
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EXHIBITS FILED WITH CURRENT FORM 10-Q:
3.0 - Articles of Incorporation - as amended
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges
27.0 - Financial Data Schedule (for SEC use only).
36
