-----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, W0KU9AwLUiByQ4pKxQBCqe8zCCVb5XELhPkiuWkGc5n+yJB7u+j9qUDqo7Sjb0eg Vq5utcTrYZJqdYBfpgGibQ== 0000004977-00-000014.txt : 20000511 0000004977-00-000014.hdr.sgml : 20000511 ACCESSION NUMBER: 0000004977-00-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 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-Q SEC ACT: SEC FILE NUMBER: 001-07434 FILM NUMBER: 623937 BUSINESS ADDRESS: STREET 1: 1932 WYNNTON RD CITY: COLUMBUS STATE: GA ZIP: 31999 BUSINESS PHONE: 7063233431 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY CORP DATE OF NAME CHANGE: 19920306 10-Q 1 1ST QUARTER FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarter ended March 31, 2000 Commission File No. 1-7434 AFLAC INCORPORATED ------------------------------------------------------ GEORGIA 58-1167100 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code (706) 323-3431 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class May 3, 2000 - ---------------------------- ------------------ Common Stock, $.10 Par Value 265,441,553 shares AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 and December 31, 1999. . . . . . . . . . 1 Consolidated Statements of Earnings - Three Months Ended March 31, 2000 and 1999 . . . . . . . 3 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2000 and 1999 . . . . . . . 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 . . . . . . . 5 Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2000 and 1999 . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . 8 Review by Independent Certified Public Accountants. . . . . . . . . . . . . . . . . . . . . . . 14 Independent Auditors' Report . . . . . . . . . . . . . . . 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . 28 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 32 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 33 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 34 Items other than those listed above are omitted because they are not required or are not applicable. i Part I. Financial Information AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In millions) March 31, December 31, 2000 1999 (Unaudited) ----------- ------------ ASSETS: Investments and cash: Securities available for sale, at fair value: Fixed maturities (amortized cost, $19,454 in 2000 and $18,896 in 1999) $ 21,484 $ 20,859 Perpetual debentures (amortized cost, $2,485 in 2000 and $2,564 in 1999) 2,062 2,024 Equity securities (cost, $148 in 2000 and $137 in 1999) 228 215 Securities held to maturity, at amortized cost: Fixed maturities (fair value, $4,114 in 2000 and $4,280 in 1999) 4,216 4,389 Perpetual debentures (fair value, $3,632 in 2000 and $3,732 in 1999) 3,754 3,903 Other investments 15 18 Cash and cash equivalents 692 616 -------- -------- Total investments and cash 32,451 32,024 Receivables, primarily premiums 262 270 Accrued investment income 322 369 Deferred policy acquisition costs 3,672 3,692 Property and equipment, at cost less accumulated depreciation 492 509 Other 192 177 -------- -------- Total assets $ 37,391 $ 37,041 ======== ======== See the accompanying Notes to Consolidated Financial Statements. (continued) 1 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions, except for share and per-share amounts) March 31, December 31, 2000 1999 (Unaudited) ----------- ----------- Liabilities and Shareholders' Equity: Liabilities: Policy liabilities: Future policy benefits $ 26,939 $ 27,310 Unpaid policy claims 1,637 1,618 Unearned premiums 360 361 Other policyholders' funds 302 315 -------- -------- Total policy liabilities 29,238 29,604 Notes payable 1,072 1,111 Income taxes 1,727 1,511 Payables for return of cash collateral on loaned securities 340 - Other 947 947 -------- -------- Total liabilities 33,324 33,173 -------- -------- Shareholders' equity: Common stock of $.10 par value. In thousands: authorized 400,000 shares; issued 321,495 shares in 2000 and 320,349 shares in 1999 32 32 Additional paid-in capital 320 310 Retained earnings 3,493 3,356 Accumulated other comprehensive income: Unrealized foreign currency translation gains 182 232 Unrealized gains on investment securities 1,207 1,032 Treasury stock, at average cost (1,167) (1,094) -------- -------- Total shareholders' equity 4,067 3,868 -------- -------- Total liabilities and shareholders' equity $ 37,391 $ 37,041 ======== ======== Shareholders' equity per share $ 15.34 $ 14.56 ======== ======== See the accompanying Notes to Consolidated Financial Statements. 2 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings (In millions, except for share and Three Months Ended March 31, per-share amounts - Unaudited) ---------------------------- 2000 1999 -------- -------- Revenues: Premiums, principally supplemental health insurance $ 2,020 $ 1,728 Net investment income 376 320 Realized investment gains (losses) (2) (5) Other income 4 5 ------- ------- Total revenues 2,398 2,048 ------- ------- Benefits and expenses: Benefits and claims 1,620 1,400 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 69 57 Insurance commissions 255 226 Insurance expenses 189 142 Interest expense 5 4 Other operating expenses 17 16 ------- ------- Total acquisition and operating expenses 535 445 ------- ------- Total benefits and expenses 2,155 1,845 ------- ------- Earnings before income taxes 243 203 ------- ------- Income tax expense (benefit): Operations 87 74 Deferred tax benefit from Japanese tax rate reduction - (67) ------- ------- Total income taxes 87 7 ------- ------- Net earnings $ 156 $ 196 ======= ======= Net earnings per share: Basic $ .59 $ .74 Diluted .57 .71 ======= ======= Shares used in computing earnings per share (In thousands): Basic 265,599 266,115 Diluted 272,261 276,769 ======= ======= Cash dividends per share $ .075 $ .065 ======= ======= See the accompanying Notes to Consolidated Financial Statements. 3 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions, except for per-share amounts - Unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ------ ------ Common Stock: Balance at beginning and end of period $ 32 $ 32 ------ ------ Additional paid-in capital: Balance at beginning of year 310 235 Exercise of stock options 7 3 Gain on treasury stock reissued 3 3 ------ ------ Balance at end of period 320 241 ------ ------ Retained earnings: Balance at beginning of year 3,356 2,862 Net earnings 156 196 Dividends to shareholders ($.075 per share in 2000 and $.065 in 1999) (19) (18) ------ ------ Balance at end of period 3,493 3,040 ------ ------ Accumulated other comprehensive income: Balance at beginning of year 1,264 1,551 Change in unrealized foreign currency translation gains (losses) during period, net of income taxes (51) (5) Change in unrealized gains (losses) on investment securities during period, net of income taxes 176 (89) ------ ------ Balance at end of period 1,389 1,457 ------ ------ Treasury stock: Balance at beginning of year (1,094) (910) Purchases of treasury stock (81) (11) Cost of shares issued 8 10 ------ ------ Balance at end of period (1,167) (911) ------ ------ Total shareholders' equity $ 4,067 $ 3,859 ====== ====== See the accompanying Notes to Consolidated Financial Statements. 