-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rj1s2f+psnmk9hzPRyRCGkNgzCCe7ODkcRhUa/1XS1I+DmU9vVqQjGaC8uJjQ/R0 us2WkXWoCaF1d+CQWhpjvA== 0000004977-95-000006.txt : 199507120000004977-95-000006.hdr.sgml : 19950711 ACCESSION NUMBER: 0000004977-95-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFLAC INC CENTRAL INDEX KEY: 0000004977 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 581167100 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07434 FILM NUMBER: 95523736 BUSINESS ADDRESS: STREET 1: 1932 WYNNTON RD CITY: COLUMBUS STATE: GA ZIP: 31999 BUSINESS PHONE: 4043233431 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY CORP DATE OF NAME CHANGE: 19920306 10-K405 1 94 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file no. 1-7434 ----------------- ------ AFLAC INCORPORATED - ---------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Georgia 58-1167100 - ------------------------------------ ---------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 1932 Wynnton Road, Columbus, Georgia 31999 - ------------------------------------ ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 706-323-3431 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered ---------------------------------------------------------------------- Common Stock, $.10 Par Value New York Stock Exchange Pacific Stock Exchange Tokyo Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X -------- The number of shares of the registrant's Common Stock outstanding at March 17, 1995, with $.10 par value, was 99,410,117. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 17, 1995 was $3,802,440,915. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 Pages 13-5 to 13-18; 13-27 to 13-33 and 13-45 to 13-46 of Exhibit 13 (Notes 2, 3 and 10 of Notes to the Consolidated Financial Statements). The applicable portions of the Company's Annual Report to Shareholders for the year ended December 31, 1994, are included as Exhibit 13 Item 2 Pages 13-18 and 13-36 (Note 5) of Exhibit 13 PART II Item 5 Pages 13-1, 13-2 and 13-43 (note 9) of Exhibit 13 Item 6 Pages 13-3 and 13-4 of Exhibit 13 Item 7 Pages 13-5 to 13-18 of Exhibit 13 Item 8 Pages 13-19.1 to 13-52 of Exhibit 13 PART III Item 10 Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 1, 1995 (the "Proxy Statement") Item 11 Incorporated by reference from the Proxy Statement Item 12 Incorporated by reference from the Proxy Statement Item 13 Incorporated by reference from the Proxy Statement AFLAC Incorporated Annual Report on Form 10-K For the Year Ended December 31, 1994 Table of Contents Page ______ PART I Item 1. Business................................................ I- 1 Item 2. Properties.............................................. I-14 Item 3. Legal Proceedings....................................... I-15 Item 4. Submission of Matters to a Vote of Security Holders..... I-15 Item 4A. Executive Officers of the Company....................... I-16 PART II Item 5. Market for Company's Common Equity and Related Shareholder Matters................................... II- 1 Item 6. Selected Financial Data................................. II- 1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... II- 1 Item 8. Financial Statements and Supplementary Data............. II- 1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... II- 1 PART III Item 10. Directors and Executive Officers of the Company......... III- 1 Item 11. Executive Compensation.................................. III- 1 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ III- 1 Item 13. Certain Relationships and Related Transactions.......... III- 1 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... IV- 1 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION AFLAC Incorporated (the "Parent Company") was incorporated in 1973 under the laws of the State of Georgia and acts as a general business holding company. The Parent Company is a management company principally engaged, through its insurance subsidiaries, in providing supplemental health insurance products in the United States and Japan. In addition, the Parent Company, through subsidiaries and a general partnership with American Family Life Assurance Company of Columbus ("AFLAC"), operates in television broadcasting. In 1992, AFLAC transferred its minor United Kingdom insurance subsidiary and, in 1994, its minor Canadian insurance subsidiary to the Parent Company. As a management company, the Parent Company oversees the operations of its subsidiaries and provides capital and management services. AFLAC Incorporated and its subsidiaries ("the Company") have only one significant industry segment - insurance. For financial information relating to the Company's foreign and U.S. operations, see Exhibit 13, pages 13-5 to 13-18 and page 13-27 (Note 2 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. The Parent Company's principal operating subsidiary is AFLAC, which has both U.S. and foreign operations (principally in Japan). AFLAC is a specialty insurer whose dominant business is individual supplemental health insurance with emphasis on cancer expense insurance plans. Management believes AFLAC is the world's leading writer of cancer expense insurance. In recent years, AFLAC has diversified its product offerings to include other types of supplemental health products in both the United States and Japan. The Japan Branch ("AFLAC Japan") also sells long-term care plans ("Super Care") and supplemental general medical expense plans. The United States operation ("AFLAC U.S."), in addition to cancer expense plans, also sells other types of supplemental health insurance, including hospital intensive care, accident and disability, hospital indemnity, long-term care, short-term disability and Medicare supplement plans. AFLAC U.S. also offers several life insurance plans. The Company is authorized to conduct insurance business in all 50 states, the District of Columbia, American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, the Commonwealth of the Northern Mariana Islands and several foreign countries. The Company's only significant foreign operation is AFLAC Japan, which accounted for 83.9% of the Company's total revenues in 1994. Insurance premiums and investment income from insurance operations are the major sources of revenues. The Company's consolidated premium income was $5.2 billion for 1994, $4.2 billion for 1993 and $3.4 billion for 1992. I-1 The following table lists, for each of the last three years, the percentage of consolidated premiums contributed by each class of insurance sold: Percentage of Insurance Class Consolidated Premium Income - ---------------------- ----------------------------------- 1994 1993 1992 ------ ------ ------ Health insurance 99.7% 99.6% 99.2% Life and other insurance .3 .4 .8 The following table sets forth consolidated earned premiums by class and information with respect to the health insurance plans, primarily cancer, offered by AFLAC principally in Japan and the United States for the three years ended December 31. (In thousands) 1994 1993 1992 ---------- ---------- ---------- Earned premiums: Health insurance $ 5,164,665 $ 4,205,637 $ 3,342,439 Life and other insurance 16,067 19,753 26,762 ---------- ---------- ---------- Total earned premiums $ 5,180,732 $ 4,225,390 $ 3,369,201 ========== ========== ========== Health insurance plans: No. of policies issued 2,252,414 1,954,417 1,923,232 No. of policies terminated 1,169,990 1,122,952 1,002,020 No. of policies in force at year-end 16,560,892 15,478,468 14,647,003 INVESTMENTS AND INVESTMENT RESULTS FOR U.S. AND JAPAN Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, issued by the Financial Accounting Standards Board. Under the provisions of SFAS No. 115, fixed-maturity securities available for sale are carried at fair value. Previously, fixed-maturity securities were carried at amortized cost. Prior year numbers have not been restated. The fair value of fixed-maturity securities available for sale exceeded amortized cost by $820.9 million at December 31, 1994. For additional information regarding SFAS No. 115, see Exhibit 13, page 13-25 (Note 1 of Notes to the Consolidated Financial Statements). The Company's investments (including cash) amounted to $16.0 billion at December 31, 1994. Since December 31, 1993, total invested assets, including the effect of SFAS No. 115, have increased $3.5 billion, or 28.3%. AFLAC Japan investments increased $3.4 billion (29.5%), while AFLAC U.S. investments increased $162.2 million (14.8%). Since December 31, 1993, total invested assets, excluding the effect of SFAS No. 115, have increased $2.7 billion, or 21.7%. AFLAC Japan investments increased $2.5 billion (21.9%), while AFLAC U.S. investments increased $211.7 million (19.4%). Net investment income of $838.8 million in 1994 continues to be a growing source of revenues and earnings for the Company, increasing $149.6 million in 1994 I-2 over 1993 and $156.1 million in 1993 over 1992. It is generally AFLAC's policy to invest in high-grade investments, principally in high-quality government, public utility and corporate bonds. AFLAC primarily operates within the investment environments of the United States and Japan. Although aspects of these two financial markets are slowly converging, they remain fundamentally different. For example, differences in asset selection, liquidity, credit quality, accounting practices, insurance regulations and taxation affect the way the Company invests and purchases securities. The challenge is to integrate the varied market characteristics of Japan and the United States into a unified and coherent set of investment strategies. The Company has streamlined and integrated the organizational structure of the investment department into a single functional unit and has set specific worldwide criteria regarding credit quality, liquidity, compliance with regulatory requirements and conformance to product needs. During 1994, 88% of AFLAC Japan's yen cash flow available for investments was allocated to yen-denominated securities, while the remaining 12% was invested in dollar-denominated securities. Of the total amount invested in 1994, 10.5% was invested in Japanese government bonds at a yield of 4.73%, 53.3% was invested in the longer-dated private sector at a rate of 5.12%, 10.0% was invested in municipal bonds at a rate of 4.30%, and the remainder was invested in yen in assorted sectors at an average rate of 4.37%. At year-end 1994, Japanese government bonds accounted for 35.8% of AFLAC Japan's total invested assets (including cash). Twenty-year government bonds made up the majority of AFLAC Japan's government bond holdings. AFLAC Japan continued to use longer-dated corporate instruments in 1994, which help maintain a favorable asset/liability match, accounting for 19.6% of our total invested assets in Japan at year-end. At the end of the year, municipal securities represented 5.5% of the invested assets, while utility bonds represented 18.5%. Other assorted sectors accounted for 14.2%, and dollar- denominated securities represented the balance of AFLAC Japan's invested assets. In January 1995, there was a major earthquake in Kobe, Japan. The Company's fixed-maturity portfolio includes securities issued by governmental units and public utilities located in that region. The amortized cost of these securities is approximately $541 million. These securities account for less than 4% of AFLAC Japan's fixed-maturities. While the earthquake may temporarily disrupt general business conditions, management does not expect any change in the credit quality of these bonds. The Company continued to avoid the Japanese equity and investment real estate markets in 1994. AFLAC Japan's equity portfolio accounted for only .1% of invested assets at year-end, and the Company does not expect this portion to increase in 1995. The Company also does not anticipate any change in the current level of mortgage loans on Japanese real estate, which was less than .1% of invested assets at year-end. The Company increased its commitment to the dollar-denominated portfolio of AFLAC Japan's invested assets during 1994. AFLAC Japan added $303.6 million to this portfolio at an average yield of 7.39%. AFLAC Japan's dollar-denominated portfolio represented 6.4% of invested assets in Japan, or $951.3 million at the end of 1994, compared with $627.9 million at the end of 1993. This portfolio carries certain tax and yield advantages that make it attractive; however, the Company is careful to balance yield enhancement with I-3 its corporate goal of increasing profit repatriation from AFLAC Japan to AFLAC U.S. and to the Parent. Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $132.9 million in 1994, up from $97.9 million in 1993. Of the $132.9 million in 1994, $51.9 million was transferred to the Parent Company and used primarily to pay down debt. The balance was invested by AFLAC U.S. in dollar- denominated fixed-maturity securities at an average yield to maturity of 7.86%. Repatriation benefits 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. The Company expects profit repatriation to continue to have a positive impact on its consolidated net earnings in the future. The Company's portfolio allocation in the United States continued to emphasize investment-grade corporate bonds, which accounted for 56.5% of new money purchases in 1994, at an average yield of 7.62%. AFLAC U.S. maintained its overall investment quality throughout the year, with more than 51% of the fixed-income portfolio rated "AA" or better at the end of the year. The equity portion of the U.S. portfolio was $66.5 million, compared with $55.8 million in 1993. Equity investments accounted for 5.7% of U.S. invested assets in 1994. Mortgage loans on real estate remained immaterial. For information on the composition of the Company's investment portfolio and investment results, see Part IV, Schedule I, and Exhibit 13, pages 13-14 to 13-15, 13-18 (discussions relating to Balance Sheet and Cash Flow) and pages 13-29 to 13-35 (Notes 3 and 4 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. I-4 INSURANCE - JAPAN The following table sets forth AFLAC Japan's earned premiums by product line for the last three years ended December 31. (In thousands) Earned premiums: 1994 1993 1992 ---------- ---------- ---------- Health insurance, principally Cancer expense $ 4,073,400 $ 3,275,915 $ 2,545,055 Super Care and other insurance 297,691 208,345 137,265 ---------- ---------- ---------- Total earned premiums $ 4,371,091 $ 3,484,260 $ 2,682,320 ========== ========== ========== The following table sets forth the reconciliation of annualized premiums in force for AFLAC Japan for the years ended December 31: (In thousands) 1994 1993 1992 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 3,672,594 $ 2,914,428 $ 2,503,500 New issues 767,289 594,171 508,756 Lapses and surrenders (182,115) (163,441) (115,088) Foreign currency translation adjustment 461,015 327,436 17,260 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,718,783 $ 3,672,594 $ 2,914,428 ========== ========== ========== INSURANCE PLANS - JAPAN AFLAC's insurance is supplemental in nature and is designed to provide insurance to cover the medical and nonmedical costs that are not reimbursed by other forms of Japanese health coverage. The cancer expense insurance plans offered in Japan are basically daily indemnity plans, providing a fixed amount for each day the insured is hospitalized for the treatment of cancer. The plans differ from the AFLAC U.S. cancer plans (described on pages I-9 and I-10) in that the Japanese policies also provide death benefits and cash surrender values (the Company estimates that approximately 28% of the premiums earned are associated with these benefits). During 1990, AFLAC introduced the Super Cancer Plan. The Super Cancer Plan includes, for the first time in Japan, first occurrence and outpatient benefits in addition to the benefits of the previous cancer coverages. Sales of new policies and conversions of existing policies resulted in 58.2% of all cancer units in force being Super Cancer Plans as of December 31, 1994. In 1992, AFLAC broadened its product line with the introduction of a new care product, "Super Care". Super Care provides periodic benefits to those who become bedridden, demented or seriously disabled due to illness or accident. The new plan is offered with several riders, providing death I-5 benefits or additional care benefits, to enhance coverage. Prior to the introduction of the "Super Care" plan, AFLAC marketed a plan that primarily provided dementia care benefits. The Ministry of Finance (MOF) in Japan recently permitted insurance companies to increase the premiums on new policy issues in response to the lower investment yields available in the Japanese market. AFLAC Japan increased the premiums on Super Cancer new issues by an average of 16% in July 1994. AFLAC Japan also increased the premiums on Super Care new issues by an average of 10% effective November 1993. The Company anticipates implementing a similar increase to the Super Care policies in the fourth quarter of 1995. Since the premium increases apply to new policies only, management does not expect any adverse impact on persistency of existing policies. The Company has filed two new products for approval and introduction in 1995. The first product is a medical expense policy similar to a U.S. hospital indemnity policy. It provides benefits for daily hospital confinement and surgery, as well as a death benefit. The second product is a life insurance product with living benefit features. Management believes these products will fill another niche in the supplemental insurance marketplace for consumers and AFLAC. AGENCY FORCE - JAPAN The development of a "Corporate Agency" system has been important to the growth of AFLAC Japan. This distribution method permits Japanese companies to form insurance agencies as subsidiaries that offer our insurance plans to the total affiliated group's employees, suppliers and customers. About 95% of all companies listed on the Tokyo Stock Exchange have either a corporate agency or allow payroll deduction of premiums for AFLAC's products. AFLAC has no ownership interest in these corporate agencies. AFLAC products are also sold through independent agencies that are not affiliated with large corporations and through agencies formed by individuals. At December 31, 1994, there were 4,961 agencies in Japan with 19,270 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 66 sales offices located throughout Japan. COMPETITION - JAPAN In 1974, AFLAC became the second foreign (non-Japanese) life insurance company to gain direct access to the Japanese insurance market by obtaining a license to do business in Japan. Through 1981, AFLAC was the only company in Japan authorized to issue a cancer expense insurance policy. Since that time, several other life companies have been permitted to offer cancer insurance. However, AFLAC remains the leading issuer of cancer expense insurance coverage in Japan, principally due to its lead time in the market, its unique marketing system (see "Agency Force"), its low-cost operations and its product expertise developed in the United States. AFLAC has been very successful in the sale of cancer expense policies in Japan, with over 11.8 million cancer policies in force at December 31, 1994. I-6 The Japanese government is continuing the discussions begun in 1991 with the insurance industry and other groups to explore various long-term deregulation approaches for the financial services businesses in Japan. The principles upon which deregulation of the Japanese insurance industry is based are: (1) to promote competition and to enhance efficiency through deregulation and liberalization; (2) to preserve soundness; and (3) to secure fairness and equity in business operations. This project is still in a preliminary stage and the ultimate changes and their effects are not presently determinable. Due to the Company's unique marketing distribution system in Japan, management believes that deregulation will not have an immediate material effect on the Company. AFLAC's strategy for future growth in Japan centers on the expansion of the Company's product line. Although the basic plan for growth is the same in Japan as in the United States, management has had to formulate a strategy specifically tailored for the Japanese insurance marketplace, which is very different from the U.S. system. There are only 31 life insurance companies in Japan, compared with more than 2,000 life insurers in the United States. In Japan, insurers have traditionally been restricted in the types of policies they could offer. However, as Japan begins deregulating the insurance industry, the marketplace should become more competitive, with insurers able to offer more types of products as they do in the United States. During 1994, Japan held a series of trade talks with the United States. The U.S.-Japan Framework Agreement negotiations looked at the possibility of opening various Japanese market sectors, including insurance, to expanded foreign competition. During the discussions, the Japanese government agreed to avoid any radical changes in the third sector of the insurance market until a substantial portion of the life and non-life insurance sectors are deregulated. AFLAC and other foreign-owned insurers, as well as some small to medium-sized companies, operate in the third sector. As a result, AFLAC should not be directly affected by deregulation in Japan in the immediate future. However, by building on the Company's strengths, management has prepared for increased competition. REGULATION AND REMITTANCE OF FUNDS - JAPAN Annual payments are made from AFLAC Japan for management fees to the Parent Company, and allocated expenses and remittances of earnings to AFLAC U.S. These payments totaled $167.9 million in 1994, $133.4 million in 1993 and $65.5 million in 1992. Management fees paid to the Parent Company are largely based on expense allocations. It is expected that profit remittances will continue in future years, based on projected annual earnings of AFLAC Japan as computed on a Japanese regulatory accounting basis. Japanese earnings available for profit remittance reflect investments generally valued at the lower of market value or cost. Also, AFLAC Japan's statutory earnings reflect foreign exchange gains and losses on the translation of its U.S. dollar-denominated investments. Therefore, changes in interest rate levels, yen/dollar exchange rates and other factors that affect market values of investment securities can cause wide fluctuations from year to year in the amounts of regulatory earnings in Japan and, therefore, profit remittances to AFLAC U.S. As part of the deregulation process, the Japanese Ministry of Finance ("MOF") is developing new solvency regulations and standards that represent I-7 a form of risk-based capital requirements. AFLAC Japan must meet these requirements to continue profit transfers to AFLAC U.S. At this time, AFLAC Japan is in compliance with the proposed new standards, and management does not expect these requirements would adversely affect the repatriation of funds from Japan for the next several years. The insurance business in Japan, which is conducted as a branch office of AFLAC, is subject to regulation by the MOF, similar to the regulation and supervision in the United States as described on page I-12 under "Regulation - -U.S." AFLAC Japan files annual reports and financial statements for the Japanese insurance operations based on a March 31 year-end, prepared in accordance with Japanese regulatory accounting practices prescribed or permitted by the MOF. Also, financial and other affairs of AFLAC Japan are subject to examination by the MOF. Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets determined on a Japanese regulatory accounting basis as of December 31 are as follows: (In thousands - unaudited) 1994 1993 ---------- ---------- Net assets on GAAP basis $ 1,564,938 $ 1,099,712 Elimination of deferred policy acquisition costs (1,951,549) (1,537,128) Reduction in carrying value of fixed- maturity investments for market value and foreign exchange adjustments (978,855) (113,349) Adjustment to liability for future policy benefits 500,952 40,943 Elimination of deferred income taxes and adjustment to prepaid Japan taxes 1,223,368 791,268 Reduction in premiums receivable (227,270) (83,064) Other, net 97,041 (14,010) ---------- --------- Net assets on Japanese regulatory accounting basis $ 228,625 $ 184,372 ========== ========= For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-8 to 13-11 and pages 13-27 and 13-45 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. EMPLOYEES - JAPAN AFLAC Japan employed 1,527 full-time and 178 part-time employees at December 31, 1994. AFLAC Japan considers its employee relations to be excellent. I-8 INSURANCE - U.S. The following table sets forth AFLAC U.S. earned premiums by product line for the last three years ended December 31. Earned premiums (in thousands): 1994 1993 1992 -------- -------- -------- Cancer expense $ 384,943 $ 369,256 $ 356,732 Other accident and health 392,371 338,743 288,643 Life insurance 15,149 14,488 14,641 -------- -------- -------- Total AFLAC U.S. earned premiums $ 792,463 $ 722,487 $ 660,016 ======== ======== ======== HEALTH INSURANCE PLANS - U.S. AFLAC's insurance is supplemental in nature and is designed for persons who have major medical coverage. All of AFLAC's supplemental health insurance plans are guaranteed renewable for the lifetime of the policyholder. Guaranteed-renewable coverage may not be cancelled by the insurer, but premium rates on existing and future policies may be increased by class of policy in response to claims experience higher than originally expected (subject to federal and state loss-ratio guidelines) on a uniform, nondiscriminatory, state-wide basis subject to state regulatory approval. AFLAC's cancer plans are designed to provide insurance benefits for medical and nonmedical costs that are generally not reimbursed by major medical insurance. AFLAC currently offers a series of five different cancer plans in the United States that vary by benefit amounts and type. All five plans provide a first occurrence benefit that pays an initial amount when internal cancer is first diagnosed, a fixed amount for each day an insured is hospitalized for cancer treatment, and benefits for medical, radiation, chemotherapy, nursing, blood, plasma, physician, transportation, prosthesis and ambulance expenses. Some of the plans currently offered contain benefits that reimburse the insured for anesthesia and surgical expenses incurred in connection with cancer treatment, as well as benefits for a second surgical opinion and a "wellness" benefit applicable toward certain diagnostic tests such as pap smears and mammograms. AFLAC also issues several riders that may be purchased, including one that increases the amount of the first occurrence benefit for each month until age 65 that the coverage remains in force. AFLAC periodically introduces new forms of coverage, revising benefits and related premiums based upon the anticipated needs of the policyholders and AFLAC's claims experience. AFLAC currently markets five of the Medicare Supplement Standardized Plans, with the majority of sales being for Plans F and C. The plans are priced on an issue-age basis. Under this method, rates are revised due to changes in the Medicare program and medical inflation. There is no automatic rate increase due to the aging of the insured. Premium rates are determined based on zip code groupings, which are adjusted for increases in costs for each area. The benefits provided range from the basic plan, covering Part A and B coinsurance, to plans with more extensive coverage, including Part A I-9 and B deductibles, skilled nursing coinsurance, Part B excess and other benefits. AFLAC U.S. does not market the standardized plans covering prescription drug benefits. AFLAC also issues other supplemental health insurance, such as intensive care, which is a low-premium policy that provides protection against the high cost of intensive care facilities during hospital confinement, regardless of reimbursements from other insurers. Other types of health insurance issued by AFLAC include a long-term convalescent care policy, an accident and disability protection policy, long- and short-term disability and a hospital confinement indemnity policy. LIFE INSURANCE PLANS - U.S. AFLAC issues various life insurance policies including whole life, limited pay life, voluntary group term life and term life coverage. LifeCare policies, which constitute the majority of life insurance sales, are written under master policies issued through several employer trusts. LifeCare policies are marketed in a manner similar to AFLAC's health plans, as described below. AGENCY FORCE AND MARKETING - U.S. AFLAC's sales agents are licensed to sell accident and health insurance, and many are also licensed to sell life insurance. Most agents' efforts are directed toward selling supplemental health insurance. The 1994 monthly average number of U.S. agents and brokers actively producing business was 5,692, compared with 5,437 in 1993 and 4,960 in 1992. Agents' activities are principally limited to sales, with all policyholder service functions, including issuance of policies, premium collection, payment notices and claims, handled by the staff at headquarters. Agents are paid commissions based on first-year and renewal premiums from their sales of health and life insurance products. AFLAC's State, Regional and District Sales Coordinators, who are independent contractors, are compensated by override commissions. AFLAC has concentrated on the development of "payroll marketing" in marketing its policies. Payroll marketing offers policies to individuals through common media such as trade and other associations or place of employment. This manner of marketing is distinct from "group" insurance sales in that each individual insured is directly contacted by the sales associate. Policies are individually underwritten and issued to the insured, and most employers do not contribute to the payment of premiums. Additionally, individuals may retain their full insurance coverage upon separation from employment or such affiliation, generally at the same premium. A major portion of premiums on such sales are collected through payroll deduction or other forms of group billings. Group-billed plans normally result in a lower average age of the insured at the time of policy issuance, and also result in certain savings in administrative costs, a portion of which are passed on to the policyholder in the form of reduced premiums. Management believes that payroll marketing enables the agency force to reach a greater number of prospective policyholders than individual solicitation and that such sales lower distribution costs. I-10 Another valuable marketing and sales tool is the flexible benefits program, or cafeteria plan, which allows an employee to pay for medical insurance using pretax dollars. These programs help achieve increased penetration as agents are required to present the program to all employees. They also help improve overall persistency levels due to the limited changes allowed during the plan year. The U.S. Congress continues to address possible changes to the U.S. health care system. Some of the 1994 proposals included provisions that would have eliminated cafeteria plans. However, no action on health care reform was taken in 1994. During 1994 and 1993, AFLAC continued to develop marketing arrangements with insurance brokers. Also, AFLAC has signed joint-marketing agreements with several large companies within and outside of the insurance industry. The core of the Company's distribution network will remain independent agents. The Company has improved its access to large payroll groups through insurance brokers and joint marketing alliances. In 1994, AFLAC's U.S. premiums collected were $787.4 million, 7.3% of which was collected in Florida, 6.9% in Georgia, 6.8% in Texas, 5.5% in North Carolina and 5.1% in Tennessee. Premiums collected in all other states were individually less than 5% of AFLAC's U.S. premiums. COMPETITION - U.S. The accident and health and life insurance industry in the United States is highly competitive. AFLAC competes with a large number of other insurers, some of which have been in business for a longer period of time or have greater financial resources. In the United States, there are more than 2,000 life and accident and health insurance companies, most of which compete in the states AFLAC conducts business. Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield, provide insurance for meeting basic hospitalization and medical expenses. Much of this insurance is sold on a group basis. The federal and state governments also pay substantial costs of medical treatment through Medicare and Medicaid programs. Such major medical insurance generally covers a substantial amount of the medical (but not nonmedical) expenses incurred by an insured as a result of cancer or other major illnesses. AFLAC's policies are designed to provide coverage that is supplemental to coverage provided by major medical insurance. AFLAC's benefits may also be used to defray nonmedical expenses. Since other insurers generally do not provide full coverage of medical expenses or any coverage of nonmedical expenses, AFLAC's supplemental insurance is not an alternative to major medical insurance, but is sold to complement major medical insurance by covering the gap between major medical insurance reimbursements and the total costs of an individual's health care. AFLAC thus competes only indirectly with major medical insurers in terms of premium rates and similar factors. However, the scope of the major medical coverage offered by other insurers does represent a limitation on the market for AFLAC's products. Accordingly, expansion of coverage by other insurers or governmental programs could adversely affect AFLAC's business opportunities. I-11 AFLAC competes directly with other insurers offering supplemental health insurance and believes that its current policies and premium rates are generally competitive with those offered by other companies selling similar types of insurance. For additional information regarding U.S. insurance operations, see Exhibit 13, page 13-11 to 13-13, which is incorporated herein by reference. REGULATION - U.S. The Parent Company and its insurance subsidiaries are subject to state regulations in the United States as an insurance holding company system. Such regulations generally provide that transactions between companies within the holding company system must be fair and equitable. In addition, transfer of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and material transactions between companies within the system are subject to prior notice to, or approval by, state regulatory authorities. AFLAC and its insurance subsidiaries, in common with all U.S. insurance companies, are subject to regulation and supervision in the states and other jurisdictions in which they do business. In general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to, among other things: granting and revoking licenses to transact business, regulating trade practices, licensing agents, prior approval of forms of policies and premium rate increases, standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements, capital for the protection of policyholders, limitations on dividends to shareholders, the nature of and limitations on investments, deposits of securities for the benefit of policyholders, filing of annual reports and financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by the regulatory authorities, and periodic examinations of the financial and other affairs of insurance companies. For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-45 (Note 10 - Statutory Accounting and Dividend Restrictions of Notes to the Consolidated Financial Statements), incorporated herein by reference. A risk-based capital formula was adopted by the National Association of Insurance Commissioners ("NAIC") in 1992 for U.S. life insurance companies that established capital requirements relating to insurance risk, business risk, asset risk and interest rate risk. These requirements are intended to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formulas for determining the amount of risk- based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels are company action, regulatory action, authorized control and mandatory control. I-12 Companies that have triggered a company action level event are required to submit a detailed comprehensive financial plan to the domiciliary state insurance department. In the regulatory action level, in addition to submitting the comprehensive financial plan, a company may be subjected to a detailed regulatory investigation. The domiciliary state insurance department is permitted, but not required, to place the insurance company under regulatory control when it falls to the authorized control level; regulatory control is required in the mandatory control level. AFLAC's NAIC risk-based capital ratio continues to reflect a very strong statutory capital and surplus position. Also, there are several ongoing regulatory initiatives being developed by the NAIC relating to investments, reinsurance, dividend restrictions, revision of the risk-based capital formula as it pertains to health organizations and other accounting requirements. Currently, four states have laws, regulations or regulatory practices that either prohibit the sale of specific disease insurance, such as AFLAC's cancer expense insurance, or make its sale impractical. These states are Connecticut, Massachusetts, New Jersey and New York. The remainder of the states do not impose prohibitions or restrictions that prevent AFLAC from marketing cancer expense insurance. AFLAC U.S. is marketing several of its other products in these states, directly or through a subsidiary. Under insurance guaranty fund laws in most states in the United States, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies with similar lines of business. Such assessments have not been material to the Company in recent years. The Company believes that future assessments relating to companies currently involved in insolvency proceedings will not materially impact the consolidated financial statements. The Company continues to monitor developments in the U.S. Congress concerning possible changes to the U.S. health care system. No action on health care reform was taken in 1994; however, some of the 1994 proposals included provisions that could have unfavorably affected the Company's tax expense, product design and marketing techniques in the United States. Management believes that a more limited approach to health care reform will be on the legislative calendar in 1995. The future of health care reform and its impact on AFLAC U.S. cannot be readily predicted at this time. Despite the movement toward managed care in the U.S. health care system, management believes that opportunities for marketing high-quality, affordable supplemental insurance policies in the United States will continue. The Company believes that a reformed health care system will require individuals to assume responsibility for larger portions of their total health care expenses, which should increase the demand for supplemental insurance products. EMPLOYEES - U.S. In its U.S. insurance operations, the Company employed 1,627 full-time and 33 part-time employees at December 31, 1994. The Company considers its employee relations to be excellent. I-13 OTHER OPERATIONS At December 31, 1994, the AFLAC Broadcast Division owned seven network- affiliated television stations with total assets of $152.1 million. The Broadcast Division employed 539 full-time and 108 part-time employees at December 31, 1994. The Broadcast Group considers its employee relations to be excellent. The Broadcast Division produced increased revenues and earnings during 1994 as compared with 1993. Revenues increased 12.5%, to $77.0 million. Pretax earnings before interest expense rose 28.1%, to $17.2 million. Stations benefited from advertising related to the off-year political elections, an improved U.S. economy and strengthened cost controls. The Broadcast Division has succeeded despite significant changes in the industry. With the emergence of new cable networks and stations, there are more outlets for advertising dollars than ever before. Despite the segmentation of television entertainment and news, network-affiliated stations continue to effectively deliver mass audiences to advertisers. As a result, the AFLAC Broadcast Division is able to successfully compete in a crowded, competitive marketplace. For additional information regarding broadcast operations, see Exhibit 13, page 13-14, which is incorporated herein by reference. The Company's other operations employed 307 full-time and 2 part-time employees at December 31, 1994; employee relations are considered to be excellent. ITEM 2. PROPERTIES AFLAC owns an 18-story office building, which is the worldwide headquarters of the Parent Company and AFLAC, along with a six-story parking garage. These structures are located on approximately 14 acres of land in Columbus, Georgia. In addition, AFLAC Real Estate Holdings, Inc. (AREH), a wholly owned subsidiary of the Parent Company, owns a two-story building located on the same property. AFLAC also owns an administrative office building located nearby. The Parent Company, AFLAC and AREH also own and lease office space and warehouse facilities at other locations in the United States. In Tokyo, Japan, AFLAC owns a new 11-story administrative office building which was completed in April 1994. AFLAC also leases office space in Tokyo, along with regional sales offices located throughout the country, and owns a training and computer facility in Tokyo. For further information concerning the new building in Japan, see Exhibit 13, pages 13-18, (discussion concerning cash flow) and 13-36 (Note 5 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. Other foreign affiliates of the Company also have leased office space. The Broadcast Division owns and leases land, buildings, transmission towers and other broadcast equipment in the cities where its seven television stations are located. I-14 ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various litigation considered to be in the normal course of business. Management does not believe the outcome of any pending litigation in which it is a defendant will have a material effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the security holders for a vote in the fourth quarter ended December 31, 1994. I-15 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION (*) AGE ___________________ _____________________________________ ___ Paul S. Amos Chairman of the Board of the Company 68 and AFLAC since August 1990; Vice Chairman of the Company and AFLAC until August 1990 Daniel P. Amos Chief Executive Officer of the 43 Company and AFLAC, Vice Chairman of the Company, since August 1990; President of the Company since August 1991; President of AFLAC and Deputy Chief Executive Officer of the Company, until August 1990; Chief Operating Officer of AFLAC, until August 1990 William J. Bugg, Jr. Senior Vice President, Corporate 55 Actuary of AFLAC Monthon Chuaychoo Vice President, Financial Services, of 51 the Company and AFLAC since September 1993; Second Vice President, Assistant Controller of the Company and AFLAC from June 1991 to September 1993; Second Vice President of AFLAC until June 1991 Kriss Cloninger III Executive Vice President, Chief 47 Financial Officer and Treasurer of the Company, and Executive Vice President, Chief Financial Officer of AFLAC since March 1993; Senior Vice President, Chief Financial Officer and Treasurer of the Company, and Senior Vice President, Chief Financial Officer of AFLAC from March 1992 until March 1993; Principal, KPMG Peat Marwick LLP, Atlanta, GA, until March 1992 Martin A. Durant, III Senior Vice President, Corporate Services, 46 of the Company and AFLAC since August 1993; Vice President and Controller of the Company, from 1990 to August 1993, and of AFLAC from June 1991 to August 1993; President of Rebuilding Service, Inc., until 1990 I-16 Norman P. Foster Executive Vice President, Corporate 59 Finance, of the Company and AFLAC since March 1992; Senior Vice President, Chief Financial Officer and Treasurer of the Company, and Senior Vice President and Chief Financial Officer of AFLAC until March 1992 David Halmrast Senior Vice President, Corporate 55 Development, of AFLAC since December 1993; Senior Vice President, Corporate Development of the Company from April 1993 to December 1993; Senior Vice President and Chief Financial Officer of Colonial Companies, Inc. until July 1992 Kerry W. Hand Senior Vice President, Home Office 42 Administration, of AFLAC Kenneth S. Janke Jr. Senior Vice President, Investor 36 Relations, of the Company since August 1993; Vice President, Investor Relations, of the Company, since 1990; Second Vice President, Investor Relations, of the Company until 1990 Akitoshi Kan Vice President, AFLAC Japan, Accounting 47 Department, since 1992; Manager, AFLAC Japan, Accounting Department, until 1992 Kyoichi Kasuya Vice President, AFLAC Japan, Actuary, 57 since 1992; General Manager, AFLAC Japan, Actuarial Department, until 1992 Joseph P. Kuechenmeister Senior Vice President, Director 53 of Marketing of AFLAC, since December 1990; Vice President, Agency Director of AFLAC, October 1990 until December 1990; Second Vice President, Director of Direct Product and Sales Development of AFLAC until October 1990 I-17 Joey M. Loudermilk Senior Vice President, General Counsel 41 and Corporate Secretary of the Company, and Senior Vice President, General Counsel and Director, Legal and Governmental Relations and Corporate Secretary of AFLAC since May 1992; Senior Vice President, Corporate Counsel and Assistant Secretary of the Company and AFLAC and Director, Legal and Governmental Affairs of AFLAC, from 1990 until May 1992; Senior Vice President, Corporate Counsel and Assistant Secretary of the Company and Senior Vice President, Director, Legal and Governmental Affairs of AFLAC, from August 1989 until 1990; Vice President of the Company, and Vice President, Legal and Regulatory Department of AFLAC, until August 1989 Hidefumi Matsui Executive Vice President of AFLAC Japan, 50 since January 1992; Senior Vice President, Director of Marketing of AFLAC Japan, from January 1990 until January 1992; Senior Vice President of AFLAC Japan, until January 1990 Minoru Nakai President of AFLAC International, Inc., 53 since October 1991; Senior Vice President, U.S.-Japan Operations, of AFLAC, until October 1991 Yoshiki Otake President of AFLAC Japan; Vice 55 Chairman of AFLAC International, Inc., since October 1991; Executive Vice President of AFLAC from January 1991 until October 1991 Thomas L. Paul President of AFLAC Broadcast Group, Inc.; 65 Vice President, Corporate Development, of the Company until 1993 E. Stephen Purdom Executive Vice President of AFLAC since 47 October 1994; Senior Vice President, Medical Director of AFLAC until October 1994 I-18 Joseph W. Smith, Jr. Chief Investment Officer of the Company 41 and AFLAC since August 1991; Senior Vice President, Investments of AFLAC, until August 1991 Gary L. Stegman Senior Vice President, Assistant Chief 45 Financial Officer of the Company and AFLAC since June 1991; Senior Vice President, Treasurer of AFLAC until June 1991 (*) Unless specifically noted, the respective executive officer has held the occupation(s) set forth in the table for at least five years. Each executive officer is appointed annually by the board of directors and serves until his successor is chosen and qualified, or until his death, resignation or removal. I-19 PART II Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1994 Annual Report to Shareholders, the appropriate sections of which are included herein as Exhibit 13. The page numbers of the selected information from the Annual Report (as well as the Annual Report) containing the required information are set forth below: Refer To Refer To Exhibit 13 Annual Report Pages Pages __________ _____________ ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 24; 46 (Note EQUITY AND RELATED SHAREHOLDER 13-43 9); and 50 MATTERS (Note 9) ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 32 - 33 ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 25 - 31 ANALYSIS OF FINANCIAL CONDITION 13-18 AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND 13-19.1 to 34 - 50 SUPPLEMENTARY DATA 13-52 ITEM 9. CHANGES IN AND DISAGREEMENTS None None WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE II-1 PART III Pursuant to General Instruction G to Form 10-K, Items 10 through 13 are incorporated by reference to the Company's definitive Proxy Statement relating to the Company's 1995 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 10, 1995, pursuant to Regulation 14A under the Securities Exchange Act of 1934. Refer to the Information Refer to Contained in the Proxy Printed Statement under Captions Proxy (filed electronically) Statement Pages ________________________ _________ ITEM 10. DIRECTORS AND EXECUTIVE Security Ownership of 3 - 7 OFFICERS OF THE COMPANY Management. 1. Election Directors of Directors Executive Officers - see Part I, Item 4A herein ITEM 11. EXECUTIVE COMPENSATION Board and Committee 8 - 18 Meetings and Directors Compensation; Summary Compensation Table; De- fined Benefit Pension Plan; Retirement Plans for Key Executives; Employment Contracts and Termination of Employ- ment Arrangements ITEM 12. SECURITY OWNERSHIP OF Voting Securities and 2 - 7 CERTAIN BENEFICIAL Principal Holders OWNERS AND Thereof. Security Owner- MANAGEMENT ship of Management. 1. Election of Directors ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 19 AND RELATED and Relationships TRANSACTIONS III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS Refer to Page(s) Included in Part II of this report and incorporated by reference to the following pages of Exhibit 13: AFLAC Incorporated and Subsidiaries: Consolidated Statements of Earnings, for 13-19.1 - each of the years in the three-year 13-19.2 period ended December 31, 1994 Consolidated Balance Sheets, at December 13-20.1 - 31, 1994 and 1993 13-20.2 Consolidated Statements of Shareholders' 13-21.1 - Equity, for each of the years in the 13-21.2 three-year period ended December 31, 1994 Consolidated Statements of Cash Flows, 13-22.1 - for each of the years in the three-year 13-22.2 period ended December 31, 1994 Notes to the Consolidated Financial 13-23 to Statements 13-49 Report of Independent Auditors 13-51 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report: Auditors' Report on Financial Statement Schedules IV-5 Schedule I - Summary of Investments - Other IV-6 Than Investments in Related Parties, at December 31, 1994 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1994 IV-12 and 1993 and for each of the years in the three-year period ended December 31, 1994 Schedule IV - Reinsurance, for each of the IV-13 years in the three-year period ended December 31, 1994 Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. IV-1 3. EXHIBITS 3.0 - Articles of Incorporation, as amended - incorporated by reference from 1991 Form 10-K, Commission file number 1-7434, Exhibit 3.0; and Bylaws of the Company, as amended - incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 3.0. 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized under any single instrument 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. 10.0* - American Family Corporation Incentive Stock Option Plan (1982) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1* - American Family Corporation Stock Option Plan (1985) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - American Family Corporation Supplemental Executive Retirement Plan - incorporated by reference from 1989 Form 10-K, Commission file number 1-7434, Exhibit 10.9. 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.6* - AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7* - AFLAC Incorporated Management Incentive Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit B. IV-2 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 27.0 - Financial Data Schedule (electronic filing only). 28.0* - AFLAC Incorporated 401(K) Retirement Plan incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 28.0. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the quarter ended December 31, 1994. IV-3 (c) EXHIBITS FILED WITH CURRENT FORM 10-K 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 27.0 - Financial Data Schedule (electronic filing only). * Management contract or compensatory plan or arrangement. IV-4 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Shareholders and Board of Directors AFLAC Incorporated: Under date of January 30, 1995, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Atlanta, Georgia January 30, 1995 IV-5 SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1994 (In thousands) Amount in Fair Balance Type of Investment Cost Value Sheet ----------- ---------- --------- Fixed maturities available for sale: Bonds: United States Government and government agencies and authorities $ 373,215 $ 355,406 $ 355,406 States, municipalities and political subdivisions 806,036 839,346 839,346 Foreign governments 6,200,319 6,724,439 6,724,439 Public utilities 2,878,286 3,108,117 3,108,117 Convertibles 25,053 26,804 26,804 All other corporate bonds 4,426,911 4,476,582 4,476,582 ---------- ---------- ---------- Total fixed maturities available for sale 14,709,820 15,530,694 15,530,694 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 1,540 1,829 1,829 Banks, trusts and insurance companies 3,295 4,830 4,830 Industrial, miscellaneous and all other 66,750 77,714 77,714 ---------- ---------- ---------- Total equity securities 71,585 84,373 84,373 ---------- ---------- ---------- Total securities available for sale 14,781,405 15,615,067 15,615,067 Mortgage loans on real estate 25,104 29,104 25,104 Policy loans 1,202 1,202 1,202 Other long-term investments 3,836 3,836 3,836 Short-term investments 330,916 330,916 330,916 ---------- ---------- ---------- Total investments $15,142,463 $15,980,125 $15,976,125 ========== ========== ========== IV-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1994 1993 ---------- ---------- Assets: Investments: Investments in subsidiaries* $ 1,988,329 $ 1,489,961 Other investments: Money market funds 2,489 20,823 Mortgage loans and other 2,468 3,132 ---------- ---------- Total investments 1,993,286 1,513,916 Due from subsidiaries* 9,574 6,674 Other receivables 4,851 6,472 Property and equipment, net 8,961 10,107 Other 267 1,924 ---------- ---------- Total assets 2,016,939 1,539,093 ========== ========== Liabilities and Shareholders' Equity: Liabilities: Cash overdraft 82 59 Due to subsidiaries* 714 3,145 Notes payable (note A) 111,970 54,511 Employee and beneficiary benefit plans 117,145 84,445 Income taxes, primarily deferred 25,399 25,977 Other 9,862 5,332 Commitments and contingencies (note B) ---------- --------- Total liabilities 265,172 173,469 ---------- --------- Shareholders' equity: Common stock of $.10 par value: Authorized 175,000; issued 104,000 shares in 1994 and 103,710 shares in 1993 10,400 10,371 Additional paid-in capital 198,099 195,730 Unrealized foreign currency translation 174,091 123,294 Unrealized gains on equity securities 228,844 14,811 Retained earnings (note D) 1,277,487 1,029,625 Treasury stock (135,776) (6,568) Notes receivable for stock purchases (1,378) (1,639) ---------- ---------- Total shareholders' equity 1,751,767 1,365,624 ---------- ---------- Total liabilities and shareholders' equity $ 2,016,939 $ 1,539,093 ========== ========== * Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. IV-7 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Earnings AFLAC Incorporated (Parent Only) (In thousands) Years ended December 31, 1994 1993 1992 ---------- ---------- ---------- Revenues: Dividends from subsidiaries* $ 109,533 $ 71,268 $ 46,657 Management and service fees from subsidiaries* 26,391 30,357 28,227 Other income from subsidiaries, principally rental and interest* 683 992 828 Other income 1,327 (620) 693 --------- --------- --------- Total revenues 137,934 101,997 76,405 --------- --------- --------- Operating expenses: Interest expense - subsidiaries* 22 162 293 Interest expense - others 6,070 3,362 2,743 Capitalized interest (2,419) (3,250) (1,333) Other operating expense 65,635 53,595 48,760 --------- --------- --------- Total operating expenses 69,308 53,869 50,463 --------- --------- --------- Earnings before income taxes, equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 68,626 48,128 25,942 Income tax expense (note C) 874 1,063 1,103 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 67,752 47,065 24,839 Equity in undistributed earnings of subsidiaries 225,038 196,824 158,528 --------- --------- --------- Earnings before cumulative effect of accounting changes 292,790 243,889 183,367 Cumulative affect on prior years of accounting changes (including a $46,100 credit related to subsidiaries) (note F) - 11,438 - --------- --------- --------- Net earnings $ 292,790 $ 255,327 $ 183,367 ========= ========= ========= * Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. IV-8 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Cash Flows AFLAC Incorporated (Parent Only) (In thousands) Years ended December 31, 1994 1993 1992 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 292,790 $ 255,327 $ 183,367 Adjustments to reconcile net earnings to net cash provided from operating activities: Cumulative effect on prior years of accounting changes - (11,438) - Equity in undistributed earnings of subsidiaries (225,038) (196,824) (158,528) Deferred income taxes (578) (300) 1,103 Employee and beneficiary benefit plans 32,700 18,195 12,659 Other, net 4,307 190 8,020 --------- --------- --------- Net cash provided by operating activities 104,181 65,150 46,621 --------- --------- --------- Cash flows from investing activities: Additions to property and equipment, net - (75) (1,368) Cost of other investments 18,998 (14,703) (9,301) Additional capitalization of subsidiaries (3,592) - (10,430) --------- --------- --------- Net cash used by investing activities 15,406 (14,778) (21,099) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings/assumption of subsidiary debt 84,000 - 11,300 Proceeds from exercise of stock options 2,163 6,975 7,534 Principal payments under debt obligations (26,541) (11,419) (3,598) Dividends paid to shareholders (44,928) (40,057) (35,283) Net increase in amount due to/from subsidiaries (5,331) (3,866) (2,338) Purchases of treasury stock (131,734) (1,325) (3,067) Treasury stock reissued 2,761 - - Other, net - (1,072) --------- --------- --------- Net cash used by financing activities (119,610) (50,764) (25,452) --------- --------- --------- Net change in cash (23) (392) 70 Cash (overdraft) at beginning of year (59) 333 263 --------- --------- --------- Cash (overdraft) at end of year $ (82) $ (59) $ 333 ========= ========= ========= See the accompanying Notes to Condensed Financial Statements. IV-9 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Notes to Condensed Financial Statements AFLAC Incorporated (Parent Only) The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of AFLAC Incorporated and Subsidiaries (see Part II - Item 8). (A) NOTES PAYABLE A summary of notes payable serviced by the Parent Company at December 31, 1994 and 1993 follows: (In thousands) 1994 1993 -------- -------- 6.63% short-term note payable to bank under unsecured line of credit, due January 13, 1995. $ 9,000 $ - Unsecured note payable to bank under revolving credit and term-loan agreement, variable interest rate, due in quarterly installments, beginning June 1995 through March 2000......... 50,000 - 5.965% unsecured note payable to banks, due in semiannual installments beginning October 1995 through 1997...................... 49,000 49,000 8.3% note payable, due in monthly installments through 1997, secured by equipment........................... 3,970 5,511 ------- ------- Total notes payable $111,970 $ 54,511 ======= ======= The aggregate maturities of the notes payable for each of the five years after December 31, 1994, are as follows: (In thousands) 1995............................................ $ 28,007 1996............................................ 31,485 1997............................................ 29,978 1998............................................ 10,000 1999............................................ 10,000 Thereafter...................................... 2,500 IV-10 (B) CONTINGENCIES In prior years, the Parent Company executed promissory notes to banks and transferred the proceeds to its broadcast subsidiaries for the acquisition of television broadcasting stations. The outstanding balances on these notes assumed by a partnership formed by the Broadcast Group and AFLAC were $32,277,779 as of December 31, 1994, and are not included in the accompanying condensed balance sheet. In addition, the Parent Company has also guaranteed repayment of bank borrowings by its subsidiary, AFLAC. The related outstanding loan balance at December 31, 1994, was $1,400,000. The Company has also guaranteed to AFLAC repayment of intercompany borrowings from affiliates, which approximated $650,198 at December 31, 1994. (C) INCOME TAXES The Company and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or benefits are recorded by each principal subsidiary based upon separate return calculations, and any difference between the consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial statements. 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. Although the final outcome is uncertain, the Company believes its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements. For further information on income taxes, see Exhibit 13, page 13-40, Note 8 of the Notes to the Consolidated Financial Statements. (D) DIVIDEND RESTRICTIONS See Exhibit 13, pages 13-45 and 13-46 (Note 10, Statutory Accounting and Dividend Restrictions, of Notes to the Consolidated Financial Statements) for information regarding dividend restrictions. (E) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (In thousands) 1994 1993 1992 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 6,302 $ 3,588 $ 2,781 Income taxes 400 - 139 In 1993, non-cash investing activities included issuance of common stock for purchase of a company amounting to $8,730,381. For further information see Note 9, Other, page 13-43 of Exhibit 13. IV-11 (F) ACCOUNTING CHANGES For information concerning the cumulative affect of new accounting standards adopted in 1994 and 1993, see page 13-25 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated Financial Statements. IV-12 SCHEDULE IV AFLAC INCORPORATED AND SUBSIDIARIES Reinsurance Years Ended December 31, 1994, 1993 and 1992 (In thousands)
Percentage Ceded to Assumed from of amount Gross other other assumed Amount companies companies Net amount to net ------------ ------------ ------------ ------------ ------------ Year ended December 31, 1994: Life insurance in force $ 2,715,954 $ 101,863 $ - $ 2,614,091 - ============ ============ ============ ============ ============ Premiums: Health insurance $ 5,165,557 $ 171 $ - $ 5,165,386 - Life insurance 15,713 367 - 15,346 - ------------ ------------ ------------ ------------ ------------ Total premiums $ 5,181,270 $ 538 $ - $ 5,180,732 - ============ ============ ============ ============ ============ Year ended December 31, 1993: Life insurance in force $ 2,691,221 $ 119,771 $ - $ 2,571,450 - ============ ============ ============ ============ ============ Premiums: Health insurance $ 4,210,723 $ 392 $ - $ 4,210,331 - Life insurance 15,497 438 - 15,059 - ------------ ------------ ------------ ------------ ------------ Total premiums $ 4,226,220 $ 830 $ - $ 4,225,390 - ============ ============ ============ ============ ============ Year ended December 31, 1992: Life insurance in force $ 2,708,814 $ 109,125 $ - $ 2,599,689 - ============ ============ ============ ============ ============ Premiums: Health insurance $ 3,352,737 $ 218 $ - $ 3,352,519 - Life insurance 17,245 563 - 16,682 - ------------ ------------ ------------ ------------ ------------ Total premiums $ 3,369,982 $ 781 $ - $ 3,369,201 - ============ ============ ============ ============ ============
