-----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, OzUTLDyY9Qs/FqLY4DV1QNqZsvp8dsIGo4JxoCctYlpRineQ55coNFYswpApIBFv 41qNwv6CiVlOMidudZTTZQ== 0000004977-97-000009.txt : 19970327 0000004977-97-000009.hdr.sgml : 19970327 ACCESSION NUMBER: 0000004977-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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: 97563345 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 1996 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, 1996 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 17, 1997, with $.10 par value, was 136,612,572. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 17, 1997 was $5,355,683,873. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 Exhibit 13 - pages 13-5 to 13-24 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)), pages 13-37 to 13-46 (Notes 2 and 3 of the Notes to the Consolidated Financial Statements), and pages 13-57 to 13-58 (Note 10). The applicable portions of the Company's Annual Report to Shareholders for the year ended December 31, 1996, are included as Exhibit 13 Item 2 Exhibit 13 - page 13-23 (Cash Flow section of MD&A) and page 13-48 (Note 5) PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-57 (Note 10) Item 6 Exhibit 13 - pages 13-3 and 13-4 Item 7 Exhibit 13 - pages 13-5 to 13-24 Item 8 Exhibit 13 - pages 13-25 to 13-64 PART III Item 10 Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 5, 1997 (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, 1996 Table of Contents Page ______ PART I Item 1. Business................................................ I- 1 Item 2. Properties.............................................. I-16 Item 3. Legal Proceedings....................................... I-17 Item 4. Submission of Matters to a Vote of Security Holders..... I-17 Item 4A. Executive Officers of the Company....................... I-18 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. 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 13-24 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)) and page 13-37 (Note 2 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. During 1996, the Company entered into definitive agreements for the sale of its broadcast division business consisting of seven network- affiliated television stations. The total pretax gain from this transaction is estimated to be $325 million. Finalization of the transaction is subject to approval by the Federal Communications Commission. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. The pretax and after-tax gains recognized on the sale of WAFB in 1996 were $60.3 million and $48.2 million, respectively. The effect of the after-tax gain on 1996 net earnings per share was $.33. Management expects the sale of the six remaining stations to be finalized during the first half of 1997. On March 12, 1997, AFLAC Incorporated sold its minor Canadian insurance subsidiary. The Parent Company's principal operating subsidiary is AFLAC, which operates in the United States and Japan. AFLAC is a specialty insurer whose dominant business is individual supplemental health insurance. 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 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 82% of the Company's total revenues in 1996. The Company issued a three-for-two stock split on March 18, 1996. Share and per-share amounts have been adjusted to reflect this split. I-1 In the fourth quarter of 1996, the Company raised its primary financial objective for 1997 through 2000 from 13% to 15% annual growth in operating earnings per share to 15% to 17% excluding the effect of foreign currency translation. During 1996, the board of directors authorized the purchase of up to an additional 7.0 million shares of AFLAC Incorporated common stock. Including shares remaining under a previous authorization, the Company had approval to purchase up to 8.0 million shares as of December 31, 1996. The Company had purchased 20.4 million shares from the inception of the plan in February 1994 through December 31, 1996. Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported results. During the first half of 1995, the yen strengthened substantially versus the dollar. In the third quarter of 1995, the yen began to weaken in relation to the dollar and continued to weaken throughout 1996. The average yen-to-dollar exchange rates were 108.84 in 1996, 94.10 in 1995 and 102.26 in 1994. In years when the yen weakens, translating yen into dollars causes smaller increases or negative percentage changes for financial results in dollars. When the yen strengthens, translating yen into dollars causes larger increases for financial results in dollars. Insurance premiums and investment income from insurance operations are the major sources of revenues. The Company's consolidated premium income was $5.9 billion for 1996, $6.1 billion for 1995 and $5.2 billion for 1994. 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) 1996 1995 1994 ---------- ---------- ---------- Premiums earned: Health insurance $ 5,690,886 $ 6,037,206 $ 5,148,406 Life and other insurance 206,480 17,937 15,149 ---------- ---------- ---------- Total U.S. and Japan premiums earned $ 5,897,366 $ 6,055,143 $ 5,163,555 ========== ========== ========== I-2 The following table sets forth the changes in annualized premiums in force for AFLAC health insurance for the years ended December 31. (In thousands) 1996 1995 1994 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 5,837,883 $ 5,578,987 $ 4,460,076 New issues including policy conversions 763,836 965,321 922,773 Change in unprocessed policies 18,587 (107,287) 212,058 Lapses and surrenders (414,628) (408,366) (347,020) Other 3,284 (11,676) (129,932) Foreign currency translation adjustment (571,011) (179,096) 461,032 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 5,637,951 $ 5,837,883 $ 5,578,987 ========== ========== ========== INVESTMENTS AND INVESTMENT RESULTS The Company classifies all fixed-maturity securities as available for sale. All fixed-maturity and equity securities are carried at fair value. The fair value of fixed-maturity securities available for sale exceeded amortized cost by $2.4 billion and $2.6 billion at December 31, 1996 and 1995, respectively. I-3 The following table shows an analysis of invested assets at December 31: (In thousands) 1996 1995 % Change ------------ ------------ -------- AFLAC U.S.: Total invested assets, at cost or amortized cost $ 1,910,154 $ 1,543,549 23.8% Unrealized gains on securities available for sale 101,258 128,697 ------------ ------------ Total invested assets $ 2,011,412 $ 1,672,246 20.3% ============ ============ ====== AFLAC Japan: Total invested assets, at cost or amortized cost $ 16,390,997 $ 15,924,083 2.9% Unrealized gains on securities available for sale 2,334,537 2,468,018 ------------ ------------ Total invested assets $ 18,725,534 $ 18,392,101 1.8% ============ ============ ====== Consolidated: Total invested assets, at cost or amortized cost $ 18,309,930 $ 17,447,551 4.9% Unrealized gains on securities available for sale 2,436,605 2,597,413 ------------ ------------ Total invested assets $ 20,746,535 $ 20,044,964 3.5% ============ ============ ====== Net investment income was $1.0 billion in 1996, unchanged from 1995. Net investment income in 1995 was $186.1 million higher than in 1994. 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. I-4 For information on the composition of the Company's investment portfolio and investment results, see Part IV, Schedule I, and Exhibit 13, pages 13-16 to 13-24 (discussions relating to Balance Sheet and Cash Flow) and pages 13-41 to 13-47 (Notes 3 and 4 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. INVESTMENTS - JAPAN Approximately 96% of the 301.4 billion yen ($2.6 billion) that AFLAC Japan had available for investment activities was invested in yen- denominated securities at an average yield to maturity of 3.92%. The company invested 26.6% of the total funds available in Japanese government bonds at an average yield to maturity of 3.46% and allocated 56.6% to longer-dated securities at an average rate of 4.29%. An additional 12.3% was invested in yen-denominated securities of various other sectors. Dollar-denominated securities accounted for the remaining 4.5% of the purchases in 1996 at an average yield to maturity of 7.20%. At year-end 1996, Japanese government bonds accounted for 37.2% 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 1996, which provide a better match of asset and liability durations, and these instruments accounted for 30.1% of total investments in Japan at year-end. At the end of the year, municipal securities represented 3.8% of the total investments, while utility bonds represented 15.3%. Other assorted sectors accounted for 5.5%, and dollar-denominated securities represented 8.1% of AFLAC Japan's total investments. Low investment yields have posed difficulties for the entire insurance industry in Japan for several years. To help insurers address the problem of low rates of return, the Ministry of Finance (MOF) has required the industry to raise premium rates on new policies for four consecutive years. The most recent rate increase, which was implemented on all policies sold after October 1, 1996, will benefit AFLAC Japan in the long run. In the meantime, management believes the Company's investment approach in Japan provides the Company with an advantage over its competitors. The Company's asset allocation is much different than the industry as a whole, and management believes it is better suited to a low interest rate environment. As in 1995, the Company's portfolio yield was once again the third highest among all life insurers in Japan based on March 31, 1996 data submitted to the MOF. The Company's investments in the Japanese equity and investment real estate markets continued to be immaterial in 1996. INVESTMENTS - U.S. Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $217.3 million in 1996, up from $140.5 million in 1995. AFLAC U.S. in turn paid additional dividends to the Parent Company in 1996 in the amount of $64.3 million. Repatriation has a positive effect on consolidated results 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. I-5 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. Approximately 44% of the fixed-maturity portfolio was rated "AA" or better at the end of the year. Including profit repatriation and proceeds from bond swaps and redemptions, AFLAC U.S. invested $977.4 million in 1996. Of that amount, approximately 31.0% was invested in U.S. government or agency securities at an average yield to maturity of 7.60%, 65.0% was invested in corporate fixed-maturity securities at 7.49%, and 1.8% was allocated to various other sectors. Approximately $21.6 million, or 2.2% of total funds available for investment, were added to the AFLAC U.S. equity portfolio. At the end of 1996, fixed-maturity securities continued to dominate AFLAC U.S. total investments. Fixed-maturity securities represented 84.9% of total investments at the end of the year. Within that category, U.S. government and agency securities accounted for 20.6% of the holdings, while corporate securities were 73.0%. Equity investments made up 6.0% of total investments. Mortgage loans on real estate remained immaterial. 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) 1996 1995 1994 ---------- ---------- ---------- Premiums earned: Cancer expense $ 4,314,821 $ 4,752,338 $ 4,054,697 Other accident and health 445,704 440,635 316,395 Life insurance 191,035 2,378 - ---------- ---------- ---------- Total AFLAC Japan premiums earned $ 4,951,560 $ 5,195,351 $ 4,371,092 ========== ========== ========== 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) 1996 1995 1994 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 4,900,779 $ 4,718,783 $ 3,672,594 New issues including policy conversions 442,629 690,170 680,879 Change in unprocessed policies 23,878 (105,496) 209,392 Lapses and surrenders (181,756) (200,507) (163,047) Other (18,103) (23,075) (142,067) Foreign currency translation adjustment (571,011) (179,096) 461,032 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,596,416 $ 4,900,779 $ 4,718,783 ========== ========== ========== I-6 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 provide a fixed daily indemnity benefit for hospitalization and outpatient services related to cancer and a lump sum benefit upon initial diagnosis of internal cancer. The plans differ from the AFLAC U.S. cancer plans (described on pages I-11 and I-12) 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 1997, AFLAC Japan will offer an economy cancer plan that has lower premiums and benefits. This new plan should appeal to those who may have postponed a purchase decision due to the weak economy in Japan. In 1992, AFLAC broadened its product line with the introduction of a new care product. Care insurance 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 this 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 gives 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. The rider adds heart attack and stroke benefits to the cancer policy. Marketing efforts for living benefit life primarily focus on the sale of the rider. Introduction of the rider began in late 1995. Sales of the rider for 1996, its first full year of availability, were $282.9 million in new annualized premium, representing 1.6 million units. Due to the continued low level of available investment yields in Japan, the Ministry of Finance has required 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 16% in September 1995. As a result of continuing low yields, the Company increased premium rates on all new policy issues by approximately 13% beginning in the fourth quarter 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 I-7 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, 1996, there were 5,166 agencies in Japan with 20,067 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 50 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 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 12.6 million cancer policies in force at December 31, 1996. In December 1996, the governments of the United States and Japan reached an agreement on deregulation of the Japanese insurance industry. The agreement calls for the gradual liberalization of the industry over the next four years and includes provisions to avoid "radical change" in the third sector of the insurance industry. AFLAC and other foreign-owned insurers, as well as some small to medium-sized Japanese insurers, operate primarily in the third sector. One of the measures for avoiding radical change in the third sector is the prohibition of additional Japanese life and non-life insurance companies from selling cancer or medical insurance until January 1, 2001. AFLAC's strategy for future growth in Japan centers on broadening the Company's product line and expanding the distribution system. 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 44 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 $253.6 million in 1996, $179.5 million in 1995 and $167.9 million in 1994. Management fees paid to the Parent Company are largely based on expense allocations. I-8 A portion of AFLAC Japan's 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 less certain market value adjustments. The Japanese Ministry of Finance imposes solvency standards that represent a form of risk-based capital requirements. AFLAC Japan must meet these requirements to continue profit transfers to AFLAC U.S. At this time, AFLAC Japan is in compliance with these standards, and management does not expect these requirements to adversely affect the repatriation of funds from Japan in the foreseeable future. The Life Insurance Association of Japan, an industry organization, is currently implementing a policyholder protection fund. The purpose of the fund is to provide capital support to member companies for business assumed from insolvent life insurers. AFLAC Japan has pledged investment securities to the Life Insurance Association of Japan for this program. The Company retains ownership of the securities and receives the related investment income. The amount of securities pledged is based on premium income and policy reserves. As of December 31, 1996, $49.5 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund. 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 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, 1996, pretax operating earnings would have been reduced by approximately $16.4 million ($9.0 million after income tax) in 1996. The Company is in the process of evaluating changes in its compensation arrangements with its agents to mitigate a portion of this tax increase. In late 1996, the Japanese government proposed new income tax provisions that would increase Japan's income taxes on investment income received by foreign companies operating in Japan from securities issued from their home country. The government plans to finalize the proposal near the end of March 1997. The new provisions are expected to be effective beginning in 1998. If the proposal had been enacted in 1996 in its present form, AFLAC Japan's income tax expense would have been increased, and net earnings of the Company would have decreased by approximately $23.7 million for the year 1996. I-9 Management is evaluating the impact of this proposal and will seek to mitigate much of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Based on a preliminary review, management does not expect this tax change as it is presently proposed to materially affect future net earnings of the Company. 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-14 and I-15 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) 1996 1995 ---------- ---------- Net assets on GAAP basis $ 1,697,003 $ 1,817,106 Elimination of deferred policy acquisition costs (2,022,899) (2,067,409) Adjustment to carrying value of fixed- maturity securities (2,561,097) (2,613,600) Adjustment to policy liabilities 2,476,384 2,205,072 Elimination of deferred income taxes 1,006,550 1,211,187 Reduction in premiums receivable (124,829) (237,929) Other, net (4,222) 98,378 ---------- --------- Net assets on Japanese regulatory accounting basis $ 466,890 $ 412,805 ========== ========= For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-9 to 13-13 (AFLAC Japan section of MD&A) and pages 13- 37 and 13-57 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. EMPLOYEES - JAPAN AFLAC Japan employed 1,584 full-time and 236 part-time employees at December 31, 1996. AFLAC Japan considers its employee relations to be excellent. I-10 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) 1996 1995 1994 -------- -------- -------- Premiums earned: Cancer expense $ 429,006 $ 402,789 $ 384,943 Other accident and health 501,355 441,444 392,371 Life insurance 15,445 15,559 15,149 -------- -------- -------- Total AFLAC U.S. premiums earned $ 945,806 $ 859,792 $ 792,463 ======== ======== ======== 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) 1996 1995 1994 --------- --------- --------- Annualized premiums in force, at beginning of year $ 937,104 $ 860,204 $ 787,482 New issues including policy conversions 321,207 275,151 241,894 Change in unprocessed policies (5,291) (1,791) 2,666 Lapses (232,872) (207,859) (183,973) Other 21,387 11,399 12,135 --------- --------- --------- Annualized premiums in force, at end of year $1,041,535 $ 937,104 $ 860,204 ========= ========= ========= 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. 