-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UNHuVVtW9nZsX4sXQeiFrfsjWijF65xLB8g8ShHhXSKTSdHa4qF50a9AUEGPuoxB 2H1PhNhDhAUuIE0iSZWC/Q== 0000004977-96-000006.txt : 19960327 0000004977-96-000006.hdr.sgml : 19960327 ACCESSION NUMBER: 0000004977-96-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07434 FILM NUMBER: 96538371 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-K 1 1995 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, 1995 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. -------- The number of shares of the registrant's Common Stock outstanding at March 18, 1996, with $.10 par value, was 142,142,286. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 18, 1996 was $4,382,039,560. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 Exhibit 13 - pages 13-5 to 13-19 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)), pages 13-32 to 13-39 (Notes 2 and 3 of the Notes to the Consolidated Financial Statements), and pages 13-50 to 13-51 (Note 10). The applicable portions of the Company's Annual Report to Shareholders for the year ended December 31, 1995, are included as Exhibit 13 Item 2 Exhibit 13 - pages 13-18 (Cash Flow section of MD&A) and page 13-41 (Note 5) PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-48 (Note 9) Item 6 Exhibit 13 - pages 13-3 and 13-4 Item 7 Exhibit 13 - pages 13-5 to 13-19 Item 8 Exhibit 13 - pages 13-20 to 13-58 PART III Item 10 Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 8, 1996 (the Proxy Statement) Item 11 Incorporated by reference from the Proxy Statement Item 12 Incorporated by reference from the Proxy Statement Item 13 Incorporated by reference from the Proxy Statement i AFLAC Incorporated Annual Report on Form 10-K For the Year Ended December 31, 1995 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 ii 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 1994, AFLAC transferred 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 13-19 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)) and page 13-32 (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 operates principally in the United States and 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, supplemental general medical expense plans and a living benefit life plan. 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, and several U.S. territories and foreign countries. The Company's only significant foreign operation is AFLAC Japan, which accounted for 85% of the Company's total revenues in 1995. On February 13, 1996, the board of directors declared a three-for-two stock split to shareholders of record as of February 29, 1996, payable on March 18, 1996. Share and per-share amounts have been adjusted to reflect this split. Insurance premiums and investment income from insurance operations are the major sources of revenues. The Company's consolidated premium income was $6.1 billion for 1995, $5.2 billion for 1994 and $4.2 billion for 1993. I-1 The following table sets forth consolidated premiums earned by class offered by AFLAC in Japan and the United States for the three years ended December 31. (In thousands) 1995 1994 1993 ---------- ---------- ---------- Premiums earned: Health insurance $ 6,037,206 $ 5,148,406 $ 4,192,259 Life and other insurance 17,937 15,149 14,488 ---------- ---------- ---------- Total U.S. and Japan premiums earned $ 6,055,143 $ 5,163,555 $ 4,206,747 ========== ========== ========== The following table sets forth the changes in annualized premiums in force for AFLAC health insurance for the years ended December 31. (In thousands) 1995 1994 1993 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 5,578,987 $ 4,460,076 $ 3,628,961 New issues including policy conversions 965,321 922,773 801,937 Change in unprocessed policies (107,287) 212,058 154,684 Lapses and surrenders (408,366) (347,020) (302,690) Other (11,676) (129,932) (143,432) Foreign currency translation adjustment (179,096) 461,032 320,616 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 5,837,883 $ 5,578,987 $ 4,460,076 ========== ========== ========== INVESTMENTS AND INVESTMENT RESULTS 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 $2.6 billion and $820.9 million at December 31, 1995 and 1994, respectively. For additional information regarding SFAS No. 115, see Exhibit 13, page 13-34 (Note 3 of Notes to the Consolidated Financial Statements). The Company's investments (including cash) were $20.0 billion at December 31, 1995. Since December 31, 1994, total investments, including unrealized gains on fixed-maturity securities, increased $4.1 billion, or 25.3%. AFLAC Japan investments increased $3.6 billion (24.7%), while AFLAC U.S. investments increased $416.3 million (33.1%). Since December 31, 1994, total investments, excluding unrealized gains on fixed-maturity securities, I-2 have increased $2.3 billion, or 15.2%. AFLAC Japan investments increased $2.0 billion (14.7%), while AFLAC U.S. investments increased $265.4 million (20.3%). Net investment income of $1.0 billion in 1995 continued to be a growing source of revenues and earnings for the Company, increasing $186.1 million in 1995 over 1994 and $149.6 million in 1994 over 1993. It is generally AFLAC's policy to invest in high-grade investments, principally in government, and high-quality 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 investment strategy. The Company has streamlined and integrated the organizational structure of investment operations into a single functional unit and has set specific worldwide criteria regarding credit quality, liquidity, compliance with regulatory requirements and conformance to product needs. INVESTMENTS - JAPAN During 1995, 90.3% of AFLAC Japan's yen cash flow available for investment was allocated to yen-denominated fixed-maturity securities, while the remaining 9.7% was invested in dollar-denominated securities. Of the total amount invested in yen-denominated securities in 1995, 26.0% was invested in Japanese government bonds at a yield of 3.84%, 33.7% was invested in the longer-dated private sector at a rate of 5.07%, 6.0% was invested in municipal bonds at a rate of 3.95%, and the remaining 24.6% was invested in assorted sectors of yen-denominated fixed-maturity securities at an average rate of 4.19%. At year-end 1995, Japanese government bonds accounted for 37.7% of AFLAC Japan's total investments (at amortized cost). 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 1995, which provide a better match of asset and liability durations, and these instruments accounted for 20.3% of total investments in Japan at year-end. At the end of the year, municipal securities represented 5.3% of the total investments, while utility bonds represented 18.1%. Other assorted sectors accounted for 11.1%, and dollar-denominated securities represented 7.5% of AFLAC Japan's total investments. The Company increased its commitment to the dollar-denominated portfolio of AFLAC Japan's invested assets during 1995. AFLAC Japan added $307.9 million to this portfolio at an average yield of 7.55%. AFLAC Japan's dollar-denominated portfolio represented 7.5% of total investments in Japan, or $1.3 billion at the end of 1995, compared with $951.3 million at the end of 1994. Investments in dollar-denominated fixed-maturity securities provide certain tax and yield advantages to the Company. The Company continued to avoid the Japanese equity and investment real estate markets in 1995. AFLAC Japan's equity portfolio accounted for only .1% of invested assets at year-end, and the Company does not expect this I-3 portion to increase in 1996. 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 total investments at year-end. INVESTMENTS - U.S. Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $140.5 million in 1995, up from $132.9 million in 1994. Of the $140.5 million in 1995, $21.2 million was transferred to the Parent Company. 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 future profit repatriation to continue to have a positive impact on its consolidated net earnings. AFLAC U.S. continued to focus on purchasing securities that emphasize safety and liquidity. AFLAC U.S. maintained its overall investment quality throughout the year. Almost half of the fixed-maturity portfolio was rated "AA" or better at the end of the year. Including profit repatriation, AFLAC U.S. invested $660.7 million in 1995. Of that amount, approximately 46.3% was invested in U.S. government or agency securities at an average yield to maturity of 7.82%, 42.4% was invested in corporate fixed-maturity securities at 7.66%, and 5.1% was allocated to various other sectors at an average yield of 7.17%. We also added approximately $41.1 million, or 6.2% of total funds available for investment, to the AFLAC U.S. equity portfolio. At the end of 1995, fixed-maturity securities continued to dominate AFLAC U.S. total investments. Fixed-maturity securities represented 85.0% of total investments at the end of the year. Within that category, U.S. government and agency securities accounted for 17.7% of the holdings, while corporate securities were 58.9%. Equity investments made up 5.7% of total investments. 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 13-15 to 13-19 (discussions relating to Balance Sheet and Cash Flow) and pages 13-34 to 13-41 (Notes 3 and 4 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. INSURANCE - JAPAN The following table sets forth AFLAC Japan's premiums earned by product line for the last three years ended December 31. (In thousands) 1995 1994 1993 ---------- ---------- ---------- Premiums earned: Cancer expense $ 4,752,338 $ 4,054,697 $ 3,259,705 Other accident and health 440,635 316,395 224,555 Life insurance 2,378 - - ---------- ---------- ---------- Total AFLAC Japan premiums earned $ 5,195,351 $ 4,371,092 $ 3,484,260 ========== ========== ========== I-4 The following table sets forth the changes in annualized premiums in force for AFLAC Japan health insurance for the years ended December 31: (In thousands) 1995 1994 1993 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 4,718,783 $ 3,672,594 $ 2,914,428 New issues including policy conversions 690,170 680,879 576,127 Change in unprocessed policies (105,496) 209,392 157,142 Lapses and surrenders (200,507) (163,047) (145,567) Other (23,075) (142,067) (150,152) Foreign currency translation adjustment (179,096) 461,032 320,616 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,900,779 $ 4,718,783 $ 3,672,594 ========== ========== ========== 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 insurance 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 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). 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. This plan is offered with several riders, providing death 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. In 1995, the Company introduced two other products in Japan. The first product is an improved medical expense policy. It is similar to hospital indemnity insurance products in the United States and provides cash benefits to policyholders when they are hospitalized. The market for medical expense coverage in Japan is very competitive, but the Company believes the revised policy will give AFLAC Japan's agents greater flexibility in product offerings. AFLAC Japan also introduced a new living benefit life plan. This product is a life insurance policy that provides lump-sum benefits when policyholders experience heart attack, cancer or stroke. The Company is offering this product in two forms - as a stand-alone policy or as a rider to the cancer plan. Marketing efforts for living benefit life primarily focus on the sale of the rider. Introduction of the rider began in late I-5 1995. AFLAC Japan sold more than 406,000 living benefit life riders in the last four months of the year. Sales of the rider for the year exceeded $77 million in new annualized premium. The Company anticipates very strong results from this new product in 1996, its first full year of availability. Due to the continued low level of available investment yields in Japan, the Ministry of Finance has permitted insurers to increase premium rates on new policy issues in recent years. AFLAC Japan increased premium rates by an average of 16% on all cancer policy sales made after July 1, 1994. Premium rates on care policy new issues were increased by an average of 10% in both November 1993 and 1995. As a result of continuing low yields, the Company expects to increase premium rates on all new policy issues by an additional 10% beginning in the second half of 1996. AGENCY FORCE - JAPAN The development of a "corporate agency" system has been important to the growth of AFLAC Japan. Affiliated corporate agencies are formed when companies establish subsidiary businesses to sell AFLAC products to their employees, suppliers and customers. These agencies help AFLAC Japan reach the employees of almost all of Japan's large corporations. AFLAC has no ownership interest in these corporate agencies. AFLAC products are also sold through independent corporate agencies and individual agencies that are not affiliated with large companies. At December 31, 1995, there were 5,224 agencies in Japan with 20,375 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 47 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, unique marketing system (see Agency Force), low-cost operations and product expertise developed in the United States. AFLAC has been very successful in the sale of cancer expense policies in Japan, with over 12.2 million cancer policies in force at December 31, 1995. During 1994, the governments of Japan and the United States held a series of trade talks. The U.S.-Japan Framework Agreement negotiations discussed 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 Japanese insurers, operate in the third sector. I-6 In 1996, the Japanese government will adopt a framework for long-term deregulation of the financial services businesses in Japan. The principles upon which deregulation of the Japanese insurance industry is based are: to promote competition and to enhance efficiency through deregulation and liberalization; to preserve soundness; and to secure fairness and equity in business operations. As Japan begins gradually deregulating the insurance industry, the marketplace should become more competitive; however, the ultimate changes and their effects on AFLAC Japan are not presently determinable. But, due to the Company's unique marketing distribution system and low-cost operations in Japan, AFLAC believes it should not be directly affected by deregulation in Japan in the immediate future. 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. REGULATION AND REMITTANCE OF FUNDS - JAPAN Payments are made from AFLAC Japan to the Parent Company for management fees, and to AFLAC U.S. for allocated expenses and remittances of earnings. These payments totaled $179.5 million in 1995, $167.9 million in 1994 and $133.4 million in 1993. Management fees paid to the Parent Company are largely based on expense allocations. 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 conditions imposed by Japanese regulatory authorities for protecting policyholders and obtaining remittance approvals from such authorities. These conditions 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 Japanese regulatory accounting practices and fluctuations in currency translations of AFLAC Japan's U.S. dollar-denominated investments into yen. 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. Japan statutory accounting practices differ in many respects from U.S. generally accepted accounting principles. Under Japan statutory accounting practices, policy acquisition costs are charged off immediately, policy benefit and claim reserving methods are different, deferred income tax liabilities are not recognized, and investment securities are generally carried at cost. As part of the deregulation process, the Japanese Ministry of Finance (MOF) is developing new solvency regulations and standards that represent a form of risk-based capital requirements. AFLAC Japan must meet these I-7 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 to adversely affect the repatriation of funds from Japan in the foreseeable future. 