-----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, WqZ9SUUDSddHHDXDYw1R70+g2i3EuqQNhcRsTobRQ0k8eshdSNrjLd8thXHZKbiH 2/xsOxKTUYYNlAidbJkB9w== 0000004977-97-000017.txt : 19970811 0000004977-97-000017.hdr.sgml : 19970811 ACCESSION NUMBER: 0000004977-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970808 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07434 FILM NUMBER: 97653912 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-Q 1 2ND QUARTER FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarter ended June 30, 1997 Commission File No. 1-7434 AFLAC INCORPORATED ------------------------------------------------------ (Exact name of Registrant as specified in its charter) GEORGIA 58-1167100 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code (706) 323-3431 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class July 31, 1997 ---------------------------- ------------------ Common Stock, $.10 Par Value 136,955,752 shares AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1997 and December 31, 1996.................... 1 Consolidated Statements of Earnings - Three Months Ended June 30, 1997 and 1996 Six Months Ended June 30, 1997 and 1996................. 3 Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 1997 and 1996................. 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996................. 5 Notes to Consolidated Financial Statements................ 7 Review by Independent Certified Public Accountants............................................. 13 Independent Auditors' Report.............................. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 15 Part II. Other Information: Item 1. Legal Proceedings................................. 29 Item 6. Exhibits and Reports on Form 8-K.................. 29 Items other than those listed above are omitted because they are not required or are not applicable. i Part I. Financial Information AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30, December 31, 1997 1996 (Unaudited) ------------- ------------- ASSETS: Investments: Securities available for sale, at fair value: Fixed maturities (amortized cost, $19,678,245 in 1997 and $17,941,200 in 1996) $ 22,390,967 $ 20,327,726 Equity securities (cost, $96,099 in 1997 and $86,249 in 1996) 156,273 136,328 Mortgage loans on real estate 16,524 17,802 Other long-term investments 2,921 2,999 Short-term investments 590,956 261,680 ------------ ------------ Total investments 23,157,641 20,746,535 Receivables, primarily premiums 229,573 226,981 Accrued investment income 282,232 253,850 Deferred policy acquisition costs 2,745,129 2,582,946 Property and equipment, net 444,382 471,907 Securities held as collateral for loaned securities 3,224,796 573,911 Intangible assets, net - 60,933 Other 106,367 105,749 ------------ ------------ Total assets $ 30,190,120 $ 25,022,812 ============ ============ See accompanying Notes to Consolidated Financial Statements. (continued) 1 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands, except for per-share amounts) June 30, December 31, 1997 1996 (Unaudited) ------------ ------------- Liabilities and Shareholders' Equity: Liabilities: Policy liabilities: Future policy benefits $ 20,000,091 $ 18,697,173 Unpaid policy claims 1,099,347 1,039,257 Unearned premiums 291,516 288,976 Other policyholders' funds 206,842 208,799 ------------ ------------ Total policy liabilities 21,597,796 20,234,205 Notes payable 539,249 353,533 Income taxes, primarily deferred 1,451,651 1,181,121 Payables for return of collateral on loaned securities 3,224,796 573,911 Payables for security transactions 228,044 99,408 Other 504,283 455,065 ------------ ------------ Total liabilities 27,545,819 22,897,243 ------------ ------------ Shareholders' equity: Common stock of $.10 par value. Authorized 400,000; issued 157,817 in 1997 and 157,239 in 1996 15,782 15,724 Additional paid-in capital 216,423 208,994 Unrealized foreign currency translation gains 216,427 229,782 Unrealized gains on securities available for sale 515,284 280,154 Retained earnings 2,281,326 1,917,794 Treasury stock, at average cost (600,459) (526,425) Notes receivable for stock purchases (482) (454) ------------ ------------ Total shareholders' equity 2,644,301 2,125,569 ------------ ------------ Total liabilities and shareholders' equity $ 30,190,120 $ 25,022,812 ============ ============ Shareholders' equity per share $ 19.32 $ 15.42 ============ ============ See accompanying Notes to Consolidated Financial Statements. 2 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings
(In thousands, except for Three Months Ended June 30, Six Months Ended June 30, per-share amounts - Unaudited) --------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Revenues: Premiums, principally supplemental health insurance $ 1,467,256 $ 1,461,484 $ 2,903,343 $ 2,917,847 Net investment income 267,001 252,885 518,630 504,284 Realized investment gains (losses) (692) 214 (1,135) (429) Gain on sale of television stations 267,223 - 267,223 - Other income 7,899 27,074 28,169 49,875 ----------- ----------- ----------- ----------- Total revenues 2,008,687 1,741,657 3,716,230 3,471,577 ----------- ----------- ----------- ----------- Benefits and expenses: Benefits and claims 1,204,680 1,208,051 2,391,749 2,417,060 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 45,813 41,348 87,475 82,564 Insurance commissions 194,309 191,819 383,112 383,789 Insurance expenses 124,741 108,734 230,291 210,685 Interest expense 4,113 3,953 7,447 9,039 Other operating expenses 20,070 43,510 52,076 77,015 ----------- ----------- ----------- ----------- Total acquisition and operating expenses 389,046 389,364 760,401 763,092 ----------- ----------- ----------- ----------- Total benefits and expenses 1,593,726 1,597,415 3,152,150 3,180,152 ----------- ----------- ----------- ----------- Earnings before income taxes 414,961 144,242 564,080 291,425 Income taxes 112,168 58,495 171,130 119,155 ----------- ----------- ----------- ----------- Net earnings $ 302,793 $ 85,747 $ 392,950 $ 172,270 =========== =========== =========== =========== Net earnings per share $ 2.14 $ .59 $ 2.77 $ 1.18 =========== =========== =========== =========== Shares used in computing earnings per share 141,489 144,879 141,687 145,623 =========== =========== =========== =========== Cash dividends per share $ .115 $ .10 $ .215 $ .187 =========== =========== =========== =========== See accompanying Notes to Consolidated Financial Statements. 3
AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands - Unaudited) Six Months Ended June 30, ---------------------------- 1997 1996 ---------- ---------- Common Stock: Balance at beginning of year $ 15,724 $ 15,636 Exercise of stock options 58 47 ---------- ---------- Balance at end of period 15,782 15,683 ---------- ---------- Additional paid-in capital: Balance at beginning of year 208,994 196,928 Exercise of stock options 1,973 3,617 Gain on treasury stock reissued 5,456 2,749 Cash in lieu of fractional shares - (83) ---------- ---------- Balance at end of period 216,423 203,211 ---------- ---------- Unrealized foreign currency translation gains: Balance at beginning of year 229,782 213,319 Change in unrealized translation gains (losses), net of income taxes (13,355) 7,979 ---------- ---------- Balance at end of period 216,427 221,298 ---------- ---------- Unrealized gains on securities available for sale: Balance at beginning of year 280,154 482,787 Change in unrealized gains (losses), net of income taxes 235,130 (208,647) ---------- ---------- Balance at end of period 515,284 274,140 ---------- ---------- Retained earnings: Balance at beginning of year 1,917,794 1,577,605 Net earnings 392,950 172,270 Cash dividends ($.215 per share in 1997 and $.187 in 1996) (29,418) (26,372) ---------- ---------- Balance at end of period 2,281,326 1,723,503 ---------- ---------- Treasury stock: Balance at beginning of year (526,425) (351,117) Purchases of treasury stock (87,213) (71,810) Cost of shares issued to sales associates stock bonus plan and dividend reinvestment plan 13,179 12,964 ---------- ---------- Balance at end of period (600,459) (409,963) ---------- ---------- Notes receivable for stock purchases (482) (586) ---------- ---------- Total shareholders' equity $ 2,644,301 $ 2,027,286 ========== ========== See accompanying Notes to Consolidated Financial Statements. 4 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands - Unaudited) Six Months Ended June 30, ----------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net earnings $ 392,950 $ 172,270 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 1,156,038 1,209,231 Deferred income taxes 23,411 37,748 Change in income taxes payable 34,697 (48,612) Increase in deferred policy acquisition costs (126,413) (119,442) Change in receivables and advance premiums 71 (41,643) Gain on sale of television stations (267,223) - Other, net 27,097 56,737 ---------- ---------- Net cash provided by operating activities 1,240,628 1,266,289 ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 1,152,458 547,855 Fixed-maturity securities matured 218,882 416,808 Equity securities 21,141 7,695 Mortgage loans, net 1,327 2,814 Other long-term investments, net 79 347 Costs of investments acquired: Fixed-maturity securities (2,715,490) (1,982,971) Equity securities (21,765) (9,337) Short-term investments, net (315,297) (270,561) Proceeds from sale of television stations 350,633 - Additions to property & equipment, net (2,089) (5,126) ---------- ---------- Net cash used by investing activities $(1,310,121) $(1,292,476) ---------- ---------- (continued) 5 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands - Unaudited) Six Months Ended June 30, ----------------------------- 1997 1996 ------------ ------------ Cash flows from financing activities: Proceeds from borrowings $ 184,689 $ 125,918 Principal payments under debt obligations (19,592) (19,863) Dividends paid to shareholders (29,418) (26,372) Purchases of treasury stock (87,213) (71,810) Treasury stock reissued 18,635 15,713 Other, net 2,031 3,581 ---------- ---------- Net cash provided by financing activities 69,132 27,167 ---------- ---------- Effect of exchange rate changes on cash 361 (1,424) ---------- ---------- Net change in cash - (444) Cash at beginning of year - 4,139 ---------- ---------- Cash at end of period $ - $ 3,695 ========== ========== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest on debt obligations $ 5,507 $ 7,491 Income taxes 112,092 130,042 See accompanying Notes to Consolidated Financial Statements. 6 AFLAC INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments (none of which were other than normal recurring accruals) necessary to fairly present the financial position as of June 30, 1997, and the results of operations for the three-month and six-month periods ended June 30, 1997 and 1996, and statements of cash flows and shareholders' equity for the six months ended June 30, 1997 and 1996. Results of operations for interim periods are not necessarily indicative of results for the entire year. 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. The financial statements should be read in conjunction with the financial statements included in the Company's annual report to shareholders for the year ended December 31, 1996. Effective January 1, 1997 the Company changed its method of determining the costs of investment securities sold from the first-in, first-out (FIFO) method to the specific identification method. The specific identification method allows the Company greater financial flexibility in the matching of its assets and liabilities. Also, the specific identification method is the predominant method used by the insurance industry. This accounting change had no material effect on net earnings for the three months and six months ended June 30, 1997. 2. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, on January 1, 1997. 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. The adoption of the 1997 provisions of SFAS No. 125 had no material affect on the Company's net earnings or shareholders' equity. SFAS No. 127 amended the 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. This change will have no affect on the Company's net earnings or shareholders' equity. 7 In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. Effective December 31, 1997, SFAS No. 128 will require the presentation of two earnings per share (EPS) numbers, basic EPS and diluted EPS, in the statements of earnings. Basic EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period. Diluted EPS includes the impact of stock options and other common stock equivalents. The Company's present EPS calculation is the same as the diluted method under SFAS No. 128. Net earnings per share calculated under the new statement would be as follows: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------------ ------------------ Basic EPS $2.22 $ .61 $2.87 $1.22 Diluted EPS 2.14 .59 2.77 1.18 SFAS No. 129, Disclosures of Information about Capital Structure, was also issued in February 1997 and is also effective December 31, 1997. This Statement establishes standards for disclosing information about an entity's capital structure. No changes in the Company's present disclosures will be required under SFAS No. 129. On June 30, 1997 the Financial Accounting Standards Board released SFAS No. 130, Reporting Comprehensive Income. This Statement establishes standards for reporting and displaying comprehensive income and its components in a full set of financial statements. SFAS No. 130 requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Examples of items that will be included in the Company's presentation of comprehensive income, in addition to net earnings, are unrealized foreign currency translation adjustments and unrealized gains and losses on securities available for sale. This Statement is effective beginning in 1998. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was also issued on June 30, 1997. This Statement requires that companies disclose segment data on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement requires that a company report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It also requires various reconciliations of total segment information to amounts in the consolidated financial statements. The Company is currently evaluating the necessary changes in its disclosures. This Statement is effective beginning in 1998. 3. In 1997, the Company completed the sale of its broadcast division business which consisted of seven network-affiliated television stations. The total pretax gain from the sale of the seven stations was $327.5 million. Cash sales proceeds received, after applicable selling expenses, were $449.1 million. Total sales proceeds also included advertising credits to be used 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 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 8 WAFB-TV in the fourth quarter of 1996 were $60.3 million and $48.2 million ($.33 per share), respectively. The sale of the remaining six stations closed on April 15, 1997. The pretax and after-tax gains recognized in the second quarter of 1997 were $267.2 million and $211.2 million ($1.49 per share), respectively. The operating results of the broadcast division included in the 1996 and 1997 consolidated financial statements were as follows: Three Months Six Months (In thousands) Ended June 30, Ended June 30, 1997 1996 1997 1996 ------------------- ------------------- Total revenues $ - $24,164 $16,107 $43,571 Earnings before interest and income taxes - 7,311 3,532 11,667 Broadcast revenues and operating expenses prior to April 15, 1997 were included in other income and other operating expenses, respectively, in the Consolidated Statements of Earnings. 4. 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, except for short-term hedges of its annual profit repatriations. The Company currently uses two types of derivatives, interest rate swaps and foreign currency forward contracts. 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. 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 Company uses short-term foreign currency forward contracts (usually five months or less) which are designated at inception as hedges of foreign transaction exposures on annual profit transfers from AFLAC Japan. Such contracts are accounted for using the deferral method. Gains and losses during the period the contracts are outstanding and at termination of the contracts are reflected on the Consolidated Balance Sheets, in the unrealized foreign currency translation gains component of shareholders' equity. 9 5. A summary of notes payable is as follows: June 30, December 31, (In thousands) 1997 1996 ------------ ------------ Unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement: 2.58%, due annually through July 2001 $ 367,294 $ 284,238 Short-term, variable interest rate (.88% at June 30, 1997), due July 15, 1997 112,812 - Unsecured, yen-denominated notes payable to banks, due semiannually, through October 1997, variable interest rate (.91% at June 30, 1997) 8,101 17,453 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through September 1998 11,167 15,389 Obligations under capitalized leases, due monthly through 2002, secured by computer equipment in Japan 22,862 25,392 Short-term yen-denominated note payable to bank under unsecured line of credit due September 16, 1997, variable interest rate (.795% at June 30, 1997) 16,477 - Short-term yen-denominated note payable to bank under unsecured line of credit, refinanced in 1997 - 9,850 Other 536 1,211 ---------- ---------- Total notes payable $ 539,249 $ 353,533 ========== ========== The Company has a reducing revolving credit agreement that currently provides for bank borrowings in either U.S. dollars or equivalent Japanese yen. The principal amount of the loan at any date will fluctuate due to changes in the yen to dollar foreign currency exchange rate. At June 30, 1997, bank borrowings of 54.9 billion yen ($480.1 million) were outstanding under this agreement. Under the terms of the agreement, the borrowing limits reduce to $400 million at July 15, 1997. The Company has entered into interest rate swaps that effectively change the Company's interest rate exposure on 42.0 billion yen ($367.3 million) of this loan from variable interest rates to fixed interest rates. The fixed-rate is 2.58% after the effect of the swaps. Interest payments are made based on variable interest rates and the Company either pays to or receives from the counterparty an amount necessary to equal the fixed swap rate. At June 30, 1997, the variable rate based on the three-month Tokyo Interbank Offered Rate plus loan costs of 25 basis points was .96%. During the second quarter, the Company borrowed an additional 1.9 billion yen ($16.5 million at June 30, 1997) under an unsecured line of credit at a variable interest rate of .795%. The Company has designated its yen-denominated borrowings as a hedge of its net investment in AFLAC Japan. Foreign currency translation gains/losses are included in the unrealized foreign currency translation gains component in shareholders' equity. Outstanding principal and related accrued interest payable on the yen-denominated borrowings were translated 10 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. 6. 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 the following dates was: (In thousands) June 30, 1997 December 31, 1996 ---------------- ----------------- Securities available for sale - unrealized gains $ 2,772,896 $ 2,436,605 Less: Policy liabilities 1,926,583 2,023,107 Deferred income taxes 331,029 133,344 ------------ ------------ Shareholders' equity, net unrealized gains on securities available for sale $ 515,284 $ 280,154 ============ ============ 7. AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At June 30, 1997 and December 31, 1996, the Company held Japanese government bonds as collateral for loaned securities in the amount of $3.2 billion and $573.9 million, respectively, at fair value. 