-----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, O70rY9ajXNAlDcEllTZsjPCl9bzOlWtIGkXDIv9gISrkrqTl9WMDpOLMbJC2QAGV dsXY5NNVaQI51PQ/LaUs0w== 0000004977-98-000006.txt : 19980327 0000004977-98-000006.hdr.sgml : 19980327 ACCESSION NUMBER: 0000004977-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE SROS: PCX 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: SEC FILE NUMBER: 001-07434 FILM NUMBER: 98573769 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 1997 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, 1997 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 16, 1998, with $.10 par value, was 133,571,707. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 16, 1998 was $8,381,997,714. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 Exhibit 13 - pages 13-5 to 13-28 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)), pages 13-42 to 13-52 (Notes 2 and 3 of the Notes to the Consolidated Financial Statements), and pages 13-64 to 13-65 (Note 10 of the Notes to the Consolidated Financial Statements). The applicable portions of the Company's Annual Report to Shareholders for the year ended December 31, 1997, are included as Exhibit 13 Item 2 Exhibit 13 - page 13-54 (Note 5 of the Notes to the Consolidated Financial Statements) PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-64 (Note 10 of the Notes to the Consolidated Financial Statements) Item 6 Exhibit 13 - pages 13-3 and 13-4 Item 7 Exhibit 13 - pages 13-5 to 13-28 Item 7A Exhibit 13 - pages 13-6 to 13-8, and 13-17 to 13-20 Item 8 Exhibit 13 - pages 13-29 to 13-71 PART III Item 10 Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 1998 (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, 1997 Table of Contents Page PART I Item 1. Business................................................ I- 1 Item 2. Properties.............................................. I-19 Item 3. Legal Proceedings....................................... I-19 Item 4. Submission of Matters to a Vote of Security Holders..... I-20 Item 4A. Executive Officers of the Company....................... I-20 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 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 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) and its subsidiaries (the Company) have only one significant industry segment - insurance. 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 whose primary business is supplemental health insurance, which is marketed and administered primarily through American Family Life Assurance Company of Columbus (AFLAC). As a management company, the Parent Company oversees the operations of its subsidiaries, provides management services, and makes capital available. Most of AFLAC's policies are individually underwritten and marketed at the work site, 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. For financial information relating to the Company's foreign and U.S. operations, see Exhibit 13, pages 13-5 to 13-28 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)) and page 13-42 (Note 2 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference. In 1997, the Company completed the sale of its broadcast 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 closed on December 31, 1996. The pretax and after-tax gains recognized in 1996 were $60.3 million and $48.2 million, respectively. The effect of the after-tax gain on 1996 basic and diluted net earnings per share was $.34 and $.33, respectively. The pretax and after-tax gains recognized during the second quarter of 1997 on the closing of the six remaining stations were $267.2 million and $211.2 million, respectively. The effect of the after-tax gain on 1997 basic and diluted net earnings per share was $1.55 and $1.50, respectively. In March 1997, AFLAC Incorporated sold its minor Canadian insurance subsidiary at a nominal gain. 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. AFLAC Japan also sells care plans, supplemental general medical expense plans and a living benefit life plan. AFLAC U.S., in addition to cancer expense plans, 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 also offers several life insurance plans in the United States and Japan. 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 79%, 82% and 85% of the Company's total revenues for I-1 1997, 1996 and 1995, respectively, and 87% and 88% of total assets at December 31, 1997 and 1996, respectively. During 1997, the board of directors authorized the purchase of up to an additional 4.0 million shares of AFLAC Incorporated common stock. Including shares remaining under a previous authorization, the Company had approval to purchase up to 5.6 million shares as of December 31, 1997. The Company purchased 26.8 million shares from the inception of the share repurchase program in February 1994 through December 31, 1997. During the same period 2.5 million shares were reissued to the AFLAC Associate Stock Bonus Plan, through the Company's dividend reinvestment plan, and the exercise of stock options. 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 operating results. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. In the third quarter of 1995, the yen began to weaken in relation to the dollar and continued to weaken throughout 1996 and 1997. The average yen-to-dollar exchange rates were 121.07 in 1997, 108.84 in 1996 and 94.10 in 1995. Operating earnings per share (excludes realized investment gains/losses and the gain from the sale of the broadcast business), which were affected by these fluctuations in the value of the yen, increased 10.8% to $2.66 in 1997, 3.0% to $2.40 in 1996 and 23.3% to $2.33 in 1995. The Company's primary financial objective is the growth of operating earnings per share before the effect of foreign currency fluctuations. In 1996, the Company set this objective at an annual growth rate of 15% to 17% through the year 2000. The goal for 1997 was 17% growth, which the Company exceeded. Excluding the effect of currency fluctuations, operating earnings per share increased 18.3% in 1997, 15.5% in 1996 and 15.3% in 1995. In early 1998, the Company raised its 1998 objective for growth in operating earnings per share from a 17% increase to 20% before the effect of currency translation. For further information, see Exhibit 13, pages 13-6 to 13-8 (Foreign Currency Translation section of MD&A). 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 1997, $5.9 billion for 1996 and $6.1 billion for 1995. The following table sets forth consolidated premiums earned by health and life insurance offered by AFLAC in Japan and the United States for the three years ended December 31. (In thousands) 1997 1996 1995 ---------- ---------- ---------- Premiums earned: Health insurance $ 5,501,816 $ 5,690,886 $ 6,037,206 Life and other insurance 362,500 206,480 17,937 ---------- ---------- ---------- Total U.S. and Japan premiums earned $ 5,864,316 $ 5,897,366 $ 6,055,143 ========== ========== ========== I-2 The following table sets forth the changes in annualized premiums in force for AFLAC health insurance in Japan and the United States for the years ended December 31. (In thousands) 1997 1996 1995 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 5,637,951 $ 5,837,883 $ 5,578,987 New issues including policy conversions 755,650 763,836 965,321 Change in unprocessed policies (20,306) 18,587 (107,287) Lapses and surrenders (462,914) (414,628) (408,366) Other 19,337 3,284 (11,676) Foreign currency translation adjustment (504,736) (571,011) (179,096) ---------- ---------- ---------- Annualized premiums in force, at end of year $ 5,424,982 $ 5,637,951 $ 5,837,883 ========== ========== ========== 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. Net unrealized gains on securities available for sale were $3.4 billion and $2.4 billion at December 31, 1997 and 1996, respectively. I-3 The following table shows an analysis of investments and cash at December 31: (In millions) 1997 1996 % Change -------- -------- -------- AFLAC U.S.: Total investments and cash, at cost or amortized cost $ 2,678 $ 1,910 40.2% Unrealized gains on securities available for sale 228 101 ------- ------- Total investments and cash $ 2,906 $ 2,011 44.5% ======= ======= ===== AFLAC Japan: Total investments and cash, at cost or amortized cost $ 16,743 $ 16,391 2.1% Unrealized gains on securities available for sale 3,155 2,335 ------- ------- Total investments and cash $ 19,898 $ 18,726 6.3% ======= ======= ===== Consolidated: Total investments and cash, at cost or amortized cost $ 19,497 $ 18,307 6.5% Unrealized gains on securities available for sale 3,383 2,437 ------- ------- Total investments and cash $ 22,880 $ 20,744 10.3% ======= ======= ===== Net investment income was $1.1 billion in 1997 and $1.0 billion in both 1996 and 1995. AFLAC primarily invests within the United States, Japan, and Euroyen investment markets. The aspects of these financial markets 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. AFLAC maintains a strong portfolio by investing in high-quality securities that provide AFLAC with a predictable source of investment income (principally in government, public utility and corporate bonds, including private placement securities). When committing the huge cash flows to new investments, the Company only purchases securities that are rated investment grade by the Securities Valuation Office of the National Association of Insurance Commissioners. The Company does not purchase junk bonds and has avoided the investment real estate and mortgage loan sectors. The Company does not trade in the derivatives market. For information on the composition of the Company's investment portfolio and investment results, see Part IV, Schedule I, and Exhibit 13, pages 13-12 and 13-17 to 13-28 (discussions relating to investments, Balance I-4 Sheet and Cash Flow) and pages 13-46 to 13-54 (Notes 3 and 4 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference. INVESTMENTS - JAPAN Approximately 75% of the 353.6 billion yen ($2.7 billion) that AFLAC Japan had available for investment in 1997 was invested in yen-denominated securities at an average yield of 4.38%. The Company invested 65.9% in longer-dated securities at an average rate of 4.57%. The longer-dated sector includes purchases of dual-currency bonds (yen principal securities that pay a dollar coupon) at an average yield of 5.18%. An additional 8.8% was invested in yen-denominated securities of various other sectors. Dollar-denominated securities accounted for the remaining 25.3% of the purchases in 1997 at an average yield to maturity of 7.61%. AFLAC requires that all private placement issuers have an NAIC rating of class 1 or 2 and requires call protection limits of ten years or longer for such issues. Most of AFLAC's private placement issues are issued under medium term note programs and have standard covenants commensurate with credit rankings except when internal credit analysis indicates that additional protective and/or event risk covenants are required. At the end of 1997, private placements (at amortized cost) held by AFLAC Japan represented 37.7% of AFLAC Japan's total investments and cash and 32.3% of the consolidated total investments and cash. Although AFLAC Japan purchased only a small amount of Japanese government bonds during 1997, that sector continues to be a large asset class in Japan. Japanese government bonds constituted 32.3% of AFLAC Japan's total portfolio. Utility bonds accounted for 13.1%. Municipal securities made up 3.1%. A variety of other sectors accounted for 5.3%. AFLAC Japan's dollar- denominated portfolio represented 8.5% of the portfolio at year-end. AFLAC Japan's fixed-maturity securities available for sale, at amortized cost, as of December 31 were rated as follows: 1997 1996 ------ ------ AAA 40.6% 48.2% AA 20.6 19.9 A 26.0 23.6 BBB 12.8 8.3 ----- ----- 100.0% 100.0% ===== ===== Japan's life insurance industry has contended with low investment yields for the last several years. Despite a series of premium rate increases designed to help offset the effect of lower yields, the low interest rate environment took its toll in April when the government declared Nissan Mutual Life Insurance Company insolvent. As a result, more attention has been paid to the composition of the life insurance industry's assets. The Company's asset allocation is much different than the industry as a whole and, management believes, is better suited to a low interest rate environment. Based on March 31, 1997, Ministry of Finance data, AFLAC had I-5 the highest portfolio yield among all of Japan's life insurers. AFLAC earned this distinction without sacrificing the quality of the Company's portfolio, and management believes it provides AFLAC Japan with a tremendous competitive advantage. The Company's investments in the Japanese equity and investment real estate markets continued to be immaterial in 1997. INVESTMENTS - U.S. AFLAC U.S. had additional funds to invest in 1997 after completing the sale of the AFLAC Broadcast Division and also receiving a record profit repatriation from AFLAC Japan. Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $347.0 million in 1997, up from $217.3 million in 1996. The profit transfer in 1997 included $124.8 million of a non-recurring nature related to gains realized from the valuation of investments as determined on a Japanese regulatory accounting basis. 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 lower on investment income earned in the United States. The Company expects future profit repatriation to continue to have a positive impact on its consolidated net earnings. AFLAC U.S. continued to focus on purchasing securities that emphasize safety and liquidity. AFLAC U.S. fixed-maturity securities available for sale, at amortized cost, as of December 31 were rated as follows: 1997 1996 ------ ------ AAA 24.1% 27.4% AA 20.0 16.7 A 47.5 49.4 BBB 8.4 6.5 ----- ----- 100.0% 100.0% ===== ===== Including profit repatriation and proceeds from the sale of the broadcast business, AFLAC U.S. invested $1.7 billion in 1997. Of that amount, approximately 16.1% was invested in U.S. government or agency securities at an average yield of 7.65%, 78.9% was invested in corporate fixed-maturity securities at 7.65%, and 2.0% was allocated to various other sectors. The remaining 3.0% was invested in equities. At the end of 1997, fixed-maturity securities continued to dominate AFLAC U.S. total investments. Fixed-maturity securities represented 93.8% of total investments and cash (at amortized cost) at the end of the year. U.S. government and agency securities accounted for 17.1% of the fixed- maturity holdings, while corporate securities made up 78.1%. Equity investments made up 5.0% of total investments and cash at the end of the year. Mortgage loans on real estate remained immaterial. I-6 INSURANCE - JAPAN The following table sets forth AFLAC Japan's premiums earned by product line for the years ended December 31: (In thousands) 1997 1996 1995 ---------- ---------- ---------- Premiums earned: Cancer life $ 4,011,401 $ 4,314,821 $ 4,752,338 Other accident and health 448,048 445,704 440,635 Life insurance 343,216 191,035 2,378 ---------- ---------- ---------- Total AFLAC Japan premiums earned $ 4,802,665 $ 4,951,560 $ 5,195,351 ========== ========== ========== 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) 1997 1996 1995 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 4,596,416 $ 4,900,779 $ 4,718,783 New issues including policy conversions 365,845 442,629 690,170 Change in unprocessed policies (27,168) 23,878 (105,496) Lapses and surrenders (180,125) (181,756) (200,507) Other (16,889) (18,103) (23,075) Foreign currency translation adjustment (504,736) (571,011) (179,096) ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,233,343 $ 4,596,416 $ 4,900,779 ========== ========== ========== 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 life 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-13 and I-14) 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 January 1997, AFLAC Japan introduced a new economy cancer life policy with lower premium rates and benefit levels. This plan was developed to mitigate the effect of premium rate increases due to low investment yields available 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. I-7 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 this coverage gives AFLAC Japan's agents greater flexibility in product offerings. Demand for AFLAC's medical expense coverage rose significantly during 1997, accounting for 10.8% of total sales in 1997 compared with 3.1% in 1996. This product is widely available in the Japanese insurance marketplace, but AFLAC's policy is very competitive. AFLAC's plan offers a maximum hospitalization benefit of 1,000 days, which is the longest period offered in the industry. Management believes the strong medical expense policy sales in 1997 resulted from an increase in the copayments for Japan's national health care plans, which took effect in September. AFLAC Japan also introduced a new living benefit life plan in late 1995. 