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 pages I-12 and I-13 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) 1995 1994 ---------- ---------- Net assets on GAAP basis $ 1,817,106 $ 1,564,938 Elimination of deferred policy acquisition costs (2,067,409) (1,951,549) Reduction in carrying value of fixed- maturity investments for fair value and foreign exchange adjustments (2,613,600) (978,855) Adjustment to policy liabilities 2,205,072 500,952 Elimination of deferred income taxes 1,211,187 1,223,368 Reduction in premiums receivable (237,929) (227,270) Other, net 98,378 97,041 ---------- --------- Net assets on Japanese regulatory accounting basis $ 412,805 $ 228,625 ========== ========= For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-8 to 13-11 (AFLAC Japan section of MD&A) and pages 13- 32 and 13-50 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. EMPLOYEES - JAPAN AFLAC Japan employed 1,571 full-time and 157 part-time employees at December 31, 1995. AFLAC Japan considers its employee relations to be excellent. I-8 INSURANCE - U.S. The following table sets forth AFLAC U.S. premiums earned by product line for the last three years ended December 31. (In thousands) 1995 1994 1993 -------- -------- -------- Premiums earned: Cancer expense $ 402,789 $ 384,943 $ 369,256 Other accident and health 441,444 392,371 338,743 Life insurance 15,559 15,149 14,488 -------- -------- -------- Total AFLAC U.S. premiums earned $ 859,792 $ 792,463 $ 722,487 ======== ======== ======== The following table sets forth the changes in annualized premiums in force for AFLAC U.S. health insurance for the years ended December 31. (In thousands) 1995 1994 1993 --------- --------- --------- Annualized premiums in force, at beginning of year $ 860,204 $ 787,482 $ 714,533 New issues including policy conversions 275,151 241,894 225,810 Change in unprocessed policies (1,791) 2,666 (2,458) Lapses (207,859) (183,973) (157,123) Other 11,399 12,135 6,720 --------- --------- --------- Annualized premiums in force, at end of year $ 937,104 $ 860,204 $ 787,482 ========= ========= ========= HEALTH INSURANCE PLANS - U.S. AFLAC's insurance is supplemental in nature and is designed for people who already have major medical or primary insurance 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, statewide 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 four different cancer plans in the United States that vary by benefit amount and type. All four plans provide a first occurrence benefit that pays an initial amount when internal cancer is first diagnosed, a fixed amount for each day an insured is hospitalized for cancer treatment, and benefits for medical, radiation, chemotherapy, surgery and a "wellness" benefit applicable toward certain diagnostic tests such as mammograms, pap smears, flexible sigmoidoscopy, etc. Two of the plans currently offered contain benefits that reimburse the insured for nursing services, anesthesia, prosthesis, blood, plasma, second I-9 surgical opinion, ambulance, transportation, family lodging, extended care facility, bone marrow transplant and hospice. The remaining two plans make these benefits available as an optional schedule of benefits rider. AFLAC also issues several riders, including one that increases the amount of the first occurrence benefit on each rider anniversary date until the covered person reaches age 65 or until internal cancer is diagnosed. AFLAC periodically introduces new forms of coverage, revising benefits and related premiums based upon the anticipated needs of the policyholders and AFLAC's claim experience. AFLAC offers an accident and disability policy to protect against losses resulting from accidents. The accident portion of the policy includes lump sum benefits for accidental death, dismemberment and specific injuries. Fixed benefits for hospital confinement, emergency treatment, follow-up treatments, ambulance, transportation, family lodging, wellness, prosthesis, medical appliances and physical therapy are also provided. Optional disability riders are available to the primary insured only and include choices of a sickness disability rider, on-the-job disability rider and off-the-job disability rider. These benefits are payable up to a maximum benefit period of one year and for one disability at a time. 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 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, 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. 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 1995 monthly average number of U.S. agents actively producing business was 6,121, compared with 5,489 in 1994 and 5,110 in 1993. I-10 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 in the payroll market, with premiums generally paid by the employee. 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 this method lowers distribution costs. 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. During 1995 and 1994, 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 1995, AFLAC's U.S. premiums collected were $846.4 million, 7.1% of which was collected in Florida, 6.8% in both Georgia and Texas, 5.6% 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 I-11 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. Conversely, any reduction of coverages, such as increased deductibles and copayments, by other insurers or governmental programs could favorably affect AFLAC's business opportunities. 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 13-12 to 13-14 (AFLAC U.S. section of MD&A), 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 I-12 regulatory authorities, and periodic examinations of the financial, market conduct, and other affairs of insurance companies. In addition, the National Association of Insurance Commissioners (NAIC) is currently working on regulatory initiatives relating to investments, reinsurance, dividend restrictions, revision of the risk-based capital formula, recodification of statutory accounting principles and other related matters. For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-50 (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 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. 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. Currently, four states have laws, regulations or regulatory practices that either prohibit the sale of specified 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. I-13 The Company continues to monitor developments concerning possible changes to the U.S. health care system at both the federal and state levels. The future of health care changes and its impact on AFLAC U.S. cannot be readily predicted at this time. EMPLOYEES - U.S. In its U.S. insurance operations, the Company employed 1,613 full-time and 39 part-time employees at December 31, 1995. The Company considers its employee relations to be excellent. OTHER OPERATIONS At December 31, 1995, the AFLAC Broadcast Division operated seven network-affiliated television stations with total assets of $159.6 million. The Broadcast Division employed 554 full-time and 123 part-time employees at December 31, 1995. The Broadcast Division considers its employee relations to be excellent. The Broadcast Division produced increased revenues and earnings during 1995 as compared with 1994. Revenues increased 5.1%, to $81.6 million. Pretax earnings before interest expense rose 10.4%, to $19.0 million. Stations benefited from advertising related to 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 (Other Operations section of MD&A), which is incorporated herein by reference. The Company's other operations employed 332 full-time and four part- time employees at December 31, 1995; 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 administrative office buildings located nearby. AFLAC New York also occupies leased office space in Albany, New York. In Tokyo, Japan, AFLAC owns an 11-story administrative office building, which was completed in April 1994. AFLAC also leases office space in Tokyo, I-14 along with regional sales offices located throughout the country, and owns a training and computer facility in Tokyo. For further information concerning the building in Japan, see Exhibit 13, pages 13-18, (discussion concerning cash flow) and 13-55 (Note 12 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. Other foreign affiliates of the Company also occupy leased office space. The Broadcast Division owns land, buildings, transmission towers and other broadcast equipment in the cities where its seven television stations are located. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. During 1995, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the year. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of the litigation still pending will not have a material adverse effect on the financial position of 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, 1995. I-15 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION (*) AGE - ------------------- ------------------------------------- --- Daniel P. Amos Chief Executive Officer of the 44 Company and AFLAC, Vice Chairman of the Company; President of the Company since August 1991 Paul S. Amos Chairman of the Board of the Company 69 and AFLAC. William J. Bugg, Jr. Senior Vice President, Corporate 56 Actuary of AFLAC Monthon Chuaychoo Vice President, Financial Services, of 52 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 48 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, 47 of the Company and AFLAC since August 1993; Vice President and Controller of the Company until August 1993, and of AFLAC from June 1991 to August 1993 Norman P. Foster Executive Vice President, Corporate 61 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 I-16 David Halmrast Senior Vice President, Corporate 56 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 Kenneth S. Janke Jr. Senior Vice President, Investor 37 Relations, of the Company since August 1993; Vice President, Investor Relations, of the Company until August 1993 Akitoshi Kan Senior Vice President, AFLAC Japan, 48 Accounting, Corporate Planning, Audit, and Legal Affairs since January 1995; Vice President, AFLAC Japan Accounting Department, from 1992 through 1994; Manager, AFLAC Japan, Accounting Department, until 1992 Kyoichi Kasuya Vice President, Chief Actuary, AFLAC 58 Japan, since 1992; General Manager, AFLAC Japan, Actuarial Department, until 1992 Nobuo Kawamura Senior Vice President, AFLAC Japan, 51 Underwriting, Policy Maintenance, Premium Accounting, Customer Service, Administration Support since January 1992; Deputy Director of Marketing, AFLAC Japan, until 1992 Joseph P. Kuechenmeister Senior Vice President, Director 54 of Marketing of AFLAC Joey M. Loudermilk Senior Vice President, General Counsel 42 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 until May 1992 I-17 Hidefumi Matsui President, AFLAC Japan, since January 51 1995, Executive Vice President of AFLAC Japan, from January 1992 to 1995; Senior Vice President, Director of Marketing, AFLAC Japan, until January 1992 Minoru Nakai President of AFLAC International, Inc., 54 since October 1991; Senior Vice President, U.S.-Japan Operations, of AFLAC, until October 1991 Yoshiki Otake Chairman, AFLAC Japan, since January 56 1995, Vice Chairman of AFLAC International Inc., since October 1991, President of AFLAC Japan from October 1991 until 1995; Executive Vice President of AFLAC from January 1991 until October 1991 Thomas L. Paul President of AFLAC Broadcast Group, Inc.; 66 Vice President, Corporate Development, of the Company until 1993 E. Stephen Purdom Executive Vice President of AFLAC since 48 October 1994; Senior Vice President, Medical Director of AFLAC until October 1994, and also Medical Director, Columbus Clinic, Columbus, GA until September 1994 Tsuneo Shioiri Senior Vice President, Director of Sales 57 Administration, AFLAC Japan, since January 1992; Deputy Director of Marketing, AFLAC Japan, until 1992 Joseph W. Smith, Jr. Senior Vice President, Chief Investment 42 Officer of AFLAC since August 1991; Senior Vice President, Investments of AFLAC, until August 1991 Gary L. Stegman Senior Vice President, Assistant Chief 46 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-18 PART II Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1995 Annual Report to Shareholders, the appropriate sections of which are included herein as Exhibit 13. Exhibit 13 Annual Report Pages Pages __________ _____________ ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 24; EQUITY AND RELATED SHAREHOLDER 13-48 46 (Note 9); MATTERS (Note 9) and 50 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 13-19 AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND 13-20 to 34 - 50 SUPPLEMENTARY DATA 13-58 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 1996 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 1, 1996, 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 18 - 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 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 13-20 - each of the years in the three-year 13-21 period ended December 31, 1995 Consolidated Balance Sheets, at December 13-22 - 31, 1995 and 1994 13-23 Consolidated Statements of Shareholders' 13-24 - Equity, for each of the years in the 13-25 three-year period ended December 31, 1995 Consolidated Statements of Cash Flows, 13-26 - for each of the years in the three-year 13-27 period ended December 31, 1995 Notes to the Consolidated Financial 13-28 to Statements 13-55 Report of Independent Auditors 13-57 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, 1995 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1995 IV-11 and 1994 and for each of the years in the three-year period ended December 31, 1995 Schedule IV - Reinsurance, for each of the IV-12 years in the three-year period ended December 31, 1995 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. 10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - 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 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.3.1. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5. IV-2 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. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9. 10.10* - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 - incorporated by reference from form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 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. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock 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. *Management contract or compensatory plan or agreement. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the quarter ended December 31, 1995. IV-3 (c) EXHIBITS FILED WITH CURRENT FORM 10-K 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 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. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only). IV-4 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Shareholders and Board of Directors AFLAC Incorporated: Under date of January 29, 1996, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1995 and 1994, 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, 1995, as contained in the 1995 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 1995. 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 29, 1996 IV-5 SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1995 (In thousands) Amount in Fair Balance Type of Investment Cost Value Sheet ----------------------- ----------- ----------- ---------- Securities available for sale: Fixed maturities: Bonds: United States Government and government agencies and authorities $ 497,357 $ 519,761 $ 519,761 States, municipalities and political subdivisions 872,673 962,966 962,966 Foreign governments 6,809,934 8,201,769 8,201,769 Public utilities 3,272,635 3,735,385 3,735,385 Convertibles 29,749 33,465 33,465 All other corporate bonds 5,622,395 6,221,660 6,221,660 ---------- ---------- ---------- Total fixed maturities available for sale 17,104,743 19,675,006 19,675,006 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 3,264 3,698 3,698 Banks, trusts and insurance companies 7,033 9,297 9,297 Industrial, miscellaneous and all other 70,615 95,067 95,067 ---------- ---------- ---------- Total equity securities 80,912 108,062 108,062 ---------- ---------- ---------- Total securities available for sale 17,185,655 19,783,068 19,783,068 Mortgage loans on real estate 22,213 28,825 22,213 Policy loans 1,230 1,230 1,230 Other long-term investments 2,113 2,113 2,113 Short-term investments 232,201 232,201 232,201 ---------- ---------- ---------- Total investments $17,443,412 $20,047,437 $20,040,825 ========== ========== ========== IV-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1995 1994 ---------- ---------- Assets: Investments: Investments in subsidiaries* $ 2,573,606 $ 1,988,329 Other investments: Money market funds 17,346 2,489 Mortgage loans and other 2,548 2,468 ---------- ---------- Total investments 2,593,500 1,993,286 Due from subsidiaries* 3,910 9,574 Other receivables 4,478 4,851 Property and equipment, net 9,231 8,961 Other 1,291 267 ---------- ---------- Total assets 2,612,410 2,016,939 ========== ========== Liabilities and Shareholders' Equity: Liabilities: Cash overdraft 160 82 Due to subsidiaries* 1,237 714 Notes payable (note A) 272,158 111,970 Employee and beneficiary benefit plans 147,319 117,145 Income taxes, primarily deferred 33,577 25,399 Other 23,818 9,862 Commitments and contingencies (note B) ---------- ---------- Total liabilities 478,269 265,172 ---------- ---------- Shareholders' equity: Common stock of $.10 par value: Authorized 175,000; issued 156,358 shares in 1995 and 155,999 shares in 1994 15,636 15,600 Additional paid-in capital 196,928 192,899 Unrealized foreign currency translation gains 213,319 174,091 Unrealized gains on securities available for sale 482,787 228,844 Retained earnings (note D) 1,577,605 1,277,487 Treasury stock (351,117) (135,776) Notes receivable for stock purchases (1,017) (1,378) ---------- ---------- Total shareholders' equity 2,134,141 1,751,767 ---------- ---------- Total liabilities and shareholders' equity $ 2,612,410 $ 2,016,939 ========== ========== * 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, 1995 1994 1993 ---------- ---------- ---------- Revenues: Dividends from subsidiaries* $ 82,343 $ 109,533 $ 71,268 Management and service fees from subsidiaries* 30,509 26,391 30,357 Other income from subsidiaries, principally rental and interest* 196 683 992 Other income 1,069 1,327 (620) --------- --------- --------- Total revenues 114,117 137,934 101,997 --------- --------- --------- Operating expenses: Interest expense - subsidiaries* 30 22 162 Interest expense - others 8,419 6,070 3,362 Capitalized interest - (2,419) (3,250) Other operating expenses 70,921 65,635 53,595 --------- --------- --------- Total operating expenses 79,370 69,308 53,869 --------- --------- --------- Earnings before income taxes, equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 34,747 68,626 48,128 Income tax expense (note C) 8,583 874 1,063 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 26,164 67,752 47,065 Equity in undistributed earnings of subsidiaries 322,893 225,038 196,824 --------- --------- --------- Earnings before cumulative effect of accounting changes 349,057 292,790 243,889 Cumulative effect on prior years of accounting changes (including a $46,100 credit related to subsidiaries) (note F) - - 11,438 --------- --------- --------- Net earnings $ 349,057 $ 292,790 $ 255,327 ========= ========= ========= * 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, 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 349,057 $ 292,790 $ 255,327 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 (322,893) (225,038) (196,824) Deferred income taxes 8,178 (578) (300) Employee and beneficiary benefit plans 30,174 32,700 18,195 Other, net 17,017 4,307 190 --------- --------- --------- Net cash provided by operating activities 81,533 104,181 65,150 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in other investments (14,325) 18,998 (14,703) Additional capitalization of subsidiaries - (3,592) - Additions to property and equipment, net - - (75) --------- --------- --------- Net cash (used)/provided by investing activities (14,325) 15,406 (14,778) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 198,250 84,000 - Principal payments under debt obligations (11,507) (26,541) (11,419) Proceeds from exercise of stock options 3,235 2,163 6,975 Dividends paid to shareholders (48,939) (44,928) (40,057) Purchases of treasury stock (224,204) (131,734) (1,325) Treasury stock reissued 9,693 2,761 - Net change in amount due to/from subsidiaries 6,186 (5,331) (3,866) Other, net - - (1,072) --------- --------- --------- Net cash used by financing activities (67,286) (119,610) (50,764) --------- --------- --------- Net change in cash (78) (23) (392) Cash (overdraft) at beginning of year (82) (59) 333 --------- --------- --------- Cash (overdraft) at end of year $ (160) $ (82) $ (59) ========= ========= ========= 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, 1995 and 1994 follows: (In thousands) 1995 1994 -------- -------- 2.71% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually, July 1996 through July 2001........................................ $ 230,695 $ - 5.965% unsecured notes payable to banks, due semiannually through 1997.................... 39,167 49,000 8.3% note payable, due monthly through 1997, secured by equipment............................. 2,296 3,970 Unsecured notes payable to banks under revolving credit and term-loan agreement, variable interest rate (6.75% at December 31, 1994), refinanced into the 2.71% notes payable in 1995.. - 50,000 6.63% short-term note payable to bank under unsecured line of credit......................... - 9,000 -------- -------- Total notes payable $ 272,158 $ 111,970 ======== ======== The aggregate maturities of the notes payable for each of the five years after December 31, 1995, are as follows: (In thousands) 1996............................................ 59,934 1997............................................ 58,427 1998............................................ 38,449 1999............................................ 38,449 2000............................................ 38,449 (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 $23.8 million as of December 31, 1995, and are not included in the accompanying condensed balance sheet. IV-10 In addition, the Parent Company has also guaranteed repayment of bank borrowings by its subsidiary, AFLAC. The related outstanding loan balance at December 31, 1995, was $1.0 million. (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 relating to both the years under examination and subsequent years. Management does not agree with the proposed tax issues and is vigorously contesting them. The Company filed a formal protest with the IRS during 1995. Although the final outcome is uncertain and will likely take several years to resolve, the Company believes that 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 13-45, Note 8 of the Notes to the Consolidated Financial Statements. (D) DIVIDEND RESTRICTIONS See Exhibit 13, pages 13-50 and 13-51 (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) 1995 1994 1993 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 7,807 $ 6,302 $ 3,588 Income taxes 406 400 - In 1993, non-cash investing activities included issuance of common stock for purchase of a company amounting to $8.7 million. For further information see Note 9, Other, page 13-49 of Exhibit 13. (F) ACCOUNTING CHANGES For information concerning the cumulative effect of new accounting standards adopted in 1995, 1994, and 1993, see page 13-30 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated Financial Statements. IV-11 SCHEDULE IV AFLAC INCORPORATED AND SUBSIDIARIES Reinsurance Years Ended December 31, 1995, 1994 and 1993 (In thousands)
Percentage Ceded to Assumed from of amount Gross other other assumed Amount companies companies Net amount to net ------------- ------------- ------------- ------------- ------------ Year ended December 31, 1995: Life insurance in force $ 3,461,944 $ 230,238 $ - $ 3,231,706 - ============= ============= ============= ============= ============ Premiums: Health insurance $ 6,053,137 $ 304 $ - $ 6,052,833 - Life insurance 18,371 374 - 17,997 - ------------- ------------- ------------- ------------- ------------ Total premiums $ 6,071,508 $ 678 $ - $ 6,070,830 - ============= ============= ============= ============= ============ 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 - ============= ============= ============= ============= ============ IV-12
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 26, 1996 By /s/ PAUL S. AMOS ------------------------ ---------------------------------- (Paul S. Amos) Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ DANIEL P. AMOS Chief Executive Officer, MARCH 26, 1996 - ------------------------ President and Vice ----------------- (Daniel P. Amos) Chairman of the Board of Directors /s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1996 - ------------------------ Chief Financial Officer ----------------- (Kriss Cloninger, III) and Treasurer /s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1996 - ------------------------ Corporate Finance ----------------- (Norman P. Foster) IV-13 /s/ J. SHELBY AMOS, II Director MARCH 26, 1996 - ------------------------------ ----------------- (J. Shelby Amos, II) /s/ MICHAEL H. ARMACOST Director MARCH 26, 1996 - ------------------------------ ----------------- (Michael H. Armacost) /s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1996 - ------------------------------ ----------------- (M. Delmar Edwards, M.D.) /s/ GEORGE W. FORD, JR. Director MARCH 26, 1996 - ------------------------------ ----------------- (George W. Ford, Jr.) /s/ CESAR E. GARCIA Director MARCH 26, 1996 - ------------------------------ ----------------- (Cesar E. Garcia) /s/ JOE FRANK HARRIS Director MARCH 26, 1996 - ------------------------------ ----------------- (Joe Frank Harris) /s/ ELIZABETH J. HUDSON Director MARCH 26, 1996 - ------------------------------ ----------------- (Elizabeth J. Hudson) /s/ KENNETH S. JANKE, SR. Director MARCH 26, 1996 - ------------------------------ ----------------- (Kenneth S. Janke, Sr.) IV-14 /s/ CHARLES B. KNAPP Director MARCH 26, 1996 - ------------------------------ ----------------- (Charles B. Knapp) /s/ HISAO KOBAYASHI Director MARCH 26, 1996 - ------------------------------ ----------------- (Hisao Kobayashi) /s/ YOSHIKI OTAKE Director MARCH 26, 1996 - ------------------------------ ----------------- (Yoshiki Otake) /s/ E. STEPHEN PURDOM Director MARCH 26, 1996 - ------------------------------ ----------------- (E. Stephen Purdom) /s/ BARBARA K. RIMER Director MARCH 26, 1996 - ------------------------------ ----------------- (Barbara K. Rimer) /s/ HENRY C. SCHWOB Director MARCH 26, 1996 - ------------------------------ ----------------- (Henry C. Schwob) /s/ J. KYLE SPENCER Director MARCH 26, 1996 - ------------------------------ ----------------- (J. Kyle Spencer) /s/ GLENN VAUGHN, JR. Director MARCH 26, 1996 - ------------------------------ ----------------- (Glenn Vaughn, Jr.) IV-15 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. 10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - 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 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.3.1. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5. IV-16 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. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9. 10.10* - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 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. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock 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. *Management contract or compensatory plan or agreement. IV-17 Exhibits Filed with Current Form 10-K: 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 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. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only). IV-18 EX-13 2 ANNUAL REPORT DATA EXHIBIT 13 EXH 13 EXHIBIT 13 The following information is contained in the 1995 Annual Report to Shareholders. The required information incorporated by reference to the preceding pages of this 1995 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, 1995, are as follows: Quarterly Common Stock Prices 1995 High Low Close -------------------------------------------------------------------- 4th Quarter $ 29.08 $ 27.17 $ 29.00 3rd Quarter 29.25 24.33 27.67 2nd Quarter 29.83 26.00 29.17 1st Quarter 28.50 21.25 27.33 1994 -------------------------------------------------------------------- 4th Quarter $ 22.92 $ 21.33 $ 21.33 3rd Quarter 24.08 21.67 22.75 2nd Quarter 23.25 19.33 22.50 1st Quarter 21.25 16.83 20.50 1993 -------------------------------------------------------------------- 4th Quarter $ 21.83 $ 16.50 $ 19.00 3rd Quarter 22.67 18.58 21.50 2nd Quarter 21.47 18.40 18.92 1st Quarter 19.67 17.60 19.20 Adjusted for three-for-two stock split payable on March 18, 1996. EXH 13-1 ITEM 5. (b) Holders: 1995 1994 1993 - --------------------------------------------------------------------------- Number of common shares outstanding* 141,974,309 149,454,647 155,207,126 Number of registered common shareholders 39,317 34,628 27,866 Approximate number of common shareholders 88,700 67,500 51,500 ITEM 5. (c) Quarterly cash dividends*: 1995 1994 ------ ------ 4th Quarter $.087 $.077 3rd Quarter .087 .077 2nd Quarter .087 .077 1st Quarter .077 .067 *Adjusted for three-for-two stock split, payable on March 18, 1996. 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 13-15, and Note 10, Statutory Accounting and Dividend Restrictions, of the Notes to the Consolidated Financial Statements, also presented in this Exhibit 13 on page 13-50. EXH 13-2 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except for per-share amounts):
For the Year 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Revenues: Premiums, principally supplemental health $ 6,070,830 $ 5,180,732 $ 4,225,390 $ 3,369,201 $ 2,765,349 Net investment income 1,024,960 838,825 689,272 533,166 431,315 Realized investment gains (losses) (270) (58) 2,937 (3,264) (1,451) Other income 95,100 91,259 83,019 87,369 87,456 ---------- ---------- ---------- ---------- ---------- Total revenues 7,190,620 6,110,758 5,000,618 3,986,472 3,282,669 ---------- ---------- ---------- ---------- ---------- Benefits and expenses: Benefits and claims 5,034,266 4,256,541 3,423,297 2,692,353 2,188,817 Expenses 1,555,359 1,349,881 1,148,937 969,575 829,160 ---------- ---------- ---------- ---------- ---------- Total benefits and expenses 6,589,625 5,606,422 4,572,234 3,661,928 3,017,977 ---------- ---------- ---------- ---------- ---------- Pretax earnings 600,995 504,336 428,384 324,544 264,692 Income taxes 251,938 211,546 184,495 141,177 116,008 ---------- ---------- ---------- ---------- ---------- Net earnings $ 349,057 $ 292,790 $ 243,889(1) $ 183,367 $ 148,684 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------- Per Common Share Net earnings $ 2.33 $ 1.89 $ 1.55(1) $ 1.19 $ .97 Cash dividends .338 .298 .26 .23 .197 Shareholders' equity 15.03 11.72 8.80 7.00 6.03 Price range: High $ 29.83 $ 24.08 $ 22.67 $ 18.60 $ 16.60 Low 21.25 16.83 16.50 12.80 9.53 Close 29.00 21.33 19.00 18.40 15.93 Price/earnings ratio:* High 12.8x 12.7x 14.8x 15.6x 17.1x Low 9.1 8.9 10.8 10.8 9.8 Common shares used for EPS 149,540 154,652 157,801 153,815 152,971 - ------------------------------------------------------------------------------------------------------------------------- EXH 13-3 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- At Year-End Assets: Investments and cash $20,044,964 $15,993,768 $12,469,140 $ 9,461,341 $ 8,056,657 Other 5,293,022 4,293,311 2,973,546 2,440,033 2,087,843 ---------- ---------- ---------- ---------- ---------- Total assets $25,337,986 $20,287,079 $15,442,686 $11,901,374 $10,144,500 ========== ========== ========== ========== ========== Liabilities and shareholders' equity: Policy liabilities $19,634,981 $16,006,607 $12,065,471 $ 9,350,241 $ 7,877,941 Notes payable 327,268 184,901 122,062 125,800 138,810 Income taxes, primarily deferred 1,397,709 1,392,441 950,278 848,514 768,515 Other liabilities 1,843,887 951,363 939,251 494,937 435,745 Shareholders' equity 2,134,141 1,751,767 1,365,624 1,081,882 923,489 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $25,337,986 $20,287,079 $15,442,686 $11,901,374 $10,144,500 ========== ========== ========== ========== ========== - -------------------------------------------------------------------------------------------------------------------------- Supplemental Data Operating earnings** $ 348,734 $ 293,053 $ 241,654(1) $ 183,426 $ 148,076 Operating earnings per share** $ 2.33 $ 1.89 $ 1.53(1) $ 1.19 $ .97 Pretax profit margin** 8.4% 8.3% 8.5% 8.2% 8.1% After-tax profit margin** 4.8% 4.8% 4.8%(1) 4.6% 4.5% Operating return on equity*** 22.0% 20.4% 19.9%(1) 18.4% 17.3% Yen/dollar exchange rate at year-end 102.95 99.85 112.00 124.70 125.25 Average yen/dollar exchange rate 94.10 102.26 111.21 126.67 134.52 Notes: (1) Excludes gain of $11,438 ($.07 per share) from cumulative effect of accounting changes in 1993; (*) Based on operating earnings per share. (**) Excludes realized investment gains/losses, net of tax. (***)Excludes realized investment gains/losses and unrealized gains on securities available for sale, net. Share and per-share amounts have been adjusted to reflect the three-for-two stock split payable on March 18, 1996. 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 year of the three- year period ended December 31, 1995. 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). Most of AFLAC's policies are individually underwritten in the payroll market, with premiums paid by the employee. 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. On February 13, 1996, the board of directors declared a three-for-two stock split, effectively increasing the number of shares outstanding by 50%. All share and per-share amounts have been restated for the stock split. EXH 13-5 RESULTS OF OPERATIONS The following table sets forth the results of operations by business component for the years shown and the percentage changes from the previous year. SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT (In millions, except for per-share amounts) Percentage change Years ended over previous year December 31, ------------------ ------------------------ 1995 1994 1995 1994 1993 ------------------ ------------------------ Pretax operating earnings: Insurance operations (excluding realized investment gains and losses): AFLAC Japan........... 19.1% 18.2% $561.4 $471.4 $398.9 AFLAC U.S............. 15.8 20.1 104.5 90.2 75.1 ----- ----- ----- Total U.S. and Japan insurance 18.6 18.5 665.9 561.6 474.0 Realized investment gains (losses).......... (.3) (.1) 2.9 Broadcast division........ 10.4 28.1 19.0 17.2 13.4 Interest expense, noninsurance operations. (11.3) (9.9) (8.1) Capitalized interest, building construction... - 2.4 8.8 Corporate expenses, other operations and eliminations............ (7.9) (6.8) (72.3) (66.9) (62.6) ----- ----- ----- Earnings before income taxes and cumulative effect of accounting changes.............. 19.2 17.7 601.0 504.3 428.4 Income taxes............... 19.1 14.7 251.9 211.5 184.5 ----- ----- ----- Earnings before cumulative effect of accounting changes..... 19.2 20.1 349.1 292.8 243.9 Cumulative effect of accounting changes....... - - 11.4 ----- ----- ----- Net earnings............. $349.1 $292.8 $255.3 ===== ===== ===== Net earnings per share... 