IV-13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AFLAC Incorporated Date MARCH 28, 1995 By /s/ PAUL S. AMOS ------------------------ ----------------------------- (Paul S. Amos) Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ DANIEL P. AMOS Chief Executive Officer, MARCH 28, 1995 - ------------------------ President and Vice ----------------- (Daniel P. Amos) Chairman Board of Directors /s/ KRISS CLONINGER, III Executive Vice President, MARCH 28, 1995 - ------------------------ Chief Financial Officer ----------------- (Kriss Cloninger, III) and Treasurer /s/ NORMAN P. FOSTER Executive Vice President, MARCH 28, 1995 - ------------------------ Corporate Finance ----------------- (Norman P. Foster) IV-14 /s/ J. SHELBY AMOS, II Director MARCH 28, 1995 - ------------------------------ ----------------- (J. Shelby Amos, II) Director March 28, 1995 - ------------------------------ ----------------- (Michael H. Armacost) /s/ M. DELMAR EDWARDS, M.D. Director MARCH 28, 1995 - ------------------------------ ----------------- (M. Delmar Edwards, M.D.) /s/ GEORGE W. FORD, JR. Director MARCH 28, 1995 - ------------------------------ ----------------- (George W. Ford, Jr.) /s/ CESAR E. GARCIA Director MARCH 28, 1995 - ------------------------------ ----------------- (Cesar E. Garcia) /s/ JOE FRANK HARRIS Director MARCH 28, 1995 - ------------------------------ ----------------- (Joe Frank Harris) Director MARCH 28, 1995 - ------------------------------ ----------------- (Elizabeth J. Hudson) /s/ KENNETH S. JANKE, SR. Director MARCH 28, 1995 - ------------------------------ ----------------- (Kenneth S. Janke, Sr.) IV-15 /s/ CHARLES B. KNAPP Director MARCH 28, 1995 - ------------------------------ ----------------- (Charles B. Knapp) /s/ HISAO KOBAYASHI Director MARCH 28, 1995 - ------------------------------ ----------------- (Hisao Kobayashi) /s/ PETER D. MORROW Director MARCH 28, 1995 - ------------------------------ ----------------- (Peter D. Morrow) Director MARCH 28, 1995 - ------------------------------ ----------------- (Yoshiki Otake) /s/ JOHN M. POPE Director MARCH 28, 1995 - ------------------------------ ----------------- (John M. Pope) /s/ E. STEPHEN PURDOM, M.D. Director MARCH 28, 1995 - ------------------------------ ----------------- (E. Stephen Purdom, M.D.) /s/ HENRY C. SCHWOB Director MARCH 28, 1995 - ------------------------------ ----------------- (Henry C. Schwob) /s/ J. KYLE SPENCER Director MARCH 28, 1995 - ------------------------------ ----------------- (J. Kyle Spencer) /s/ GLENN VAUGHN, JR. Director MARCH 28, 1995 - ------------------------------ ----------------- (Glenn Vaughn, Jr.) IV-16 Exhibit Index 3.0 - Articles of Incorporation, as amended - incorporated by reference from 1991 Form 10-K, Commission file number 1-7434, Exhibit 3.0; and Bylaws of the Company, as amended - incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 3.0. 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized under any single instrument 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. 10.0* - American Family Corporation Incentive Stock Option Plan (1982) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1* - American Family Corporation Stock Option Plan (1985) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - American Family Corporation Supplemental Executive Retirement Plan - incorporated by reference from 1989 Form 10-K, Commission file number 1-7434, Exhibit 10.9. 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.6* - AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7* - AFLAC Incorporated Management Incentive Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit B. (i) 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 27.0 - Financial Data Schedule (electronic filing only). 28.0* - AFLAC Incorporated 401(K) Retirement Plan incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 28.0. Exhibits Filed with Current Form 10-K: 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 27.0 - Financial Data Schedule (electronic filing only). * Management contract or compensatory plan or agreement. (ii) EX-10.3.1 2 SERP EXHIBIT 10.3.1* AFLAC INCORPORATED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN In order to provide retirement benefits for certain key executives of the Company and its subsidiaries, the Company hereby adopts this Supplemental Executive Retirement Plan, originally effective as of October 1, 1989 and as amended, effective September 1, 1993, to provide as follows: 1. DEFINITIONS. Except as otherwise expressly provided herein, or as otherwise required by the context, the following terms, whenever used in capitalized form, shall have the meaning set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Company" means AFLAC Incorporated, a Georgia corporation, and any successor thereto. (c) "Early Retirement Benefit" means an annual pension which, when combined with the retirement income payable under the AFLAC Incorporated Pension Plan (assuming benefits thereunder are paid immediately as a single life annuity with an early commencement reduction as specified in the qualified Pension Plan without regard to years of service requirement) will equal fifty percent (50%) of the Participant's Final Pay, payable in accordance with Section 3(b) of the Plan. (d) "Early Retirement Date" means the date a Participant attains age 55, and for those who participate on or after August 11, 1992, it means the date a Participant attains age 55 and completes 15 years of employment; provided, however, that an earlier or later date may be agreed to between a Participant and the Compensation Committee of the Board. (e) "Effective Date" means October 1, 1989. (f) "Final Pay" means the highest annual base salary paid to a Participant during any calendar year in the three calendar year period preceding the Participant's Termination of Employment. (g) "Normal Retirement Benefit" means an annual pension which, when combined with the retirement income payable under the AFLAC Incorporated Pension Plan (assuming benefits thereunder are paid as a single life annuity) will equal sixty-five percent (65%) of the Participant's Final Pay, payable in accordance with Section 3(a) of the Plan. (h) "Norman Retirement Date" means the date a Participant attains age 65; provided, however, that an earlier or later date may be agreed to between a Participant and the Compensation Committee of the Board. EXH 10.3.1-1 (i) "Participant" means any employee of the Company (or any subsidiary or affiliate of the Company) who meets the requirements for participation set forth in Section 2 hereof. (j) "Plan" means this AFLAC Incorporated Supplemental Executive Retirement Plan, including any and all schedules and appendices hereto. (k) "Retirement" means a Participant's Termination of Employment on or after his Early Retirement Date. (l) "Retirement Benefit" means a Participant's Early Retirement Benefit or Normal Retirement Benefit, as applicable. (m) "Termination of Employment" means termination of a Participant's employment with the Company (and its subsidiaries and affiliates) for any reason except approved leaves of absence. 2. ELIGIBILITY. Participation in the Plan shall be limited to key employees of the Company (and its subsidiaries and affiliates) designated by the Board from time to time. 3. RETIREMENT BENEFITS. (a) NORMAL RETIREMENT. If a Participant's Termination of Employment occurs on or after his Normal Retirement Date for any reason other than Cause or death, he shall be entitled to receive an annual Retirement Benefit equal to the Normal Retirement Benefit, payable in the form of annuity for the life of the Participant (except as otherwise provided in Section 3(h)). (b) EARLY RETIREMENT. If a Participant's Termination of Employment occurs on or after his Early Retirement Date but before his Normal Retirement Date for any reason other than Cause (as defined in Section 8(e) hereof) or death, he shall be entitled to receive an annual Retirement Benefit equal to the Early Retirement Benefit, payable in the form of an annuity for the life of the Participant (except as otherwise provided in Section 3(h)). (c) DEATH BENEFIT. If a Participant dies after qualifying for an early or normal Retirement Benefit but before his commencing to receive such Retirement Benefit, the Participant's spouse shall receive a death benefit equal to fifty percent (50%) of the Retirement Benefit which the Participant would have been entitled to receive had he retired on the day preceding his date of death. (d) TERMINATION FOR CAUSE. Notwithstanding any other provisions of this Plan, if a Participant's Termination of EXH 10.3.1-2 Employment is by the Company (or any subsidiary or affiliate of the Company) for Cause (as defined in Section 8(e)) he shall immediately forfeit all rights and entitlements under the Plan. (e) NONCOMPETITION. The payment of Retirement Benefits to a Participant, as set forth in this Plan, shall immediately cease and be forfeited if the Participant, without the prior consent of the Board, directly or indirectly, renders advisory or any other services to, or becomes employed by, or participates or engages in any business competitive with any of the business activities of the Company (or any subsidiary or affiliate of the Company) in any states and/or foreign countries in which the Company or any of its subsidiaries or affiliates do business. (f) CONSULTATION. As a condition to the payment of Retirement Benefits as set forth in this Plan, a Participant shall make himself available to the Company for ten (10) years after Retirement as an independent consultant for consultation at the request of the Company at reasonable business hours and upon reasonable notice, and subject to the conditions of health, without further compensation except necessary and proper business or travel expenses required in connection with such consultation. (g) NON-DISCLOSURE OF INFORMATION. As a condition to the payment of Retirement Benefits as set forth in this Plan, a Participant shall not, directly or indirectly, use or permit the use of any confidential or other proprietary information of a special and unique nature and value to the Company, including, but not limited to, technological data, trade secrets, systems, procedures, confidential reports, client lists, client relationships, marketing strategies of the Company (or any subsidiary or affiliate of the Company), information with respect to the nature and type of services rendered by the Company, or financial information concerning the Company. (h) OPTIONAL FORMS OF PAYMENT. In lieu of a life annuity, a Participant may elect to receive his Retirement Benefit in the form of a joint and survivor annuity by electing such alternate form of benefit prior to his Retirement. Under this option, the Participant shall receive for his lifetime under this Plan a reduced annual Retirement Benefit with the additional provision that, effective with the calendar month following the death of the Participant after Retirement, the Company will pay to the surviving spouse of the Participant a monthly benefit equal to one-half (1/2) of the amount which had been payable to the Participant. The reduced amount payable to the Participant shall be determined such that the joint and survivor benefit is the actuarial equivalent (determined using the same fifty percent (50%) Joint and Survivor conversion factors as specified in the AFLAC Incorporated Pension Plan) of the Participant's Retirement Benefit payable as a life annuity. EXH 10.3.1-3 4. TIME OF PAYMENT. A Retirement Benefit shall commence on the first day of the calendar month coinciding with or next following a Participant's Retirement or death (in the case of the benefit provided under Section 3(c) hereof). 5. VESTING. Except as otherwise provided in Section 8 of the Plan, no benefit shall be payable to a Participant if the Participant incurs a Termination of Employment or is removed from participation in the Plan by the Board prior to his Early Retirement Date. 6. NONALIENABILITY. Except for the withholding of any tax under the laws of the United States or any state or locality, no Retirement Benefit payable at any time hereunder shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such Retirement Benefit, whether currently or hereafter payable, shall be void. Except as otherwise specifically provided by law, no Retirement Benefit shall, in any manner, be liable for or subject to the debts or liabilities of any Participant or any other person entitled to such benefits. 7. MISCELLANEOUS. (a) NO RIGHT TO CONTINUED EMPLOYMENT. This Plan shall not be construed as providing any Participant with the right to be retained in the employ of the Company (or any subsidiary or affiliate of the Company) or to receive any benefit not specifically provided for hereunder. (b) PARTICIPATION IN OTHER PLANS. Nothing contained herein shall exclude or in any manner modify or otherwise affect any existing or future rights of any Participant to participate in and receive the benefits of any compensation, bonus, pension, life insurance, medical and hospitalization insurance or other employee benefit plan or program to which he otherwise might be or become entitled as an employee of the Company (or any subsidiary or affiliate of the Company). (c) GOVERNING LAW. This Plan shall be construed in accordance with and governed by the laws of the State of Georgia, without regard to the conflict of law principles of Georgia. (d) INCAPACITY. If the Company determines that any Participant is unable to care for his affairs because of illness or accident, any Retirement Benefit payment due hereunder (unless a prior claim therefore shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to such Participant's spouse, child, brother or sister, or to any person deemed by the Company to have incurred expenses for such person otherwise EXH 10.3.1-4 entitled to payment. Any such payment shall be a complete discharge of the liabilities of the Company hereunder. (e) AMENDMENT OR TERMINATION OF THE PLAN. The Company shall have the right, at any time and from time to time, to amend in whole or in part, or to terminate any of the provisions of this Plan, and such amendment or termination shall be binding upon all Participants and parties in interest; provided, however, that no such amendment or termination shall impair any vested rights which have accrued to Participants hereunder prior to the date of such amendment or termination. Notwithstanding any other provisions of this Plan, for a period of three years following a Change in Control (as defined in Section 8(c) hereof), this Plan may not be (i) terminated or (ii) amended in any manner which would adversely affect in any way the amount of or the entitlement to retirement benefits hereunder or remove a Participant from participation hereunder. Notwithstanding any other provisions of this Section 7, the foregoing provisions of this paragraph may not be amended following a Change in Control without the written consent of a majority in both number and interest of the Participants who are actively employed by the Company (or any subsidiary or affiliate of the Company), both immediately prior to the Change in Control and at the date of such amendment. (f) GENDER. The masculine pronoun wherever used shall include the feminine pronoun, and the singular shall include the plural unless the context clearly indicates the distinction. (g) HEADINGS. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any of the provisions of this Plan. 8. CHANGE IN CONTROL OF THE COMPANY. (a) TERMINATION WITHIN TWO YEARS OF A CHANGE IN CONTROL. If a Participant's Termination of Employment occurs during the two-year period following a Change in Control of the Company, unless such Termination of Employment is (A) because of the Participant's death or Disability (as defined in Section 8(d)), (B) by the Company (or any subsidiary or affiliate of the Company) for Cause (as defined in Section 8(e)), or (C) by the Participant other than for Good Reason (as defined below) (such Termination of Employment being hereinafter referred to as "Qualifying Termination"), such Participant shall be one hundred percent (100%) vested in his Retirement Benefit and the Company shall pay to the Participant, no later than the fifth day following the date of the Participant's Qualifying Termination, a lump sum amount (the "Cash-Out Payment") equal to the greater of (i) the present value (determined as of the date of the Qualifying Termination) of the Retirement Benefit (assuming payment in the form EXH 10.3.1-5 of a single life annuity) (a) to which the Participant is entitled as of the date of the Qualifying Termination, or (b) in the case of a Participant who has not yet qualified for early retirement as of the date of his Qualifying Termination, to which the Participant would have been entitled had he remained in the employ of the Company until his Early Retirement Date, and (ii) three times the Participant's Final Pay. The present value of the Retirement Benefit described in clause (i) above shall be determined by using the mortality table and interest rate utilized in the most recent actuarial valuation for the AFLAC Incorporated Pension Plan. (b) LIMITATION ON PAYMENTS. Notwithstanding any other provisions of this Plan in the event that any payment or benefit received or to be received by a Participant in connection with a Change in Control or the termination of the Participant's employment (whether pursuant to the terms of this Plan or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits including the Cash-Out Payment, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or Person making such payment or providing such benefit as a result of Section 280G of the Internal Revenue Code of 1986 (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), the Cash-Out Payment shall be reduced (if necessary, to zero). For purposes of this limitation: (i) no portion of the Total Payments, the receipt or enjoyment of which the Participant shall have effectively waived in writing prior to the Termination of Employment shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Participant does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, including by reason of Section 280G(b)(4)(A) of the Code; (iii) the Cash-Out Payment shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. EXH 10.3.1-6 (c) CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control of the Company" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or (II) during any period of two consecutive years (not including any period prior to adoption of this Plan), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (I), (III) or (IV) of this paragraph), whose election by the Board of nomination for election by the Company stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (III) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least seventy-five percent (75%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (d) DISABILITY. As used herein, the term "Disability" shall mean, as a result of a Participant's incapacity due to physical or mental illness, his absence from the full-time EXH 10.3.1-7 performance of his duties with the Company (or any subsidiary or affiliate of the Company) for six consecutive months, and his failure to return to the full-time performance of his duties within thirty (30) days after written notice of termination is given. (e) CAUSE. As used herein, the term "Cause" shall mean (i) the willful and continued failure by a Participant to substantially perform the Participant's duties with the Company or a subsidiary or affiliate of the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness or any such actual or anticipated failure after a Participant gives a notice of termination of employment for Good Reasons) after a written demand for substantial performance is delivered to the Participant by the Board, which demand specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's act, or failure to act, was in the best interest of the Company. Notwithstanding the foregoing, a termination for Cause shall not be deemed to have occurred unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Participant and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant engaged in conduct set forth above in this Section 8(e) and specifying the particulars thereof in detail. (f) GOOD REASON. As used herein, the term "Good Reason" shall mean, without the express written consent of the Participant, the occurrence after a Change in Control of the Company of any of the following circumstances unless, in the case of paragraph (i), (v) or (vi), such circumstances are fully corrected prior to the date the Participant terminates employment. (i) the assignment to the Participant of any duties inconsistent with the position he held in the Company (or any subsidiary or affiliate of the Company) immediately prior to the Change in Control of the Company, or a significant adverse alteration in the nature or status of his responsibilities from those in effect immediately prior to such change; EXH 10.3.1-8 (ii) a reduction by the Company in the Participant's annual base salary, or a reduction by the Company in the Participant's total compensation, as in effect on the Effective Date or as the same may be increased from time to time; (iii) the relocation of the Company's principal executive offices to a location outside the Columbus, Georgia Metropolitan Area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control of the Company) or the Company's requiring the Participant to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with the Participant's business travel obligations immediately prior to the Change in Control; (iv) the failure by the Company (or any subsidiary or affiliate of the Company) to pay to the Participant any portion of his current compensation within seven (7) days of the date such compensation is due; (v) the failure by the Company (or any subsidiary or affiliate of the Company) to continue in effect any compensation plan in which the Participant participates immediately prior to the Change in Control of the Company which is material to the Participant's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company (or any subsidiary or affiliate of the Company) to continue the Participant's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Participant's participation relative to other Participants, as existed at the time of the Change in Control of the Company; or (vi) the failure by the Company (or any subsidiary or affiliate of the Company) to continue to provide the Participant with benefits substantially similar to those enjoyed by him under any of the Company's life insurance, medical, health and accident, retirement, or disability plans in which he was participating at the time of the Change in Control of the Company, the taking of any action by the Company (or any subsidiary or affiliate of the Company) which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by him at the time of the Change in Control of the Company, or the failure by the Company (or any subsidiary or affiliate of the Company) to provide the Participant with the number of paid vacation days to which he is entitled on the basis of years of service EXH 10.3.1-9 with the Company (or any subsidiary or affiliate of the Company) in accordance with the Company's normal vacation policy in effect at the time of the Change in Control of the Company. A Participant's right to terminate his employment for Good Reason shall not be affected by the Participant's incapacity due to physical or mental illness. The Participant's continued employment shall not constitute consent to, or a waiver of rights with respect to any act or failure to act, constituting Good Reason hereunder. (g) PERSON. As used herein, the term "Person" shall have the meaning given in Section 3(a)(9) of the Securities Exchange Act of 1934, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 9. SUCCESSORS. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume the Company's obligations hereunder in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 10. LEGAL EXPENSES. The Company shall pay or reimburse a Participant for all fees and disbursements of counsel, if any, incurred by the Participant in seeking to obtain or enforce any right or benefit provided by this Plan. AFLAC INCORPORATED /s/ Daniel P. Amos _____________________________ DANIEL P. AMOS Chief Executive Officer ATTEST: /s/ Joey M. Loudermilk _____________________________ Corporate Secretary (CORPORATE SEAL) EXH 10.3.1-10 EX-10.5 3 OTAKE AGREEMENT EXHIBIT 10.5* EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of January 1, 1995, by and between AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, a Georgia corporation (hereinafter "AFLAC"), and YOSHIKI OTAKE (hereinafter "OTAKE"). WHEREAS, AFLAC and OTAKE desire to enter into an Employment Agreement and to set forth the terms and conditions of OTAKE's employment; and WHEREAS, AFLAC and OTAKE desire to terminate any and all other employment agreements heretofore existing between them prior to January 1, 1995; and WHEREAS, AFLAC believes that OTAKE has made and continues to make substantial and highly significant contributions to the development and expansion of AFLAC-Japan; and WHEREAS, OTAKE was one of the founders of AFLAC-Japan and has continuously headed its sales force, and AFLAC recognizes the special contributions made by OTAKE including the development and continuing expansion of AFLAC-Japan. NOW, THEREFORE, the parties, for and in consideration of the mutual covenants and agreements hereinafter contained, do contract and agree as follows: 1. EMPLOYMENT. AFLAC agrees to employ OTAKE for the term of this Agreement in the capacity set forth herein and OTAKE agrees to devote full-time to his duties hereunder as specified. 2. TERM. OTAKE's employment hereunder shall be for the period commencing January 1, 1995 and continuing through December 31, 2004 (10 years), unless sooner terminated as hereinafter provided, and may be renewed thereafter on an annual basis by mutual consent of the parties to this Agreement. 3. COMPENSATION. a) BASE SALARY. For the year 1995, AFLAC shall pay as salary to OTAKE an amount equal to 68,290,000 yen. For 1996 and subsequent years, OTAKE shall be considered for salary increases in the same general proportion as the annual increases in the base salaries of other senior executive officers of Corporation as determined by the Compensation Committee of AFLAC Incorporated's Board of Directors (the "Board"). b) MANAGEMENT INCENTIVE PLAN. In addition to the Base Salary paid to Otake, AFLAC shall, for each calendar year of OTAKE's employment by AFLAC, beginning with the calendar year 1995, continue to pay OTAKE, as performance bonus compensation, an amount determined each year under AFLAC's current Management Incentive Plan (short-term Incentive Program) with a target level based on at least thirty-five percent (35%) of base salary. Nothing in this EXH 10.5-1 paragraph shall preclude OTAKE from receiving additional discretionary bonuses approved by the Board of AFLAC Incorporated. c) STOCK OPTIONS. OTAKE shall continue to be eligible to be awarded stock options to purchase AFLAC Incorporated's common stock under its Stock Option Plans for selected key employees and Directors during the term of this Agreement. 4. DUTIES. Pursuant to the terms and conditions of this Agreement, OTAKE will provide executive management services as Chairman of AFLAC-Japan and continue to be the sole AFLAC representative (Director) registered in Japan. OTAKE will assume the title and position of "Director Chairman of AFLAC-Japan" (hereinafter referred to as the "Director Chairman"). The Director Chairman shall be directly responsible to the Chief Executive Officer of AFLAC and shall perform any and all assignments that the Chief Executive Officer or the President of AFLAC or their designated representatives may request the Director Chairman to perform. It is specifically agreed and understood that the policies and directives of AFLAC will be promptly and fully implemented by the Director Chairman in the management and operation of AFLAC-Japan to the extent such policies and directives do not contravene or violate Japanese laws, directives of the Ministry of Finance of Japan or administrative guidance governing the operations of AFLAC in Japan. Subject to AFLAC's Bylaws and with the prior consent of AFLAC, OTAKE shall appoint the President of AFLAC-Japan (hereinafter referred to as the "President-Japan"). Subject to AFLAC's bylaws, OTAKE shall appoint one or more executive vice presidents, and senior vice presidents (hereinafter referred to as Executive Officers) and any other officers (hereinafter referred to as Supervisory Officers), upon taking into consideration the nominations for such posts made by the President-Japan. The Corporation's Chief Executive Officer may terminate OTAKE's service as Director Chairman at any time by giving OTAKE sixty (60) days written notice. From the termination date until OTAKE attains age sixty-five (65), if OTAKE remains mentally and physically sound, OTAKE shall be allowed to continue his employment with such status as deemed appropriate by AFLAC, with a starting salary equivalent to seventy percent (70%) of his last salary, subject to annual cost-of-living increases as described in Section 3(a) above. This continued employment shall not adversely affect the base figure for the retirement benefits as set forth in Section 6(b) below. OTAKE will continue to participate in the Management Incentive Plan as described in Section 3(b) above. 5. OTHER BENEFITS. During his service as Director Chairman, OTAKE will be furnished office space suitable to this position, an automobile and driver, secretarial support and other benefits usual to a similar position in Japan. 6. RETIREMENT. AFLAC, in recognition of OTAKE's role in the development and expansion of the AFLAC-Japan, and in consideration of the value to AFLAC of offering OTAKE a retirement plan which will encourage his continued employment until date of retirement and thereafter assure his continued service in an advisory capacity and to preclude him from rendering any service, assistance or advice EXH 10.5-2 to any competitor of AFLAC, hereby agrees to the following retirement plan for OTAKE: a) ELIGIBILITY FOR RETIREMENT. Subject to the terms and conditions of this Agreement, OTAKE shall be eligible for retirement as follows: 1) At age sixty-five (65) -- mandatory retirement with full benefits, as defined below. 2) Early retirement -- At the request of OTAKE and subject to approval of the Chief Executive Officer of AFLAC, or at the request of the CEO, OTAKE may take voluntary retirement with full benefits, as defined below. 3) Early retirement -- Total and Permanent Disability prior to attainment of age sixty-five (65), retirement with full benefits, as defined below. Disability is defined as any physical or mental condition which prevents OTAKE from performing the normal functions of his duties as defined herein. b) RETIREMENT BENEFITS. Upon retirement, OTAKE shall be paid benefits under either Sub-section (1) or (2) below: 1) Full Retirement Without Surviving Spouse Benefit. Participant shall be paid, at the same intervals as active employees of the AFLAC-Japan, at the rate of sixty percent (60%) of the compensation equal to Base Salary and Management Incentive Plan Bonus (Section 3(a) and 3(b) above) received from AFLAC, or AFLAC-Japan, for either: (a) the last twelve (12) months of active employment with AFLAC, or (b) the highest compensation received in any calendar year of this Agreement preceding the date of retirement, whichever is higher; such retirement compensation to be paid for the lifetime of OTAKE and to be terminate at the end of the calendar month in which OTAKE's death occurs. 2) Full Retirement with Surviving Spouse Benefit. At the option of OTAKE, and subject to his written notice of such election being filed by OTAKE with the Secretary of AFLAC on or before the effective date of retirement, OTAKE may elect to receive for his lifetime a reduced compensation in the amount of fifty -four percent (54%) of previous compensation, as set forth in Section (1) above, with the additional provision that, effective with the calendar month following the death of OTAKE after retirement, AFLAC will pay monthly to the surviving spouse of OTAKE one-half (1/2) of the amount which OTAKE would have received as retirement income had he survived, such survivor's income to be paid for the appropriate period of time shown below: (a) If at the time of OTAKE's death, the surviving spouse is fifty-five (55) years of age or older, then such EXH 10.5-3 survivor's benefit shall be paid for the lifetime of the surviving spouse, or (b) If at the time of OTAKE's death, the surviving spouse is younger than 55 years of age, then such survivor's benefit shall be paid only for a maximum period of 20 years from OTAKE's death or until the surviving spouse's earlier death, whichever occurs first. c) ADJUSTMENTS TO RETIREMENT BENEFITS. All retirement benefits paid under Sub-section b) above shall be subject to annual cost-of-living type increases proportionate to any such compensation increases granted each year to the most senior officers of AFLAC-Japan, or, at the option of AFLAC, by any alternate reasonable index of cost-of-living increases. d) After Retirement, OTAKE shall be furnished suitable office space and secretarial support for the maintenance of his consultation work for AFLAC, with payment by AFLAC of appropriate expenses. e) After Retirement, OTAKE and his spouse shall receive for their lifetime full medical expense benefits, either through direct payment by AFLAC or, at the option of AFLAC, by insurance paid by AFLAC. 7. TERMINATION FOR GOOD CAUSE Notwithstanding any other provision of this Agreement, AFLAC shall have the right to terminate OTAKE for good cause at which time AFLAC shall no longer be required to pay any benefits under this Agreement. "Good cause" shall mean: (i) OTAKE's willful and deliberate failure to substantially perform his executive and management duties hereunder for a continuous period of more than sixty (60) days for reasons other than OTAKE's sickness, injury, or disability; (ii) the willful and deliberate conduct by OTAKE which is intended by OTAKE to cause, and which does in fact result in substantial injury or damage to AFLAC; or (iii) the conviction or plea of guilty by OTAKE of a felony crime involving moral turpitude. 