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 accounting provisions of SFAS No. 125 and SFAS No. 127. Note 2.) 11 8. The following is a reconciliation of the number of shares of the Company's common stock for the six months ended June 30: (In thousands) 1997 1996 ---------- ---------- Common stock - number of shares: Issued: Balance at beginning of year 157,239 156,358 Exercise of stock options 578 468 -------- -------- Balance at end of period 157,817 156,826 -------- -------- Treasury stock - number of shares: Balance at beginning of year 19,354 14,384 Purchases of treasury stock 2,085 2,356 Shares issued to sales associates stock bonus plan and dividend reinvestment plan (399) (492) Exercise of stock options (70) (27) -------- -------- Balance at end of period 20,970 16,221 -------- -------- Shares outstanding at end of period 136,847 140,605 ======== ======== On May 5, 1997 the shareholders approved an increase in the number of shares of common stock the Company is authorized to issue from 175 million to 400 million shares. 9. 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. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of pending litigation will not have a material adverse effect on the financial position of the Company. 10. During the second quarter of 1997, Nissan Mutual Life Insurance Company, a Japanese insurer, was declared insolvent by the Japanese Ministry of Finance. All life insurers doing business in Japan previously agreed to contribute to a voluntary policyholder protection fund, which will be used to help offset Nissan Mutual Life's deficiency. The total assessment was allocated among the life insurance companies based on relative company size. During the second quarter of 1997, AFLAC Japan recognized a non-recurring pretax charge of 3.0 billion yen ($24.9 million) for this policyholder protection fund. The after-tax amount was $13.6 million. The Company does not anticipate any additional voluntary contributions in the future. 12 REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The June 30, 1997 and 1996 financial statements included in this filing have been reviewed by KPMG Peat Marwick LLP, independent certified public accountants, in accordance with established professional standards and procedures for such a review. The report of KPMG Peat Marwick LLP commenting upon their review is included on page 14. 13 KPMG PEAT MARWICK LLP Certified Public Accountants 303 Peachtree Street, N.E. Telephone: (404) 222-3000 Suite 2000 Telefax: (404) 222-3050 Atlanta, GA 30308 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors AFLAC Incorporated: We have reviewed the consolidated balance sheet of AFLAC Incorporated and subsidiaries as of June 30, 1997, and the related consolidated statements of earnings for the three-month and six-month periods ended June 30, 1997 and 1996, and the consolidated statements of cash flows and shareholders' equity for the six-month periods ended June 30, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of December 31, 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 29, 1997, we expressed an unqualified opinion on those consolidated financial statements. KPMG PEAT MARWICK LLP July 22, 1997 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The primary business activity of AFLAC Incorporated and subsidiaries (the "Company") is supplemental health insurance, which is marketed and administered primarily through American Family Life Assurance Company of Columbus (AFLAC). Most of AFLAC's policies are individually underwritten in the payroll market, with premiums paid by the employees. The Company's operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two principal markets for the Company's insurance operations. AFLAC Japan and AFLAC U.S. are the primary components for this discussion and analysis, due to their significance to the Company's consolidated financial condition and results of operations. RESULTS OF OPERATIONS In 1997, the Company completed the sale of its broadcast division business which consisted of seven network-affiliated television stations. The total pretax gain from the sale was $327.5 million. The sale of one station, WAFB-TV in Baton Rouge, Louisiana, closed on December 31, 1996. The pretax and after-tax gains recognized in 1996 on the sale of WAFB-TV were $60.3 million and $48.2 million, respectively. The pretax and after- tax gains recognized during the second quarter of 1997 on the sale of the six remaining stations were $267.2 million and $211.2 million, respectively. The effect of the after-tax gain on 1997 net earnings per share was $1.49 for both the three months and six months ended June 30, 1997. For further information, see Note 3 of the Notes to the Consolidated Financial Statements. 15 The following table sets forth the results of operations by business component for the periods shown and the percentage change from the prior period. SUMMARY OF OPERATING RESULTS BY BUSINESS COMPONENT (In millions, except for per-share amounts)
Three Months Ended June 30, Six Months Ended June 30, ----------------------------------------- ---------------------------------------- Percentage Change Percentage Change Over Previous Over Previous Period 1997 1996 Period 1997 1996 -------------------- ------------------ -------------------- ----------------- Insurance operations (excluding realized investment gains and losses): AFLAC Japan...................... (8.1)% $ 121.5 $ 132.2 (6.2)% $ 248.7 $ 265.3 AFLAC U.S........................ 43.0 43.8 30.7 34.0 81.3 60.7 ------ ------ ------ ------ Total ......................... 1.5 165.3 162.9 1.2 330.0 326.0 Broadcast division operations........ - 7.3 (69.7) 3.5 11.7 Interest expense, noninsurance operations............ (2.4) (3.1) (3.1) 21.4 (5.7) (7.2) Corporate expenses, other operations and eliminations........ 40.4 (13.8) (23.1) 22.5 (29.8) (38.7) ------ ------ ------ ------ Pretax operating earnings.......... 3.1 148.4 144.0 2.1 298.0 291.8 Realized investment gains (losses)... (.6) .2 (1.1) (.4) Gain on sale of television stations.. 267.2 - 267.2 - ------ ------ ------ ------ Earnings before income taxes....... 187.7 415.0 144.2 93.6 564.1 291.4 Income taxes......................... 91.8 112.2 58.5 43.6 171.1 119.1 ------ ------ ------ ------ Net earnings..................... 253.1 $ 302.8 $ 85.7 128.1 $ 393.0 $ 172.3 ====== ====== ====== ====== Net earnings per share........... 262.7 $ 2.14 $ .59 134.7 $ 2.77 $ 1.18 ====== ====== ====== ====== ============================================================================================================================= 16