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 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-11 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 coming from 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 force comprises independent sales agents who are licensed to sell accident and health insurance. Many are also licensed to sell life insurance. Most agents' efforts are directed toward selling supplemental health insurance. The 1996 monthly average number of U.S. agents actively producing business was 6,665, compared with 6,121 in 1995 and 5,489 in 1994. I-12 Agents' activities are principally limited to sales, with 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 at the work site. 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, AFLAC supplemental policies are portable in that 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-issued 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 1996 and 1995, AFLAC continued to develop marketing arrangements with insurance brokers. Insurance brokers generally have better access to larger payroll groups than independent agents. The core of the Company's distribution network will remain independent agents. In 1996, AFLAC's U.S. premiums collected were $934.5 million, 7.0% of which was collected in Georgia, 6.8% in Texas, 6.7% in Florida, 5.6% in North Carolina and 5.0% 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 operate in the states AFLAC conducts business. Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield, provide insurance for meeting basic hospitalization and medical expenses. Much of this insurance is sold on a group basis. The federal and state governments also pay substantial costs of medical I-13 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 (supplement) major medical insurance by helping cover 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 13-13 to 13-15 (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 regulatory authorities, and periodic examinations of the I-14 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 and other matters. Currently, prescribed or permitted statutory accounting principles (SAP) may vary between states and between companies. The NAIC is in the process of recodifying SAP to promote standardization throughout the industry. Completion of this project will result in changes in statutory accounting practices for the Company. The impact on the Company's statutory capital and surplus is not presently determinable. For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-57 (Note 10 - Statutory Accounting and Dividend Restrictions of Notes to the Consolidated Financial Statements), incorporated herein by reference. The NAIC risk-based capital formula for U.S. life insurance companies 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 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. AFLAC's NAIC risk-based capital ratio continues to reflect a very strong statutory capital and surplus position. Currently, three 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 Massachusetts, New Jersey and New York. Regulations in Connecticut were recently changed to allow the sale of specified disease insurance beginning in June 1997. 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 U.S. 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-15 EMPLOYEES - U.S. In its U.S. insurance operations, the Company employed 1,697 full-time and 32 part-time employees at December 31, 1996. The Company considers its employee relations to be excellent. RESERVES - JAPAN AND U.S. The reserves reported in the financial statements have been computed in accordance with generally accepted accounting principles (GAAP). These reserves differ from those reflected in the various regulatory financial statements filed by the Company. Such differences arise from the use of different mortality, morbidity, interest, lapse assumptions and actuarial reserving methods as required by the laws of the various states and Japan. 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 13.3% in 1996 and 5.1% in 1995 primarily due to increased advertising revenues from an improved U.S. economy and from the political elections in 1996. As previously mentioned, the Company entered into definitive agreements for the sale of its broadcast division business. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. Management expects the sale of the remaining six stations will close during the first half of 1997. The Broadcast Division employed 477 full-time and 87 part-time employees at December 31, 1996. The Broadcast Division considers its employee relations to be excellent. The Company's other operations, in addition to Broadcast, had 308 employees at December 31, 1996; employee relations are considered to be excellent. For additional information regarding other operations, see Exhibit 13, page 13-15 (Other Operations section of MD&A), which is incorporated herein by reference. 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. The Company also owns two additional buildings located on the same property. AFLAC also owns administrative office buildings located nearby. AFLAC New York 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 along with regional sales offices located throughout the country, and owns a training facility in Tokyo. I-16 The Broadcast Division owns land, buildings, transmission towers and other broadcast equipment in the cities where its six television stations are located. These properties will be sold in conjunction with the sale of the Broadcast Division during the first half of 1997. 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, 1996. I-17 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION (*) AGE - ------------------- ------------------------------------- --- Daniel P. Amos President; Chief Executive Officer of 45 AFLAC Incorporated and AFLAC, Vice Chairman of AFLAC Incorporated Paul S. Amos Chairman of the Board of AFLAC 70 Incorporated and AFLAC William J. Bugg, Jr. Senior Vice President, Corporate 57 Actuary of AFLAC Monthon Chuaychoo Vice President, Financial Services, of 53 AFLAC Incorporated and AFLAC since September 1993; Second Vice President, Assistant Controller of AFLAC Incorporated and AFLAC to September 1993 Kriss Cloninger III Executive Vice President, Chief 49 Financial Officer of AFLAC Incorporated and AFLAC, and Treasurer of AFLAC Incorporated since March 1993; Senior Vice President, Chief Financial Officer of AFLAC Incorporated and AFLAC and Treasurer of AFLAC Incorporated 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, 48 of AFLAC Incorporated and AFLAC since August 1993; Vice President and Controller of AFLAC Incorporated and AFLAC to August 1993 Norman P. Foster Executive Vice President, Corporate 62 Finance, of AFLAC Incorporated and AFLAC since March 1992; Senior Vice President, Chief Financial Officer of AFLAC Incorporated, and AFLAC and Treasurer of AFLAC Incorporated until March 1992 I-18 David Halmrast Senior Vice President, Director of 57 Corporate and Market Development of AFLAC Incorporated since September 1996; Senior Vice President, Corporate Development, of AFLAC until September 1996; Senior Vice President, Corporate Development of AFLAC Incorporated until December 1993; Senior Vice President and Chief Financial Officer of Colonial Companies, Inc. until July 1992 Kenneth S. Janke Jr. Senior Vice President, Investor 38 Relations, of AFLAC Incorporated since August 1993; Vice President, Investor Relations, of AFLAC Incorporated until August 1993 Akitoshi Kan Deputy Chief Financial Officer of AFLAC, 49 Senior Vice President, AFLAC Japan, Accounting, Information Systems, ABC and Legal affairs since January 1997; Senior Vice President, AFLAC Japan, Accounting, Corporate Planning, Audit, and Legal Affairs until January 1997; Vice President, AFLAC Japan Accounting Department until 1995 Kyoichi Kasuya Vice President, Chief Actuary, AFLAC 59 Japan Nobuo Kawamura Senior Vice President, AFLAC Japan, 52 Underwriting, Policy Maintenance, Premium Accounting, Customer Service, Administration Support Joseph P. Kuechenmeister Senior Vice President, Director 55 of Marketing of AFLAC Joey M. Loudermilk Senior Vice President, General Counsel 43 and Corporate Secretary of AFLAC Incorporated and AFLAC, and Director, Legal and Governmental Relations of AFLAC since May 1992; Senior Vice President, Corporate Counsel and Assistant Secretary of AFLAC Incorporated and AFLAC and Director, Legal and Governmental Affairs of AFLAC until May 1992 I-19 Hidefumi Matsui President, AFLAC Japan, since January 52 1995, Executive Vice President of AFLAC Japan until 1995 Minoru Nakai President of AFLAC International, Inc. 55 Yoshiki Otake Chairman, AFLAC Japan, since January 57 1995, Vice Chairman of AFLAC International Inc., President of AFLAC Japan until 1995 E. Stephen Purdom Executive Vice President, U.S. Operations, 49 of AFLAC since October 1994; Senior Vice President, Medical Director of AFLAC until October 1994, and also Medical Director, Columbus Clinic, Columbus, GA until September 1994 Joseph W. Smith, Jr. Senior Vice President, Chief Investment 43 Officer of AFLAC Gary L. Stegman Senior Vice President, Assistant Chief 47 Financial Officer of AFLAC Incorporated and AFLAC; Treasurer and Assistant Secretary of AFLAC (*) 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-20 PART II Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1996 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; 50 (Note 10); EQUITY AND RELATED SHAREHOLDER 13-57 and 53-54 MATTERS (Note 10) ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 26 - 27 ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 28 - 36 ANALYSIS OF FINANCIAL CONDITION 13-24 AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND 13-25 to 37 - 52 SUPPLEMENTARY DATA 13-64 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 from the Company's definitive Proxy Statement relating to the Company's 1997 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 14, 1997, 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 - 19 Meetings and Directors Compensation; Summary Compensation Table; De- fined Benefit Pension Plan; Retirement Plans for Key Executives; Employment Contracts and Termination of Employ- ment Arrangements ITEM 12. SECURITY OWNERSHIP OF Voting Securities and 2 - 7 CERTAIN BENEFICIAL Principal Holders OWNERS AND Thereof. Security Owner- MANAGEMENT ship of Management. 1. Election of Directors ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 19 AND RELATED and Relationships TRANSACTIONS III-1 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS 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 13-25 each of the years in the three-year period ended December 31, 1996 Consolidated Balance Sheets, at December 13-26 31, 1996 and 1995 13-27 Consolidated Statements of Shareholders' 13-28 - Equity, for each of the years in the 13-29 three-year period ended December 31, 1996 Consolidated Statements of Cash Flows, 13-30 - for each of the years in the three-year 13-31 period ended December 31, 1996 Notes to the Consolidated Financial 13-32 to Statements 13-61 Report of Independent Auditors 13-63 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, 1996 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1996 IV-11 and 1995 and for each of the years in the three-year period ended December 31, 1996 Schedule IV - Reinsurance, for each of the IV-12 years in the three-year period ended December 31, 1996 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 Form 10-Q for June 30, 1996, Commission file number 1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0. 4.0 - There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of AFLAC Incorporated and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any of its long-term debt instruments 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 1996. 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). - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-53737 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-01243 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - 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. - 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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 333-16533 with respect to the AFLAC Associate Stock Bonus Plan. 27.0 - Financial Data Schedule (electronic filing only). *Management contract or compensatory plan or agreement. IV-3 (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the quarter ended December 31, 1996. (c) EXHIBITS FILED WITH CURRENT FORM 10-K 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1996. 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). - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-53737 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-01243 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - 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. - 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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 333-16533 with respect to the AFLAC Associate Stock Bonus 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, 1997, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1996 and 1995, 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, 1996, as contained in the 1996 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 1996. 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, 1997 IV-5 SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1996 (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 $ 687,556 $ 707,510 $ 707,510 States, municipalities and political subdivisions 6,840 6,477 6,477 Foreign governments 7,523,637 8,954,473 8,954,473 Public utilities 2,865,634 3,263,311 3,263,311 Convertibles 27,005 29,544 29,544 All other corporate bonds 6,830,528 7,366,411 7,366,411 ---------- ---------- ---------- Total fixed maturities available for sale 17,941,200 20,327,726 20,327,726 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 3,665 4,395 4,395 Banks, trusts and insurance companies 6,628 11,685 11,685 Industrial, miscellaneous and all other 75,956 120,248 120,248 ---------- ---------- ---------- Total equity securities 86,249 136,328 136,328 ---------- ---------- ---------- Total securities available for sale 18,027,449 20,464,054 20,464,054 Mortgage loans on real estate 17,802 21,151 17,802 Policy loans 1,273 1,273 1,273 Other long-term investments 1,726 1,726 1,726 Short-term investments 261,680 261,680 261,680 ---------- ---------- ---------- Total investments $18,309,930 $20,749,884 $20,746,535 ========== ========== ========== IV-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1996 1995 ---------- ---------- ASSETS: Investments: Investments in subsidiaries* $ 2,677,304 $ 2,573,606 Other investments: Money market funds 22,458 17,346 Mortgage loans and other 2,350 2,548 ---------- ---------- Total investments 2,702,112 2,593,500 Due from subsidiaries* 3,947 3,910 Other receivables 2,523 4,478 Property and equipment, net 8,428 9,231 Other 3,288 1,291 ---------- ---------- Total assets 2,720,298 2,612,410 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Cash overdraft 286 160 Due to subsidiaries* 869 1,237 Notes payable (note A) 327,408 272,158 Employee and beneficiary benefit plans 183,807 147,319 Income taxes, primarily deferred 45,948 33,577 Other 36,411 23,818 Commitments and contingencies (note B) ---------- ---------- Total liabilities 594,729 478,269 ---------- ---------- Shareholders' equity: Common stock of $.10 par value: Authorized 175,000; issued 157,239 shares in 1996 and 156,358 shares in 1995 15,724 15,636 Additional paid-in capital 208,994 196,928 Unrealized foreign currency translation gains 229,782 213,319 Unrealized gains on securities available for sale 280,154 482,787 Retained earnings (note D) 1,917,794 1,577,605 Treasury stock, at average cost (526,425) (351,117) Notes receivable for stock purchases (454) (1,017) ---------- ---------- Total shareholders' equity 2,125,569 2,134,141 ---------- ---------- Total liabilities and shareholders' equity $ 2,720,298 $ 2,612,410 ========== ========== * 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, 1996 1995 1994 ---------- ---------- ---------- Revenues: Dividends from subsidiaries* $ 137,692 $ 82,343 $ 109,533 Management and service fees from subsidiaries* 30,470 30,509 26,391 Other income from subsidiaries, principally rental and interest* 6 196 683 Other income 4,041 1,069 1,327 --------- --------- --------- Total revenues 172,209 114,117 137,934 --------- --------- --------- Operating expenses: Interest expense - subsidiaries* 16 30 22 Interest expense - others 10,512 8,419 6,070 Capitalized interest - - (2,419) Other operating expenses 84,055 70,921 65,635 --------- --------- --------- Total operating expenses 94,583 79,370 69,308 --------- --------- --------- Earnings before income taxes and equity in undistributed earnings of subsidiaries 77,626 34,747 68,626 Income tax expense (note C) 12,410 8,583 874 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries 65,216 26,164 67,752 Equity in undistributed earnings of subsidiaries 329,147 322,893 225,038 --------- --------- --------- Net earnings $ 394,363 $ 349,057 $ 292,790 ========= ========= ========= * 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, 1996 1995 1994 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 394,363 $ 349,057 $ 292,790 Adjustments to reconcile net earnings to net cash provided from operating activities: Equity in undistributed earnings of subsidiaries (329,147) (322,893) (225,038) Deferred income taxes 12,371 8,178 (578) Employee and beneficiary benefit plans 36,488 30,174 32,700 Other, net 14,814 17,017 4,307 --------- --------- --------- Net cash provided by operating activities 128,889 81,533 104,181 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in other investments (4,914) (14,325) 18,998 Additional capitalization of subsidiaries - - (3,592) --------- --------- --------- Net cash (used)/provided by investing activities (4,914) (14,325) 15,406 --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 135,914 198,250 84,000 Assumption of debt from affiliate 15,389 - - Principal payments under debt obligations (57,671) (11,507) (26,541) Proceeds from exercise of stock options 6,549 3,235 2,163 Dividends paid to shareholders (54,174) (48,939) (44,928) Purchases of treasury stock (204,169) (224,204) (131,734) Treasury stock reissued 34,549 9,693 2,761 Net change in amount due to/from subsidiaries (405) 6,186 (5,331) Other, net (83) - - --------- --------- --------- Net cash used by financing activities (124,101) (67,286) (119,610) --------- --------- --------- Net change in cash (126) (78) (23) Cash (overdraft) at beginning of year (160) (82) (59) --------- --------- --------- Cash (overdraft) at end of year $ (286) $ (160) $ (82) ========= ========= ========= 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, 1996 and 1995 follows: (In thousands) 1996 1995 -------- -------- 2.74% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually through July 2001........ $ 284,238 $ 230,695 Unsecured, yen-denominated notes payable to banks, due semiannually, through October 1997, variable interest rate (.88% at December 31, 1996)............................... 17,453 - 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through 1998, assumed from broadcast affiliates in 1996..................... 15,389 - 8.3% note payable, due monthly through March 1997, secured by equipment............................. 478 2,296 5.965% unsecured notes payable to banks, refinanced in 1996............................... - 39,167 Short-term yen-denominated note payable to bank under unsecured line of credit, variable interest rate (.76% at December 31, 1996)........ 9,850 - -------- -------- Total notes payable............................ $ 327,408 $ 272,158 ======== ======== The aggregate maturities of the notes payable for each of the five years after December 31, 1996, are as follows: (In thousands) 1997............................................ $ 93,074 1998............................................ 63,792 1999............................................ 56,848 2000............................................ 56,848 2001............................................ 56,846 IV-10 (B) CONTINGENCIES In prior years, the Parent Company executed promissory notes to banks and transferred the proceeds to its broadcast affiliates for the acquisition of television broadcasting stations. On December 31, 1996, the Parent Company assumed the remaining debt from the broadcast affiliates. The amount of such debt assumed was $15.4 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. For further information on income taxes, see Exhibit 13, page 13-51, Note 8 of the Notes to the Consolidated Financial Statements. (D) DIVIDEND RESTRICTIONS See Exhibit 13, pages 13-57 and 13-58 (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) 1996 1995 1994 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 9,805 $ 7,807 $ 6,302 Income taxes - 406 400 (F) ACCOUNTING CHANGES For information concerning the cumulative effect of new accounting standards adopted in 1996, 1995, and 1994, see page 13-35 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, 1996, 1995 and 1994 (In thousands)
Percentage Ceded to Assumed from of amount Gross other other assumed Amount companies companies Net amount to net ------------- ------------- ------------- ------------- ------------ Year ended December 31, 1996: Life insurance in force $ 16,329,749 $ 416,295 $ - $ 15,913,454 - ============= ============= ============= ============= ============ Premiums: Health insurance $ 5,704,213 $ 657 $ - $ 5,703,556 - Life insurance 207,232 752 - 206,480 - ------------- ------------- ------------- ------------- ------------ Total premiums $ 5,911,445 $ 1,409 $ - $ 5,910,036 - ============= ============= ============= ============= ============ 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 - ============= ============= ============= ============= ============ 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, 1997 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, 1997 - ------------------------ President and Vice ----------------- (Daniel P. Amos) Chairman of the Board of Directors /s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1997 - ------------------------ Chief Financial Officer ----------------- (Kriss Cloninger, III) and Treasurer /s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1997 - ------------------------ Corporate Finance ----------------- (Norman P. Foster) IV-13 /s/ J. SHELBY AMOS, II Director MARCH 26, 1997 - ------------------------------ ----------------- (J. Shelby Amos, II) /s/ MICHAEL H. ARMACOST Director MARCH 26, 1997 - ------------------------------ ----------------- (Michael H. Armacost) /s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1997 - ------------------------------ ----------------- (M. Delmar Edwards, M.D.) /s/ GEORGE W. FORD, JR. Director MARCH 26, 1997 - ------------------------------ ----------------- (George W. Ford, Jr.) /s/ JOE FRANK HARRIS Director MARCH 26, 1997 - ------------------------------ ----------------- (Joe Frank Harris) /s/ ELIZABETH J. HUDSON Director MARCH 26, 1997 - ------------------------------ ----------------- (Elizabeth J. Hudson) /s/ KENNETH S. JANKE, SR. Director MARCH 26, 1997 - ------------------------------ ----------------- (Kenneth S. Janke, Sr.) /s/ CHARLES B. KNAPP Director MARCH 26, 1997 - ------------------------------ ----------------- (Charles B. Knapp) IV-14 /s/ HISAO KOBAYASHI Director MARCH 26, 1997 - ------------------------------ ----------------- (Hisao Kobayashi) /s/ YOSHIKI OTAKE Director MARCH 26, 1997 - ------------------------------ ----------------- (Yoshiki Otake) /s/ E. STEPHEN PURDOM Director MARCH 26, 1997 - ------------------------------ ----------------- (E. Stephen Purdom) /s/ BARBARA K. RIMER Director MARCH 26, 1997 - ------------------------------ ----------------- (Barbara K. Rimer) /s/ HENRY C. SCHWOB Director MARCH 26, 1997 - ------------------------------ ----------------- (Henry C. Schwob) /s/ J. KYLE SPENCER Director MARCH 26, 1997 - ------------------------------ ----------------- (J. Kyle Spencer) /s/ GLENN VAUGHN, JR. Director MARCH 26, 1997 - ------------------------------ ----------------- (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 Form 10-Q for June 30, 1996, Commission file number 1-7434, Accession No. 0000004977-96-000012, Exhibit 3.0. 4.0 - There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of AFLAC Incorporated and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of any of its long-term debt instruments 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. i 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 1996. 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). - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-53737 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-01243 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - 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. - 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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 333-16533 with respect to the AFLAC Associate Stock Bonus Plan. 27.0 - Financial Data Schedule (electronic filing only). *Management contract or compensatory plan or agreement. ii Exhibits Filed with Current Form 10-K: 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1996. 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). - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-53737 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-01243 with respect to the AFLAC Incorporated Amended 1985 Stock Option Plan. - 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. - 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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 333-16533 with respect to the AFLAC Associate Stock Bonus Plan. 27.0 - Financial Data Schedule (electronic filing only). iii EX-13 2 1996 FINANCIALS EXHIBIT 13 EXH 13 EXHIBIT 13 The following information is contained in the 1996 Annual Report to Shareholders. The required information incorporated by reference to the preceding pages of this 1996 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, 1996, are as follows: Quarterly Common Stock Prices 1996 High Low Close --------------------------------------------------------------------- 4th Quarter $ 44.00 $ 35.75 $ 42.75 3rd Quarter 37.38 28.25 35.50 2nd Quarter 32.88 29.00 29.88 1st Quarter 32.88 28.83 31.25 1995 -------------------------------------------------------------------- 4th Quarter $ 29.42 $ 26.33 $ 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 EXH 13-1 ITEM 5. (b) Holders: 1996 1995 1994 - --------------------------------------------------------------------------- Number of common shares outstanding 137,884,887 141,974,309 149,454,647 Number of registered common shareholders 49,474 39,317 34,628 Approximate number of common shareholders 113,300 88,700 67,500 ITEM 5. (c) Quarterly cash dividends: 1996 1995 ------ ------ 4th Quarter $.10 $.087 3rd Quarter .10 .087 2nd Quarter .10 .087 1st Quarter .087 .077 For information concerning dividend restrictions, see Management's Discussion and Analysis of Financial Condition, the section concerning shareholders' equity, presented in this Exhibit 13 on page 13-21, and Note 10, Statutory Accounting and Dividend Restrictions, of the Notes to the Consolidated Financial Statements, also presented in this Exhibit 13 on page 13-57. EXH 13-2 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except for per-share amounts):
For the Year 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Revenues: Premiums, principally supplemental health $ 5,910,036 $ 6,070,830 $ 5,180,732 $ 4,225,390 $ 3,369,201 Net investment income 1,021,955 1,024,960 838,825 689,272 533,166 Realized investment gains (losses) 1,980 (270) (58) 2,937 (3,264) Gain on sale of television station 60,264 - - - - Other income 105,968 95,100 91,259 83,019 87,369 ---------- ---------- ---------- ---------- ---------- Total revenues 7,100,203 7,190,620 6,110,758 5,000,618 3,986,472 ---------- ---------- ---------- ---------- ---------- Benefits and expenses: Benefits and claims 4,895,522 5,034,266 4,256,541 3,423,297 2,692,353 Expenses 1,554,680 1,555,359 1,349,881 1,148,937 969,575 ---------- ---------- ---------- ---------- ---------- Total benefits and expenses 6,450,202 6,589,625 5,606,422 4,572,234 3,661,928 ---------- ---------- ---------- ---------- ---------- Pretax earnings 650,001 600,995 504,336 428,384 324,544 Income taxes 255,638 251,938 211,546 184,495 141,177 ---------- ---------- ---------- ---------- ---------- Net earnings $ 394,363 $ 349,057 $ 292,790 $ 243,889(1) $ 183,367 ========== ========== ========== ========== ========== - --------------------------------------------------------------------------------------------------------------------------- Per Common Share Net earnings $ 2.73 $ 2.33 $ 1.89 $ 1.55(1) $ 1.19 Cash dividends .387 .338 .298 .26 .23 Shareholders' equity 15.42 15.03 11.72 8.80 7.00 Price range: High $ 44.00 $ 29.83 $ 24.08 $ 22.67 $ 18.60 Low 28.25 21.25 16.83 16.50 12.80 Close 42.75 29.00 21.33 19.00 18.40 Price/earnings ratio:* High 18.3x 12.8x 12.7x 14.8x 15.6x Low 11.8 9.1 8.9 10.8 10.8 Common shares used for EPS 144,512 149,540 154,652 157,801 153,815 - --------------------------------------------------------------------------------------------------------------------------- EXH 13-3
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- At Year-End Assets: Investments and cash $20,746,535 $20,044,964 $15,993,768 $12,469,140 $ 9,461,341 Other 4,276,277 5,171,545 4,293,311 2,973,546 2,440,033 ---------- ---------- ---------- ---------- ---------- Total assets $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374 ========== ========== ========== ========== ========== Liabilities and shareholders' equity: Policy liabilities $20,234,205 $19,513,504 $16,006,607 $12,065,471 $ 9,350,241 Notes payable 353,533 327,268 184,901 122,062 125,800 Income taxes, primarily deferred 1,181,121 1,397,709 1,392,441 950,278 848,514 Other liabilities 1,128,384 1,843,887 951,363 939,251 494,937 Shareholders' equity 2,125,569 2,134,141 1,751,767 1,365,624 1,081,882 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $25,022,812 $25,216,509 $20,287,079 $15,442,686 $11,901,374 ========== ========== ========== ========== ========== - -------------------------------------------------------------------------------------------------------------------------- Supplemental Data Operating earnings** $ 347,425 $ 348,734 $ 293,053 $ 241,654(1) $ 183,426 Operating earnings per share** $ 2.40 $ 2.33 $ 1.89 $ 1.53(1) $ 1.19 Pretax profit margin** 8.4% 8.4% 8.3% 8.5% 8.2% After-tax profit margin** 4.9% 4.8% 4.8% 4.8%(1) 4.6% Operating return on equity*** 19.9% 22.0% 20.4% 19.9%(1) 18.4% Yen/dollar exchange rate at year-end 116.10 102.95 99.85 112.00 124.70 Average yen/dollar exchange rate 108.84 94.10 102.26 111.21 126.67 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, and in 1996, the gain from the sale of a television station. (***)Excludes realized investment gains/losses and unrealized gains on securities available for sale, net. For segment and foreign information, see Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 2 of Notes to the Consolidated Financial Statements. EXH 13-4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The primary business of AFLAC Incorporated (the Parent Company) and subsidiaries (the Company) 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 markets for the Company's insurance operations. AFLAC Japan and AFLAC U.S. are the primary components for this discussion and analysis due to their significance to the Company's consolidated financial condition and results of operations. The Company paid a three-for-two stock split on March 18, 1996. All share and per-share amounts have been restated for the stock split. RESULTS OF OPERATIONS During 1996, the Company entered into definitive agreements for the sale of its broadcast division business consisting of seven network- affiliated television stations. The total pretax gain from this transaction is estimated to be $325 million. Finalization of the transaction is subject to approval by the Federal Communications Commission. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. The pretax and after-tax gains recognized on the sale of WAFB-TV in 1996 were $60.3 million and $48.2 million, respectively. The effect of the after- tax gain on 1996 net earnings per share was $.33. Management expects the sale of the six remaining stations to be finalized during the first half of 1997. For further information, see Note 2 of the Notes to the Consolidated Financial Statements. Net earnings (including realized investment gains/losses and the gain on the sale of the television station in 1996) were $394.4 million, or $2.73 per share, in 1996, compared with $349.1 million, or $2.33 per share, in 1995, and $292.8 million, or $1.89 per share, in 1994. Operating earnings per share (excluding realized investment gains/losses and the gain on the sale of the television station in 1996) increased 3.0% to $2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994. Operating earnings were $347.4 million in 1996, $348.7 million in 1995 and $293.1 million in 1994. EXH 13-5 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, ------------------ ------------------------ 1996 1995 1996 1995 1994 ------------------ ------------------------ Insurance operations (excluding realized investment gains and losses): AFLAC Japan................. (5.1)% 19.1% $532.8 $561.4 $471.4 AFLAC U.S................... 23.0 15.8 128.5 104.5 90.2 ----- ----- ----- Total (.7) 18.6 661.3 665.9 561.6 Broadcast division operations.. 35.0 10.4 25.6 19.0 17.2 Interest expense, noninsurance operations................... (10.8) (14.7) (12.5) (11.3) (9.9) Capitalized interest, building construction........ - - 2.4 Corporate expenses, other operations and eliminations.. (20.0) (7.9) (86.6) (72.3) (66.9) ----- ----- ----- Pretax operating earnings.. (2.2) 19.2 587.8 601.3 504.4 Realized investment gains (losses)............... 1.9 (.3) (.1) Gain on sale of television station...................... 60.3 - - ----- ----- ----- Earnings before income taxes.................... 8.2 19.2 650.0 601.0 504.3 Income taxes................... 1.5 19.1 255.6 251.9 211.5 ----- ----- ----- Net earnings............... 13.0% 19.2% $394.4 $349.1 $292.8 ==== ==== ===== ===== ===== Net earnings per share..... 