4 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions - Unaudited) Three Months Ended March 31, 2000 1999 ------ ------ Cash flows from operating activities: Net earnings $ 156 $ 196 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 688 652 Deferred income taxes 38 (41) Change in income taxes payable 147 (55) Increase in deferred policy acquisition costs (81) (69) Change in receivables and advance premiums 12 2 Other, net (19) 14 ------ ------ Net cash provided by operating activities 941 699 ------ ------ Cash flows from investing activities: Proceeds from investments sold or matured: Securities available for sale: Fixed-maturity securities sold 207 279 Fixed-maturity securities matured 121 63 Equity securities 15 16 Securities held to maturity: Fixed-maturity securities matured - 9 Other investments, net (1) 1 Costs of investments acquired: Securities available for sale: Fixed-maturity securities (1,377) (648) Perpetual debentures (1) (434) Equity securities (59) (19) Securities held to maturity: Fixed-maturity securities - (42) Cash received as collateral on loaned securities 340 - Additions to property and equipment, net (1) (3) ------ ------ Net cash used by investing activities $ (756) $ (778) ------ ------ (continued) 5 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In millions - Unaudited) Three Months Ended March 31, 2000 1999 ------ ------ Cash flows from financing activities: Principal payments under debt obligations $ (4) $ (3) Dividends paid to shareholders (18) (17) Purchases of treasury stock (81) (11) Treasury stock reissued 6 10 Other, net 7 4 ------ ------ Net cash used by financing activities (90) (17) ------ ------ Effect of exchange rate changes on cash and cash equivalents (19) (9) ------ ------ Net change in cash and cash equivalents 76 (105) Cash and cash equivalents, beginning of year 616 374 ------ ------ Cash and cash equivalents, end of period $ 692 $ 269 ====== ====== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest on debt obligations $ 3 $ 3 Income taxes - 139 Non-cash financing activities: Capital lease obligations 4 4 Treasury shares issued for: Dividends to shareholders 1 1 Associates stock bonus plan 4 3 See the accompanying Notes to Consolidated Financial Statements. 6 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In millions - Unaudited) Three Months Ended March 31, 2000 1999 ------ ------ Net earnings $ 156 $ 196 ------ ------ Other comprehensive income, before income taxes: Foreign currency translation adjustments: Change in unrealized foreign currency translation gains during the period 32 24 Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during the period 232 (95) Reclassification adjustment for realized (gains) losses included in net earnings 2 4 ------ ------ Total other comprehensive income, before income taxes 266 (67) Income tax expense related to items of other comprehensive income 141 27 ------ ------ Other comprehensive income, net of income taxes 125 (94) ------ ------ Total comprehensive income $ 281 $ 102 ====== ====== 7 AFLAC INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments necessary to fairly present the financial position as of March 31, 2000, and the results of operations and statements of cash flows, shareholders' equity and comprehensive income for the three months ended March 31, 2000 and 1999. Results of operations for interim periods are not necessarily indicative of results for the entire year. We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). These principles are established primarily by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants. The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations, based on information currently available. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are: deferred policy acquisition costs, liabilities for future policy benefits and unpaid policy claims, and accrued liabilities for unfunded retirement plans. As additional information becomes available (or actual amounts are determinable), the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, we believe the amounts provided are adequate. The financial statements should be read in conjunction with the financial statements included in our annual report to shareholders for the year ended December 31, 1999. 2. Accounting Pronouncements SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in investment securities and other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative will be included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. We are currently evaluating this standard, which for us becomes effective January 1, 2001. 8 3. Segment Information Information regarding components of operations for the three months ended March 31 follows: (In millions) 2000 1999 -------- -------- Total revenues: AFLAC Japan: Earned premiums $ 1,646 $ 1,398 Net investment income 306 262 ------- ------- Total AFLAC Japan revenues 1,952 1,660 ------- ------- AFLAC U.S.: Earned premiums 374 330 Net investment income 67 58 Other income 1 - ------- ------- Total AFLAC U.S. revenues 442 388 ------- ------- Other business segments 6 7 ------- ------- Total business segments 2,400 2,055 Realized investment gains (losses) (2) (5) Corporate 8 7 Intercompany eliminations (8) (9) ------- ------- Total $ 2,398 $ 2,048 ======= ======= Earnings before income taxes: AFLAC Japan $ 188 $ 158 AFLAC U.S. 70 63 Other business segments - 1 ------- ------- Total business segments 258 222 Realized investment gains (losses) (2) (5) Interest expense, non-insurance operations (4) (3) Corporate (9) (11) ------- ------- Total $ 243 $ 203 ======= ======= 9 Total assets were as follows: March 31, December 31, (In millions) 2000 1999 ---------- ----------- Total assets: AFLAC Japan $ 32,550 $ 32,274 AFLAC U.S. 4,597 4,448 Other business segments 32 34 -------- -------- Total business segments 37,179 36,756 Corporate 5,429 5,213 Intercompany eliminations (5,217) (4,928) -------- -------- Total $ 37,391 $ 37,041 ======== ======== 4. Japanese Income Taxes At the end of March 1999, the Japanese government reduced the Japanese corporate income tax rate from 41.7% to 36.2%, which increased net earnings for the first quarter of 1999 by $67 million ($.25 per basic share, $.24 per diluted share) from the reduction of our consolidated deferred income tax liability as of March 31, 1999. This was the net effect of recalculating Japanese deferred income taxes at the new 36.2% rate on the temporary differences between the financial reporting basis of AFLAC Japan's assets and liabilities, reduced by the limitations in the U.S. foreign tax credit provisions. The 1999 rate reduction for AFLAC Japan was effective April 1, 1999 for purposes of calculating income tax expense on operating earnings. 5. Notes Payable A summary of notes payable is as follows: March 31, December 31, (In millions) 2000 1999 ---------- ------------ 1.67% yen-denominated senior notes due April 2009 $ 522 $ 541 Unsecured, yen-denominated notes payable to banks: Reducing, revolving credit agreement, due annually through July 2001: 2.29% fixed interest rate 214 222 Variable interest rate (.41% at March 31, 2000) 30 31 Revolving credit agreement due November 2002: 1.24% fixed interest rate 110 114 Variable interest rate (.36% at March 31, 2000) 134 138 .36% short term 43 45 Obligations under capitalized leases, due monthly through 2004, secured by computer equipment in Japan 19 20 ------ ------ Total notes payable $ 1,072 $ 1,111 ====== ====== 10 In April 1999, we issued $450 million of senior notes with a 6.50% coupon, payable semiannually, due April 15, 2009. The notes are redeemable at our option at any time with a redemption price equal to the principal amount of the notes being redeemed plus a make-whole amount. We have entered into cross currency swaps that have the effect of converting the dollar-denominated principal and interest into yen-denominated obligations. At March 31, 2000, the outstanding principal was 55.6 billion yen ($523 million using the March 31, 2000 exchange rate), less loan discount of $1 million, for a net payable of $522 million