<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarter ended March 31, 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 May 3, 2000
- ---------------------------- ------------------
Common Stock, $.10 Par Value 265,441,553 shares
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AFLAC INCORPORATED AND SUBSIDIARIES
INDEX
Page
No.
----
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999. . . . . . . . . . 1
Consolidated Statements of Earnings -
Three Months Ended March 31, 2000 and 1999 . . . . . . . 3
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 2000 and 1999 . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 . . . . . . . 5
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2000 and 1999 . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . 8
Review by Independent Certified Public
Accountants. . . . . . . . . . . . . . . . . . . . . . . 14
Independent Auditors' Report . . . . . . . . . . . . . . . 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . . . . . . . . 28
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 32
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . . 33
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
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Part I. Financial Information
AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
March 31, December 31,
2000 1999
(Unaudited)
----------- ------------
ASSETS:
Investments and cash:
Securities available for sale, at fair value:
Fixed maturities (amortized cost,
$19,454 in 2000 and $18,896 in 1999) $ 21,484 $ 20,859
Perpetual debentures (amortized cost,
$2,485 in 2000 and $2,564 in 1999) 2,062 2,024
Equity securities (cost, $148 in 2000
and $137 in 1999) 228 215
Securities held to maturity, at amortized cost:
Fixed maturities (fair value, $4,114 in
2000 and $4,280 in 1999) 4,216 4,389
Perpetual debentures (fair value, $3,632
in 2000 and $3,732 in 1999) 3,754 3,903
Other investments 15 18
Cash and cash equivalents 692 616
-------- --------
Total investments and cash 32,451 32,024
Receivables, primarily premiums 262 270
Accrued investment income 322 369
Deferred policy acquisition costs 3,672 3,692
Property and equipment, at cost less
accumulated depreciation 492 509
Other 192 177
-------- --------
Total assets $ 37,391 $ 37,041
======== ========
See the accompanying Notes to Consolidated Financial Statements.
(continued)
1
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions, except for share and per-share amounts)
March 31, December 31,
2000 1999
(Unaudited)
----------- -----------
Liabilities and Shareholders' Equity:
Liabilities:
Policy liabilities:
Future policy benefits $ 26,939 $ 27,310
Unpaid policy claims 1,637 1,618
Unearned premiums 360 361
Other policyholders' funds 302 315
-------- --------
Total policy liabilities 29,238 29,604
Notes payable 1,072 1,111
Income taxes 1,727 1,511
Payables for return of cash collateral
on loaned securities 340 -
Other 947 947
-------- --------
Total liabilities 33,324 33,173
-------- --------
Shareholders' equity:
Common stock of $.10 par value. In thousands:
authorized 400,000 shares; issued 321,495
shares in 2000 and 320,349 shares in 1999 32 32
Additional paid-in capital 320 310
Retained earnings 3,493 3,356
Accumulated other comprehensive income:
Unrealized foreign currency translation gains 182 232
Unrealized gains on investment securities 1,207 1,032
Treasury stock, at average cost (1,167) (1,094)
-------- --------
Total shareholders' equity 4,067 3,868
-------- --------
Total liabilities and shareholders' equity $ 37,391 $ 37,041
======== ========
Shareholders' equity per share $ 15.34 $ 14.56
======== ========
See the accompanying Notes to Consolidated Financial Statements.
2
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
(In millions, except for share and Three Months Ended March 31,
per-share amounts - Unaudited) ----------------------------
2000 1999
-------- --------
Revenues:
Premiums, principally supplemental
health insurance $ 2,020 $ 1,728
Net investment income 376 320
Realized investment gains (losses) (2) (5)
Other income 4 5
------- -------
Total revenues 2,398 2,048
------- -------
Benefits and expenses:
Benefits and claims 1,620 1,400
Acquisition and operating expenses:
Amortization of deferred policy
acquisition costs 69 57
Insurance commissions 255 226
Insurance expenses 189 142
Interest expense 5 4
Other operating expenses 17 16
------- -------
Total acquisition and
operating expenses 535 445
------- -------
Total benefits and expenses 2,155 1,845
------- -------
Earnings before income taxes 243 203
------- -------
Income tax expense (benefit):
Operations 87 74
Deferred tax benefit from Japanese
tax rate reduction - (67)
------- -------
Total income taxes 87 7
------- -------
Net earnings $ 156 $ 196
======= =======
Net earnings per share:
Basic $ .59 $ .74
Diluted .57 .71
======= =======
Shares used in computing
earnings per share (In thousands):
Basic 265,599 266,115
Diluted 272,261 276,769
======= =======
Cash dividends per share $ .075 $ .065
======= =======
See the accompanying Notes to Consolidated Financial Statements.