8. CONSULTATION. As a condition to the payment of retirement benefits as set forth in this Employment Agreement, OTAKE agrees to make himself available to AFLAC after retirement as an independent consultant for consultation by request of AFLAC at reasonable business hours and upon reasonable notice, and subject to conditions of health, without further compensation, except necessary and proper business, travel or entertainment expenses required in connection with such consultation. 9. NON-COMPETITION. As a further condition to the payment of benefits (including retirement benefits), OTAKE agrees that so long as benefits are paid to him by AFLAC he will not, without the prior written consent of the Chief Executive Officer of AFLAC, directly or indirectly render advisory or any other services to, or become employed by, or participate or engage in any business competitive with any of the insurance business activities of AFLAC or its subsidiaries in any states and/or foreign countries in which it or its subsidiaries do business. EXH 10.5-4 10. RIGHTS UNDER OTHER AFLAC RETIREMENT PLANS. In consideration of the benefits contained herein, OTAKE waives any and all rights to participate in any and all other AFLAC or AFLAC-Japan retirement or pension plans. 11. IRREVOCABLE. Upon execution by both parties hereto, the agreement shall be binding on the parties hereto and cannot be amended, modified, suspended, or supplemented in any respect except by an agreement in writing executed by both parties hereto. 12. SUCCESSORS OF AFLAC. This Agreement shall be binding upon any successor to AFLAC and such successor shall be deemed substituted for AFLAC for all purposes under this Agreement. 13. CONSOLIDATION OR MERGER. In the event AFLAC consolidates or merges into another corporation which survives the consolidation or merger, it is AFLAC's intent that such surviving corporation shall assume this Agreement, and upon such assumption OTAKE and the survivor shall become obligated to perform the terms and conditions hereof and the term "AFLAC" as used in this Agreement shall be deemed to refer to such survivor. 14. ARBITRATION. Matters not specifically mentioned herein shall be resolved upon mutual consultation in accordance with the principles of good faith and trust. Any unresolved dispute arising out of or relating to this Agreement or controversy relating to the interpretation or breach hereof shall be settled by arbitration at a mutually agreeable location in the United States in accordance with the commercial arbitration rules of the American Arbitration Association. 15. APPLICABLE LAW. This Agreement is intended to and shall be governed by the laws of the State of Georgia. 16. ENTIRE AGREEMENT. This Agreement shall supersede any other contract of employment or retirement, whether oral or in writing, between AFLAC and OTAKE. EXH 10.5-5 IN WITNESS WHEREOF, AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS has caused this Agreement to be executed in its corporate name and by its officers thereto fully authorized, this 24th day of October 1994, in the State of Georgia. /s/ Yoshiki Otake AMERICAN FAMILY LIFE - -------------------------(L.S.) ASSURANCE COMPANY OF YOSHIKI OTAKE COLUMBUS, GEORGIA (AFLAC) /s/ Masatami Ohtsuka - -------------------------(L.S.) WITNESS BY: /s/ Daniel P. Amos -------------------------- DANIEL P. AMOS, CEO ATTEST: /s/ Joey M. Loudermilk -------------------------- JOEY M. LOUDERMILK Secretary EXH 10.5-6 EX-10.8 4 MATSUI AGREEMENT EXHIBIT 10.8* EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of January 1, 1995, by and between AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS, a Georgia corporation (hereinafter "AFLAC"), and HIDEFUMI MATSUI (hereinafter "MATSUI"). WHEREAS, AFLAC and MATSUI desire to enter into an Employment Agreement and to set forth the terms and conditions of MATSUI's employment; and WHEREAS, AFLAC and MATSUI desire to terminate any and all other employment agreements heretofore existing between them prior to January 1, 1995; and NOW, THEREFORE, the parties, for and in consideration of the mutual covenants and agreements hereinafter contained, do contract and agree as follows: 1. EMPLOYMENT. AFLAC agrees to employ MATSUI for the term of this Agreement in the capacity set forth herein and MATSUI agrees to devote full-time to his duties hereunder as specified. 2. TERM. MATSUI's employment hereunder shall be for the period commencing January 1, 1995 and continuing through December 31, 2004 (10 years), unless sooner terminated as hereinafter provided, and may be renewed thereafter on an annual basis by mutual consent of the parties to this Agreement. 3. COMPENSATION. a) BASE SALARY. For the year 1995, AFLAC shall pay as salary to MATSUI an amount equal to 37,220,000 yen. For 1996 and subsequent years, MATSUI shall be considered for salary increases in the same general proportion as the annual increases in the base salaries of other senior executive officers of AFLAC. b) MANAGEMENT INCENTIVE PLAN. In addition to the Base Salary paid to MATSUI, AFLAC shall, for each calendar year of MATSUI's employment by AFLAC, beginning with the calendar year 1995, continue to pay MATSUI, as performance bonus compensation, an amount determined each year under AFLAC's current Management Incentive Plan (short-term Incentive Program) with a target level based on at least thirty-five percent (35%) of base salary. Nothing in this paragraph shall preclude MATSUI from receiving additional discretionary bonuses approved by the Board of AFLAC Incorporated. c) STOCK OPTIONS. MATSUI shall continue to be eligible to be awarded stock options to purchase AFLAC Incorporated's common stock under its Stock Option Plans for selected key employees and Directors during the term of this Agreement. 4. DUTIES. Pursuant to the terms and conditions of this Agreement, MATSUI shall EXH 10.8-1 assume the title and position of President-Japan of AFLAC-Japan (hereinafter referred to as the "President-Japan"). The President-Japan shall be directly responsible to the Director Chairman of AFLAC-Japan (hereinafter referred to as the "Director Chairman") and shall perform any and all assignments that the Director Chairman may request the President-Japan to perform. The President-Japan shall have primary responsibility to oversee and manage the day-to-day business operations of AFLAC-Japan under the Director Chairman's instructions and pursuant to the policies, rules and regulations of AFLAC, and any relevant Ministry of Finance directives or administrative guidance. As a member of the Executive Committee and the Chair of the Management Committee of AFLAC-Japan, the President-Japan shall participate in the determination of overall management policies and corporate planning. Further, he shall participate in the decision-making process of AFLAC-Japan as described in the internal rules of AFLAC-Japan, which set forth guidelines concerning the respective duties and scopes of authority of the Director Chairman and the President-Japan. 5. RETIREMENT. AFLAC, in consideration of the value to AFLAC of offering MATSUI a retirement plan which will encourage his continued employment until date of retirement and thereafter assure his continued service in an advisory capacity and to preclude him from rendering any service, assistance or advice to any competitor of AFLAC, hereby agrees to the following retirement plan for MATSUI: a) ELIGIBILITY FOR RETIREMENT. Subject to the terms and conditions of this Agreement, MATSUI shall be eligible for retirement as follows: 1) At age sixty-five (65) -- mandatory retirement at sixty-five percent (65%) of Base Salary (Section 3(a)) on the day before retirement. 2) From age fifty-five (55) to age sixty-five (65) -- voluntary retirement at fifty percent (50%) of Base Salary (Section 3(a)) on the day before retirement. 3) Early retirement -- Total and Permanent Disability prior to attainment of age sixty-five (65), retirement at fifty percent (50%) of Base Salary (Section 3(a)) on the day before Disability. Disability is defined as any physical or mental condition which prevents MATSUI from performing the normal functions of his duties as defined herein. b) RETIREMENT BENEFITS. Upon retirement, MATSUI shall be paid benefits under either Sub-section (1) or (2) below: 1) Retirement Without Surviving Spouse Benefit. Participant shall be paid, at the same intervals as active employees of AFLAC- Japan, at the rate specified in Section 5(a). 2) Retirement with Surviving Spouse Benefit. At the option of MATSUI, and subject to his written notice of such election being filed by MATSUI with the Secretary of AFLAC on or before the effective date of retirement, MATSUI may elect to receive for his lifetime a reduced compensation in the amount of ninety percent (90%) of the rate specified in Section 5(a), with the EXH 10.8-2 additional provision that, effective with the calendar month following the death of MATSUI after retirement, AFLAC will pay monthly to the surviving spouse of MATSUI one-half (1/2) of the amount which MATSUI would have received as retirement income had he survived, such survivor's income to be paid for the appropriate period of time shown below: (a) If at the time of MATSUI's death, the surviving spouse is fifty-five (55) years of age or older, then such survivor's benefit shall be paid for the lifetime of the surviving spouse, or (b) If at the time of MATSUI's death, the surviving spouse is younger than 55 years of age, then such survivor's benefit shall be paid only for a maximum period of 20 years from MATSUI's death or until the surviving spouse's earlier death, whichever occurs first. c) ADJUSTMENTS TO RETIREMENT BENEFITS. All retirement benefits paid under Sub-section b) above shall be subject to annual cost-of-living type increases proportionate to any such compensation increases granted each year to the most senior officers of AFLAC-Japan, or, at the option of AFLAC, by any alternate reasonable index of cost-of-living increases. 6. TERMINATION FOR GOOD CAUSE Notwithstanding any other provision of this Agreement, AFLAC shall have the right to terminate MATSUI for good cause at which time AFLAC shall no longer be required to pay any benefits under this Agreement. "Good cause" shall mean: (i) MATSUI's willful and deliberate failure to substantially perform his executive and management duties hereunder for a continuous period of more than sixty (60) days for reasons other than MATSUI's sickness, injury, or disability; (ii) the willful and deliberate conduct by MATSUI which is intended by MATSUI to cause, and which does in fact result in substantial injury or damage to AFLAC; or (iii) the conviction or plea of guilty by MATSUI of a felony crime involving moral turpitude. 7. NON-COMPETITION. As a further condition to the payment of benefits (including retirement benefits), MATSUI agrees that so long as benefits are paid to him by AFLAC he will not, without the prior written consent of the Chief Executive Officer of AFLAC, directly or indirectly render advisory or any other services to, or become employed by, or participate or engage in any business competitive with any of the insurance business activities of AFLAC or its subsidiaries in any states and/or foreign countries in which it or its subsidiaries do business. 8. RIGHTS UNDER OTHER AFLAC RETIREMENT PLANS. In consideration of the benefits contained herein, MATSUI waives any and all rights to participate in any and all other AFLAC or AFLAC-Japan retirement or pension plans. 9. IRREVOCABLE. Upon execution by both parties hereto, the agreement shall be binding on the parties hereto and cannot be amended, modified, suspended, or EXH 10.8-3 supplemented in any respect except by an agreement in writing executed by both parties hereto. 10. SUCCESSORS OF AFLAC. This Agreement shall be binding upon any successor to AFLAC and such successor shall be deemed substituted for AFLAC for all purposes under this Agreement. 11. CONSOLIDATION OR MERGER. In the event AFLAC consolidates or merges into another corporation which survives the consolidation or merger, it is AFLAC's intent that such surviving corporation shall assume this Agreement, and upon such assumption MATSUI and the survivor shall become obligated to perform the terms and conditions hereof and the term "AFLAC" as used in this Agreement shall be deemed to refer to such survivor. 12. ARBITRATION. Matters not specifically mentioned herein shall be resolved upon mutual consultation in accordance with the principles of good faith and trust. Any unresolved dispute arising out of or relating to this Agreement or controversy relating to the interpretation or breach hereof shall be settled by arbitration at a mutually agreeable location in the United States in accordance with the commercial arbitration rules of the American Arbitration Association. 13. APPLICABLE LAW. This Agreement is intended to and shall be governed by the laws of the State of Georgia. 14. ENTIRE AGREEMENT. This Agreement shall supersede any other contract of employment or retirement, whether oral or in writing, between AFLAC and MATSUI. IN WITNESS WHEREOF, AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS has caused this Agreement to be executed in its corporate name and by its officers thereto fully authorized, this 27th day of October, 1994, in the State of Georgia. /s/ Hidefumi Matsui AMERICAN FAMILY LIFE - -------------------------(L.S.) ASSURANCE COMPANY OF HIDEFUMI MATSUI COLUMBUS, GEORGIA (AFLAC) /s/ Kriss Cloninger - -------------------------(L.S.) WITNESS BY: /s/ Daniel P. Amos -------------------------- DANIEL P. AMOS, CEO ATTEST: /s/ Joey M. Loudermilk -------------------------- JOEY M. LOUDERMILK Secretary EXH 10.8-4 EX-10.9 5 PURDOM AGREEMENT EXHIBIT 10.9* STATE OF GEORGIA, COUNTY OF MUSCOGEE: EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 25th day of October, 1994, by and between AMERICAN FAMILY LIFE ASSURANCE COMPANY OF COLUMBUS (AFLAC), a Georgia corporation, hereinafter referred to as "Company," and DR. E. STEPHEN PURDOM, a resident of said State and County, hereinafter referred to as "Employee;" W I T N E S S E T H T H A T: WHEREAS, Company and Employee desire to enter into an Employment Agreement and to set forth the terms and conditions of Employee's employment as an executive employee by Company as its Executive Vice Present; NOW, THEREFORE, the parties, for and in consideration of the mutual covenants and agreements hereinafter contained, do contract and agree as follows, to-wit: 1. PURPOSE AND EMPLOYMENT. The purpose of this Agreement is to define the relationship between Company as an employer and Employee as an employee and Executive Vice President of the Company. 2. DUTIES. Employee agrees to provide executive management services as Executive Vice President of Company to Company and its subsidiaries and affiliates on a full-time and exclusive basis; provided, however, nothing shall preclude Employee from engaging in charitable and community affairs or managing his own or his family's personal investments. 3. PERFORMANCE. Employee agrees to devote all necessary time and his best efforts in the performance of his duties as Executive Vice President of Company on behalf of Company and its subsidiaries and affiliates. 4. TERM. The term of employment under this Agreement shall begin October 25, 1994, and shall continue for a period of three (3) years until October 24, 1997, unless extended or sooner terminated as hereinafter provided. On an annual basis beginning effective October 25, 1995, the scheduled term of this Agreement shall be extended for successive one year periods unless written notice of termination is given prior to such annual date by one party to the other party that the Agreement will not be extended by its terms. 5. BASE SALARY. For all the services rendered by Employee, Company shall continue to pay Employee a base salary of Three Hundred Thousand Dollars ($300,000.00) per year commencing October 25, 1994, said salary to be payable in accordance with Company's normal payroll procedures. Employee's base salary may be increased annually during the term of this Agreement and any extensions hereof as determined by the Compensation Committee of the Board of Directors. 6. ADJUSTMENTS TO BASE SALARY. Company and Employee shall, from time to time, reflect increases in Employee's base salary as provided for in Paragraph 5 by entering the change on the "Schedule of Compensation," as EXH 10.9-1 shown by the form attached hereto as Exhibit "A" and made a part hereof. If an increase in compensation is entered on said Schedule and duly signed by the proper officers of Company and by Employee, said entry shall constitute an amendment to this Employment Agreement as of the date of said entry and shall supersede the base salary provided for in Paragraph 5 and any other increases in Employee's base salary previously entered on said Schedule. 7. MANAGEMENT INCENTIVE PLAN. In addition to the base salary paid to Employee in accordance with Paragraph 5, Company shall, for each calendar year of Employee's employment by Company, beginning with the calendar year 1994, continue to pay Employee, as performance bonus compensation, an amount determined each year under Company's current Management Incentive Plan (short-term Incentive Program) with a target level based on at least fifty percent (50%) of base salary. Nothing in this paragraph shall preclude Employee from receiving additional discretionary bonuses approved by the Chief Executive Officer or the Board. 8. EMPLOYEE BENEFITS. Employee shall be eligible to participate with other employees of the Company in all fringe benefit programs applicable to employees generally which may be authorized and adopted from time to time by the Board, including without limitation: a qualified pension plan, a profit sharing plan, a disability income or sick pay plan, a thrift and savings plan, an accident and health plan (including medical reimbursement and hospitalization and major medical benefits), and a group life insurance plan. In addition, Company shall furnish to Employee such other "fringe" or employee benefits as are provided to key executive employees of Company and such additional employee benefits which the Compensation Committee of the Board shall determine to be appropriate to Employee's duties and responsibilities as Executive Vice President of Company, including, without limitation, reimbursement of legal and accounting expenses incurred by Employee in connection with the preparation of his employment or other agreements with Company and any expenses for legal, accounting or financial services incurred by Employee in connection with his employment. 9. STOCK OPTION PLANS. Employee shall be eligible to be awarded stock options to purchase Company's common stock under Company's Stock Option Plans for selected key employees and directors during the term of this Agreement. 10. WORKING FACILITIES AND EXPENSES. Employee shall be provided with an office, books, periodicals, stenographic and technical help, ground and air transportation, and such other facilities, equipment, supplies and services suitable to his position and adequate for the performance of his duties. The Company shall pay Employee's fees and dues in such social and country clubs, civic clubs and business societies and associations as shall be appropriate in facilitating Employee's job performance and in the best interest of Company. The Company shall also pay all appropriate business liability insurance and any business licenses and fees pertaining to the services rendered by Employee hereunder. Employee is encouraged and is expected, from time to time to incur reasonable expenses for promoting the business of Company, including expenses for social and civic club memberships and participation, entertainment, travel and other activities associated with Employee's duties. The cost of all such activities shall be the expenses of Company unless the Compensation Committee of the Board shall determine in advance that any such expense of Employee should be paid by Employee. EXH 10.9-2 11. VACATION. Employee shall continue to be entitled to his vacation time with pay during each calendar year in accordance with Company's vacation policy for senior executive employees. In addition, Employee shall be entitled to such holidays as Company shall recognize for its employees generally. 12. SICKNESS AND TOTAL DISABILITY. Employee's absence from work because of sickness or accident (not resulting in Employee becoming "totally disabled," as that term is hereinafter defined) shall not result in any adjustment in Employee's compensation or other benefits under this Agreement. Should Employee become totally disabled as a result of sickness or accident and unable to adequately perform his regular duties prescribed under this Agreement, his base salary (which shall continue to be adjusted as provided for in Paragraph 5), together with incentive bonuses under the Company's Management Incentive Plan and his participation in Company's employee benefit programs and retirement plan shall continue without reduction except as hereinafter provided, during the continuance of such disability of a period not exceeding the earlier of (1) the end of the term of this Agreement or any extension hereof or (2) a period of one and one-half (1-1/2) years (547 calendar days) for each continuous disability. Payments pursuant to this paragraph 12 shall be reduced by any amounts paid to Employee during any such period of disability from time to time under any disability programs, plans or policies maintained by Company, its subsidiaries or affiliates. Should Employee's total disability continue for a period beyond the end of the term of this Agreement or in excess of 547 calendar days, this Agreement shall, at the end of such period which first occurs, be automatically terminated. If, however, prior to such time, Employee's total disability shall have ceased and he shall have resumed the adequate performance of his duties hereunder, this Agreement shall continue in full force and effect and Employee shall be entitled to continue his employment hereunder and to receive his full compensation and other benefits as though he had not been disabled; provided, however, unless Employee shall adequately perform his duties hereunder for a continuous period of at least sixty (60) calendar days following a period of total disability before Employee again becomes totally disabled, he shall not be entitled to start a new 547-day period under this paragraph, but instead may only continue under the remaining portion of the original 547-day period of total disability. In the event Employee shall not adequately perform his duties hereunder for a continuous period of at least sixty (60) calendar days following a period of total disability, the running of the original 547-day period shall cease during the time of Employee's adequate performance of his duties hereunder before Employee again becomes totally disabled. It is understood that for purposes of this Paragraph 12, Employee shall, upon his becoming totally disabled, be given such additional "credited service" if necessary to fully qualify Employee under Company's Supplemental Executive Retirement Plan (SERP) and to provide a survivor annuity to Employee's spouse under the Plan. For the purpose of this Agreement, the term "totally disabled" or "total disability" shall mean Employee's inability to adequately perform his executive and management duties hereunder on account of accident or illness. It is understood that Employee's occasional sickness or other incapacity of short duration may not result in his being or becoming "totally disabled;" EXH 10.9-3 however, such illness or incapacity could constitute Employee's being or becoming "totally disabled" if such illness or incapacity is prolonged or recurring. 13. TERMINATION OF EMPLOYMENT. A. Termination by Company. The Company's Chief Executive Officer may terminate this Agreement, at any time, with or without "good cause" ("good cause" being hereinafter defined), by giving at least sixty (60) days' written notice to Employee of its intention to terminate Employee's employment without "good cause" or at least five (5) days' written notice to Employee of its intention to terminate Employee's employment for "good cause;" provided, however, Company may, at its selection, terminate Employee's actual employment (so that Employee no longer renders services on behalf of Company) at any time during said sixty (60) day or five (5) day period; and, (1) In the event such termination is for "good cause," Company shall be obligated only to: (a) pay Employee his base salary as provided for in Paragraph 5 of this Agreement up to the termination date stated in said written notice; provided, however, if Company does not elect to terminate Employee's employment during said five (5) day period, but Employee, after receiving such notice of termination from Company, elects to leave the employ of Company prior to the end of said five (5) day period without the approval of Company, then Company shall pay said base salary only up to the date on which Employee actually terminates his employment; (b) pay Employee any performance bonus due Employee under Paragraph 7 of this Agreement for the period ending on the termination date stated in said written notice or on such earlier date of Employee's actual termination of his employment prior to the end of said (5) day period if such termination is without the approval of Company. The amount of said bonus, if any, shall be calculated on a prorata basis, using the number of days Employee was actually employed during such period, and the amount so calculated shall be paid to Employee within a reasonable time after the end of Company's fiscal year in which written notice of Employee's termination is given; (c) continue to honor all fully vested stock options, subject to the terms thereof, granted to Employee prior to the termination date stated in said written notice or prior to such earlier date of Employee's actual termination of his employment prior to the end of said five (5) day period if such termination is without the approval of the Company; (d) continue to pay all of Employee's fringe and other employee benefits as provided for in this Agreement up to the termination date stated in said written notice or up to such earlier date of Employee's actual termination of his employment prior to the end of said five (5) day period if such termination is without the approval of the Company. EXH 10.9-4 (e) For purposes of this subparagraph (1) and paragraph 18 hereof, "good cause" shall mean: (i) the willful and deliberate failure of Employee to substantially perform his executive and management duties hereunder for a continuous period of more than sixty (60) days for reasons other than Employee's sickness, injury or disability; (ii) the willful and deliberate conduct by Employee which is intended by Employee to cause, and which does in fact result in substantial injury or damage to Company; or (iii) the conviction or plea of guilty by Employee of a felony crime involving moral turpitude. (2) In the event such termination is without "good cause," as defined in subparagraph (1)(e) of this paragraph and, if applicable, subject to the terms of paragraph 18, Company shall be obligated to: (a) pay employee his base salary as provided for in paragraph 5 of this Agreement up to the end of the scheduled term of this Agreement; (b) pay employee his performance bonus compensation as provided for in paragraph 7 of this Agreement up to the end of the scheduled term of this Agreement; (c) continue to honor all stock options, subject to the terms thereof, granted to Employee prior to the termination date stated in said written notice, all of said options to be or become fully vested as of the termination date stated in said written notice; (d) continue to pay or provide to Employee all of the retirement, health, life and disability benefits, as are provided for in this Agreement or under any programs, plans or policies covering Employee at the time of any such notice of termination, up to the end of the scheduled term of this Agreement, to the extent that continued eligibility or participation for this time period is permitted under the terms of the benefit plans. (e) Company agrees that if Employee's employment is terminated for any reason other than "for good cause," as defined in paragraph (13)(A)(1)(e), Employee shall have the right to participate in the AFLAC Incorporated Employee Health Plan (so long as he meets the eligibility criterion of the Plan) until the earlier of his becoming eligible for coverage under another group plan, becoming eligible for coverage under a government health plan such as Medicare, or his death. Should Employee be terminated for any reason other than good cause, and prior to becoming eligible for coverage under another group health plan or government plan such as Medicare, Employee does not meet eligibility criterion for participation in the AFLAC Incorporated Employee Health Plan, Company shall reimburse to Employee the cost of premiums for purchasing health insurance with comparable coverage and benefits until the earliest of Employee's becoming eligible for coverage under another group health plan, becoming eligible for coverage under a government health plan (such as Medicare), or his death. EXH 10.9-5 B. TERMINATION BY EMPLOYEE. Employee may terminate this Agreement, at any time by giving at least sixty (60) days' written notice to Company of his intention to terminate his employment; (1) in the event such termination by Employee shall be without "good reason" (as defined in paragraph 18 hereof) and with a bona fide intent to retire or to work or engage in a business or activity which is not in competition with Company or any of its subsidiaries or affiliates, Company shall be obligated to: (a) pay Employee his base salary due him under paragraph 5 of this Agreement up to the termination date stated in said written notice; (b) pay Employee any performance bonus compensation due him under paragraph 7 of this Agreement for the period ending on the termination date stated in said written notice. The amount of such performance bonus, if any shall be calculated on a prorata basis, using the number of days Employee was actually employed by Company during such year of termination; and the amount so calculated shall be paid to Employee within a reasonable time after the end of Company's fiscal year in which Employee's notice of termination is given; (c) continue to honor all stock options, subject to the terms thereof, granted to Employee which are fully vested prior to the termination date stated in said written notice; (d) pay Employee, and if elected by Employee, his spouse such retirement benefits, if any, as are provided for in the Supplemental Executive Retirement Plan (SERP) under paragraph 9 hereof, said benefits to commence at such time as provided for under the Retirement Plan. For purposes of this subparagraph, Employee shall continue to accrue "credited service" as Employee under the Supplemental Executive Retirement Plan (SERP) up through the termination date stated in said notice. (2) In the event such termination by Employee shall be for "good reason" (as defined in paragraph 18 hereof), the Company shall be obligated to provide Employee with the payments, benefits and rights specified in subparagraphs A.(2)(a)-(d) of this paragraph 13 hereof. (3) In the event such termination by Employee shall be without "good reason" (as defined in paragraph 18 hereof) and with the intention or purpose to work or invest, directly or indirectly, in a business or activity which is in competition, directly or indirectly, with Company or any of its subsidiaries or affiliates or, irrespective of Employee's intention at the time of his termination, if Employee shall violate his covenant not to compete under paragraph 15 or the requirements of paragraph 16, then Company shall not be obligated to make or provide any further payments or benefits to Employee under this Agreement except as herein provided in this subparagraph. (a) Subject to Company's rights under paragraphs 15 and 16, Company shall pay Employee his base salary due him under paragraph 5 of this Agreement up to the termination date stated in said written notice; EXH 10.9-6 (b) Subject to Company's rights under paragraphs 15 and 16 hereof, Company shall continue to honor all stock options, subject to the terms thereof, granted to Employee which are fully vested prior to the termination date stated in said written notice; C. TERMINATION WHILE DISABLED. If Employee is totally disabled at the time any such notice of termination is given, then notwithstanding the provisions of this paragraph 13, Company shall nevertheless continue to pay Employee, as his sole compensation hereunder, the compensation and other benefits for the remaining period of Employee's total disability as provided for in paragraph 12 hereinabove. It is understood that in no event shall such disabled Employee be entitled to compensation under this paragraph 13 in addition to the continuation of his compensation under paragraph 12. D. COOPERATION AFTER NOTICE OF TERMINATION. Following any such notice of termination, Employee shall fully cooperate with Company in all matters relating to the winding up of his pending work on behalf of Company and the orderly transfer of any such pending work to other employees of Company as may be designated by the Chief Executive Officer; and to that end, Company shall be entitled to such full-time or part-time services of Employee as Company may reasonably require during all or any part of the sixty (60) day period following any such notice of termination. 