The following discussion of earnings comparisons focuses on pretax operating earnings and excludes realized investment gains/losses and the gain of $267.2 million from the sale of the television stations on April 15, 1997. 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. The yen weakened in relation to the dollar throughout 1996 and the first part of 1997. Although the yen strengthened slightly in relation to the dollar during the second quarter of 1997, it is still weaker than a year ago. The average yen-to-dollar exchange rates were 119.68 for the three months ended June 30, 1997, compared with 107.67 for the second quarter of 1996, and 120.48 for the six months ended June 30, 1997, compared with 106.75 for the first six months of 1996. Operating earnings per share, which were affected by the fluctuations in the value of the yen, increased 10.2% to $.65 for the three months ended June 30, 1997, compared with the second quarter of 1996 and increased 9.3% to $1.29 for the six months ended June 30, 1997, compared with the six months ended June 30, 1996. The weakening of the yen in 1997 lowered operating earnings by approximately $.04 per share during the second quarter and $.10 per share for the first six months. This per-share amount was 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 16.9% for the three months ended June 30, 1997 compared with the same period in 1996, and increased 17.8% for the six months ended June 30, 1997 compared with the same period in 1996. The table below 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. 17 AFLAC Incorporated and Subsidiaries Supplemental Consolidated Data Selected Percentage Changes Three Months Ended Six Months Ended June 30, 1997 June 30, 1997 ---------------------- --------------------- Adjusted to Adjusted to Exclude Exclude Foreign Foreign As Currency As Currency Reported Changes* Reported Changes* -------- ----------- -------- ----------- Premium income .4% 9.6% (.5)% 10.0% Net investment income 5.6 14.4 2.8 12.7 Total revenues** 15.3 24.3 7.0 17.3 Total benefits and expenses (.2) 8.9 (.9) 9.5 Operating earnings*** 7.4 14.5 5.7 14.5 Operating earnings per share*** 10.2 16.9 9.3 17.8 - ---------------------------------------------------------------------------- * Amounts excluding foreign currency changes shown above were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. ** Includes a $267.2 million gain from the sale of the television stations in 1997. ***Excludes realized investment gains/losses and a $211.2 million after- tax gain from the sale of the television stations in 1997. ============================================================================ The Company's objective for 1997 is to increase operating earnings per share by 17% for the year, excluding the effect of currency translation. However, if that objective is achieved and the yen/dollar exchange rate averages 120.00 for the full year 1997 compared with the 1996 average rate of 108.84, operating earnings per share including foreign currency translation would increase by approximately 10% for the year 1997. Despite the weaker yen in 1997 compared with 1996, operating earnings per share increased for the three-month period ended June 30, 1997 compared with the second quarter of 1996 and increased for the six months ended June 30, 1997, compared with the six months ended June 30, 1996. The increases reflected strong earnings in the functional currencies of AFLAC's core insurance operations in Japan and the United States, additional investment income on the proceeds from the sale of the television stations, and a consolidated benefit from additional investment income associated with profit repatriations from AFLAC Japan to AFLAC U.S. 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, repatriations benefit consolidated operations because higher investment yields can be earned on funds invested in the United States. Also, income tax expense is presently lower on investment income earned in the United States. Management estimates these transfers have benefited consolidated net earnings by $8.8 million and $5.2 million for the three months ended June 30, 1997 and 1996, respectively, and $17.4 million and $10.2 million for the six months ended 18 June 30, 1997 and 1996, respectively. The Company repatriated 40.9 billion yen ($347.0 million) from AFLAC Japan to AFLAC U.S. in July 1997 which included $124.8 million of a non-recurring nature related to gains realized from the valuation of investments as determined on a Japanese statutory accounting basis. At June 30, 1997, the Company had approximately $75.4 million in short- term forward exchange contracts outstanding related to the profit transfer in 1997. These contracts were in a net loss position ($3.6 million) which is recorded in the unrealized foreign currency translation gains component of shareholders' equity at June 30, 1997. These contracts closed in July, coinciding with the transfer of funds. Share Repurchase Program During the second quarter, the Company purchased 234,300 shares of its common stock. The Company has purchased 22.3 million shares (through June 30, 1997) since the inception of the share repurchase program in February 1994. The difference in percentage increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. 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. 19 AFLAC JAPAN SUMMARY OF OPERATING RESULTS Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 ------------------ ------------------ Premium income................... $1,204.4 $1,225.4 $2,381.1 $2,449.5 Investment income, as adjusted*.. 228.0 227.9 449.5 454.9 Other income..................... 1.1 .1 1.4 .5 ------- ------- ------- ------- Total revenues, as adjusted*... 1,433.5 1,453.4 2,832.0 2,904.9 ------- ------- ------- ------- Benefits and claims.............. 1,037.7 1,058.8 2,061.3 2,123.3 Operating expenses............... 267.5 257.2 508.6 505.9 ------- ------- ------- ------- Total benefits and expenses.... 1,305.2 1,316.0 2,569.9 2,629.2 ------- ------- ------- ------- Pretax operating earnings, as adjusted*................ 128.3 137.4 262.1 275.7 Investment income applicable to profit repatriations............ (6.8) (5.2) (13.4) (10.4) ------- ------ ------- ------- Pretax operating earnings.... $ 121.5 $ 132.2 $ 248.7 $ 265.3 ======= ====== ======= ======= - ---------------------------------------------------------------------------- Percentage changes in dollars over previous period: Premium income................. (1.7)% (13.6)% (2.8)% (7.8)% Investment income*............. - (10.3) (1.2) (3.9) Total revenues*................ (1.4) (13.1) (2.5) (7.2) Pretax operating earnings*..... (6.7) (12.4) (4.9) (6.5) Pretax operating earnings...... (8.1) (13.0) (6.2) (7.2) - ---------------------------------------------------------------------------- Percentage changes in yen over previous period: Premium income................. 9.3% 9.2% 9.7% 8.9% Investment income*............. 11.4 13.1 11.6 13.4 Total revenues*................ 9.7 9.7 10.0 9.5 Pretax operating earnings*..... 4.0 10.5 7.5 10.3 Pretax operating earnings...... 2.3 9.8 6.0 9.6 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims............ 72.4% 72.8% 72.7% 73.1% Operating expenses............. 18.7 17.7 18.0 17.4 Pretax operating earnings...... 8.9 9.5 9.3 9.5 Ratio of pretax operating earnings to total reported revenues..... 8.5 9.1 8.8 9.2 - ---------------------------------------------------------------------------- *Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income for the three months ended June 30, 1997 and 1996 of $6.8 million and $5.2 million, respectively, and for the six months ended June 30, 1997 and 1996 of $13.4 million and $10.4 million, respectively, foregone due to profit repatriations. ============================================================================ 20 Japan Sales The increase in premium income in yen was due to sales of new policies and continued excellent policy persistency. AFLAC Japan's new policy sales in 1997 have been affected by a lingering weak economy and a series of premium rate increases that AFLAC and the insurance industry have implemented since 1993, including the most recent one in the fourth quarter of 1996. Following Nissan Mutual Life's insolvency (see Note 10 of the Notes to the Consolidated Financial Statements), the media has focused a great deal of attention on the financial weakness of some insurers in Japan, and consumers have been reluctant to purchase any insurance products. Although AFLAC is one of the financially strongest insurance companies operating in Japan, it has not been immune to the industrywide downturn in sales. As a result, sales have been negatively impacted. During the second quarter, new annualized premium sales were 14.0 billion yen, a 29.0% decline compared with a year ago. For the first six months of 1997, sales were 28.0 billion yen, or 24.7% lower than the first six months of 1996. Out-of-pocket expenses related to medical treatments continue to rise in Japan, and there remains a strong need for quality supplemental insurance products. For example, individual copayments for Japan's national health care plan will increase in September 1997. As the economy and consumer sentiment improve, management believes the demand for AFLAC's coverage will improve. Management has taken several actions to help mitigate the impact of the weak sales environment in Japan. First, a new economy cancer life policy was introduced in January 1997. This new plan has lower premium rates and benefit levels and was developed to combat the impact of increased premium rates for new issues. In addition, the Company has increased the use of direct mail marketing for its products as a supplemental distribution method, and will continue its popular television advertising program. The Company has also revised the incentive pay system for AFLAC Japan's employed sales managers to improve compensation for sales performance. The Company will spend up to an additional 1.0 billion yen ($8.7 million) during the remainder of 1997 on sales promotion efforts in Japan. Management expects the negative sales comparisons to continue throughout 1997 and to have a sales decrease for the year 1997 of approximately 15% to 20%. Management also anticipates that 1998 sales should return to the 1996 level. Japan Investments The historically low level of available investment yields continued to make investing AFLAC Japan's cash flows a difficult task during the quarter. However, the new money yields are providing a significant investment margin over the Company's current reserving assumption for new policy issues. For instance, the Company purchased yen-denominated securities at an average yield to maturity of 4.48% during the second quarter. Including dollar- denominated investments, the blended new money yield to maturity for the quarter was 6.21%. AFLAC's second quarter investment yield on new money compares very favorably with the 3.5% interest rate in the Company's reserving assumptions. In fact, this spread of nearly 100 basis points is the highest margin on new business the Company has been able to produce in several years. 21 The yield to maturity on AFLAC Japan's fixed-maturity portfolio declined from 5.58% at year-end to 5.49% at the end of the second quarter. The return on average invested assets was 5.37% for the first six months, compared with 5.59% for the first six months of 1996 and 5.54% for the full year 1996. Japan Other During the second quarter of 1997, Nissan Mutual Life Insurance Company, a Japanese insurer, was declared insolvent by the Japanese Ministry of Finance. All life insurers doing business in Japan previously agreed to contribute to a voluntary policyholder protection fund which will be used to help offset Nissan Mutual Life's deficiency. The total assessment was allocated among the life insurance companies based on relative company size. During the second quarter of 1997, AFLAC Japan recognized a non-recurring pretax charge of 3.0 billion yen ($24.9 million) for this policyholder protection fund. The after-tax amount was $13.6 million or $.10 per share. The Company does not anticipate any additional voluntary contributions in the future. 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 increased from the rate of 3% to 5% effective April 1, 1997. AFLAC Japan currently incurs consumption tax on agents' commissions. The Company implemented changes in its compensation arrangements with its agents to mitigate a portion of this tax increase. In March 1997, the Japanese government ratified new income tax provisions that increase income taxes on investment income received by foreign companies operating in Japan from securities issued from their home country. The new provisions are effective beginning in 1998. If the new income tax provisions had been effective January 1, 1997 , AFLAC Japan's income tax expense, without any offsets or mitigation, would have been increased, and net earnings of the Company would have decreased by approximately $11 million for the six months ended June 30, 1997. Management has mitigated much of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Management does not expect this tax change to materially affect future net earnings of the Company. 