3
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions, except for per-share
amounts - Unaudited) Three Months Ended March 31,
----------------------------
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 7 3
Gain on treasury stock reissued 3 3
------ ------
Balance at end of period 320 241
------ ------
Retained earnings:
Balance at beginning of year 3,356 2,862
Net earnings 156 196
Dividends to shareholders ($.075 per share
in 2000 and $.065 in 1999) (19) (18)
------ ------
Balance at end of period 3,493 3,040
------ ------
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 (51) (5)
Change in unrealized gains (losses) on
investment securities during period, net
of income taxes 176 (89)
------ ------
Balance at end of period 1,389 1,457
------ ------
Treasury stock:
Balance at beginning of year (1,094) (910)
Purchases of treasury stock (81) (11)
Cost of shares issued 8 10
------ ------
Balance at end of period (1,167) (911)
------ ------
Total shareholders' equity $ 4,067 $ 3,859
====== ======
See the accompanying Notes to Consolidated Financial Statements.
4
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions - Unaudited)
Three Months Ended
March 31,
2000 1999
------ ------
Cash flows from operating activities:
Net earnings $ 156 $ 196
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Increase in policy liabilities 688 652
Deferred income taxes 38 (41)
Change in income taxes payable 147 (55)
Increase in deferred policy
acquisition costs (81) (69)
Change in receivables and advance premiums 12 2
Other, net (19) 14
------ ------
Net cash provided by operating activities 941 699
------ ------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Securities available for sale:
Fixed-maturity securities sold 207 279
Fixed-maturity securities matured 121 63
Equity securities 15 16
Securities held to maturity:
Fixed-maturity securities matured - 9
Other investments, net (1) 1
Costs of investments acquired:
Securities available for sale:
Fixed-maturity securities (1,377) (648)
Perpetual debentures (1) (434)
Equity securities (59) (19)
Securities held to maturity:
Fixed-maturity securities - (42)
Cash received as collateral on
loaned securities 340 -
Additions to property and equipment, net (1) (3)
------ ------
Net cash used by investing activities $ (756) $ (778)
------ ------
(continued)
5
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In millions - Unaudited)
Three Months Ended
March 31,
2000 1999
------ ------
Cash flows from financing activities:
Principal payments under debt obligations $ (4) $ (3)
Dividends paid to shareholders (18) (17)
Purchases of treasury stock (81) (11)
Treasury stock reissued 6 10
Other, net 7 4
------ ------
Net cash used by financing activities (90) (17)
------ ------
Effect of exchange rate changes on cash
and cash equivalents (19) (9)
------ ------
Net change in cash and cash equivalents 76 (105)
Cash and cash equivalents, beginning of year 616 374
------ ------
Cash and cash equivalents, end of period $ 692 $ 269
====== ======
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest on debt obligations $ 3 $ 3
Income taxes - 139
Non-cash financing activities:
Capital lease obligations 4 4
Treasury shares issued for:
Dividends to shareholders 1 1
Associates stock bonus plan 4 3
See the accompanying Notes to Consolidated Financial Statements.
6
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AFLAC INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions - Unaudited)
Three Months Ended
March 31,
2000 1999
------ ------
Net earnings $ 156 $ 196
------ ------
Other comprehensive income, before
income taxes:
Foreign currency translation adjustments:
Change in unrealized foreign currency
translation gains during the period 32 24
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses)
arising during the period 232 (95)
Reclassification adjustment for realized
(gains) losses included in net earnings 2 4
------ ------
Total other comprehensive income,
before income taxes 266 (67)
Income tax expense related to items
of other comprehensive income 141 27
------ ------
Other comprehensive income,
net of income taxes 125 (94)
------ ------
Total comprehensive income $ 281 $ 102
====== ======
7
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AFLAC INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements of AFLAC Incorporated and subsidiaries (the "Company")
contain all adjustments necessary to fairly present the financial position
as of March 31, 2000, and the results of operations and statements of cash
flows, shareholders' equity and comprehensive income for the three months
ended March 31, 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, 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.
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. We are currently evaluating this standard, which for us becomes
effective January 1, 2001.