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 life 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. Sales of the living benefit life plan were $145.5 million and $286.0 million in new annualized premium in 1997 and 1996, respectively. During 1997, AFLAC Japan began selling ordinary life products. Sales for 1997 were immaterial. In December 1997, AFLAC Japan received approval from Japanese regulators to sell three new riders to the Company's popular cancer life policy. One rider adds cancer surgical benefits, while another provides supplemental accident coverage. The third rider provides supplemental medical benefits for general hospitalization. In September 1997, the Japanese government increased copayments for the employer-sponsored health care program from 10% to 20% for the primary insured, thereby increasing the portion of the costs the insured must pay. Given the increase in copayments, the Company believes the medical benefits should be especially appealing to consumers. During 1998, AFLAC Japan will primarily market the accident and medical riders in a single affordable package that should be attractive in the current economy. AFLAC Japan's sales mix is changing, although cancer life still accounts for the majority of insurance in force. Cancer life sales accounted for 52.5% of total new sales in yen in 1997, 46.7% in 1996 and 71.2% in 1995. Living benefit life, which was introduced in the fourth quarter of 1995, accounted for 28.3% of total new sales in 1997 and 39.5% in 1996. Care product sales represented 6.8% of total new sales in 1997, 10.6% in 1996 and 15.6% in 1995. Due to the continued low level of available investment yields in Japan, the Ministry of Finance directed insurers to increase premium rates on new policy issues in recent years. AFLAC Japan increased premium rates by an I-8 average of 16% on all cancer life 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 by approximately 13% on new policy issues for all product lines beginning in the fourth quarter of 1996. JAPANESE ECONOMY Since the last half of 1997, there has been widespread concern regarding the economic outlook of many Asian countries, including Japan. The financial strength of some Japanese financial institutions has deteriorated, and others have experienced bankruptcy. Some experts believe Japan's economy could weaken further. As management has indicated in the past, the weak economy in Japan has resulted in a difficult marketing environment for AFLAC Japan, declining interest rates for new money investments and decreased consumer confidence. The time required for the Japanese economy to recover remains uncertain. AGENCY FORCE - JAPAN The development of a "corporate agency" system has been important to the growth of AFLAC Japan. Affiliated corporate agencies are formed when companies establish subsidiary businesses to sell AFLAC products to their employees, suppliers and customers. These agencies help AFLAC Japan reach the employees of almost all of Japan's large corporations. AFLAC has no ownership interest in these corporate agencies. AFLAC products are also sold through independent corporate agencies and individual agencies that are not affiliated with large companies. At December 31, 1997, there were 5,427 agencies in Japan with 25,293 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 57 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 life insurance policy. Since that time, 16 other life companies offer cancer insurance. However, AFLAC remains the leading issuer of cancer life insurance coverage in Japan, principally due to its lead time in the market, unique marketing system (see Agency Force - Japan), low-cost operations and product expertise developed in the United States. AFLAC has been very successful in the sale of cancer life policies in Japan, with 12.7 million cancer policies in force at December 31, 1997. In 1997, AFLAC had a 93% market share of all stand-alone care insurance sold by life insurance companies and approximately 44% market share of all stand-alone care insurance sold by non-life and life insurers combined. Management believes that future demand for this product will be fueled by the Japanese government's plan to introduce a national care I-9 insurance program of its own. Given the current state of the Japanese economy, it is unlikely that the government can afford to pay for the entire program, and as a result, private care insurance will be an important aspect of the new program. 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 through the year 2001 and includes provisions to avoid "radical change" in the third sector of the insurance industry, which includes supplemental insurance products. 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. Although the Company has inherent competitive strengths in distribution, products and investments that should enable the support of business expansion in a more competitive environment, the ultimate impact of deregulation is not presently determinable. 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 $386.0 million in 1997, $253.6 million in 1996 and $179.5 million in 1995. Management fees paid to the Parent Company are largely based on expense allocations. 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. 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. 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 determined using accounting principles that differ materially from U.S. generally accepted accounting principles. Such differences relate primarily to the valuation of investments, policy benefit I-10 and claim reserves, acquisition costs and deferred income taxes. Among other items, fluctuations in currency translations of AFLAC Japan's U.S. dollar-denominated investments into yen also affect regulatory earnings. Japanese regulatory earnings and related profit repatriations may therefore vary materially from year to year because of these differences. Management currently expects that 1998 profit repatriation will approximate 20 billion yen ($155 million using the December 31, 1997, exchange rate) and that profit remittances will continue in future years, based on projected annual earnings of AFLAC Japan as computed on a Japanese regulatory accounting basis. During the second quarter of 1997, Nissan Mutual Life Insurance Company, a medium-sized Japanese insurer, was declared insolvent by the Japanese Ministry of Finance. Previously, all life insurers doing business in Japan had agreed to contribute to a voluntary policyholder protection fund that would be used to help offset insurer insolvencies. 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 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 for both basic and diluted earnings per share. Without this charge, the expense ratio for 1997 would have decreased from 18.1% to 17.7%. The Life Insurance Association of Japan, an industry organization, implemented a policyholder protection fund in 1996 to provide capital support to 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 was based on relative company size. As of December 31, 1997, $40.4 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund, of which approximately $33.8 million will be used in future years for assessment payments for the 1997 insolvency of Nissan Mutual Life. The policyholder protection fund was depleted by this insolvency, and the Japanese government may require additional contributions in the future. The Japanese Ministry of Finance (MOF) and the Life Insurance Association of Japan are discussing a permanent policyholder protection fund system that will cover 90% of the reserves of any failed company. The contributions to this system will also be based on relative company size. This new system is not expected to be established until April 1999. The Japanese government increased the consumption tax from 3% to 5% effective April 1, 1997. AFLAC Japan currently incurs consumption tax on most of the commissions paid to its agents. The Company implemented changes in its compensation arrangements with its agents to mitigate a portion of this tax increase. The consumption tax increase had no material affect on 1997 consolidated net earnings. 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. Management has mitigated some of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Management estimates the net impact of this tax change will decrease 1998 net earnings by $13 million. I-11 Most of the Company's income tax expense represents Japanese income taxes on AFLAC Japan's operating results calculated at the Japanese corporate tax rate of 45.3%. In December 1997, Japanese government leaders announced proposals to stimulate the Japanese economy. If enacted as presently proposed, the Japanese corporate tax rate would be reduced beginning in 1999. The proposals also include tax-base broadening provisions whereby certain accrued expenses would no longer be deductible for tax purposes until paid. Discussions continue among government leaders, and these corporate tax changes are expected to be finalized in March 1998. 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-16 and I-17 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) 1997 1996 ---------- ---------- Net assets on GAAP basis $ 2,540,932 $ 1,697,003 Elimination of deferred policy acquisition costs (1,940,447) (2,022,899) Elimination of unrealized gains and other adjustments to carrying value of fixed-maturity securities (3,350,246) (2,561,097) Adjustment to policy liabilities 1,612,242 2,476,384 Elimination of deferred income taxes 1,634,746 1,006,550 Reduction in premiums receivable (114,436) (124,829) Other, net 17,227 (4,222) ---------- ---------- Net assets on Japanese regulatory accounting basis $ 400,018 $ 466,890 ========== ========== The decline in net assets based on a Japanese regulatory accounting basis is primarily due to the weakening of the yen. During the last few years, the MOF has developed solvency standards, a version of risk-based capital requirements. Management believes the solvency margin of AFLAC Japan is very strong compared with other Japanese insurers. For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-9 to 13-14 (AFLAC Japan section of MD&A) and pages 13- 42 and 13-64 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. EMPLOYEES - JAPAN AFLAC Japan had 1,895 employees at December 31, 1997. AFLAC Japan considers its employee relations to be excellent. I-12 INSURANCE - U.S. The following table sets forth AFLAC U.S. premiums earned by product line for the years ended December 31: (In thousands) 1997 1996 1995 --------- --------- --------- Premiums earned: Cancer expense $ 456,100 $ 429,006 $ 402,789 Other accident and health 586,267 501,355 441,444 Life insurance 19,284 15,445 15,559 --------- --------- --------- Total AFLAC U.S. premiums earned $1,061,651 $ 945,806 $ 859,792 ========= ========= ========= 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) 1997 1996 1995 --------- --------- --------- Annualized premiums in force, at beginning of year $1,041,535 $ 937,104 $ 860,204 New issues including policy conversions 389,805 321,207 275,151 Change in unprocessed policies 6,862 (5,291) (1,791) Lapses (282,789) (232,872) (207,859) Other 36,226 21,387 11,399 --------- --------- --------- Annualized premiums in force, at end of year $1,191,639 $1,041,535 $ 937,104 ========= ========= ========= The slight increase in lapses is primarily due to the changing mix of business. 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, I-13 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 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 is introducing a new series of three cancer plans in 1998. 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 geographic 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 qualified and non-qualified long-term care plans, 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. I-14 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 1997 monthly average number of U.S. agents actively producing business was 7,376, compared with 6,665 in 1996 and 6,121 in 1995. 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 marketing its policies at the work site. This method offers policies to individuals through common media such as employment, trade and other associations. 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 marketing at the work site 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. AFLAC continues 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 1997, AFLAC's U.S. premiums collected were $1.1 billion, 7.0% of which was collected in Texas, 6.5% in Florida, 6.1% in Georgia, and 5.6% in North Carolina. Premiums collected in all other states were individually less than 5% of AFLAC's U.S. premiums. I-15 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. 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 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 13-14 to 13-16 (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. I-16 AFLAC and its insurance subsidiaries, in common with all U.S. insurance companies, are subject to regulation and supervision in the states and other jurisdictions in which they do business. In general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to, among other things: granting and revoking licenses to transact business, regulating trade practices, licensing agents, prior approval of forms of policies and premium rate increases, standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements, capital for the protection of policyholders, limitations on dividends to shareholders, the nature of and limitations on investments, deposits of securities for the benefit of policyholders, filing of annual reports and financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by the regulatory authorities, and periodic examinations of the financial, 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, policy reserves, limited benefit insurance policies, 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 to SAP. One change is the requirement that insurance companies establish a deferred income tax liability for statutory accounting purposes. Management estimates AFLAC's deferred tax liability under the present provisions of the project would be approximately $180 million using SAP. The capital and surplus of AFLAC, as determined on a U.S. statutory accounting basis, was $1.8 billion at December 31, 1997. For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-64 (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 exceeds all regulatory action levels and continues to reflect a very strong statutory capital and surplus position. 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 I-17 changed to allow the sale of specified disease insurance beginning in June 1997. AFLAC is now marketing cancer insurance in Connecticut. 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 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 in the U.S. currently involved in insolvency proceedings will not materially impact the consolidated financial statements. EMPLOYEES - U.S. In its U.S. insurance operations, the Company had 1,870 employees at December 31, 1997. The Company considers its employee relations to be excellent. POLICY LIABILITIES - JAPAN AND U.S. The reserves for policy liabilities 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 had 267 employees at December 31, 1997. On March 12, 1997, the Company sold its Canadian insurance subsidiary at a nominal gain. Other operations include an insurance operation in Taiwan. Additional expense charges were recognized in 1997 and 1996 for estimated termination costs and fair value adjustments related to these operations. For additional information regarding other operations, see Exhibit 13, page 13-16 (Other Operations section of MD&A), which is incorporated herein by reference. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. 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 I-18 Form 10-K, 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 as well as specific projections of future results 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, assessments for insurance company insolvencies, 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 Japanese tax laws, adequacy of reserves, credit and other risks associated with the Company's investment activities, significant changes in interest rates and fluctuations in foreign currency exchange rates. ITEM 2. PROPERTIES AFLAC owns an 18-story office building, which is the worldwide headquarters of the Parent Company and AFLAC, along with a six-story parking garage. These structures are located on approximately 14 acres of land in Columbus, Georgia. In 1997, the Company began construction of a new five- story administrative office building located on the same property. The building is expected to be completed in the fall of 1998 at an estimated cost of $15 million. 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. In conjunction with the sale of the broadcast business in 1996 and 1997, the Company sold the land, buildings, transmission towers and other broadcast equipment in the cities where its television stations were located. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. 