23.3 21.9 $ 2.33 $ 1.89 $ 1.55* ===== ===== ===== ============================================================================ *Excludes gain of $.07 per share from cumulative effect of accounting changes in 1993. ============================================================================ Per-share amounts have been adjusted to reflect the three-for-two stock split payable March 18, 1996. EXH 13-6 The following discussion of earnings comparisons excludes a gain of $11.4 million, or $.07 per share, from the cumulative effect of required accounting changes adopted in the first quarter of 1993. For additional information on these accounting changes, see Note 1 of Notes to the Consolidated Financial Statements. Net earnings increased in each year of the three-year period ended December 31, 1995. The increases reflected strong earnings in the functional currencies of AFLAC's core insurance operations in Japan and the United States, improved earnings by the AFLAC Broadcast Division in 1995 and 1994, a consolidated benefit from additional investment income associated with profit repatriations from AFLAC Japan to AFLAC U.S., and reduced income tax expense beginning in 1994 resulting from a tax rate reduction in Japan. Partially offsetting the increases were higher corporate expenses and increased interest expense from the Company's stock repurchase program in 1994 and 1995. However, the repurchase program benefited earnings per share. Earnings in 1994 and 1993 benefited from capitalized interest due to construction of the Company's administrative office building in Japan, which was completed in early 1994. Due to the relative size of AFLAC Japan, fluctuations in the foreign currency markets can have a significant effect on the Company's reported results. From 1993 through 1995, the reported results in U.S. dollars for AFLAC Japan and the Company's consolidated earnings 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 each year of the three-year period when compared with the results for each preceding year. As a result of the strengthening yen, operating earnings per share (excluding realized investment gains/losses) increased 23.3% to $2.33 in 1995, 23.5% to $1.89 in 1994 and 28.6% to $1.53 in 1993. The strengthening of the yen benefited operating earnings by approximately $.15 per share in 1995 compared with 1994, $.12 per share in 1994 compared with 1993, and $.16 per share in 1993 compared with 1992. However, the Company sets its objective for growth in operating earnings per share before the effect of foreign currency fluctuations. Excluding the effect of currency fluctuations, operating earnings per share increased 15.3%, 15.7% and 15.1% for the years ended December 31, 1995, 1994 and 1993, respectively. The yen began to weaken in relation to the dollar in the third quarter of 1995 and most currency commentators expect it to remain weaker in 1996 than in 1995. A weaker yen has a negative effect on net earnings reported in U.S. dollars. However, all of AFLAC Japan's premiums and most of its investment income are received in yen, and its claims and expenses are paid in yen. Also, the majority of its invested assets are denominated in yen. Therefore, the translation of results from yen into U.S. dollars does not affect AFLAC Japan's financial condition or its results of operations in real economic terms. The Company's objective for 1996 is to increase operating earnings per share by 15%, excluding the effect of currency translation. However, if that objective is achieved and the yen/dollar exchange rate averages 105.00 compared with the 1995 average rate of 94.10, operating earnings per share including foreign currency translation would increase by 6% in 1996. AFLAC Japan's pretax operating earnings (excluding realized investment gains/losses) in yen increased 9.7%, 8.5% and 10.2% for the years ended December 31, 1995, 1994 and 1993, respectively. The reported U.S. dollar EXH 13-7 results for AFLAC Japan were affected by the increasingly favorable cumulative-average yen-to-dollar exchange rates of 94.10 in 1995, 102.26 in 1994 and 111.21 in 1993. As a result, percentage increases in U.S. dollars for AFLAC Japan's pretax operating earnings were 19.1% in 1995, 18.2% in 1994 and 25.6% in 1993. The Company's effective income tax rates were 41.9% in both 1995 and 1994, and 43.1% in 1993. 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 both 1995 and 1994, and 46.2% for 1993. Changes in the mix of contributions from the Company's business components also impacted the effective tax rates for the three-year period from 1993 through 1995. During 1995, the board of directors authorized the purchase of up to an additional 14.4 million shares of AFLAC Incorporated common stock on the open market. In total, the board of directors has authorized the purchase of up to 21.4 million shares since the inception of the repurchase program in February 1994. As of December 31, 1995, 14.5 million shares had been purchased under these repurchase authorizations. The difference in the percentage increases of net earnings and net earnings per share primarily reflects the impact of the share repurchase program. The shares purchased were financed with available cash and borrowings under revolving credit and term note agreements. Interest expense related to the share repurchase program was $5.3 million in 1995 and $2.6 million in 1994. Consolidated interest expense, including interest expense from insurance operations, was $15.6 million in 1995, $13.5 million in 1994 and $10.6 million in 1993. AFLAC Japan repatriated profits to AFLAC U.S. of $140.5 million in 1995, $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, profit repatriations benefit consolidated operations because higher investment yields can be obtained 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 cumulative profit transfers from 1992 through 1995 have benefited consolidated net earnings by $13.9 million in 1995, $7.4 million in 1994 and $3.3 million in 1993. 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. As discussed above, AFLAC Japan transferred profits to AFLAC U.S., which distorts 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 1995. EXH 13-8 AFLAC JAPAN SUMMARY OF OPERATING RESULTS In Dollars (In millions) 1995 1994 1993 ----------------------------------- Premium income.................... $5,195.4 $4,370.7 $3,484.0 Investment income, as adjusted*... 941.3 766.0 622.4 Other income (.5) 2.8 1.8 ------- ------- ------- Total revenues, as adjusted*.... 6,136.2 5,139.5 4,108.2 ------- ------- ------- Benefits and claims............... 4,486.3 3,752.8 2,957.4 Operating expenses................ 1,068.0 902.9 746.7 ------- ------- ------- Total benefits and expenses 5,554.3 4,655.7 3,704.1 ------- ------- ------- Pretax operating earnings, as adjusted*..................... 581.9 483.8 404.1 Investment income applicable to profit repatriations............ (20.5) (12.4) (5.2) ------- ------- ------- Pretax operating earnings....... $ 561.4 $ 471.4 $ 398.9 ======= ======= ======= - --------------------------------------------------------------------------- In Dollars In Yen 1995 1994 1993 1995 1994 1993 -------------------- -------------------- Percentage increases over previous year: Premium income....... 18.9% 25.5% 29.9% 9.4% 15.4% 14.1% Investment income*... 22.9 23.1 31.8 13.1 13.1 15.7 Total revenues*...... 19.4 25.1 30.2 9.9 15.0 14.3 Pretax operating earnings*.......... 20.3 19.7 26.8 10.7 10.0 11.3 Pretax operating earnings........... 19.1 18.2 25.6 9.7 8.5 10.2 - --------------------------------------------------------------------------- 1995 1994 1993 -------------------------------- Ratios to total revenues, as adjusted*: Benefits and claims................ 73.1% 73.0% 72.0% Operating expenses................. 17.4 17.6 18.2 Pretax operating earnings.......... 9.5 9.4 9.8 Ratio of pretax operating earnings to total reported revenues......... 9.2 9.2 9.7 ============================================================================ * Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $20.5 million in 1995, $12.4 million in 1994 and $5.2 million in 1993 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 7.5% in 1995, 14.5% in 1994 and 13.2% in 1993 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: $772.0 million in 1995, up 13.4% (4.3% in yen); $680.9 million in 1994, up 18.2% (10.0% in yen); and $576.1 million in 1993, up 6.3% (a decline of 7.5% in yen). Sales for the past three years have been affected by a decline in conversion activity, which has steadily decreased since a peak in 1992. Management believes sales during the last three years have also been affected by reduced consumer disposable income resulting from the troubled Japanese economy. Sales growth, excluding conversions, was positively affected in 1995 by product broadening, particularly the introduction of living benefit life, AFLAC Japan's newest product, in the fourth quarter of 1995. AFLAC Japan's sales mix is changing, although cancer insurance still accounts for the majority of total new sales and insurance in force. Cancer insurance sales accounted for 71.2% of total new sales in yen in 1995, 81.3% in 1994 and 79.3% in 1993. Sales of a care product, which was introduced in 1992, represented 15.6% of total new sales in 1995, 17.9% in 1994 and 19.9% in 1993. Sales of living benefit life accounted for 11.6% of total new sales in 1995. Management believes that the contributions of cancer insurance to new sales will decline in the future and that newer products, such as living benefit life, will increase as AFLAC Japan proceeds with its strategy of product broadening. Due to the continued low level of available investment yields in Japan, the Ministry of Finance has permitted insurers to increase premium rates on new policy issues in recent years. AFLAC Japan increased premium rates by an average of 16% on all cancer policy sales made after July 1, 1994. Premium rates on care policy new issues were increased by an average of 10% in both November 1993 and 1995. As a result of continuing low yields, the Company expects to increase premium rates an additional 10% on all new policy issues beginning in the second half of 1996. 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 1993 to 1995, despite a decline in available investment yields. Funds available for investment during the three-year period 1993 through 1995 were reduced by the annual profit repatriations discussed above and expenditures of $173.5 million in 1994 and $94.4 million in 1993 for the construction of the administrative office building in Tokyo. Rates of return on fixed-maturity securities in Japan have remained low in 1995 compared with historical levels. For instance, the yield on 10-year Japanese government bonds, as measured by a composite index, declined from 4.72% in January 1995 to a low of 2.60% in July 1995, closing the year at 3.07%. AFLAC Japan's new money rates for investments made were 4.71% for 1995, 5.17% for 1994 and 5.55% for 1993. The cumulative effect of 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 5.81% in 1995, compared with 6.00% in 1994 and 6.16% in 1993. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related assets. Therefore, there is a risk that reinvestment of the proceeds at maturity of such investments will be at a yield below that of the interest required for the accretion of policy EXH 13-10 liabilities. At December 31, 1995, the average duration of the policy liabilities was approximately 13 years. The average duration of the related assets denominated in yen was approximately nine years. The weighted- average period to maturity of fixed-maturity securities at December 31, 1995, was 11.3 years, compared with 10.7 years at December 31, 1994. Over the next four years, $2.0 billion, or 13.1% of AFLAC Japan's fixed-maturity securities, will mature and be reinvested. By concentrating on selected sectors, the Company has secured higher yields than 10-year Japanese government bonds would have provided while adhering to conservative standards for credit quality. The Company believes that it can maintain an overall return on invested assets with an adequate spread over premium pricing assumptions and assumed interest rates for policy liabilities for the near term. The premium increases implemented during the past two years should have a positive impact on these spreads and therefore contribute to stability in the pretax operating profit margin. During the three-year period ended December 31, 1995, 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 some increase in claims experience due to fewer-than-expected policy lapses. The Company's annual claims experience studies continue to support the current reserving assumptions. In 1994, the Japanese government 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, is scheduled to 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, 1995, pretax operating earnings would have been reduced by approximately $17.6 million ($9.6 million after income tax) in 1995. During 1994, the governments of Japan and the United States held a series of trade talks. The U.S.-Japan Framework Agreement negotiations discussed 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 Japanese insurers, operate in the third sector. In 1996, the Japanese government will adopt a framework for long-term deregulation of the financial services businesses in Japan. The principles upon which deregulation of the Japanese insurance industry is based are: to promote competition and to enhance efficiency through deregulation and liberalization; to preserve soundness; and to secure fairness and equity in business operations. As Japan begins gradually deregulating the insurance industry, the marketplace should become more competitive; however, the ultimate changes, and their effects on AFLAC Japan, are not presently determinable. But, due to the Company's unique marketing distribution system and low-cost operations in Japan, AFLAC believes it should not be directly affected by deregulation in Japan in the immediate future. Even with Japan's economic slowdown, the Company believes the market for supplemental insurance remains bright. Demand for the Company's EXH 13-11 products in Japan has continued, and the Company remains optimistic about increasing penetration within existing groups, selling new products, opening new accounts and developing additional supplemental products for the Japanese market. INSURANCE OPERATIONS, AFLAC U.S. AFLAC U.S. pretax operating earnings benefited from additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. received profit transfers in the amounts of $140.5 million in 1995, $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 $21.2 million in 1995, $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 1995 has been reclassified in the presentation on the following page in order to improve comparability between years. EXH 13-12 AFLAC U.S. SUMMARY OF OPERATING RESULTS (In millions) 1995 1994 1993 -------------------------------- Premium income......................... $ 859.8 $ 792.5 $ 722.5 Investment income, as adjusted*........ 78.3 68.5 62.3 Other income........................... 1.2 1.9 2.7 ------ ------ ------ Total revenues, as adjusted*......... 939.3 862.9 787.5 ------ ------ ------ Benefits and claims.................... 533.1 490.2 450.7 Operating expenses..................... 322.9 295.3 267.9 ------ ------ ------ Total benefits and expenses.......... 856.0 785.5 718.6 ------ ------ ------ Pretax operating earnings, as adjusted*........................ 83.3 77.4 68.9 Investment income applicable to profit repatriations................. 21.2 12.8 6.2 ------ ------ ------ Pretax operating earnings.......... $ 104.5 $ 90.2 $ 75.1 ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous year: Premium income....................... 8.5% 9.7% 9.5% Investment income* ................. 14.3 10.0 10.4 Total revenues*...................... 8.9 9.6 9.6 Pretax operating earnings*........... 7.7 12.2 12.7 Pretax operating earnings............ 15.8 20.1 20.1 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted*: Benefits and claims.................. 56.7% 56.8% 57.2% Operating expenses................... 34.4 34.2 34.0 Pretax operating earnings............ 8.9 9.0 8.8 Ratio of pretax operating earnings to total reported revenues.............. 10.9 10.3 9.5 ============================================================================ *Excludes estimated investment income of $21.2 million in 1995, $12.8 million in 1994 and $6.2 million in 1993 related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ The operating results continue to reflect slightly lower benefit ratios. This trend is principally due to the mix of business shifting toward accident and hospital indemnity policies, which have lower benefit ratios 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 improve policy persistency by enhancing policyholder benefits. In addition, potential minimum benefit ratio requirements by insurance regulators may also result in an increase to these ratios. EXH 13-13 At the same time, management expects the operating expense ratio, excluding discretionary advertising expenses, to decline in the future due to continued improvements in operating efficiencies. By improving administrative systems and controlling other costs, management has been able to redirect funds to national advertising programs without significantly affecting the operating expense ratio. For more information regarding advertising expenses, see Note 2 of the Notes to the Consolidated Financial Statements. Operating expenses in 1995 also reflect the Company's decision to settle certain litigation in Alabama related to an ancillary line of business. Management expects the pretax operating profit margin, which was 8.9% excluding the effect of repatriation in 1995, to remain approximately the same in 1996. The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force of 8.8% in 1995, 9.1% in 1994 and 10.0% in 1993 were favorably affected by an improvement in the persistency for several lines of business, increased sales through Section 125 plans (commonly known as "cafeteria plans"), the product-broadening program and expanding affiliations with insurance brokers. Declining sales of Medicare supplement, which has higher persistency, and increasing sales of accident insurance, which has lower persistency, have partially offset these increases in premium in force. The Company continues to de-emphasize the sale of Medicare supplement insurance, its lowest margin product. New annualized premiums from sales and conversions were: $279.1 million in 1995, up 13.6%; $245.8 million in 1994, up 7.3%; and $229.0 million in 1993, up 11.1%. New products contributed greatly to new sales growth. Excluding Medicare supplement sales, new annualized premium sales were up 20.8% for 1995, compared with 1994. The Company continues to believe that there are significant opportunities to market high-quality, affordable supplemental insurance products in the U.S. marketplace. OTHER OPERATIONS The Company's other operations primarily include seven network- affiliated television stations located in small to mid-size U.S. markets. Broadcast revenues increased 5.1% in 1995 and 12.3% in 1994 primarily due to increased advertising revenues from an improved U.S. economy and from the off-year political elections in 1994. Due to the large size and growth 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 the growth in corporate service activities and to increased retirement accruals in 1995 and 1994 for certain senior officers and beneficiaries due to enhanced benefits, early retirement and certain revisions in actuarial assumptions. EXH 13-14 FINANCIAL ACCOUNTING STANDARDS BOARD'S STATEMENTS For information regarding Statements of Financial Accounting Standards (SFAS) adopted during 1995 and those to be adopted in 1996, see Note 1 of the Notes to the Consolidated Financial Statements. 