8
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3. Segment Information
Information regarding components of operations for the three months
ended March 31 follows:
(In millions) 2000 1999
-------- --------
Total revenues:
AFLAC Japan:
Earned premiums $ 1,646 $ 1,398
Net investment income 306 262
------- -------
Total AFLAC Japan revenues 1,952 1,660
------- -------
AFLAC U.S.:
Earned premiums 374 330
Net investment income 67 58
Other income 1 -
------- -------
Total AFLAC U.S. revenues 442 388
------- -------
Other business segments 6 7
------- -------
Total business segments 2,400 2,055
Realized investment gains (losses) (2) (5)
Corporate 8 7
Intercompany eliminations (8) (9)
------- -------
Total $ 2,398 $ 2,048
======= =======
Earnings before income taxes:
AFLAC Japan $ 188 $ 158
AFLAC U.S. 70 63
Other business segments - 1
------- -------
Total business segments 258 222
Realized investment gains (losses) (2) (5)
Interest expense, non-insurance operations (4) (3)
Corporate (9) (11)
------- -------
Total $ 243 $ 203
======= =======
9
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Total assets were as follows:
March 31, December 31,
(In millions) 2000 1999
---------- -----------
Total assets:
AFLAC Japan $ 32,550 $ 32,274
AFLAC U.S. 4,597 4,448
Other business segments 32 34
-------- --------
Total business segments 37,179 36,756
Corporate 5,429 5,213
Intercompany eliminations (5,217) (4,928)
-------- --------
Total $ 37,391 $ 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 quarter of 1999 by $67 million ($.25 per basic share, $.24 per
diluted share) from the reduction of our consolidated deferred income tax
liability as of March 31, 1999. This was the net effect of recalculating
Japanese deferred income taxes at the new 36.2% rate on the temporary
differences between the financial reporting basis of AFLAC Japan's assets
and liabilities, reduced by the limitations in the U.S. foreign tax credit
provisions.
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:
March 31, December 31,
(In millions) 2000 1999
---------- ------------
1.67% yen-denominated senior notes due April 2009 $ 522 $ 541
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate 214 222
Variable interest rate (.41% at March 31, 2000) 30 31
Revolving credit agreement due November 2002:
1.24% fixed interest rate 110 114
Variable interest rate (.36% at March 31, 2000) 134 138
.36% short term 43 45
Obligations under capitalized leases, due
monthly through 2004, secured by computer
equipment in Japan 19 20
------ ------
Total notes payable $ 1,072 $ 1,111
====== ======
10
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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 March 31, 2000, the outstanding principal was 55.6 billion yen ($523
million using the March 31, 2000 exchange rate), less loan discount of $1
million, for a net payable of $522 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 March
31, 2000, 22.7 billion yen ($214 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.
We also have an unsecured revolving credit agreement that provides for
bank borrowings through November 2002 with a borrowing limit of $250
million, payable in either U.S. dollars or Japanese yen. At March 31, 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 (.14% at March 31, 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.
6. Unrealized Gains on 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.
11
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The net effect on shareholders' equity of unrealized gains and losses
from investment securities at the following dates was:
(In millions) March 31, December 31,
2000 1999
------------ ------------
Unrealized gains on securities
available for sale $ 1,687 $ 1,501
Unamortized unrealized gains on
securities transferred on October 1,
1998 to held to maturity 1,184 1,258
Less:
Policy liabilities 719 840
Deferred income taxes 945 887
--------- ---------
Shareholders' equity, net
unrealized gains on
investment securities $ 1,207 $ 1,032
========= =========
7. Security Lending
AFLAC Japan uses short-term security lending arrangements to increase
investment income with minimal risk. At March 31, 2000 and December 31,
1999 we had security loans outstanding in the amounts of $335 million and
$2.4 billion at fair value, respectively. We receive cash or other
securities as collateral for such loans. At March 31, 2000, we held cash
collateral of $340 million for loaned securities in the amount of $335
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.
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.
12
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8. Common Stock
The following is a reconciliation of the number of shares of our common
stock for the three months ended March 31:
2000 1999
(In thousands of shares) ---------- ----------
Common stock - issued:
Balance at beginning of year 320,349 317,971
Exercise of stock options 1,146 599
-------- --------
Balance at end of period 321,495 318,570
-------- --------
Treasury stock:
Balance at beginning of year 54,608 52,287
Purchases of treasury stock:
Open market 2,044 150
Other 48 98
Shares issued to sales associates
stock bonus plan and AFL Stock Plan (229) (191)
Exercise of stock options (159) (429)
-------- --------
Balance at end of period 56,312 51,915
-------- --------
Shares outstanding at end of period 265,183 266,655
======== ========
At March 31, 2000, there were 1.6 million 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 quarter 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.
10. Subsequent Event
The surviving spouse of John B. Amos, the Company's former chairman of
the board, has been receiving lifetime retirement benefits under his
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 died. The
Company has an accrued unfunded liability for projected retirement payments
based on a normal life expectancy. Accordingly, during the second quarter
of 2000, the release of the remaining accrued liability is estimated to
increase net earnings by approximately $95 million ($.35 per diluted share).