14. DEATH OF EMPLOYEE. In the event of Employee's death during the term of this agreement or any extension hereof, this Agreement shall terminate immediately, and Employee's estate shall be entitled to receive terminal pay in an amount equal to the amount of Employee's base salary and any performance bonus compensation actually paid by Company to Employee during the last thirty-six (36) months of his life, said terminal pay to be paid in thirty-six (36) equal monthly installments beginning on the first day of the month next following the month during which Employee's death occurs. Terminal pay as herein provided for in this paragraph shall be in addition to amounts otherwise receivable by Employee or his estate under this or any other agreements with Company or under any employee benefits or retirement plans established by Company and in which Employee is participating at the time of his death. In addition, Company shall honor all stock options, subject to the terms thereof, granted to Employee prior to his death and Employee or his Estate shall, if not otherwise vested, become fully vested in said options as of the date of Employee's death. For purposes of this paragraph, Employee shall, upon his death, be given such additional "credited service" as necessary to fully qualify Employee under Company's Supplemental Executive Retirement Plan (SERP) and to provide a survivor annuity to Employee's spouse under the Plan. 15. AGREEMENT NOT TO COMPETE. It is specifically agreed that, in the event Employee shall voluntarily terminate his employment without "good reason" (as defined in Paragraph 18) or be terminated by Company for "good cause" (as defined in Paragraph 13), Employee shall not work for a period of two (2) years from the date of such termination as a manager, officer, owner, partner or employee or render any services as a consultant or advisor or engage or invest, directly or indirectly, in any business activity which is in competition, directly or indirectly, with Company, its subsidiaries or affiliates within the United States of America (excluding any state in which Company, its subsidiaries, and affiliates have not been engaged in business activities within one (1) year prior to the date of Employee's termination of employment), the country of Japan, or within two hundred (200) miles of any EXH 10.9-7 office of Company, its subsidiaries or affiliates outside the United States of America or Japan which was in existence, or in the process of being established, at the time of Employee's termination of employment. Provided, however, it is agreed that Employee may invest in the publicly traded securities of any corporation, partnership or trust which is in competition with Company so long as such investment does not exceed three percent (3%) of such securities at any time. It is specifically agreed that if, after Employee's termination of employment, Employee engages in any such prohibited activity at any time during said two (2) year period, Company shall, in addition to any other rights it may have under this contract and applicable law, be entitled to injunctive relief or, if Company shall so elect (due to the difficulty of determining damages) be entitled to liquidated damages in the amount of Five Hundred Thousand Dollars ($500,000.00) which Employee agrees to promptly pay to Company upon demand. 16. NONDISCLOSURE OF TRADE SECRETS AND CONFIDENTIAL INFORMATION. Employee agrees to protect the business interest of Company, its subsidiaries and affiliates, and not to disclose any trade secrets, confidential information or any organizational, operating, marketing, product design, or business know-how which Employee has access to or knowledge of as a result of his employment by Company. It is specifically agreed that if, at any time during the term of this Agreement and for a period of two (2) years after the date of employee's termination of employment with Company for any reason, Employee shall violate the provisions of this paragraph 16, Company shall, in addition to any rights it may have under this contract and applicable law, be entitled to liquidated damages of Five Hundred Thousand Dollars ($500,000.00) which Employee agrees to promptly pay Company upon demand. It is understood and agreed that Company's remedies under this paragraph 16 shall be separate and in addition to the remedies provided to Company under paragraph 15 hereof. It is also understood and agreed that, notwithstanding the foregoing two (2) year period, Employee shall not use or disclose any written confidential information or any policyholder lists at any time or times hereafter, except in the performance of Employee's obligations to the Company. 17. RIGHT TO ACQUIRE INSURANCE. If Employee shall terminate his employment hereunder for any reason other than death, he may, at his election, acquire any insurance policies upon his life owned by the Company by giving written notice of his election to Company within ninety (90) days after his termination of employment. Such policies shall be transferred to the Employee upon his payment to Company of the then interpolated terminal reserve value of said insurance. In the event any policies transferred to Employee as herein provided shall not have an interpolated terminal reserve value, then the amount to be paid by Employee shall be its then fair market value. 18. CHANGE IN CONTROL. A. IN GENERAL. In the event there is a Change in Control (as defined in this paragraph) of Company, this Agreement shall, in order to help eliminate the uncertainties and concerns which may arise at such time, be automatically extended upon all of the same terms and provisions contained herein, for an additional period of three (3) years, beginning on the first day of the month during which such Change in Control shall occur. B. Notwithstanding the term of subparagraph A(2) and (B)(2) of Paragraph 13, and in lieu of the obligations of the Company under such EXH 10.9-8 paragraph, if, after a Change in Control Employee's employment is terminated by Company without "good cause" (as defined in paragraph 13), or is terminated by Employee for "good reason" (as defined in paragraph 18), any such termination by Company to be made only in accordance with the requirements specified by paragraph 13.A, Employee shall be entitled to the following: (1) The Company shall pay Employee's full base salary to Employee through the date of termination stated in Company's written notice required pursuant to paragraph 13.A hereof (hereinafter in this paragraph the "Termination Date") at the rate in effect on the date such notice is given and, additionally, shall pay Employee all compensation and benefits payable to Employee under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period through the Termination Date. (2) The Company shall pay Employee all compensation and benefits due Employee under Company's retirement, insurance and other compensation or benefit plans, programs of arrangements as such payments become due. The amount of such compensation and benefits shall be determined under, and paid in accordance with, Company's retirement, insurance and other compensation or benefit plans, programs and arrangements. (3) In lieu of any further salary payments to Employee for periods subsequent to the Termination Date, the Company shall pay to Employee, immediately after the Termination Date, a lump sum severance payment, in cash, equal to three times the sum of (i) Employee's annual base salary in effect immediately prior to the Change in Control and (ii) the higher of the amount paid to Employee pursuant to the Company's Management Incentive Plan (or any successor plan thereto) for the year preceding the year in which the Termination Date occurs or paid in the year preceding the year in which the Change in Control occurs. (4) The Company shall pay to Employee, immediately after the Termination Date, a lump sum amount, in cash, equal to a prorata portion (based on the number of days Employee is an employee during the year in which the Termination Date occurs) of the aggregate value of the maximum annual target amount of all contingent incentive compensation awards to Employee for all uncompleted periods under the Company's Management Incentive Plan (or successor plan thereto). (5) For a thirty-six (36) month period after the termination date, the Company shall provide Employee with life, disability, accident and health insurance benefits substantially similar to an equal or greater in economic value than such benefits which Employee is receiving immediately prior to the Termination Date (without giving effect to any reduction in such benefits subsequent to a Change in Control which reduction in benefits would constitute "good reason" as defined in this paragraph). Benefits required to be provided to Employee pursuant to this subparagraph B(5) shall be reduced to the extent comparable benefits are actually received by or made available to Employee without cost during such thirty-six (36) month period and any such benefit actually received by Employee shall be reported to the Company by Employee. C. In addition to the payments provided for in subparagraph B of this paragraph 18, in the event that after a Change in Control Employee's employment by the Company is terminated by the Company without "good cause" EXH 10.9-9 or by Employee for "good reason," the Company shall continue to honor all stock options granted to Employee (subject to the terms of such options) prior to the Termination Date, and all stock options granted to Employee prior to the Termination Date shall become fully vested and exercisable as of the Termination Date. D. Notwithstanding any other provisions of this Agreement in the event that any payment or benefit received or to be received by Employee in connection with a Change in Control or the termination of Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Corporation or such person) (all such payment and benefits being hereinafter called "Total Payments") would not be deductible (in whole or in part) by the Company, an affiliate or person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986 (the "Code") then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payment provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), adjustments in such payments shall be made as follows: (1) the cash payments provided pursuant to subparagraph B(3) and B(4) of this paragraph 18 shall first be reduced (if necessary, to zero), and (2) benefits provided under subparagraph B(5) of this paragraph 18 shall next be reduced. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing prior to the date of termination of employment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Corporation's independent auditors and reasonably acceptable to Employee does not constitute a "parachute payment" within the meaning of Section 280G(b) (2) of the Code, including by reason of Section 280G(b) (4) (A) of the Code, (iii) the payments and benefits be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b) (4) (B) of the Code or are otherwise not subject to disallowance as deductions, (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d) (3) (4) of the Code. In no event shall the Company's obligation to continue to honor all stock options granted to Employee prior to the Termination Date nor the vesting of stock options in accordance with Paragraph 18.C. hereof be affected by this Paragraph 18.D. E. DEFINITIONS. (1) "Beneficial Owner" has the meaning provided in Rule 13d-3 under the Exchange Act. (2) "Change in Control" means the occurrence of either (a), (b), (c) or (d), as hereinafter set forth: (a) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company, subsidiaries or its affiliates) representing 30% or more of the combined voting power of the Company's then outstanding securities; or EXH 10.9-10 (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this subparagraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the members of the Board (or, if Board nominations are not voted on by the full Board, members of the Board Committee voting on such nominations) then still in office who either were members of the Board at the beginning of the period or whose election or nomination for elections was previously so approved, cease for any reason to constitute a majority of the Board; or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities or the surviving trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (3) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (4) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d) and 14(d) of the Exchange Act; however, a person shall not include (a) the Company or any of its subsidiaries, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the corporation or any of its subsidiaries, (c) an underwriter temporarily holding securities pursuant to an offering of such securities, or (d) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (5) "Good reason" shall mean the termination of employment by Employee upon the occurrence of any one or more of the following events: (a) Any breach by Company of the terms and conditions of this Agreement affecting Employee's salary and bonus compensation, any employee benefit, stock options or the loss of any of Employee's titles or positions with Company; EXH 10.9-11 (b) A significant diminution of Employee's duties and responsibilities; (c) the assignment to Employee of any duties inconsistent with or significantly different from his duties and responsibilities existing at the time of a Change in Control. (d) Any purported termination of Employee's employment by Company other than as permitted by this Agreement; (e) The relocation of Company's principal office or of Employee's own office to any place beyond twenty-five (25) miles from the current principal office of Company in Columbus, Georgia; (f) The failure of any successor to Company to expressly assume and agree to discharge Company's obligations to Employee under this Agreement as extended under this paragraph, in form and substance satisfactory to Employee. F. CONTINUATION OF COMPENSATION AND BENEFITS. If Company shall attempt to terminate Employee's employment at any time after a change in Control and such termination is in good faith disputed by Employee, Company shall continue to pay Employee all of his compensation and benefits provided for in this Agreement until the dispute is finally resolved, either by mutual written agreement or by final judgment, order or decree of a court of competent jurisdiction. 19. NO REQUIREMENT TO SEEK EMPLOYMENT AND NO OFFSET. Company agrees that, if Employee's employment is terminated by Corporation during the term of this Agreement or by Employee for "good reason" during the term of this Agreement, Employee is not required to seek other employment or attempt in any way to reduce the amounts payable to Employee by Company pursuant to the applicable terms of this Agreement; it being understood and agreed that the amount of any payment or benefit to Employee provided for hereunder shall not be reduced by any compensation or other benefits earned by Employee as a result of his employment by another employer or, after a Change in Control, by Company's attempt to offset any amount claimed to be owed by Employee to Company or otherwise. 20. WAIVER OF BREACH OR VIOLATION NOT DEEMED CONTINUING. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach hereof. 21. NOTICES. Any and all notices required or permitted to be given under this Agreement will be sufficient if furnished in writing, sent by registered or certified mail to his last known residence in the case of Employee or to its principal office in Columbus, Georgia, in the case of the Company. 22. AUTHORITY. The provisions of this Agreement required to be approved by the Board of Directors of Company has been so approved and authorized. 23. ARBITRATION. Except for any dispute or matter arising after a Change in Control, as defined in paragraph 18, any dispute arising under this Agreement, to the maximum extent allowed by applicable law, shall be subject EXH 10.9-12 to arbitration and prior to commencing any court action, the parties agree that they shall arbitrate all controversies. The arbitration shall be pursuant to the terms of the Federal Arbitration Act. The parties shall notify each other of the existence of an arbitrable controversy by certified mail and shall attempt in good faith to resolve their differences within fifteen (15) days after the receipt of such notice. Notice to Employee shall be sent to Employee's address as it appears in Company's records and notice to Company shall be sent to: Arbitration Officer, American Family Life Assurance Company of Columbus (AFLAC), AFLAC Worldwide Headquarters, Columbus, Georgia, 31999. If the dispute cannot be resolved within said fifteen (15) day period, either party may file a written demand for arbitration with the other party. The party filing such demand shall simultaneously specify his or its arbitrator, giving the name, address and telephone number of said arbitrator. The party receiving such notice shall notify the party demanding the arbitration of his or its arbitrator giving the name, address, and telephone number of said arbitrator within five (5) days of the receipt of such demand. The arbitrator named by the respective parties need not be neutral. The Senior Judge of the Superior court of Muscogee County, Georgia, on request by either party, shall appoint a neutral person to serve as the third arbitrator and shall also appoint an arbitrator for any party failing or refusing to name his arbitrator within the time herein specified. The arbitrators thus constituted shall promptly meet, select a chairperson, fix the time and place of the hearing, and notify the parties. The majority of the panel shall render an award within ten (10) days of the completion of the hearing, and shall promptly transmit an executed copy of the award to the respective parties. Such an award shall be binding and conclusive upon the parties hereto, in the absence of fraud or corruption. Each party shall have the right to have the award made the judgment of the court of competent jurisdiction. 24. GOVERNING LAW. This Agreement shall be interpreted, construed and governed according to the laws of the State of Georgia. 25. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for convenience only and shall in no manner be construed as part of this Agreement. 26. TWO ORIGINALS. This Agreement is executed in two (2) originals, each of which shall be deemed an original and together shall constitute one and the same Agreement, with one original being delivered to each party hereto. EXH 10.9-13 IN WITNESS WHEREOF, Company has hereunto caused its name to be signed and its seal to be affixed by its duly authorized officers, and Employee has hereunto set his hand and seal, all being done in duplicate originals, with one original being delivered to each party as of the 25th day of October, 1994. /s/ Dr. E. Stephen Purdom (L.S.) AMERICAN FAMILY LIFE - ------------------------------ ASSURANCE COMPANY OF DR. E. STEPHEN PURDOM COLUMBUS, GEORGIA EMPLOYEE BY: /s/ Daniel P. Amos ------------------------------ DANIEL P. AMOS CHIEF EXECUTIVE OFFICER ATTEST: /s/ Joey M. Loudermilk ------------------------------ JOEY M. LOUDERMILK SECRETARY EXH 10.9-14 EX-13 6 FINANCIALS EXHIBIT 13 EXHIBIT 13 The following information is contained in the 1994 Annual Report to Shareholders. The required information incorporated by reference to the preceding pages of this 1994 Form 10-K have been reproduced herein as Exhibit 13 for purposes of electronic filing of this Form 10-K. PART II ITEM 5. (a) Market Information: The Company's common stock is principally traded on the New York Stock Exchange. The Company is also listed on the Pacific Stock Exchange and the Tokyo Stock Exchange. The high, low and closing quarterly sales prices for the Company's common stock, as published in the U.S. consolidated transaction reporting system, for the last three fiscal years ended December 31, 1994, are as follows: Quarterly Common Stock Prices 1994 High Low Close - -------------------------------------------------------------------- 4th Quarter $ 34.38 $ 32.00 $ 32.00 3rd Quarter 36.13 32.50 34.13 2nd Quarter 34.88 29.00 33.75 1st Quarter 31.88 25.25 30.75 1993 - -------------------------------------------------------------------- 4th Quarter $ 32.75 $ 24.75 $ 28.50 3rd Quarter 34.00 27.88 32.25 2nd Quarter 32.20 27.60 28.38 1st Quarter 29.50 26.40 28.80 1992 - -------------------------------------------------------------------- 4th Quarter $ 27.90 $ 23.50 $ 27.60 3rd Quarter 27.20 23.00 25.20 2nd Quarter 24.30 19.20 24.20 1st Quarter 26.30 21.50 22.00 EXH 13-1 ITEM 5. (b) Holders: 1994 1993 1992 - --------------------------------------------------------------------------- Number of common shares outstanding 99,636,431 103,471,417 103,014,646 Number of registered common shareholders 34,628 27,866 24,474 Approximate number of common shareholders 67,500 51,500 43,800 ITEM 5. (c) Quarterly cash dividends: 1994 1993 ------ ------ 4th Quarter $.115 $.10 3rd Quarter .115 .10 2nd Quarter .115 .10 1st Quarter .10 .088 For information concerning dividend restrictions, see Management's Discussion and Analysis of Financial Condition, the section concerning the balance sheet, presented in this Exhibit 13 on page 13-14, and Note 10, Statutory Accounting and Dividend Restrictions, of the Notes to the Consolidated Financial Statements, also presented in this Exhibit 13 on page 13-45. EXH 13-2 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except for per share):
For the Year 1994 1993 1992 1991 1990 Revenues: Premiums, principally supplemental health $ 5,180,732 $ 4,225,390 $ 3,369,201 $ 2,765,349 $ 2,259,122 Net investment income 838,825 689,272 533,166 431,315 340,966 Realized investment gains (losses) (58) 2,937 (3,264) (1,451) 407 Other income 91,259 83,019 87,369 87,456 77,859 ---------- ---------- ---------- ---------- ---------- Total revenues 6,110,758 5,000,618 3,986,472 3,282,669 2,678,354 ---------- ---------- ---------- ---------- ---------- Benefits and expenses: Benefits and claims 4,256,541 3,423,297 2,692,353 2,188,817 1,759,191 Expenses 1,349,881 1,148,937 969,575 829,160 702,763 ---------- ---------- ---------- ---------- ---------- Total benefits and expenses 5,606,422 4,572,234 3,661,928 3,017,977 2,461,954 ---------- ---------- ---------- ---------- ---------- Pretax earnings 504,336 428,384 324,544 264,692 216,400 Income taxes 211,546 184,495 141,177 116,008 99,214 ---------- ---------- ---------- ---------- ---------- Net earnings $ 292,790 $ 243,889(1)$ 183,367 $ 148,684 $ 117,186 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------ Per Common Share Net earnings $ 2.84 $ 2.32(1)$ 1.79 $ 1.46 $ 1.15 Cash dividends .445 .388 .344 .296 .264 Shareholders' equity 17.58 13.20 10.50 9.04 7.77 Price range: High $ 36.13 $ 34.00 $ 27.90 $ 24.90 $ 15.40 Low 25.25 24.75 19.20 14.30 9.70 Close 32.00 28.50 27.60 23.90 15.30 Price/earnings ratio:* High 12.7x 14.8x 15.6x 17.1x 13.4x Low 8.9 10.8 10.7 9.8 8.4 Common shares used for EPS 103,101 105,201 102,544 101,980 101,719 - ------------------------------------------------------------------------------------------------------------------ At Year-End Assets: Investments and cash $15,993,768 $12,469,140 $ 9,461,341 $ 8,056,657 $ 6,269,478 Other 4,293,311 2,973,546 2,440,033 2,087,843 1,765,354 ---------- ---------- ---------- ---------- ---------- Total assets $20,287,079 $15,442,686 $11,901,374 $10,144,500 $ 8,034,832 ========== ========== ========== ========== ========== Liabilities and shareholders' equity: Policy liabilities $16,006,607 $12,065,471 $ 9,350,241 $ 7,877,941 $ 6,202,912 Notes payable 184,901 122,062 125,800 138,810 157,738 Income taxes, primarily deferred 1,392,441 950,278 848,514 768,515 684,118 Other liabilities 951,363 939,251 494,937 435,745 199,098 Shareholders' equity 1,751,767 1,365,624 1,081,882 923,489 790,966 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $20,287,079 $15,442,686 $11,901,374 $10,144,500 $ 8,034,832 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------ EXH 13-3 Supplemental Data Operating earnings** $ 293,053 $ 241,654(1) $ 183,426 $ 148,076 $ 116,976 Operating earnings per share** $ 2.84 $ 2.30(1) $ 1.79 $ 1.46 $ 1.15 Pretax profit margin** 8.3% 8.5% 8.2% 8.1% 8.1% After-tax profit margin** 4.8% 4.8%(1) 4.6% 4.5% 4.4% Operating return on equity*** 20.4% 19.9%(1) 18.4% 17.3% 15.7% Yen/dollar exchange rate at year-end 99.85 112.00 124.70 125.25 134.60 Average yen/dollar exchange rate 102.26 111.21 126.67 134.52 144.83 Notes: (1) Excludes gain of $11,438 ($.11 per share) from cumulative effect of accounting changes in 1993; (*) Based on operating earnings. (**) Excludes realized investment gains/losses, net of tax. (***)Excludes realized investment gains/losses and unrealized gains on securities available for sale, net. For segment and foreign information, see Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 2 of Notes to the Consolidated Financial Statements.
EXH 13-4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AFLAC Incorporated (the "Parent Company") and its subsidiaries (the "Company") achieved record-setting results during each of the three years from 1992 through 1994. The Company's primary business activity 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. The following discussion of earnings comparisons excludes a gain of $11.4 million, or $.11 per share, from the cumulative effect of accounting changes from the required adoption of three new Statements of Financial Accounting Standards (SFAS) in the first quarter of 1993. For additional information on these accounting changes, see Note 1 of Notes to the Consolidated Financial Statements. EXH 13-5 RESULTS OF OPERATIONS The following table sets forth the pretax operating earnings by business components for the periods shown and the percentage change from the prior periods. SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT (In millions) Percentage change Years ended over previous year December 31, ------------------ ------------------------ 1994 1993 1994 1993 1992 ------------------ ------------------------ Insurance operations(excluding realized investment gains and losses): AFLAC Japan.............. 18.2% 25.6% $471.4 $398.9 $317.7 AFLAC U.S................ 20.1 20.1 90.2 75.1 62.5 Other foreign ........... (1.5) (7.8) (13.8) ----- ----- ----- Total insurance 20.1 27.2 560.1 466.2 366.4 Realized investment gains (losses)............ (.1) 2.9 (3.3) Broadcast division......... 28.1 .8 17.2 13.4 13.3 Interest expense, noninsurance operations... (9.9) (8.1) (8.5) Capitalized interest, building construction..... 2.4 8.8 4.5 Parent company, other operations and eliminations.............. (19.2) (14.3) (65.4) (54.8) (47.9) ----- ----- ----- Earnings before income taxes and cumulative effect of accounting changes................. 17.7 32.0 504.3 428.4 324.5 Income taxes............... 14.7 30.7 211.5 184.5 141.1 ----- ----- ----- Earnings before cumulative effect of accounting changes................. 20.1 33.0 292.8 243.9 183.4 Cumulative effect of accounting changes........ - 11.4 - ----- ----- ----- Net earnings............. $292.8 $255.3 $183.4 ===== ===== ===== EXH 13-6 Net earnings before the cumulative effect of accounting changes increased in each of the three years from 1992 to 1994. The increases reflected strong earnings from our core insurance operations in Japan and the U.S., reduced losses in other foreign operations in 1994 and 1993, improved earnings in the AFLAC Broadcast Division in 1994, an expanded profit margin at AFLAC U.S. due partially to additional investment income from profit repatriations, and reduced income tax expense in 1994 resulting from a tax rate reduction in Japan. Partially offsetting the increases were higher loss ratios for AFLAC Japan and higher corporate expenses. Additionally, 1994 net earnings were unfavorably affected by increased interest expense from the Company's stock repurchase program and less capitalized interest on construction of the Company's administrative office building in Japan. The increases in reported results in U.S. dollars for AFLAC Japan and consolidated earnings from 1992 through 1994 were aided by favorable currency translations from yen to dollars. The continued strength of the Japanese yen caused our yen-based earnings to be translated for reporting purposes into a greater amount of dollars during the three-year period when compared with the results for each preceding year. The strengthening of the yen benefited operating earnings (excluding realized investment gains/losses) by approximately $.19 per share in 1994, $.24 per share in 1993 and $.08 per share in 1992. Excluding the benefit of the stronger yen, operating earnings per share increased 15.2%, 15.1% and 17.1% for the years ended December 31, 1994, 1993 and 1992, respectively. AFLAC Japan's pretax operating earnings (excluding realized investment gains/losses) in yen increased 8.5%, 10.2% and 13.1% for the years ended December 31, 1994, 1993 and 1992, respectively. The reported U.S. dollar results for AFLAC Japan were affected by the increasingly favorable cumulative-average yen-to-dollar exchange rates of 102.26 in 1994, 111.21 in 1993 and 126.67 in 1992. As a result, percentage increases in U.S. dollars for AFLAC Japan's pretax operating earnings were 18.2% in 1994, 25.6% in 1993 and 20.0% in 1992. During the last three years, the Company's pretax operating earnings have benefited from the capitalization of interest costs of $2.4 million in 1994, $8.8 million in 1993 and $4.5 million in 1992 associated with the construction of an administrative office building in Japan. Capitalization of interest ceased at the end of the first quarter of 1994 due to the completion of the building. Consolidated interest expense before such capitalization was $13.5 million in 1994, $10.6 million in 1993 and $10.4 million in 1992. Interest expense for 1994 includes $2.6 million related to the share repurchase program. AFLAC Japan repatriated profits to AFLAC U.S. of $132.9 million in 1994, $97.9 million in 1993 and $33.4 million in 1992. The profit transfers to AFLAC U.S. adversely impact AFLAC Japan's investment income. However, repatriation benefits 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 that these transfers during 1992 through 1994 have benefited consolidated net earnings by $7.4 million in 1994, $3.3 million in 1993 and $.8 million in 1992. The Company's effective income tax rates were 41.9% in 1994, 43.1% in 1993 and 43.5% in 1992. During the first quarter of 1994, the Japanese government enacted new tax legislation that terminated the extension of a EXH 13-7 temporary special corporate tax of .9% on taxable income in Japan. This tax was previously scheduled to expire at December 31, 1994. This tax rate reduction decreased income tax expense by approximately $4.0 million for 1994. The other changes in the effective tax rates for the three-year period from 1992 through 1994 were principally due to changes in the mix of the contributions from the Company's business components. Most of the Company's income tax expense represented Japanese income taxes on AFLAC Japan's operating results, which were taxed at Japan's corporate income tax rate of 45.3% for 1994, and 46.2% for both 1993 and 1992. For U.S. income tax purposes, worldwide earnings are taxed under the alternative minimum tax basis at a rate of 20%, less available foreign tax credits. Under the alternative minimum tax basis, the use of foreign tax credits is more restrictive than under the regular tax basis. In February 1994, the board of directors authorized the purchase of up to 4.6 million shares of AFLAC Incorporated common stock on the open market. As of December 31, 1994, 4.2 million shares had been purchased under the buyback program. The program increased 1994 earnings per share by an immaterial amount. In early 1995, the board of directors authorized the purchase of an additional 4.6 million shares. INSURANCE OPERATIONS, 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. AFLAC Japan transferred profits to AFLAC U.S. in the amounts of $132.9 million in 1994, $97.9 million in 1993 and $33.4 million in 1992. These transfers distorted comparisons of operating results between years. The AFLAC Japan summary of operations table on the following page presents investment income, total revenues and pretax operating earnings calculated on a pro forma basis in order to improve comparability between years. The pro forma adjustment represents cumulative investment income foregone by AFLAC Japan on funds repatriated to AFLAC U.S. during 1992 through 1994. EXH 13-8 AFLAC JAPAN SUMMARY OF OPERATING RESULTS In Dollars (In millions) 1994 1993 1992 ----------------------------------- Premium income.................... $4,370.7 $3,484.0 $2,681.9 Investment income, as adjusted*... 