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, 1995, was 102.95 yen to one U.S. dollar, 3.0% weaker than the December 31, 1994, exchange rate of 99.85. Management estimates that the weaker yen rate decreased invested assets, including cash, by $531.2 million, total assets by $668.3 million and total liabilities by $652.3 million 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 the Notes to the Consolidated Financial Statements. 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. Net unrealized gains of $2.6 billion on investments in fixed-maturity securities at December 31, 1995, consisted of $2.6 billion in gross unrealized gains and $18.9 million in gross unrealized losses. At year-end 1994, net unrealized gains were $820.9 million. During 1995, net unrealized gains increased by $1.7 billion, primarily due to the decrease in general- market interest rates in Japan and the United States. Since December 31, 1994, AFLAC Japan's net unrealized gains have increased by $1.6 billion, and AFLAC U.S. net unrealized gains have increased by $150.9 million. For additional information regarding SFAS No. 115, see Note 3 of the Notes to the Consolidated Financial Statements. During 1995, total invested assets, including unrealized gains on fixed-maturity securities, increased $4.1 billion, or 25.3%. During 1994, total invested assets increased $3.5 billion, or 28.3%. In 1995, AFLAC Japan's invested assets increased $3.6 billion (24.7%), while AFLAC U.S. invested assets increased $416.3 million (33.1%). Since December 31, 1994, total invested assets, excluding unrealized gains on fixed-maturity securities, have increased $2.3 billion, or 15.2%. AFLAC Japan's investments increased $2.0 billion (14.7%), while AFLAC U.S. investments increased $265.4 million (20.3%). During 1995, deferred policy acquisition costs increased 6.7%, and total assets increased 24.9%. 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 earned in AFLAC Japan (89% of AFLAC Japan premiums) and the effect of SFAS No. 115. Partially offsetting these positive factors was the previously mentioned weaker yen/dollar exchange rate. EXH 13-15 AFLAC invests primarily within the Japanese and U.S. fixed-maturity markets. The Company uses specific criteria to judge the credit quality and liquidity of its investments. The Company utilizes a variety of credit rating services to monitor this criteria. The percentages of the Company's fixed-maturity securities available for sale, at amortized cost by quality rating, as of December 31, 1995, were as follows: AAA 49.2% AA 22.2 A 24.6 BBB 4.0 ----- 100.0% Private placement investments made up 23.1% and 20.3% of the Company's total fixed-maturity securities available for sale as of December 31, 1995 and 1994, respectively. AFLAC Japan has made investments in the private sector to secure higher yields than 10-year Japanese government bonds would have provided. At the same time, the Company has adhered to its conservative standards for credit quality. Mortgage loans on real estate and other long-term investments amounted to less than .2% of invested assets at both December 31, 1995 and 1994. Cash and short-term investments totaled $236.3 million as of December 31, 1995, or 1.2% of total invested assets, compared with $348.6 million, or 2.2% of total invested assets, at December 31, 1994. For additional information concerning investments and market values, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements. Policy liabilities increased $3.6 billion, or 22.7%, during 1995. AFLAC Japan policy liabilities increased $3.5 billion, or 24.0%, and AFLAC U.S. policy liabilities increased $138.2 million, or 10.0%. These increases are due to the addition of new business, the aging of policies in force and the effect of SFAS No. 115 (see Note 3). The weaker yen decreased reported policy liabilities by $560.8 million in 1995. During 1994, policy liabilities increased $3.9 billion, or 32.7%. The stronger yen in 1994 compared with 1993 increased reported policy liabilities by $1.6 billion. Loan agreements for the share repurchase program were amended to provide for borrowings of up to $500 million in U.S. dollars with interest at the London Interbank Offered Rate plus 25 basis points or in Japanese yen with interest at the Tokyo Interbank Offered Rate plus 25 basis points. Principal payments are payable annually over six years beginning in July 1996. In August 1995, all outstanding borrowings under the agreement were converted from dollar-denominated to yen-denominated amounts. At December 31, 1995, bank borrowings of 23.9 billion yen ($230.7 million) were outstanding in connection with the share repurchase program. The Company has entered into interest rate swaps with a notional amount that approximates the unpaid principal at December 31, 1995. These swaps effectively change the interest rate exposure from floating-rate to a fixed- rate of 2.71%. The Company has also designated these yen-denominated borrowings as a hedge of its net investment in AFLAC Japan for financial reporting purposes. The Company's ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized market gains on securities available for sale) was 16.5% and 10.8% as of December 31, 1995 and 1994, respectively. EXH 13-16 AFLAC Japan uses short-term (usually seven days) security lending arrangements to increase investment income with minimal risk. At December 31, 1995 and 1994, the Company held Japanese government bonds as collateral for loaned securities in the amount of $1.4 billion and $556.9 million, respectively, at market value. The Company's security lending policy requires that the market value of the securities received as collateral be 105% or more of the market value of the loaned securities as of the date the securities are loaned, and not less than 100% thereafter. During 1995, the average month-end balance of outstanding security loans was $1.1 billion. This program increased investment income in AFLAC Japan by approximately $.9 million. Shareholders' equity has increased $382.4 million since December 31, 1994. The increase was primarily due to net earnings of $349.1 million, an increase in net unrealized gains on securities available for sale of $253.9 million, and an increase in unrealized foreign exchange gains of $39.2 million, less net treasury stock purchases of $215.3 million and dividends paid of $48.9 million. For information regarding proposed tax adjustments by the Internal Revenue Service and pending litigation (including Alabama), see Notes 8 and 12, respectively, of the Notes to the Consolidated Financial Statements. Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to the Company in the past. The Company believes that future assessments relating to companies currently involved in insolvency proceedings will not materially impact the consolidated financial statements. The Japanese government is currently implementing a funding program for the protection of policyholders similar to the guarantee funds in the United States. The Company's insurance operations continue to provide its primary sources of liquidity. 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. The Company's investment objectives provide for liquidity through the ownership of high-quality investment securities. AFLAC insurance policies are generally not interest- sensitive and therefore are not subject to unexpected policyholder redemptions due to investment-yield changes. Also, the majority of AFLAC policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore are not subject to the risks of medical cost inflation. The achievement of continued long-term growth will require growth in the statutory capital and surplus of the insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Parent 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. EXH 13-17 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 within 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 that establishes capital requirements relating to insurance risk, business risk, asset risk and interest rate risk was adopted by the NAIC in 1992 for U.S. life insurance companies. 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 capital and surplus position. Also, there are various ongoing regulatory initiatives by the NAIC relating to investments, reinsurance, limited benefit insurance policies, dividend restrictions, revisions to the risk-based capital formula, recodification of statutory accounting principles and other related matters. 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. Payments are made from AFLAC Japan to the Parent Company for management fees and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were $179.5 million in 1995, $167.9 million in 1994 and $133.4 million in 1993. During the last few years, the MOF has developed solvency standards, a version of risk-based capital requirements, as part of its long-term regulatory revisions. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the Notes to the Consolidated Financial Statements. CASH FLOW Operating cash flows for AFLAC Japan are translated using average monthly exchange rates for the year. The average yen/dollar exchange rate, which is used to convert revenues, expenses and cash flows, strengthened 8.7% in 1995 compared with 1994, 8.8% in 1994 compared with 1993 and 13.9% in 1993 compared with 1992. The average exchange rates for 1995, 1994 and 1993 were 94.10, 102.26 and 111.21, respectively. In 1995, consolidated cash flow from operations increased 24.3% to $2.9 billion, compared with $2.4 billion in 1994 and $1.8 billion in 1993. Net cash flow from operations for AFLAC Japan increased 28.0% to $2.7 billion in 1995, compared with $2.1 billion in 1994 and $1.7 billion in 1993. AFLAC Japan represented 93% of the consolidated net cash flow from operations in EXH 13-18 1995 and 90% in both 1994 and 1993. The increasing cash flow from operations was due to the continued growth of the Company's insurance operations in Japan and the United States, and the stronger yen. Cash flow from operations in 1995 was also favorably affected by a one-time acceleration of remittances from premium collection agencies to AFLAC Japan in the amount of $121.5 million. This cash flow change did not affect earnings. Consolidated cash flow used by investing activities (purchases less dispositions of investment securities and additions to property and equipment) increased 27.4% to $2.9 billion in 1995, compared with $2.2 billion in 1994 and $1.8 billion in 1993. AFLAC Japan accounted for 90% of the consolidated net cash used by investing activities in 1995, compared with 89% in 1994 and 88% in 1993. Included in AFLAC Japan's portion for 1994 and 1993 were expenditures of $267.9 million for the construction of an administrative office building in Tokyo. 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 4% of the annual average investment portfolio of fixed-maturity securities in 1995, compared with 8% in both 1994 and 1993. In 1995, net cash used by financing activities (principally net purchases of treasury stock, dividends to shareholders, and debt proceeds net of debt repayments) was $93.4 million, compared with $130.4 million in 1994 and $67.7 million in 1993. The treasury stock purchases of $224.2 million in 1995 were funded by proceeds from new borrowings in the amount of $198.3 million and available cash. In 1994, treasury stock purchases of $131.7 million were funded by proceeds from new borrowings of $84.0 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 $48.9 million in 1995, an increase of 8.9% over 1994. Cash dividends paid to shareholders in 1994 were $44.9 million, an increase of 12.2% over the 1993 cash dividends of $40.1 million. The 1995 cash dividend of $.338 per share increased 13.4% over 1994. The 1994 cash dividend of $.298 per share represented an increase of 14.6% over the 1993 cash dividend of $.26 per share. The Company has increased the cash dividend per share at a compound rate of 13.7% over the last 10 years. EXH 13-19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, (In thousands, except for per 1995 1994 1993 share amounts) ---------- ---------- ---------- Revenues: Premiums, principally supplemental health insurance $6,070,830 $5,180,732 $4,225,390 Net investment income 1,024,960 838,825 689,272 Realized investment gains (losses) (270) (58) 2,937 Other income 95,100 91,259 83,019 --------- --------- --------- Total revenues 7,190,620 6,110,758 5,000,618 --------- --------- --------- Benefits and expenses: Benefits and claims 5,034,266 4,256,541 3,423,297 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 168,779 153,503 127,108 Insurance commissions 802,176 689,096 561,678 Insurance expenses 424,974 361,881 340,350 Interest expense 15,611 13,496 10,554 Capitalized interest on building construction - (2,419) (8,766) Other operating expenses 143,819 134,324 118,013 --------- --------- --------- Total acquisition and operating expenses 1,555,359 1,349,881 1,148,937 --------- --------- --------- Total benefits and expenses 6,589,625 5,606,422 4,572,234 --------- --------- --------- Earnings before income taxes and cumulative effect of accounting changes 600,995 504,336 428,384 Income taxes: Current 233,662 146,472 136,930 Deferred 18,276 65,074 47,565 --------- --------- --------- Total income taxes 251,938 211,546 184,495 --------- --------- --------- Earnings before cumulative effect of accounting changes 349,057 292,790 243,889 Cumulative effect on prior years of accounting changes - - 11,438 --------- --------- --------- Net earnings $ 349,057 $ 292,790 $ 255,327 ========= ========= ========= (continued) EXH 13-20 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (continued) Years Ended December 31, 1995 1994 1993 -------- -------- -------- Earnings per share of common stock: Earnings before cumulative effect of accounting changes $ 2.33 $ 1.89 $ 1.55 Cumulative effect of accounting changes - - .07 -------- -------- -------- Net earnings $ 2.33 $ 1.89 $ 1.62 ======== ======== ======== Common shares used in computing earnings per share (In thousands) 149,540 154,652 157,801 ======== ======== ======== See the accompanying Notes to the Consolidated Financial Statements. Share and per-share amounts have been adjusted to reflect the three-for-two stock split payable March 18, 1996. EXH 13-21 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands) 1995 1994 ---------- ---------- ASSETS: Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost $17,104,743 in 1995 and $14,709,820 in 1994) $ 19,675,006 $ 15,530,694 Equity securities (cost $80,912 in 1995 and $71,585 in 1994) 108,062 84,373 Mortgage loans on real estate 22,213 25,104 Other long-term investments 3,343 5,038 Short-term investments 232,201 330,916 ----------- ----------- Total investments 20,040,825 15,976,125 Cash 4,139 17,643 Receivables, primarily premiums 321,111 303,748 Accrued investment income 256,659 220,757 Deferred policy acquisition costs 2,565,027 2,402,869 Property and equipment, at cost less accumulated depreciation 552,061 580,247 Securities held as collateral for loaned securities 1,378,197 556,937 Intangible assets, at cost less accumulated amortization of $37,263 in 1995 and $35,003 in 1994 104,546 109,865 Other assets 115,421 118,888 ----------- ----------- Total assets $ 25,337,986 $ 20,287,079 =========== =========== (continued) EXH 13-22 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) December 31, (In thousands) 1995 1994 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 18,000,296 $ 14,586,171 Unpaid policy claims 1,016,295 929,350 Unearned premiums 301,452 339,514 Other policyholders' funds 316,938 151,572 ----------- ----------- Total policy liabilities 19,634,981 16,006,607 Notes payable 327,268 184,901 Income taxes, primarily deferred 1,397,709 1,392,441 Payables for return of collateral on loaned securities 1,378,197 556,937 Payables for security transactions 80,014 46,371 Other liabilities 385,676 348,055 Commitments and contingencies (Notes 8, 11 and 12) ----------- ----------- Total liabilities 23,203,845 18,535,312 ----------- ----------- Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 156,358 shares in 1995 and 155,999 in 1994 15,636 15,600 Additional paid-in capital 196,928 192,899 Unrealized foreign currency translation gains 213,319 174,091 Unrealized gains on securities available for sale 482,787 228,844 Retained earnings 1,577,605 1,277,487 Treasury stock (351,117) (135,776) Notes receivable for stock purchases (1,017) (1,378) ----------- ----------- Total shareholders' equity 2,134,141 1,751,767 ----------- ----------- Total liabilities and shareholders' equity $ 25,337,986 $ 20,287,079 =========== =========== See the accompanying Notes to the Consolidated Financial Statements. Share amounts have been adjusted to reflect the three-for-two stock split payable March 18, 1996. EXH 13-23 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, (In thousands) 1995 1994 1993 ---------- ---------- ---------- Common stock: Balance at beginning of year $ 15,600 $ 15,556 $ 15,478 Exercise of stock options 36 44 63 Shares issued in connection with acquisition - - 15 ---------- ---------- ---------- Balance at end of year 15,636 15,600 15,556 ---------- ---------- ---------- Additional paid-in capital: Balance at beginning of year 192,899 190,545 183,564 Exercise of stock options 3,199 2,119 3,759 Gain on treasury stock reissued 830 235 - Shares issued in connection with acquisition - - 3,222 ---------- ---------- ---------- Balance at end of year 196,928 192,899 190,545 ---------- ---------- ---------- Unrealized foreign currency translation gains: Balance at beginning of year 174,091 123,294 68,978 Change in unrealized translation gains during year, net of income taxes 39,228 50,797 54,316 ---------- ---------- ---------- Balance at end of year 213,319 174,091 123,294 ---------- ---------- ---------- Unrealized gains on securities available for sale: Balance at beginning of year 228,844 14,811 5,167 Cumulative effect of accounting change, net of income taxes - 461,478 - Change in unrealized gains (losses) during year, net of income taxes 