13
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REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 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
15.
14
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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 Stockholders and Board of Directors
AFLAC Incorporated:
We have reviewed the consolidated balance sheet of AFLAC Incorporated and
subsidiaries as of March 31, 2000, and the related consolidated statements
of earnings, shareholders' equity, cash flows and comprehensive income for
the three-month periods ended March 31, 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 generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the accompanying consolidated balance sheet of AFLAC Incorporated
and subsidiaries as of December 31, 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
consolidated financial statements.
KPMG LLP
Atlanta, GA
April 25, 2000
15
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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
A significant non-operating item affected our net earnings in the first
quarter of 1999. Due to a corporate income tax rate reduction in Japan
during 1999, the statutory tax rate for AFLAC Japan declined from 41.7% to
36.2%. This tax rate decline resulted in a reduction in our deferred income
tax liability as of March 31, 1999, which increased net earnings by $67
million ($.25 per basic share and $.24 per diluted share) in 1999.
16
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The following table sets forth the results of operations by business
segment for the periods shown.
SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT
(In millions, except for per-share amounts)
Percentage Change Three Months
Over Previous Ended March 31,
Period 2000 1999
----------------- ------------------
Operating earnings:
AFLAC Japan. . . . . . . . . . . . 19.1% $ 188 $ 158
AFLAC U.S. . . . . . . . . . . . . 11.4 70 63
Other business segments. . . . . . - 1
----- -----
Total business segments. . . . . 16.3 258 222
Interest expense,
non-insurance operations . . . . (52.7) (4) (3)
Corporate and eliminations . . . . 28.2 (8) (12)
----- -----
Pretax operating earnings. . . . 18.4 246 207
Income taxes . . . . . . . . . . . 15.3 87 75
----- -----
Operating earnings . . . . . . . 20.2 159 132
Non-operating items:
Deferred tax benefit from Japanese
tax rate reduction . . . . . . . - 67
Realized investment gains
(losses), net of tax . . . . . . (3) (3)
----- -----
Net earnings . . . . . . . . . . (20.1) $ 156 $ 196
===== =====
Operating earnings per basic share . 20.0 $ .60 $ .50
Operating earnings per diluted share 20.8 .58 .48
===== =====
Net earnings per basic share . . . . (20.3) $ .59 $ .74
Net earnings per diluted share . . . (19.7) .57 .71
===== =====
============================================================================
The following discussion of earnings comparisons focuses on operating
earnings and excludes realized investment gains/losses, and in 1999 the
deferred income tax benefit from the Japanese tax rate reduction. 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.
17
<PAGE>
The following table illustrates the effect of foreign currency
translation on our reported results by comparing those results as if foreign
currency rates had remained unchanged from the comparable period in the
prior year.
AFLAC Incorporated and Subsidiaries
Selected Percentage Changes for Supplemental Consolidated Data
Three Months Ended March 31, 2000
Including Excluding
Currency Currency
Changes Changes*
----------- -----------
Premium income 16.9% 9.2%
Net investment income 17.6 12.0
Operating revenues 17.0 9.6
Total benefits and expenses 16.8 9.1
Operating earnings 20.2 15.9
Operating earnings per share 20.8 16.7
- ----------------------------------------------------------------------------
*Amounts excluding foreign currency changes were determined using the
same yen/dollar exchange rate for the current period as the comparable
period in the prior year.
============================================================================
The yen began to strengthen in relation to the dollar at the end of
1998 after several years of weakening. The average yen-to-dollar exchange
rates were 107.13 and 116.58 for the three months ended March 31, 2000 and
1999, respectively. The 8.8% strengthening of the yen in 2000 increased
operating earnings by approximately $.02 per share for the three months
ended March 31, 2000. Operating earnings per share increased 20.8% to $.58
for the three-month period ended March 31, 2000 compared with the same
period in 1999.
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.
18
<PAGE>
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 March 31, 2000, remains constant for the
rest of 2000, the cumulative average rate would be approximately 106.40 and
the annual diluted operating earnings per share would approximate $2.41,
assuming our earnings objective is met.
SHARE REPURCHASE PROGRAM
During the first quarter of 2000, we purchased 2 million shares of our
common stock. On May 1, 2000, the board of directors authorized the
repurchase of up to an additional 10 million shares. Including shares
remaining under a previous authorization, the Company currently has approval
to purchase up to approximately 11 million shares.
INCOME TAXES
Our combined U.S. and Japanese effective income tax rates on operating
earnings for the three months ended March 31, 2000 and 1999 were 35.4% and
36.4%, respectively. Income tax expense for the first quarter of 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 the first quarter of 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 due to the operation of the U.S. foreign tax credit provisions.
