SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarter ended September 30, 1995 Commission File No. 1-7434 AFLAC INCORPORATED ------------------------------------------------------ (Exact name of Registrant as specified in its charter) GEORGIA 58-1167100 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code (706) 323-3431 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class November 3, 1995 - ---------------------------- ------------------ Common Stock, $.10 Par Value 94,752,640 shares
AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1995, and December 31, 1994.............. 1 Consolidated Statements of Earnings - Three Months Ended September 30, 1995 and 1994 Nine Months Ended September 30, 1995 and 1994........... 3 Consolidated Statements of Shareholders' Equity - Nine Months Ended September 30, 1995 and 1994........... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994........... 5 Notes to Consolidated Financial Statements................ 7 Review by Independent Certified Public Accountants............................................. 10 Independent Auditors' Report.............................. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 12 Part II. Other Information: Item 1. Legal Proceedings................................. 24 Item 6. Exhibits and Reports on Form 8-K.................. 24 Items other than those listed above are omitted because they are not required or are not applicable. i
Part I. Financial Information AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In thousands - Unaudited) September 30, December 31, 1995 1994 ------------ ------------ ASSETS Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost, $16,593,479 in 1995 and $14,709,820 in 1994) $ 19,385,647 $ 15,530,694 Equity securities (cost, $74,199 in 1995 and $71,585 in 1994) 99,535 84,373 Mortgage loans on real estate 21,459 25,104 Other long-term investments 4,865 5,038 Short-term investments 497,459 330,916 ------------- ------------- Total investments 20,008,965 15,976,125 Cash 18,060 17,643 Receivables, primarily premiums 325,209 303,748 Accrued investment income 210,409 220,757 Deferred policy acquisition costs 2,596,078 2,402,869 Property and equipment, net 572,476 580,247 Securities held as collateral for loaned securities 980,940 556,937 Intangible assets, net 106,665 109,865 Other 121,959 118,888 ------------- ------------- Total assets $ 24,940,761 $ 20,287,079 ============= ============= See accompanying Notes to Consolidated Financial Statements. (continued) 1
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands, except for per-share amounts - Unaudited) September 30, December 31, 1995 1994 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 18,130,146 $ 14,586,171 Unpaid policy claims 1,055,956 929,350 Unearned premiums 333,996 339,514 Other policyholders' funds 172,610 151,572 ------------- ------------- Total policy liabilities 19,692,708 16,006,607 Notes payable 352,437 184,901 Income taxes, primarily deferred 1,444,204 1,392,441 Payable for return of collateral on loaned securities 980,940 556,937 Payables for security transactions 25,048 46,371 Other 385,242 348,055 ------------- ------------- Total liabilities 22,880,579 18,535,312 ------------- ------------- Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 104,208 in 1995 and 104,000 in 1994 10,421 10,400 Additional paid-in capital 201,398 198,099 Unrealized foreign currency translation gains 213,306 174,091 Unrealized gains on securities available for sale 471,501 228,844 Retained earnings 1,506,617 1,277,487 Treasury stock (341,949) (135,776) Notes receivable for stock purchases (1,112) (1,378) ------------- ------------- Total shareholders' equity 2,060,182 1,751,767 ------------- ------------- Total liabilities and shareholders' equity $ 24,940,761 $ 20,287,079 ============= ============= Shareholders' equity per share $ 21.72 $ 17.58 ============= ============= Shares outstanding at end of period 94,835 99,636 ============= ============= See accompanying Notes to Consolidated Financial Statements. 2 <TABLE> AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings <CAPTION> (In thousands, except for Three Months Ended September 30, Nine Months Ended September 30, per-share amounts - Unaudited) -------------------------------- ------------------------------- 1995 1994 1995 1994 Revenues: ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Premiums, principally supplemental health insurance $ 1,531,396 $ 1,362,309 $ 4,617,262 $ 3,796,341 Net investment income 259,125 217,298 772,168 612,547 Realized investment gains (losses) (64) (248) 85 (345) Other income 21,261 22,152 68,650 66,153 ------------ ------------ ------------ ------------ Total revenues 1,811,718 1,601,511 5,458,165 4,474,696 ------------ ------------ ------------ ------------ Benefits and expenses: Benefits and claims 1,270,332 1,119,696 3,830,392 3,109,235 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 41,016 41,138 123,849 107,762 Insurance commissions 202,562 181,731 609,836 503,834 Insurance expenses 109,856 91,916 321,804 276,939 Interest expense 4,086 3,794 12,096 9,918 Capitalized interest on building construction - - - (2,419) Other operating expenses 32,135 33,724 102,591 97,413 ------------ ------------ ------------ ------------ Total acquisition and operating expenses 389,655 352,303 1,170,176 993,447 ------------ ------------ ------------ ------------ Total benefits and expenses 1,659,987 1,471,999 5,000,568 4,102,682 ------------ ------------ ------------ ------------ Earnings before income taxes 151,731 129,512 457,597 372,014 Income taxes 63,771 53,453 191,848 156,620 ------------ ------------ ------------ ------------ Net earnings $ 87,960 $ 76,059 $ 265,749 $ 215,394 ============ ============ ============ ============ Net earnings per share $ .89 $ .74 $ 2.64 $ 2.08 ============ ============ ============ ============ Shares used in computing earnings per share 98,436 102,812 100,484 103,513 ============ ============ ============ ============ Cash dividends per share $ .13 $ .115 $ .375 $ .33 ============ ============ ============ ============ See accompanying Notes to Consolidated Financial Statements. 3 </TABLE>