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. I-19 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, 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION (*) AGE - ------------------- ------------------------------------- --- Paul S. Amos Chairman, AFLAC Incorporated and 71 American Family Life Assurance Company of Columbus (AFLAC) Daniel P. Amos Chief Executive Officer of AFLAC 46 Incorporated and AFLAC; President, AFLAC Incorporated and AFLAC; Director, CIT Group Inc., Livingston, NJ; Director, Georgia Power Company, Atlanta, GA William J. Bugg, Jr. Senior Vice President, Corporate 58 Actuary of AFLAC Monthon Chuaychoo Vice President, Financial Services, of 54 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 50 Financial Officer of AFLAC Incorporated and AFLAC, and Treasurer of AFLAC Incorporated Martin A. Durant, III Senior Vice President, Corporate 49 Services, 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 63 Finance, of AFLAC Incorporated and AFLAC Kenneth S. Janke Jr. Senior Vice President, Investor 39 Relations, of AFLAC Incorporated since August 1993; Vice President, Investor Relations, of AFLAC Incorporated until August 1993 I-20 Akitoshi Kan Executive Vice President of AFLAC since 50 1998 and Deputy Chief Financial Officer of AFLAC, 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 Nobuo Kawamura Senior Vice President, AFLAC Japan, 53 Underwriting, Policy Maintenance, Premium Accounting, Customer Service, Administration Support Joseph P. Kuechenmeister Senior Vice President, Director 56 of Marketing of AFLAC Joey M. Loudermilk Senior Vice President, General Counsel 44 and Corporate Secretary of AFLAC Incorporated and AFLAC, and Director, Legal and Governmental Relations of AFLAC Hidefumi Matsui President, AFLAC Japan, since January 53 1995, Executive Vice President of AFLAC Japan until 1995 Shoichi Matsumoto Executive Vice President, Director 52 of Marketing, AFLAC Japan, since 1998; Senior Vice President, Director of Marketing, AFLAC Japan, until January 1998; Senior Vice President, AFLAC Japan, until July 1997; Vice President, Assistant Director of Marketing, AFLAC Japan, until January 1996 Minoru Nakai President of AFLAC International, Inc. 56 Yoshiki Otake Chairman, AFLAC Japan, since January 58 1995; President, AFLAC Japan, until December 1994; Vice Chairman, AFLAC International, Inc. I-21 E. Stephen Purdom Executive Vice President, 50 AFLAC, since October 1994; Medical Director, Columbus Clinic, Columbus, GA, until September 1994; Senior Vice President and Medical Director, AFLAC, until October 1994; Director, Trust Company Bank, Columbus, GA Joseph W. Smith, Jr. Senior Vice President, Chief Investment 44 Officer of AFLAC Gary L. Stegman Senior Vice President, Assistant Chief 48 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-22 PART II Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1997 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; 54 (Note 10); EQUITY AND RELATED SHAREHOLDER 13-64 and 57-58 MATTERS (Note 10) ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 26 - 27 ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 28 - 38 ANALYSIS OF FINANCIAL CONDITION 13-28 AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE 13-6 to 28, 33-34 DISCLOSURES ABOUT MARKET RISK 13-8, 13-17 to 13-20 ITEM 8. FINANCIAL STATEMENTS AND 13-29 to 39 - 56 SUPPLEMENTARY DATA 13-71 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 1998 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 13, 1998, 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 - 20 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 20 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 13-29 each of the years in the three-year period ended December 31, 1997 Consolidated Balance Sheets, at 13-30 - December 31, 1997 and 1996 13-31 Consolidated Statements of Shareholders' 13-32 Equity, for each of the years in the three-year period ended December 31, 1997 Consolidated Statements of Cash Flows, 13-33 - for each of the years in the three-year 13-34 period ended December 31, 1997 Consolidated Statements of Comprehensive 13-35 Income, for each of the years in the three-year period ended December 31, 1997 Notes to the Consolidated Financial 13-36 to Statements 13-68 Report of Independent Auditors 13-70 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, 1997 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1997 IV-12 and 1996 and for each of the years in the three-year period ended December 31, 1997 Schedule IV - Reinsurance, for each of the IV-13 years in the three-year period ended December 31, 1997 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 Form 10-Q for March 31, 1997, Commission file number 1-7434, Accession No. 0000004977- 97-000011, 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. 10.11* - AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997. 10.12* - AFLAC Incorporated 1997 Stock Option Plan, incorporated by reference from the 1997 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977- 97-000007, Appendix B. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1997. 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-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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-27883 with respect to the AFLAC Incorporated 1997 Stock Option Plan. IV-3 27.0** - Financial Data Schedule for December 31, 1997. 27.1** - Restated Financial Data Schedule for September 30, 1997. 27.2** - Restated Financial Data Schedule for June 30, 1997. 27.3** - Restated Financial Data Schedule for March 31, 1997. 27.4** - Restated Financial Data Schedule for December 31, 1996. 27.5** - Restated Financial Data Schedule for September 30, 1996. 27.6** - Restated Financial Data Schedule for June 30, 1996. 27.7** - Restated Financial Data Schedule for March 31, 1996. 27.8** - Restated Financial Data Schedule for December 31, 1995. * Management contract or compensatory plan or agreement. **All Financial Data Schedules are submitted in the electronic filing only. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the quarter ended December 31, 1997. (c) EXHIBITS FILED WITH CURRENT FORM 10-K 10.11* - AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1997. 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-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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-27883 with respect to the AFLAC Incorporated 1997 Stock Option Plan. 27.0** - Financial Data Schedule for December 31, 1997. 27.1** - Restated Financial Data Schedule for September 30, 1997. 27.2** - Restated Financial Data Schedule for June 30, 1997. 27.3** - Restated Financial Data Schedule for March 31, 1997. 27.4** - Restated Financial Data Schedule for December 31, 1996. 27.5** - Restated Financial Data Schedule for September 30, 1996. 27.6** - Restated Financial Data Schedule for June 30, 1996. 27.7** - Restated Financial Data Schedule for March 31, 1996. 27.8** - Restated Financial Data Schedule for December 31, 1995. * Management contract or compensatory plan or agreement. **All Financial Data Schedules are submitted in the 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, 1998, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 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 1997. 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, 1998 IV-5 SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1997 (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 $ 667,367 $ 697,682 $ 697,682 States, municipalities and political subdivisions 13,379 14,243 14,243 Foreign governments 6,829,390 8,643,694 8,643,694 Public utilities 2,734,130 3,216,183 3,216,183 Convertibles 22,100 24,610 24,610 All other corporate bonds 8,854,762 9,841,406 9,841,406 ---------- ---------- ---------- Total fixed maturities available for sale 19,121,128 22,437,818 22,437,818 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 513 649 649 Banks, trusts and insurance companies 3,821 14,421 14,421 Industrial, miscellaneous and all other 75,936 131,256 131,256 ---------- ---------- ---------- Total equity securities 80,270 146,326 146,326 ---------- ---------- ---------- Total securities available for sale 19,201,398 $22,584,144 22,584,144 ========== Mortgage loans on real estate 14,137 14,137 Policy loans 1,288 1,288 Other long-term investments 1,322 1,322 Short-term investments 43,344 43,344 Cash and cash equivalents 235,675 235,675 ---------- ---------- Total investments $19,497,164 $22,879,910 ========== ========== See the accompanying Auditors' Report. IV-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1997 1996 ---------- ---------- ASSETS: Investments and cash: Investments in subsidiaries* $ 4,204,586 $ 2,677,304 Mortgage loans and other (Note B) 11,215 2,368 Cash and cash equivalents 8,799 22,154 ---------- ---------- Total investments and cash 4,224,600 2,701,826 Due from subsidiaries* 7,235 3,947 Other receivables 3,108 2,523 Property and equipment, net 7,731 8,428 Other assets 3,250 3,288 ---------- ---------- Total assets $ 4,245,924 $ 2,720,012 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Due to subsidiaries* $ 5 $ 869 Notes payable (note A) 505,023 327,408 Employee and beneficiary benefit plans 207,362 183,807 Income taxes, primarily deferred 58,309 45,948 Other liabilities 44,753 36,411 ---------- ---------- Total liabilities 815,452 594,443 ---------- ---------- Shareholders' equity: Common stock of $.10 par value: Authorized 400,000 shares; issued 158,190 shares in 1997 and 157,239 shares in 1996 15,819 15,724 Additional paid-in capital 227,292 208,994 Retained earnings (note D) 2,442,309 1,917,794 Accumulated other comprehensive income: Unrealized foreign currency translation gains 274,074 229,782 Unrealized gains on securities available for sale 1,284,717 280,154 ---------- ---------- Total accumulated other comprehensive income 1,558,791 509,936 Treasury stock, at average cost (812,672) (526,425) Notes receivable for stock purchases (1,067) (454) ---------- ---------- Total shareholders' equity 3,430,472 2,125,569 ---------- ---------- Total liabilities and shareholders' equity $ 4,245,924 $ 2,720,012 ========== ========== *Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. See the accompanying Auditors' Report. IV-7 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Earnings AFLAC Incorporated (Parent Only) (In thousands) Years ended December 31, 1997 1996 1995 ---------- ---------- ---------- Revenues: Dividends from subsidiaries* $ 118,125 $ 137,692 $ 82,343 Management and service fees from subsidiaries* 31,741 30,470 30,509 Other income from subsidiaries, principally rental and interest* 5 6 196 Other income 3,408 4,041 1,069 --------- --------- --------- Total revenues 153,279 172,209 114,117 --------- --------- --------- Operating expenses: Interest expense - subsidiaries* 5 16 30 Interest expense - others 10,456 10,512 8,419 Other operating expenses 82,894 84,055 70,921 --------- --------- --------- Total operating expenses 93,355 94,583 79,370 --------- --------- --------- Earnings before income taxes and equity in undistributed earnings of subsidiaries 59,924 77,626 34,747 Income tax expense (note C): Current 720 - - Deferred 13,706 12,410 8,583 --------- --------- --------- Total income taxes 14,426 12,410 8,583 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries 45,498 65,216 26,164 Equity in undistributed earnings of subsidiaries 539,525 329,147 322,893 --------- --------- --------- Net earnings $ 585,023 $ 394,363 $ 349,057 ========= ========= ========= * Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. See the accompanying Auditors' Report. IV-8 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Cash Flows AFLAC Incorporated (Parent Only) Years ended December 31, (In thousands) 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 585,023 $ 394,363 $ 349,057 Adjustments to reconcile net earnings to net cash provided from operating activities: Equity in undistributed earnings of subsidiaries (539,525) (329,147) (322,893) Deferred income taxes 13,706 12,410 8,583 Increase in employee and beneficiary benefit plans 23,555 36,488 30,174 Other, net 29,325 14,775 16,585 --------- --------- --------- Net cash provided by operating activities 112,084 128,889 81,506 --------- --------- --------- Cash flows from investing activities: Cost of other investments disposed of 373 395 515 Purchase of mortgage loans from subsidiary (10,044) - - --------- --------- --------- Net cash provided (used) by investing activities (9,671) 395 515 --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 409,489 135,914 198,250 Assumption of debt from affiliate - 15,389 - Principal payments under debt obligations (191,398) (57,671) (11,507) Dividends paid to shareholders (60,508) (54,174) (48,939) Net change in amount due to/from subsidiaries (4,152) (405) 6,186 Purchases of treasury stock (314,252) (204,169) (224,204) Treasury stock reissued 39,813 34,549 9,693 Proceeds from exercise of stock options 5,240 6,549 3,235 Other, net - (83) - --------- --------- --------- Net cash used by financing activities (115,768) (124,101) (67,286) --------- --------- --------- Net change in cash and cash equivalents (13,355) 5,183 14,735 Cash and cash equivalents at beginning of year 22,154 16,971 2,236 --------- --------- --------- Cash and cash equivalents at end of year $ 8,799 $ 22,154 $ 16,971 ========= ========= ========= See the accompanying Notes to Condensed Financial Statements. See the accompanying Auditors' Report. IV-9 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Comprehensive Income AFLAC Incorporated (Parent Only) (In thousands) Years ended December 31, 1997 1996 1995 ---------- ---------- ---------- Net earnings $ 585,023 $ 394,363 $ 349,057 ---------- ---------- ---------- Other comprehensive income, before income taxes: Foreign currency translation adjustments: Change in unrealized foreign currency translation gains during year - Parent only 44,227 38,119 28,728 Equity in change in unrealized foreign currency translation gains (losses) during year of subsidiaries (445) (21,656) 9,850 Reclassification adjustment for realized currency (gains) losses on sale of subsidiary included in net earnings - Parent only 509 - (1,527) Equity in unrealized gains (losses) on securities available for sale of subsidiaries: Unrealized holding gains (losses) arising during year 1,693,389 (314,050) 214,274 Reclassification adjustment for realized (gains) losses included in net earnings 4,158 (4,788) (1) ---------- ---------- ---------- Total other comprehensive income, before income taxes 1,741,838 (302,375) 251,324 Income tax expense (benefit) related to items of other comprehensive income 692,983 (116,205) (41,847) ---------- ---------- ---------- Other comprehensive income, net of income taxes 1,048,855 (186,170) 293,171 ---------- ---------- ---------- Total comprehensive income $ 1,633,878 $ 208,193 $ 642,228 ========== ========== ========== See the accompanying Notes to Condensed Financial Statements. See the accompanying Auditors' Report. IV-10 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, 1997 and 1996 follows: (In thousands) 1997 1996 ---------- ---------- Unsecured, yen-denominated notes payable to banks: 2.29% (2.74% in 1996) reducing, revolving credit agreement, due annually through July 2001..... $ 348,962 $ 284,238 1.24% revolving credit agreement, due October 2002.................................. 149,116 - Variable interest rate, paid in full............ - 17,453 Short-term line of credit....................... - 9,850 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through September 1998........ 6,945 15,389 Other............................................. - 478 -------- -------- Total notes payable........................... $ 505,023 $ 327,408 ======== ======== The aggregate maturities of the notes payable for each of the five years after December 31, 1997, are as follows: (In thousands) 1998............................................ $ 30,907 1999............................................ 75,000 2000............................................ 125,000 2001............................................ 125,000 2002............................................ 149,116 For further information regarding notes payable, see Exhibit 13, page 13-57 (Note 7 of the Notes to the Consolidated Financial Statements). IV-11 (B) MORTGAGE LOANS During 1997, the Parent Company purchased the entire mortgage loan portfolio of AFLAC U.S., at book value ($10.0 million). (C) INCOME TAXES The Company and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or benefits are recorded by each principal subsidiary based upon separate return calculations, and any difference between the consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial statements. For further information on income taxes, see Exhibit 13, page 13-58, Note 8 of the Notes to the Consolidated Financial Statements. (D) DIVIDEND RESTRICTIONS See Exhibit 13, page 13-64 (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) 1997 1996 1995 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 9,698 $ 9,805 $ 7,807 Income taxes 720 - 406 (F) ACCOUNTING CHANGES For information concerning new accounting standards adopted in 1997, 1996, and 1995, see page 13-40 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated Financial Statements. IV-12 SCHEDULE IV AFLAC INCORPORATED AND SUBSIDIARIES Reinsurance Years Ended December 31, 1997, 1996 and 1995 (In thousands)
Percentage Ceded to Assumed from of amount Gross other other assumed Amount companies companies Net amount to net ------------- ------------- ------------- ------------ ------------ Year ended December 31, 1997: Life insurance in force $ 19,819,547 $ 509,847 $ - $ 19,309,700 - ============= ============= ============= ============= ============ Premiums: Health insurance $ 5,511,810 $ 649 $ - $ 5,511,161 - Life insurance 363,621 1,121 - 362,500 - ------------- ------------- ------------- ------------- ------------ Total premiums $ 5,875,431 $ 1,770 $ - $ 5,873,661 - ============= ============= ============= ============= ============ 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 - ============= ============= ============= ============= ============ See the accompanying Auditors' Report. IV-13