19
<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-MONTH PERIOD ENDED MARCH 31,
(In millions) 2000 1999
---------------------------
Premium income. . . . . . . . . . . . . $ 1,646 $ 1,398
Investment income . . . . . . . . . . . 306 262
-------- --------
Total revenues. . . . . . . . . . . . 1,952 1,660
-------- --------
Benefits and claims . . . . . . . . . . 1,385 1,196
Operating expenses. . . . . . . . . . . 379 306
-------- --------
Total benefits and expenses . . . . . 1,764 1,502
-------- --------
Pretax operating earnings . . . . . $ 188 $ 158
======== ========
- ----------------------------------------------------------------------------
Percentage changes in dollars
over previous period:
Premium income. . . . . . . . . . . . 17.7% 18.4%
Investment income . . . . . . . . . . 17.1 15.8
Total revenues. . . . . . . . . . . . 17.6 17.9
Pretax operating earnings . . . . . . 19.1 26.2
- ----------------------------------------------------------------------------
Percentage changes in yen
over previous period:
Premium income. . . . . . . . . . . . 8.2% 7.8%
Investment income . . . . . . . . . . 7.4 5.5
Total revenues. . . . . . . . . . . . 8.0 7.3
Pretax operating earnings . . . . . . 9.1 15.0
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . . . . . 70.9% 72.0%
Operating expenses. . . . . . . . . . 19.5 18.5
Pretax operating earnings . . . . . . 9.6 9.5
============================================================================
20
<PAGE>
AFLAC JAPAN SALES
AFLAC Japan's total new annualized premium sales rose 17.6% to 22.3
billion yen, or $208 million, in the first quarter. Our sales results were
driven by Rider MAX, which accounted for about 43% of sales for the quarter.
During the quarter, we sold approximately 350,000 of these riders. With its
attractive accident and medical benefits, Rider MAX has broadened the appeal
of our founding product, cancer life insurance. Almost 60% of our cancer
life sales in the first quarter included Rider MAX. We also saw continued
momentum of our ordinary life insurance product line. Life insurance sales
increased sharply over a year ago, accounting for approximately 7.4% of
sales in the quarter.
Our sales force also continued to grow. At the end of the first
quarter, AFLAC Japan was represented by 43,000 licensed sales associates at
more than 8,400 corporate and individual agencies. We continue to focus on
recruiting new agencies, particularly individual agents, in order to better
reach the tremendous market of small businesses in Japan.
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.
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
Investment yields in Japan remained at very depressed levels. For
example, the yield of 20-year Japanese government bonds, based on a
composite index, averaged 2.30% during the first three months of the year.
However, we purchased yen-denominated securities at an average yield of
3.93% in the quarter by focusing on selected sectors of the fixed-maturity
market. Including dollar-denominated investments, our blended new money
yield was 4.09% for the quarter. As of April 14, we had invested or
committed to invest approximately 42% of our expected 2000 cash flow at an
average yield of 3.98%. At the end of the first quarter, the yield on AFLAC
Japan's fixed-maturity portfolio was 5.14%, compared with 5.19% at the end
of 1999. The return on average invested assets was 4.88% for the quarter,
compared with 5.02% a year ago.
AFLAC JAPAN OTHER
The operating expense ratio has increased slightly due to expenditures
for additional marketing programs including advertising and direct response
efforts. The benefit ratio has declined due to the mix of business shifting
to newer products that have a lower loss ratio than the traditional cancer
life insurance. The 9.1% increase in pretax operating earnings is primarily
due to the increased premium income.
21
<PAGE>
INSURANCE OPERATIONS, AFLAC U.S.
The following table presents a summary of AFLAC U.S. operating results.
AFLAC U.S.
SUMMARY OF OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31,
(In millions) 2000 1999
--------------------------
Premium income. . . . . . . . . . . . . $ 374 $ 330
Investment income . . . . . . . . . . . 67 58
Other income. . . . . . . . . . . . . . 1 -
----- -----
Total revenues. . . . . . . . . . . . 442 388
----- -----
Benefits and claims . . . . . . . . . . 235 205
Operating expenses. . . . . . . . . . . 137 120
----- -----
Total benefits and expenses . . . . . 372 325
----- -----
Pretax operating earnings . . . . . $ 70 $ 63
===== =====
- ----------------------------------------------------------------------------
Percentage increases
over previous period:
Premium income. . . . . . . . . . . . 13.4% 13.9%
Investment income . . . . . . . . . . 15.2 12.8
Total revenues. . . . . . . . . . . . 13.7 13.3
Pretax operating earnings . . . . . . 11.4 11.4
- ----------------------------------------------------------------------------
Ratios to total revenues:
Benefits and claims . . . . . . . . . 53.3% 52.8%
Operating expenses. . . . . . . . . . 30.9 31.1
Pretax operating earnings . . . . . . 15.8 16.1
============================================================================
AFLAC U.S. SALES
New annualized premium sales in the United States rose rapidly in the
first quarter. New sales increased 20.3% to $150 million, marking the
second best quarter in AFLAC's history. Accident/disability insurance again
accounted for the majority of our new business in the quarter. However,
sales of our founding product, cancer expense insurance, were also strong.