at an interest rate of 1.67%. We have a reducing, revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. The current borrowing limit is $250 million. Under the terms of the agreement, the borrowing limit will reduce to $125 million on July 15, 2000. At March 31, 2000, 22.7 billion yen ($214 million) was outstanding at a fixed interest rate and 3.2 billion yen ($30 million) was outstanding at a variable interest rate under this agreement. We also have an unsecured revolving credit agreement that provides for bank borrowings through November 2002 with a borrowing limit of $250 million, payable in either U.S. dollars or Japanese yen. At March 31, 2000, 11.6 billion yen ($110 million) was outstanding at a fixed interest rate and 14.2 billion yen ($134 million) was outstanding at a variable interest rate under this agreement. Since these loans are denominated in yen, the principal amount of the loans as stated in dollar terms at any date will fluctuate due to changes in the yen/dollar exchange rate. We have outstanding interest rate swaps on a portion of our variable interest rate yen-denominated borrowings (34.3 billion yen). These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the anticipated unpaid principal amounts on a portion of these loans. Under these agreements, we make fixed rate payments at 2.29% on one loan and 1.24% on another loan and receive floating rate payments (.14% at March 31, 2000 plus loan costs of 25 or 20 basis points, respectively) based on the three-month Tokyo Interbank Offered Rate. We have designated our yen-denominated borrowings as a hedge of our net investment in AFLAC Japan. Foreign currency translation gains/losses are included in accumulated other comprehensive income. Outstanding principal and related accrued interest payable on the yen-denominated borrowings were translated into dollars at end-of-period exchange rates. Interest expense was translated at average exchange rates for the period the interest expense was incurred. 6. Unrealized Gains on Investment Securities Net unrealized gains and losses on investment securities, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income. The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of shareholders if such gains were actually realized. These amounts relate to policy reserve interest requirements and reflect the difference between market investment yields and estimated minimum required interest rates. 11 The net effect on shareholders' equity of unrealized gains and losses from investment securities at the following dates was: (In millions) March 31, December 31, 2000 1999 ------------ ------------ Unrealized gains on securities available for sale $ 1,687 $ 1,501 Unamortized unrealized gains on securities transferred on October 1, 1998 to held to maturity 1,184 1,258 Less: Policy liabilities 719 840 Deferred income taxes 945 887 --------- --------- Shareholders' equity, net unrealized gains on investment securities $ 1,207 $ 1,032 ========= ========= 7. Security Lending AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At March 31, 2000 and December 31, 1999 we had security loans outstanding in the amounts of $335 million and $2.4 billion at fair value, respectively. We receive cash or other securities as collateral for such loans. At March 31, 2000, we held cash collateral of $340 million for loaned securities in the amount of $335 million. Also at December 31, 1999, we held Japanese government bonds as collateral for loaned securities in the amount of $2.4 billion, at fair value. Our security lending policy requires that the fair value of the securities received as collateral and cash received as collateral be 102% and 100% or more, respectively, of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. For loans involving unrestricted cash collateral, the collateral is recorded as an asset with a corresponding liability for the return of the collateral. For loans involving securities as collateral, the collateral is not recorded as an asset or liability. 12 8. Common Stock The following is a reconciliation of the number of shares of our common stock for the three months ended March 31: 2000 1999 (In thousands of shares) ---------- ---------- Common stock - issued: Balance at beginning of year 320,349 317,971 Exercise of stock options 1,146 599 -------- -------- Balance at end of period 321,495 318,570 -------- -------- Treasury stock: Balance at beginning of year 54,608 52,287 Purchases of treasury stock: Open market 2,044 150 Other 48 98 Shares issued to sales associates stock bonus plan and AFL Stock Plan (229) (191) Exercise of stock options (159) (429) -------- -------- Balance at end of period 56,312 51,915 -------- -------- Shares outstanding at end of period 265,183 266,655 ======== ======== At March 31, 2000, there were 1.6 million weighted average shares for outstanding stock options that were not included in the computation of diluted earnings per share because the exercise price for these options was greater than the average market price during the first quarter of 2000. On May 1, 2000 the shareholders approved an increase in the number of authorized shares from 400 million to 1 billion. 9. Litigation We are a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows. 10. Subsequent Event The surviving spouse of John B. Amos, the Company's former chairman of the board, has been receiving lifetime retirement benefits under his shareholder approved employment contract. The benefits were payable at .5% of the Company's pretax earnings for the previous year, as defined in the agreement. On May 3, 2000, the former chairman's spouse unexpectedly died. The Company has an accrued unfunded liability for projected retirement payments based on a normal life expectancy. Accordingly, during the second quarter of 2000, the release of the remaining accrued liability is estimated to increase net earnings by approximately $95 million ($.35 per diluted share). 13 REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The March 31, 2000 and 1999 financial statements included in this filing have been reviewed by KPMG LLP, independent certified public accountants, in accordance with established professional standards and procedures for such a review. The report of KPMG LLP commenting upon their review is included on page 15. 14 KPMG LLP Certified Public Accountants 303 Peachtree Street, N.E. Telephone: (404) 222-3000 Suite 2000 Telefax: (404) 222-3050 Atlanta, GA 30308 INDEPENDENT AUDITORS' REVIEW REPORT The Stockholders and Board of Directors AFLAC Incorporated: We have reviewed the consolidated balance sheet of AFLAC Incorporated and subsidiaries as of March 31, 2000, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for the three-month periods ended March 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for the year then ended (not presented herein); and in our report dated January 27, 2000, we expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Atlanta, GA April 25, 2000 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AFLAC Incorporated is the parent company of American Family Life Assurance Company of Columbus, AFLAC. Our principal business is supplemental health insurance, which is marketed and administered through AFLAC. Most of AFLAC's policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee. Our business in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two markets for our insurance operations. RESULTS OF OPERATIONS A significant non-operating item affected our net earnings in the first quarter of 1999. Due to a corporate income tax rate reduction in Japan during 1999, the statutory tax rate for AFLAC Japan declined from 41.7% to 36.2%. This tax rate decline resulted in a reduction in our deferred income tax liability as of March 31, 1999, which increased net earnings by $67 million ($.25 per basic share and $.24 per diluted share) in 1999. 