17.2% 23.3% $ 2.73 $ 2.33 $ 1.89 ==== ==== ===== ===== ===== ============================================================================ The following discussion of earnings comparisons focuses on pretax operating earnings and excludes realized investment gains/losses and the gain of $60.3 million from the sale of one television station in 1996. Foreign Currency Translation Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported results. During the first half of 1995, the yen strengthened substantially versus the dollar. In the third quarter of 1995, the yen began to weaken in relation to the dollar and continued to weaken throughout 1996. The average yen-to-dollar exchange rates were 108.84 in 1996, 94.10 in 1995 and 102.26 in 1994. Operating earnings per share, which were EXH 13-6 affected by the fluctuations in the value of the yen, increased 3.0% to $2.40 in 1996, 23.3% to $2.33 in 1995 and 23.5% to $1.89 in 1994. The weakening of the yen in 1996 lowered operating earnings by approximately $.29 per share in 1996 compared with 1995, and the strengthening of the yen in 1995 and 1994 benefited operating earnings by $.15 per share in 1995 compared with 1994 and $.12 per share in 1994 compared with 1993. These per-share amounts were solely attributable to the translation effect of the fluctuations in the yen and not to any fundamental change in business operations. The Company sets its growth objective for operating earnings per share before the effect of foreign currency fluctuations. Excluding the effect of currency fluctuations, operating earnings per share increased 15.5%, 15.3% and 15.7% for the years ended December 31, 1996, 1995 and 1994, respectively. The goal for 1996 was 15% growth in operating earnings per share excluding the effect of foreign currency translation. In the fourth quarter of 1996, the Company raised its primary financial objective for 1997 through 2000 from 13%-15% annual growth in operating earnings per share to 15%-17%, excluding the effect of foreign currency translation. The following table illustrates the effect of foreign currency translation on the Company's reported results by comparing those results as if foreign currency rates had remained unchanged. In years when the yen weakens, translating yen into dollars causes smaller increases or negative percentage changes for financial results in dollars. When the yen strengthens, translating yen into dollars causes larger increases for financial results in dollars. Supplemental Consolidated Data Selected Percentage Changes Years Ended December 31, Adjusted to As Exclude Foreign Reported Currency Changes* ---------------------- ---------------------- 1996 1995 1994 1996 1995 1994 ------ ------ ------ ------ ------ ------ Premium income (2.6)% 17.2% 22.6% 10.1% 9.2% 14.3% Net investment income (.3) 22.2 21.7 11.9 14.2 13.6 Total revenues** (1.3) 17.7 22.2 11.3 9.8 14.0 Total benefits and expenses (2.1) 17.5 22.6 10.5 9.7 14.5 Operating earnings*** (.4) 19.0 21.3 11.5 11.3 13.1 Operating earnings per share*** 3.0 23.3 23.5 15.5 15.3 15.7 - ---------------------------------------------------------------------------- * Amounts excluding foreign currency changes for each year shown above were determined using the average yen/dollar exchange rate for each respective prior year. ** Includes the gain from the sale of the television station in 1996. ***Excludes realized investment gains/losses and, in 1996, the gain on the sale of the television station. ============================================================================ EXH 13-7 The Company's objective for 1997 is to increase operating earnings per share by 17% excluding the effect of currency translation. However, if that objective is achieved and the yen/dollar exchange rate averages 120.00 compared with the 1996 average rate of 108.84, operating earnings per share including foreign currency translation would increase by approximately 10% in 1997. Despite the weakening of the yen during 1996, operating earnings per share increased in each year of the three-year period ended December 31, 1996. The increases reflected strong earnings in the functional currencies of AFLAC's core insurance operations in Japan and the United States, improved operating earnings by the AFLAC Broadcast Division, and a consolidated benefit from additional investment income associated with profit repatriations from AFLAC Japan to AFLAC U.S. Partially offsetting the increases were higher corporate expenses and increased interest expense associated with the Company's share repurchase program. However, the share repurchase program benefited earnings per share. Profit Repatriation AFLAC Japan repatriated profits to AFLAC U.S. of $217.3 million in 1996, $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 AFLAC U.S. investment income and 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 1996 have benefited consolidated net earnings by $25.7 million in 1996, $13.9 million in 1995 and $7.4 million in 1994. Repatriated profits represent a portion of the after-tax earnings reported to the Japanese Ministry of Finance as of March 31 each year. Such regulatory basis earnings are based on accounting principles that differ materially from generally accepted accounting principles. Such differences relate primarily to valuation of investments, policy benefit and claim reserves, acquisition costs and deferred income taxes. Japanese regulatory earnings and related profit repatriations may therefore vary materially from year to year because of these differences. Management currently expects that the 1997 profit repatriation amount will fall between the amounts transferred in 1995 and 1996. Share Repurchase Program During 1996, the board of directors authorized the purchase of up to an additional 7.0 million shares of AFLAC Incorporated common stock. Including shares remaining under a previous authorization, the Company had approval to purchase up to 8.0 million shares as of December 31, 1996. The Company had purchased 20.4 million shares from the inception of the plan in February 1994 through December 31, 1996. 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 bank borrowings. Interest expense related to the share repurchase program was $9.4 million in 1996, $5.3 million in 1995 and $2.6 million in 1994. Consolidated interest expense, including interest expense from insurance EXH 13-8 operations, was $16.2 million in 1996, $15.6 million in 1995 and $13.5 million in 1994. Income Taxes The Company's effective income tax rates were 39.3% in 1996, and 41.9% in both 1995 and 1994. Japanese income taxes on AFLAC Japan's operating results, which were taxed at Japan's corporate income tax rate of 45.3%, made up most of the Company's income tax expense. The decrease in the effective tax rate in 1996 resulted from changes in the contributions from the Company's business components, primarily the gain on the sale of the television station. INSURANCE OPERATIONS, AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to the Company's 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 fourth in terms of individual policies in force and 17th in terms of assets. The transfer of profits from AFLAC Japan to AFLAC U.S. distorts comparisons of operating results between years. Therefore, 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 1996. EXH 13-9 AFLAC JAPAN SUMMARY OF OPERATING RESULTS In Dollars (In millions) 1996 1995 1994 ---------------------------------- Premium income.................... $4,951.6 $5,195.4 $4,370.7 Investment income, as adjusted*... 920.5 941.3 766.0 Other income 1.6 (.5) 2.8 ------- ------- ------- Total revenues, as adjusted*.... 5,873.7 6,136.2 5,139.5 ------- ------- ------- Benefits and claims............... 4,293.7 4,486.3 3,752.8 Operating expenses................ 1,022.3 1,068.0 902.9 ------- ------- ------- Total benefits and expenses 5,316.0 5,554.3 4,655.7 ------- ------- ------- Pretax operating earnings, as adjusted*..................... 557.7 581.9 483.8 Investment income applicable to profit repatriations............ (24.9) (20.5) (12.4) ------- ------- ------- Pretax operating earnings....... $ 532.8 $ 561.4 $ 471.4 ======= ======= ======= - --------------------------------------------------------------------------- Percentage changes in dollars over previous year: Premium income.................. (4.7)% 18.9% 25.5% Investment income*.............. (2.2) 22.9 23.1 Total revenues*................. (4.3) 19.4 25.1 Pretax operating earnings*...... (4.2) 20.3 19.7 Pretax operating earnings....... (5.1) 19.1 18.2 - --------------------------------------------------------------------------- Percentage changes in yen over previous year: Premium income.................. 10.2% 9.4% 15.4% Investment income*.............. 13.1 13.1 13.1 Total revenues*................. 10.7 9.9 15.0 Pretax operating earnings*...... 10.9 10.7 10.0 Pretax operating earnings....... 9.8 9.7 8.5 - --------------------------------------------------------------------------- Ratios to total revenues, as adjusted*: Benefits and claims............. 73.1% 73.1% 73.0% Operating expenses.............. 17.4 17.4 17.6 Pretax operating earnings....... 9.5 9.5 9.4 Ratio of pretax operating earnings to total reported revenues...... 9.1 9.2 9.2 ============================================================================ * Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $24.9 million in 1996, $20.5 million in 1995 and $12.4 million in 1994 foregone due to profit repatriations. ============================================================================ EXH 13-10 Japan Sales The percentage increases in premium income in yen reflect the growth of premiums in force. The increases in annualized premiums in force of 12.2% in 1996, 7.5% in 1995 and 14.5% in 1994 reflect the high persistency of our business, premium rate increases during the last three years, sales of new policies, and conversions of existing policies to policies with higher benefits and premiums. New annualized premiums from sales and conversions were: $728.9 million in 1996, down 5.6% (up 9.1% in yen); $772.0 million in 1995, up 13.4% (4.3% in yen); and $680.9 million in 1994, up 18.2% (10.0% in yen). Sales growth, excluding conversions, has been positively affected by product broadening. AFLAC Japan's sales mix is changing, although cancer insurance still accounts for the majority of insurance in force. Cancer insurance sales accounted for 46.7% of total new sales in yen in 1996, 71.2% in 1995 and 81.3% in 1994. Sales of AFLAC Japan's living benefit life product were very strong in 1996. Living benefit life, which was introduced in the fourth quarter of 1995, accounted for 39.5% of total new sales in 1996. Care product sales represented 10.6% of total new sales in 1996, 15.6% in 1995 and 17.9% in 1994. Management believes that the sale of newly introduced products will continue to be important to AFLAC Japan's new sales growth. Japan Investments Due to the continued low level of available investment yields in Japan, the Ministry of Finance has required 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 new care policy issues were increased by an average of 16% in September 1995. As a result of continuing low yields, the Company increased premium rates by approximately 13% on all new policy issues beginning in the fourth quarter of 1996. Investment income, which is affected by available cash flow from operations and investment yields achievable on new investments, continually increased in 1994 and 1995, despite a general decline in available investment yields. Investment income declined in 1996 due to the weaker yen (increased 13.1% in yen). Funds available for investment during the three- year period 1994 through 1996 were reduced by the annual profit repatriations previously discussed and expenditures of $173.5 million in 1994 for the final construction phase of the administrative office building in Tokyo. Rates of return on fixed-maturity securities in Japan remained low in 1996 compared with historical levels. For instance, the yield on 10-year Japanese government bonds, as measured by a composite index, declined from a high of 3.54% in February 1996 to a low of 2.51% in November 1996, closing the year at 2.77%. AFLAC Japan's new money rates for investments were 4.07% for 1996, 4.71% for 1995 and 5.17% for 1994. 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 5.54% in 1996, compared with 5.81% in 1995 and 6.00% in 1994. 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 EXH 13-11 yield below that of the interest required for the accretion of policy liabilities. At December 31, 1996, the average duration of the policy liabilities was approximately 13 years, unchanged from 1995. The average duration of the yen-denominated invested assets was approximately nine years in both 1996 and 1995. The weighted-average period to maturity of fixed- maturity securities at December 31, 1996, was 12.2 years, compared with 11.3 years at December 31, 1995. Over the next five years, $2.4 billion, at amortized cost, or 14.8%, of AFLAC Japan's fixed-maturity securities are scheduled to mature. By concentrating on selected sectors, AFLAC Japan has secured higher yields than 10-year Japanese government bonds would have provided while still adhering to conservative standards for credit quality. Management 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 three years will have a positive impact on these spreads and therefore contribute to stability in the pretax operating profit margin. Japan Deregulation In December 1996, the governments of the United States and Japan reached an agreement on deregulation of the Japanese insurance industry. The agreement calls for the gradual liberalization of the industry over the next four years and includes provisions to avoid "radical change" in the third sector of the insurance industry. AFLAC and other foreign-owned insurers, as well as some small to medium-sized Japanese insurers, operate primarily in the third sector. One of the measures for avoiding radical change in the third sector is the prohibition of additional Japanese life and non-life insurance companies from selling cancer or medical insurance until January 1, 2001. Japan Other During the three-year period ended December 31, 1996, the benefit ratio and the operating expense ratio have been stable. Annual claims experience and persistency 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 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, 1996, pretax operating earnings would have been reduced by approximately $16.4 million ($9.0 million after income tax) in 1996. In late 1996, the Japanese government proposed new income tax provisions that would increase Japan's income taxes on investment income received by foreign companies operating in Japan from securities issued from their home country. The government plans to finalize the proposal in March 1997. The new provisions are expected to be effective beginning in 1998. If the proposal had been enacted in 1996 in its present form, AFLAC Japan's income tax expense would have been increased, and net earnings of the Company would have decreased by approximately $23.7 million for the year 1996. EXH 13-12 Management is evaluating the impact of this proposal and will seek to mitigate much of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Based on a preliminary review, management does not expect this tax change as it is presently proposed to materially affect future net earnings of the Company. Even with Japan's economic slowdown, the Company believes the market for supplemental insurance remains bright. Demand for the Company's products in Japan has continued, and the Company remains optimistic about increasing penetration within existing groups, 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 continued to benefit from additional investment income earned on profit transfers received from AFLAC Japan. AFLAC U.S. received profit transfers in the amounts of $217.3 million in 1996, $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 $64.3 million in 1996, $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 1996 has been reclassified in the presentation on the following page in order to improve comparability between years. EXH 13-13 AFLAC U.S. SUMMARY OF OPERATING RESULTS (In millions) 1996 1995 1994 -------------------------------- Premium income......................... $ 945.8 $ 859.8 $ 792.5 Investment income, as adjusted*........ 86.3 78.3 68.5 Other income........................... 1.5 1.2 1.9 ------- ------- ------- Total revenues, as adjusted*......... 1,033.6 939.3 862.9 ------- ------- ------- Benefits and claims.................... 590.4 533.1 490.2 Operating expenses..................... 347.4 322.9 295.3 ------- ------- ------- Total benefits and expenses.......... 937.8 856.0 785.5 ------- ------- ------- Pretax operating earnings, as adjusted*........................ 95.8 83.3 77.4 Investment income applicable to profit repatriations................. 32.7 21.2 12.8 ------- ------- ------- Pretax operating earnings.......... $ 128.5 $ 104.5 $ 90.2 ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous year: Premium income....................... 10.0% 8.5% 9.7% Investment income* ................. 10.2 14.3 10.0 Total revenues*...................... 10.0 8.9 9.6 Pretax operating earnings*........... 15.0 7.7 12.2 Pretax operating earnings............ 23.0 15.8 20.1 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted*: Benefits and claims.................. 57.1% 56.7% 56.8% Operating expenses................... 33.6 34.4 34.2 Pretax operating earnings............ 9.3 8.9 9.0 Ratio of pretax operating earnings to total reported revenues.............. 12.1 10.9 10.3 ============================================================================ *Excludes estimated investment income of $32.7 million in 1996, $21.2 million in 1995 and $12.8 million in 1994 related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ U.S. Sales The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force of 11.1% in 1996, 8.8% in 1995 and 9.1% in 1994 were favorably affected by an improvement in the persistency for several lines of business and increased sales at the work site through cafeteria plans (Internal Revenue Code Section 125). EXH 13-14 New annualized premiums from sales and policy conversions were: $326.6 million in 1996, up 17.0%; $279.1 million in 1995, up 13.6%; and $245.8 million in 1994, up 7.3%. Product lines developed since 1986 have contributed greatly to new sales growth, accounting for 66.2% of total sales in 1996. U.S. Other 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 a national advertising program without significantly affecting the operating expense ratio. For more information regarding advertising expenses, see Note 2 of the Notes to the Consolidated Financial Statements. At the same time, the operating results continue to reflect relatively stable benefit ratios. 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. However, the aggregate benefit ratio has been relatively stable due to the mix of business shifting towards accident and hospital indemnity policies, which have lower benefit ratios than other products. Management expects the pretax operating profit margin, which was 9.3% excluding the effect of repatriation in 1996, to remain approximately the same in 1997. Management continues to believe that there are significant opportunities to market high-quality, affordable supplemental insurance products in the U.S. marketplace. BROADCAST OPERATIONS The Company's broadcast operations include seven network-affiliated television stations located in small to mid-size U.S. markets. Broadcast revenues increased 13.3% in 1996 and 5.1% in 1995 primarily due to increased advertising revenues from an improved U.S. economy and from the political elections in 1996. As previously mentioned, the Company entered into definitive agreements during 1996 for the sale of its broadcast division business. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. Management expects the sale of the remaining six stations will close during the first half of 1997. OTHER OPERATIONS The Parent Company's operating expenses consist primarily of corporate overhead expenses such as salary costs, retirement provisions, professional fees and litigation expenses. These expenses have increased in recent years, principally due to the growth in corporate service activities, EXH 13-15 changes in the legal environment in certain states, and to greater retirement accruals for certain senior officers and beneficiaries due to enhanced benefits, early retirements and revisions in actuarial assumptions. Other operations include minor insurance operations in Taiwan and Canada. As of December 31, 1996, the Company was in the process of selling its Canadian operation. Additional expense charges were recognized in 1996 for estimated termination costs and fair value adjustments related to these operations. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS For information regarding Statements of Financial Accounting Standards (SFAS) adopted during 1996 and those to be adopted in 1997, see Note 1 of the Notes to the Consolidated Financial Statements. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET During the last two years, the financial condition of the Company has remained strong in the functional currencies of its operations. 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, 1996, was 116.10 yen to one U.S. dollar, 11.3% weaker than the December 31, 1995, exchange rate of 102.95. Management estimates that the weaker yen rate decreased invested assets, including cash, by $2.2 billion, total assets by $2.6 billion and total liabilities by $2.6 billion compared with the amounts that would have been reported using the previous year-end exchange rate. For additional information on exchange rates, see Note 2 of the Notes to the Consolidated Financial Statements. EXH 13-16 Invested Assets Fixed-maturity securities available for sale are carried at fair value. The following table shows an analysis of invested assets at December 31: (In thousands) 1996 1995 % Change ------------ ------------ -------- AFLAC U.S.: Total invested assets, at cost or amortized cost $ 1,910,154 $ 1,543,549 23.8% Unrealized gains on securities available for sale 101,258 128,697 ------------ ------------ Total invested assets $ 2,011,412 $ 1,672,246 20.3% ============ ============ ====== AFLAC Japan: Total invested assets, at cost or amortized cost $ 16,390,997 $ 15,924,083 2.9% Unrealized gains on securities available for sale 2,334,537 2,468,018 ------------ ------------ Total invested assets $ 18,725,534 $ 18,392,101 1.8% ============ ============ ====== Consolidated: Total invested assets, at cost or amortized cost $ 18,309,930 $ 17,447,551 4.9% Unrealized gains on securities available for sale 2,436,605 2,597,413 ------------ ------------ Total invested assets $ 20,746,535 $ 20,044,964 3.5% ============ ============ ====== The continued growth in invested assets reflects the strength of the Company's primary business, substantial cash flows from operations, strong new annualized premium sales and significant premium income growth in both AFLAC U.S. and AFLAC Japan. In addition, AFLAC U.S. received $94.5 million in cash in conjunction with the sale of a television station on December 31, 1996. Offsetting these positive factors was a decrease in unrealized investment gains due in part to the weaker yen/dollar exchange rate. Net unrealized gains of $2.4 billion on investments in fixed-maturity securities at December 31, 1996, consisted of $2.4 billion in gross unrealized gains and $27.7 million in gross unrealized losses. EXH 13-17 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 and utilizes a variety of credit rating services to monitor this criteria. Applying those various credit ratings to a standardized rating system based on a nationally recognized service's categories, the percentages of the Company's fixed-maturity securities available for sale, at amortized cost, as of December 31 were as follows: 1996 1995 ------ ------ AAA 46.2% 49.2% AA 19.6 22.2 A 26.0 24.6 BBB 8.2 4.0 ------ ------ 100.0% 100.0% ====== ====== Private placement investments accounted for 28.8% and 23.1% of the Company's total fixed-maturity securities available for sale as of December 31, 1996 and 1995, respectively. AFLAC Japan has made investments in the private sector to secure higher yields than those available from Japanese government bonds. 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 remained immaterial at both December 31, 1996 and 1995. Cash and short-term investments totaled $261.7 million as of December 31, 1996, or 1.3% of total invested assets, compared with $236.3 million, or 1.2% of total invested assets, at December 31, 1995. For additional information concerning investments and fair values, see Notes 3 and 4 of the Notes to the Consolidated Financial Statements. Policy Liabilities Policy liabilities increased $720.7 million, or 3.7%, during 1996. AFLAC Japan policy liabilities increased $536.0 million, or 3.0%, and AFLAC U.S. policy liabilities increased $177.0 million, or 11.6%. These increases were primarily due to the addition of new business, the aging of policies in force and the effect of the market value adjustment for securities available for sale (see Note 3 of the Notes to the Consolidated Financial Statements). The weaker yen decreased reported policy liabilities by $2.4 billion in 1996. During 1995, policy liabilities increased $3.4 billion, or 23.2%. The weaker yen in 1995 compared with 1994 decreased reported policy liabilities by $557.0 million. Debt The Company has a reducing, revolving credit agreement that currently provides for bank borrowings of up to $450 million in either U.S. dollars or equivalent Japanese yen. At December 31, 1996, borrowings of 33.0 billion yen ($284.2 million) were outstanding under this agreement. The Company has entered into interest rate swaps with notional amounts equal to the unpaid principal amount during the six-year term of the loan. These transactions effectively change the Company's interest rate exposure on this loan from variable rates to fixed interest rates. The fixed rate is 2.74% after the effect of the swaps. Interest payments are made based on variable interest EXH 13-18 rates, and the Company either pays to or receives from the counterparty an amount necessary to equal the fixed swap rate. At December 31, 1996, the floating rate, based on the three-month Tokyo Interbank Offered Rate (TIBOR) plus loan costs of 25 basis points, was .79%. In the second quarter of 1996, the Company converted another loan with outstanding principal of $29.3 million and a 5.965% fixed rate from dollar- denominated to yen-denominated amounts with a variable interest rate based on TIBOR plus loan costs of 25 basis points. At December 31, 1996, bank borrowings of 2.0 billion yen ($17.5 million) were outstanding under this agreement at a variable interest rate of .88%. Also at December 31, 1996, the Company had 1.1 billion yen ($9.9 million) of short-term borrowings outstanding under a line of credit at an interest rate of .76%. The Company has designated these yen-denominated borrowings as a hedge of its net investment in AFLAC Japan. Foreign currency translation gains/losses are included in the unrealized foreign currency translation gains component in shareholders' equity. Outstanding principal and related accrued interest payable on the yen-denominated borrowings are translated into dollars at end-of-period exchange rates. Interest expense is translated at average monthly exchange rates for the period the interest expense is incurred. The Company's ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized market gains on securities available for sale) was 16.1% and 16.5% as of December 31, 1996 and 1995, respectively. For further information concerning notes payable, see Note 7 of the Notes to the Consolidated Financial Statements. The following table provides information about the Company's debt obligations and related contracts that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. The instrument's actual cash flows are denominated in both U.S. dollars and Japanese yen. The table on the following page assumes a constant foreign currency exchange rate. EXH 13-19 DEBT OBLIGATIONS AND RELATED CONTRACTS Total Maturity Schedule at ------------------------------------------ Dec. 31, (In thousands) 1996 1997 1998 1999 2000 2001 ------- ------ ------ ------ ------ ------ Debt obligations: Payable in U.S. dollars: Fixed interest rate $ 16,467 $ 9,322 $ 7,145 Weighted-average interest rate 10.16% 10.23% 10.32% - ---------------------------------------------------------------------------- Payable in Japanese yen: Variable interest rate $ 27,303 $27,303 Weighted-average interest rate .83% 1.13% Variable interest rate with swap contracts $284,238 $56,848 $56,848 $56,848 $56,848 $56,846 Interest rate .78% 1.13% 1.96% 2.62% 3.45% 3.71% - ---------------------------------------------------------------------------- Weighted-average interest rate of all debt 1.26% 1.49% 2.08% 2.62% 3.45% 3.71% - ---------------------------------------------------------------------------- Interest rate swaps: Payable in Japanese yen: Notional amount $284,238 $56,848 $56,848 $56,848 $56,848 $56,846 Weighted-average pay fixed interest rate 2.74% 2.74% 2.74% 2.74% 2.74% 2.74% Weighted-average receive variable interest rate .78 1.13 1.96 2.62 3.45 3.71 There are no principal payments scheduled after 2001. ============================================================================ Security Lending AFLAC Japan uses short-term (usually seven days) security lending arrangements to increase investment income with minimal risk. This program increased AFLAC Japan's investment income by approximately $1.1 million in 1996 and $.9 million in 1995. For further information regarding such arrangements, see Note 4 of the Notes to the Consolidated Financial Statements. EXH 13-20 Policyholder Protection 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 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 Life Insurance Association of Japan, an industry organization, is currently implementing a policyholder protection fund. The purpose of the fund is to provide capital support to member companies for business assumed from insolvent life insurers. AFLAC Japan has pledged investment securities to the Life Insurance Association of Japan for this program. The Company retains ownership of the securities and receives the related investment income. The amount of securities pledged is based on premium income and policy reserves. As of December 31, 1996, $49.5 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund. Shareholders' Equity Shareholders' equity decreased $8.6 million from December 31, 1995, to December 31, 1996. This was primarily due to a decrease in net unrealized gains on securities available for sale of $202.6 million, net treasury stock purchases of $175.3 million and dividends paid of $54.2 million. Offsetting these decreases were net earnings of $394.4 million and an increase in unrealized foreign exchange gains of $16.5 million. 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 increasing risks of medical cost inflation. The achievement of continued long-term growth will require growth in AFLAC's statutory capital and surplus. AFLAC 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. The disposition of the AFLAC Broadcast Division will increase the Company's capital resources upon closing of the transaction. Management believes outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures and business expansion. Parent Company capital resources are largely dependent upon the ability of the subsidiaries to pay management fees and dividends. The Georgia Insurance Department imposes certain limitations and restrictions on EXH 13-21 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. Currently, prescribed or permitted statutory accounting principles (SAP) may vary between states and between companies. The NAIC is in the process of recodifying SAP to promote standardization throughout the industry. Completion of this project will result in changes in statutory accounting practices for the Company. The impact on the Company's statutory capital and surplus is not presently determinable. 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 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 $253.6 million in 1996, $179.5 million in 1995 and $167.9 million in 1994. During the last few years, the MOF has developed solvency standards, a version of risk-based capital requirements. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the Notes to the Consolidated Financial Statements. Other For information regarding pending litigation, see Note 12 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, weakened 13.5% in 1996 compared with 1995, strengthened 8.7% in 1995 compared with 1994, EXH 13-22 and strengthened 8.8% in 1994 compared with 1993. The average exchange rates for 1996, 1995 and 1994 were 108.84, 94.10 and 102.26, respectively. In years when the yen weakens, translating yen into dollars causes smaller increases or negative percentage changes for financial results in dollars. When the yen strengthens, translating yen into dollars causes larger increases for financial results in dollars. For additional information, reference should be made to the Consolidated Statements of Cash Flows on pages 13-30 and 13-31. Operating Activities In 1996, consolidated cash flow from operations decreased 8.4% to $2.7 billion, compared with $2.9 billion in 1995 and $2.4 billion in 1994. Net cash flow from operations for AFLAC Japan decreased 10.6% to $2.5 billion in 1996, compared with $2.7 billion in 1995 and $2.1 billion in 1994. AFLAC Japan represented 91% of the consolidated net cash flow from operations in 1996, 93% in 1995 and 90% in 1994. The decrease in cash flow from operations in 1996 was due to the weaker yen. Cash flow from operations in 1995 was favorably affected by an acceleration of remittances from premium collection agencies to AFLAC Japan in the amount of $121.5 million. This cash flow change did not affect premium income. Investing Activities Consolidated cash flow used by investing activities decreased 11.3% to $2.5 billion in 1996, compared with $2.9 billion in 1995 and $2.2 billion in 1994. The sale of one television station in 1996 generated $98.5 million in cash flow. AFLAC Japan accounted for 91% of the consolidated net cash used by investing activities in 1996, compared with 90% in 1995 and 89% in 1994. Included in AFLAC Japan's portion for 1994 were expenditures of $173.5 million for the final construction phase 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 ranged between 4% and 9% of the annual average investment portfolio of fixed-maturity securities for the three years ended December 31, 1996. Financing Activities In 1996, net cash used by financing activities was $157.9 million, compared with $93.4 million in 1995 and $130.4 million in 1994. Treasury stock purchases of $204.2 million in 1996 were funded by proceeds from new borrowings in the amount of $135.9 million and available cash. In 1995, treasury stock purchases of $224.2 million were funded by proceeds from new borrowings of $198.3 million and available cash. Treasury stock purchases of $131.7 million in 1994 were funded by proceeds from new borrowings in the amount of $84.0 million and available cash. The Company has sold treasury shares to the sales associate stock bonus plan and its dividend reinvestment plan. These dispositions have generated proceeds in the amounts of $34.5 million, $9.7 million and $2.8 million for the years 1996, 1995 and 1994, respectively. All cash dividends paid by the Parent Company were funded by EXH 13-23 dividends received from its subsidiaries. Cash dividends paid to shareholders amounted to $54.2 million in 1996, an increase of 10.7% over 1995. Cash dividends paid to shareholders in 1995 were $48.9 million, an increase of 8.9% over the 1994 cash dividends of $44.9 million. The 1996 cash dividend of $.387 per share increased 14.5% over 1995. The 1995 cash dividend of $.338 per share represented an increase of 13.4% over the 1994 cash dividend of $.298 per share. SAFE HARBOR PROVISIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information about their companies, so long as those 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. The Company desires 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 officers of the Company in oral discussions with analysts and contained in documents filed with the Securities and Exchange Commission (the 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 words generally qualify as forward-looking. The Company undertakes no obligation to update such forward-looking statements. The Company cautions that the following factors, in addition to other factors mentioned from time to time in the Company's reports filed with the SEC, could cause the Company's actual results to differ materially: regulatory developments, competitive conditions, new products, Japanese Ministry of Finance approval of profit repatriations to the United States, general economic conditions in the United States and Japan, changes in U.S. and/or Japan tax laws, adequacy of reserves, credit and other risks associated with the Company's investment portfolio, significant changes in interest rates and fluctuations in foreign currency exchange rates. EXH 13-24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, (In thousands, except for per 1996 1995 1994 share amounts) ---------- ---------- ---------- Revenues: Premiums, principally supplemental health insurance $5,910,036 $6,070,830 $5,180,732 Net investment income 1,021,955 1,024,960 838,825 Realized investment gains (losses) 1,980 (270) (58) Gain on sale of television station 60,264 - - Other income 105,968 95,100 91,259 --------- --------- --------- Total revenues 7,100,203 7,190,620 6,110,758 --------- --------- --------- Benefits and expenses: Benefits and claims 4,895,522 5,034,266 4,256,541 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 162,475 168,779 153,503 Insurance commissions 778,082 802,176 689,096 Insurance expenses 437,265 424,974 361,881 Interest expense 16,186 15,611 13,496 Capitalized interest on building construction - - (2,419) Other operating expenses 160,672 143,819 134,324 --------- --------- --------- Total acquisition and operating expenses 1,554,680 1,555,359 1,349,881 --------- --------- --------- Total benefits and expenses 6,450,202 6,589,625 5,606,422 --------- --------- --------- Earnings before income taxes 650,001 600,995 504,336 Income taxes: Current 239,682 233,662 146,472 Deferred 15,956 18,276 65,074 --------- --------- --------- Total income taxes 255,638 251,938 211,546 --------- --------- --------- Net earnings $ 394,363 $ 349,057 $ 