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AFLAC Incorporated Date MARCH 26, 1998 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, 1998 - ------------------------ President and Vice ---------------- (Daniel P. Amos) Chairman of the Board of Directors /s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1998 - ------------------------ Chief Financial Officer ---------------- (Kriss Cloninger, III) and Treasurer /s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1998 - ------------------------ Corporate Finance ---------------- (Norman P. Foster) IV-14 /s/ J. SHELBY AMOS, II Director MARCH 26, 1998 - ----------------------------- ---------------- (J. Shelby Amos, II) - ------------------------------ Director ---------------- (Michael H. Armacost) /s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1998 - ------------------------------ ---------------- (M. Delmar Edwards, M.D.) /s/ GEORGE W. FORD, JR. Director MARCH 26, 1998 - ------------------------------ ---------------- (George W. Ford, Jr.) /s/ JOE FRANK HARRIS Director MARCH 26, 1998 - ------------------------------ ---------------- (Joe Frank Harris) - ------------------------------ Director ---------------- (Elizabeth J. Hudson) /s/ KENNETH S. JANKE, SR. Director MARCH 26, 1998 - ------------------------------ ---------------- (Kenneth S. Janke, Sr.) /s/ CHARLES B. KNAPP Director MARCH 26, 1998 - ------------------------------ ---------------- (Charles B. Knapp) IV-15 /s/ HISAO KOBAYASHI Director MARCH 26, 1998 - ------------------------------ ---------------- (Hisao Kobayashi) - ------------------------------ Director ---------------- (Yoshiki Otake) /s/ E. STEPHEN PURDOM Director MARCH 26, 1998 - ------------------------------- ---------------- (E. Stephen Purdom) /s/ BARBARA K. RIMER Director MARCH 26, 1998 - ------------------------------- ---------------- (Barbara K. Rimer) /s/ HENRY C. SCHWOB Director MARCH 26, 1998 - ------------------------------ ---------------- (Henry C. Schwob) /s/ J. KYLE SPENCER Director MARCH 26, 1998 - ------------------------------ ---------------- (J. Kyle Spencer) /s/ GLENN VAUGHN, JR. Director MARCH 26, 1998 - ------------------------------ ---------------- (Glenn Vaughn, Jr.) IV-16 3. EXHIBITS 3.0 - Articles of Incorporation, as amended - incorporated by reference from Form 10-Q for March 31, 1997, Commission file number 1-7434, Accession No. 0000004977- 97-000011, 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-17 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. 10.11* - AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997. 10.12* - AFLAC Incorporated 1997 Stock Option Plan, incorporated by reference from the 1997 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977- 97-000007, Appendix B. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1997. 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-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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-27883 with respect to the AFLAC Incorporated 1997 Stock Option Plan. IV-18 27.0** - Financial Data Schedule for December 31, 1997. 27.1** - Restated Financial Data Schedule for September 30, 1997. 27.2** - Restated Financial Data Schedule for June 30, 1997. 27.3** - Restated Financial Data Schedule for March 31, 1997. 27.4** - Restated Financial Data Schedule for December 31, 1996. 27.5** - Restated Financial Data Schedule for September 30, 1996. 27.6** - Restated Financial Data Schedule for June 30, 1996. 27.7** - Restated Financial Data Schedule for March 31, 1996. 27.8** - Restated Financial Data Schedule for December 31, 1995. * Management contract or compensatory plan or agreement. **All Financial Data Schedules are submitted in the electronic filing only. EXHIBITS FILED WITH CURRENT FORM 10-K 10.11* - AFLAC Incorporated Deferred Compensation Agreement with Paul S. Amos, dated July 15, 1997. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1997. 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-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. - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 333-27883 with respect to the AFLAC Incorporated 1997 Stock Option Plan. 27.0** - Financial Data Schedule for December 31, 1997. 27.1** - Restated Financial Data Schedule for September 30, 1997. 27.2** - Restated Financial Data Schedule for June 30, 1997. 27.3** - Restated Financial Data Schedule for March 31, 1997. 27.4** - Restated Financial Data Schedule for December 31, 1996. 27.5** - Restated Financial Data Schedule for September 30, 1996. 27.6** - Restated Financial Data Schedule for June 30, 1996. 27.7** - Restated Financial Data Schedule for March 31, 1996. 27.8** - Restated Financial Data Schedule for December 31, 1995. * Management contract or compensatory plan or agreement. **All Financial Data Schedules are submitted in the electronic filing only. IV-19 EX-10.11 2 DEFERRED COMPENSATION AGREEMENT EXHIBIT 10.11 EXH 10.11 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made and entered into as of this 15th day of July, 1997, by AFLAC INCORPORATED, a Georgia corporation (hereinafter referred to as the "Company"), and PAUL S. AMOS, a resident of the state of Georgia (hereinafter referred to as the "Employee"). WITNESSETH: WHEREAS, the Employee has rendered and continues to render outstanding and valuable services to the Company in such capacity; and WHEREAS, the Company wishes to reward the Employee for such services, to retain his full and undivided commitment to the interests of the Company both before and after his retirement as an active employee of the Company, and to fairly compensate him for such services and commitment; and WHEREAS, the Company intends that this Agreement shall be considered an unfunded nonqualified retirement plan maintained by the Company primarily for the purpose of providing deferred compensation for Employee, who is a highly compensated employee of the Company, and this Agreement shall be construed in all respects in accordance with such intended purposes; and WHEREAS, the Employee and Company intend that this agreement to clarify the terms of the executive deferral plan for the Employee and to specify the terms and conditions of the payment of such deferred compensation to the Employee (or his beneficiaries). NOW, THEREFORE, the Company and the Employee hereby agree as follows: ARTICLE 1 DEFINITIONS The following words and phrases as used in this Agreement shall have the meanings set forth in this Article unless a different meaning is clearly required by the context: 1.1 ACCOUNT shall mean an unfunded bookkeeping account which shall be established by the Company and to which shall be credited the Employee's Deferred Amounts, plus the interest adjustment provided herein, less the amount of any subsequent distributions to the Employee (or his Beneficiaries). 1.2 BENEFICIARY OR BENEFICIARIES shall mean any person or persons designated by the Employee in a written instrument signed by the Employee and delivered to the Secretary of the Company to receive amounts payable in accordance with this Agreement in the event of his death. In the absence of such a designation, or if a designated person is not alive or cannot be located at the time payment is to be made, the Employee's estate shall be deemed to be the Employee's Beneficiary. 1.3 BOARD shall mean the Board of Directors of the Company. EXH 10.11-1 1.4 COMPANY shall mean AFLAC INCORPORATED, a Georgia corporation, and its successors and assigns, and any other corporation, partnership or sole proprietorship into which the Company may be merged or consolidated unless such organization indicates in writing that it does not approve of such automatic succession. 1.5 CODE shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.6 DEFERRAL PERIOD shall mean the period commencing on the effective date of this Agreement through December 31, 1997, and each calendar year thereafter. 1.7 DEFERRED AMOUNTS shall mean any amount credited to the Employee's Account pursuant to an election by the Employee to defer current compensation, as described in Article 2 hereof. 1.8 EFFECTIVE DATE shall mean July 1, 1997. 1.9 ERISA shall mean the Employee Retirement Income Security Act of 1974 as amended from time to time. 1.10 INSOLVENCY shall mean, with respect to the Company, the occurrence of any of the following: (a) The Company's inability to pay its debts as they become due; (b) The Company's becoming subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 1.11 TRUST shall mean the trust created under the Trust Agreement for the purpose of aiding the Company in satisfying its liabilities under this Agreement, the assets of which shall always remain subject to the claims of the Company's creditors in the event of the Company's Insolvency. 1.12 TRUST AGREEMENT shall mean the agreement between the Trustee and the Company creating the Trust accompanying this Agreement. 1.13 TRUST FUND shall mean the assets of the Trust held by the Trustee pursuant to the provisions of the Trust Agreement. 1.14 TRUSTEE shall mean the entity, person or persons who have entered into the Trust Agreement with the Company to act as trustee(s) of the Trust Fund. ARTICLE 2 AMOUNT OF DEFERRED COMPENSATION 2.1 COMMENCEMENT OF DEFERRALS. The Employee may elect to defer up to one hundred percent (100%) of his salary and bonus for each calendar year (the "Deferral Amounts") during the Deferral Period as deferred compensation, as long as an appropriate written deferral election is made by the Employee prior to the date he renders services for such amounts to become payable to him. The deferral amounts shall be credited to the Employee's Account as soon as practicable after such deferrals have been made. For the calendar year in which the Agreement becomes effective, the Employee may elect within 30 days after the Agreement becomes effective to elect to defer his salary and bonus for the remainder of the calendar year. EXH 10.11-2 2.2 CESSATION OF DEFERRALS. Deferrals shall immediately cease under this Agreement as of the date of the Employee's termination of employment for any reason. 2.3 EARNINGS ON DEFERRAL AMOUNTS. Until distributed, as of each December 31 during the Deferral Period, the Employee's Account shall be credited with interest on an annual basis at a percentage rate which is equal to earnings for the calendar year on the investments of the Trust Fund. 2.4 VESTING OF ACCOUNT. The Employee shall be fully vested in his Account at all times, and therefore, all Deferral Amounts will be subject to tax withholding under the Federal Insurance Contributions Act. ARTICLE 3 DISTRIBUTION OF ACCOUNT 3.1 TIMING OF DISTRIBUTIONS. Except as provided in Section 3.3, the Company shall commence payment to Employee of his Account as of the first day of the month following the event elected by Employee for each Deferral Period as set forth in the attached election form. Such election shall be made at the time the deferral is made pursuant to Section 2.1. 3.2 FORM OF PAYMENT. Distributions pursuant to Section 3.1 above shall be made in the manner elected by Employee. For each calendar year election described in Section 2.1, Employee may elect among the various payout forms described in such election including but not limited to lump-sum at retirement or payment of annual installments over a period of years. Such election shall be made at the time Employee elects a Deferral for each calendar year in accordance with Section 2.1. 3.3 EARLY DISTRIBUTIONS FROM THE AGREEMENT. Notwithstanding Section 3.1, distributions of Employee's Account shall be made to the Employee in lump- sum within 30 days of the following instances: (1) in the event of a medical hardship, including home nursing care, as determined by the Company, (2) Change in Ownership or Control of the Company or (3) the termination of employment of the CEO of the Company. The amount of the withdrawal described in the case of medical hardship is limited to the amount necessary to meet the medical hardship. For purposes of this Section 3.3, Change in Control shall mean the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or of the sale of all or substantially all of Company's assets. EXH 10.11-3 ARTICLE 4 CONTRIBUTIONS TO THE TRUST 4.1 GENERAL PROVISIONS. All obligations to the Employee (or his Beneficiary) created under this Agreement shall be the sole responsibility, liability, and obligation of the Company to the Trustee under the provisions of Section 4.2 below. The Employee shall have no preferred claim on, or any beneficial ownership interest in, any specific assets of the Company or any assets of the Trust. The Trust exists simply for the purpose of aiding the Company in satisfying its liabilities under this Agreement. 4.2 USE OF TRUST FUNDS TO PROVIDE AGREEMENT BENEFITS. The Company may make, in its sole discretion, at any time, or from time to time, contributions of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Any amounts contributed to the Trustee shall, if not used by the Company's general creditors in the event of the Company's Insolvency, be used for the purpose of providing benefits to the Employee under this Agreement unless such benefits are otherwise provided by the Company. All contributions made by the Company to the Trustee as well as all other Trust assets shall be subject to the claims of the Company's general creditors under federal and state law in the event of the Company's Insolvency. 4.3 USE OF TRUST FUNDS TO PROVIDE AGREEMENT BENEFITS. The principal of the Trust, and earnings thereon, shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of providing benefits to the Employee and satisfying debt obligations to general creditors of the Company as set forth in this Agreement and Trust Agreement. Except as provided in the last two sentences of section 4.2 above and the immediately preceding sentence, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to the Employee pursuant to the terms of this Agreement. 4.4 UNSECURED INTEREST. No Employee hereunder shall have any interest whatsoever in any specific asset of the Company or of the Trust as a result of this Agreement. To the extent that any person acquires a right to receive payments under the Agreement, such right shall be no greater than the right of any unsecured general creditor of the Company, and such obligation may be satisfied from Trust assets or by the Company, as set forth in Article 6 of this Agreement. ARTICLE 5 INVESTMENT OF TRUST FUND 5.1 INVESTMENT OF TRUST FUND. (a) GENERAL RULE. The Trust Fund, and all contributions thereto made under this Agreement, shall be invested by the Trustee who shall have exclusive authority and discretion to manage and control the Trust Fund pursuant to the terms of the Trust Agreement, subject to any investment directions allowed by the Company under subsection (b) below, and made by an authorized investment manager an indicated in such subsection, as applicable. EXH 10.11-4 (b) INVESTMENT MANAGER. The Company may appoint one or more investment managers (as defined in ERISA Art. Sec. 3(38)) to manage, acquire or dispose of all or a portion of the Trust Fund. Any such appointment shall be made in writing, shall be communicated to the Trustee, and shall relieve the Trustee of the responsibility of exclusive authority and discretion to manage and control the Trust Fund. The Company shall promptly give written notice to the Trustee of changes of a designated investment manager. A designated investment manager may certify to the Trustee in writing the name of any person, together with a specimen signature of any such person, who is authorized to communicate and implement the investment manager's respective instructions concerning the Trust Fund. The investment manager shall promptly give written notice to the Trustee of any change in any such person. The Trustee shall be subject to the directions of such investment manager(s) which are made in accordance with the terms of this Agreement. 5.2 TRUSTEE'S RELIANCE. The Trustee may rely and act upon any certificate, notice or direction of the Company, Administrator, investment manager, or a person authorized to act on behalf of such person, that the Trustee reasonably believes to be genuine and to have been signed by the person or persons duly authorized to sign such certificate, notice or direction until otherwise notified in writing. Employee may provide recommendations to the Company as to the investments held by the Trust; however, the Company is under no obligation to invest Trust assets according to the Employee's recommendations. ARTICLE 6 SOURCE OF PAYMENT OF BENEFITS 6.1 GENERAL PROVISIONS. All payment obligations to the Employee created under this Agreement shall be the sole responsibility, liability, and obligation of the Company regardless of any contributions made by the Company to the Trustee. Although it is anticipated that payment of benefits provided under this Agreement shall be made by the Trustee to the extent that the Trust Fund is sufficient to pay such benefits, the Company, in lieu of such payment by the Trustee, may pay any benefit obligation hereunder as it becomes due under the terms of the Agreement. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Agreement, the Company shall have the obligation to make the balance of each such payment as it falls due. ARTICLE 7 ADMINISTRATION 7.1 ADMINISTRATOR. The Company may designate one or more individuals to administer the provisions of this Agreement. In the absence of such a designation, the Board shall carry out the responsibilities of the Administrator. 