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. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1996, along with estimated investment income earned from proceeds from the sale of the television stations, have been reclassified in the following presentation in order to improve comparability between periods. 22 AFLAC U.S. SUMMARY OF OPERATING RESULTS Three Months Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 ------------------ ------------------ Premium income................... $ 260.4 $ 232.9 $ 517.3 $ 462.0 Investment income, as adjusted*.. 26.9 21.2 50.8 42.3 Other income..................... .5 .3 .8 .6 ------ ------ ------ ------ Total revenues, as adjusted*... 287.8 254.4 568.9 504.9 ------ ------ ------ ------ Benefits and claims.............. 164.3 146.6 325.1 288.4 Operating expenses............... 96.8 83.8 191.4 169.2 ------ ------ ------ ------ Total benefits and expenses.... 261.1 230.4 516.5 457.6 ------ ------ ------ ------ Pretax operating earnings, as adjusted*................ 26.7 24.0 52.4 47.3 Investment income applicable to profit repatriations and in 1997 proceeds from the sale of the television stations............. 17.1 6.7 28.9 13.4 ------ ------ ------ ------ Pretax operating earnings.... $ 43.8 $ 30.7 $ 81.3 $ 60.7 ====== ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous period: Premium income................. 11.8% 9.9% 12.0% 9.6% Investment income*............. 26.8 9.2 20.3 11.1 Total revenues*................ 13.1 9.9 12.7 9.8 Pretax operating earnings*..... 11.4 10.0 10.8 10.0 Pretax operating earnings...... 43.0 18.4 34.0 18.5 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims............ 57.1% 57.6% 57.2% 57.1% Operating expenses............. 33.6 33.0 33.6 33.5 Pretax operating earnings...... 9.3 9.4 9.2 9.4 Ratio of pretax operating earnings to total reported revenues..... 14.4 11.7 13.6 11.7 - ---------------------------------------------------------------------------- *Excludes estimated investment income for the three months and six months ended June 30, 1997 of $17.1 million and $28.9 million, respectively, related to investment of profit repatriation funds retained by AFLAC U.S. and investment of proceeds from the sale of the television stations, and for the three months and six months ended June 30, 1996 of $6.7 million and $13.4 million, respectively, related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ 23 U.S. Sales The increase in premium income was primarily due to an increase in new sales over the last 12 months. Total new annualized premium sales in the United States have grown at an extremely strong pace during 1997. During the second quarter, new sales increased 23.5% to $93.7 million. The first quarter of this year was the only quarter in the history of AFLAC U.S. in which more business was produced. For the first six months, new annualized premium sales increased 22.3% to $187.9 million. Accident/disability coverage continued to be the best-selling product. AFLAC U.S. also experienced strong contributions from other payroll-deduction products, including cancer expense, hospital indemnity and short-term disability. Management believes AFLAC has tremendous market opportunities in the United States and expects new policy sales to increase by 15% or better for the second half of 1997. U.S. Investments The increase in investment income was primarily due to the continued cash flow from operations. Also, AFLAC has paid less dividends to the Parent Company during the first six months of 1997. During the second quarter, available cash flow was invested at an average yield to maturity of 7.89% compared with 7.71% during the second quarter of 1996. The overall return on average invested assets, net of investment expenses, was 7.58% for the first six months of 1997 compared with 7.36% for the same period of 1996. U.S. Other Management expects the operating expense ratio, excluding discretionary advertising expenses, to continue to decline slightly in the future due to continued improvements in operating efficiencies. By improving administrative systems and controlling other costs, management has been able to redirect funds to national advertising programs without significantly affecting the operating expense ratio. Management expects the pretax operating profit margin, which was 9.3% for the year 1996 excluding the effect of repatriation, to remain approximately the same in 1997, excluding the effect of repatriation and the earnings generated by investing the broadcast sale proceeds. The operating results reflect slightly higher benefit ratios 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. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS For information regarding new Statements of Financial Accounting Standards see Note 2 of the Notes to the Consolidated Financial Statements. 24 ANALYSIS OF FINANCIAL CONDITION Since December 31, 1996, 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 significance of yen-denominated items in the balance sheet, changes in the yen/dollar exchange rate can have a significant effect on the Company's financial statements. The yen/dollar exchange rate at the end of each period is used to convert yen-denominated balance sheet items into U.S. dollars for reporting purposes. The exchange rate at June 30, 1997, was 114.35 yen to one U.S. dollar, 1.5% stronger than the exchange rate of 116.10 as of December 31, 1996. Management estimates that the stronger yen rate increased invested assets by $288.5 million, total assets by $381.6 million, and total liabilities by $379.9 million versus the amounts that would have been reported based on the exchange rate as of December 31, 1996. Invested Assets Securities available for sale are carried at fair value. The following table shows an analysis of invested assets (including cash): June 30, December 31, (In thousands) 1997 1996 % Change --------- ------------ -------- AFLAC U.S.: Total invested assets, at cost or amortized cost $ 2,371,197 $ 1,910,154 24.1% Unrealized gains on securities available for sale 115,962 101,258 ---------- ---------- Total invested assets $ 2,487,159 $ 2,011,412 23.7% ========== ========== ======== AFLAC Japan: Total invested assets, at cost or amortized cost $17,918,051 $16,390,997 9.3% Unrealized gains on securities available for sale 2,656,934 2,334,537 ---------- ---------- Total invested assets $20,574,985 $18,725,534 9.9% ========== ========== ======== Consolidated: Total invested assets, at cost or amortized cost $20,384,745 $18,309,930 11.3% Unrealized gains on securities available for sale 2,772,896 2,436,605 ---------- ---------- Total invested assets $23,157,641 $20,746,535 11.6% ========== ========== ======== Net unrealized gains of $2.8 billion on securities available for sale at June 30, 1997 consisted of $2.8 billion in gross unrealized gains and $43.6 million in gross unrealized losses. The continued growth in invested assets in their functional currencies reflects the strength of the Company's primary business, the substantial cash flows from operations, strong new annualized premium sales by AFLAC 25 U.S., and the substantial renewal premiums collected by AFLAC Japan. In addition, the Company received $350.6 million in cash in the second quarter of 1997 in conjunction with the sale of the television stations. 