292,790 ========= ========= ========= Net earnings per share $ 2.73 $ 2.33 $ 1.89 ========= ========= ========= Common shares used in computing earnings per share (In thousands) 144,512 149,540 154,652 ========= ========= ========= See the accompanying Notes to the Consolidated Financial Statements. EXH 13-25 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands) 1996 1995 ---------- ---------- ASSETS: Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost $17,941,200 in 1996 and $17,104,743 in 1995) $ 20,327,726 $ 19,675,006 Equity securities (cost $86,249 in 1996 and $80,912 in 1995) 136,328 108,062 Mortgage loans on real estate 17,802 22,213 Other long-term investments 2,999 3,343 Short-term investments 261,680 232,201 ----------- ----------- Total investments 20,746,535 20,040,825 Cash - 4,139 Receivables, primarily premiums 226,981 199,634 Accrued investment income 253,850 256,659 Deferred policy acquisition costs 2,582,946 2,565,027 Property and equipment, at cost less accumulated depreciation 471,907 552,061 Securities held as collateral for loaned securities 573,911 1,378,197 Intangible assets, at cost less accumulated amortization of $27,122 in 1996 and $37,263 in 1995 60,933 104,546 Other 105,749 115,421 ----------- ----------- Total assets $ 25,022,812 $ 25,216,509 =========== =========== (continued) EXH 13-26 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) December 31, (In thousands) 1996 1995 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 18,697,173 $ 18,000,296 Unpaid policy claims 1,039,257 1,016,295 Unearned premiums 288,976 301,452 Other policyholders' funds 208,799 195,461 ----------- ----------- Total policy liabilities 20,234,205 19,513,504 Notes payable 353,533 327,268 Income taxes, primarily deferred 1,181,121 1,397,709 Payables for return of collateral on loaned securities 573,911 1,378,197 Payables for security transactions 99,408 80,014 Other 455,065 385,676 Commitments and contingencies (Notes 11 and 12) ----------- ----------- Total liabilities 22,897,243 23,082,368 ----------- ----------- Shareholders' equity: Common stock of $.10 par value. Authorized 175,000; issued 157,239 shares in 1996 and 156,358 in 1995 15,724 15,636 Additional paid-in capital 208,994 196,928 Unrealized foreign currency translation gains 229,782 213,319 Unrealized gains on securities available for sale 280,154 482,787 Retained earnings 1,917,794 1,577,605 Treasury stock, at average cost (526,425) (351,117) Notes receivable for stock purchases (454) (1,017) ----------- ----------- Total shareholders' equity 2,125,569 2,134,141 ----------- ----------- Total liabilities and shareholders' equity $ 25,022,812 $ 25,216,509 =========== =========== See the accompanying Notes to the Consolidated Financial Statements. EXH 13-27 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, (In thousands) 1996 1995 1994 ---------- ---------- ---------- Common stock: Balance at beginning of year $ 15,636 $ 15,600 $ 15,556 Exercise of stock options 88 36 44 ---------- ---------- ---------- Balance at end of year 15,724 15,636 15,600 ---------- ---------- ---------- Additional paid-in capital: Balance at beginning of year 196,928 192,899 190,545 Exercise of stock options 6,461 3,199 2,119 Gain on treasury stock reissued 5,688 830 235 Cash in lieu of fractional shares (83) - - ---------- ---------- ---------- Balance at end of year 208,994 196,928 192,899 ---------- ---------- ---------- Unrealized foreign currency translation gains: Balance at beginning of year 213,319 174,091 123,294 Change in unrealized translation gains during year, net of income taxes 16,463 39,228 50,797 ---------- ---------- ---------- Balance at end of year 229,782 213,319 174,091 ---------- ---------- ---------- Unrealized gains on securities available for sale: Balance at beginning of year 482,787 228,844 14,811 Cumulative effect of accounting change, net of income taxes - - 461,478 Change in unrealized gains (losses) during year, net of income taxes (202,633) 253,943 (247,445) ---------- ---------- ---------- Balance at end of year 280,154 482,787 228,844 ---------- ---------- ---------- Retained earnings: Balance at beginning of year 1,577,605 1,277,487 1,029,625 Net earnings 394,363 349,057 292,790 Cash dividends ($.387 per share in 1996, $.338 in 1995 and $.298 in 1994) (54,174) (48,939) (44,928) ---------- ---------- ---------- Balance at end of year $ 1,917,794 $ 1,577,605 $ 1,277,487 ---------- ---------- ---------- (continued) EXH 13-28 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) Years Ended December 31, (In thousands) 1996 1995 1994 ---------- ---------- ---------- Treasury stock: Balance at beginning of year $ (351,117) $ (135,776) $ (6,568) Purchases of treasury stock (204,169) (224,204) (131,734) Cost of shares issued to sales associates stock bonus plan and dividend reinvestment plan 28,861 8,863 2,526 ---------- ---------- ---------- Balance at end of year (526,425) (351,117) (135,776) ---------- ---------- ---------- Notes receivable for stock purchases (454) (1,017) (1,378) ---------- ---------- ---------- Total shareholders' equity $ 2,125,569 $ 2,134,141 $ 1,751,767 ========== ========== ========== See the accompanying Notes to the Consolidated Financial Statements. EXH 13-29 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (In thousands) 1996 1995 1994 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 394,363 $ 349,057 $ 292,790 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 2,482,615 2,539,406 2,236,198 Deferred income taxes 15,956 18,276 65,074 Change in income taxes payable 14,915 79,785 (9,666) Increase in deferred policy acquisition costs (264,734) (248,522) (262,696) Change in receivables and advance premiums (32,083) 124,882 (44,984) Gain on sale of television station (60,264) - - Other, net 145,982 81,214 92,530 ---------- ---------- ---------- Net cash provided by operating activities 2,696,750 2,944,098 2,369,246 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 1,707,537 626,938 1,125,179 Fixed-maturity securities matured 560,305 506,043 353,422 Equity securities 17,057 42,247 42,208 Mortgage loans, net 3,970 2,775 35,395 Other long-term investments, net 344 1,695 - Short-term investments, net - 100,634 - Costs of investments acquired: Fixed-maturity securities (4,854,398) (4,082,021) (3,425,922) Equity securities (23,473) (44,459) (40,632) Other long-term investments, net - - (3,312) Short-term investments, net (41,130) - (147,849) Additions to property and equipment, net (9,183) (17,391) (185,395) Proceeds from sale of television station 98,500 - - ---------- ---------- ---------- Net cash used by investing activities $(2,540,471) $(2,863,539) $(2,246,906) ---------- ---------- ---------- (continued) EXH 13-30 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, (In thousands) 1996 1995 1994 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings $ 135,940 $ 198,291 $ 84,000 Principal payments under debt obligations (76,492) (31,442) (42,681) Dividends paid to shareholders (54,174) (48,939) (44,928) Purchases of treasury stock (204,169) (224,204) (131,734) Treasury stock reissued 34,549 9,693 2,761 Other, net 6,466 3,235 2,163 ---------- ---------- ---------- Net cash used by financing activities (157,880) (93,366) (130,419) ---------- ---------- ---------- Effect of exchange rate changes on cash (2,538) (697) 2,309 ---------- ---------- ---------- Net change in cash (4,139) (13,504) (5,770) Cash at beginning of year 4,139 17,643 23,413 ---------- ---------- ---------- Cash at end of year $ - $ 4,139 $ 17,643 ========== ========== ========== Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 14,286 $ 12,764 $ 13,742 Income taxes 223,851 154,011 154,826 Noncash financing activities included capital lease obligations incurred for computer equipment totaling $8,524 in 1996, $2,517 in 1995 and $18,210 in 1994. Noncash operating activities included future advertising credits received from the sale of a television station totaling $1.4 million at fair value in 1996. See the accompanying Notes to the Consolidated Financial Statements. EXH 13-31 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. 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 82%, 85% and 84% of the Company's total revenues for 1996, 1995 and 1994, respectively, and 88% and 90% of total assets at December 31, 1996 and 1995, respectively. 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. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. TRANSLATION OF FOREIGN CURRENCIES: Financial statement accounts maintained in foreign currencies, principally Japanese yen (the functional currency of AFLAC Japan), are translated into U.S. dollars as follows. Assets and liabilities denominated in foreign currencies are translated at end-of-period exchange rates. Realized gains and losses on securities transactions are translated at the spot rate on the trade dates of the transactions. Other 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. Such amounts were immaterial during the three-year period 1994 through 1996. 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 exchange rates. Currency translation adjustments are accumulated and reported as a separate component of shareholders' equity. Interest expense is translated at average monthly exchange rates for the period the borrowings are outstanding. EXH 13-32 INSURANCE REVENUE AND EXPENSE RECOGNITION: 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. 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: The Company classifies all fixed-maturity securities and equity securities as "available for sale." Such securities are reported 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 adjusted for accrual of discount or amortization of premium. The amortized cost of fixed-maturity securities purchased at a discount will equal the face or par value at maturity. Fixed-maturity securities purchased at a premium will have an amortized cost equal to face or par value at the earlier of a call date or 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. EXH 13-33 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, 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 $427.2 million in 1996, $413.5 million in 1995 and $416.2 million in 1994. Of the policy acquisition costs deferred, commissions represented 67.3% in 1996, 63.8% in 1995 and 66.6% in 1994. 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 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. DERIVATIVES: Interest rate swaps are accounted for using the accrual method. The difference between amounts paid and received under such agreements is reported in interest expense in the Consolidated Statements of Earnings. Changes in the fair value of the swap agreements are not recognized in the Consolidated Balance Sheets. 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. TREASURY SHARES: Shares purchased are recorded at cost as a reduction of shareholders' equity. The weighted-average purchase cost is used to determine the cost of treasury shares sold to the AFLAC Associate Stock Bonus Plan and the Company's dividend reinvestment plan. Any realized gains or losses on the disposition of treasury shares are recorded in additional paid-in capital. EXH 13-34 EARNINGS PER SHARE: Earnings per share are based on the weighted- average number of common shares outstanding during the periods, including the dilutive effect of shares issuable under the stock option plans. All share and per-share amounts have been adjusted to reflect the three-for-two stock split paid March 18, 1996. ACCOUNTING CHANGES ADOPTED: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. Long-lived assets and certain identifiable intangibles to be disposed of must be reported at the lower of carrying amount or fair value less related selling costs. The primary assets of the Company that are subject to SFAS No. 121 are investment real estate, and property and equipment used in the Company's daily operations. There was no material effect on the financial statements from the adoption of this new accounting standard. SFAS No. 123, Accounting for Stock-Based Compensation, is effective for 1996. This Statement provides a choice of accounting methods for employee stock compensation plans, including stock option plans. This accounting standard had no effect on earnings as the Company has elected to use the intrinsic value method. Under this method, compensation cost is recognized only for the excess, if any, of the market price of stock over the amount an employee must pay upon exercise to acquire the stock at the grant date. For further information regarding SFAS No. 123, see Note 9. 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 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 by the Company had no material effect. 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 had no effect on earnings. For further information, see Note 3. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: The Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in June 1996. This Statement was amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 125 establishes criteria for determining whether transfers of financial assets are sales or secured borrowings and must be applied prospectively to all applicable transactions occurring after December 31, 1996. SFAS No. 127 amended the EXH 13-35 effective date for those transactions concerning secured obligations and collateral, which must now be applied prospectively to all applicable transactions occurring after December 31, 1997. Earlier or retroactive application is not permitted. Beginning in 1998, as required by these standards, the Company will no longer recognize securities held as collateral as an asset, nor the related liability for return of such collateral, based on the Company's current security lending agreements (see Note 4). This change will have no affect on the Company's net earnings or shareholders' equity. RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to conform to the current year presentation. EXH 13-36 (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) 1996 1995 1994 --------- --------- --------- Total revenues: Insurance: Japan $5,848,751 $6,115,689 $5,127,418 U.S. 1,066,364 960,443 875,729 Realized investment gains (losses) 1,759 (270) 17 --------- --------- --------- Total U.S. and Japan insurance 6,916,874 7,075,862 6,003,164 Broadcast operations - U.S. 92,380 81,569 77,596 Gain on sale of television station 60,264 - - Corporate and other operations 69,611 74,392 67,334 Intercompany eliminations (38,926) (41,203) (37,336) --------- --------- --------- Total $7,100,203 $7,190,620 $6,110,758 ========= ========= ========= Earnings before income taxes: Insurance: Japan $ 532,798 $ 561,361 $ 471,364 U.S. 128,532 104,459 90,216 Realized investment gains (losses) 1,759 (270) 17 --------- --------- --------- Total U.S. and Japan insurance 663,089 665,550 561,597 Broadcast operations - U.S. 25,591 18,953 17,164 Gain on sale of television station 60,264 - - Corporate and other operations (86,399) (72,189) (64,552) Interest expense (noninsurance operations) (12,544) (11,319) (9,873) --------- --------- --------- Total $ 650,001 $ 600,995 $ 504,336 ========= ========= ========= EXH 13-37 (In thousands) 1996 1995 1994 --------- --------- --------- Depreciation and amortization expense: Insurance: Japan $ 26,405 $ 21,353 $ 16,072 U.S. 12,780 10,656 9,403 --------- --------- --------- Total U.S. and Japan insurance 39,185 32,009 25,475 Broadcast operations - U.S. 8,198 8,725 7,397 Corporate and other operations 2,354 2,547 3,162 --------- --------- --------- Total $ 49,737 $ 43,281 $ 36,034 ========= ========= ========= Advertising expense - insurance: Japan $ 13,580 19,883 9,417 U.S. 22,038 15,044 14,058 --------- --------- --------- Total $ 35,618 34,927 23,475 ========= ========= ========= Total expenditures for long-lived assets: Insurance: Japan $ 2,806 $ 2,009 $ 175,464 U.S. 9,093 12,150 11,663 ---------- ---------- ---------- Total U.S. and Japan insurance 11,899 14,159 187,127 Broadcast operations - U.S. 3,864 5,851 5,485 Corporate and other operations 2,730 1,200 1,548 ---------- ---------- ---------- Total $ 18,493 $ 21,210 $ 194,160 ========== ========== ========== Total assets at December 31 were as follows: (In thousands) 1996 1995 ---------- ---------- Total assets: Insurance: Japan $22,117,213 $22,715,138 U.S. 2,673,678 2,239,324 ---------- ---------- Total U.S. and Japan insurance 24,790,891 24,954,462 Broadcast operations - U.S. 115,709 159,627 Corporate and other operations 2,834,343 2,726,366 Intercompany eliminations (2,718,131) (2,623,946) ---------- ---------- Total $25,022,812 $25,216,509 ========== ========== EXH 13-38 During 1996, the Company entered into definitive agreements for the sale of the AFLAC Broadcast Division consisting of seven network-affiliated television stations. Cash sales proceeds, after applicable selling expenses, will approximate $449.2 million. Total sales proceeds also include future advertising credits over a five-year period with a fair value of $6.3 million. The Company will also receive cash for an adjustment of various current assets and liabilities. The pretax gain for the entire transaction is estimated to be $325 million. Finalization of the transaction is subject to approval by the Federal Communications Commission. The sale of one station (WAFB-TV in Baton Rouge, Louisiana) closed on December 31, 1996, with a pretax gain of $60.3 million and an after-tax gain of $48.2 million ($.33 per share). The operating results of WAFB-TV included in the consolidated financial statements were revenues of $18.6 million in 1996 and earnings before interest and income taxes of $7.8 million. Management expects the sale of the six remaining stations to be finalized during the first half of 1997. Net assets of AFLAC Japan totaled $1.7 billion at December 31, 1996, and $1.8 billion at December 31, 1995. U.S. dollar-denominated securities (including accrued investment income) are owned by AFLAC Japan. Such securities amounted to $1.4 billion and $1.3 billion at December 31, 1996, and December 31, 1995, 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 $311.5 million at December 31, 1996, and $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 $15.9 million and $284.4 million at December 31, 1996 and 1995, respectively. Such amounts consist of AFLAC Japan's net assets, less its dollar-denominated investments and the Parent Company's yen-denominated borrowings. The 1996 year-end yen-to-dollar exchange rate, which was used to convert balance sheet items to U.S. dollars, weakened 11.3% compared with 1995, while the 1995 year-end exchange rate weakened 3.0% compared with 1994, based on the yen/dollar rates of 116.10, 102.95 and 99.85 at December 31, 1996, 1995 and 1994, respectively. If the exchange rates had remained unchanged from the respective prior year-end rates, the Company's total assets would have been higher by approximately $2.6 billion in 1996 and approximately $664.6 million in 1995. Total liabilities would have been higher by approximately $2.6 billion in 1996 and approximately $648.5 million in 1995. The average yen/dollar exchange rate, which was used to convert revenues, expenses and cash flows, weakened 13.5% in 1996 compared with 1995, strengthened 8.7% in 1995 compared with 1994, and strengthened 8.8% in 1994 compared with 1993. The average exchange rates for 1996, 1995 and 1994 were 108.84, 94.10 and 102.26, respectively. The fluctuations decreased net earnings by approximately $42.7 million in 1996 compared with 1995, and increased net earnings by approximately $23.0 million in 1995 and $19.7 million in 1994, compared with the respective prior years. 