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands - Unaudited) Nine Months Ended September 30, 1995 1994 Common stock: -------------- ------------- Balance at beginning of year $ 10,400 $ 10,371 Exercise of stock options 21 19 -------------- ------------ Balance at end of period 10,421 10,390 -------------- ------------ Additional paid-in capital: Balance at beginning of year 198,099 195,730 Exercise of stock options 2,313 1,319 Gain on treasury stock reissued 986 118 -------------- ------------ Balance at end of period 201,398 197,167 -------------- ------------ Unrealized foreign currency translation gains: Balance at beginning of year 174,091 123,294 Change in unrealized translation gains during year 39,215 51,858 -------------- ------------ Balance at end of period 213,306 175,152 -------------- ------------ Unrealized gains on securities available for sale: Balance at beginning of year 228,844 14,811 Change in unrealized gains (losses) during year, net of income taxes 242,657 (205,409) Cumulative effect of accounting change, adopted January 1, 1994 (SFAS 115), net of income taxes - 461,478 -------------- ------------ Balance at end of period 471,501 270,880 -------------- ------------ Retained earnings: Balance at beginning of year 1,277,487 1,029,625 Net earnings 265,749 215,394 Cash dividends on common stock ($.375 per share in 1995, $.33 per share in 1994) (36,619) (33,487) -------------- ------------ Balance at end of period 1,506,617 1,211,532 -------------- ------------ Treasury stock: Balance at beginning of year (135,776) (6,568) Purchases of treasury stock (5,215 shares in 1995 and 3,819 shares in 1994) (213,186) (119,009) Shares issued to sales associates stock plan 7,013 938 -------------- ------------ Balance at end of period (341,949) (124,639) -------------- ------------ Notes receivable for stock purchases (1,112) (1,401) -------------- ------------ Total shareholders' equity $ 2,060,182 $ 1,739,081 ============== ============ See accompanying Notes to Consolidated Financial Statements. 4
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands - Unaudited) Nine Months Ended September 30, ----------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net earnings $ 265,749 $ 215,394 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 1,964,745 1,615,173 Deferred income taxes 44,455 57,473 Decrease in income taxes payable (5,862) (47,703) Increase in deferred policy acquisition costs (188,326) (196,507) Increase in receivables (26,572) (42,833) Other, net 107,292 116,052 ------------ ------------ Net cash provided by operating activities 2,161,481 1,717,049 ------------ ------------ Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities matured or called 451,706 61,303 Fixed-maturity securities sold 515,920 788,222 Equity securities 17,978 37,676 Mortgage loans, net 3,683 34,288 Other long-term, net 173 - Costs of investments acquired: Fixed-maturity securities (2,881,037) (2,204,738) Equity securities (24,038) (30,525) Other long-term, net - (3,078) Short-term, net (174,312) (127,824) Additions to property and equipment, net (13,080) (183,152) ------------ ------------ Net cash used by investing activities (2,103,007) (1,627,828) ------------ ------------ See accompanying Notes to Consolidated Financial Statements. (continued) 5
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands - Unaudited) Nine Months Ended September 30, ----------------------------- 1995 1994 ------------ ------------ Cash flows from financing activities: Proceeds from borrowings 209,250 83,000 Principal payments under debt obligations (27,053) (12,384) Dividends paid to shareholders (36,618) (33,487) Purchases of treasury stock (213,186) (119,009) Treasury stock reissued 7,999 1,056 Other, net 2,334 1,338 ------------ ------------ Net cash used by financing activities (57,274) (79,486) ------------ ------------ Effect of exchange rate changes on cash (783) 3,714 ------------ ------------ Net change in cash 417 13,449 Cash at beginning of year 17,643 23,413 ------------ ------------ Cash at end of period $ 18,060 $ 36,862 ============ ============ Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 10,080 $ 8,630 Income taxes 153,381 145,932 Non-cash financing activities included capital lease obligations incurred for computer equipment totaling $2,585 in 1995 and $13,594 in 1994. See accompanying Notes to Consolidated Financial Statements. 6
AFLAC INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments (none of which were other than normal recurring accruals) necessary to fairly present the financial position as of September 30, 1995, and the results of operations for the three-month and nine-month periods ended September 30, 1995 and 1994, and changes in shareholders' equity and cash flows for the nine months ended September 30, 1995 and 1994. Results of operations for interim periods are not necessarily indicative of results for the entire year. The financial statements should be read in conjunction with the financial statements included in the Company's annual report to shareholders for the year ended December 31, 1994. 