16 The following table sets forth the results of operations by business segment for the periods shown. SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT (In millions, except for per-share amounts) Percentage Change Three Months Over Previous Ended March 31, Period 2000 1999 ----------------- ------------------ Operating earnings: AFLAC Japan. . . . . . . . . . . . 19.1% $ 188 $ 158 AFLAC U.S. . . . . . . . . . . . . 11.4 70 63 Other business segments. . . . . . - 1 ----- ----- Total business segments. . . . . 16.3 258 222 Interest expense, non-insurance operations . . . . (52.7) (4) (3) Corporate and eliminations . . . . 28.2 (8) (12) ----- ----- Pretax operating earnings. . . . 18.4 246 207 Income taxes . . . . . . . . . . . 15.3 87 75 ----- ----- Operating earnings . . . . . . . 20.2 159 132 Non-operating items: Deferred tax benefit from Japanese tax rate reduction . . . . . . . - 67 Realized investment gains (losses), net of tax . . . . . . (3) (3) ----- ----- Net earnings . . . . . . . . . . (20.1) $ 156 $ 196 ===== ===== Operating earnings per basic share . 20.0 $ .60 $ .50 Operating earnings per diluted share 20.8 .58 .48 ===== ===== Net earnings per basic share . . . . (20.3) $ .59 $ .74 Net earnings per diluted share . . . (19.7) .57 .71 ===== ===== ============================================================================ The following discussion of earnings comparisons focuses on operating earnings and excludes realized investment gains/losses, and in 1999 the deferred income tax benefit from the Japanese tax rate reduction. Operating earnings per share referred to in the following discussion are based on the diluted number of average outstanding shares. FOREIGN CURRENCY TRANSLATION Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. 17 The following table illustrates the effect of foreign currency translation on our reported results by comparing those results as if foreign currency rates had remained unchanged from the comparable period in the prior year. AFLAC Incorporated and Subsidiaries Selected Percentage Changes for Supplemental Consolidated Data Three Months Ended March 31, 2000 Including Excluding Currency Currency Changes Changes* ----------- ----------- Premium income 16.9% 9.2% Net investment income 17.6 12.0 Operating revenues 17.0 9.6 Total benefits and expenses 16.8 9.1 Operating earnings 20.2 15.9 Operating earnings per share 20.8 16.7 - ---------------------------------------------------------------------------- *Amounts excluding foreign currency changes were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. ============================================================================ The yen began to strengthen in relation to the dollar at the end of 1998 after several years of weakening. The average yen-to-dollar exchange rates were 107.13 and 116.58 for the three months ended March 31, 2000 and 1999, respectively. The 8.8% strengthening of the yen in 2000 increased operating earnings by approximately $.02 per share for the three months ended March 31, 2000. Operating earnings per share increased 20.8% to $.58 for the three-month period ended March 31, 2000 compared with the same period in 1999. Our primary financial objective is the growth of operating earnings per share before the effect of foreign currency fluctuations. Our objective for 2000 through 2002 is to increase operating earnings per share growth by 15% to 17%, excluding the impact of currency translation. 18 If we achieve a 17% increase, the following table shows the likely results for operating earnings per share for the year 2000 when the estimated impact from various foreign currency translations are included. 2000 Operating EPS Scenarios ---------------------------- Annual Average Yen Annual Operating % Growth Yen Impact Exchange Rate Diluted EPS Over 1999 on EPS ------------- ---------------- --------- ---------- 100.00 $ 2.48 24.0% $ .14 105.00 2.42 21.0 .08 110.00 2.38 19.0 .04 113.96* 2.34 17.0 - 115.00 2.33 16.5 (.01) 120.00 2.29 14.5 (.05) 125.00 2.25 12.5 (.09) *Actual exchange rate for the year ended December 31, 1999. If the exchange rate as of March 31, 2000, remains constant for the rest of 2000, the cumulative average rate would be approximately 106.40 and the annual diluted operating earnings per share would approximate $2.41, assuming our earnings objective is met. SHARE REPURCHASE PROGRAM During the first quarter of 2000, we purchased 2 million shares of our common stock. On May 1, 2000, the board of directors authorized the repurchase of up to an additional 10 million shares. Including shares remaining under a previous authorization, the Company currently has approval to purchase up to approximately 11 million shares. INCOME TAXES Our combined U.S. and Japanese effective income tax rates on operating earnings for the three months ended March 31, 2000 and 1999 were 35.4% and 36.4%, respectively. Income tax expense for the first quarter of 1999 included approximately $2 million of additional taxes from an income tax audit in Japan. Excluding that amount the effective income tax rate on operating earnings for the first quarter of 1999 was 35.4%. The 1999 reduction in the statutory tax rate in Japan did not significantly change our combined U.S./Japan effective tax rate as it shifted a portion of our income tax expense from Japan operations to U.S. operations due to the operation of the U.S. foreign tax credit provisions. 19 INSURANCE OPERATIONS, AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to our earnings, ranks number one in terms of premium income and profits among all foreign life and non-life insurance companies operating in Japan. Among all life insurance companies operating in Japan, AFLAC Japan ranks second in terms of individual policies in force and 14th based on assets. The following table presents a summary of AFLAC Japan's operating results. AFLAC JAPAN SUMMARY OF OPERATING RESULTS THREE-MONTH PERIOD ENDED MARCH 31, (In millions) 2000 1999 --------------------------- Premium income. . . . . . . . . . . . . $ 1,646 $ 1,398 Investment income . . . . . . . . . . . 306 262 -------- -------- Total revenues. . . . . . . . . . . . 1,952 1,660 -------- -------- Benefits and claims . . . . . . . . . . 1,385 1,196 Operating expenses. . . . . . . . . . . 379 306 -------- -------- Total benefits and expenses . . . . . 1,764 1,502 -------- -------- Pretax operating earnings . . . . . $ 188 $ 158 ======== ======== - ---------------------------------------------------------------------------- Percentage changes in dollars over previous period: Premium income. . . . . . . . . . . . 17.7% 18.4% Investment income . . . . . . . . . . 17.1 15.8 Total revenues. . . . . . . . . . . . 17.6 17.9 Pretax operating earnings . . . . . . 19.1 26.2 - ---------------------------------------------------------------------------- Percentage changes in yen over previous period: Premium income. . . . . . . . . . . . 8.2% 7.8% Investment income . . . . . . . . . . 7.4 5.5 Total revenues. . . . . . . . . . . . 8.0 7.3 Pretax operating earnings . . . . . . 9.1 15.0 - ---------------------------------------------------------------------------- Ratios to total revenues: Benefits and claims . . . . . . . . . 70.9% 72.0% Operating expenses. . . . . . . . . . 19.5 18.5 Pretax operating earnings . . . . . . 