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 $253.6 million in 1996, $179.5 million in EXH 13-39 1995 and $167.9 million in 1994. See Note 10 for information concerning restrictions on remittances from AFLAC Japan. 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, 1996, $126.3 million, or 55.7% of total receivables, were receivables for AFLAC Japan ($119.0 million at December 31, 1995). EXH 13-40 (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, 1996 -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Japan national government direct obligations $ 5,787.7 $ 1,201.6 $ 1.4 $ 6,987.9 Japan government guaranteed 310.2 40.5 - 350.7 Japan municipalities 618.3 78.8 - 697.1 Corporate obligations: Public utilities 2,501.2 366.0 - 2,867.2 Banks and other financial institutions 400.1 36.7 - 436.8 Foreign issuers: Euroyen 4,738.8 507.7 7.7 5,238.8 Samurai 194.3 22.4 - 216.7 Other foreign 43.1 .5 - 43.6 Other corporate 353.7 64.4 - 418.1 -------- -------- -------- -------- Total yen-denominated 14,947.4 2,318.6 9.1 17,256.9 -------- -------- -------- -------- U.S. dollar-denominated: U.S. government direct obligations 81.4 1.2 - 82.6 U.S. agencies (FNMA, etc.) 291.5 7.4 .7 298.2 U.S. mortgage-backed securities 235.8 3.3 2.4 236.7 Sovereign and Supranational 121.5 6.6 - 128.1 Corporate obligations: Public utilities 157.4 2.4 3.7 156.1 Asset-backed securities 148.8 5.2 - 154.0 Banks and other financial institutions 907.7 35.0 4.0 938.7 Other corporate 1,031.8 33.8 7.8 1,057.8 -------- -------- -------- -------- Total dollar-denominated 2,975.9 94.9 18.6 3,052.2 -------- -------- -------- -------- Other foreign securities 17.9 .8 - 18.7 -------- -------- -------- -------- Total fixed-maturity securities available for sale 17,941.2 2,414.3 27.7 20,327.8 Equity securities 86.2 52.6 2.5 136.3 -------- -------- -------- -------- Total securities available for sale $18,027.4 $ 2,466.9 $ 30.2 $20,464.1 ======== ======== ======== ======== EXH 13-41 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 Corporate obligations: Public utilities 2,882.9 408.4 .1 3,291.2 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 corporate 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 Banks and other financial institutions 794.8 70.0 .3 864.5 Other corporate 809.3 67.5 .4 876.4 -------- -------- ------- -------- 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 13-42 The amortized cost and fair values of investments in fixed-maturity securities available for sale at December 31, 1996, by contractual maturity are shown below. This table excludes fixed-maturity securities in the amount of $18.7 million, at fair value, held by minor foreign operations. (In millions) AFLAC Japan AFLAC U.S. -------------------- --------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 383.4 $ 396.2 $ 7.5 $ 7.7 Due after one year through five years 2,017.7 2,242.8 249.2 265.5 Due after five years through 10 years 2,878.1 3,318.1 278.8 292.9 Due after 10 years 10,883.4 12,538.9 989.2 1,010.3 U.S. mortgage-backed securities 95.4 97.2 140.6 139.4 --------- --------- --------- --------- Total fixed-maturity securities available for sale $16,258.0 $18,593.2 $ 1,665.3 $ 1,715.8 ========= ========= ========= ========= 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, 1996, the average duration of the yen- denominated policy liabilities was approximately 13 years, unchanged from 1995. The average duration of the yen-denominated invested assets was approximately nine years at both December 31, 1996 and 1995. The weighted- average period to maturity of fixed-maturity securities of AFLAC Japan at December 31, 1996, was 12.2 years, compared with 11.3 years at December 31, 1995. 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 13-43 Realized and unrealized gains and losses from investments for the years ended December 31 were as follows: (In thousands) 1996 1995 1994 ---------- ---------- ---------- Realized gains (losses) on sale or redemption of investments: Fixed-maturity securities: Gross gains from sales $ 20,994 $ 7,561 $ 19,054 Gross losses from sales (17,508) (16,293) (24,761) Net gains from redemptions 112 924 2,416 ---------- ---------- ---------- 3,598 (7,808) (3,291) Equity securities: Gross gains from sales 2,529 9,471 5,346 Gross losses from sales (1,339) (1,662) (1,587) Other long-term assets, net (2,808) (271) (526) ---------- ---------- ---------- Net realized gains (losses) $ 1,980 $ (270) $ (58) ========== ========== ========== Changes in unrealized gains (losses): Fixed-maturity securities $ (183,737) $ 1,749,389 $(1,030,290) Equity securities 22,929 14,362 (1,585) ---------- ---------- ---------- Net unrealized gains (losses) $ (160,808) $ 1,763,751 $(1,031,875) ========== ========== ========== The Company classifies all fixed-maturity securities as available for sale. All fixed-maturity and equity securities are carried at fair value. The related unrealized gains and losses, less amounts applicable to policy liabilities and deferred income taxes, are reported in a separate component of shareholders' equity. The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of the shareholders if such gains were actually realized. These amounts are necessary to cover policy reserve interest requirements based on market investment yields at these dates. The net effect of unrealized gains and losses from securities available for sale on shareholders' equity at December 31 was: (In thousands) 1996 1995 ------------ ------------ Securities available for sale - unrealized gains $ 2,436,605 $ 2,597,413 Less: Policy liabilities 2,023,107 1,865,077 Deferred income taxes 133,344 249,549 ------------ ------------ Shareholders' equity, net unrealized gains on securities available for sale $ 280,154 $ 482,787 ============ ============ EXH 13-44 The following fixed-maturity securities individually exceeded 10% of shareholders' equity at December 31: 1996 1995 ------------------- ------------------- Amortized Fair Amortized Fair (In millions) Cost Value Cost Value ------------------- ------------------- Japan National Government $5,787.7 $6,987.9 $5,504.9 $6,743.4 Tokyo Electric Power Company, Ltd. 850.3 974.1 976.8 1,111.4 Chubu Electric Power 552.8 621.9 614.1 694.0 Province De Quebec 299.5 323.3 277.7 299.4 Tohoku Electric Power 223.7 254.7 251.9 286.2 ASLK-CGER IFICO 215.3 224.3 * * BIL Asia Group 215.3 221.5 * * Generale Bank N.V. 215.3 219.4 242.8 239.5 Abbey National PLC 215.3 249.5 * * Societe Generale 214.6 236.5 * * Tokyo Metropolitan Government 211.5 237.5 324.9 356.2 Kyushu Electric Power Company, Ltd. 211.3 245.6 250.5 289.5 Kansai Electric Power Company, Ltd. * * 224.2 259.0 Chugoku Electric Power * * 211.2 238.1 Goldman Sachs Group * * 208.9 241.3 Finance Corp. of Local Enterprise * * 208.7 233.4 *Less than 10% The Company's investments in Japanese government bonds (at amortized cost) constituted 34.0% and 35.1% of total fixed-maturity securities available for sale at December 31, 1996 and 1995, respectively. The components of net investment income for the years ended December 31 were as follows: (In thousands) 1996 1995 1994 --------- --------- --------- Fixed-maturity securities $1,026,611 $1,030,224 $ 841,917 Equity securities 1,705 1,466 1,255 Mortgage loans on real estate 1,693 1,893 3,193 Other long-term investments 93 130 146 Short-term investments 9,543 13,472 11,668 --------- --------- --------- Gross investment income 1,039,645 1,047,185 858,179 Less investment expenses 17,690 22,225 19,354 --------- --------- --------- Net investment income $1,021,955 $1,024,960 $ 838,825 ========= ========= ========= The Life Insurance Association of Japan, an industry organization, is currently implementing a policyholder protection fund. The purpose of the fund is to provide capital support to member companies for business assumed EXH 13-45 from insolvent life insurers. AFLAC Japan has pledged investment securities to the Life Insurance Association of Japan for this program. The Company retains ownership of the securities and receives the related investment income. The amount of securities pledged is based on premium income and policy reserves. As of December 31, 1996, $49.5 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund. At December 31, 1996, fixed-maturity securities with a market value of $4.4 million were on deposit with regulatory authorities in the United States. Also, fixed-maturity securities with a market value of $9.7 million were on deposit with the Central Bank of China, R.O.C., as required by the Ministry of Finance in Taiwan. (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 on the following page. 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 discounted cash flow analyses 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, 1996, 72.7% of mortgage loans were commercial and 27.3% were residential (at December 31, 1995, 74.5% and 25.5%, 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, 1996 and 1995, the Company held Japanese government bonds as collateral for loaned securities. 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. (Beginning in 1998, such collateral assets and the related liability will no longer be included on the balance sheet under the new accounting provisions of SFAS No. 125 and SFAS No. 127. Note 1.) 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. 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. EXH 13-46 The Company has outstanding interest rate swaps on certain of its variable interest rate yen-denominated borrowings (Note 7). These swaps reduce the impact of changes in interest rates on the Company's borrowing costs and effectively change a portion of the Company's interest rate exposure from variable interest rates to fixed interest rates. The interest rate swaps have notional principal amounts that equal the unpaid principal amount during the remaining five-year term of the loan (33.0 billion yen or $284.2 million at December 31, 1996). Under these agreements, the Company makes fixed-rate payments at 2.74% and receives floating-rate payments in return (.78% at December 31, 1996, and .81% at December 31, 1995) based on the three-month Tokyo 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 nonperformance by counterparts to these interest rate swap agreements. The counterparts are credit-worthy financial institutions. The carrying values and estimated fair values of the Company's financial instruments as of December 31 were as follows: 1996 1995 ------------------------ ----------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ------------------------ ----------------------- Assets: Fixed-maturity securities $20,327,726 $20,327,726 $19,675,006 $19,675,006 Equity securities 136,328 136,328 108,062 108,062 Mortgage loans 17,802 21,151 22,213 26,151 Policy loans 1,273 1,273 1,230 1,230 Short-term investments 261,680 261,680 232,201 232,201 Securities held as collateral for loaned securities 573,911 573,911 1,378,197 1,378,197 Liabilities: Notes payable (excluding capitalized leases) 328,141 328,825 297,103 298,522 Derivatives - interest rate swaps - 8,802 - 4,876 Payables for return of collateral on loaned securities 573,911 573,911 1,378,197 1,378,197 EXH 13-47 (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: (In thousands) 1996 1995 -------- -------- Land $124,264 $138,765 Buildings 327,757 360,949 Equipment 188,272 190,833 ------- ------- 640,293 690,547 Less accumulated depreciation 168,386 138,486 ------- ------- Net property and equipment $471,907 $552,061 ======= ======= (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 1996 1995 Issue Years ------ -------- -------- -------- --------- Health insurance: Foreign: 1995-96 $ 152.5 $ 17.4 4.0% 4.0% 1994-95 1,025.8 429.3 4.5 4.5 1990-95 7,457.7 7,399.9 5.5 5.5 1988-93 1,103.5 1,132.8 5.25 5.25 1987-88 1,203.9 1,269.6 5.5 5.5 1985-87 189.5 211.1 5.65 5.65 1985-86 936.5 999.5 6.75 5.5 1978-84 2,565.8 2,795.7 6.5 5.0 1974-79 597.0 603.1 7.0 5.0 Other 46.3 35.9 U.S.: 1988-96 481.5 368.4 8.0 6.0 1986-96 440.0 390.9 6.0 6.0 1985-86 25.4 24.8 6.5 6.5 1981-86 264.4 267.0 7.0 5.5 Other 157.4 164.6 Life insurance 1956-96 26.9 25.2 4.0-6.75 5.5 Adjustment for market value of securities (Note 3) 2,023.1 1,865.1 -------- -------- Total $18,697.2 $18,000.3 ======== ======== EXH 13-48 The weighted-average interest rates reflected in the statements of earnings for health insurance future policy benefits for Japan policies were 5.5% in 1996, 5.6% in 1995 and 5.7% in 1994, and for U.S. policies, 6.4% in 1996 and 6.3% in both 1995 and 1994. Changes in the liability for unpaid policy claims are summarized as follows for the years ended December 31: (In thousands) 1996 1995 1994 --------- --------- --------- Unpaid supplemental health claims - beginning of year $1,014,736 $ 916,139 $ 699,395 --------- --------- --------- Add claims incurred during the year related to: Current year 2,378,211 2,411,025 1,986,125 Prior years (158,418) (130,882) (63,552) --------- --------- --------- Total incurred 2,219,793 2,280,143 1,922,573 --------- --------- --------- Less claims paid during the year: On claims incurred during current year 1,478,673 1,503,922 1,241,882 On claims incurred during prior years 618,340 632,267 533,502 --------- --------- --------- Total paid 2,097,013 2,136,189 1,775,384 --------- --------- --------- Effect of foreign exchange rate changes on unpaid claims (107,808) (45,357) 69,555 --------- --------- --------- Unpaid supplemental health claims - end of year 1,029,708 1,014,736 916,139 Unpaid claims for life and other business 9,549 1,559 13,211 --------- --------- --------- Total liability for unpaid policy claims $1,039,257 $1,016,295 $ 929,350 ========= ========= ========= EXH 13-49 (7) NOTES PAYABLE A summary of notes payable at December 31 follows: (In thousands) 1996 1995 --------- --------- 2.74% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually through July 2001 $ 284,238 $ 230,695 Unsecured, yen-denominated notes payable to banks, due semiannually, through October 1997, variable interest rate (.88% at December 31, 1996) 17,453 - 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through 1998 15,389 23,833 Obligations under capitalized leases, due monthly through 2001, secured by computer equipment in Japan 25,392 30,165 5.965% unsecured notes payable to banks, refinanced in 1996 - 39,167 Short-term yen-denominated note payable to bank under unsecured line of credit, variable interest rate (.76% at December 31, 1996) 9,850 - Other 1,211 3,408 -------- -------- Total notes payable $ 353,533 $ 327,268 ======== ======== The 5.965% fixed rate notes payable that were outstanding at December 31, 1995, were converted in April 1996 from dollar-denominated to yen- denominated amounts with a variable interest rate based on the Tokyo Interbank Offered Rate plus loan costs of 25 basis points. At December 31, 1996, bank borrowings of 2.0 billion yen ($17.5 million) were outstanding under this agreement. Interest rate swaps related to the 2.74% (fixed rate after swaps) loan are described in Note 4. The aggregate maturities of notes payable during each of the five years after December 31, 1996, are: 1997, $104.5 million; 1998, $72.0 million; 1999, $60.9 million; 2000, $58.8 million; and 2001, $57.2 million. 