2. In August 1995, the Company's board of directors authorized the purchase of up to an additional 5.0 million shares of the Company's common stock. In total, the board of directors has authorized the purchase of up to 14.2 million shares since the initiation of the repurchase program in February 1994. There were 5.2 million shares and 3.8 million shares purchased during the nine months ended September 30, 1995 and 1994, respectively. Through September 30, 1995, a total of 9.4 million shares had been purchased under the repurchase authorizations. At September 30, 1995, 9.4 million shares were held in the treasury at a cost of $341.9 million. The shares purchased during the first nine months of 1995 were financed with available cash and borrowings under revolving credit and term note agreements. The loan agreements were amended during 1995 to provide for borrowings up to $250 million in either U.S. dollars with interest at LIBOR plus 27.5 basis points or Japanese yen with interest at the Tokyo Interbank Offered Rate (TIBOR) plus 27.5 basis points. Principal payments are payable over five years beginning in June 1996. The loan agreement contains various covenants, one of which requires the Company to maintain a minimum consolidated shareholders' equity of $1.0 billion. In August 1995, all outstanding borrowings under the agreement were converted from dollar-denominated to yen-denominated loans. At September 30, 1995, bank borrowings of 23.9 billion yen ($239.3 million) were outstanding in connection with the share purchase program. Interest expense related to the share repurchase program for the nine months ended September 30, 1995 and 1994 was $4.3 million and $1.8 million, respectively. The Company has designated the yen-denominated borrowings as a hedge of its net investment in AFLAC Japan. Foreign currency translation gains/losses are included in the unrealized foreign currency translation gains component in shareholders' equity. Outstanding principal and related accrued interest payable on the yen-denominated borrowings were translated into dollars at the spot exchange rates as of September 30, 1995. Interest expense was translated at average exchange rates for the period the borrowings were outstanding in 1995. In August 1995, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on this floating-rate long-term debt. The swaps have notional principal amounts which approximate the unpaid principal amount during the six-year loan period. Under these agreements, the Company makes fixed-rate interest payments at 2.46% and 7
receives floating-rate payments in return. As of September 30, 1995, the floating rate based on three-month TIBOR was .92%. These transactions effectively change a portion of the Company's interest rate exposure from a floating rate to a fixed rate of 2.74% (including 27.5 basis point loan margin). 3. Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under this standard, the Company classifies all fixed-maturity securities as "available for sale." Such securities are carried at fair value rather than amortized cost. The related unrealized gains and losses, less amounts applicable to policy liabilities and deferred income taxes, are reported in a separate component of shareholders' equity together with unrealized gains and losses on equity securities. This change in accounting method has no effect on net earnings. The effect of this accounting change on shareholders' equity was as follows: (In thousands) September 30, 1995 December 31, 1994 January 1, 1994 ------------------ ----------------- --------------- Investments $ 2,792,168 $ 820,874 $ 1,851,141 Policy liabilities (2,034,172) (315,599) (1,088,633) Deferred income taxes (312,095) (289,089) (301,030) ------------ ------------ ------------- Shareholders' equity, net unrealized gains on securities available for sale $ 445,901 $ 216,186 $ 461,478 ============ ============ ============= The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of the shareholders if such gains were actually realized. These amounts are necessary to cover policy reserve interest requirements based on market investment yields at these dates. 4. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. Fixed-maturity securities owned by AFLAC Japan are loaned to major securities firms. At September 30, 1995, the Company held Japanese government bonds as collateral for loaned securities in the amount of $1.0 billion at market value. The Company's security lending policy requires that the fair value of the securities received as collateral be greater than or equal to 105% of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. Bond market quotations are used to determine the fair value (carrying value) of the collateral asset and related liability. 5. The Company is 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 damage awards bearing little relation to the actual damages sustained by plaintiffs have been awarded against companies, including other insurers, in recent years. During the quarter, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the nine months ended September 30, 1995. Although the final results of any litigation cannot be predicted with 8
certainty, the Company does not believe the outcome of any litigation still pending will have a material adverse effect on the financial position of the Company. The Internal Revenue Service has proposed adjustments to the Company's U.S. consolidated federal income tax returns for the years 1989 through 1991. The proposed adjustments relate primarily to the computation of foreign source income for purposes of the foreign tax credit that, if upheld, would have a significant effect on the Company's operating results. Management does not agree with the proposed tax issues and is vigorously contesting them. The final outcome is still undetermined. However, the Company believes its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements. 9
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The September 30, 1995 and 1994 financial statements included in this filing have been reviewed by KPMG Peat Marwick LLP, independent certified public accountants, in accordance with established professional standards and procedures for such a review. The report of KPMG Peat Marwick LLP commenting upon their review is included on page 11. 10
KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Telephone: (404) 222-3000 Suite 2000 Telefax: (404) 222-3050 Atlanta, GA 30308 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors AFLAC Incorporated: We have reviewed the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings for the three-month and nine-month periods ended September 30, 1995 and 1994, and the consolidated statements of cash flows and shareholders' equity for the nine-month periods ended September 30, 1995 and 1994. 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 any 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, 1994, and the related consolidated statements of earnings, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1995, we expressed an unqualified opinion on those consolidated financial statements. KPMG PEAT MARWICK LLP October 25, 1995 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The primary business activity of AFLAC Incorporated and subsidiaries (the "Company") is supplemental health insurance, which is marketed and administered primarily through American Family Life Assurance Company of Columbus (AFLAC). The Company's operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two principal markets for the Company's insurance operations. AFLAC Japan and AFLAC U.S. are the primary components for this discussion and analysis, due to their significance to the Company's consolidated financial condition and results of operations. 12 <TABLE> RESULTS OF OPERATIONS <CAPTION> The following table sets forth the pretax operating earnings by business component for the periods shown and the percentage change from the prior period. SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT (In millions, except for per-share amounts) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- -------------------------------------- Percentage Change Percentage Change Over Previous Over Previous Period 1995 1994 Period 1995 1994 ----------------- ------------------ ----------------- ------------------ <S> <C> <C> <C> <C> <C> <C> Insurance operations (excluding realized investment gains and losses): AFLAC Japan........................ 14.6% $ 140.0 $ 122.2 22.0% $ 425.8 $ 349.1 AFLAC U.S.......................... 2.8 24.3 23.6 15.0 75.5 65.6 Other foreign...................... (.5) (.1) (.6) (1.2) ------ ------ ------ ------ Total insurance................... 12.4 163.8 145.7 21.1 500.7 413.5 Realized investment gains (losses)... (.1) (.2) .1 (.3) Broadcast division................... 11.7 4.4 3.9 12.7 14.8 13.1 Interest expense, noninsurance operations............. (3.1) (2.9) (9.0) (7.4) Capitalized interest, building construction............... - - - 2.4 Parent company, other operations and eliminations.................... 21.9 (13.3) (17.0) .7 (49.0) (49.3) ------ ------ ------ ------ Earnings before income taxes...... 17.2 151.7 129.5 23.0 457.6 372.0 Income taxes......................... 63.7 53.4 191.9 156.6 ------ ------ ------ ------ Net earnings...................... 15.6 $ 88.0 $ 76.1 23.4 $ 265.7 $ 215.4 ====== ====== ====== ====== Net earnings per share............ 20.3 $ .89 $ .74 26.9 $ 2.64 $ 2.08 ====== ====== ====== ====== 13 </TABLE>
Net earnings increased 15.6% for the three months ended September 30, 1995, and 23.4% for the nine months ended September 30, 1995, compared with the respective periods in 1994. The increases primarily resulted from strong earnings from our core insurance operations in Japan and the United States and improved results by the Broadcast Division. Partially offsetting the increases was additional interest expense primarily related to the Company's stock repurchase program. Also partially offsetting the increase for the nine months was the absence of capitalized interest in 1995 due to completion of the Company's administrative office building in Japan in early 1994. The increases in reported results in U.S. dollars for AFLAC Japan and consolidated earnings for both the three months and nine months ended September 30, 1995, were aided by favorable currency translations from yen to dollars. Following the dramatic rise in the value of the Japanese yen in relation to the U.S. dollar during the second quarter of this year, the yen began to weaken in the third quarter. However, the yen was still stronger in the third quarter compared with the same period a year ago, which resulted in a benefit to operating earnings per share. The strengthening of the yen benefited operating earnings (excluding realized investment gains/losses) by approximately $.03 per share for the three months ended September 30, 1995, and $.24 per share for the nine months ended September 30, 1995. Excluding the benefit of the stronger yen, operating earnings per share increased 16.2% for the three months ended September 30, 1995, and increased 15.4% for the nine months ended September 30, 1995, compared with the respective periods in 1994. AFLAC Japan's pretax operating earnings (excluding realized investment gains/losses) in yen increased 8.6% for the three months ended September 30, 1995, compared with the third quarter of 1994, and increased 8.2% for the nine months ended September 30, 1995, compared with the nine months ended September 30, 1994. The reported U.S. dollar results for AFLAC Japan were affected by the favorable average yen-to-dollar exchange rate of 91.62 for the nine months ended September 30, 1995, compared with 103.39 for the first nine months of 1994. As a result, percentage increases in U.S. dollars for AFLAC Japan's pretax operating earnings were 14.6% for the three months ended September 30, 1995, compared with the third quarter of 1994, and 22.0% for the nine months ended September 30, 1995, compared with the nine months ended September 30, 1994. AFLAC Japan repatriated profits to AFLAC