7.2 POWERS AND RESPONSIBILITIES. The Administrator shall have complete control of the administration of the Agreement hereunder, with all powers necessary to enable it to properly carry out its duties as set forth in this Agreement. The Administrator shall have the following duties and responsibilities: (a) to interpret the terms of the Agreement and to determine all questions that shall arise thereunder; EXH 10.11-5 (b) to have all powers elsewhere herein conferred upon it; (c) to provide procedures for determination of claims for benefits; (d) to determine the benefits of the Agreement to which the Employee may be entitled; (e) to maintain and retain records relating to the Employee; (f) to prepare and furnish to the Employee all information required under federal law or provisions of the Agreement to be furnished to him; (g) to prepare and furnish to the Trustee sufficient data so that the Trustee may make payments of benefits; (h) to prepare and file or publish with the Secretary of Labor, the Secretary of the Treasury, their delegates and all other appropriate government officials all reports and other information required under law to be filed or published; (i) to provide directions to the Trustee with respect to all matters where called for in the Agreement or requested by the Trustee; and (j) to engage assistants and professional advisors. 7.3 RECORDS OF ADMINISTRATOR. (a) WRITTEN DIRECTIONS TO TRUSTEE. Any notice, direction, order, request, certification or instruction of the Administrator to the Trustee shall be in writing and shall be signed by a member of the Board or Administrator. The Trustee and every other person shall be entitled to rely conclusively upon any and all such notices, directions, orders, requests, certifications and instructions received from the Board or Administrator and reasonably believed to be properly executed, and shall act and be fully protected in acting in accordance therewith. (b) WRITTEN DETERMINATIONS OF THE ADMINISTRATOR. All acts and determinations of the Administrator shall be duly recorded, and all such records, together with such other documents as may be necessary for the administration of the Agreement, shall be preserved in the custody of the Administrator. 7.4 CONSTRUCTION OF THE AGREEMENT. The Administrator shall take such steps as are considered necessary and appropriate to remedy any inequity that results from incorrect information received or communicated in good faith or as the consequence of an administrative error. The Administrator shall interpret the Agreement and shall determine the questions arising in the administration, interpretation and application of the Agreement. The Administrator shall correct any defect, reconcile any inconsistency or supply any omission with respect to the Agreement. 7.5 INDEMNIFICATION. The Administrator and each member thereof shall be indemnified by the Company against judgment amounts, settlement amounts (other than amounts paid in settlement to which the Company does not consent) and expenses reasonably incurred by the Administrator or him in connection with any action to which the Administrator or he may be a party (by reason of his service as a member of an Administrator) except in EXH 10.11-6 relation to matters as to which the Administrator or he shall be adjudged in such action to be personally guilty of gross negligence or willful misconduct in the performance of its or his duties. The foregoing right to indemnification shall be in addition to such other rights as such Administrator or each Administrator member may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which such Administrator or each Administrator member may be entitled pursuant to the by-laws of the Company. Service of the Administrator shall be deemed in partial fulfillment of an Administrator member's function as an employee, officer and/or director of the Company, if he serves in such other capacity as well. ARTICLE 8 AMENDMENT OR TERMINATION 8.1 CONTINUATION OF AGREEMENT. The continuation of this Agreement by the Company is entirely a voluntary act on the part of the Company, and the continuation of this Agreement is not a contractual obligation of the Company. The Board reserves and retains the right to amend and/or terminate this Agreement as set forth in this Article. 8.2 RIGHT TO AMEND AGREEMENT. The Company reserves the right, at any time, to modify or amend, in whole or in part, any or all of the provisions of the Agreement. Any amendment to the Agreement shall be prospective only. Except as may be otherwise required by law, there shall be no restrictions or limitations on the Board's power to amend this Agreement, except that no amendment to, or modifications of, this Agreement shall decrease or eliminate the Account of the Employee hereunder as determined as of the date of execution of such amendment or modification. 8.3 RIGHT TO TERMINATE AGREEMENT. Upon mutual agreement of the parties hereto, the Board shall have the right, at any time, to wholly or partially terminate the Agreement if necessary or desirable in the opinion of the Board. 8.4 DISTRIBUTIONS UPON TERMINATION. If the Agreement is terminated, the Account of the Employee shall be distributed to the Employee pursuant to the provisions of the Agreement. ARTICLE 9 MISCELLANEOUS 9.1 EMPLOYEE'S RIGHTS TO EMPLOYMENT, ETC. Nothing contained in the Agreement or the establishment of the Trust, or any modification thereof, or the creation of any fund, or the payment of any benefits, shall be construed to give any individual or Employee, any rights to continued employment or continued performance of services for the Company or any Affiliate, any legal or equitable right against the Company or an Affiliate, or any officer, director or employee thereof, or the Trustee, or its agents or employees, except as herein provided. 9.2 CLAIMS PROCEDURES. (a) FILING A CLAIM. All claims and requests for benefits under the Agreement shall be directed to the attention of the Administrator in writing. The writing must be reasonably calculated to bring the claim to the attention of the Administrator. EXH 10.11-7 (b) NOTIFICATION OF DENIAL. If the Administrator determines that any individual who has claimed a right to receive benefits under the Agreement (the "claimant") is not entitled to receive all or any part of the benefits claimed, the claimant shall be informed in writing of the specific reason or reasons for the denial, with specific reference to pertinent Agreement provisions on which the denial is based, a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why said material or information is necessary and a description of the review procedures set forth in subsection (d) below. (c) TIMING OF NOTIFICATION. The claimant shall be so notified of the Administrator's decision within 90 days after the receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, the Administrator shall furnish the claimant written notice of the extension prior to the termination of the initial 90-day period. In no event shall said extension exceed a period of 90 days from the end of said initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Administrator expects to render a final decision. If for any reason, the claimant is not notified within the period described above, the claim shall be deemed and the claimant may then request review of said denial, subject to the provisions of subsection (d) below. (d) REVIEW PROCEDURE. The claimant or his duly authorized representative may, within 60 days after notice of the Administrator's decision, request a review of said decision, review pertinent documents and submit to the Board such further information as will, in the claimant's opinion, establish his rights to such benefits. If upon receipt of this further information, the Board determines that the claimant is not entitled to the benefits claimed, it shall afford the claimant or his representative reasonable opportunity to submit issues and comments in writing and to review pertinent documents. If the claimant wished, he may request opportunity for a full and fair hearing on the issue as soon as is reasonably possible under the circumstances. The Board shall render its final decision with the specific reasons therefor in writing and in a manner calculated to be understood by the claimant. (e) TIMING OF FINAL DECISIONS. The Board's final decision shall include specific references to the pertinent Agreement provisions on which the decision is based, and shall be transmitted to the claimant by certified mail within 60 days of receipt of claimant's request for such review, unless special circumstances require a further extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. If such an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the Board holds regularly scheduled meetings at least quarterly, in lieu of the time period described above, the Board's decision on review shall be made by no later than the date of the meeting of the Board which immediately follows its receipt of the request for review, unless said request is filed within 30 days preceding the date of said meeting in which case a decision shall be made no later than the date of the second meeting following its receipt of said request for review. If special circumstances require a further extension of time for processing, decision shall be rendered not later than the third meeting of the Board following its receipt of the request for review. If a decision on review is EXH 10.11-8 not furnished within the time period described above, the claim shall be deemed denied on review. (f) PREREQUISITE TO COMMENCEMENT OF LEGAL ACTION. No legal action may be commenced by any claimant unless the claimant has filed his claim and appealed his claim to the Board pursuant to the foregoing procedures specified in this section. 9.3 NONALIENATION OR ASSIGNMENT. Except as otherwise provided by applicable law, none of the benefits under this Agreement is subject to the claims of creditors of the Employee, and will not be subject to attachment, garnishment, or any other legal process whatsoever. The Employee may not assign, sell, borrow on, or otherwise encumber any of his interest in the Agreement, nor shall any such benefits be in any manner liable for or subject to the deeds, contracts, liabilities, engagements, or torts of the Employee. 9.4 PAYMENTS TO OTHERS ON BEHALF OF THE EMPLOYEE. In making any distribution to or for the benefit of any incompetent Employee who, in the opinion of the Administrator, is incapable of properly using, expending, investing, or otherwise disposing of such distribution, the Administrator, in its sole and complete discretion may, but need not, order the Trustee to make, or have the Company make, such distribution to a legal guardian or other relative of any incompetent, or to any adult with whom such person temporarily or permanently resides; and any such guardian, relative, or other person shall have full authority and discretion to expend such distribution for the use and benefit of such person; and the receipt of such guardian, relative, or other person shall be a complete discharge to the Trustee, the Company, the Administrator, and this Agreement, without any responsibility on the part of the Company, the Administrator or the Trustee to see to the application of amounts so distributed. 9.5 LOCATION OF PAYEE; UNCLAIMED BENEFITS. In the event that all, or any portion, of the distribution payable to an Employee hereunder shall, at the expiration of a reasonable time after it has become payable, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address of such person, and after further diligent effort, to ascertain the whereabouts of such person, the amount so distributable shall be forfeited. 9.6 GOVERNING LAW. This Agreement shall be administered in the United States of America, and its validity, construction, and all rights hereunder shall be governed by the laws of the United States under ERISA to the extent applicable. To the extent that ERISA shall not be applicable, the Agreement shall be administered under the laws of the State of Georgia. If any provision of the Agreement shall be held invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 9.7 RECOVERY OF MISTAKEN PAYMENTS. If any benefit is paid to an Employee in an amount that is greater than the amount payable under the terms of the Agreement, the Agreement shall recover the excess benefit amount by eliminating or reducing the Employee's future benefit payments, if any. Whether or not further benefits are payable to the Employee under the Agreement, the Administrator, in its discretion, may employ such means as are available under applicable law to recover the excess benefit amount on behalf of the Company from the Employee. EXH 10.11-9 9.8 ACTION OF COMPANY AND ADMINISTRATOR. Except as may be specifically provided, any action required or permitted to be taken by the Company or the Administrator may be taken on behalf of such person by any entity or individual who has been delegated the proper authority. 9.9 GENDER AND NUMBER. Wherever applicable, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. 9.10 HEADINGS. The titles in this Agreement are inserted for convenience of reference; they constitute no part of the Agreement, and are not to be considered in the construction hereof. 9.11 LIABILITY LIMITED. To the extent permitted by ERISA and/or other applicable law, neither the Administrator, nor any member thereof, nor the Company shall be liable for any acts of omission or commission in administering the Agreement, except for his or its own individual, willful misconduct. The Company and each member of the Administrator shall be entitled to rely conclusively on all table, valuations, certificates, opinions and reports which shall be furnished by an actuary, accountant, Trustee, insurance company, counsel or other expert who shall be employed or engaged by the Administrator or the Company. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers and its corporate seal to be affixed hereto, all as of the date first above written. AFLAC INCORPORATED By: /s/ M. A. Durant ----------------------------------- Title: Senior Vice President -------------------------------- Attest: /s/ Diana Green ------------------------------- Title: Secretary - Corporate Services ------------------------------- EMPLOYEE /s/ Paul S. Amos --------------------------------------- EXH 10.11-10 EX-13 3 ANNUAL REPORT INFORMATION EXHIBIT 13 EXH 13 EXHIBIT 13 The following information is contained in the 1997 Annual Report to Shareholders. The required information incorporated by reference to the preceding pages of this 1997 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, 1997, are as follows: Quarterly Common Stock Prices 1997 High Low Close -------------------------------------------------------------------- 4th Quarter $ 56.31 $ 44.25 $ 51.13 3rd Quarter 57.88 48.50 54.25 2nd Quarter 51.38 38.38 47.25 1st Quarter 43.50 37.50 37.50 1996 --------------------------------------------------------------------- 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 33.00 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 EXH 13-1 ITEM 5. (b) Holders: 1997 1996 1995 - --------------------------------------------------------------------------- Number of common shares outstanding 133,218,010 137,884,887 141,974,309 Number of registered common shareholders 57,788 49,474 39,317 Approximate number of common shareholders 128,900 113,300 88,700 ITEM 5. (c) Quarterly cash dividends: 1997 1996 ------ ------ 4th Quarter $.115 $.10 3rd Quarter .115 .10 2nd Quarter .115 .10 1st Quarter .10 .087 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 13-24, and Note 10, Statutory Accounting and Dividend Restrictions, of the Notes to the Consolidated Financial Statements, also presented in this Exhibit 13 on page 13-64. EXH 13-2 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except for per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES For the Year 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Revenues: Premiums, principally supplemental health insurance $ 5,873,661 $ 5,910,036 $ 6,070,830 $ 5,180,732 $ 4,225,390 Net investment income 1,077,715 1,021,955 1,024,960 838,825 689,272 Realized investment gains (losses) (5,440) 1,980 (270) (58) 2,937 Gain on sale of television business 267,223 60,264 - - - Other income 37,543 105,968 95,100 91,259 83,019 ---------- ---------- ---------- ---------- ---------- Total revenues 7,250,702 7,100,203 7,190,620 6,110,758 5,000,618 ---------- ---------- ---------- ---------- ---------- Benefits and expenses: Benefits and claims 4,833,077 4,895,522 5,034,266 4,256,541 3,423,297 Expenses 1,552,805 1,554,680 1,555,359 1,349,881 1,148,937 ---------- ---------- ---------- ---------- ---------- Total benefits and expenses 6,385,882 6,450,202 6,589,625 5,606,422 4,572,234 ---------- ---------- ---------- ---------- ---------- Pretax earnings 864,820 650,001 600,995 504,336 428,384 Income taxes 279,797 255,638 251,938 211,546 184,495 ---------- ---------- ---------- ---------- ---------- Net earnings $ 585,023(1) $ 394,363(2) $ 349,057 $ 292,790 $ 243,889(3) ========== ========== ========== ========== ========== - --------------------------------------------------------------------------------------------------------------------------- Per Common Share - --------------------------------------------------------------------------------------------------------------------------- Net earnings (basic) $ 4.30(1) $ 2.81(2) $ 2.40 $ 1.93 $ 1.57(3) Net earnings (diluted) 4.16(1) 2.73(2) 2.33 1.89 1.55(3) Cash dividends .445 .387 .338 .298 .26 Shareholders' equity 25.75 15.42 15.03 11.72 8.80 Price range: High $ 57.88 $ 44.00 $ 29.83 $ 24.08 $ 22.67 Low 37.50 28.25 21.25 16.83 16.50 Close 51.13 42.75 29.00 21.33 19.00 Price/earnings ratio:* High 21.8x 18.3x 12.8x 12.7x 14.8x Low 14.1 11.8 9.1 8.9 10.8 Common shares used for EPS (basic) 136,055 140,176 145,677 151,446 154,875 Common shares used for EPS (diluted) 140,798 144,461 149,492 154,648 157,857 - --------------------------------------------------------------------------------------------------------------------------- EXH 13-3