We remain especially pleased with the sales of our new ordinary life
insurance products. Life insurance sales increased 55% over the first
quarter of 1999, accounting for approximately 6% of total new sales.
In addition to strong sales, we experienced expansion of our sales
force in the United States. During the first quarter we continued to
aggressively recruit new AFLAC sales associates. As a result, the average
number of producing associates on a monthly basis was 9,990 in the quarter,
an increase of 16.7% over the first quarter of 1999.
22
<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. For example, we
are currently in the process of testing the first phase of an Internet-based
billing system for our U.S. payroll account customers. Internet billing
will improve service to our payroll accounts and enhance our administrative
efficiency. In addition, we have claims forms available for download from
our Web site for each product we offer in every state. The combination of
downloadable claims forms and facsimile claims submission greatly enhances
service to our customers and efficiency of our administration. Savings from
new electronic work processes have allowed us to invest heavily in national
advertising, which has benefited our name recognition, recruiting and sales
results. We have set an objective for AFLAC U.S. sales to increase by 12%
to 15% for the year 2000.
AFLAC U.S. INVESTMENTS
During the first quarter of 2000, available cash flow was invested at
an average yield-to-maturity of 8.11% compared with 8.08% during the first
quarter of 1999. The overall return on average invested assets, net of
investment expenses, was 7.60% for the first three months of 2000 compared
with 7.52% for the first quarter 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, which was
16.0% for the year 1999, to remain approximately the same in 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
23
<PAGE>
financial statements. The yen/dollar exchange rate at the end of each
period is used to translate yen-denominated balance sheet items to U.S.
dollars for reporting purposes. The exchange rate at March 31, 2000, was
106.15 yen to one U.S. dollar, 3.5% weaker than the exchange rate of 102.40
as of December 31, 1999. Management estimates that the weaker yen rate
decreased reported investments and cash by $1.0 billion, total assets by
$1.1 billion, and total liabilities by $1.1 billion compared with the
amounts that would have been reported for 2000 if the exchange rate had
remained unchanged from year-end 1999.
INVESTMENTS AND CASH
The continued growth in investments and cash reflects the substantial
cash flows in the functional currencies of our operations. Net unrealized
gains of $1.5 billion on investment securities at March 31, 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:
March 31, December 31,
2000 1999
----------- ------------
AAA 26.9% 28.0%
AA 23.3 24.6
A 36.8 33.5
BBB 12.1 12.1
BB .9 1.8
----- -----
100.0% 100.0%
===== =====
As of 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, at March 31, 2000 we held two other corporate issues
with an amortized cost of $249 million that were downgraded to `BB' during
the first quarter.
Private placement investments accounted for 50.2% and 49.0% of our
total debt securities as of March 31, 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
24
<PAGE>
(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.
The following table shows an analysis of investment securities (at cost
or amortized cost):
AFLAC Japan AFLAC U.S.
---------------------- ----------------------
March 31, December 31, March 31, December 31,
(In millions) 2000 1999 2000 1999
---------------------- ----------------------
Available for sale:
Fixed-maturity securities $16,069 $15,491 $ 3,385* $ 3,405*
Perpetual debentures 2,331 2,411 154 153
Equity securities 53 45 95 92
------ ------ ------ ------
Total available for sale 18,453 17,947 3,634 3,650
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 4,216 4,389 - -
Perpetual debentures 3,754 3,903 - -
------ ------ ------ ------
Total held to maturity 7,970 8,292 - -
------ ------ ------ ------
Total $26,423 $26,239 $ 3,634 $ 3,650
====== ====== ====== ======
*Includes securities held by the parent company of $165 at March 31,
2000, and $240 at December 31, 1999
POLICY LIABILITIES
Policy liabilities decreased $366 million, or 1.2%, during the first
three months of 2000. AFLAC Japan decreased $428 million, or 1.6% (2.0%
increase in yen), and AFLAC U.S. increased $62 million, or 2.7%. 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 March 31,
2000, compared with December 31, 1999, decreased reported policy liabilities
by $1.0 billion.