U.S. of $140.5 million in 1995, $132.9 million in 1994, and $97.9 million in 1993. The profit transfers to AFLAC U.S. adversely impact AFLAC Japan's investment income. However, repatriations benefit consolidated operations because higher investment yields can be earned on funds invested in the United States. Also, income tax expense is presently lower on investment income earned in the United States. Management estimates profit transfers from 1992 through 1995 have benefited consolidated net earnings by $5.0 million and $2.6 million for the three months ended September 30, 1995 and 1994, respectively, and $9.2 million and $4.7 million for the nine months ended September 30, 1995 and 1994, respectively. During the third quarter, AFLAC purchased 2.9 million shares of its common stock. The Company has bought a total of 9.4 million shares (through September 30, 1995) since the inception of the share repurchase program in February 1994. The spread in percentage points between the increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. 14
AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to the Company's earnings, is the fourth largest life insurance company in Japan in terms of individual policies in force. The transfer of profits from 1992 through 1995 from AFLAC Japan to AFLAC U.S. distorted comparisons of operating results between periods. The following AFLAC Japan summary of operations tables present investment income, total revenues and pretax operating earnings calculated on a pro forma basis in order to improve comparability between periods. The pro forma adjustment represents cumulative investment income foregone by AFLAC Japan on funds repatriated to AFLAC U.S. during 1992 through 1995. 15
AFLAC JAPAN SUMMARY OF OPERATING RESULTS THREE MONTHS ENDED SEPTEMBER 30, In Dollars (In millions) 1995 1994 -------------------------- Premium income...................... $ 1,310.4 $ 1,158.6 Investment income, as adjusted*..... 237.7 198.8 Other income........................ (1.6) .5 --------- --------- Total revenues, as adjusted*...... 1,546.5 1,357.9 --------- --------- Benefits and claims................. 1,134.2 994.3 Operating expenses.................. 266.4 237.3 --------- --------- Total benefits and expenses....... 1,400.6 1,231.6 --------- --------- Pretax operating earnings, as adjusted*................... 145.9 126.3 Investment income applicable to profit repatriations............... (5.9) (4.1) --------- --------- Pretax operating earnings....... $ 140.0 $ 122.2 ========= ========= - ---------------------------------------------------------------------------- In Dollars In Yen 1995 1994 1995 1994 ---------------- ---------------- Percentage increases over previous period: Premium income.............. 13.1% 26.1% 6.9% 18.1% Investment income*.......... 19.6 20.5 13.1 12.8 Total revenues*............. 13.9 25.3 7.6 17.3 Pretax operating earnings*.. 15.5 19.3 9.4 11.8 Pretax operating earnings... 14.6 17.8 8.6 10.4 - ---------------------------------------------------------------------------- In Dollars 1995 1994 ------------------ Ratios to total revenues, as adjusted:* Benefits and claims................ 73.4% 73.2% Operating expenses................. 17.2 17.5 Pretax operating earnings.......... 9.4 9.3 Ratio of pretax operating earnings to total reported revenues......... 9.1 9.0 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $5.9 million in 1995 and $4.1 million in 1994, foregone due to profit repatriations. ============================================================================ 16
AFLAC JAPAN SUMMARY OF OPERATING RESULTS NINE MONTHS ENDED SEPTEMBER 30, In Dollars (In millions) 1995 1994 -------------------------- Premium income...................... $ 3,966.5 $ 3,194.4 Investment income, as adjusted*..... 711.3 558.6 Other income........................ .1 2.2 --------- --------- Total revenues, as adjusted*...... 4,677.9 3,755.2 --------- --------- Benefits and claims................. 3,426.0 2,732.7 Operating expenses.................. 811.0 665.1 --------- --------- Total benefits and expenses....... 4,237.0 3,397.8 --------- --------- Pretax operating earnings, as adjusted*................... 440.9 357.4 Investment income applicable to profit repatriations............... (15.1) (8.3) --------- --------- Pretax operating earnings....... $ 425.8 $ 349.1 ========= ========= - ---------------------------------------------------------------------------- In Dollars In Yen 1995 1994 1995 1994 ---------------- ---------------- Percentage increases over previous period: Premium income.............. 24.2% 25.3% 10.0% 15.4% Investment income*.......... 27.3 22.9 12.9 13.2 Total revenues*............. 24.6 24.9 10.4 15.1 Pretax operating earnings*.. 23.3 20.4 9.4 10.9 Pretax operating earnings... 22.0 18.8 8.2 9.4 - ---------------------------------------------------------------------------- In Dollars 1995 1994 ------------------ Ratios to total revenues, as adjusted:* Benefits and claims................ 73.3% 72.8% Operating expenses................. 17.3 17.7 Pretax operating earnings.......... 9.4 9.5 Ratio of pretax operating earnings to total reported revenues......... 9.1 9.3 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $15.1 million in 1995 and $8.3 million in 1994, foregone due to profit repatriations. ============================================================================ The yen began to weaken in the third quarter compared with the second quarter of 1995. However, the yen was still stronger in the first nine months of 1995 compared with the first nine months of 1994. The average 17