9.6 9.5 ============================================================================ 20 AFLAC JAPAN SALES AFLAC Japan's total new annualized premium sales rose 17.6% to 22.3 billion yen, or $208 million, in the first quarter. Our sales results were driven by Rider MAX, which accounted for about 43% of sales for the quarter. During the quarter, we sold approximately 350,000 of these riders. With its attractive accident and medical benefits, Rider MAX has broadened the appeal of our founding product, cancer life insurance. Almost 60% of our cancer life sales in the first quarter included Rider MAX. We also saw continued momentum of our ordinary life insurance product line. Life insurance sales increased sharply over a year ago, accounting for approximately 7.4% of sales in the quarter. Our sales force also continued to grow. At the end of the first quarter, AFLAC Japan was represented by 43,000 licensed sales associates at more than 8,400 corporate and individual agencies. We continue to focus on recruiting new agencies, particularly individual agents, in order to better reach the tremendous market of small businesses in Japan. In 2001, Japan's insurance market will further deregulate. As a result, we expect competition to increase. At the same time, we also expect increased opportunities for AFLAC Japan. To prepare for deregulation, we will continue building on our competitive strengths. To that end, we plan on improving the products we offer, while adding new policies to our product line. We will continue to expand our distribution system through the addition of new agencies as well as alternative sales channels like the Internet. And we will also invest in new technologies to maintain our cost advantages and aggressively promote our brand through advertising. Although Japan's economy remains weak, we continue to believe it is one of the best insurance markets in the world and one of great opportunities for growth. We have set an objective for AFLAC Japan's sales to increase approximately 12% to 15% for the year 2000 compared with 1999. AFLAC JAPAN INVESTMENTS Investment yields in Japan remained at very depressed levels. For example, the yield of 20-year Japanese government bonds, based on a composite index, averaged 2.30% during the first three months of the year. However, we purchased yen-denominated securities at an average yield of 3.93% in the quarter by focusing on selected sectors of the fixed-maturity market. Including dollar-denominated investments, our blended new money yield was 4.09% for the quarter. As of April 14, we had invested or committed to invest approximately 42% of our expected 2000 cash flow at an average yield of 3.98%. At the end of the first quarter, the yield on AFLAC Japan's fixed-maturity portfolio was 5.14%, compared with 5.19% at the end of 1999. The return on average invested assets was 4.88% for the quarter, compared with 5.02% a year ago. AFLAC JAPAN OTHER The operating expense ratio has increased slightly due to expenditures for additional marketing programs including advertising and direct response efforts. The benefit ratio has declined due to the mix of business shifting to newer products that have a lower loss ratio than the traditional cancer life insurance. The 9.1% increase in pretax operating earnings is primarily due to the increased premium income. 21 INSURANCE OPERATIONS, AFLAC U.S. The following table presents a summary of AFLAC U.S. operating results. AFLAC U.S. SUMMARY OF OPERATING RESULTS THREE-MONTH PERIOD ENDED MARCH 31, (In millions) 2000 1999 -------------------------- Premium income. . . . . . . . . . . . . $ 374 $ 330 Investment income . . . . . . . . . . . 67 58 Other income. . . . . . . . . . . . . . 1 - ----- ----- Total revenues. . . . . . . . . . . . 442 388 ----- ----- Benefits and claims . . . . . . . . . . 235 205 Operating expenses. . . . . . . . . . . 137 120 ----- ----- Total benefits and expenses . . . . . 372 325 ----- ----- Pretax operating earnings . . . . . $ 70 $ 63 ===== ===== - ---------------------------------------------------------------------------- Percentage increases over previous period: Premium income. . . . . . . . . . . . 13.4% 13.9% Investment income . . . . . . . . . . 15.2 12.8 Total revenues. . . . . . . . . . . . 13.7 13.3 Pretax operating earnings . . . . . . 11.4 11.4 - ---------------------------------------------------------------------------- Ratios to total revenues: Benefits and claims . . . . . . . . . 53.3% 52.8% Operating expenses. . . . . . . . . . 30.9 31.1 Pretax operating earnings . . . . . . 15.8 16.1 ============================================================================ AFLAC U.S. SALES New annualized premium sales in the United States rose rapidly in the first quarter. New sales increased 20.3% to $150 million, marking the second best quarter in AFLAC's history. Accident/disability insurance again accounted for the majority of our new business in the quarter. However, sales of our founding product, cancer expense insurance, were also strong. We remain especially pleased with the sales of our new ordinary life insurance products. Life insurance sales increased 55% over the first quarter of 1999, accounting for approximately 6% of total new sales. In addition to strong sales, we experienced expansion of our sales force in the United States. During the first quarter we continued to aggressively recruit new AFLAC sales associates. As a result, the average number of producing associates on a monthly basis was 9,990 in the quarter, an increase of 16.7% over the first quarter of 1999. 22 Technology continues to play an important role at AFLAC U.S. In addition to the continued success of our electronic sales system, SmartApp, we are also pursuing additional technological initiatives. For example, we are currently in the process of testing the first phase of an Internet-based billing system for our U.S. payroll account customers. Internet billing will improve service to our payroll accounts and enhance our administrative efficiency. In addition, we have claims forms available for download from our Web site for each product we offer in every state. The combination of downloadable claims forms and facsimile claims submission greatly enhances service to our customers and efficiency of our administration. Savings from new electronic work processes have allowed us to invest heavily in national advertising, which has benefited our name recognition, recruiting and sales results. We have set an objective for AFLAC U.S. sales to increase by 12% to 15% for the year 2000. AFLAC U.S. INVESTMENTS During the first quarter of 2000, available cash flow was invested at an average yield-to-maturity of 8.11% compared with 8.08% during the first quarter of 1999. The overall return on average invested assets, net of investment expenses, was 7.60% for the first three months of 2000 compared with 7.52% for the first quarter of 1999. AFLAC U.S. OTHER Management expects the operating expense ratio, including discretionary television advertising expenses, to remain approximately level in the future. By improving administrative systems and controlling other costs, we have been able to redirect funds to national television advertising programs without significantly affecting the operating expense ratio. The aggregate benefit ratio has remained relatively stable. The mix of business has shifted toward accident and hospital indemnity policies, which have lower benefit ratios than other products. We expect future benefit ratios for some of our supplemental products to increase slightly due to our ongoing efforts to improve policy persistency and enhance policyholder benefits. Management expects the pretax operating profit margin, which was 16.0% for the year 1999, to remain approximately the same in 2000. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS For information regarding new Statements of Financial Accounting Standards see Note 2 of the Notes to the Consolidated Financial Statements. ANALYSIS OF FINANCIAL CONDITION Since December 31, 1999, our financial condition has remained strong in the functional currencies of our operations. The investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow and primarily consist of investment grade securities. Due to the significance of yen-denominated items in the balance sheet, changes in the yen/dollar exchange rate can have a significant effect on our 23 financial statements. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes. The exchange rate at March 31, 2000, was 106.15 yen to one U.S. dollar, 3.5% weaker than the exchange rate of 102.40 as of December 31, 1999. Management estimates that the weaker yen rate decreased reported investments and cash by $1.0 billion, total assets by $1.1 billion, and total liabilities by $1.1 billion compared with the amounts that would have been reported for 2000 if the exchange rate had remained unchanged from year-end 1999. INVESTMENTS AND CASH The continued growth in investments and cash reflects the substantial cash flows in the functional currencies of our operations. Net unrealized gains of $1.5 billion on investment securities at March 31, 2000, consisted of $2.8 billion in gross unrealized gains and $1.3 billion in gross unrealized losses. AFLAC invests primarily within the Japanese, U.S. and Euroyen debt securities markets. We use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. Applying those various credit ratings to a standardized rating system based on the categories of a nationally recognized rating service, the percentages of our debt securities, at amortized cost, were as follows: March 31, December 31, 2000 1999 ----------- ------------ AAA 26.9% 28.0% AA 23.3 24.6 A 36.8 33.5 BBB 12.1 12.1 BB .9 1.8 ----- ----- 100.0% 100.0% ===== ===== As of December 31, 1999, we owned debt securities rated below investment grade in the amount of $530 million at amortized cost, or 1.8% of total debt securities. These securities were issued by two Japanese banks that had credit rating downgrades following our purchase of the debt securities. Subsequent to December 31, 1999, these two banks were upgraded to `BBB.' However, at March 31, 2000 we held two other corporate issues with an amortized cost of $249 million that were downgraded to `BB' during the first quarter. Private placement investments accounted for 50.2% and 49.0% of our total debt securities as of March 31, 2000 and December 31, 1999, respectively. AFLAC Japan has made investments in the private placement market to secure higher yields than those available from Japanese government bonds. At the same time, we have adhered to historically conservative standards for credit quality. We require that all private placement issuers have an initial rating of Class 1 or 2 as determined by the Securities Valuation Office of the National Association of Insurance Commissioners 24 (NAIC). Most of AFLAC's private placement issues are issued under medium- term note programs and have standard covenants commensurate with credit rankings, except when internal credit analysis indicates that additional protective and/or event-risk covenants are required. The following table shows an analysis of investment securities (at cost or amortized cost): AFLAC Japan AFLAC U.S. ---------------------- ---------------------- March 31, December 31, March 31, December 31, (In millions) 2000 1999 2000 1999 ---------------------- ---------------------- Available for sale: Fixed-maturity securities $16,069 $15,491 $ 3,385* $ 3,405* Perpetual debentures 2,331 2,411 154 153 Equity securities 53 45 95 92 ------ ------ ------ ------ Total available for sale 18,453 17,947 3,634 3,650 ------ ------ ------ ------ Held to maturity: Fixed-maturity securities 4,216 4,389 - - Perpetual debentures 3,754 3,903 - - ------ ------ ------ ------ Total held to maturity 7,970 8,292 - - ------ ------ ------ ------ Total $26,423 $26,239 $ 3,634 $ 3,650 ====== ====== ====== ====== *Includes securities held by the parent company of $165 at March 31, 2000, and $240 at December 31, 1999 POLICY LIABILITIES Policy liabilities decreased $366 million, or 1.2%, during the first three months of 2000. AFLAC Japan decreased $428 million, or 1.6% (2.0% increase in yen), and AFLAC U.S. increased $62 million, or 2.7%. Changes in policy liabilities were primarily due to the addition of new business, the aging of policies in force, the weaker yen and the effect of the market value adjustment for securities available for sale (see Note 6 of the Notes to the Consolidated Financial Statements). The weaker yen at March 31, 2000, compared with December 31, 1999, decreased reported policy liabilities by $1.0 billion. DEBT In April 1999, we issued $450 million of senior notes with a 6.50% coupon, paid semiannually, due April 15, 2009. The notes are redeemable at our option and at any time at a redemption price equal to the principal amount of the notes being redeemed plus a make-whole amount. We received net proceeds of $446 million after discount and issue costs. These proceeds were temporarily invested in short-duration securities and are being used primarily to purchase shares of our common stock. The net proceeds may also be used to repay indebtedness or for 25 general corporate purposes. We have entered into cross currency swaps that had the effect of converting the dollar-denominated principal and interest into yen-denominated obligations. At March 31, 2000, the outstanding principal was 55.6 billion yen ($523 million) at an interest rate of 1.67% after the effect of the cross currency swaps. See Note 5 of the Notes to the Consolidated Financial Statements for information on other debt outstanding at March 31, 2000. Our ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized gains on investment securities) was 27.3% and 28.1% as of March 31, 2000 and December 31, 1999, respectively. SECURITY LENDING AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. For further information regarding such arrangements, see Note 7 of the Notes to the Consolidated Financial Statements. POLICYHOLDER GUARANTY FUNDS Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to us in the past. We believe that future assessments relating to companies in the U.S. currently involved in insolvency proceedings will not materially impact the consolidated financial statements. The Life Insurance Association of Japan, an industry organization, implemented a voluntary policyholder protection fund in 1996 to provide capital support to insolvent life insurers. AFLAC Japan pledged investment securities to the Life Insurance Association of Japan under this program. A separate, mandatory policyholder protection system was enacted by the Japanese government during 1998. The life insurance industry is making contributions to these funds over a 10-year period. Our obligation to the mandated policyholder protection system was increased in 1999 due to the insolvency of Toho Mutual Life Insurance Company. We have recorded a liability for our share of these obligations. For further information regarding policyholder protection funds, see Note 2 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 1999. SHAREHOLDERS' EQUITY Our insurance operations continue to provide the primary sources of liquidity. Capital needs are also supplemented by borrowed funds. The principal sources of cash from insurance operations are premiums and investment income. Primary uses of cash in the insurance operations are policy claims, commissions, operating expenses, income taxes and payments to AFLAC Incorporated for management fees and dividends. Both the sources and uses of cash are reasonably predictable. Our investment objectives provide for liquidity through the ownership of high-quality investment securities. 