766.0 622.4 472.3 Other income 2.8 1.8 1.4 ------- ------- ------- Total revenues, as adjusted*..... 5,139.5 4,108.2 3,155.6 ------- ------- ------- Benefits and claims............... 3,752.8 2,957.4 2,257.4 Operating expenses................ 902.9 746.7 579.5 ------- ------- ------- Total benefits and expenses 4,655.7 3,704.1 2,836.9 ------- ------- ------- Pretax operating earnings, as adjusted*...................... 483.8 404.1 318.7 Investment income applicable to profit repatriations............. (12.4) (5.2) (1.0) ------- ------- ------- Pretax operating earnings....... $ 471.4 $ 398.9 $ 317.7 ======= ======= ======= - ------------------------------------------------------------------------ In Dollars In Yen 1994 1993 1992 1994 1993 1992 -------------------- -------------------- Percentage increases over previous year: Premium income....... 25.5% 29.9% 24.9% 15.4% 14.1% 17.6% Investment income*... 23.1 31.8 25.3 13.1 15.7 18.0 Total revenues*...... 25.1 30.2 24.9 15.0 14.3 17.7 Pretax operating earnings*........... 19.7 26.8 20.4 10.0 11.3 13.5 Pretax operating earnings............ 18.2 25.6 20.0 8.5 10.2 13.1 - ------------------------------------------------------------------------ In Dollars 1994 1993 1992 ------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims................ 73.0% 72.0% 71.5% Operating expenses................. 17.6 18.2 18.4 Pretax operating earnings.......... 9.4 9.8 10.1 Ratio of pretax operating earnings to total reported revenues......... 9.2 9.7 10.1 ======================================================================= * Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $12.4 million in 1994, $5.2 million in 1993 and $1.0 million in 1992, foregone due to profit repatriations. EXH 13-9 The percentage increases in premium income in yen reflect the growth of premiums in force. The increases in annualized premiums in force of 14.5% in 1994, 13.2% in 1993 and 15.9% in 1992 reflect the high persistency of our business, sales of new policies and conversions of existing policies to policies with higher benefits and premiums. New annualized premiums from sales and conversions were: $680.9 million in 1994, up 18.2% (10.0% in yen); $576.1 million in 1993, up 6.3% (a decline of 7.5% in yen); and $542.2 million in 1992, up 17.5% (10.3% in yen). Sales in the first half of 1994 were strong due to intensified efforts by our sales associates to sell the cancer policy before a scheduled premium rate increase. As anticipated, sales leveled out in the second half of the year. The 1993 decline in new annualized premium sales in yen principally resulted from a slowdown in the conversion program of older cancer plans to the Super Cancer plan. Management believes sales during the last three years have also been affected by reduced consumer disposable income resulting from the troubled Japanese economy. The Super Cancer plan, which was introduced in 1990, accounted for 65.6% of cancer insurance premiums in force at December 31, 1994, compared with 55.9% and 44.1% at December 31, 1993 and 1992, respectively. Total new annualized premiums from cancer policy sales and conversions, and percentage changes from the prior year, were: $561.1 million in 1994, up 20.4% (12.3% in yen); $466.2 million in 1993, down 3.7% (a decline of 16.2% in yen); and $484.2 million in 1992, up 17.1% (10.0% in yen). A scheduled premium rate increase for the Super Cancer product was effective in July 1994. The increase raised average premium rates approximately 16% on all cancer insurance policies sold after July 1, 1994. Since the premium increases apply to new policies only, the Company does not expect any adverse impact on persistency of existing policies. New annualized premiums from the sale of Super Care policies totaled $114.5 million in 1994, or 18.1% of new annualized premium sales, compared with $105.2 million in 1993 and $34.0 million in 1992. Super Care sales for 1994 in yen were flat compared with 1993, due to the emphasis sales associates placed on selling cancer policies before the rate increase. Super Care policies accounted for 4% of total annualized premiums in force as of December 31, 1994. The premiums on Super Care new issues were increased by an average of 10% in November 1993. The Company anticipates implementing a similar increase in the fourth quarter of 1995. The Company has filed two new products for approval and introduction in 1995. The first product is a medical expense policy similar to a U.S. hospital indemnity policy. It provides benefits for daily hospital confinement and surgery, as well as a death benefit. The second product is a life insurance product with living benefit features. Investment income, which is affected by available cash flow from operations and investment yields achievable on new investments, continually increased during the three-year period from 1992 to 1994 despite investment yields that have been steadily decreasing. The new money rates were 5.17% for 1994, 5.55% for 1993 and 6.17% for 1992. The cumulative effect of the lower investment yields is reflected in the overall rate of return (net of investment expenses) on AFLAC Japan's average invested assets at amortized cost. This return was 6.00% in 1994, compared with 6.16% in 1993 and 6.22% in 1992. In declining yield environments, the Company may use forward purchase agreements to secure current investment yields. At December 31, 1993, EXH 13-10 outstanding purchase commitments for fixed-maturity securities amounted to $657.5 million, with an average yield to maturity of 4.80%. As of December 31, 1994, there were no forward commitments. Additional investments in AFLAC Japan's dollar-denominated bond portfolio and Euroyen private placements were made during 1994 in an effort to obtain the highest investment yields available within the Company's safety parameters. The Company continued to seek the highest investment yields available in longer-maturity securities without sacrificing investment quality. The weighted average period to maturity of fixed-maturity securities at December 31, 1994, was 10.7 years, compared with 11.0 years at December 31, 1993. Funds available for investment during the three-year period were reduced by the annual profit repatriations discussed above and expenditures of $173.5 million in 1994, $94.4 million in 1993 and $84.3 million in 1992 for the construction of the administrative office building in Tokyo. During the same three-year period, the benefit ratio increased, and the operating expense ratio declined slightly. The increase in the benefit ratio reflects the strengthening of policy liabilities to provide for lower assumed interest rates and the continued increase in claims experience due to fewer policy lapses. The Company's annual claims experience studies continue to support the current reserving assumptions. The Japanese government recently passed a package of tax reform bills centering on an increase in the consumption tax, which is similar to a sales tax in the United States. The consumption tax, which was enacted in 1989, will increase from the current rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently incurs consumption tax on agents' commissions. Had the rate increase been enacted effective January 1, 1994, pretax earnings would have been reduced by approximately $16 million ($9 million after tax). Management is currently exploring means to mitigate the impact of this tax increase. In January 1995, there was a major earthquake in Kobe, Japan. While the earthquake may temporarily disrupt general business conditions, management does not expect a material effect on policy claims or business operations in Japan. Even with Japan's economic slowdown, the Company believes the market for supplemental insurance remains bright. Demand for the Company's products in Japan has continued, and the Company remains optimistic about increasing penetration within existing groups, opening new accounts and developing new supplemental products for the Japanese market. INSURANCE OPERATIONS, AFLAC U.S. AFLAC U.S. pretax operating results were substantially improved by additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. received profit transfers from AFLAC Japan in the amounts of $132.9 million in 1994, $97.9 million in 1993 and $33.4 million in 1992. AFLAC U.S. in turn increased dividend payments to the Parent Company in the amounts of $51.9 million in 1994 and $10.1 million in 1993. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1994 has been reclassified in the presentation on the following page in order to improve comparability between years. EXH 13-11 AFLAC U.S. Summary of Operating Results (In millions) 1994 1993 1992 -------------------------- Premium income......................... $ 792.5 $ 722.5 $ 660.0 Investment income, as adjusted*........ 68.5 62.3 56.4 Other income........................... 1.9 2.7 2.4 ------ ------ ------ Total revenues, as adjusted*.......... 862.9 787.5 718.8 ------ ------ ------ Benefits and claims.................... 490.2 450.7 414.5 Operating expenses..................... 295.3 267.9 243.1 ------ ------ ------ Total benefits and expenses 785.5 718.6 657.6 ------ ------ ------ Pretax operating earnings, as adjusted*........................... 77.4 68.9 61.2 Investment income applicable to profit repatriations.................. 12.8 6.2 1.3 ------ ------ ------ Pretax operating earnings........... $ 90.2 $ 75.1 $ 62.5 ====== ====== ====== - ------------------------------------------------------------------------ Percentage increases over previous year: Premium income....................... 9.7% 9.5% 11.1% Investment income* ................. 10.0 10.4 13.3 Total revenues*...................... 9.6 9.6 10.7 Pretax operating earnings*........... 12.2 12.7 12.8 Pretax operating earnings............ 20.1 20.1 15.3 - ------------------------------------------------------------------------ Ratios to total revenues, as adjusted:* Benefits and claims.................. 56.8% 57.2% 57.7% Operating expenses................... 34.2 34.0 33.8 Pretax operating earnings............ 9.0 8.8 8.5 Ratio of pretax operating earnings to total reported revenues............... 10.3 9.5 8.7 ======================================================================= *Excludes estimated investment income of $12.8 million in 1994, $6.2 million in 1993 and $1.3 million in 1992 related to investment of profit repatriation funds retained by AFLAC U.S. The results continue to reflect slightly lower benefit ratios, principally due to the mix of business shifting towards accident policies, which 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 policyholder benefits. In addition, potential minimum benefit ratio requirements by insurance regulators may also increase the ratio. EXH 13-12 At the same time, management expects the operating expense ratio, excluding discretionary advertising, to decline in the future due to continued improvements in policy persistency and 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 $14.1 million in 1994, $11.2 million in 1993 and $9.9 million in 1992, or 1.6% of revenues in 1994, and 1.4% of revenues in both 1993 and 1992. Management expects the pretax operating profit margin, which was 9.0% excluding the effect of repatriation in 1994, to remain approximately the same in 1995. The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force of 9.1% in 1994, 10.0% in 1993 and 11.9% in 1992 were favorably affected by an improvement in the persistency for several lines of our business, increased sales through Section 125 plans (commonly known as "cafeteria plans"), our product-broadening program and expanding affiliations with insurance brokers. New annualized premiums from sales and conversions were $245.8 million in 1994, $229.0 million in 1993 and $206.1 million in 1992. The percentage increases of new annualized premiums from sales and conversions were 7.3% in 1994, 11.1% in 1993 and 20.0% for 1992. Growth in new sales for the year fell short of the goal of 10% due primarily to a 24.6% decline in sales of our lower-margin Medicare supplement policy. However, sales in our core market, payroll-deduction accounts, remained strong throughout the year. Sales of payroll-deduction products rose 13.1% for the year, led by a substantial increase in accident policy sales. The Company continues to monitor developments in the U.S. Congress concerning possible changes to the U.S. health care system. No action on health care reform was taken in 1994; however, some of the 1994 proposals included provisions that could have unfavorably affected the Company's tax expense, product design and marketing techniques in the United States. Management believes that a more limited approach to health care reform will be on the legislative calendar in 1995. The future of health care reform and its impact on AFLAC U.S. cannot be readily predicted at this time. Despite the movement toward managed care in the U.S. health care system, management believes that opportunities for marketing high-quality, affordable supplemental insurance policies in the United States will continue. The Company believes that a reformed health care system will require individuals to assume responsibility for larger portions of their total health care expenses, which should increase the demand for supplemental insurance products. OTHER OPERATIONS The Company's other operations include insurance operations in Taiwan and Canada, and seven network-affiliated television stations located in small to mid-size U.S. markets. In 1992, a decision was made to discontinue the underwriting of credit insurance in the United Kingdom, and in 1993, all sales activity was discontinued. During 1993 and 1992, deferred acquisition costs were written off, and claim and expense liabilities were strengthened for the discontinued insurance products. The U.K. operation is presently in a runoff mode. EXH 13-13 The Broadcast Division's operating results significantly improved in 1994. Broadcast revenues increased 12.5% in 1994 due primarily to increased advertising revenues from the off-year political elections and to an improved U.S. economy. Due to the growth and size of the Company's insurance operations, the Broadcast Division will remain a small part of the Company's overall operating results. The Parent Company's operating expenses consist primarily of corporate overhead expenses such as salary costs, retirement provisions and professional fees. These expenses have increased during the last three years, principally due to both the growth in corporate service activities and increased retirement accruals for certain senior officers and beneficiaries due to enhanced benefits, early retirement and certain revisions in actuarial assumptions. The accrued liability for unfunded supplemental retirement plans was strengthened by approximately $13 million in 1994. For more information, see Note 11 of Notes to the Consolidated Financial Statements. FINANCIAL ACCOUNTING STANDARDS BOARD'S STATEMENTS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, issued by the Financial Accounting Standards Board. Under the new standard, the Company classified 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. As a result, this change in accounting method has no effect on net earnings. SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, which amended SFAS No. 114, are effective for 1995. The impact of adopting these new standards will not have a material effect on the Company. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET The financial condition of the Company has remained strong during the last two years. The investment portfolios of AFLAC Japan and AFLAC U.S. 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 to U.S. dollars for reporting purposes. The exchange rate at December 31, 1994, was 99.85 yen to one U.S. dollar, 12.2% stronger than the December 31, 1993, exchange rate of 112.00. Management estimates that the stronger yen rate increased invested assets, including cash, by $1.5 billion, total assets by $1.9 billion and total liabilities by $1.8 billion over the amounts that would have been reported using the previous year's exchange rate. For additional information on exchange rates, see Note 2 of Notes to the Consolidated Financial Statements. EXH 13-14 Under the provisions of SFAS No. 115, which was adopted January 1, 1994, fixed-maturity securities available for sale are carried at fair value. Previously, fixed-maturity securities were carried at amortized cost. Prior year numbers have not been restated. The fair value of fixed-maturity securities available for sale exceeded amortized cost by $820.9 million at December 31, 1994. For additional information regarding SFAS No. 115, see Note 1 of Notes to the Consolidated Financial Statements. Since December 31, 1993, total invested assets, including the effect of SFAS No. 115, have increased $3.5 billion, or 28.3%. AFLAC Japan investments increased $3.4 billion (29.5%), while AFLAC U.S. investments increased $162.2 million (14.8%). Since December 31, 1993, total invested assets, excluding the effect of SFAS No. 115, have increased $2.7 billion, or 21.7%. AFLAC Japan investments increased $2.5 billion (21.9%), while AFLAC U.S. investments increased $211.7 million (19.4%). During 1994, deferred policy acquisition costs increased 23.0%, and total assets increased 31.4%. During 1993, total invested assets increased $3.0 billion, or 31.8%. The continued growth in assets reflects the strength of the Company's primary business, the substantial cash flows from operations, the record-breaking new annualized premium sales by AFLAC U.S., the substantial renewal premiums collected by AFLAC Japan (85% of AFLAC Japan premiums), the stronger yen and the effect of SFAS No. 115. The net unrealized gains of $821 million on investments in fixed-maturity securities at December 31, 1994, consisted of $1,021 million in gross unrealized gains and $200 million in gross unrealized losses. At year-end 1993, the net unrealized gains were $1,851 million. During 1994, net unrealized gains decreased by $1,030 million (declines of $910 million in Japan and $120 million in the United States), which was primarily due to the increase in general-market interest rates in Japan and the United States. Mortgage loans on real estate and other long-term investments amounted to less than .5% of invested assets at December 31, 1994 and 1993. Cash and short-term investments totaled $348.6 million as of December 31, 1994, or 2.2% of total invested assets, compared with $190.1 million, or 1.5% of total invested assets, at December 31, 1993. For additional information concerning investments and market values, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements. The increase in net property and equipment primarily resulted from the construction of the new administrative office building in Japan. The building was completed in April 1994. For additional information concerning property and equipment, see Note 5 of the Notes to the Consolidated Financial Statements. Policy liabilities increased $3.9 billion, or 32.7%, during 1994. AFLAC Japan policy liabilities increased $3.8 billion, or 35.0%, and AFLAC U.S. policy liabilities increased $158.5 million, or 12.9%. The stronger yen rate increased reported policy liabilities by $1.6 billion in 1994. Other increases in policy liabilities in 1994 are due to the addition of new business, the aging of policies in force and the effect of SFAS No. 115 (see Note 1). During 1993, policy liabilities increased $2.6 billion, or 31.3%. In April 1994, permanent bank financing for the share repurchase program was arranged under a new revolving credit and term-loan agreement for up to $150 million, with interest at LIBOR plus 50 basis points. Principal payments on the new loan are due over five years beginning in June 1995. The EXH 13-15 Company had other temporary borrowings outstanding at various times during 1994 under line-of-credit arrangements with several banks. As of December 31, 1994, bank borrowings of $59 million were outstanding in connection with the share repurchase program. The liability for income taxes has increased by $442.2 million, or 46.5%, since December 31, 1993. The increase is primarily due to the recognition of deferred income taxes of $289.1 million on unrealized gains on securities available for sale due to the implementation of SFAS No. 115. The Company uses forward purchase arrangements in Japan to secure current investment yields during periods in which yields are expected to decline. At December 31, 1993, the Company had outstanding purchase commitments for delivery of securities in 1994 of $657.5 million, with an average yield to maturity of 4.80%. These commitments are included in payables for security transactions in the balance sheet. There were no outstanding contracts at December 31, 1994. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At December 31, 1994, the Company held Japanese Government Bonds as collateral for loaned securities in the amount of $556.9 million at market value. The Company's security lending policy requires that the market value of the securities received as collateral be greater than or equal to 105% of the market value of the loaned securities as of the date the securities are loaned, and not less than 100% thereafter. Shareholders' equity has increased $386.1 million since December 31, 1993. The increase was principally due to net earnings of $292.8 million, plus $216.2 million from the implementation of SFAS No. 115, less $131.7 million for purchases of treasury stock. 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. Although the final outcome is uncertain, the Company believes its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements. Under insurance guaranty fund laws in most states in the United States, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies with similar lines of business. Such assessments have not been material to the Company in recent years. The Company believes that future assessments relating to companies currently involved in insolvency proceedings will not materially impact the consolidated financial statements. 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. 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. Our investment objectives provide for liquidity through the ownership of high-quality EXH 13-16 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 increasing 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. Insurance regulatory authorities impose certain limitations and restrictions on payments of dividends, management fees, loans and advances by AFLAC to the Parent Company. 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 among the affiliated group. These regulatory limitations are not expected to affect the level of management fees or dividends paid by AFLAC to the Parent Company. 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 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. A risk-based capital formula was adopted by the NAIC in 1992 for U.S. life insurance companies that establishes capital requirements relating to insurance risk, business risk, asset risk and interest rate risk. These requirements are intended to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. AFLAC's NAIC risk-based capital ratio continues to reflect a very strong statutory capital and surplus position. Also, there are several ongoing regulatory initiatives being developed by the NAIC relating to investments, reinsurance, dividend restrictions, revision of the risk-based capital formula as it pertains to health organizations and other accounting requirements. 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. The Parent Company and AFLAC U.S. receive funds from AFLAC Japan in the form of management fees, allocated expenses and profit remittances. Total funds received from AFLAC Japan were $167.9 million in 1994, $133.4 million in 1993 and $65.5 million in 1992. 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. EXH 13-17 CASH FLOW In 1994, consolidated cash flow from operations increased 28.4% to $2.4 billion, compared with $1.8 billion in 1993 and $1.5 billion in 1992. Net cash flow from operations for AFLAC Japan increased 28.9% to $2.1 billion in 1994, compared with $1.7 billion in 1993 and $1.3 billion in 1992. AFLAC Japan represented 90% of the consolidated net cash flow from operations in both 1994 and 1993, and 89% in 1992. The continued growth of the Company's insurance operations in Japan and the U.S. is the principal reason for the increasing cash flow from operations. Consolidated cash flow used by investing activities (purchases less dispositions of investment securities and additions to property and equipment) increased 25.3% to $2.2 billion in 1994, compared with $1.8 billion in 1993 and $1.5 billion in 1992. AFLAC Japan accounted for 89% of the consolidated net cash used by investing activities in 1994, compared with 88% in 1993 and 89% in 1992. Included in AFLAC Japan's portion for the last three years were expenditures of $352 million for the construction of an administrative office building in Tokyo for use by AFLAC Japan. Operating cash flow is primarily used to purchase high-quality fixed-maturity securities. When market opportunities arise, the Company disposes of certain fixed-maturity securities to improve future investment yields or lengthen maturities by reinvesting in securities of similar or higher quality. Therefore, dispositions before maturity can vary significantly from year to year. Dispositions before maturity represented approximately 8% of the annual average investment portfolio of fixed-maturity securities in both 1994 and 1993, compared with 18% in 1992. In 1994, net cash used by financing activities (principally treasury stock transactions, dividends to shareholders, and debt proceeds and repayments) was $130 million, compared with $68 million in 1993 and $44 million in 1992. The treasury stock purchases of $131.7 million in 1994 were funded by proceeds from new borrowings in the amount of $84 million and available cash. All cash dividends paid by the Parent Company were funded by dividends received from its subsidiaries. Cash dividends paid to shareholders amounted to $44.9 million in 1994, an increase of 12.2% over 1993. Cash dividends paid to shareholders in 1993 were $40.1 million, an increase of 13.5% over the 1992 cash dividends of $35.3 million. The 1994 cash dividend of $.445 per share was an increase of 14.7% over 1993. The 1993 cash dividend of $.388 per share represented an increase of 12.8% over the 1992 cash dividend of $.344 per share. The Company has increased the cash dividend per share at a compound rate of 15.0% over the last 10 years. EXH 13-18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, 1994, 1993 and 1992 (In thousands, except for per 1994 1993 1992 share amounts) ---------- ---------- ---------- Revenues: Premiums, principally supplemental health insurance $5,180,732 $4,225,390 $3,369,201 Net investment income 838,825 689,272 533,166 Realized investment gains (losses) (58) 2,937 (3,264) Other income 91,259 83,019 87,369 --------- --------- --------- Total revenues 6,110,758 5,000,618 3,986,472 --------- --------- --------- Benefits and expenses: Benefits and claims 4,256,541 3,423,297 2,692,353 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 153,503 127,108 88,009 Insurance commissions 689,096 561,678 451,871 Insurance expenses 361,881 340,350 304,963 Interest expense 13,496 10,554 10,446 Capitalized interest on building construction (2,419) (8,766) (4,522) Other operating expenses 134,324 118,013 118,808 --------- --------- --------- Total acquisition and operating expenses 1,349,881 1,148,937 969,575 --------- --------- --------- Total benefits and expenses 5,606,422 4,572,234 3,661,928 --------- --------- --------- Earnings before income taxes and cumulative effect of accounting changes 504,336 428,384 324,544 Income taxes: Current 146,472 136,930 105,429 Deferred 65,074 47,565 35,748 --------- --------- --------- Total income taxes 211,546 184,495 141,177 --------- --------- --------- Earnings before cumulative effect of accounting changes 292,790 243,889 183,367 Cumulative effect on prior years of accounting changes - 11,438 - --------- --------- --------- Net earnings $ 292,790 $ 255,327 $ 183,367 ========= ========= ========= (continued) EXH 13-19.1 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (continued) Years Ended December 31, 1994, 1993 and 1992 (In thousands, except for per 1994 1993 1992 share amounts) ---------- ---------- ---------- Earnings per share of common stock: Earnings before cumulative effect of accounting changes $ 2.84 $ 2.32 $ 1.79 Cumulative effect of accounting changes - .11 - --------- --------- --------- Net earnings $ 2.84 $ 2.43 $ 1.79 ========= ========= ========= Common shares used in computing earnings per share (In thousands) 103,101 105,201 102,544 ========= ========= ========= See the accompanying Notes to the Consolidated Financial Statements. EXH 13-19.2 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Years Ended December 31, 1994 and 1993 (In thousands) 1994 1993 ----------- ----------- ASSETS: Investments: Securities available for sale: Fixed maturities, at fair value in 1994 and at amortized cost in 1993 (amortized cost $14,709,820 in 1994; fair value $11,570,386 in 1993) $ 15,530,694 $ 10,055,436 Equity securities, at fair value (cost $71,585 in 1994 and $67,692 in 1993) 84,373 82,065 Fixed maturities held to maturity, at amortized cost (fair value $2,418,540 in 1993) - 2,082,326 Mortgage loans on real estate 25,104 57,485 Other long-term investments 5,038 1,726 Short-term investments 330,916 166,689 ----------- ----------- Total investments 15,976,125 12,445,727 Cash 17,643 23,413 Receivables, primarily premiums 303,748 231,977 Accrued investment income 220,757 184,087 Deferred policy acquisition costs 2,402,869 1,953,248 Property and equipment, at cost less accumulated depreciation 580,247 361,246 Securities held as collateral for loaned securities 556,937 - Intangible assets, at cost less accumulated amortization of $35,003 in 1994 and $31,801 in 1993 109,865 114,165 Other assets 118,888 128,823 ----------- ----------- Total assets $ 20,287,079 $ 15,442,686 =========== =========== (continued) EXH 13-20.1 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) Years Ended December 31, 1994 and 1993 (In thousands) 1994 1993 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 14,586,171 $ 10,932,225 Unpaid policy claims 929,350 712,066 Unearned premiums 339,514 302,846 Other policyholders' funds 151,572 118,334 ----------- ----------- Total policy liabilities 16,006,607 12,065,471 Notes payable 184,901 122,062 Income taxes, primarily deferred 1,392,441 950,278 Payables for return of collateral on loaned securities 556,937 - Payables for security transactions 46,371 659,158 Other liabilities 348,055 280,093 Commitments and contingencies (Notes 5, 8 and 11) ----------- ----------- Total liabilities 18,535,312 14,077,062 ----------- ----------- Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 104,000 shares in 1994 and 103,710 in 1993 10,400 10,371 Additional paid-in capital 198,099 195,730 Unrealized foreign currency translation gains 174,091 123,294 Unrealized gains on securities available for sale 228,844 14,811 Retained earnings 1,277,487 1,029,625 Treasury stock (135,776) (6,568) Notes receivable for stock purchases (1,378) (1,639) ----------- ----------- Total shareholders' equity 1,751,767 1,365,624 ----------- ----------- Total liabilities and shareholders' equity $ 20,287,079 $ 15,442,686 =========== =========== See the accompanying Notes to the Consolidated Financial Statements. EXH 13-20.2 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ---------- ---------- ---------- Common stock: Balance at beginning of year $ 10,371 $ 8,255 $ 8,178 Exercise of stock options 29 37 77 Shares issued in connection with acquisition - 10 - Five-for-four stock split - 2,069 - ---------- ---------- ---------- Balance at end of year 10,400 10,371 8,255 ---------- ---------- ---------- Additional paid-in capital: Balance at beginning of year 195,730 190,871 183,414 Exercise of stock options 2,134 3,785 7,457 Gain on treasury stock reissued 235 - - Shares issued in connection with acquisition - 3,227 - Five-for-four stock split - (2,069) - Cash in lieu of fractional shares - (84) - ---------- ---------- ---------- Balance at end of year 198,099 195,730 190,871 ---------- ---------- ---------- Unrealized foreign currency translation gains: Balance at beginning of year 123,294 68,978 66,750 Change in unrealized translation gains during year, net of income taxes 50,797 54,316 2,228 ---------- ---------- ---------- Balance at end of year 174,091 123,294 68,978 ---------- ---------- ---------- Unrealized gains on securities available for sale: Balance at beginning of year 14,811 5,167 1,400 Cumulative effect of accounting