exchange rate for the first nine months of 1995 was 91.62, which was 12.8% stronger than the average rate of 103.39 for the first nine months of 1994. As a result, growth rates for AFLAC Japan continued to be higher in dollars than in yen. The average exchange rate for the full year 1994 was 102.26. The increase in premium income was due to: sales of new policies; the conversion of existing policies to policies with higher benefits and premiums; continued excellent policy persistency; and, in dollars, the stronger yen rate. The single-digit increases in premium income and total revenues for the third quarter reflect a moderation in sales following exceptionally strong sales in the first half of 1994. As expected, new annualized premium sales, excluding conversions, were down in the quarter, declining 9.2% in yen. For the nine months, new annualized premium sales increased 5.9% in yen. Sales in the first half of 1994 were exceptionally strong due to the agents' heightened efforts to sell the Company's cancer policy before a July 1994 rate increase on new issues. Sales for the first half of 1994, including conversions, increased 30.6% in yen compared with the first half of 1993. Sales leveled out in the second half of 1994 and increased 10%, including conversions, for the year compared with the year 1993. Management's goal is to increase new sales, excluding conversions, by 10% in yen for the year 1995. Although Japan's economy remains soft, the Company's lower third quarter sales results primarily reflect the decision to defer various major sales campaigns to accommodate the introduction of AFLAC Japan's new product - - living benefit life. Many agencies that serve large payroll accounts have planned extensive sales campaigns in the fourth quarter of this year to promote this new product. In fact, agencies have requested more than six million pre-printed application forms for the living benefit life rider to the cancer policy for use in their sales campaigns to new and existing customers. Investment income, which is affected by available cash flow from operations and investment yields available for new investments, increased during both the three months and nine months ended September 30, 1995, compared with the respective periods of 1994, despite investment yields that have generally declined. Rates of return on fixed-income securities in Japan have remained low in 1995 compared with historical levels. For instance, the yield on 10-year Japanese government bonds, as measured by a composite index, has declined from 4.72% in January to a low of 2.60% in July, reaching 3.39% in August and closing the quarter at 2.86%. By concentrating on selected sectors, the Company has secured higher yields than 10-year government bonds would have provided. At the same time, the Company has adhered to its conservative standards for credit quality. The Company purchased yen-denominated securities at an average yield to maturity of 4.73% for the third quarter and 4.61% for the nine months. Including investments in dollar-denominated securities, the blended new money yield to maturity was 5.01% for the quarter and 4.97% for the nine months. As a result of the continued low level of investment yields, the yield to maturity on AFLAC Japan's fixed-income portfolio declined from 6.00% at the end of the second quarter to 5.98% at the end of the third quarter. The return on AFLAC Japan's average invested assets was 5.83% for the nine months, compared with 6.01% for the same period in 1994. AFLAC Japan has significant cash flows -- averaging more than $250 million per 18
month this year -- to invest. However, it is difficult to find attractive investment yields in yen-denominated securities for these cash flows in the current interest rate environment. AFLAC Japan's results continue to reflect the pattern that has developed during the last several years of slightly higher benefit ratios somewhat offset by lower expense ratios. The increase in the benefit ratio reflects the strengthening of policy liabilities to provide for lower assumed interest rates and the increase in claims experience due to fewer policy lapses. AFLAC U.S. AFLAC U.S. produced good results in the third quarter, although pretax operating earnings were impacted by the decision to settle certain litigation in Alabama related to an ancillary line of business. Earnings benefited from additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. in turn made additional dividend payments to the Parent Company in the amounts of $16.0 million in the first nine months of 1995, and $51.9 million and $10.1 million for the full years 1994 and 1993, respectively. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1995 has been reclassified in the following presentation in order to improve comparability between periods. 19
AFLAC U.S. SUMMARY OF OPERATING RESULTS Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1995 1994 1995 1994 ------------------ ----------------- Premium income................... $ 217.0 $ 199.4 $ 638.5 $ 588.7 Investment income, as adjusted*.. 19.7 17.3 57.7 50.7 Other income..................... (.2) .5 .4 2.1 ------ ------ ------ ------ Total revenues, as adjusted*... 236.5 217.2 696.6 641.5 ------ ------ ------ ------ Benefits and claims.............. 133.3 122.0 395.2 366.1 Operating expenses............... 85.3 75.8 240.5 218.5 ------ ------ ------ ------ Total benefits and expenses.... 218.6 197.8 635.7 584.6 ------ ------ ------ ------ Pretax operating earnings, as adjusted*................ 17.9 19.4 60.9 56.9 Investment income applicable to profit repatriations............ 6.4 4.2 14.6 8.7 ------ ------ ------ ------ Pretax operating earnings.... $ 24.3 $ 23.6 $ 75.5 $ 65.6 ====== ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous period: Premium income................. 8.9% 8.8% 8.5% 9.8% Investment income*............. 13.6 10.5 13.9 9.5 Total revenues*................ 8.9 8.8 8.6 9.7 Pretax operating earnings*..... (7.7) 11.3 7.0 11.7 Pretax operating earnings...... 2.8 19.1 15.0 19.9 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims............ 56.3% 56.2% 56.8% 57.0% Operating expenses............. 