253,943 (247,445) 9,644 ---------- ---------- ---------- Balance at end of year 482,787 228,844 14,811 ---------- ---------- ---------- Retained earnings: Balance at beginning of year 1,277,487 1,029,625 814,355 Net earnings 349,057 292,790 255,327 Cash dividends ($.338 per share in 1995, $.298 in 1994 and $.26 in 1993) (48,939) (44,928) (40,057) ---------- ---------- ---------- Balance at end of year $ 1,577,605 $ 1,277,487 $ 1,029,625 ---------- ---------- ---------- (continued) EXH 13-24 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) Years Ended December 31, (In thousands) 1995 1994 1993 ---------- ---------- ---------- Treasury stock: Balance at beginning of year $ (135,776) $ (6,568) $ (4,171) Purchases of treasury stock (224,204) (131,734) (7,893) Shares issued to sales associates stock plan 8,863 2,526 - Shares issued in connection with acquisition - - 5,496 ---------- ---------- ---------- Balance at end of year (351,117) (135,776) (6,568) ---------- ---------- ---------- Notes receivable for stock purchases (1,017) (1,378) (1,639) ---------- ---------- ---------- Total shareholders' equity $ 2,134,141 $ 1,751,767 $ 1,365,624 ========== ========== ========== See the accompanying Notes to the Consolidated Financial Statements. Per-share amounts have been adjusted to reflect the three-for-two stock split payable March 18, 1996. EXH 13-25 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (In thousands) 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 349,057 $ 292,790 $ 255,327 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 2,539,406 2,236,198 1,782,689 Deferred income taxes 18,276 65,074 47,565 Change in income taxes payable 79,785 (9,666) (37,022) Increase in deferred policy acquisition costs (248,522) (262,696) (200,124) Change in receivables and advance premiums 124,882 (44,984) (38,490) Other, net 81,214 92,530 35,304 ---------- ---------- ---------- Net cash provided by operating activities 2,944,098 2,369,246 1,845,249 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 626,938 1,125,179 915,629 Fixed-maturity securities matured 506,043 353,422 129,170 Equity securities 42,247 42,208 45,131 Mortgage loans, net 2,775 35,395 24,955 Other long-term investments, net 1,695 - 2,931 Short-term investments, net 100,634 - 18,483 Costs of investments acquired: Fixed-maturity securities (4,082,021) (3,425,922) (2,766,509) Equity securities (44,459) (40,632) (51,237) Other long-term investments, net - (3,312) - Short-term investments, net - (147,849) - Additions to property and equipment, net (17,391) (185,395) (112,207) ---------- ---------- ---------- Net cash used by investing activities $(2,863,539) $(2,246,906) $(1,793,654) ---------- ---------- ---------- (continued) EXH 13-26 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, (In thousands) 1995 1994 1993 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings $ 198,291 $ 84,000 $ - Principal payments under debt obligations (31,442) (42,681) (32,197) Dividends paid to shareholders (48,939) (44,928) (40,057) Purchases of treasury stock (224,204) (131,734) (1,325) Treasury stock reissued 9,693 2,761 - Other, net 3,235 2,163 5,903 ---------- ---------- ---------- Net cash used by financing activities (93,366) (130,419) (67,676) ---------- ---------- ---------- Effect of exchange rate changes on cash (697) 2,309 3,356 ---------- ---------- ---------- Net change in cash (13,504) (5,770) (12,725) Cash at beginning of year 17,643 23,413 36,138 ---------- ---------- ---------- Cash at end of year $ 4,139 $ 17,643 $ 23,413 ========== ========== ========== Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 12,764 $ 13,742 $ 9,459 Income taxes 154,011 154,826 148,071 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 $2,517 in 1995, $18,210 in 1994, and $28,460 in 1993. See the accompanying Notes to the Consolidated Financial Statements. EXH 13-27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: AFLAC Incorporated (the Parent Company) and subsidiaries (the Company) operate predominantly in the insurance industry and primarily sell 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). Most of AFLAC's insurance policies are individually underwritten in the payroll market, with premiums paid by the employee. AFLAC Japan accounted for 85%, 84% and 82% of the Company's total revenues for 1995, 1994 and 1993, respectively, and 90% of total assets at December 31, 1995 and 1994. BASIS OF PRESENTATION: The accompanying consolidated financial statements of 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, based on the best information available, in recording transactions resulting from business operations. The balance sheet amounts that involve a greater extent of accounting estimates and actuarial determinations subject to future changes are: deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, accrued liabilities for unfunded retirement plans for various officers and beneficiaries, and contingent liabilities. As additional information becomes available (or actual amounts are determinable), the recorded estimates may be revised and reflected in operating results. All significant intercompany items have been eliminated in consolidation. TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts maintained in foreign currencies, principally Japanese yen, are translated into U.S. dollars as follows: Assets and liabilities denominated in foreign currencies are translated at end-of-period rates of exchange. Revenues, expenses and cash flows are translated from foreign currencies into U.S. dollars using average monthly exchange rates for the year. The resulting currency translation adjustments are accumulated and reported as a separate component of shareholders' equity. Realized currency exchange gains and losses resulting from foreign currency transactions are included in earnings. The Parent Company has designated its yen-denominated notes payable (Note 7) as a hedge of its net investment in AFLAC Japan. Outstanding principal and related accrued interest payable on the yen-denominated borrowings are translated into dollars at end-of-period rates of exchange. Interest expense is translated at average monthly exchange rates for the period the borrowings are outstanding. INSURANCE REVENUE AND EXPENSE RECOGNITION: Substantially all supplemental health insurance policies 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 may be adjusted within prescribed guidelines and subject to approval by state insurance regulatory authorities. EXH 13-28 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 proportion to premium revenues over the period 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. The calculation of deferred policy acquisition costs and future policy benefits requires management's use of estimates consistent with sound actuarial valuation techniques. For new policy issues, actuarial assumptions and deferrable acquisition costs are reviewed each year and revised when necessary to more closely reflect recent experience and studies of actual acquisition costs. For all policies in force, deferred policy acquisition costs are evaluated to determine that they are recoverable from future revenues. Costs not recoverable would be charged against earnings. 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, these securities were carried at amortized cost. Equity securities are carried at fair value. If the fair value is higher than amortized cost for fixed-maturity securities or purchase cost for equity securities, the excess is an unrealized gain; and if lower than cost, the difference is an unrealized loss. The net unrealized gains and 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. Fixed-maturity securities loaned to financial institutions in short- term 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 and converting existing policies are deferred and amortized, with interest, over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. In this manner, EXH 13-29 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 $413.5 million in 1995, $416.2 million in 1994 and $334.5 million in 1993. Of the policy acquisition costs deferred, commissions represented 63.8% in 1995, 66.6% in 1994 and 62.4% in 1993. 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 estimates computed on an undiscounted basis using statistical analyses of historical claim experience adjusted for current trends and changed conditions. The ultimate liability may vary significantly from such estimates. These estimates are regularly adjusted in subsequent reporting periods as new experience data emerges and are reflected in operating results in the year such adjustments are made. INCOME TAXES: Different rules are used in computing 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. Under the liability method, deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. The Parent Company and its U.S. subsidiaries, including 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 amortized using the straight-line method over 40 years. Unamortized intangibles are periodically reviewed to assess recoverability using estimates of undiscounted future cash flows from the related business. 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. All share and per- share amounts have been adjusted to reflect the three-for-two stock split declared by the board of directors on February 13, 1996. ACCOUNTING CHANGES ADOPTED: On January 1, 1995, the Company 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. These new accounting standards require impaired mortgage loans to be measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral-dependent. The implementation of these standards had no material effect on the Company. EXH 13-30 Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. As required, the financial information for prior years was not restated. This accounting change has no effect on earnings. For further information, see Note 3. 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. 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 changed 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. These new accounting standards did not have a material effect on operating earnings subsequent to the change. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement, which must be adopted by March 31, 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to (1) those assets to be held and used in the business, and (2) for assets to be disposed of. The Company does not anticipate a material effect on the financial statements from this new accounting standard. SFAS No. 123, Accounting for Stock-Based Compensation, is effective for 1996. This statement provides a choice for accounting for employee stock compensation plans. A company can elect to use the new fair-value-based method of accounting for employee stock compensation plans, under which compensation cost is measured and recognized in results of operations, or continue to account for these plans under the current accounting standards. Entities electing to remain with the present accounting method must make disclosures of what net income and earnings per share would have been if the fair-value-based method of accounting had been applied. The Company plans to continue to account for employee stock options using the present accounting method and include the required disclosures in the financial statements. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to the current year presentation. EXH 13-31 (2) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION The Company's only reportable industry segment is insurance. The Company's principal foreign operations are conducted in Japan. The components of operations for the years ended December 31 were as follows: (In thousands) 1995 1994 1993 --------- --------- --------- Total revenues: Insurance: Japan $6,115,689 $5,127,418 $4,103,294 U.S. 960,443 875,729 793,645 Realized investment gains (losses) (270) 17 4,594 --------- --------- --------- Total U.S. and Japan insurance 7,075,862 6,003,164 4,901,533 Broadcast - U.S. 81,569 77,596 69,082 Corporate and other operations 74,392 67,334 74,063 Intercompany eliminations (41,203) (37,336) (44,060) --------- --------- --------- Total $7,190,620 $6,110,758 $5,000,618 ========= ========= ========= Earnings before income taxes and cumulative effect of accounting changes: Insurance: Japan $ 561,361 $ 471,364 $ 398,946 U.S. 104,459 90,216 75,104 Realized investment gains (losses) (270) 17 4,594 --------- --------- --------- Total U.S. and Japan insurance 665,550 561,597 478,644 Broadcast - U.S. 18,953 17,164 13,397 Corporate and other operations (72,189) (64,552) (55,554) Interest expense (noninsurance operations) (11,319) (9,873) (8,103) --------- --------- --------- Total $ 600,995 $ 504,336 $ 428,384 ========= ========= ========= Total assets at December 31 were as follows: (In thousands) 1995 1994 ---------- ---------- Total assets: Insurance: Japan $22,836,615 $18,256,082 U.S. 2,239,324 1,781,026 ---------- ---------- Total U.S. and Japan insurance 25,075,939 20,037,108 Broadcast - U.S. 159,627 152,115 Corporate and other operations 2,726,366 2,124,500 Intercompany eliminations (2,623,946) (2,026,644) ---------- ---------- Total $25,337,986 $20,287,079 ========== ========== EXH 13-32 Net assets of AFLAC Japan totaled $1.8 billion at December 31, 1995, and $1.6 billion at December 31, 1994. U.S. dollar-denominated securities (including accrued investment income) are owned by AFLAC Japan. Such securities amounted to $1.3 billion and $972.0 million at December 31, 1995, and December 31, 1994, respectively. AFLAC Japan's investments in dollar- denominated securities constitute an economic currency hedge of a portion of the Company's investment in its foreign branch. In addition, the Parent Company has designated its yen-denominated bank borrowings of $230.7 million at December 31, 1995, (Note 7) as a hedge of its net investment in AFLAC Japan. The Company's yen-denominated net assets subject to foreign currency translation fluctuations for financial reporting purposes were $284.4 million and $601.9 million at December 31, 1995 and 1994, respectively. Such amounts consist of AFLAC Japan's net assets less its dollar-denominated investments and the Parent Company's yen-denominated borrowings. The 1995 year-end yen-to-dollar exchange rate, which was used to convert balance sheet items to U.S. dollars, weakened 3.0% compared with 1994, while the 1994 year-end exchange rate strengthened 12.2% compared with 1993, based on the yen/dollar rates of 102.95, 99.85, and 112.00 at December 31, 1995, 1994 and 1993, respectively. If the exchange rates had remained unchanged from the prior year-end rates, the Company's total assets would have been higher by approximately $668.3 million in 1995 and lower by approximately $1.9 billion in 1994. Total liabilities would have been higher by approximately $652.3 million in 1995 and lower by approximately $1.8 billion in 1994. The average yen/dollar exchange rate, which was used to convert revenues, expenses and cash flows, strengthened 8.7% in 1995 compared with 1994, 8.8% in 1994 compared with 1993 and 13.9% in 1993 compared with 1992. The average exchange rates for 1995, 1994, and 1993 were 94.10, 102.26, and 111.21, respectively. The above strengthening increased net earnings by approximately $23.0 million in 1995, $19.7 million in 1994 and $24.5 million in 1993. Earnings before income taxes included net realized foreign exchange transaction losses of $2.9 million in 1995 and $.2 million in 1994, and gains of $.8 million in 1993. Payments are made from AFLAC Japan to the Parent Company for management fees and to AFLAC U.S. for allocated expenses and remittances of earnings. These payments totaled $179.5 million in 1995, $167.9 million in 1994 and $133.4 million in 1993. See Note 10 for information concerning restrictions on remittances of AFLAC Japan earnings. The Company's receivables consisted primarily of monthly insurance premiums due from individual policyholders or their employers for payroll deduction of premiums. At December 31, 1995, $240.5 million, or 74.9%, were receivables for AFLAC Japan ($234.9 million at December 31, 1994). The Company's advertising expense was $34.9 million in 1995, $23.5 million in 1994 and $20.7 million in 1993. AFLAC Japan accounted for $19.9 million, $9.4 million and $9.5 million in 1995, 1994 and 1993, respectively. Additions to property and equipment were $23.7 million in 1995, $194.2 million in 1994 and $123.2 million in 1993. AFLAC Japan's additions were $4.5 million in 1995, $175.5 million in 1994 and $96.8 million in 1993. EXH 13-33 (3) INVESTMENTS The amortized cost for fixed-maturity securities, purchase cost for equity securities and the fair values of investments in securities available for sale at December 31 were as follows: December 31, 1995 -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Japan national government direct obligations $ 5,504.9 $ 1,239.1 $ .6 $ 6,743.4 Japan government guaranteed 492.6 51.2 .1 543.7 Japan municipalities 845.7 89.9 .4 935.2 Japan public utilities 2,882.9 408.4 .1 3,291.2 Corporate obligations: Banks and other financial institutions 421.4 35.6 - 457.0 Foreign issuers: Euroyen 3,931.4 484.8 15.4 4,400.8 Samurai 243.5 28.7 - 272.2 Other 242.8 62.2 - 305.0 -------- -------- -------- -------- Total yen-denominated 14,565.2 2,399.9 16.6 16,948.5 -------- -------- -------- -------- U.S. dollar-denominated: U.S. government direct obligations 107.6 4.1 - 111.7 U.S. agencies (FNMA, etc.) 200.0 10.8 - 210.8 U.S. mortgage-backed securities 189.8 7.7 .3 197.2 Sovereign and Supranational 155.4 12.9 .1 168.2 Corporate obligations: Public utilities 150.1 8.3 .5 157.9 Asset-backed securities 114.6 7.3 .7 121.2 Other 1,604.1 137.5 .7 1,740.9 -------- -------- -------- -------- Total dollar-denominated 2,521.6 188.6 2.3 2,707.9 -------- -------- -------- -------- Other foreign securities 17.9 .7 - 18.6 -------- -------- -------- -------- Total fixed-maturity securities available for sale 17,104.7 2,589.2 18.9 19,675.0 Equity securities 80.9 29.3 2.1 108.1 -------- -------- -------- -------- Total securities available for sale $17,185.6 $ 2,618.5 $ 21.0 $19,783.1 ======== ======== ======== ======== EXH 13-34 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 13-35 The amortized cost and fair values of investments in fixed-maturity securities available for sale at December 31, 1995, by contractual maturity are shown below. Cost or Amortized Fair (In millions) Cost Value ----------- ----------- Due in one year or less $ 530.2 $ 541.9 Due after one year through five years 2,231.9 2,477.0 Due after five years through 10 years 4,091.0 4,675.9 Due after 10 years 10,061.8 11,783.0 U.S. mortgage-backed securities 189.8 197.2 ---------- ---------- Total fixed-maturity securities available for sale $ 17,104.7 $ 19,675.0 ========== ========== 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. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related assets. Therefore, there is a risk that the reinvestment of the proceeds at the maturity of such investments will be at a yield below that of the interest required for the accretion of policy liabilities. At December 31, 1995, the average duration of the policy liabilities was approximately 13 years, while the average duration of the related assets was nine years. The weighted average period to maturity of fixed-maturity securities at December 31, 1995, was 11.3 years, compared with 10.7 years at December 31, 1994. Over the next four years, $2.0 billion, or 13.1% of AFLAC Japan's fixed-maturity securities will mature and be reinvested. 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. EXH 13-36 Realized and unrealized gains and losses from investments for the years ended December 31 were as follows: (In thousands) 1995 1994 1993 ---------- ---------- ---------- Realized gains (losses) on sale or maturity of investments: Fixed-maturity securities: Gross gains from sales $ 7,561 $ 19,054 $ 16,447 Gross losses from sales (16,293) (24,761) (8,980) Net gains from redemptions 924 2,416 2,369 ---------- ---------- ---------- (7,808) (3,291) 9,836 Equity securities: Gross gains from sales 9,471 5,346 1,764 Gross losses from sales (1,662) (1,587) (7,628) Other long-term securities, net (271) (526) (1,035) ---------- ---------- ---------- Net realized gains (losses) $ (270) $ (58) $ 2,937 ========== ========== ========== Changes in unrealized gains (losses): Fixed-maturity securities $ 1,749,389 $(1,030,290) $ 1,351,816 Equity securities 14,362 (1,585) 11,683 ---------- ---------- ---------- Net unrealized gains (losses) $ 1,763,751 $(1,031,875) $ 1,363,499 ========== ========== ========== 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 1995 and 1994. As required, prior-year numbers were not restated. In years prior to 1994, 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 both 1995 and 1994. Since fixed-maturity securities were carried at amortized cost in 1993, the unrealized gains and losses shown above on those securities are not reflected in shareholders' equity for 1993. EXH 13-37 The effect on shareholders' equity of adopting SFAS No. 115 was as follows: (In thousands) December 31, 1995 December 31, 1994 January 1, 1994 ----------------- ----------------- ----------------- Increase in invested assets $ 2,570,263 $ 820,874 $ 1,851,141 Less: Increase in policy liabilities 1,865,077 315,599 1,088,633 Increase in deferred income taxes 249,109 289,089 301,030 ----------- ---------- ------------ Increase in shareholders' equity, net unrealized gains on securities available for sale $ 456,077 $ 216,186 $ 461,478 =========== ========== =========== The following fixed-maturity securities individually exceeded 10% of shareholders' equity at December 31: 1995 1994 ------------------- ------------------- Amortized Fair Amortized Fair (In millions) Cost Value Cost Value ------------------- ------------------- Japan National Government $5,504.9 $6,743.4 $4,790.3 $5,282.1 Tokyo Electric Power Company, Ltd. 976.8 1,111.4 767.3 842.0 Chubu Electric Power 614.1 694.0 552.3 591.2 Tokyo Metropolitan Government 324.9 356.2 300.9 314.6 Province De Quebec 277.7 299.4 269.2 252.6 Tohoku Electric Power 251.9 286.2 203.3 219.3 Kyushu Electric Power Company, Ltd. 250.5 289.5 239.7 261.5 Generale Bank NV 242.8 239.5 * * Kansai Electric Power Company, Ltd. 224.2 259.0 232.7 253.3 Chugoku Electric Power 211.2 238.1 177.8 192.1 Goldman Sachs Group 208.9 241.3 200.3 207.6 Finance Corp. of Local Enterprise 208.7 233.4 314.4 330.7 Republic of Austria * * 198.9 206.9 Nippon Telephone and Telegraph Corp. * * 168.8 180.0 *Less than 10% The Company's investments in Japanese government bonds (at amortized cost) constituted 35.1% and 36.6% of total fixed-maturity securities available for sale at December 31, 1995 and 1994, respectively. EXH 13-38 The components of net investment income for the years ended December 31 were as follows: (In thousands) 1995 1994 1993 ---------- --------- --------- Fixed-maturity securities $1,030,224 $ 841,917 $ 691,482 Equity securities 1,466 1,255 1,554 Mortgage loans on real estate 1,893 3,193 6,024 Other long-term investments 130 146 369 Short-term investments 13,472 11,668 8,094 --------- -------- -------- Gross investment income 1,047,185 858,179 707,523 Less investment expenses 22,225 19,354 18,251 --------- -------- -------- Net investment income $1,024,960 $ 838,825 $ 689,272 ========= ======== ======== (4) FINANCIAL INSTRUMENTS NONDERIVATIVES The carrying amounts for cash, receivables, accrued investment income, accounts payable and payables for security transactions approximated their fair values due to the short-term maturity of these instruments. Consequently, such instruments are not included in the table presented below. 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 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, 1995, 74.5% of mortgage loans were commercial and 25.5% were residential (at December 31, 1994, 72.8% and 27.2%, respectively). The fair values for notes payable are estimated using discounted cash flow analyses based on the Company's current borrowing rates for similar types of borrowings. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At December 31, 1995 and 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 105% or more 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. EXH 13-39 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 use derivatives to hedge the foreign-currency-denominated net assets of its foreign insurance operations. See Note 2 for additional information on the Company's yen-denominated net assets. The Company has entered into interest rate swap agreements on two floating-rate loans to reduce the impact of changes in interest rates on its borrowing costs. These transactions effectively change a portion of the Company's interest rate exposure from floating interest rates to fixed interest rates. Under these swap agreements, the Company makes fixed-rate payments and receives floating-rate payments in return to offset the floating-rate payments required under the loan agreements. In August 1995, the Company entered into swaps on its yen-denominated borrowings (Note 7). The interest rate swaps have notional principal amounts that approximate the unpaid principal amount during the six-year loan period (23.9 billion yen or $230.7 million at December 31, 1995). Under these agreements, the Company makes fixed-rate payments at 2.71% and receives floating-rate payments in return (.8125% at December 31, 1995) based on the three-month Tokyo Interbank Offered Rate. At December 31, 1995 and 1994, the Company had an interest rate swap with a notional principal amount equal to the principal balance of the related loan of $39.2 million and $49.0 million, respectively. Under this agreement, the Company makes fixed-rate payments based on a rate of 5.965% and receives floating-rate payments in return (6.86% at December 31, 1995) based on the three-month London Interbank Offered 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. The Company is exposed to nominal credit risk in the event of non-performance by counterparts to these interest rate swap agreements. The counterparts are credit-worthy financial institutions. EXH 13-40 The carrying values and estimated fair values of the Company's financial instruments as of December 31 are as follows: 1995 1994 ------------------------ ----------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ------------------------ ----------------------- Assets: Fixed-maturity securities $19,675,006 $19,675,006 $15,530,694 $15,530,694 Equity securities 108,062 108,062 84,373 84,373 Mortgage loans 22,213 28,825 25,104 29,104 Policy loans 1,230 1,230 1,202 1,202 Short-term investments 232,201 232,201 330,916 330,916 Securities held as collateral for loaned securities 1,378,197 1,378,197 556,937 556,937 Liabilities: Notes payable 327,268 328,687 184,901 186,716 Derivatives - interest rate swaps - 4,876 - (2,108) Payables for return of collateral on loaned securities 1,378,197 1,378,197 556,937 556,937 (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: (In thousands) 1995 1994 -------- -------- Land $138,765 $142,426 Buildings 360,949 362,439 Equipment 190,833 184,563 ------- ------- 690,547 689,428 Less accumulated depreciation 138,486 109,181 ------- ------- Net property and equipment $552,061 $580,247 ======= ======= EXH 13-41 (6) POLICY LIABILITIES The liability for future policy benefits at December 31 consisted of the following: (In millions) Liability Amounts Interest Rates ---------------------------- ------------------- Policy Year Issue of In 20 Year 1995 1994 Issue Years ------ -------- -------- -------- --------- Health insurance: Foreign: 1995 $ 17.4 $ - 4.0% 4.0% 1994-95 429.3 94.0 4.5 4.5 1990-95 7,399.9 6,171.5 5.5 5.5 1988-93 1,132.8 1,056.0 5.25 5.25 1987-88 1,269.6 1,222.5 5.5 5.5 1985-87 211.1 218.3 5.65 5.65 1985-86 999.5 974.8 6.75 5.5 1978-84 2,795.7 2,670.7 6.5 5.0 1974-79 603.1 731.9 7.0 5.0 Other 35.9 29.7 U.S.: 1988-95 368.4 289.1 8.0 6.0 1986-95 390.9 342.2 6.0 6.0 1985-86 24.8 23.9 6.5 6.5 1981-86 267.0 268.2 7.0 5.5 Other 164.6 154.4 Life insurance 1956-95 25.2 23.4 4.0-6.75 5.5 SFAS No. 115 adjustment (Note 3) 1,865.1 315.6 -------- -------- Total $18,000.3 $14,586.2 ======== ======== The weighted-average interest rates reflected in the statements of earnings for health insurance future policy benefits for Japan policies were 5.6% in 1995, 5.7% in 1994 and 5.8% in 1993, and for U.S. policies, 6.3% in each of the years from 1993 through 1995. EXH 13-42 Changes in the liability for unpaid policy claims are summarized as follows for the years ended December 31: (In thousands) 1995 1994 1993 --------- --------- --------- Unpaid supplemental health claims - beginning of year $ 914,826 $ 697,712 $ 546,936 --------- --------- --------- Add claims incurred during the year related to: Current year 2,399,567 1,978,901 1,576,396 Prior years (130,891) (62,940) (40,033) --------- --------- --------- Total incurred 2,268,676 1,915,961 1,536,363 --------- --------- --------- Less claims paid during the year: On claims incurred during current year 1,496,790 1,236,131 1,003,892 On claims incurred during prior years 630,759 532,001 427,395 --------- --------- --------- Total paid 2,127,549 1,768,132 1,431,287 --------- --------- --------- Effect of foreign exchange rate changes on unpaid claims (45,171) 69,285 45,700 --------- --------- --------- Unpaid supplemental health claims - end of year 1,010,782 914,826 697,712 Unpaid claims for life and other business 5,513 14,524 14,354 --------- --------- --------- Total liability for unpaid policy claims $1,016,295 $ 929,350 $ 712,066 ========= ========= ========= EXH 13-43 (7) NOTES PAYABLE A summary of notes payable at December 31 follows: (In thousands) 1995 1994 --------- --------- 2.71% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually, July 1996 through July 2001 $ 230,695 $ - 5.965% unsecured notes payable to banks, due semiannually, through 1997 39,167 49,000 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through 1998 23,833 32,278 Obligations under capitalized leases, due monthly through 2001, secured by computer equipment in Japan 30,165 39,181 Unsecured notes payable to banks under revolving credit and term loan agreement, variable interest rate (6.75% at December 31, 1994), refinanced into the 2.71% notes payable in 1995 - 50,000 6.63% short-term note payable to bank under unsecured line of credit - 9,000 Other 3,408 5,442 ------- ------- Total notes payable $327,268 $184,901 ======= ======= The aggregate maturities of notes payable during each of the five years after December 31, 1995, are: 1996, $78.6 million; 1997, $77.6 million; 1998, $52.5 million; 1999, $40.8 million; and 2000, $39.1 million. The 2.71% unsecured loan agreement for the share repurchase program was amended during 1995 to provide for borrowings up to $500 million in either U.S. dollars or Japanese yen. In August 1995, all outstanding borrowings under the agreement were converted from dollar-denominated to yen- denominated loans. At December 31, 1995, bank borrowings of 23.9 billion yen ($230.7 million) were outstanding under this agreement. Interest rate swaps related to the 2.71% and 5.965% (fixed rates after swaps) loans are described in Note 4. The weighted-average interest rate on short-term notes payable outstanding at December 31, 1994, was 6.63%. There were no short-term notes payable outstanding at December 31, 1995. Certain of the Company's loan agreements contain financial covenants. The most restrictive covenant requires the Company to maintain a minimum consolidated shareholders' equity, as defined in the agreement, of $1.0 billion. The Company was in compliance with the covenants at December 31, 1995. EXH 13-44 (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) 1995 1994 ---------- ---------- Deferred income tax liabilities: Deferred acquisition costs $ 982,239 $1,038,548 Unrealized gains on securities available for sale 1,103,153 394,378 Premiums receivable 122,974 127,136 Other - 79,108 --------- --------- Total deferred income tax liabilities 2,208,366 1,639,170 --------- --------- Deferred income tax assets: Difference in tax basis of investment in Japan branch 87,096 117,238 Foreign tax credit carryovers 112,202 69,507 Policy benefit reserves 729,638 91,634 Unfunded retirement benefits 53,334 45,124 Accrued expenses 62,933 59,569 Other 94,060 69,828 --------- --------- Total gross deferred tax assets 1,139,263 452,900 Less valuation allowance 141,397 91,594 --------- --------- Total deferred income tax assets 997,866 361,306 --------- --------- Deferred income tax liability 1,210,500 1,277,864 Current income tax liability 187,209 114,577 --------- --------- Total income tax liability $1,397,709 $1,392,441 ========= ========= A valuation allowance is provided 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 that exceed projected future offsets and nondeductible noninsurance losses. Only 35% of noninsurance losses can be offset against life insurance taxable income each year. During 1995, the valuation allowance for deferred tax assets increased by $49.8 million ($16.9 million in 1994) due to increased foreign tax credit carryovers and noninsurance losses. Foreign tax credit carryovers available at December 31, 1995, expire as follows: $3.6 million in 1996, $25.4 million in 1997, $33.0 million in 1998, $16.8 million in 1999, and $33.4 million in 2000. EXH 13-45 The components of income tax expense, applicable to earnings before the cumulative effect of accounting changes, for the years ended December 31 were as follows: (In thousands) Japan U.S. Total ----------- --------- ----------- Income tax expense (benefit): 1995: Current $ 213,784 $ 19,878 $ 233,662 Deferred 17,781 495 18,276 ---------- -------- ---------- Total $ 231,565 $ 20,373 $ 251,938 ========== ======== ========== 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 ========== ======== ========== 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% to pretax earnings before the cumulative effect of accounting changes. The principal reasons for the differences and the related tax effects for the years ended December 31 are summarized as follows: (In thousands) 1995 1994 1993 --------- --------- --------- Income taxes based on U.S. statutory rates $ 210,348 $ 176,518 $ 149,934 U.S. alternative minimum tax 12,558 10,712 9,542 Unrecognized foreign tax credits 11,992 12,473 17,275 Noninsurance losses generating no current tax benefit 7,010 5,561 1,598 Other, net 10,030 6,282 6,146 -------- -------- -------- Income tax expense $ 251,938 $ 211,546 $ 184,495 ======== ======== ======== 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 both 1995 and 1994 and 46.2% in 1993. 