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
25
<PAGE>
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 March 31, 2000, the outstanding
principal was 55.6 billion yen ($523 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 March 31, 2000.
Our ratio of debt to total capitalization (debt plus shareholders'
equity, excluding the unrealized gains on investment securities) was 27.3%
and 28.1% as of March 31, 2000 and December 31, 1999, respectively.
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.
26
<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 $12
million in the first quarter of 2000 and $11 million for the same period in
1999. 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.
27
<PAGE>
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 year.
OTHER
On May 1, 2000, the board of directors approved an increase in the
quarterly cash dividend from $.075 to $.085 per share. The increase is
effective with the second quarter dividend, which is payable on June 1,
2000, to shareholders of record at the close of business on May 18, 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 March 31, 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 $2.8 billion based on our portfolio as of March 31,
2000. The effect on yen-denominated debt securities is approximately $2.4
billion and the effect on dollar-denominated debt securities is
approximately $391 million.
28
<PAGE>
We have outstanding interest rate swaps on 34.3 billion yen ($324
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 March 31, 2000, we also had yen-denominated bank borrowings in the
amount of 21.9 billion yen ($207 million) with a variable interest rate of
.37%. The effect on net earnings in 2000 due to changes in market interest
rates was immaterial. For further information on our notes payable, see
Note 5 of the Notes to the Consolidated Financial Statements.
EQUITY PRICE RISK
Equity securities at March 31, 2000, totaled $228 million, or .7% of
total investments and cash on a consolidated basis. We use beta analysis to
measure the sensitivity of our equity securities portfolio to fluctuations
in the broad market. The beta of our equity securities portfolio is 1.03.
For example, if the overall stock market value changed by 10%, the value of
AFLAC's equity securities would be expected to change by approximately
10.3%, or $23 million.
CURRENCY RISK
Most of AFLAC Japan's investments and cash are denominated in yen.
When yen-denominated financial instruments mature or are sold, the proceeds
are generally reinvested in yen-denominated securities and are held to fund
yen-denominated policy obligations rather than converted into dollars.
In addition to the yen-denominated financial instruments held by AFLAC
Japan, AFLAC Incorporated has yen-denominated bank borrowings 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 below compares the U.S. dollar values of our yen-denominated assets
and liabilities at various exchange rates.
29
<PAGE>
Dollar Value of Yen-Denominated Assets and Liabilities
At Selected Exchange Rates
(March 31, 2000)
91.15 106.15* 121.15
(In millions) Yen Yen Yen
- ----------------------------------------------------------------------------
Yen-denominated financial
instruments:
Assets:
Securities available for sale:
Fixed maturities $ 19,349 $ 16,614 $ 14,557
Perpetual debentures 2,045 1,756 1,539
Equity securities 76 65 57
Securities held to maturity:
Fixed maturities 4,909 4,216 3,694
Perpetual debentures 4,372 3,754 3,289
Cash and cash equivalents 768 659 578
Other financial instruments 4 4 3
------- ------- -------
Total 31,523 27,068 23,717
------- ------- -------
Liabilities - notes payable 1,226 1,052 922
------- ------- -------
Net yen-denominated financial
instruments 30,297 26,016 22,795
Other yen-denominated assets 4,244 3,645 3,193
Other yen-denominated liabilities (34,006) (29,202) (25,586)
------- ------- -------
Consolidated yen-denominated
net assets subject to foreign
currency fluctuation $ 535 $ 459 $ 402
======= ======= =======
* Actual March 31, 2000 exchange rate
For information regarding the effect of foreign currency translation on
operating earnings per share, see Foreign Currency Translation beginning on
page 17.
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
30
<PAGE>
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.
31
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a defendant in various litigation considered to be in the normal
course of business. Some of this litigation is pending in Alabama, where
large punitive damages bearing little relation to the actual damages
sustained by plaintiffs have been awarded against other companies, including
insurers, in recent years. Although the final results of any litigation
cannot be predicted with certainty, we believe the outcome of pending
litigation will not have a material adverse effect on our financial
position, results of operations, or cash flows.
32
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders was held on May 1, 2000.
Matters submitted to the shareholders were: (1) Election of 18 members to
the board of directors; (2) Adopt an Amendment of Article IV of the
Company's Articles of Incorporation, to increase the Company's authorized
shares of common stock from 400 million shares to 1 billion shares; (3)
Ratification of the appointment of independent auditors for 2000. The
proposals were approved by the shareholders.
Following is a summary of each vote cast for, against or withheld, as
well as the number of abstention and broker non-votes, as to each such
matter, including a separate tabulation with respect to each nominee for
office.