change, net of income taxes 461,478 - - Change in unrealized gains (losses) during year, net of income taxes (247,445) 9,644 3,767 ---------- ---------- ---------- Balance at end of year 228,844 14,811 5,167 ---------- ---------- ---------- Retained earnings: Balance at beginning of year 1,029,625 814,355 666,271 Net earnings 292,790 255,327 183,367 Cash dividends ($.445 per share in 1994, $.388 in 1993 and $.344 in 1992) (44,928) (40,057) (35,283) ---------- ---------- ---------- Balance at end of year $ 1,277,487 $ 1,029,625 $ 814,355 ---------- ---------- ---------- (continued) EXH 13-21.1 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ---------- ---------- ---------- Treasury stock: Balance at beginning of year $ (6,568) $ (4,171) $ (1,104) Purchases of treasury stock (131,734) (7,893) (3,067) Shares issued to sales associates stock plan 2,526 - - Shares issued in connection with acquisition - 5,496 - ---------- ---------- ---------- Balance at end of year (135,776) (6,568) (4,171) ---------- ---------- ---------- Notes receivable for stock purchases (1,378) (1,639) (1,573) ---------- ---------- ---------- Total shareholders' equity $ 1,751,767 $ 1,365,624 $ 1,081,882 ========== ========== ========== See the accompanying Notes to the Consolidated Financial Statements. EXH 13-21.2 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 292,790 $ 255,327 $ 183,367 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 2,236,198 1,782,689 1,405,926 Deferred income taxes 65,074 47,565 35,748 Change in income taxes payable (9,666) (37,022) 47,911 Increase in deferred policy acquisition costs (262,696) (200,124) (199,973) Increase in receivables (44,984) (38,490) (19,034) Other, net 92,530 35,304 49,530 ---------- ---------- ---------- Net cash provided by operating activities 2,369,246 1,845,249 1,503,475 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 1,125,179 915,629 1,532,182 Fixed-maturity securities matured 353,422 129,170 77,771 Equity securities 42,208 45,131 53,271 Mortgage loans, net 35,395 24,955 406 Other long-term investments, net - 2,931 - Short-term investments, net - 18,483 11,771 Costs of investments acquired: Fixed-maturity securities (3,425,922) (2,766,509) (2,986,728) Equity securities (40,632) (51,237) (60,435) Other long-term investments, net (3,312) - (1,488) Short-term investments, net (147,849) - - Additions to property and equipment, net (185,395) (112,207) (96,670) ---------- ---------- ---------- Net cash used by investing activities $(2,246,906) $(1,793,654) $(1,469,920) ---------- ---------- ---------- (continued) EXH 13-22.1 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings $ 84,000 $ - $ 2,300 Principal payments under debt obligations (42,681) (32,197) (15,310) Dividends paid to shareholders (44,928) (40,057) (35,283) Purchases of treasury stock (131,734) (1,325) (3,067) Treasury stock reissued 2,761 - - Other, net 2,163 5,903 7,534 ---------- ---------- ---------- Net cash used by financing activities (130,419) (67,676) (43,826) ---------- ---------- ---------- Effect of exchange rate changes on cash 2,309 3,356 87 ---------- ---------- ---------- Net change in cash (5,770) (12,725) (10,184) Cash at beginning of year 23,413 36,138 46,322 ---------- ---------- ---------- Cash at end of year $ 17,643 $ 23,413 $ 36,138 ========== ========== ========== Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 13,742 $ 9,459 $ 10,148 Income taxes 154,826 148,071 59,153 Noncash investing activities included issuance of common stock for purchase of a company amounting to $8,730 in 1993. Noncash financing activities included capital lease obligations incurred for computer equipment totaling $18,210 in 1994 and $28,460 in 1993. See the accompanying Notes to the Consolidated Financial Statements. EXH 13-22.2 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements of AFLAC Incorporated (the Parent Company) and subsidiaries (the Company) are prepared in accordance with generally accepted accounting principles. These principles are established primarily by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants. All significant intercompany items have been eliminated in consolidation. The Company operates predominantly in the insurance industry and primarily sells supplemental health insurance in Japan and the United States. Substantially all of the Company's insurance operations are conducted through American Family Life Assurance Company of Columbus (AFLAC), which operates in the United States (AFLAC U.S.) and as a branch in Japan (AFLAC Japan). TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts maintained in foreign currencies, principally Japanese yen, are translated into U.S. dollars as follows: The functional foreign currency assets and liabilities are translated at the rates of exchange at the balance sheet dates, and the related unrealized translation adjustments are included in a separate component of shareholders' equity. Revenues, expenses and cash flows are translated from foreign currencies into U.S. dollars using average monthly exchange rates for the year. Realized currency exchange gains and losses resulting from foreign currency transactions are included in earnings. INSURANCE REVENUE AND EXPENSE RECOGNITION: Substantially all supplemental health insurance contracts issued by the Company are classified as long-duration contracts. The contract provisions generally cannot be changed or canceled during the contract period; however, premiums for policies issued in the United States usually may be adjusted in conformity with guidelines prescribed by state insurance regulatory authorities. Insurance premiums for health policies are recognized as earned income ratably over the terms of the policies. When revenues are recorded, the related amounts of benefits and expenses are charged against such revenues, so as to result in recognition of profits in the current year and all future years for which the policies are expected to be renewed. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. Actuarial assumptions and deferrable acquisition costs are reviewed each year and revised when necessary for new policies issued to more closely reflect recent experience and studies of actual acquisition costs. INVESTMENTS: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under this standard, the Company has classified all fixed-maturity securities as "available for sale." Such securities are reported at fair value. In prior years, they were carried at amortized cost. Equity securities are carried at fair value. If the fair value is higher than amortized cost (fixed-maturity securities) or purchase cost (equity securities), the excess is an unrealized EXH 13-23 gain; and if lower than cost, the difference is an unrealized loss. The net unrealized gains or losses on securities available for sale, less amounts applicable to policy liabilities and deferred income taxes, are reported in a separate component of shareholders' equity. Amortized cost of fixed- maturity securities is based on the purchase price and is adjusted periodically so that the carrying value will equal the face or par value at maturity. For investments that have experienced a decline in value below their cost which is considered to be other than temporary, the decline is recorded as a realized investment loss in the statement of earnings. Costs of securities sold are determined on the first-in, first-out method. Purchases and sales of securities are recorded on the trade dates of the transactions. Forward commitments to purchase fixed-maturity securities are recorded as investment assets and liabilities for payment of purchase cost on the dates the contractual commitments are entered into. Fixed-maturity securities loaned to financial institutions in security lending transactions are not recorded as sales of securities, but continue to be carried as investment assets during the term of the loans. Securities received as collateral for such loans are reported separately in assets at fair value with a corresponding liability of the same amount for the return of such collateral at termination of the loans. Interest is recorded as income when earned and is adjusted for amortization of any premium or discount. Dividends on equity securities are recorded as income on the ex-dividend dates. DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business are deferred and amortized, with interest, over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues. Costs deferred include commissions and certain direct and allocated policy issue, underwriting and marketing expenses, all of which vary with and are primarily related to the production of new business. Policy acquisition costs deferred were $416.2 million in 1994, $334.5 million in 1993 and $285.2 million in 1992. Of the policy acquisition costs deferred, commissions represented 66.6% in 1994, 62.4% in 1993 and 65.2% in 1992. INSURANCE LIABILITIES: The liabilities for future policy benefits are computed by a net level premium method using estimated future investment yields, withdrawals, and recognized morbidity and mortality tables modified to reflect the Company's experience, with reasonable provision for possible future adverse deviations in experience. Unpaid policy claims are computed using statistical analyses of historical claim experience and represent the estimated ultimate unpaid cost of all claims incurred. INCOME TAXES: Different rules are used in computing the U.S. and foreign income tax expense presented in the accompanying financial statements from those used in preparing the Company's income tax returns. Deferred income taxes are recognized using the liability method in 1994 and 1993, and the deferred method in 1992 and prior. Under the liability method, deferred EXH 13-24 income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Under the deferred method, deferred income taxes represent the tax effects of income and expense items that are reported in different years for tax and financial statement purposes, based on tax laws and rates in effect in the years such differences arose. The Parent Company and its U.S. subsidiaries, including their foreign branches, file a consolidated U.S. income tax return. Additionally, AFLAC Japan is subject to Japanese corporate income taxes. The Company's other minor foreign branches and subsidiaries are also subject to income taxation in their foreign jurisdictions. INTANGIBLES: Television network affiliations and FCC licenses of broadcast businesses acquired are being amortized using the straight-line method over 40 years. EARNINGS PER SHARE: Earnings per share are based on the weighted average number of common shares outstanding during the periods, including dilutive shares issuable under the stock option plans. ACCOUNTING CHANGES ADOPTED: Effective January 1, 1994, the Company adopted SFAS No. 115. As required, the financial information for prior years was not restated. This statement addresses the accounting for investments in equity securities that have readily determinable fair values and all investments in fixed-maturity securities. These investments are to be classified in three categories and accounted for as follows. Fixed-maturity securities that the Company has the positive intent to hold to maturity are classified as held- to-maturity securities and are reported at amortized cost. Fixed-maturity and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Fixed- maturity and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Under the new standard, the Company classified all fixed-maturity securities, along with equity securities, as "available for sale." This accounting change had no effect on 1994 earnings. The effect of this accounting change on shareholders' equity was as follows: (In thousands) December 31, 1994 January 1, 1994 ----------------- ---------------- Invested assets $ 820,874 $ 1,851,141 Policy liabilities (315,599) (1,088,633) Deferred income taxes (289,089) (301,030) --------------- --------------- Shareholders' equity, net unrealized gains $ 216,186 $ 461,478 =============== =============== EXH 13-25 The portion of unrealized gains credited to policy liabilities at January 1, 1994, and December 31, 1994, 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 of AFLAC Japan based on market investment yields at these dates. During 1994, the Company adopted the disclosure requirements under SFAS No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. Effective January 1, 1993, the Company adopted three new accounting standards prescribed by the FASB, through a one-time cumulative increase of $11.4 million in the statement of earnings. The financial information for prior years was not restated. These new accounting standards did not have a material effect on the Company's 1993 and 1994 operating earnings. Components of the cumulative adjustment were: an increase to net earnings of $22.0 million from the release of previously provided deferred income taxes (SFAS No. 109, Accounting for Income Taxes), a charge to net earnings of $9.6 million for the accrual of retirement benefits other than pensions (SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions), and a charge of $1.0 million for the accrual of postemployment benefits (SFAS No. 112, Employers' Accounting for Postemployment Benefits). SFAS No. 109 changes the method of recognizing deferred income taxes from the deferred method to the liability method. SFAS Nos. 106 and 112 require the accrual of postretirement and postemployment benefits during employees' active service years rather than recognizing the costs when benefits are paid. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: 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, which amended SFAS No. 114, are effective for 1995. The impact of adopting these new standards will not have a material effect on the Company. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to the current year presentation. EXH 13-26 (2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION The Company's only reportable industry segment is insurance, and its principal foreign operations are conducted in Japan. The components of operations for the years ended December 31 were as follows: (In thousands) 1994 1993 1992 --------- --------- --------- Total revenues: Insurance: Foreign (primarily Japan) $5,149,478 $4,127,289 $3,178,625 U.S. 874,659 796,587 724,400 --------- --------- --------- Total insurance 6,024,137 4,923,876 3,903,025 Broadcast - U.S. 76,970 68,431 66,272 Corporate and other U.S. operations 46,513 51,721 59,256 Intercompany eliminations (36,862) (43,410) (42,081) --------- --------- --------- Total $6,110,758 $5,000,618 $3,986,472 ========= ========= ========= Earnings before income taxes and cumulative effect of accounting changes: Insurance: Foreign (primarily Japan) $ 470,347 $ 390,945 $ 297,335 U.S. 89,146 78,047 66,758 --------- --------- --------- Total insurance 559,493 468,992 364,093 Broadcast - U.S. 13,362 8,673 7,567 Corporate and other U.S. operations (68,519) (49,281) (47,116) --------- --------- --------- Total $ 504,336 $ 428,384 $ 324,544 ========= ========= ========= Total assets at December 31 were as follows: (In thousands) 1994 1993 ---------- ---------- Total assets: Insurance: Foreign (primarily Japan) $18,322,308 $13,656,280 U.S. 1,781,026 1,569,651 ---------- ---------- Total insurance 20,103,334 15,225,931 Broadcast - U.S. 152,115 149,332 Corporate and other U.S. operations 2,058,274 1,569,940 Intercompany eliminations (2,026,644) (1,502,517) ---------- ---------- Total $20,287,079 $15,442,686 ========== ========== The Company had net assets of $1.6 billion at December 31, 1994, and $1.1 billion at December 31, 1993, held in AFLAC Japan. AFLAC Japan had investments in U.S. dollar-denominated securities (including accrued EXH 13-27 investment income) of $972.0 million and $643.6 million at December 31, 1994, and December 31, 1993, respectively. AFLAC Japan's investments in dollar- denominated securities constitute an economic currency hedge of a portion of the Company's investment in the foreign branch. The net assets of AFLAC Japan after deducting the dollar-denominated investments were $592.9 million at December 31, 1994, and $456.1 million at December 31, 1993, and represent yen-denominated net assets subject to foreign currency translation fluctuations for financial reporting purposes. The 1994 year-end yen-to-dollar exchange rate, which is used to convert balance sheet items to U.S. dollars, strengthened 12.2%, while the 1993 year- end exchange rate strengthened 11.3%, compared with the prior year-end exchange rates based on the yen/dollar rates of 99.85, 112.00, and 124.70 at December 31, 1994, 1993 and 1992, respectively. Had the exchange rates remained unchanged from the prior year-end rates, the change in total assets would have been lower by approximately $1.9 billion (10.2%) in 1994 and $1.3 billion (9.3%) in 1993. Total liabilities would have been lower by approximately $1.8 billion (10.8%) in 1994 and $1.3 billion (9.9%) in 1993. The average yen/dollar exchange rate for 1994, 1993 and 1992 of 102.26, 111.21 and 126.67, respectively, strengthened 8.8%, 13.9% and 6.2%, respectively, over the prior years. The strengthening increased net earnings by approximately $19.7 million in 1994, $24.5 million in 1993 and $7.8 million in 1992. Earnings before income taxes included net realized foreign exchange transaction losses of $.2 million in 1994, and gains of $.8 million in both 1993 and 1992. Annual payments are made from AFLAC Japan for management fees to the Parent Company, and allocated expenses and remittances of earnings to AFLAC U.S. These payments totaled $167.9 million in 1994, $133.4 million in 1993 and $65.5 million in 1992. See Note 10 for information concerning restrictions on remittances of AFLAC Japan earnings. EXH 13-28 (3) INVESTMENTS The amortized cost (fixed-maturity securities) or purchase cost (equity securities) and the fair values of investments in securities available for sale at December 31 were as follows: December 31, 1994 -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Japan national government direct obligations $ 4,790.3 $ 492.1 $ .3 $ 5,282.1 Japan government guaranteed 590.7 26.3 - 617.0 Japan municipalities 768.4 36.1 .5 804.0 Japan public utilities 2,505.2 220.9 3.5 2,722.6 Corporate obligations: Banks and other financial institutions 189.3 5.0 .1 194.2 Foreign issuers: Euroyen 3,212.0 176.2 66.2 3,322.0 Samurai 304.1 14.6 1.8 316.9 Other 301.7 37.4 6.2 332.9 -------- -------- -------- -------- Total yen-denominated 12,661.7 1,008.6 78.6 13,591.7 -------- -------- -------- -------- U.S. dollar-denominated: U.S. government direct obligations 132.5 .3 4.5 128.3 U.S. agencies (FNMA, etc.) 83.9 .1 3.4 80.6 U.S. mortgage-backed securities 152.2 .1 10.4 141.9 Sovereign and Supranational 134.7 1.9 5.5 131.1 Corporate obligations: Public utilities 136.4 .2 13.1 123.5 Asset backed securities 141.6 .4 8.3 133.7 Other 1,243.4 9.6 76.3 1,176.7 -------- -------- -------- -------- Total dollar-denominated 2,024.7 12.6 121.5 1,915.8 -------- -------- -------- -------- Other foreign securities 23.4 - .2 23.2 -------- -------- -------- -------- Total fixed-maturity securities available for sale 14,709.8 1,021.2 200.3 15,530.7 Equity securities 71.6 15.9 3.1 84.4 -------- -------- -------- -------- Total securities available for sale $14,781.4 $ 1,037.1 $ 203.4 $15,615.1 ======== ======== ======== ======== EXH 13-29 December 31, 1993 ----------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Japan national government direct obligations $ 3,845.9 $ 822.7 $ - $ 4,668.6 Japan government guaranteed 506.2 50.0 - 556.2 Japan municipalities 824.1 75.7 - 899.8 Japan public utilities 2,183.5 351.7 - 2,535.2 Corporate obligations: Banks and other financial institutions 218.2 17.5 - 235.7 Foreign issuers Euroyen 574.9 69.8 - 644.7 Samurai 353.9 16.9 - 370.8 Other 29.5 2.9 - 32.4 -------- ------- ------ -------- Total yen-denominated 8,536.2 1,407.2 - 9,943.4 -------- ------- ------ -------- U.S. dollar-denominated: U.S. government direct obligations 144.0 8.5 - 152.5 U.S. agencies (FNMA, etc.) 27.2 1.7 - 28.9 U.S. mortgage-backed securities 31.3 .3 .3 31.3 Sovereign and Supranational 169.8 17.6 .5 186.9 Corporate obligations: Public utilities 123.6 3.5 2.5 124.6 Other 1,006.9 83.7 4.4 1,086.2 -------- ------- ------ -------- Total dollar-denominated 1,502.8 115.3 7.7 1,610.4 -------- ------- ------ -------- Other foreign securities 16.4 .2 - 16.6 -------- ------- ------ -------- Total fixed-maturity securities available for sale 10,055.4 1,522.7 7.7 11,570.4 Equity securities 67.6 16.7 2.2 82.1 -------- ------- ------ -------- Total securities available for sale $10,123.0 $1,539.4 $ 9.9 $11,652.5 ======== ======= ====== ======== EXH 13-30 The Company had no fixed-maturity securities classified as held to maturity at December 31, 1994. The amortized cost and fair value of investments in fixed-maturity securities held to maturity at December 31, 1993, were as follows: December 31, 1993 ----------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Yen-denominated, corporate obligations: Foreign issuers: Euroyen $ 1,691.8 $ 291.7 $ - $ 1,983.5 Samurai 41.0 7.8 - 48.8 Other 322.5 53.7 19.0 357.2 -------- ------ ------- -------- 2,055.3 353.2 19.0 2,389.5 U.S. dollar-denominated: Corporate obligations 27.0 2.0 - 29.0 -------- ------ ------- -------- Total fixed-maturity securities held to maturity $ 2,082.3 $ 355.2 $ 19.0 $ 2,418.5 ======== ====== ======= ======== The amortized cost and fair values of investments in fixed-maturity securities available for sale at December 31, 1994, by contractual maturity are shown below: Cost or Amortized Fair (In millions) Cost Value ----------- ----------- Due in one year or less $ 347.6 $ 352.5 Due after one year through five years 2,344.8 2,472.2 Due after five years through 10 years 4,012.2 4,279.0 Due after 10 years 7,853.0 8,285.1 U.S. Mortgage-backed securities 152.2 141.9 ---------- ---------- Total fixed-maturity securities available for sale $ 14,709.8 $ 15,530.7 ========== ========== Expected maturities will differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. EXH 13-31 Fair values for fixed-maturity securities were provided by outside securities consultants using market quotations, prices provided by market makers or estimates of fair values obtained from yield data relating to investment securities with similar characteristics. The fair values for equity securities were determined using market quotations as of the end of the year on the principal public exchange markets. Realized and unrealized gains and losses from investments for the years ended December 31 were as follows: (In thousands) 1994 1993 1992 ---------- ---------- ---------- Realized gains (losses) on sale or maturity of investments: Fixed-maturity securities: Gross gains from sales $ 19,054 $ 16,447 $ 17,458 Gross losses from sales (24,761) (8,980) (22,311) Net gains from redemptions 2,416 2,369 2,027 --------- --------- --------- (3,291) 9,836 (2,826) Equity securities: Gross gains from sales 5,346 1,764 6,270 Gross losses from sales (1,587) (7,628) (5,990) Other long-term securities (526) (1,035) (718) --------- --------- --------- Net realized gains (losses) (58) 2,937 (3,264) ========= ========= ========= Changes in unrealized gains (losses): Fixed-maturity securities (818,399) 1,303,052 410,888 Equity securities (2,045) 12,143 113 --------- --------- --------- Net unrealized gains (losses) $ (820,444) $1,315,195 $ 411,001 ========= ========= ========= As of January 1, 1994, the Company classified all fixed-maturity securities as available for sale under the guidelines of SFAS No. 115. Such securities are carried at fair value in the financial statements in 1994. As required, prior year numbers were not restated. In prior years, all fixed- maturity securities were carried in the financial statements at amortized cost. Equity securities are carried in the financial statements at market value in all years. The unrealized gains and losses on fixed-maturity securities available for sale, less amounts applicable to policy liabilities and deferred income taxes, were reported in a separate component of shareholders' equity, along with unrealized gains and losses on equity securities in 1994. Since fixed-maturity securities were carried at amortized cost in 1993 and 1992, all unrealized gains and losses on those securities are not reflected in shareholders' equity for 1993 and 1992. EXH 13-32 The following fixed-maturity securities individually exceeded 10% of shareholders' equity at December 31: 1994 1993 ------------------- ------------------- Amortized Fair Amortized Fair (In millions) Cost Value Cost Value ------------------- ------------------- Japan National Government $4,790.3 $5,282.1 $3,845.9 $4,668.6 Tokyo Electric Power Company, Ltd. 767.3 842.0 695.6 812.4 Chubu Electric Power 552.3 591.2 486.2 556.4 Finance Corp. of Local Enterprise 314.4 330.7 311.4 345.4 Tokyo Metropolitan Government 300.9 314.6 391.0 423.7 Province De Quebec 269.2 252.6 231.9 244.5 Kyushu Electric Power Company, Ltd. 239.7 261.5 209.1 243.5 Kansai Electric Power Company, Ltd. 232.7 253.3 207.1 240.9 Tohoku Electric Power 203.3 219.3 169.3 195.2 Goldman Sachs Group 200.3 207.6 * - Republic of Austria 198.9 206.9 * - Chugoku Electric Power 177.8 192.1 137.0 159.6 Nippon Telephone and Telegraph Corp. 168.8 180.0 143.9 164.2 *Less than 10% The components of net investment income for the years ended December 31 were as follows: (In thousands) 1994 1993 1992 --------- --------- --------- Fixed-maturity securities $ 841,917 $ 691,482 $ 529,829 Equity securities 1,255 1,554 1,225 Mortgage loans on real estate 3,193 6,024 6,615 Other long-term investments 146 369 1,096 Short-term investments 11,668 8,094 11,239 -------- -------- -------- Gross investment income 858,179 707,523 550,004 Less investment expenses 19,354 18,251 16,838 -------- -------- -------- Net investment income $ 838,825 $ 689,272 $ 533,166 ======== ======== ======== (4) FINANCIAL INSTRUMENTS NONDERIVATIVES The carrying amounts for cash, cash equivalents, premium receivables, accrued investment income and accounts payable approximate their fair values due to the short-term maturity of these instruments. Consequently, such instruments are not included in the table presented in Note 4. EXH 13-33 The methods of determining the fair values of the Company's fixed- maturity and equity securities are described in Note 3. The fair values for mortgage loans are estimated using the quoted market prices for securities collateralized by similar mortgage loans, adjusted for the difference in loan characteristics. For mortgage loans where quoted market prices are not available, the fair values are estimated using discounted cash flow analysis and interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of these calculations. At December 31, 1994, 72.8% of mortgage loans were commercial and 27.2% were residential (at December 31, 1993, 81.6% and 18.4%, respectively). The fair values for notes payable are estimated using discounted cash flow analysis based on the Company's current borrowing rates for similar types of borrowings. The Company uses forward purchase arrangements in Japan to secure current investment yields during periods in which yields are expected to decline. At December 31, 1993, the Company had outstanding purchase commitments for delivery of securities in 1994 with an average yield to maturity of 4.80%. The securities related to these purchase commitments were included in the balance sheet at December 31, 1993, in investments in fixed- maturity securities available for sale at fair value. The related liability was included in payables for security transactions for the purchase price established at the dates the contracts were entered into and payable at the dates the securities were delivered. These commitments were payable at various times from January 1994 through July 1994. The fair value and carrying value of the liability for the forward commitments at December 31, 1993, was the contract price. There were no outstanding contracts at December 31, 1994. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At December 31, 1994, the Company held Japanese Government Bonds as collateral for loaned securities. 