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. EXH 13-46 Income taxes are recorded in the statements of earnings and directly in certain shareholders' equity accounts. Income tax expense (benefit) for the years ended December 31 was allocated as follows: (In thousands) 1995 1994 1993 -------- -------- -------- Statements of earnings: Operating earnings (excluding realized investment gains and losses) $252,531 $211,341 $183,793 Realized investment gains and losses (593) 205 702 Benefits of adoption of SFAS No. 109 - - (22,000) ------- ------- ------- Income taxes included in the statements of earnings 251,938 211,546 162,495 Shareholders' equity: Unrealized gains and losses on securities available for sale (39,670) 289,658 2,165 Unrealized foreign currency translation gains (2,177) (1,980) - ------- ------- ------- Total income taxes $210,091 $499,224 $164,660 ======= ======= ======= Realized investment losses incurred by AFLAC Japan are generally 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 for the years ended December 31 is summarized as follows: (In thousands) 1995 1994 1993 --------- --------- -------- Recognition of deferred policy acquisition costs $ 22,753 $ 71,701 $ 52,844 Adjustments to liability for future policy benefits (5,605) (11,417) 543 Noninsurance losses generating no tax benefit 2,130 8,377 2,060 Other, net (1,002) (3,587) (7,882) ------- ------- ------- Deferred income tax expense $ 18,276 $ 65,074 $ 47,565 ======= ======= ======= 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 relating to both the years under examination and subsequent years. Management does not agree with the proposed tax issues and is vigorously EXH 13-47 contesting them. The Company filed a formal protest with the IRS during 1995. Although the final outcome is uncertain and will likely take several years to resolve, 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 number of shares of the Company's common stock for the years ended December 31: (In thousands) 1995 1994 1993 -------- -------- -------- Common stock - number of shares: Issued: Balance at beginning of year 155,999 155,565 154,780 Exercise of stock options 359 434 629 Shares issued in connection with acquisition - - 156 -------- -------- -------- Balance at end of year 156,358 155,999 155,565 -------- -------- -------- Treasury stock - number of shares: Balance at beginning of year 6,544 358 259 Purchases of treasury stock 8,223 6,309 62 Shares received in connection with acquisition - - 357 Shares issued to sales associates stock plan (311) (123) - Exercise of stock options (72) - - Shares issued in connection with acquisition - - (320) -------- -------- -------- Balance at end of year 14,384 6,544 358 -------- -------- -------- Shares outstanding at end of year 141,974 149,455 155,207 ======== ======== ======== STOCK SPLIT: On February 13, 1996, the board of directors declared a three-for-two stock split to shareholders of record as of February 29, 1996, payable on March 18, 1996. Share and per-share amounts have been adjusted to reflect this split. SHARE REPURCHASE PROGRAM: During 1995, the Company's board of directors authorized the purchase of up to an additional 14.4 million shares, as restated for the stock split, of the Company's common stock. In total, the board of directors has authorized the purchase of up to 21.4 million shares since the inception of the repurchase program in February 1994. The Company purchased 8.2 million shares and 6.3 million shares during 1995 and 1994, respectively, under this share repurchase program. The difference in percentage increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. EXH 13-48 STOCK OPTIONS: The following table summarizes data relating to stock options, as restated for the stock split: 1995 1994 1993 --------- --------- --------- Number of shares subject to options: Outstanding at beginning of year 8,148,332 4,586,378 5,258,200 Granted 549,377 4,108,523 33,759 Expired - (938) - Canceled (25,313) (114,001) - Exercised (470,049) (431,630) (705,581) ---------- ---------- ---------- Outstanding at end of year 8,202,347 8,148,332 4,586,378 ========== ========== ========== Shares exercisable at end of year 7,676,611 6,631,818 4,143,110 ========== ========== ========== Shares available for future grants 1,774,081 505,645 167 ========== ========== ========== The exercise price for new options granted in 1995 ranged from $24.21 to $28.21 per share (weighted-average exercise price of $28.08 per share), from $18.83 to $23.13 per share in 1994 (weighted-average of $19.01 per share), and from $19.20 to $20.93 per share in 1993 (weighted-average of $19.25 per share). The exercise price for options exercised ranged from $3.57 to $20.88 per share in 1995 and $2.05 to $16.13 in both 1994 and 1993 (weighted- average exercise price of $11.32, $5.95 and $5.70 for 1995, 1994 and 1993, respectively. The exercise price of options outstanding at December 31, 1995, ranged from $3.57 to $28.21 per share (weighted-average exercise price of $14.62 per share). In August 1995, the board of directors made an additional 1,042,500 shares (as restated for the stock split) available for future grants. This represents 10% of the shares previously approved for stock options by the shareholders. The board of directors also approved 750,000 shares (as restated for the stock split) of non-qualified stock options to be granted to managers of AFLAC Japan. 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. The following share amounts have been restated to reflect the stock split. In December 1993, the Parent Company issued 319,590 shares from treasury stock and 155,532 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 357,462 shares of the Parent Company's common stock (valued at the stock-exchange average-closing market price over the preceding 18 EXH 13-49 trading-day period) and future renewal commission rights. The commission rights resulted from 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 357,462 shares of Parent Company stock acquired in 1993 have been reflected as the purchase of treasury shares in the accompanying consolidated financial statements. (10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS Net assets of the insurance subsidiaries aggregated $2.5 billion at December 31, 1995, on a generally accepted accounting principles basis. AFLAC Japan accounted for $1.8 billion of these net assets. 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. As determined on a U.S. statutory accounting basis, net income of AFLAC was $194.3 million in 1995, $252.5 million in 1994 and $149.2 million in 1993, and capital and surplus was $1.2 billion and $1.1 billion at December 31, 1995 and 1994, respectively. 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) 1995 1994 ---------- ---------- Net assets on generally accepted accounting principles basis $ 2,536,112 $ 1,952,326 Adjustment of fixed-maturity securities from fair value to amortized cost (2,568,498) (821,362) Elimination of deferred policy acquisition costs (2,563,759) (2,401,768) Adjustment to liability for future policy benefits 2,892,499 1,330,687 Adjustment to income tax liability 1,236,452 1,302,172 Reduction in premiums receivable (65,107) (61,168) Establishment of asset valuation reserve (185,180) (139,858) Elimination of statutory non-admitted assets (63,098) (52,511) Difference in foreign currency translation (51,423) (81,087) Other, net 78,398 100,173 ---------- ---------- Net assets on U.S. statutory accounting basis $ 1,246,396 $ 1,127,604 ========== ========== 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 EXH 13-50 subsidiaries are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. The maximum amount of dividends that can be paid by insurance companies domiciled in the state of Georgia to shareholders without prior approval of the Commissioner of Insurance is the greater of the net gain from operations for the previous year determined under statutory accounting principles or 10% of statutory surplus as of the previous year-end. Dividend payments by AFLAC during 1996 in excess of $192.9 million would require such approval. 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 conditions imposed by Japanese regulatory authorities for protecting policyholders and obtaining remittance approvals from such authorities. These conditions 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 Japanese regulatory accounting practices 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 $140.5 million in 1995, $132.9 million in 1994 and $97.9 million in 1993. Management expects to continue to obtain approvals from Japan regulatory authorities for annual profit transfers. Net assets (unaudited) of AFLAC Japan, based on Japan statutory accounting practices, aggregated $412.8 million and $228.6 million at December 31, 1995 and 1994, respectively. Japan statutory accounting practices differ in many respects from U.S. generally accepted accounting principles. Under Japan statutory accounting practices, policy acquisition costs are charged off immediately, policy benefit and claim reserving methods are different, deferred income tax liabilities are not recognized, and investment securities are generally carried at cost. (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. EXH 13-51 The components of retirement expense and significant actuarial assumptions for the years ended December 31 are shown below. 1995 1994 1993 -------------- -------------- -------------- (In thousands) Japan U.S. Japan U.S. Japan U.S. ------ ------ ------ ------ ------ ------ Basic employee plans: Service cost for benefits earned during the year $2,610 $ 1,880 $2,269 $ 2,166 $1,500 $ 1,602 Interest cost on projected benefit obligations 1,148 2,686 999 2,569 801 2,145 Less actual investment return on plan assets (518) (6,344) (1,135) 28 (355) (1,195) Net amortization and deferral 696 4,370 278 (1,530) 213 (487) ----- ------ ----- ------ ----- ------ Total retirement expense for basic employee plans 3,936 2,592 2,411 3,233 2,159 2,065 Officers, retirees and beneficiaries unfunded supplemental plans 1,395 33,134 1,203 33,468 1,021 18,007 ----- ------ ----- ------ ----- ------ Total retirement expense $5,331 $35,726 $3,614 $36,701 $3,180 $20,072 ===== ====== ===== ====== ===== ====== Significant actuarial assumptions: Discount rate for: Net periodic pension costs 4.0% 8.0% 4.4% 7.0% 5.5% 8.0% Benefit obligations 4.0 7.0 4.0 8.0 4.0 7.0 Projected increase in salary levels 3.5 5.0 4.5 5.0 4.5 5.0 Expected long-term return on plan assets 4.5 9.0 5.5 9.0 5.5 9.0 EXH 13-52 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: 1995 1994 ---------------- ---------------- (In thousands) Japan U.S. Japan U.S. ------- ------- ------- ------- Plan assets, at fair value (primarily bonds, stocks and insurance contracts) $18,769 $31,557 $16,631 $24,963 ------ ------ ------ ------ Actuarial present value of benefit obligations: Accumulated benefit obligations, based on employee service to date and present salary levels: Vested benefits 16,677 27,725 11,694 22,413 Non-vested benefits 128 1,385 135 1,120 Effect of assumed future salary increases 10,187 13,414 10,344 9,108 ------ ------ ------ ------ Projected benefit obligations 26,992 42,524 22,173 32,641 ------ ------ ------ ------ Projected benefit obligations in excess of plan assets (8,223) (10,967) (5,542) (7,678) Unamortized net losses from plan experience variations and changes in actuarial assumptions 1,029 11,486 589 9,661 Unrecognized prior service cost (credit) 1,347 (249) - (276) Unamortized net transition (gain) loss 857 (1,205) 983 (1,326) ------ ------ ------ ------ Prepaid retirement cost (liability) recognized in consolidated balance sheets $(4,990) $ (935) $(3,970) $ 381 ====== ====== ====== ====== 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, 1995 and 1994, was $131.3 million and $102.6 million, respectively. The actuarial present value of projected benefit obligations for these plans was $161.2 million and $114.9 million at December 31, 1995 and 1994, respectively. The discount rates used were 4.0% in both 1995 and 1994 for AFLAC Japan, and 7.0% and 8.0% for AFLAC U.S. for 1995 and 1994, 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 .5% (1% prior to 1995) of the previous year's "net earnings" as defined in the agreement. Retirement expense for the Company's various funded and unfunded supplemental plans has increased in 1994 and 1995 due to enhanced benefits, early retirements, and changes in the various actuarial assumptions for projecting future retirement obligations. EXH 13-53 POSTRETIREMENT BENEFITS: In addition to pension benefits, substantially all U.S. employees of the Company participate in health care benefit plans. 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. The accumulated benefit obligation for the years ended December 31, 1995 and 1994, was $10.5 million and $10.0 million, respectively, based on an assumed discount rate of 7% and 8%, respectively. Net postretirement benefit cost for the years ended December 31 included the following components: (In thousands) 1995 1994 1993 ------ ------ ------ Service cost $ 229 $ 251 $ 177 Interest cost 536 743 786 Amortization of unrecognized (gains)/losses (207) - - ------ ------ ------ Postretirement benefit cost $ 558 $ 994 $ 963 ====== ====== ====== Actuarial assumptions used were: Projected health care cost trend rate 13% 14% 15% Ultimate trend rate 7% 7% 7% Effect of a 1% point increase in the health care cost trend rate on the: Postretirement benefit obligation $ 675 $ 487 $ 541 Aggregate of service and interest cost $ 89 $ 94 $ 71 Discount rate - periodic cost 8% 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 participants are subject to vesting requirements based on years of service. Any shares forfeited reduce future contributions of AFLAC U.S. The net costs of this plan, which are included in deferred policy acquisition costs, amounted to $8.0 million in 1995, $6.9 million in 1994 and $3.5 million in 1993. EXH 13-54 (12) COMMITMENTS AND CONTINGENCIES For information regarding proposed U.S. income tax adjustments by the Internal Revenue Service, see Note 8. LITIGATION: The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. During 1995, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the year. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of the litigation still pending will not have a material adverse effect on the financial position of the Company. LAND PURCHASE COMMITMENT: AFLAC Japan's administrative office building is located on partially leased land. The Company is committed to purchase the leased land, at fair value, upon the demand of the owner. As of December 31, 1995, the fair value of the leased land was estimated to be 2.4 billion yen ($23.1 million). EXH 13-55 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 five 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 13-56 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 29, 1996 EXH 13-57 Unaudited Consolidated Quarterly Financial Data (In thousands, except per-share amounts)
- ----------------------------------------------------------------------------------------------------------------------------- Three Months ended, March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------------- 1995 Amount % Change Amount % Change Amount % Change Amount % Change - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $ 1,713,676 23.1% $ 1,932,771 30.5% $ 1,811,718 13.1% $ 1,732,455 5.9% Net earnings 84,873 21.3 92,916 33.9 87,960 15.6 83,308 7.6 - ----------------------------------------------------------------------------------------------------------------------------- Per common share: Net earnings $ .56 27.3 $ .61 35.6 $ .60 22.4 $ .57 11.8 Cash dividends $ .077 $ .087 $ .087 $ .087 - ----------------------------------------------------------------------------------------------------------------------------- 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 $ .44 29.4* $ .45 21.6 $ .49 19.5 $ .51 21.4 Cash dividends $ .067 $ .077 $ .077 $ .077 - ----------------------------------------------------------------------------------------------------------------------------- *Before cumulative effect of accounting changes in 1993. Per-share amounts have been adjusted to reflect the three-for-two stock split payable on March 18, 1996. EXH 13-58
EX-21 3 SUBSIDIARIES EXHIBIT 21 EXH 21 AFLAC INCORPORATED SUBSIDIARIES The following list sets forth the subsidiaries of the Company: Company Jurisdiction ------- ------------ AFLAC Broadcast Partners ("ABP") Georgia AFLAC Insurance Company of Canada ("AIC-C") Canada AFLAC International, Inc. ("AI") Georgia A.S. II, Inc. ("ASII") Tennessee AFLAC Broadcast Group, Inc. ("ABG") Georgia AFLAC Real Estate Holdings, Inc. ("AREH") Georgia 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 Hotel Columbus, Inc. ("HC") Georgia WITN-TV, Inc. ("WITN") North Carolina National Equity Corporation ("NEC") Georgia The above subsidiaries are 100% directly owned by the Company, except: WITN is 100% directly owned by ABG. AFLAC-NY is 100% directly owned by AFLAC. ABP is 99% owned by AFLAC and 1% owned by ABG. HC is 30% owned by the Company. EXH 21-1 EX-23 4 STOCK OPTION PLAN CONSENT Exhibit 23.0 EXH 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 29, 1996, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the 1995 annual report to shareholders and is incorporated by reference in the December 31, 1995, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1996 EXH 23.0-1 EX-23.1 5 STOCK BONUS PLAN CONSENT Exhibit 23.1 EXH 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 29, 1996, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the 1995 annual report to shareholders and is incorporated by reference in the December 31, 1995, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1996 EXH 23.1-1 EX-23.2 6 401(K) RETIREMENT PLAN CONSENT EXHIBIT 23.2 EXH 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 29, 1996, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the 1995 annual report to shareholders and is incorporated by reference in the December 31, 1995, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1996 EXH 23.2-1 EX-23.3 7 AFL STOCK PLAN CONSENT EXHIBIT 23.3 EXH 23.3 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. 33-64535 on Form S-3 of AFLAC Incorporated of our report dated January 29, 1996, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1995 and 1994, 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, 1995, which report appears in the 1995 annual report to shareholders and is incorporated by reference in the December 31, 1995, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1996 EXH 23.3-1 EX-27 8 FINANCIAL DATA SCHEDULE
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, 1995, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 19,675,006 0 0 108,062 22,213 0 20,040,825 4,139 0 2,565,027 25,337,986 19,016,591 301,452 0 316,938 327,268 0 0 15,636 2,118,505 25,337,986 6,070,830 1,024,960 (270) 95,100 5,034,266 168,779 1,386,580 600,995 251,938 349,057 0 0 0 349,057 2.33 0 0 0 0 0 0 0 0 Per-share amounts have been adjusted to reflect the three-for-two stock split payable March 18, 1996.
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