VOTES
- ----------------------------------------------------------------------------
Absten- With- Broker
For Against tions held Non-Votes
- ----------------------------------------------------------------------------
(1) Election of 18
members to the board
of directors:
Paul S. Amos 426,966,233 N/A N/A 16,756,460 535,059
Daniel P. Amos 427,291,387 N/A N/A 16,431,306 535,059
J. Shelby Amos, II 427,471,008 N/A N/A 16,251,685 535,059
Michael H. Armacost 438,187,272 N/A N/A 5,535,421 535,059
M. Delmar Edwards, M.D. 437,738,346 N/A N/A 5,984,347 535,059
Joe Frank Harris 437,206,212 N/A N/A 6,516,481 535,059
Elizabeth J. Hudson 437,929,150 N/A N/A 5,793,543 535,059
Kenneth S. Janke, Sr. 438,106,749 N/A N/A 5,615,944 535,059
Charles B. Knapp 437,971,954 N/A N/A 5,750,739 535,059
Takatsugu Murai 438,214,812 N/A N/A 5,507,881 535,059
Yoshiki Otake 437,832,248 N/A N/A 5,890,445 535,059
E. Stephen Purdom 438,082,714 N/A N/A 5,639,979 535,059
Barbara K. Rimer 437,958,742 N/A N/A 5,763,951 535,059
Marvin R. Schuster 438,034,059 N/A N/A 5,688,634 535,059
Henry C. Schwob 435,320,709 N/A N/A 8,401,984 535,059
J. Kyle Spencer 437,623,763 N/A N/A 6,098,930 535,059
Glenn Vaughn, Jr. 437,834,417 N/A N/A 5,888,276 535,059
Robert L. Wright 437,874,425 N/A N/A 5,848,268 535,059
VOTES
---------------------------------------------------
Absten- With- Broker
For Against tions held Non-Votes
- ----------------------------------------------------------------------------
(2) Adopt an Amendment to
the Articles of Incorpora-
tion to increase the
authorized shares of
common stock from 400
million shares to
1 billion shares 402,050,304 36,739,237 5,466,064 N/A 2,147
(3) Ratification of
appointment of KPMG
LLP as independent
auditors 436,550,439 3,393,829 4,313,484 N/A None
33
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 March
31, 2000.
Items other than those listed above are omitted because they are not
required or are not applicable.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFLAC INCORPORATED
Date May 10, 2000 /s/ KRISS CLONINGER, III
------------------------ ---------------------------
KRISS CLONINGER,III
Executive Vice President;
Treasurer and
Chief Financial Officer
Date May 10, 2000 /s/ NORMAN P. FOSTER
------------------------ ---------------------------
NORMAN P. FOSTER
Executive Vice President,
Corporate Finance
35
<PAGE>
EXHIBITS FILED WITH CURRENT FORM 10-Q:
12.0 - Statement regarding the computation of ratio of earnings to
fixed charges
27.0 - Financial Data Schedule (for SEC use only).
36
1
<PAGE>
EXHIBIT 12.0
EXH 12.0
<PAGE>
AFLAC INCORPORATED AND SUBSIDIARIES
Ratio of Earnings to Fixed Charges
(In thousands) Three Months Ended March 31,
2000 1999
----------------------------
Fixed charges:
Interest expense $ 4,866 $ 3,608
Rental expense deemed interest 129 119
------- -------
Total fixed charges $ 4,995 $ 3,727
======= =======
Earnings before income tax $243,265 $202,897
Add back:
Fixed charges 4,995 3,727
------- -------
Total earnings before income
tax and fixed charges 248,260 206,624
Adjustments:
Realized gains/(losses) (2,456) (4,590)
------- -------
Total earnings before income
tax and fixed charges and
realized gains/(losses) $250,716 $211,214
======= =======
Earnings excluding realized
gains/(losses) to fixed
charges 50.2x 56.7x
EXH 12.0-1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated financial statements as filed in Form 10-Q for the
quarter ended March 31, 2000, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
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<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<DEBT-CARRYING-VALUE> 7,970
<DEBT-MARKET-VALUE> 7,746
<EQUITIES> 228
<MORTGAGE> 0
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<TOTAL-INVEST> 31,759
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<POLICY-LOSSES> 28,576
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<POLICY-HOLDER-FUNDS> 302
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0
0
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2,020
<INVESTMENT-INCOME> 376
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<UNDERWRITING-AMORTIZATION> 69
<UNDERWRITING-OTHER> 466
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<INCOME-TAX> 87
<INCOME-CONTINUING> 156
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156
<EPS-BASIC> .59
<EPS-DILUTED> .57
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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