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 and carrying value of the collateral asset and related liability. DERIVATIVES The Company has only limited activity with derivative financial instruments and does not use them for trading purposes nor engage in leveraged derivative transactions. In addition, the Company does not engage in foreign currency speculation and does not hedge the foreign-currency- denominated net assets of its foreign insurance operations. See Note 2 for additional information on AFLAC Japan's net assets. The Company enters into interest rate swap agreements to reduce the impact of changes in interest rates on its floating-rate long-term debt. At December 31, 1994 and 1993, the Company had an outstanding interest rate swap agreement with a notional principal amount equal to the principal balance of the related loan of $49 million. Under this agreement, the Company makes fixed-rate payments based on a rate of 5.965% and receives floating-rate payments in return (6.75% at December 31, 1994) based on three-month LIBOR. EXH 13-34 The transaction effectively changes a portion of the Company's interest rate exposure from a floating rate to a fixed rate. The fair value of interest rate swaps is the estimated amount that the Company would receive or pay to terminate the swap agreements at the reporting date taking into account current interest rates. The Company had outstanding short-term foreign exchange forward contracts in the amount of $135.1 million at December 31, 1994, and $20.0 million at December 31, 1993. The Company invests certain yen-denominated funds in short-term, dollar-denominated bank deposits, which typically have a term of one week. These deposits earn yields that exceed those available on similar yen-denominated deposits. The Company purchases foreign exchange forward contracts to eliminate the foreign currency risks when such deposits are converted to yen. The foreign exchange forward contracts are carried at fair value, and the related exchange transaction gains or losses are included in other income. The carrying values and estimated fair values of the Company's financial instruments as of December 31 are as follows: 1994 1993 ---------------------- -------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ---------------------- -------------------- Assets: Fixed-maturity securities $15,530,694 $15,530,694 $12,137,762 $13,988,926 Equity securities 84,373 84,373 82,065 82,065 Mortgage loans 25,104 29,104 57,485 81,482 Policy loans 1,202 1,202 1,184 1,184 Short-term investments 330,916 330,916 166,689 166,689 Derivatives - foreign exchange forward contracts - 41 - 8 Securities held as collateral for loaned securities 556,937 556,937 - - Liabilities: Notes payable 184,901 185,494 122,062 127,398 Derivatives - interest rate swap - (2,108) - 761 Payables for return of collateral on loaned securities 556,937 556,937 - - Payables for security transactions 46,371 46,371 659,158 659,158 CONCENTRATION OF CREDIT RISK: The Company's receivables consist primarily of monthly insurance premiums due from individual policyholders or their employers for payroll deduction of premiums. At December 31, 1994, $234.9 million, or 77.3%, were receivables for AFLAC Japan ($169.1 million at December 31, 1993). These included $114.8 million in 1994 ($83.9 million in 1993) held by three service companies that act as premium-collection agents for AFLAC Japan. Most of the remaining premiums receivable of AFLAC Japan represented premium payroll withholdings by a diverse number of medium-sized to large employers. EXH 13-35 (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: (In thousands) 1994 1993 -------- -------- Land $142,426 $ 22,447 Buildings 362,439 79,441 Construction in progress (AFLAC Japan) - 202,428 Equipment 184,563 144,923 ------- ------- 689,428 449,239 Less accumulated depreciation 109,181 87,993 ------- ------- Net property and equipment $580,247 $361,246 ======= ======= In April 1994, the construction of the Company's new administrative building in Tokyo was completed. The total cost of the project was 40.7 billion yen ($407.8 million at the December 31, 1994, exchange rate). The reported cost by year was $205.4 million in 1994, $112.2 million in 1993, and $90.2 million in 1992. Construction was funded from AFLAC Japan's cash flow. In accordance with generally accepted accounting principles, interest expense on outstanding debt during the construction period was capitalized and ceased upon completion of the building. The building is located on partially leased land. The Company is committed to purchase the leased land at the fair value of the land at the time of purchase, upon the demand of the owners of the land. As of December 31, 1994, the fair value of the leased land was estimated to be 2.6 billion yen ($26.1 million). EXH 13-36 (6) POLICY LIABILITIES The liability for future policy benefits at December 31 consists of the following: (In millions) Liability Amounts Interest rates ---------------------------- ------------------- Policy Year Issue of In 20 Year 1994 1993 Issue Years ------ -------- -------- -------- --------- Health insurance: Foreign: 1994 $ 94.0 $ - 4.5% 4.5% 1990-94 6,171.5 3,795.1 5.5 5.5 1988-93 1,056.0 863.5 5.25 5.25 1987-88 1,222.5 1,077.5 5.5 5.5 1985-87 218.3 197.1 5.65 5.65 1985-86 974.8 889.2 6.75 5.5 1978-84 2,670.7 2,467.3 6.5 5.0 1974-79 731.9 647.8 7.0 5.0 Other 29.7 23.9 U.S.: 1988-94 289.1 211.7 8.0 6.0 1986-94 342.2 299.3 6.0 6.0 1985-86 23.9 22.8 6.5 6.5 1981-86 268.2 268.8 7.0 5.5 1973-80 52.9 55.1 6.0 4.5 Other 101.5 89.3 Life insurance 1956-94 23.4 23.8 4.0-6.75 5.5 SFAS No. 115 adjustment (Note 1) 315.6 - -------- -------- Total $14,586.2 $10,932.2 ======== ======== The weighted-average interest rates reflected in the statements of earnings for health insurance future policy benefits for foreign policies were 5.7% in 1994, 5.8% in 1993 and 5.9% in 1992, and for U.S. policies, 6.3% in both 1994 and 1993, and 6.2% in 1992. EXH 13-37 Activity in the liability for unpaid policy claims is summarized as follows for the years ended December 31: (In thousands) 1994 1993 1992 --------- --------- --------- Unpaid supplemental health claims - beginning of year $ 697,712 $ 546,936 $ 457,989 --------- --------- --------- Add claims incurred during the year related to: Current year 1,978,901 1,576,396 1,214,123 Prior years (62,940) (40,033) (18,007) --------- --------- --------- Total incurred 1,915,961 1,536,363 1,196,116 --------- --------- --------- Less claims paid during the year: On claims incurred during current year 1,236,131 1,003,892 770,160 On claims incurred during prior years 532,001 427,395 339,496 --------- --------- --------- Total paid 1,768,132 1,431,287 1,109,656 --------- --------- --------- Add effect of exchange rate changes on unpaid claims 69,285 45,700 2,487 --------- --------- --------- Unpaid supplemental health claims - end of year 914,826 697,712 546,936 Unpaid claims for life and other business 14,524 14,354 14,750 --------- --------- --------- Total liability for unpaid policy claims $ 929,350 $ 712,066 $ 561,686 ========= ========= ========= EXH 13-38 (7) NOTES PAYABLE A summary of notes payable at December 31 follows: (In thousands) 1994 1993 --------- --------- 6.63% short-term note payable to bank under unsecured line of credit, due January 13, 1995 $ 9,000 $ - Unsecured note payable to bank under revolving credit and term-loan agreement, variable interest rate, due in quarterly installments, beginning June 1995 through March 2000 50,000 - 5.965% unsecured note payable to banks, due in semiannual installments beginning October 1995 through 1997 49,000 49,000 9.60% to 10.72% unsecured notes payable to bank, due in semiannual installments through 1998 32,278 40,722 Obligations under capitalized leases, due in monthly installments through 2001, secured by computer equipment in Japan 39,181 25,052 8.3% note payable due in monthly installments through 1997, secured by equipment 3,970 5,511 Other 1,472 1,777 ------- ------- Total notes payable $184,901 $122,062 ======= ======= The aggregate maturities of notes payable during each of the five years after December 31, 1994, are: 1995, $46.2 million; 1996, $50.3 million; 1997, $49.3 million; 1998, $24.0 million; and 1999, $12.5 million. In 1994, the Company arranged permanent bank financing for the share repurchase program under a new revolving credit and term-loan agreement for up to $150 million with interest at LIBOR plus 50 basis points. At December 31, 1994, there was $50 million outstanding under this agreement at the current interest rate of 6.75%. The weighted average interest rate on short-term notes payable at December 31, 1994, is 6.63%. The Company had no short-term notes payable at December 31, 1993. In connection with the 5.965% unsecured note payable, the Company had an interest rate swap agreement, which is described in Note 4. Several loan agreements contain various covenants, which, among other things, require the Company to maintain a minimum consolidated shareholders' equity of $750 million. EXH 13-39 (8) INCOME TAXES The income tax effects of the temporary differences that give rise to deferred income tax assets and liabilities as of December 31 were as follows: (In thousands) 1994 1993 ---------- ---------- Deferred income tax liabilities: Deferred acquisition costs $1,038,548 $ 785,699 Unrealized gains on securities available for sale 394,378 439 Policy benefit reserves - 97,199 Premiums receivable 127,136 58,491 Other 79,108 37,472 --------- --------- Total deferred income tax liabilities 1,639,170 979,300 --------- --------- Deferred income tax assets: Difference in tax basis of investment in Japan branch 117,238 69,204 Foreign tax credit carryovers 69,507 61,758 Policy benefit reserves 91,634 - Unfunded retirement benefits 45,124 23,993 Accrued expenses 59,569 22,734 Other 69,828 45,643 --------- --------- Total gross deferred tax assets 452,900 223,332 Less valuation allowance 91,594 74,711 --------- --------- Total deferred income tax assets 361,306 148,621 --------- --------- Deferred income tax liability 1,277,864 830,679 Current income tax liability 114,577 119,599 --------- --------- Total income tax liability $1,392,441 $ 950,278 ========= ========= A valuation allowance is recognized under SFAS No. 109 when it is more likely than not that deferred tax assets will not be realized. The Company has established valuation allowances primarily for foreign tax credit carryovers and nondeductible noninsurance losses. During 1994, the valuation allowance for deferred tax assets increased by $16.9 million due to increased foreign tax credit carryovers and noninsurance losses. Foreign tax credit carryovers available at December 31, 1994, expire as follows: $13.4 million in 1995, $25.4 million in 1997, $23.0 million in 1998 and $7.7 million in 1999. EXH 13-40 The components of income tax expense, excluding the cumulative effect of accounting changes, for the years ended December 31 were as follows: Foreign, Principally (In thousands) Japan U.S. Total ----------- --------- ----------- Income tax expense (benefit): 1994: Current $ 133,885 $ 12,587 $ 146,472 Deferred 65,225 (151) 65,074 ---------- -------- ---------- Total $ 199,110 $ 12,436 $ 211,546 ========== ======== ========== 1993: Current $ 126,439 $ 10,491 $ 136,930 Deferred 47,222 343 47,565 ---------- -------- ---------- Total $ 173,661 $ 10,834 $ 184,495 ========== ======== ========== 1992: Current $ 97,979 $ 7,450 $ 105,429 Deferred 33,786 1,962 35,748 ---------- -------- ---------- Total $ 131,765 $ 9,412 $ 141,177 ========== ======== ========== Income tax expense in the accompanying consolidated financial statements is greater than the amount computed by applying the expected U.S. tax rate of 35% for both 1994 and 1993, and 34% for 1992, to pretax earnings before the cumulative effect of accounting changes. The principal reasons for the differences and the related tax effects are summarized as follows: (In thousands) 1994 1993 1992 --------- --------- --------- Income taxes based on U.S. statutory rates $ 176,518 $ 149,934 $ 110,345 U.S. alternative minimum tax 10,712 9,542 7,380 Unrecognized foreign tax credits 12,473 17,275 14,612 Noninsurance losses generating no current tax benefit 5,561 1,598 1,754 Other, net 6,282 6,146 7,086 -------- -------- -------- Income tax expense $ 211,546 $ 184,495 $ 141,177 ======== ======== ======== Most of the Company's income tax expense represents Japanese income taxes on AFLAC Japan operating results. Japan's corporate tax rate was 45.3% in 1994, and 46.2% in both 1993 and 1992. During the first quarter of 1994, the Japanese government enacted new tax legislation that terminated an extension of the temporary special corporate tax of .9% of Japan's taxable income. This tax was previously scheduled to expire at December 31, 1994. This tax rate reduction decreased income tax expense by approximately $4.0 million for 1994. EXH 13-41 Income taxes are recorded in the statements of earnings and directly in certain shareholders' equity accounts. Income tax expense (benefit) for the years ended December 31 was allocated as follows: Liability Liability Deferred Method Method Method (In thousands) 1994 1993 1992 --------- -------- -------- Statements of earnings: Operating earnings (excluding realized investment gains and losses) $211,341 $183,793 $144,382 Realized investment gains and losses 205 702 (3,205) Benefits of adoption of SFAS No. 109 - (22,000) - ------- ------- ------- Income taxes included in the statements of earnings 211,546 162,495 141,177 Shareholders' equity: Unrealized gains and losses on securities available for sale 289,658 2,165 (3,654) Unrealized foreign currency translation gains (1,980) - - ------- ------- ------- Total income taxes $499,224 $164,660 $137,523 ======= ======= ======= Realized investment losses incurred by AFLAC Japan are fully deductible for Japan income tax purposes. Accordingly, the income tax effects shown above for realized and unrealized investment gains and losses reflect such tax benefit of any losses related to AFLAC Japan operations. Also, AFLAC Japan receives certain Japanese income tax benefits from foreign exchange translation losses on its dollar-denominated investments. These tax benefits are included directly in the shareholders' equity component of unrealized foreign currency translation gains. Deferred income tax expense, which results from differences in the timing of reporting various income and expense items between the financial statements (excluding the cumulative effect of accounting changes) and the income tax returns, is summarized as follows: Liability Liability Deferred Method Method Method (In thousands) 1994 1993 1992 --------- --------- -------- Recognition of deferred policy acquisition costs $ 78,182 $ 56,786 $ 52,097 Adjustments of liability for future policy benefits (12,449) 584 201 Unrecognized foreign tax credits (5,882) (3,548) (6,393) Noninsurance losses generating no tax benefit 9,134 2,214 1,754 Other, net (3,911) (8,471) (11,911) ------- ------- ------- Deferred income tax expense $ 65,074 $ 47,565 $ 35,748 ======= ======= ======= EXH 13-42 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. Although the final outcome is uncertain, the Company believes that its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements. (9) SHAREHOLDERS' EQUITY The following is a reconciliation of the Company's common stock for the years ended December 31: (In thousands) 1994 1993 1992 -------- -------- -------- Common stock - number of shares: Issued: Balance at beginning of year 103,710 82,549 81,778 Exercise of stock options 290 370 771 Shares issued in connection with acquisition - 104 - Five-for-four stock split - 20,687 - -------- -------- -------- Balance at end of year 104,000 103,710 82,549 -------- -------- -------- Treasury stock - number of shares: Balance at beginning of year 239 137 43 Purchases of treasury stock 4,206 33 94 Shares received in connection with acquisition - 238 - Five-for-four stock split - 44 - Shares issued to sales associates stock plan (81) - - Shares issued in connection with acquisition - (213) - -------- -------- -------- Balance at end of year 4,364 239 137 -------- -------- -------- Shares outstanding at end of year 99,636 103,471 82,412 ======== ======== ======== SHARE REPURCHASE PROGRAM: In February 1994, the board of directors authorized the purchase of up to 4.6 million shares of AFLAC Incorporated common stock on the open market. Through December 31, 1994, 4.2 million shares had been purchased under the repurchase program. The repurchase of shares and related financing costs did not materially increase earnings per share during 1994. In early 1995, the board of directors authorized the purchase of an additional 4.6 million shares. EXH 13-43 STOCK OPTIONS: The following table summarizes data relating to qualified and non-qualified stock options: 1994 1993 1992 --------- --------- --------- Number of shares subject to options: Outstanding at beginning of year 3,057,515 3,505,379 4,212,674 Granted 2,739,000 22,501 425,143 Expired/canceled (76,625) - (12,657) Exercised (287,742) (470,365) (1,119,781) ---------- ---------- ---------- Outstanding at end of year 5,432,148 3,057,515 3,505,379 ========== ========== ========== Exercisable at end of year 4,421,114 2,761,980 2,913,053 ========== ========== ========== Available for future grants 337,901 276 22,777 ========== ========== ========== Exercise price per share for options exercised $3.07-24.20 $3.07-24.20 $3.07-18.40 ========== ========== ========== In April 1994, the Company's shareholders approved an additional three million shares to be made available for future grants. The exercise price of options outstanding at December 31, 1994, ranged from $5.35 to $34.69 per share (average exercise price of $20.30 per share). OTHER: In accordance with the Parent Company's Articles of Incorporation, shares of common stock are generally entitled to one vote per share until they have been held by the same beneficial owner for a continuous period of 48 months, at which time they become entitled to 10 votes per share. In December 1993, the Parent Company issued 213,060 shares from treasury stock and 103,688 newly issued shares of common stock in exchange for the common stock of a corporation owned by the Company's president and chief executive officer. The principal assets of the acquired corporation consisted of 238,308 shares of the Parent Company's common stock (valued at the stock exchange average closing market price over the preceding 18 trading-day period) and future renewal commission rights on certain AFLAC insurance policies sold in the officer's territory while he served as an independent agent for the Company on a commission-only basis prior to 1983 (computed at fair value based on the average of three appraisals of the present value determinations made by three independent actuarial consultants). The 238,308 shares of Parent Company stock acquired have been reflected as the purchase of treasury shares in the accompanying consolidated financial statements. EXH 13-44 (10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS Net assets of the insurance subsidiaries aggregated $2.0 billion at December 31, 1994, on a generally accepted accounting principles basis. AFLAC Japan accounted for $1.6 billion of the above net assets. The Parent Company depends on its subsidiaries for cash flow, primarily in the form of dividends and management fees. Consolidated retained earnings in the accompanying financial statements largely represent undistributed earnings of the insurance subsidiaries. Dividends, management fees (see Note 2) and other payments to the Parent Company by its insurance subsidiaries are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. Dividend payments by American Family Life Assurance Company of Columbus (AFLAC) during 1995 in excess of $259.0 million would require prior approval of U.S. state insurance regulatory authorities. The Company's insurance subsidiaries are required to report their results of operations and financial position to state insurance regulatory authorities, and in the case of AFLAC Japan, to the Japanese Ministry of Finance, on the basis of statutory accounting practices prescribed or permitted by such authorities. U.S. statutory net income of AFLAC was $252.5 million in 1994, $149.2 million in 1993 and $153.2 million in 1992. Statutory capital and surplus was $1,127.6 million and $992.7 million at December 31, 1994 and 1993, respectively, as determined on a U.S. statutory accounting basis. Reconciliations of AFLAC's net assets on a generally accepted accounting principles basis to net assets determined on a U.S. statutory accounting basis as of December 31 are as follows: (In thousands) 1994 1993 ---------- ---------- Net assets on generally accepted accounting principles basis $ 1,952,326 $ 1,447,352 Adjustment for SFAS No. 115 (216,462) - Elimination of deferred policy acquisition costs (2,401,768) (1,950,845) Adjustment to liability for future policy benefits 1,015,088 828,932 Adjustment to income tax liability 1,013,083 857,124 Reduction in premiums receivable (61,168) (42,989) Establishment of asset valuation reserve (139,858) (106,431) Elimination of statutory non-admitted assets (52,511) (37,038) Difference in foreign currency translation (81,087) (56,238) Other, net 99,961 52,833 ---------- ---------- Net assets on U.S. statutory accounting basis $ 1,127,604 $ 992,700 ========== ========== A portion of AFLAC Japan annual earnings, as determined on a Japan statutory accounting basis, can be remitted each year to AFLAC U.S. after satisfying various restrictions imposed by Japanese regulatory authorities for protecting policyholders and obtaining remittance approvals from such EXH 13-45 authorities. Such restrictions include compliance with risk-based capital guidelines for Japanese insurers. Profit remittances to the United States can fluctuate due to changes in the amounts of Japanese regulatory earnings. Among other items, factors affecting regulatory earnings include changes in the market value of investments and fluctuations in currency translations of AFLAC Japan's U.S. dollar-denominated investments into yen. Earnings were remitted from AFLAC Japan to AFLAC U.S. in the amount of $132.9 million in 1994, $97.9 million in 1993 and $33.4 million in 1992. Management expects to continue to obtain approvals from Japan regulatory authorities for annual transfers. Net assets (unaudited) of AFLAC Japan, based on Japan statutory accounting practices, aggregated $228.6 million and $184.4 million at December 31, 1994 and 1993, respectively. Japan statutory accounting practices differ in many respects from U.S. generally accepted accounting principles, including: different policy benefit reserving methods, immediate charge-off of policy acquisition costs, investment securities generally carried at lower of cost or market, and nonrecognition of deferred income tax liabilities. EXH 13-46 (11) BENEFIT PLANS Retirement Plans: The Company sponsors several defined-benefit retirement plans covering substantially all employees. The retirement benefits for employees are generally based on years of service and formula- determined salaries at retirement for AFLAC Japan employees, and salary during the five highest consecutive years out of the last 10 years preceding retirement for U.S. employees. It is the Company's general policy to annually fund through a trust the accrued costs for the U.S. employee plans to the extent deductible for U.S. federal income tax purposes (such accrued costs are calculated under the frozen entry-age actuarial cost method). A portion of the AFLAC Japan employee retirement program is funded under a group annuity arrangement with another insurance company. An accrued liability is included in the consolidated financial statements for the unfunded portion of the AFLAC Japan program and supplemental plans for certain Japan and U.S. officers. The components of retirement expense and significant actuarial assumptions for the years ended December 31 are shown below. 1994 1993 1992 -------------- -------------- -------------- (In thousands) Japan U.S. Japan U.S. Japan U.S. ------ ------ ------ ------ ------ ------ Basic employee plans: Service cost for benefits earned during the year $2,269 $ 2,166 $1,500 $ 1,602 $1,249 $ 1,160 Interest cost on projected benefit obligations 999 2,569 801 2,145 618 1,745 Less actual investment return on plan assets (1,135) 28 (355) (1,195) (538) (1,538) Net amortization and deferral 278 (1,530) 213 (487) 97 (308) ----- ------ ----- ------ ----- ------ Total retirement expense for basic employee plans 2,411 3,233 2,159 2,065 1,426 1,059 Officers, retirees and beneficiaries unfunded supplemental plans 1,203 33,468 1,021 18,007 932 16,506 ----- ------ ----- ------ ----- ------ Total retirement expense $3,614 $36,701 $3,180 $20,072 $2,358 $17,565 ===== ====== ===== ====== ===== ====== Significant actuarial assumptions: Discount rate for: Net periodic pension costs 4.4% 7.0% 5.5% 8.0% 5.5% 9.0% Benefit obligations 5.0 8.0 4.0 7.0 5.5 9.0 Projected increase in salary levels 4.5 5.0 4.5 5.0 4.5 6.6 Expected long-term return on plan assets 5.5 9.0 5.5 9.0 5.5 9.0 EXH 13-47 Reconciliations of the funded status of the basic employee plans with amounts recognized in the accompanying consolidated balance sheets as of December 31 are as follows: 1994 1993 ---------------- ---------------- (In thousands) Japan U.S. Japan U.S. ------- ------- ------- ------- Plan assets, at fair value (primarily bonds, stocks and insurance contracts) $16,631 $24,963 $12,615 $22,874 ------ ------ ------ ------ Actuarial present value of benefit obligations: Accumulated benefit obligations, based on employee service to date and present salary levels: Vested benefits 11,694 22,413 10,953 22,159 Non-vested benefits 135 1,120 203 1,298 Effect of assumed future salary increases 10,344 9,108 10,452 10,919 ------ ------ ------ ------ Projected benefit obligations 22,173 32,641 21,608 34,376 ------ ------ ------ ------ Projected benefit obligations in excess of plan assets (5,542) (7,678) (8,993) (11,502) Unamortized net losses from plan experience variations and changes in actuarial assumptions 589 9,661 4,802 11,341 Unrecognized prior service cost (credit) - (276) - 596 Unamortized net transition (gain) loss 983 (1,326) 966 (1,448) ------ ------ ------ ------ Prepaid retirement cost (liability) recognized in consolidated balance sheets $(3,970) $ 381 $(3,225) $(1,013) ====== ====== ====== ====== In addition to the funded benefit obligations shown above for basic employee plans, the accrued retirement liability for unfunded supplemental retirement plans for various officers and beneficiaries at December 31, 1994 and 1993, was $102.6 million and $73.0 million, respectively. The actuarial present value of projected benefit obligations for these plans was $114.9 million and $117.4 million at December 31, 1994 and 1993, respectively. The discount rates used were 5.0% and 4.0% for AFLAC Japan, and 8.0% and 7.0% for AFLAC U.S. for 1994 and 1993, respectively. Such supplemental retirement plans include a lifetime obligation to the surviving spouse of the Company's former chairman of the board. Current benefits are payable at 1% of the previous year's "net earnings" as defined in the agreement. Benefits after 1994 will be reduced by one-half. In 1994, the provision for future increases in "net earnings" was strengthened to 15% for 1995 and graded to 10% over five years. As a result, approximately $13 million was added to the accrued liability for unfunded supplemental retirement plans in 1994. POSTRETIREMENT BENEFITS: In addition to pension benefits, substantially all U.S. employees of the Company participate in health care benefit plans. EXH 13-48 Employees become eligible for these benefits, up to age 65, if they terminate employment after age 55 with 15 years of service. Certain employees are eligible for nonmedical benefits. In 1993, the Company adopted the accrual method of accounting for postretirement benefits and elected to recognize the transition obligation in earnings. The cumulative effect of recognizing this transition obligation was a decrease to earnings by $9.6 million during 1993. The accumulated benefit obligation for the years ended December 31, 1994 and 1993 was $10.0 million and $11.2 million, respectively, based on an assumed discount rate of 8% and 7%, respectively. Net postretirement benefit cost for the years ended December 31 included the following components: (In thousands) 1994 1993 ------ ------ Service Cost $ 251 $ 177 Interest Cost 743 786 ----- ----- Postretirement benefit cost $ 994 $ 963 ===== ===== Actuarial assumptions used were: Projected health care cost trend rate 14% 15% Ultimate trend rate 7% 7% Effect of a 1% point increase in the care-cost trend rate on the postretirement benefit obligation $ 487 $ 541 Effect of a 1% point increase in the care-cost trend rate on the aggregate of service and interest cost $ 94 $ 71 Discount rate - periodic cost 7% 8% STOCK BONUS PLAN: AFLAC U.S. maintains a Stock Bonus Plan for eligible U.S. sales associates. Contributions to the plan, which are determined based on sales of insurance policies, are made by AFLAC U.S. to a trust and are used to purchase the Parent Company's common stock for later distribution to the participants. The net costs of this plan, which are included in deferred policy acquisition costs, amounted to $6.9 million in 1994, $3.5 million in 1993 and $4.1 million in 1992. EXH 13-49 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the consolidated financial statements of AFLAC Incorporated and subsidiaries. The statements have been prepared in accordance with generally accepted accounting principles and include amounts based upon management's best estimates and judgments. Informed judgments and estimates are used for those transactions not yet complete or for which the ultimate effects cannot be measured precisely. Financial information elsewhere in this annual report is consistent with the information in the financial statements. The Company's internal controls are designed to reasonably assure that AFLAC Incorporated's books and records reflect the transactions of the Company, that assets are safeguarded, and that the Company's established policies and procedures are followed. The effectiveness of the controls system is supported by the selection and training of qualified personnel, an organizational structure that provides an appropriate division of responsibility, and a comprehensive internal audit program. The Company engages KPMG Peat Marwick LLP as independent auditors to audit its financial statements and express their opinion thereon. Their audits include reviews and tests of the Company's internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. Members of that firm also have the right of full access to each member of management in conducting their audits. The report of KPMG Peat Marwick LLP appears on the following page. The Audit Committee of the board of directors, which is composed of four outside directors, serves in an oversight role to assure the integrity and objectivity of the Company's financial reporting process. The committee meets periodically with representatives of management, as well as the independent and internal auditors, to review matters of a material nature related to financial reporting and the planning, results and recommendations of audits. The independent and internal auditors have free access to the Audit Committee, without management present, to discuss any matter they believe should be brought to the attention of the committee. The committee is also responsible for making recommendations to the board of directors concerning the selection of the independent auditors. /s/ Daniel P. Amos - --------------------------------- Daniel P. Amos President and Chief Executive Officer /s/ Kriss Cloninger III - --------------------------------- Kriss Cloninger III Executive Vice President and Chief Financial Officer EXH 13-50 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors AFLAC Incorporated: We have audited the accompanying consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AFLAC Incorporated and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1994, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 30, 1995 EXH 13-51 Unaudited Consolidated Quarterly Financial Data (In thousands, except per-share amounts)
- ----------------------------------------------------------------------------------------------------------------------------- Three Months ended, March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------------- 1994 Amount % Change Amount % Change Amount % Change Amount % Change - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $1,391,982 24.1% $1,481,203 19.8% $1,601,511 22.4% $1,636,062 22.6% Net earnings 69,957 30.2 69,378 18.1 76,059 17.8 77,396 15.8 - ----------------------------------------------------------------------------------------------------------------------------- Per common share: Net earnings $ .67 31.4 $ .67 19.6 $ .74 21.3 $ .76 18.8 Cash dividends $ .10 $ .115 $ .115 $ .115 - ----------------------------------------------------------------------------------------------------------------------------- Three Months ended, March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------------- 1993 Amount % Change Amount % Change Amount % Change Amount % Change - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $1,121,470 20.0% $1,236,720 29.5% $1,308,241 27.6% $1,334,187 24.5% Net earnings before cumulative effect of accounting changes 53,746 26.8 58,741 32.7 64,540 34.8 66,861 36.9 Net earnings 65,184 58,741 64,540 66,861 - ----------------------------------------------------------------------------------------------------------------------------- Per common share: Net earnings before cumulative effect of accounting changes $ .51 24.4 $ .56 27.3 $ .61 32.6 $ .64 33.3 Cash dividends $ .088 $ .10 $ .10 $ .10 - -----------------------------------------------------------------------------------------------------------------------------
EXH 13-52 EX-21 7 SUBSIDIARIES EXHIBIT 21 AFLAC INCORPORATED SUBSIDIARIES The following list sets forth the subsidiaries of the Company: Company Jurisdiction ___________________________________________ ______________ AFI Japan Co., Ltd. ("AFIJC") Japan AFLAC Broadcast Group, Inc. ("AFBG") Georgia AFLAC Broadcast Partners ("AFLACBP") Georgia AFLAC Insurance Company, Ltd. ("AICL") United Kingdom AFLAC Insurance Company of Canada ("AFLACIC") Canada AFLAC International, Inc. ("AII") Georgia AFLAC Life Assurance Company, Ltd. ("ALACL") United Kingdom AFLAC plc ("AL") United Kingdom AFLAC Real Estate Holdings, Inc. ("AREH") Georgia A. S. Hospitality, Inc. ("ASH") Tennessee American Family, Ltd. ("AF") United Kingdom American Family Life Assurance Company of Columbus ("AFLAC") Georgia American Family Life Assurance Company of New York ("AFLAC-NY") New York Communicorp, Inc. ("COMM") Georgia Communicorp International, Ltd. ("CI") Hong Kong Famous Artists Corporation ("FAC") Pennsylvania Hotel Columbus, Inc. ("HCI") Georgia National Equity Corporation Nevada WITN-TV, Inc. ("WITN") North Carolina The above subsidiaries are 100% directly owned by the Company, except: WITN is 100% directly owned by AFBG. CI is 100% directly owned by COMM. AF, AICL and ALACL are 100% directly owned by AL. AFLAC-NY is 100% directly owned by AFLAC. AFIJC is 100% directly owned by AREH. AFLACBP is 99% owned by AFLAC and 1% owned by AFBG. EXH 21-1 EX-23.0 8 KPMG CONSENT INCENT STOCK OPT PLAN Exhibit 23.0 KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Suite 2000 Atlanta, GA 30308 INDEPENDENT AUDITORS' CONSENT The Shareholders and The Board of Directors AFLAC Incorporated We consent to incorporation by reference in the Registration Statement No. 33-44720 on Form S-8 of AFLAC Incorporated of our report dated January 30, 1995, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the 1994 annual report to shareholders and is incorporated by reference in the December 31, 1994, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 28, 1995 EXH 23.0-1 EX-23.1 9 KPMG CONSENT ASSOC STOCK BONUS PLAN Exhibit 23.1 KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Suite 2000 Atlanta, GA 30308 INDEPENDENT AUDITORS' CONSENT The Shareholders and The Board of Directors AFLAC Incorporated We consent to incorporation by reference in the Registration Statement No. 33-41926 on Form S-3 of AFLAC Incorporated of our report dated January 30, 1995, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the 1994 annual report to shareholders and is incorporated by reference in the December 31, 1994, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 28, 1995 EXH 23.1-1 EX-23.2 10 KPMG CONSENT 401(K) RETIREMENT PLAN EXHIBIT 23.2 KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Suite 2000 Atlanta, GA 30308 INDEPENDENT AUDITORS' CONSENT The Shareholders and The Board of Directors AFLAC Incorporated We consent to incorporation by reference in the Registration Statement No. 33-41552 on Form S-8 of AFLAC Incorporated of our report dated January 30, 1995, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the 1994 annual report to shareholders and is incorporated by reference in the December 31, 1994, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 28, 1995 EXH 23.2-1 EX-27 11 ARTICLE 7 FDS FOR 1994 FORM 10-K
7 This schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-K for the year ended December 31, 1994, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 15,530,694 0 0 84,373 25,104 0 15,976,125 17,643 0 2,402,869 20,287,079 15,515,521 339,514 0 151,572 184,901 10,400 0 0 1,741,367 20,287,079 5,180,732 838,825 (58) 91,259 4,256,541 153,503 1,196,378 504,336 211,546 292,790 0 0 0 292,790 2.84 0 0 0 0 0 0 0 0
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