26 AFLAC insurance policies are generally not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of our policies provide indemnity benefits rather than reimbursement for actual medical costs and thus are not subject to the risks of medical-cost inflation. The achievement of continued long-term growth will require growth in AFLAC's statutory capital and surplus. We may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by AFLAC Incorporated from funds generated through debt or equity offerings. We believe outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures, business expansion and the funding of our share repurchase program. AFLAC Incorporated capital resources are largely dependent upon the ability of AFLAC to pay management fees and dividends. The Georgia Insurance Department imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances by AFLAC to AFLAC Incorporated. The Georgia Insurance Statutes require prior approval for dividend distributions that exceed the greater of statutory earnings for the previous year or 10% of statutory capital and surplus as of the previous year-end. In addition, the Georgia Insurance Department must approve service arrangements and other transactions within the affiliated group. These regulatory limitations are not expected to affect the level of management fees or dividends paid by AFLAC to AFLAC Incorporated. A life insurance company's statutory capital and surplus is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to emphasize policyholder protection and company solvency. Currently, prescribed or permitted statutory accounting principles (SAP) used by insurers for financial reporting to state insurance regulators may vary among states and among companies. The NAIC has recodified SAP to promote standardization throughout the industry. The NAIC has scheduled these new accounting principles to become effective January 1, 2001. They must also be adopted by the individual state insurance departments. In addition to restrictions by U.S. insurance regulators, the Japanese Financial Supervisory Agency (FSA) may impose restrictions on transfers of funds from AFLAC Japan. Payments are made from AFLAC Japan to AFLAC Incorporated for management fees, and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were $12 million in the first quarter of 2000 and $11 million for the same period in 1999. The FSA may not allow transfers of funds if the payment would cause AFLAC Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains solvency standards, a version of risk- based capital requirements. AFLAC Japan's solvency margin significantly exceeds regulatory minimums. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 9 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 1999. 27 YEAR 2000 We did not experience any material date-related problems with our internal information or other systems, nor did we experience any material disruptions in connection with external information and data exchanges in connection with the year 2000 date rollover. Our preparations for year 2000 were completed as of the end of calendar year 1999, and it was not necessary to implement any contingency plans prepared as part of those efforts. We have discontinued regular meetings of our year 2000 executive steering committee. We will continue to monitor our internal systems and external information and data exchanges throughout the year for first date occurrence events. Based on the information now available to us, we do not expect any material disruptions with respect to such events during the year. OTHER On May 1, 2000, the board of directors approved an increase in the quarterly cash dividend from $.075 to $.085 per share. The increase is effective with the second quarter dividend, which is payable on June 1, 2000, to shareholders of record at the close of business on May 18, 2000. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our financial instruments are exposed to primarily three types of market risks. These are interest rate, equity price, and foreign currency exchange rate risk. INTEREST RATE RISK Our primary interest rate exposure is a result of the effect of changes in interest rates on the fair value of our investments in debt securities. We use modified duration analysis, which provides a measure of price percentage volatility, to estimate the amount of sensitivity to interest rate changes in our debt securities. We attempt to match the duration of our assets with the duration of our liabilities. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related invested assets due to the unavailability of acceptable long-duration yen-denominated securities. Currently, when our debt securities mature, the proceeds are reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the investment yield on new investments exceeds interest requirements on policies issued in recent years. At March 31, 2000 we had $1.4 billion of net unrealized gains on debt securities. The hypothetical reduction in the fair value of our debt securities resulting from a 100 basis point increase in market interest rates is estimated to be $2.8 billion based on our portfolio as of March 31, 2000. The effect on yen-denominated debt securities is approximately $2.4 billion and the effect on dollar-denominated debt securities is approximately $391 million. 28 We have outstanding interest rate swaps on 34.3 billion yen ($324 million) of our variable-interest-rate yen-denominated borrowings. These swaps reduce the impact of fluctuations in interest rates on our borrowing costs and effectively change our interest rates from variable to fixed. Therefore, movements in market interest rates should have no material effect on earnings. At March 31, 2000, we also had yen-denominated bank borrowings in the amount of 21.9 billion yen ($207 million) with a variable interest rate of .37%. The effect on net earnings in 2000 due to changes in market interest rates was immaterial. For further information on our notes payable, see Note 5 of the Notes to the Consolidated Financial Statements. EQUITY PRICE RISK Equity securities at March 31, 2000, totaled $228 million, or .7% of total investments and cash on a consolidated basis. We use beta analysis to measure the sensitivity of our equity securities portfolio to fluctuations in the broad market. The beta of our equity securities portfolio is 1.03. For example, if the overall stock market value changed by 10%, the value of AFLAC's equity securities would be expected to change by approximately 10.3%, or $23 million. CURRENCY RISK Most of AFLAC Japan's investments and cash are denominated in yen. When yen-denominated financial instruments mature or are sold, the proceeds are generally reinvested in yen-denominated securities and are held to fund yen-denominated policy obligations rather than converted into dollars. In addition to the yen-denominated financial instruments held by AFLAC Japan, AFLAC Incorporated has yen-denominated bank borrowings that have been designated as a hedge of our investment in AFLAC Japan. The unrealized foreign currency translation gains and losses related to these borrowings are reported in accumulated other comprehensive income. AFLAC Incorporated has cross currency swaps on its $450 million senior notes. We have entered into cross currency swaps to convert the dollar- denominated principal and interest into yen-denominated obligations. These swaps have been designated as a hedge of our investment in AFLAC Japan. The unrealized foreign currency translation gains and losses related to these swaps are reported in accumulated other comprehensive income. We attempt to match yen-denominated assets to yen-denominated liabilities on a consolidated basis in order to minimize the exposure of our shareholders' equity to foreign currency translation fluctuations. The table below compares the U.S. dollar values of our yen-denominated assets and liabilities at various exchange rates. 