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, 1996. EXH 13-50 (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) 1996 1995 ---------- ---------- Deferred income tax liabilities: Deferred acquisition costs $ 972,678 $ 982,239 Unrealized gains on securities available for sale 949,978 1,103,153 Premiums receivable 73,353 122,974 --------- --------- Total deferred income tax liabilities 1,996,009 2,208,366 --------- --------- Deferred income tax assets: Difference in tax basis of investment in Japan branch 2,354 87,096 Foreign tax credit carryforwards 116,607 122,203 Policy benefit reserves 720,755 729,638 Unfunded retirement benefits 63,292 53,334 Other accrued expenses 66,824 62,933 Other 187,975 94,060 --------- --------- Total gross deferred tax assets 1,157,807 1,149,264 Less valuation allowance 162,903 151,398 --------- --------- Total deferred income tax assets 994,904 997,866 --------- --------- Deferred income tax liability 1,001,105 1,210,500 Current income tax liability 180,016 187,209 --------- --------- Total income tax liability $1,181,121 $1,397,709 ========= ========= 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 and noninsurance loss carryforwards that exceed projected future offsets. Only 35% of noninsurance losses can be offset against life insurance taxable income each year. During 1996, the valuation allowance for deferred tax assets increased by $11.5 million ($59.8 million in 1995) due to changes in carryforwards of foreign tax credits and noninsurance losses. Foreign tax credit carryforwards available at December 31, 1996, expire as follows: $25.9 million in 1997, $33.6 million in 1998, $16.5 million in 1999 and $40.6 million in 2000. EXH 13-51 The components of income tax expense applicable to pretax earnings for the years ended December 31 were as follows: (In thousands) Japan U.S. Total ----------- --------- ----------- Income tax expense (benefit): 1996: Current $ 206,716 $ 32,966 $ 239,682 Deferred 14,153 1,803 15,956 ---------- -------- ---------- Total $ 220,869 $ 34,769 $ 255,638 ========== ======== ========== 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 ========== ======== ========== 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. The principal reasons for the differences and the related tax effects for the years ended December 31 are summarized as follows: (In thousands) 1996 1995 1994 --------- --------- --------- Income taxes based on U.S. statutory rates $ 227,500 $ 210,348 $ 176,518 U.S. alternative minimum tax 26,333 12,558 10,712 Unrecognized foreign tax credits (11,331) 11,992 12,473 Noninsurance losses generating no current tax benefit 12,344 7,010 5,561 Other, net 792 10,030 6,282 -------- -------- -------- Income tax expense $ 255,638 $ 251,938 $ 211,546 ======== ======== ======== Most of the Company's income tax expense represents Japanese income taxes on AFLAC Japan operating results calculated at Japan's corporate tax rate of 45.3%. EXH 13-52 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) 1996 1995 1994 -------- -------- -------- Statements of earnings $255,638 251,938 211,546 Shareholders' equity: Unrealized gains and losses on securities available for sale (116,205) (39,670) 289,658 Unrealized foreign currency translation gains - (2,177) (1,980) ------- ------- ------- Total income taxes $139,433 $210,091 $499,224 ======= ======= ======= Realized investment losses incurred by AFLAC Japan are generally deductible for Japan income tax purposes. Accordingly, the income tax effects recognized 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 and the income tax returns for the years ended December 31, is summarized as follows: (In thousands) 1996 1995 1994 --------- --------- -------- Recognition of deferred policy acquisition costs $ 30,551 $ 22,753 $ 71,701 Adjustments to liability for future policy benefits (8,678) (5,605) (11,417) Noninsurance losses generating no tax benefit 4,800 2,130 8,377 Unfunded retirement benefits (5,003) (3,351) (3,627) Other, net (5,714) 2,349 40 ------- ------- ------- Deferred income tax expense $ 15,956 $ 18,276 $ 65,074 ======= ======= ======= In 1994, the Internal Revenue Service (IRS) proposed adjustments to the Company's U.S. consolidated federal income tax returns for the years 1989 through 1991. The primary proposed adjustment related to the computation of foreign-source income for purposes of utilizing foreign tax credits. These issues were settled during 1996 with no material adjustments to the income tax returns as originally filed. The IRS is currently examining the Company's U.S. consolidated income tax returns for the years 1992 through 1994. EXH 13-53 (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) 1996 1995 1994 -------- -------- -------- Common stock - number of shares: Issued: Balance at beginning of year 156,358 155,999 155,565 Exercise of stock options 881 359 434 -------- -------- -------- Balance at end of year 157,239 156,358 155,999 -------- -------- -------- Treasury stock - number of shares: Balance at beginning of year 14,384 6,544 358 Purchases of treasury stock 6,095 8,223 6,309 Shares issued to sales associates stock bonus plan and dividend reinvestment plan (925) (311) (123) Exercise of stock options (200) (72) - -------- -------- -------- Balance at end of year 19,354 14,384 6,544 -------- -------- -------- Shares outstanding at end of year 137,885 141,974 149,455 ======== ======== ======== STOCK SPLIT: The Company paid a three-for-two stock split on March 18, 1996. Share and per-share amounts have been adjusted to reflect this split. SHARE REPURCHASE PROGRAM: During 1996, the Company's board of directors authorized the purchase of up to an additional 7.0 million shares of the Company's common stock. In total, the board of directors has authorized the purchase of up to 28.4 million shares since the inception of the repurchase program in February 1994. The Company purchased 5.9 million shares during 1996, 8.2 million shares during 1995 and 6.3 million shares during 1994 under this share repurchase program. The differences in percentage increases in net earnings and net earnings per share primarily reflect the impact of the share repurchase program. STOCK OPTIONS: The Company adopted SFAS No. 123, Accounting for Stock- Based Compensation, on January 1, 1996. This statement provides a choice of accounting methods 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 intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25). Companies electing to remain with the method prescribed by APB No. 25 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 has elected to continue to account for employee stock options using the method prescribed by APB No. 25 and include the required disclosures. EXH 13-54 The Company's stock option plan allows grants for both incentive stock options (ISO) and non-qualifying stock options (NQSO) to employees and NQSO to members of the board of directors. The option period runs for 10 years unless provided for otherwise in the individual option agreement. The option price for an ISO must be equal to 100% of the fair market value at the date of grant and at least 50% of the fair market value for a NQSO. The options are exercisable immediately unless they are placed under a vesting schedule which is determined by the compensation committee. No compensation expense is recognized by the Company for ISO grants. For NQSO, the Company incurs a compensation expense for the difference between the grant price and market value at date of grant for all discounted NQSO. No discounted options were granted during the three-year period ending December 31, 1996. In August 1995, the board of directors made an additional 1,042,500 shares 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 of non-qualified stock options to be granted to managers of AFLAC Japan. At December 31, 1996, shares available for future grants amounted to 6,045. The following table summarizes stock option activity: Option Weighted-Average Shares Exercise Price --------- ---------------- Outstanding at January 1, 1994 4,586,410 $ 8.04 Granted 4,108,523 19.01 Expired (938) - Canceled (114,001) 18.41 Exercised (431,630) 5.95 ---------- Outstanding at December 31, 1994 8,148,364 13.53 Granted 549,377 28.08 Canceled (25,313) 18.65 Exercised (470,047) 11.32 --------- Outstanding at December 31, 1995 8,202,381 14.62 Granted 1,830,085 32.79 Canceled (61,976) 24.96 Exercised (1,166,419) 10.56 --------- Outstanding at December 31, 1996 8,804,071 $18.86 ========= 1996 1995 1994 --------- --------- --------- Shares exercisable at end of year 6,776,583 7,676,624 6,631,838 ========= ========= ========= Weighted-average fair value per share of shares granted during the year $ 32.79 $ 28.08 $ 19.01 ========= ========= ========= EXH 13-55 The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable ----------------------------------- ---------------------- Wgtd. Avg. Remaining Wgtd. Avg. Wgtd. Avg. Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ------------ ---------- ----------- ---------- $ 3.57 - $ 7.13 760,630 3.01 $ 4.52 760,630 $ 4.52 7.33 - 8.00 1,083,804 3.17 7.93 1,083,804 7.93 8.07 - 16.13 1,089,823 4.07 11.57 1,089,823 11.57 18.83 3,182,380 6.49 18.83 3,182,380 18.83 19.20 - 28.21 886,074 7.94 25.24 659,946 24.72 31.67 1,371,610 9.12 31.67 - - 33.94 - 42.94 429,750 9.69 36.47 - - --------- --------- $ 3.57 - $42.94 8,804,071 6.19 $ 18.86 6,776,583 $ 14.89 ========= ========= Had compensation cost for the Company's stock options granted in 1996 and 1995 been determined using the fair-value-based method as described in SFAS No. 123, the Company's net earnings and earnings per share would approximate the pro forma amounts indicated below: (In thousands, except for 1996 1995 per-share amounts) --------- --------- Net earnings: As reported $ 394,363 $ 349,057 Effect of stock options (8,479) (1,786) --------- --------- Pro forma net earnings $ 385,884 $ 347,271 ========= ========= Earnings per share: As reported $ 2.73 $ 2.33 Effect of stock options (.06) (.01) --------- --------- Pro forma net earnings per share $ 2.67 $ 2.32 ========= ========= The fair value of each option granted during 1996 and 1995 was estimated on the date of grant using the Black-Scholes multiple option approach with the following assumptions: dividend yield of 1.0% for both 1996 and 1995, expected volatility of 19% for 1996 and 21% for 1995, risk- free interest rate of 7.0% for 1996 and 6.5% for 1995, and expected life from the vesting dates ranging from 3.65 years to 6.10 years for 1996 and 2.52 years to 7.10 years for 1995. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. The provisions of SFAS No. 123 are applicable prospectively and the above pro forma disclosures therefore do not include amortization of the fair value of awards prior to 1995. Also, the Company expects to grant additional awards in future years. EXH 13-56 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. (10) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS Net assets of the insurance subsidiaries aggregated $2.6 billion at December 31, 1996, on a generally accepted accounting principles basis. AFLAC Japan accounted for $1.7 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 $256.6 million in 1996, $194.3 million in 1995 and $252.5 million in 1994, and capital and surplus was $1.4 billion and $1.2 billion at December 31, 1996 and 1995, 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 were as follows: (In thousands) 1996 1995 ----------- ----------- Net assets on generally accepted accounting principles basis $ 2,644,408 $ 2,536,112 Adjustment of fixed-maturity securities from fair value to amortized cost (2,385,328) (2,568,498) Elimination of deferred policy acquisition costs (2,580,682) (2,563,759) Adjustment to liability for future policy benefits 3,006,909 2,892,499 Adjustment to income tax liability 1,030,111 1,236,452 Reduction in premiums receivable (83,946) (65,107) Establishment of asset valuation reserve (188,131) (185,180) Elimination of statutory non-admitted assets (73,321) (63,098) Difference in foreign currency translation (477) (51,423) Other, net 35,977 78,398 ----------- ----------- Net assets on U.S. statutory accounting basis $ 1,405,520 $ 1,246,396 =========== =========== The Parent Company depends on its subsidiaries for cash flow, primarily in the form of dividends and management fees. Consolidated retained earnings in the accompanying financial statements largely represent undistributed earnings of the insurance subsidiaries. Dividends, management fees (see Note 2) and other payments to the Parent Company by its insurance subsidiaries are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. The maximum amount of dividends that can be paid by insurance companies domiciled in the State of Georgia to shareholders without prior approval of EXH 13-57 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 1997 in excess of $259.6 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 $217.3 million in 1996, $140.5 million in 1995 and $132.9 million in 1994. Management expects to continue to obtain approvals from Japanese regulatory authorities for annual profit transfers. Net assets (unaudited) of AFLAC Japan, based on Japanese statutory accounting practices, aggregated $466.9 million and $412.8 million at December 31, 1996 and 1995, respectively. Japanese statutory accounting practices differ in many respects from U.S. generally accepted accounting principles. Under Japanese 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 carried at cost less certain market value adjustments. (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 13-58 The components of retirement expense and significant actuarial assumptions for the years ended December 31 are shown below. 1996 1995 1994 -------------- -------------- -------------- (In thousands) Japan U.S. Japan U.S. Japan U.S. ------ ------ ------ ------ ------ ------ Basic employee plans: Service cost for benefits earned during the year $2,169 $ 2,591 $2,610 $ 1,880 $2,269 $ 2,166 Interest cost on projected benefit obligations 1,031 3,142 1,148 2,686 999 2,569 Less actual investment return on plan assets (1,117) (4,429) (518) (6,344) (1,135) 28 Net amortization and deferral 702 1,861 696 4,370 278 (1,530) ----- ----- ----- ----- ----- ----- Total retirement expense for basic employee plans 2,785 3,165 3,936 2,592 2,411 3,233 Officers, retirees and beneficiaries unfunded supplemental plans 1,369 35,806 1,395 35,634 1,203 33,468 ----- ------ ----- ------ ----- ------ Total retirement expense $4,154 $38,971 $5,331 $38,226 $3,614 $36,701 ===== ====== ===== ====== ===== ====== Significant actuarial assumptions: Discount rate for: Net periodic pension costs 4.0% 7.0% 4.0% 8.0% 4.4% 7.0% Benefit obligations 4.0-5.5 7.0 4.0 7.0 4.0 8.0 Projected increase in salary levels 3.5 5.0 3.5 5.0 4.5 5.0 Expected long-term return on plan assets 2.5 9.0 4.5 9.0 5.5 9.0 EXH 13-59 Reconciliations of the funded status of the basic employee plans with amounts recognized in the accompanying consolidated balance sheets as of December 31 were as follows: 1996 1995 ---------------- ---------------- (In thousands) Japan U.S. Japan U.S. ------- ------- ------- ------- Plan assets, at fair value (primarily bonds, stocks and insurance contracts) $18,445 $37,574 $18,769 $31,557 ------ ------ ------ ------ Actuarial present value of benefit obligations: Accumulated benefit obligations, based on employee service to date and present salary levels: Vested benefits 15,768 32,557 16,677 28,373 Non-vested benefits 94 1,167 128 1,455 Effect of assumed future salary increases 8,789 13,945 10,187 12,696 ------ ------ ------ ------ Projected benefit obligations 24,651 47,669 26,992 42,524 ------ ------ ------ ------ Projected benefit obligations in excess of plan assets (6,206) (10,095) (8,223) (10,967) Unamortized net losses (gains) from plan experience variations and changes in actuarial assumptions (170) 9,731 1,029 11,486 Unrecognized prior service cost (credit) 1,119 (222) 1,347 (249) Unamortized net transition (gain) loss 673 (1,083) 857 (1,205) ------ ------ ------ ------ Prepaid retirement cost (liability) recognized in consolidated balance sheets $(4,584) $(1,669) $(4,990) $ (935) ====== ====== ====== ====== In addition to the funded benefit obligations for basic employee plans, the accrued retirement liability for unfunded supplemental retirement plans for various officers and beneficiaries at December 31, 1996 and 1995, was $165.7 million and $134.6 million, respectively. The actuarial present value of projected benefit obligations for these plans was $170.2 million and $161.2 million at December 31, 1996 and 1995, respectively. The discount rates used were 4.0% in both 1996 and 1995 for AFLAC Japan, and 7.0% for AFLAC U.S. for both 1996 and 1995. Such supplemental retirement plans include a lifetime obligation to the surviving spouse of the Company's former chairman of the board. Benefits are payable at .5% of the Company's "net earnings" for the previous year as defined in the agreement. 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 as of December 31, 1996 and 1995, was $9.4 million and $8.9 million, respectively, based on an assumed discount rate of 7.0% for both years. EXH 13-60 Net postretirement benefit cost for the years ended December 31 included the following components: (In thousands) 1996 1995 1994 ------ ------ ------ Service cost $ 296 $ 229 $ 251 Interest cost 630 536 743 Amortization of unrecognized gains (41) (207) - ----- ----- ----- Postretirement benefit cost $ 885 $ 558 $ 994 ===== ===== ===== Actuarial assumptions used were: Discount rate - periodic cost 7% 8% 7% Projected health care cost trend rate 12% 13% 14% Ultimate trend rate 7% 7% 7% Effect of a 1% point increase in the health care cost trend rate on the: Postretirement benefit obligation $ 466 $ 675 $ 487 Aggregate of service and interest cost $ 86 $ 89 $ 94 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 $8.9 million in 1996, $8.0 million in 1995 and $6.9 million in 1994. (12) COMMITMENTS AND CONTINGENCIES 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. Under the terms of an agreement entered into in 1991, the Company is committed to purchase the leased land, at fair value, upon the demand of the owner. As of December 31, 1996, the fair value of the leased land was estimated to be 2.1 billion yen ($18.4 million). EXH 13-61 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 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 13-62 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 29, 1997 EXH 13-63 Unaudited Consolidated Quarterly Financial Data (In thousands, except per-share amounts)
- ----------------------------------------------------------------------------------------------------------------------------- Three Months ended, March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------------------- 1996 Amount % Change Amount % Change Amount % Change Amount % Change - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $ 1,729,920 .9% $ 1,741,657 (9.9)% $ 1,775,579 (2.0)% $ 1,853,047 7.0% Net earnings 86,523 1.9 85,747 (7.7) 88,345 .4 133,748 60.5 - ------------------------------------------------------------------------------------------------------------------------------ Per common share: Net earnings $ .59 5.4 $ .59 (3.3) $ .62 3.3 $ .93 63.2 Cash dividends $ .087 $ .10 $ .10 $ .10 - ----------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------- EXH 13-64
EX-21 3 SUBSIDIARIES EXHIBIT 21 EXH 21.0 AFLAC INCORPORATED SUBSIDIARIES The following list sets forth the subsidiaries of the Company: Company Jurisdiction ------- ------------ AFLAC Broadcast Partners ("ABP") Georgia AFLAC International, Inc. ("AI") Georgia 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 WITN-TV, Inc. ("WITN") North Carolina 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. EXH 21.0-1 EX-23 4 KPMG 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 Registration Statement Nos. 33-41926, 33-64535 and 333-16533 on Form S-3, and 33-41552, 33-44720, 33-53737 and 333-01243 on Form S-8 of AFLAC Incorporated of our report dated January 29, 1997, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the 1996 annual report to shareholders and is incorporated by reference in the December 31, 1996, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1997 EXH 23.0-1 EX-27 5 1996 FDS
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, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 20,327,726 0 0 136,328 17,802 0 20,746,535 0 0 2,582,946 25,022,812 19,736,430 288,976 0 208,799 353,533 0 0 15,724 2,109,845 25,022,812 5,910,036 1,021,955 1,980 166,232 4,895,522 162,475 1,392,205 650,001 255,638 394,363 0 0 0 394,363 2.73 0 0 0 0 0 0 0 0 Includes $60.3 million gain from the sale of a television station on December 31, 1996.
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