(In thousands, except for per-share amounts):
AFLAC INCORPORATED AND SUBSIDIARIES At Year-End 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Assets: Investments and cash $22,879,910 $20,744,107 $20,044,964 $15,993,768 $12,469,140 Other 6,574,095 4,276,277 5,171,545 4,293,311 2,973,546 ---------- ---------- ---------- ---------- ---------- Total assets $29,454,005 $25,020,384 $25,216,509 $20,287,079 $15,442,686 ========== ========== ========== ========== ========== Liabilities and shareholders' equity: Policy liabilities $19,885,068 $20,234,205 $19,513,504 $16,006,607 $12,065,471 Notes payable 523,209 353,533 327,268 184,901 122,062 Income taxes 1,827,337 1,181,121 1,397,709 1,392,441 950,278 Other liabilities 3,787,919 1,125,956 1,843,887 951,363 939,251 Shareholders' equity 3,430,472 2,125,569 2,134,141 1,751,767 1,365,624 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $29,454,005 $25,020,384 $25,216,509 $20,287,079 $15,442,686 ========== ========== ========== ========== ========== - -------------------------------------------------------------------------------------------------------------------------- Supplemental Data - -------------------------------------------------------------------------------------------------------------------------- Operating earnings** $ 374,486 $ 347,425 $ 348,734 $ 293,053 $ 241,654(3) Operating earnings per share (basic)** $ 2.75 $ 2.48 $ 2.39 $ 1.94 $ 1.56(3) Operating earnings per share (diluted)** 2.66 2.40 2.33 1.89 1.53(3) Pretax profit margin** 8.6% 8.4% 8.4% 8.3% 8.5% After-tax profit margin** 5.4% 4.9% 4.8% 4.8% 4.8%(3) Operating return on equity*** 18.8% 19.9% 22.0% 20.4% 19.9%(3) Yen/dollar exchange rate at year-end 130.10 116.10 102.95 99.85 112.00 Average yen/dollar exchange rate 121.07 108.84 94.10 102.26 111.21 Notes: (1) Includes gain of $211,190 ($1.55 per basic share, $1.50 per diluted share) from the sale of the broadcast business in 1997. (2) Includes gain of $48,211 ($.34 per basic share, $.33 per diluted share) from the sale of the broadcast business in 1996. (3) Excludes gain of $11,438 ($.07 per share) from cumulative effect of accounting changes in 1993. (*) Based on diluted operating earnings per share. (**) Excludes realized investment gains/losses and in 1996 and 1997, the gains from the sale of the television business. (***)Based on operating earnings and excluding unrealized gains on securities available for sale, net. 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 and marketed at the work site, 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. RESULTS OF OPERATIONS In 1997, the Company completed the sale of its broadcast 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 closed on December 31, 1996. The pretax and after-tax gains recognized in 1996 on this sale were $60.3 million and $48.2 million, respectively. The effect of the after-tax gain on 1996 basic and diluted net earnings per share was $.34 and $.33, respectively. The pretax and after-tax gains recognized during the second quarter of 1997 on the closing of the six remaining stations were $267.2 million and $211.2 million, respectively. The effect of the after-tax gain on 1997 basic and diluted net earnings per share was $1.55 and $1.50, respectively. For further information, see Note 2 of the Notes to the Consolidated Financial Statements. EXH 13-5 The table below sets forth the results of operations by business segment for the years shown and the percentage changes from the previous year. SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT (In millions, except for per-share amounts) Percentage change Years ended over previous year December 31, ------------------ ------------------------ 1997 1996 1997 1996 1995 ------------------ ------------------------ Insurance operations (excluding realized investment gains and losses): AFLAC Japan................. (5.4)% (5.1)% $504.1 $532.8 $561.4 AFLAC U.S................... 43.4 23.0 184.3 128.5 104.5 ----- ----- ----- Total 4.1 (.7) 688.4 661.3 665.9 Broadcast division operations.. 35.0 3.5 25.6 19.0 Interest expense, noninsurance operations................... 16.7 (10.8) (10.5) (12.5) (11.3) Corporate expenses, other operations and eliminations.. 9.3 (20.0) (78.4) (86.6) (72.3) ----- ----- ----- Pretax operating earnings.. 2.6 (2.2) 603.0 587.8 601.3 Realized investment gains (losses)............... (5.4) 1.9 (.3) Gain on sale of television business..................... 267.2 60.3 - ----- ----- ----- Earnings before income taxes.................... 33.0 8.2 864.8 650.0 601.0 Income taxes................... 9.5 1.5 279.8 255.6 251.9 ----- ----- ----- Net earnings............... 48.3% 13.0% $585.0 $394.4 $349.1 ==== ==== ===== ===== ===== Net earnings per share: Basic........................ 53.0% 17.1% $ 4.30 $ 2.81 $ 2.40 Diluted...................... 52.4 17.2 4.16 2.73 2.33 ==== ==== ===== ===== ===== ============================================================================ The following discussion of earnings comparisons focuses on pretax operating earnings and excludes realized investment gains/losses and the gains from the sale of the television business in 1996 and 1997. Operating earnings per share referred to in the following discussion are based on the diluted number of average outstanding shares. Foreign Currency Translation Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on the Company's reported results. EXH 13-6 The following table illustrates the effect of foreign currency translation on the Company's reported results by comparing those results as if foreign currency exchange rates had remained unchanged from the previous year. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. Selected Percentage Changes for Supplemental Consolidated Data (Years Ended December 31) Adjusted to As Exclude Foreign Reported Currency Changes* ------------------------ ------------------------ 1997 1996 1995 1997 1996 1995 ------ ------ ------ ------ ------ ------ Premium income (.6)% (2.6)% 17.2% 8.5% 10.1% 9.2% Net investment income 5.5 (.3) 22.2 14.0 11.9 14.2 Total revenues** 2.1 (1.3) 17.7 10.9 11.3 9.8 Total benefits and expenses (1.0) (2.1) 17.5 8.0 10.5 9.7 Operating earnings*** 7.8 (.4) 19.0 15.2 11.5 11.3 Operating earnings per diluted share*** 10.8 3.0 23.3 18.3 15.5 15.3 - ---------------------------------------------------------------------------- * Amounts excluding foreign currency changes for each year were determined using the average yen/dollar exchange rate for each respective prior year. ** Includes realized investment gains and losses, and the gains from the sale of the television business in 1996 and 1997. *** Excludes realized investment gains and losses, and the gains from the sale of the television business in 1996 and 1997. ============================================================================ In the third quarter of 1995, the yen began to weaken in relation to the dollar and continued to weaken throughout 1996 and 1997. The average yen-to-dollar exchange rates were 121.07 in 1997, 108.84 in 1996 and 94.10 in 1995. Operating earnings per share, which were affected by these currency fluctuations, increased 10.8% to $2.66 in 1997, 3.0% to $2.40 in 1996 and 23.3% to $2.33 in 1995. The weakening of the yen in 1997 and 1996 lowered operating earnings by $.18 per share in 1997 compared with 1996 and $.29 per share in 1996 compared with 1995. The strengthening of the yen in 1995 benefited operating earnings by $.15 per share in 1995 compared with 1994. 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. Despite the weakening of the yen during 1996 and 1997, operating earnings per share increased in each year of the three-year period ended December 31, 1997. The increases reflected strong earnings in the functional currencies of AFLAC's core insurance operations in Japan and the United States, a consolidated benefit from additional investment income associated with profit repatriations from AFLAC Japan to AFLAC U.S., and in 1997, additional investment income earned on the proceeds from the sale of the television business. The Company's share repurchase program also increased operating earnings per share. EXH 13-7 The Company's primary financial objective is the growth of operating earnings per share before the effect of foreign currency fluctuations. In 1996, the Company set this objective at an annual growth rate of 15% to 17% through the year 2000. The goal for 1997 was 17% growth, which the Company exceeded. Excluding the effect of currency fluctuations, operating earnings per share increased 18.3% in 1997, 15.5% in 1996 and 15.3% in 1995. In early 1998, the Company raised its 1998 objective for growth in operating earnings per share from a 17% increase to 20% before the effect of currency translation. If that objective is achieved, the following table shows various results for operating earnings per share in 1998 when the estimated impact from foreign currency translation is included. Annual Yen Average Annual Operating % Growth Yen Impact Exchange Rate Diluted EPS Over 1997 on EPS - ------------------ ---------------- --------- ---------- 1998 @ 110.00 $ 3.35 25.9% $ .16 1998 @ 115.00 3.27 22.9 .08 1998 @ 120.00 3.20 20.3 .01 1998 @ 121.07* 3.19 19.9 - 1998 @ 125.00 3.14 18.0 (.05) 1998 @ 130.00 3.09 16.2 (.10) 1998 @ 135.00 3.04 14.3 (.15) *Actual 1997 average exchange rate Profit Repatriation AFLAC Japan repatriated profits to AFLAC U.S. of $347.0 million in 1997, $217.3 million in 1996 and $140.5 million in 1995. The profit transfer in 1997 included $124.8 million of a non-recurring nature related to gains realized from the valuation of investments as determined on a Japanese regulatory accounting basis. Since the first repatriation in 1989, AFLAC Japan has repatriated $1.0 billion, which has enhanced the Company's flexibility and profitability. 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 lower on investment income earned in the United States. Management estimates that cumulative profit transfers from 1992 through 1997 have benefited consolidated net earnings by $41.3 million in 1997, $25.7 million in 1996 and $13.9 million in 1995. 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 determined using accounting principles that differ materially from U.S. generally accepted accounting principles. Such differences relate primarily to the 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 1998 profit repatriation will approximate 20 billion yen ($155 million using the December 31, 1997, exchange rate). EXH 13-8 Share Repurchase Program During 1997, the board of directors authorized the purchase of up to an additional 4.0 million shares of AFLAC Incorporated common stock. Including shares remaining under a previous authorization, the Company had approval to purchase up to 5.6 million shares as of December 31, 1997. The Company had purchased 26.8 million shares from the inception of the share repurchase program in February 1994 through December 31, 1997. The shares purchased were financed with bank borrowings and available cash. Interest expense related to the share repurchase program was $9.0 million in 1997, $9.4 million in 1996 and $5.3 million in 1995. Consolidated interest expense, including interest expense from insurance operations, was $13.7 million in 1997, $16.2 million in 1996 and $15.6 million in 1995. The difference between the percentage increases in net earnings and net earnings per share primarily reflects the impact of the share repurchase program. Income Taxes The Company's effective income tax rates were 32.4% in 1997, 39.3% in 1996 and 41.9% in 1995. Japanese income taxes on AFLAC Japan's operating results, which were taxed at Japan's corporate income tax rate of 45.3%, accounted for most of the Company's income tax expense. The decline in the effective tax rates in 1997 and 1996 resulted primarily from increased earnings from the Company's U.S. business segment, which included the gains from the sale of the television business in 1996 and 1997. 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. AFLAC was ranked number one in financial strength among Japan's major life insurers in Nikkei Business Magazine. 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 1997. EXH 13-9 AFLAC JAPAN SUMMARY OF OPERATING RESULTS In Dollars (In millions) 1997 1996 1995 ---------------------------------- Premium income.................... $4,802.7 $4,951.6 $5,195.4 Investment income, as adjusted*... 928.6 920.5 941.3 Other income 1.9 1.6 (.5) ------- ------- ------- Total revenues, as adjusted*.... 5,733.2 5,873.7 6,136.2 ------- ------- ------- Benefits and claims............... 4,156.3 4,293.7 4,486.3 Operating expenses................ 1,036.9 1,022.3 1,068.0 ------- ------- ------- Total benefits and expenses 5,193.2 5,316.0 5,554.3 ------- ------- ------- Pretax operating earnings, as adjusted*..................... 540.0 557.7 581.9 Investment income applicable to profit repatriations............ (35.9) (24.9) (20.5) ------- ------- ------- Pretax operating earnings....... $ 504.1 $ 532.8 $ 561.4 ======= ======= ======= - --------------------------------------------------------------------------- Percentage changes in dollars over previous year: Premium income.................. (3.0)% (4.7)% 18.9% Investment income*.............. .9 (2.2) 22.9 Total revenues*................. (2.4) (4.3) 19.4 Pretax operating earnings*...... (3.2) (4.2) 20.3 Pretax operating earnings....... (5.4) (5.1) 19.1 - --------------------------------------------------------------------------- Percentage changes in yen over previous year: Premium income.................. 7.9% 10.2% 9.4% Investment income*.............. 12.3 13.1 13.1 Total revenues*................. 8.6 10.7 9.9 Pretax operating earnings*...... 7.8 10.9 10.7 Pretax operating earnings....... 5.4 9.8 9.7 - --------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims............. 72.5% 73.1% 73.1% Operating expenses.............. 18.1 17.4 17.4 Pretax operating earnings....... 9.4 9.5 9.5 Ratio of pretax operating earnings to total reported revenues...... 8.9% 9.1% 9.2% ============================================================================ * Adjusted investment income, total revenues and pretax operating earnings include estimates of additional investment income of $35.9 million in 1997, $24.9 million in 1996 and $20.5 million in 1995, foregone due to profit repatriations. ============================================================================ EXH 13-10 Japanese Economy Since the last half of 1997, there has been widespread concern regarding the economic outlook of many Asian countries, including Japan. The financial strength of some Japanese financial institutions has deteriorated, and others have experienced bankruptcy. Some experts believe Japan's economy could weaken further. As management has indicated in the past, the weak economy in Japan has resulted in a difficult marketing environment for AFLAC Japan, declining interest rates for new money investments and decreased consumer confidence. The time required for the Japanese economy to recover remains uncertain. AFLAC Japan Sales The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force in yen of 5.2% in 1997, 12.2% in 1996 and 7.5% in 1995 reflect the high persistency of AFLAC Japan's business and sales of new policies. Annualized premiums in force were: 597.8 billion yen ($4.6 billion) at December 31, 1997; 568.1 billion yen ($4.9 billion) at December 31, 1996; and 506.4 billion yen ($4.9 billion) at December 31, 1995. New annualized premiums from sales were: $515.3 million in 1997, down 28.5% (down 20.4% in yen); $721.0 million in 1996, down 4.8% (up 10.0% in yen); and $757.4 million in 1995, up 19.8% (up 10.3% in yen). AFLAC Japan's sales mix is changing, although cancer life still accounts for the majority of insurance in force. Cancer life sales accounted for 52.5% of total new sales in yen in 1997, 46.7% in 1996 and 71.2% in 1995. Living benefit life, which was introduced in the fourth quarter of 1995, accounted for 28.3% of total new sales in 1997 and 39.5% in 1996. Care product sales represented 6.8% of total new sales in 1997, 10.6% in 1996 and 15.6% in 1995. AFLAC Japan's new policy sales in 1997 were 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. Additionally, consumer confidence in the life insurance industry declined following the April 1997 collapse of Nissan Mutual Life Insurance Company. 