29 Dollar Value of Yen-Denominated Assets and Liabilities At Selected Exchange Rates (March 31, 2000) 91.15 106.15* 121.15 (In millions) Yen Yen Yen - ---------------------------------------------------------------------------- Yen-denominated financial instruments: Assets: Securities available for sale: Fixed maturities $ 19,349 $ 16,614 $ 14,557 Perpetual debentures 2,045 1,756 1,539 Equity securities 76 65 57 Securities held to maturity: Fixed maturities 4,909 4,216 3,694 Perpetual debentures 4,372 3,754 3,289 Cash and cash equivalents 768 659 578 Other financial instruments 4 4 3 ------- ------- ------- Total 31,523 27,068 23,717 ------- ------- ------- Liabilities - notes payable 1,226 1,052 922 ------- ------- ------- Net yen-denominated financial instruments 30,297 26,016 22,795 Other yen-denominated assets 4,244 3,645 3,193 Other yen-denominated liabilities (34,006) (29,202) (25,586) ------- ------- ------- Consolidated yen-denominated net assets subject to foreign currency fluctuation $ 535 $ 459 $ 402 ======= ======= ======= * Actual March 31, 2000 exchange rate For information regarding the effect of foreign currency translation on operating earnings per share, see Foreign Currency Translation beginning on page 17. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. We desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected in this discussion and analysis, and in any other statements made by company officials in oral discussions with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward-looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. In particular, statements containing words such as "expect," "anticipate," "believe," "goal," "objective" or similar 30 words as well as specific projections of future results generally qualify as forward-looking. AFLAC undertakes no obligation to update such forward- looking statements. We caution readers that the following factors, in addition to other factors mentioned from time to time in our reports filed with the SEC, could cause actual results to differ materially: regulatory developments, assessments for insurance company insolvencies, competitive conditions, new products, ability to repatriate profits from Japan, general economic conditions in the United States and Japan, changes in U.S. and/or Japanese tax laws, adequacy of reserves, credit and other risks associated with AFLAC's investment activities, significant changes in interest rates, and fluctuations in foreign currency exchange rates. 31 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS We are a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows. 32 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Shareholders was held on May 1, 2000. Matters submitted to the shareholders were: (1) Election of 18 members to the board of directors; (2) Adopt an Amendment of Article IV of the Company's Articles of Incorporation, to increase the Company's authorized shares of common stock from 400 million shares to 1 billion shares; (3) Ratification of the appointment of independent auditors for 2000. The proposals were approved by the shareholders. Following is a summary of each vote cast for, against or withheld, as well as the number of abstention and broker non-votes, as to each such matter, including a separate tabulation with respect to each nominee for office. VOTES - ---------------------------------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes - ---------------------------------------------------------------------------- (1) Election of 18 members to the board of directors: Paul S. Amos 426,966,233 N/A N/A 16,756,460 535,059 Daniel P. Amos 427,291,387 N/A N/A 16,431,306 535,059 J. Shelby Amos, II 427,471,008 N/A N/A 16,251,685 535,059 Michael H. Armacost 438,187,272 N/A N/A 5,535,421 535,059 M. Delmar Edwards, M.D. 437,738,346 N/A N/A 5,984,347 535,059 Joe Frank Harris 437,206,212 N/A N/A 6,516,481 535,059 Elizabeth J. Hudson 437,929,150 N/A N/A 5,793,543 535,059 Kenneth S. Janke, Sr. 438,106,749 N/A N/A 5,615,944 535,059 Charles B. Knapp 437,971,954 N/A N/A 5,750,739 535,059 Takatsugu Murai 438,214,812 N/A N/A 5,507,881 535,059 Yoshiki Otake 437,832,248 N/A N/A 5,890,445 535,059 E. Stephen Purdom 438,082,714 N/A N/A 5,639,979 535,059 Barbara K. Rimer 437,958,742 N/A N/A 5,763,951 535,059 Marvin R. Schuster 438,034,059 N/A N/A 5,688,634 535,059 Henry C. Schwob 435,320,709 N/A N/A 8,401,984 535,059 J. Kyle Spencer 437,623,763 N/A N/A 6,098,930 535,059 Glenn Vaughn, Jr. 437,834,417 N/A N/A 5,888,276 535,059 Robert L. Wright 437,874,425 N/A N/A 5,848,268 535,059 VOTES --------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes - ---------------------------------------------------------------------------- (2) Adopt an Amendment to the Articles of Incorpora- tion to increase the authorized shares of common stock from 400 million shares to 1 billion shares 402,050,304 36,739,237 5,466,064 N/A 2,147 (3) Ratification of appointment of KPMG LLP as independent auditors 436,550,439 3,393,829 4,313,484 N/A None 33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 12.0 - Statement regarding the computation of ratio of earnings to fixed charges 27.0 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended March 31, 2000. Items other than those listed above are omitted because they are not required or are not applicable. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AFLAC INCORPORATED Date May 10, 2000 /s/ KRISS CLONINGER, III ------------------------ --------------------------- KRISS CLONINGER,III Executive Vice President; Treasurer and Chief Financial Officer Date May 10, 2000 /s/ NORMAN P. FOSTER ------------------------ --------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 35 EXHIBITS FILED WITH CURRENT FORM 10-Q: 12.0 - Statement regarding the computation of ratio of earnings to fixed charges 27.0 - Financial Data Schedule (for SEC use only). 36 1 EX-12 2 RATIO OF EARNINGS STATEMENT EXHIBIT 12.0 EXH 12.0 AFLAC INCORPORATED AND SUBSIDIARIES Ratio of Earnings to Fixed Charges (In thousands) Three Months Ended March 31, 2000 1999 ---------------------------- Fixed charges: Interest expense $ 4,866 $ 3,608 Rental expense deemed interest 129 119 ------- ------- Total fixed charges $ 4,995 $ 3,727 ======= ======= Earnings before income tax $243,265 $202,897 Add back: Fixed charges 4,995 3,727 ------- ------- Total earnings before income tax and fixed charges 248,260 206,624 Adjustments: Realized gains/(losses) (2,456) (4,590) ------- ------- Total earnings before income tax and fixed charges and realized gains/(losses) $250,716 $211,214 ======= ======= Earnings excluding realized gains/(losses) to fixed charges 50.2x 56.7x EXH 12.0-1 EX-27 3 FDS FOR 3/31/2000
7 This schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended March 31, 2000, and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 23,546 7,970 7,746 228 0 0 31,759 692 0 3,672 37,391 28,576 360 0 302 1,072 0 0 32 4,035 37,391 2,020 376 (2) 4 1,620 69 466 243 87 156 0 0 0 156 .59 .57 0 0 0 0 0 0 0
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