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, were as follows: June 30, 1997 December 31, 1996 -------------- ----------------- AAA 41.8% 46.2% AA 19.9 19.6 A 27.4 26.0 BBB 10.9 8.2 ----- ----- 100.0% 100.0% Private placement investments accounted for 33.1% and 28.8% of the Company's total fixed-maturity securities available for sale as of June 30, 1997 and December 31, 1996, 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. Policy Liabilities Policy liabilities increased $1.4 billion, or 6.7%, during the first six months of 1997. AFLAC Japan increased $1.3 billion, or 6.9% (5.3% increase in yen), and AFLAC U.S. increased $89.0 million, or 5.2%. The stronger yen rate increased reported policy liabilities by $297.8 million. Debt See Note 5 of the Notes to the Consolidated Financial Statements for information on debt outstanding at June 30, 1997. The Company's ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized gains on securities available for sale) was 20.2% and 16.1% as of June 30, 1997 and December 31, 1996, respectively. Security Lending AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. At June 30, 1997, the Company held Japanese government bonds as collateral for loaned securities in the amount of $3.2 billion at fair value. For further information regarding such arrangements, see Note 7 of the Notes to the Consolidated Financial Statements. Shareholders' Equity The Company's insurance operations continue to provide the primary sources of liquidity for the Company. Capital needs can also be supplemented by 26 borrowed funds. The principal sources of cash from insurance operations are premiums and investment income. Primary uses of cash in the insurance operations are policy claims, commissions, operating expenses, income taxes and payments to the Parent Company for management fees and dividends. Both the sources and uses of cash are reasonably predictable. The Company's investment objectives provide for liquidity through the ownership of high-quality investment securities. AFLAC insurance policies are generally not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of AFLAC policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore are not subject to the risks of medical cost inflation. The achievement of continued long-term growth will require growth in the statutory capital and surplus of the Company's insurance subsidiaries. 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 has increased the Company's capital resources. Management believes outside sources for additional debt and equity capital will continue to be available for capital expenditures, business expansion, and the Company's share repurchase program. Parent Company capital resources are largely dependent upon the ability of the subsidiaries to pay management fees and dividends. The Georgia Insurance Department imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances by AFLAC to the Parent Company. In addition to restrictions by U.S. insurance regulators, the Japanese Ministry of Finance (MOF) imposes restrictions on, and requires approval for, the remittances of earnings from AFLAC Japan to AFLAC U.S. 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 $18.8 million and $17.5 million in the first six months of 1997 and 1996, respectively, and $253.6 million in the full year 1996. AFLAC Japan repatriated profits to AFLAC U.S. in the amount of $347.0 million in July 1997, including $124.8 million of a non-recurring nature. AFLAC U.S. then paid a dividend of $66.5 million to the Parent Company, which was used to reduce debt. 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 in the Company's annual report to shareholders for the year ended December 31, 1996. Other Standard & Poor's Corporation assigned AFLAC a claims-paying ability rating of "AA" based on "superior market position in both Japan and the U.S., which has translated into superior operating results and superior capital adequacy." AFLAC is also rated A+ by A.M. Best Company. For information regarding pending litigation, see Note 9 of the Notes to the Consolidated Financial Statements. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information about 27 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. 28 PART II. OTHER INFORMATION Item 1. 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. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of pending litigation will not have a material adverse effect on the financial position of the Company. Items 2, 3, 4 and 5 Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.0 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended June 30, 1997. Items other than those listed above are omitted because they are not required or are not applicable. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AFLAC INCORPORATED Date August 8, 1997 /s/ KRISS CLONINGER, III ------------------------ --------------------------- KRISS CLONINGER,III Executive Vice President; Treasurer and Chief Financial Officer Date August 8, 1997 /s/ NORMAN P. FOSTER ------------------------ --------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 30 EXHIBITS FILED WITH CURRENT FORM 10-Q: 27.0 - Financial Data Schedule (for SEC use only). 31 EX-27 2 6/97 FDS
7 This schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the period ended June 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 22,390,967 0 0 156,273 16,524 0 23,157,641 0 0 2,745,129 30,190,120 21,099,438 291,516 0 206,842 539,249 0 0 15,782 2,628,519 30,190,120 2,903,343 518,630 266,088 28,169 2,391,749 87,475 672,926 564,080 171,130 392,950 0 0 0 392,950 2.77 0 0 0 0 0 0 0 0 Includes $267.2 million gain from the sale of the television stations in 1997. Includes $211.2 million after-tax gain ($1.49 per share) on the sale of the television stations in 1997.
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