36.1 34.9 34.5 34.1 Pretax operating earnings...... 7.6 8.9 8.7 8.9 Ratio of pretax operating earnings to total reported revenues...... 10.3 10.9 10.8 10.2 - ---------------------------------------------------------------------------- *Excludes estimated investment income for the three months ended September 30, 1995 and 1994 of $6.4 million and $4.2 million, respectively, and for the nine months ended September 30, 1995 and 1994 of $14.6 million and $8.7 million, respectively, related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ Benefit ratios have been slightly lower, which is principally due to the mix of business shifting towards accident policies. Accident policies have a lower benefit ratio compared with other products. Management expects future benefit ratios for some of the Company's supplemental products to increase slightly due to the Company's ongoing efforts to enhance 20
policyholder benefits. In addition, potential minimum benefit ratio requirements by insurance regulators may also increase the ratio. At the same time, management expects the operating expense ratio, excluding discretionary advertising, to decline in the future due to continued improvement in operating efficiencies. By improving administrative systems and controlling other costs, management has been able to redirect funds to discretionary national advertising programs without significantly affecting the operating expense ratio. The Company's advertising expense was $11.3 million and $10.1 million for the nine months ended September 30, 1995 and 1994, respectively, or 1.6% of revenues in both 1995 and 1994. Management expects the pretax operating profit margin, which was 9.0% for the year 1994 excluding the effect of repatriation, to remain approximately the same for the year 1995. The increase in premium income was due to an increase in new sales over the last 12 months and some improvement in persistency for several of the product lines. Total new annualized premium sales continued to grow at a solid rate, increasing 16.5% for the third quarter. Total new sales of $72.2 million for the three-month period set a quarterly record for production. For the nine months, total new sales rose 13.4% to $204.8 million. New products again contributed greatly to new sales growth. At the same time, the Company continued to experience declines in Medicare supplement sales, the lowest-margin product, due to a de-emphasis of this product. Excluding Medicare supplement sales, new annualized premium sales were up 22.1% for the third quarter and 20.3% for the nine months. The increase in investment income was primarily due to profit repatriations from AFLAC Japan and the continued strong cash flow from operations. During the third quarter, available cash flow was invested at an average yield-to-maturity of 7.50%, compared with 7.96% during the third quarter of 1994. The overall return on average invested assets, net of investment expenses, was 7.33% for the first nine months of 1995 versus 7.46% for the first nine months of 1994. FINANCIAL ACCOUNTING STANDARDS BOARD'S STATEMENTS On January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures. SFAS No. 114 requires impaired mortgage loans to be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 eliminates certain income recognition provisions previously included in SFAS No. 114. The implementation of these standards had no material effect on the Company. In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement establishes accounting standards for: 1) the impairment of long- lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used in the business; and 2) long-lived assets and certain identifiable intangibles to be disposed of. This standard, which must be adopted by March 31, 1996, will require the Company to report certain investment real estate at fair value, rather than at net realizable 21
value as previously required. The Company does not anticipate a material effect on net income, liquidity or capital related to adoption of this standard. ANALYSIS OF FINANCIAL CONDITION Since December 31, 1994, the financial condition of the Company has remained strong. Investments have continued to grow and consist of high-quality securities. Due to the relative size of AFLAC Japan, changes in the yen/dollar exchange rate can have a significant effect on the Company's financial statements. The yen/dollar exchange rate at the end of each period is used to convert yen-denominated balance sheet items into U.S. dollars for reporting purposes. The exchange rate at September 30, 1995, was 99.10 yen to one U.S. dollar, which was almost the same as the December 31, 1994, rate of 99.85. The small difference in the rates had little effect on the comparison of the September 30, 1995, balance sheet with the December 31, 1994, balance sheet. During the first nine months, the exchange rate ranged between 80.20 and 104.50. Under the provisions of SFAS No. 115 adopted January 1, 1994, fixed- maturity securities available for sale are carried at fair value. Previously, fixed-maturity securities were carried at amortized cost. Since December 31, 1994, total invested assets, including the effect of SFAS No. 115, have increased $4.0 billion, or 25.2%. AFLAC Japan invested assets increased $3.7 billion (24.8%), while AFLAC U.S. invested assets increased $353.9 million (28.2%). Since December 31, 1994, total invested assets, excluding the effect of SFAS No. 115, have increased $2.1 billion, or 13.6%. AFLAC Japan invested assets increased $1.8 billion (12.9%), while AFLAC U.S. invested assets increased $252.7 million (19.4%). The continued growth in assets reflects the substantial cash flows from new annualized premium sales by AFLAC U.S. and renewal premiums collected by AFLAC Japan. The net unrealized gains of $2.8 billion on investments in fixed- maturity securities at September 30, 1995, consisted of $2.8 billion in gross unrealized gains and $16.1 million in gross unrealized losses. During 1995, net unrealized gains increased by $2.0 billion, which was primarily due to the decrease in general-market interest rates in Japan and the United States. AFLAC Japan net unrealized gains increased $1.9 billion, and AFLAC U.S. net unrealized gains increased $101.1 million since December 31, 1994. Policy liabilities increased $3.7 billion, or 23.0%, during the first nine months of 1995. AFLAC Japan increased $3.6 billion, or 24.6% (23.7% in yen), and AFLAC U.S. increased $96.0 million, or 6.9%. The increases in policy liabilities are due to the addition of new business, the aging of policies in force and the effect of SFAS No. 115. See Note 3 of the Notes to the Consolidated Financial Statements. Notes payable has increased $167.5 million, or 90.6%, since December 31, 1994. This increase is primarily related to stock repurchase activity. For further information regarding notes payable, see Note 2 of the Notes to the Consolidated Financial Statements. 22
Shareholders' equity increased $308.4 million during the first nine months of 1995. The increase is due to: net earnings of $265.7 million, an increase in net unrealized gains on securities available for sale of $242.7 million, an increase in unrealized foreign exchange translation gains of $39.2 million, less treasury stock purchases of $213.2 million and dividends paid of $36.6 million. The Company's insurance operations continue to provide the primary sources of liquidity for the Company. Capital needs can also be supplemented by borrowed funds. The principal sources of cash from insurance operations are premiums and investment income. The primary uses of cash in the insurance operations are policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable. The Company's investment objectives provide for liquidity through the ownership of high-quality investment securities. AFLAC insurance policies are generally not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of AFLAC policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore are not subject to the risks of medical cost inflation. The achievement of continued long-term growth will require growth in the statutory capital and surplus of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings. Management believes outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures and business expansion. Parent Company capital resources are largely dependent upon the ability of the subsidiaries 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 the Parent Company. In addition to restrictions by U.S. insurance regulators, the Japanese Ministry of Finance (MOF) imposes restrictions on, and requires approval for, the remittances of earnings from AFLAC Japan to AFLAC U.S. Annual payments are made from AFLAC Japan for management fees to the Parent Company, and for allocated expenses and remittances of earnings to AFLAC U.S. Total funds received from AFLAC Japan were $168.9 million in the first nine months of 1995 and $167.9 million and $133.4 million in the full years 1994 and 1993, respectively. During the last two years, the MOF has developed solvency standards, a version of risk-based capital requirements, as part of its long- term deregulation process. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the Notes to the Consolidated Financial Statements in the Company's annual report to shareholders for the year ended December 31, 1994. For information regarding proposed tax adjustments by the Internal Revenue Service and pending litigation, see Note 5 of the Notes to the Consolidated Financial Statements. The board of directors declared a fourth quarter cash dividend of $.13 per share. The dividend is payable on December 1, 1995, to shareholders of record at the close of business on November 17, 1995. 23
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A number of civil jury verdicts involving insurance sales practices and other matters have been returned against life and health insurers in the jurisdictions in which the Company does business in the United States. Some of the lawsuits have resulted in the award of substantial judgments against the insurers, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company is 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 damage awards bearing little relation to the actual damages sustained by plaintiffs have been awarded against companies, including other insurers, in recent years. During the quarter, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the nine months ended September 30, 1995. Although the final results of any litigation cannot be predicted with certainty, the Company does not believe the outcome of any litigation still pending will have a material adverse effect on the financial position of the Company. ITEMS 2, 3, 4 and 5 Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. 10 - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995. 10.1 - AFLAC Incorporated Employment Agreement with Paul S. Amos dated August 1, 1995. 27 - 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 September 30, 1995. 24
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AFLAC INCORPORATED Date: November 8, 1995 /s/ Kriss Cloninger, III ------------------------ -------------------------------- KRISS CLONINGER, III Executive Vice President; Treasurer and Chief Financial Officer Date: November 8, 1995 /s/ Norman P. Foster ------------------------ -------------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 25
EXHIBITS FILED WITH CURRENT FORM 10-Q: 10 - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995. 10.1 - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995. 27 - Financial Data Schedule (for SEC use only) 26