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 incentive pay system for AFLAC Japan's employed sales managers was revised to reward them for improved sales performance. The Company made additional expenditures in the second half of 1997 that will continue in 1998 for expanded sales promotion efforts in Japan. In December 1997, AFLAC Japan received approval from Japanese regulators to sell three new riders to the Company's popular cancer life policy. One rider adds cancer surgical benefits, while another provides supplemental accident coverage. The third rider provides supplemental medical benefits for general hospitalization. In September 1997, the EXH 13-11 Japanese government increased the copayments for the employer-sponsored health care program from 10% to 20% for the primary insured, thereby increasing the portion of the costs the insured must pay. Given the increase in copayments, the Company believes the medical benefits should be especially appealing to consumers. During 1998, AFLAC Japan will primarily market the accident and medical riders in a single affordable package that should be attractive in the current economy. In 1998, the Company expects to increase sales by 15% to 20% compared with 1997 and maintain the profit margin at approximately the 1997 level. Management also expects revenues in yen to increase 7% and the Company's strong policy persistency to continue. AFLAC Japan Investments Due to the continued low level of available investment yields in Japan, the Ministry of Finance has directed 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 life policy sales made after July 1, 1994. Premium rates on new care policy issues were increased by an average of 10% in November 1993 and an additional 16% in September 1995. As a result of continuing low yields, the Company increased premium rates by approximately 13% on new policy issues for all product lines beginning in the fourth quarter of 1996. Investment income is affected by available cash flow from operations, investment yields achievable on new investments and foreign currency exchange rates. Investment income in dollars in 1997 and 1996 was affected by the weaker yen. Despite a general decline in available investment yields, investment income in yen increased 12.3% in 1997 and 13.1% in 1996. Funds available for investment during the three-year period 1995 through 1997 were reduced by the annual profit repatriations previously discussed. Rates of return on fixed-maturity securities in Japan remained low in 1997 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 2.89% in May 1997 to a low of 1.79% in November 1997, closing the year at 1.94%. AFLAC Japan's new money rates for investments were 5.20% for 1997, 4.07% for 1996 and 4.71% for 1995. The improvement in AFLAC Japan's new money yield in 1997 resulted from restructuring portions of the existing dollar-denominated investment portfolio and a greater allocation of cash flow to private placement securities, which included dual-currency securities (yen-denominated bonds with a dollar coupon). The cumulative effect of lower investment yields is reflected in the overall rate of return (net of investment expenses) on AFLAC Japan's average investments and cash, at amortized cost. This return was 5.37% in 1997, compared with 5.55% in 1996 and 5.81% in 1995. By concentrating on selected sectors of the bond market, 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 invest new money in the near term at an adequate spread over premium pricing assumptions for new business and assumed interest rates for policy liabilities. The premium increases implemented during the past three years will have a positive impact on investment margins and therefore should contribute to stability in the pretax operating profit margin. EXH 13-12 Insurance 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 through the year 2001 and includes provisions to avoid "radical change" in the third sector of the insurance industry, which includes supplemental insurance. 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. Although the Company has inherent competitive strengths in distribution, products and investments that should enable the support of business expansion in a more competitive environment, the ultimate impact of deregulation is not presently determinable. AFLAC Japan Other During the three-year period ended December 31, 1997, the benefit ratio and the operating expense ratio were relatively stable. The decline of the benefit ratio in 1997 is primarily attributable to newer products that have somewhat lower loss ratios than the cancer life plan. Annual claims experience and persistency studies continue to support the current reserving assumptions. During the second quarter of 1997, Nissan Mutual Life Insurance Company, a medium-sized Japanese insurer, was declared insolvent by the Japanese Ministry of Finance. Previously, all life insurers doing business in Japan had agreed to contribute to a voluntary policyholder protection fund that would be used to help offset insurer insolvencies. 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 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 for both basic and diluted earnings per share. Without this charge, the expense ratio would have decreased from 18.1% to 17.7% in 1997. The Japanese government increased the consumption tax from 3% to 5% effective April 1, 1997. AFLAC Japan currently incurs consumption tax on most of the commissions paid to its agents. The Company implemented changes in compensation arrangements with its agents to mitigate a portion of this tax increase. The consumption tax increase had no material affect on 1997 consolidated net earnings. 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. Management has mitigated some of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Management estimates the net impact of this tax change will decrease 1998 net earnings by $13 million. Most of the Company's income tax expense represents Japanese income taxes on AFLAC Japan's operating results calculated at the Japanese corporate tax rate of 45.3%. In December 1997, Japanese government leaders EXH 13-13 announced proposals to stimulate the Japanese economy. If enacted as presently proposed, the Japanese corporate tax rate would be reduced beginning in 1999. The proposals also include tax-base broadening provisions whereby certain accrued expenses would no longer be deductible for tax purposes until paid. Discussions continue among government leaders, and these corporate tax changes are expected to be finalized in March 1998. Even with Japan's economic slowdown, the Company believes the market for supplemental insurance remains bright. Need 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. Estimated investment income earned from profits repatriated to and retained by AFLAC U.S. from 1992 through 1997, along with estimated investment income earned from the sales proceeds of the television business, have been reclassified in the presentation on the following page in order to improve comparability between years. EXH 13-14 AFLAC U.S. SUMMARY OF OPERATING RESULTS (In millions) 1997 1996 1995 -------------------------------- Premium income......................... $1,061.7 $ 945.8 $ 859.8 Investment income, as adjusted*........ 103.8 86.3 78.3 Other income........................... 1.8 1.5 1.2 ------- ------- ------- Total revenues, as adjusted*......... 1,167.3 1,033.6 939.3 ------- ------- ------- Benefits and claims.................... 667.0 590.4 533.1 Operating expenses..................... 391.9 347.4 322.9 ------- ------- ------- Total benefits and expenses.......... 1,058.9 937.8 856.0 ------- ------- ------- Pretax operating earnings, as adjusted*........................ 108.4 95.8 83.3 Investment income applicable to profit repatriations and, in 1997, proceeds from the sale of the television business.................. 75.9 32.7 21.2 ------- ------- ------- Pretax operating earnings.......... $ 184.3 $ 128.5 $ 104.5 ====== ====== ====== - ---------------------------------------------------------------------------- Percentage increases over previous year: Premium income....................... 12.2% 10.0% 8.5% Investment income* ................. 20.3 10.2 14.3 Total revenues*...................... 12.9 10.0 8.9 Pretax operating earnings*........... 13.2 15.0 7.7 Pretax operating earnings............ 43.4 23.0 15.8 - ---------------------------------------------------------------------------- Ratios to total revenues, as adjusted:* Benefits and claims.................. 57.1% 57.1% 56.7% Operating expenses................... 33.6 33.6 34.4 Pretax operating earnings............ 9.3 9.3 8.9 Ratio of pretax operating earnings to total reported revenues.............. 14.8% 12.1% 10.9% ============================================================================ *Excludes estimated investment income of $75.9 million in 1997, related to investment of profit repatriation funds retained by AFLAC U.S. and investment of proceeds from the sale of the television business, and $32.7 million in 1996 and $21.2 million in 1995 related to investment of profit repatriation funds retained by AFLAC U.S. ============================================================================ AFLAC U.S. Sales The percentage increases in premium income reflect the growth of premiums in force. The increases in annualized premiums in force of 14.7% in 1997, 11.1% in 1996 and 8.8% in 1995 were favorably affected by increased EXH 13-15 sales at the work site through cafeteria plans (Internal Revenue Code Section 125) and an improvement in the persistency for several lines of business. Annualized premiums in force were: $1.2 billion at December 31, 1997; $1.1 billion at December 31, 1996; and $954.0 million at December 31, 1995. New annualized premiums from sales and policy conversions were: $400.9 million in 1997, up 22.7%; $326.6 million in 1996, up 17.0%; and $279.1 million in 1995, up 13.6%. Accident/disability coverage was the best- selling product for the fourth year in a row, while sales of cancer coverage remained strong, up 9.7% in 1997. AFLAC 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. The Company has developed a laptop, point-of- sale computer system that allows sales associates to input the customer's information, capture the signature, and electronically transmit the application from the field to headquarters in a completely paperless transaction. At year-end 1997, approximately 50% of new business was transmitted via this laptop compared with about 16% in 1996. By improving administrative systems and controlling other costs, management has been able to redirect funds to a national advertising program without significantly affecting the pretax operating profit margin. For more information regarding advertising expenses, see Note 2 of the Notes to the Consolidated Financial Statements. 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. Management expects the pretax operating profit margin, which was 9.3% excluding investment earnings from profit repatriation and from the broadcast sale in 1997, to remain approximately the same or increase slightly in 1998. Management continues to believe that there are significant opportunities to market high-quality, affordable supplemental insurance products in the U.S. marketplace. 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 fluctuated in recent years due to changes in the legal environment in certain states and to enhanced benefits, early retirements and revisions in actuarial assumptions for retirement accruals. EXH 13-16 On March 12, 1997, the Company sold its Canadian insurance subsidiary at a nominal gain. Other operations include an insurance operation in Taiwan. Additional expense charges were recognized in 1996 and 1997 for estimated termination costs and fair value adjustments related to these operations. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS For information regarding new Statements of Financial Accounting Standards (SFAS), 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. 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, 1997, was 130.10 yen to one U.S. dollar, 10.8% weaker than the December 31, 1996, exchange rate of 116.10. Management estimates that the weaker yen rate decreased reported investments and cash by $2.2 billion, total assets by $2.9 billion and total liabilities by $2.8 billion compared with the amounts that would have been reported for 1997 if the exchange rate had remained unchanged from year-end 1996. For additional information on exchange rates, see Note 2 of the Notes to the Consolidated Financial Statements. Market Risks of Financial Instruments The Company is exposed primarily to three types of market risks on its financial instruments. These are interest rate, equity price and foreign currency exchange rate risk. Interest Rate Risk The primary interest rate exposure is the effect of changes in interest rates on the fair value of the Company's investments in fixed-maturity securities. The Company uses modified duration analysis to estimate the amount of sensitivity to interest rate changes in its fixed-maturity securities. Modified duration analysis provides a measure of price percentage volatility. For example, if the current duration of a bond is five, then the market value of the bond will increase by approximately 5% if market interest rates decrease by 100 basis points. Likewise, the value of the bond will decrease by approximately 5% if market interest rates increase by 100 basis points. EXH 13-17 The following table shows the effect of changes in interest rates on the fair values of the Company's fixed-maturity securities and notes payable. SENSITIVITY OF FAIR VALUES OF FINANCIAL INSTRUMENTS TO INTEREST RATE CHANGES (DECEMBER 31, 1997) -150 -100 - 50 Market + 50 +100 +150 Basis Basis Basis Value Basis Basis Basis (In millions) Points Points Points 12/31/97 Points Points Points - ---------------------------------------------------------------------------- Fixed-maturity securities: Yen-denominated $21,069 $20,045 $19,084 $18,191 $17,355 $16,577 $15,851 Dollar- denominated 4,787 4,594 4,414 4,236 4,083 3,925 3,775 ------ ------ ------ ------ ------ ------ ------ Total $25,856 $24,639 $23,498 $22,427 $21,438 $20,502 $19,626 ====== ====== ====== ====== ====== ====== ====== Notes payable* $ 482 $ 490 $ 498 $ 505 $ 513 $ 520 $ 528 *Excludes capitalized leases. The unrealized gains and losses on fixed-maturity securities, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income in 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. For further information, see Note 3 of the Notes to the Consolidated Financial Statements. The Company attempts to match the duration of its assets with the duration of its liabilities. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related assets due to the unavailability of qualified long-duration securities. Therefore, there is a risk that reinvestment of the proceeds at maturity of such investments will be at a yield below that of the interest required for the accretion of policy liabilities. At December 31, 1997, the average duration of the policy liabilities was approximately 13 years, unchanged from 1996. The average duration of the yen-denominated invested assets was approximately nine years in 1997 and 1996. Over the next five years, $2.4 billion, at amortized cost, or 16.1%, of AFLAC Japan's yen-denominated fixed-maturity securities are scheduled to mature. The following is a comparison of the actuarially assumed interest rates for policy reserves and investment yields for: U.S. Japan --------- --------- Policies issued in 1997: Required interest on policy reserves 7.07% 3.50% Investment portfolio - new money yield 7.64 5.20 All policies in force at December 31, 1997: Required interest on policy reserves 6.40 5.43 Investment portfolio yield 7.79 5.37 EXH 13-18 The Company has outstanding interest rate swaps on all of its variable- interest-rate yen-denominated borrowings. These swaps reduce the impact of changes in interest rates on the Company's borrowing costs and effectively change the Company's interest rate from variable to fixed. Therefore, there was no effect on net earnings due to changes in market interest rates. For further information on the Company's notes payable, see Note 7 of the Notes to the Consolidated Financial Statements. Equity Price Risk Equity securities at December 31, 1997, totaled $146.3 million, or .6% of total investments and cash on a consolidated basis. The Company uses beta analysis to measure the sensitivity of its equity securities portfolio to fluctuations in the broad market. The beta of the Company's equity securities portfolio is .93. For example, if the overall stock market value changed by 10%, the value of AFLAC's equity securities would be expected to change by approximately 9.3%, or $13.6 million. Currency Risk Most of AFLAC Japan's investments and cash are denominated in yen. When the yen-denominated financial instruments mature or are sold, the proceeds are generally reinvested in yen-denominated securities and are held to fund yen-denominated policy obligations rather than converted into dollars. Therefore, there is no significant economic or foreign currency transaction risk. In addition to the yen-denominated financial instruments held by AFLAC Japan, the Parent Company has yen-denominated borrowings that have been designated as a hedge of the Company's investment in AFLAC Japan. The unrealized foreign currency translation gains and losses are reported in accumulated other comprehensive income in shareholders' equity. The Company attempts to match its yen-denominated assets to its yen-denominated liabilities on a consolidated basis in order to minimize the exposure of its shareholders' equity to foreign currency translation fluctuations. EXH 13-19 The following table compares the U.S. dollar values of the Company's yen-denominated assets and liabilities at various exchange rates. Dollar Value of Yen-Denominated Assets and Liabilities At Selected Exchange Rates (December 31, 1997) 115.10 120.10 130.10* 140.10 145.10 (In millions) Yen Yen Yen Yen Yen - ---------------------------------------------------------------------------- Yen-denominated financial instruments: Assets: Fixed-maturity securities $20,561.3 $19,705.3 $18,190.7 $16,892.3 $16,310.2 Cash and cash equivalents 185.0 177.3 163.7 152.0 146.7 Securities held as collateral 3,429.7 3,286.9 3,034.2 2,817.7 2,720.6 Other financial instruments 18.9 18.1 16.7 15.4 15.0 -------- -------- -------- -------- -------- Total 24,194.9 23,187.6 21,405.3 19,877.4 19,192.5 -------- -------- -------- -------- -------- Liabilities: Securities held as collateral 3,429.7 3,286.9 3,034.2 2,817.7 2,720.6 Notes payable 563.0 539.6 498.1 462.5 446.6 -------- -------- -------- -------- -------- Total 3,992.7 3,826.5 3,532.3 3,280.2 3,167.2 -------- -------- -------- -------- -------- Net yen-denominated financial instruments 20,202.2 19,361.1 17,873.0 16,597.2 16,025.3 Other yen-denominated assets 2,964.1 2,840.7 2,622.3 2,435.1 2,351.2 Other yen-denominated liabilities (22,614.5)(21,672.9)(20,007.1)(18,578.9)(17,938.7) -------- -------- -------- -------- -------- Total yen-denominated net assets subject to foreign currency fluctuation $ 551.8 $ 528.9 $ 488.2 $ 453.4 $ 437.8 ======== ======== ======== ======== ======== *Actual year-end rate. For information regarding the effect of foreign currency translation on operating earnings per share, see Results of Operations on pages 13-5 through 13-8 and Note 2 of the Notes to the Consolidated Financial Statements. EXH 13-20 Investments and Cash Fixed-maturity securities available for sale are carried at fair value. The following table shows an analysis of investments and cash at December 31: (In millions) 1997 1996 % Change -------- -------- -------- AFLAC U.S.: Total investments and cash, at cost or amortized cost $ 2,678 $ 1,910 40.2% Unrealized gains on securities available for sale 228 101 -------- -------- Total investments and cash $ 2,906 $ 2,011 44.5% ======== ======== ====== AFLAC Japan: Total investments and cash, at cost or amortized cost $ 16,743 $ 16,391 2.1% Unrealized gains on securities available for sale 3,155 2,335 -------- -------- Total investments and cash $ 19,898 $ 18,726 6.3% ======== ======== ====== Consolidated: Total investments and cash, at cost or amortized cost $ 19,497 $ 18,307 6.5% Unrealized gains on securities available for sale 3,383 2,437 -------- -------- Total investments and cash $ 22,880 $ 20,744 10.3% ======== ======== ====== The continued growth in investments and cash reflects the substantial cash flows from operations, and $98.5 million and $350.6 million received in cash in conjunction with the sale of the television business in 1996 and 1997, respectively. In addition, there was an increase in net unrealized gains on securities available for sale. Net unrealized gains of $3.4 billion on securities available for sale at December 31, 1997, consisted of $3.4 billion in gross unrealized gains and $17.9 million in gross unrealized losses. EXH 13-21 AFLAC invests primarily within the Japanese, U.S. and Euroyen 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 these 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: 1997 1996 ------ ------ AAA 38.3% 46.2% AA 20.5 19.6 A 28.9 26.0 BBB 12.3 8.2 ------ ------ 100.0% 100.0% ====== ====== The Company does not hold any securities rated below BBB. Private placement investments accounted for 36.3% and 28.8% of the Company's total fixed-maturity securities available for sale as of December 31, 1997 and 1996, respectively. AFLAC Japan has made investments in the private placement market to secure higher yields than those available from Japanese government bonds. At the same time, the Company has adhered to its conservative standards for credit quality. The Company's purchases in the private placement market are often done through Euro medium-term note programs. Securities in these programs are more marketable due to standardized documentation and relatively wide distribution. All of the Company's private placement investments are rated as Class 1 or 2 by the Securities Valuation Office of the National Association of Insurance Commissioners. Mortgage loans on real estate and other long-term investments remained immaterial at both December 31, 1997 and 1996. Cash, cash equivalents and short-term investments totaled $279.0 million, or 1.2% of total investments and cash, as of December 31, 1997, compared with $259.3 million, or 1.2% of total investments and cash, at December 31, 1996. 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 decreased $349.1 million, or 1.7%, during 1997. AFLAC Japan policy liabilities decreased $520.7 million, or 2.8%, and AFLAC U.S. policy liabilities increased $179.3 million, or 10.6%. Changes in policy liabilities were primarily due to the addition of new business, the aging of policies in force, the weaker yen and the effect of the market value adjustment for securities available for sale (see Note 3 of the Notes to the Consolidated Financial Statements). The weaker yen in 1997 compared with 1996 decreased reported policy liabilities by $2.2 billion. The weaker yen in 1996 compared with 1995 decreased reported policy liabilities by $2.4 billion in 1996. EXH 13-22 Debt The Company has a reducing revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or equivalent Japanese yen. Under the terms of the agreement, the borrowing limits were reduced to $400 million at July 15, 1997, and will reduce to $325 million on July 15, 1998. At December 31, 1997, bank borrowings of 45.4 billion yen ($349.0 million) were outstanding under this agreement. The Company also has a revolving credit agreement that provides for bank borrowings through October 2002 in either U.S. dollars or equivalent Japanese yen. The borrowing limit is $250 million. At December 31, 1997, bank borrowings of 19.4 billion yen ($149.1 million) were outstanding under this agreement. The proceeds from these loans were used to fund the Company's share repurchase program. When any portion of these loans is denominated in yen, the principal amounts of the loans in dollars will fluctuate due to changes in the yen/dollar exchange rate. The Company intends to service these loans with yen-denominated funds received as profit repatriations from AFLAC Japan. The Company has entered into interest rate swaps that effectively change the Company's interest rate on these loans from variable to fixed. The variable rate on the 45.4 billion yen ($349.0 million) loan is 1.03%, and the fixed rate is 2.29% after the effect of the swaps (including loan costs of 25 basis points). The variable rate on the 19.4 billion yen ($149.1 million) loan is .99%, and the fixed rate is 1.24% after the effect of the swaps (including loan costs of 20 basis points). Interest payments are made to the bank based on variable interest rates, and the Company either pays to or receives from the swap counterparty an amount necessary to equal the fixed rate. The variable interest rate at December 31, 1997, is based on the three-month Tokyo Interbank Offered Rate of 1.15%, plus loan costs. The Company has designated these yen-denominated borrowings, along with the dollar-denominated investments held by AFLAC Japan, as a hedge of its net investment in AFLAC Japan. Foreign currency translation gains/losses on the borrowings are included in the accumulated other comprehensive income 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 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 net unrealized gains on securities available for sale) was 19.6% and 16.1% as of December 31, 1997 and 1996, respectively. For further information concerning notes payable, see Note 7 of the Notes to the Consolidated Financial Statements. Security Lending AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. This program increased AFLAC Japan's investment income by approximately $1.5 million in 1997 and $1.1 million in 1996. EXH 13-23 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. Beginning in 1998, the Company will no longer recognize securities held as collateral as an asset, nor the related liability for the return of such collateral due to recently enacted accounting standards (Statements of Financial Accounting Standards No. 125 and No. 127). For further information regarding such arrangements, see Note 4 of the Notes to the Consolidated Financial Statements. Policy Guaranty Funds Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to the Company in the past. The Company believes that future assessments relating to companies in the U.S. currently involved in insolvency proceedings will not materially impact the consolidated financial statements. The Life Insurance Association of Japan, an industry organization, implemented a policyholder protection fund in 1996 to provide capital support to 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 was based on relative company size. As of December 31, 1997, $40.4 million, at fair value, of AFLAC Japan's investment securities had been pledged to this fund, of which approximately $33.8 million will be used in future years for assessment payments for the 1997 insolvency of Nissan Mutual Life. The fund was depleted by this insolvency, and the Japanese government may require additional contributions in the future. The Japanese Ministry of Finance and the Life Insurance Association of Japan are discussing a permanent policyholder protection fund system that will cover 90% of the reserves of any failed company. The contributions to this system will also be based on relative company size. This new fund is not expected to be established until April 1999. Shareholders' Equity Shareholders' equity increased $1.3 billion from December 31, 1996, to December 31, 1997. This was primarily due to an increase in net unrealized gains on securities available for sale of $1.0 billion, net earnings of $585.0 million and an increase in unrealized foreign currency exchange gains of $44.3 million. Offsetting these increases were net treasury stock purchases of $286.2 million and dividends to shareholders of $60.5 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 EXH 13-24 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 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 recent disposition of the broadcast business has increased the Company's capital resources. Management believes outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures, business expansion and funding 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. 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 many changes to SAP. One change is the requirement that insurance companies establish a deferred income tax liability for statutory accounting purposes. Management estimates AFLAC's deferred tax liability under the present provisions of the project would be approximately $180 million using SAP. The capital and surplus of AFLAC, as determined on a U.S. statutory accounting basis, was $1.8 billion at December 31, 1997. The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset risk and interest rate risk 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 increase and reflects 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, revisions to the risk-based capital formula and other related matters. EXH 13-25 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 $386.0 million in 1997, $253.6 million in 1996 and $179.5 million in 1995. During the last few years, the MOF has developed solvency standards, a version of risk-based capital requirements. Management believes the solvency margin of AFLAC Japan is very strong compared with other Japanese insurers. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 10 of the Notes to the Consolidated Financial Statements. Year 2000 System Conversion Costs The Company initiated a corporatewide program to assure that all of its computer systems in the United States and Japan will function properly in the year 2000. Any computer software that has date-sensitive coding might recognize a code of "00" as the year 1900 rather than the year 2000. If this were to occur, disruptions in premium and claim processing could occur. The Company has completed an assessment of the changes needed and developed a comprehensive plan to upgrade its systems to be year 2000- compliant. The conversion and testing of the changes is currently in process. The Company will utilize both internal and external resources to prepare the systems for the year 2000. The expenses incurred during the year ended December 31, 1997, totaled $1.1 million. As of December 31, 1997, the Company has estimated the total remaining cost of the year 2000 system-conversion project to be approximately $3.0 million, which will be expensed as incurred over the next two years. Management expects its year 2000 efforts to be completed on a timely basis. The Company receives premium and claim information from many external sources. Failure by a significant number of these customers to have year 2000-compliant systems could have a material effect on premium and claim processing by the Company. To help minimize this exposure, the Company initiated formal communications with its customers and is monitoring their progress. In addition, the Company is making contingency plans to develop interface programs capable of converting files that have noncompliant date fields. However, there can be no guarantee that the systems of other companies on which the Company depends will be completed on a timely basis. Rating Agencies AFLAC is rated "A+" (superior) by A.M. Best Company, an independent rating service that analyzes the financial condition and operating performance of insurance companies. AFLAC's claims-paying ability is rated "AA" by both Standard & Poor's and Duff & Phelps Credit Rating Co. Other For information regarding pending litigation, see Note 12 of the Notes to the Consolidated Financial Statements. EXH 13-26 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 10.1% in 1997 compared with 1996, weakened 13.5% in 1996 compared with 1995, and strengthened 8.7% in 1995 compared with 1994. The average exchange rates for 1997, 1996 and 1995 were 121.07, 108.84 and 94.10, respectively. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. For additional information, reference should be made to the Consolidated Statements of Cash Flows on pages 13-33 and 13-34. Operating Activities In 1997, consolidated cash flow from operations decreased 3.6% to $2.6 billion, compared with $2.7 billion in 1996 and $2.9 billion in 1995. Net cash flow from operations for AFLAC Japan decreased 4.1% (increased 6.1% in yen) to $2.3 billion in 1997, compared with $2.5 billion in 1996 and $2.7 billion in 1995. AFLAC Japan represented 91% of the consolidated net cash flow from operations in both 1997 and 1996, and 93% in 1995. The decrease in cash flow from operations in 1997 and 1996 was due to the weaker yen. Investing Activities Consolidated cash flow used by investing activities decreased 2.8% to $2.4 billion in 1997, compared with $2.5 billion in 1996 and $3.0 billion in 1995. The sale of the television business generated cash flow of $350.6 million in 1997 and $98.5 million in 1996. AFLAC Japan accounted for 81% of the consolidated net cash used by investing activities in 1997, compared with 93% in 1996 and 91% in 1995. 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 during the three years ended December 31, 1997. Financing Activities In 1997, net cash used by financing activities was $121.6 million, compared with $157.9 million in 1996 and $93.4 million in 1995. Treasury stock purchases of $314.3 million in 1997 were funded by proceeds from new borrowings. In 1996, treasury stock purchases of $204.2 million were funded by proceeds from new borrowings of $135.9 million and available cash. Treasury stock purchases of $224.2 million in 1995 were funded by proceeds from new borrowings in the amount of $198.3 million and available cash. Debt repayments of $55.3 million in 1997 and $36.2 million in 1996 on yen- denominated loans were made from annual profit repatriations from Japan. The Company has sold treasury shares to its dividend reinvestment plan and to the AFLAC Associate Stock Bonus Plan. These dispositions have generated proceeds in the amounts of $39.8 million, $34.5 million and $9.7 million for EXH 13-27 the years 1997, 1996 and 1995, respectively. Cash dividends paid to shareholders amounted to $60.5 million in 1997, an increase of 11.7% over 1996. Cash dividends paid to shareholders in 1996 were $54.2 million, an increase of 10.7% over the 1995 cash dividends of $48.9 million. The 1997 cash dividend of $.445 per share increased 15.0% over 1996. The 1996 cash dividend of $.387 per share represented an increase of 14.5% over the 1995 cash dividend of $.338 per share. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. 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 as well as specific projections of future results 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, assessments for insurance company insolvencies, 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 Japanese tax laws, adequacy of reserves, credit and other risks associated with the Company's investment activities, significant changes in interest rates and fluctuations in foreign currency exchange rates. EXH 13-28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, (In thousands, except for 1997 1996 1995 per share amounts) ---------- ---------- ---------- Revenues: Premiums, principally supplemental health insurance $5,873,661 $5,910,036 $6,070,830 Net investment income 1,077,715 1,021,955 1,024,960 Realized investment gains (losses) (5,440) 1,980 (270) Gain on sale of television business 267,223 60,264 - Other income 37,543 105,968 95,100 --------- --------- --------- Total revenues 7,250,702 7,100,203 7,190,620 --------- --------- --------- Benefits and expenses: Benefits and claims 4,833,077 4,895,522 5,034,266 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 180,417 162,475 168,779 Insurance commissions 773,354 778,082 802,176 Insurance expenses 479,151 437,265 424,974 Interest expense 13,709 16,186 15,611 Other operating expenses 106,174 160,672 143,819 --------- --------- --------- Total acquisition and operating expenses 1,552,805 1,554,680 1,555,359 --------- --------- --------- Total benefits and expenses 6,385,882 6,450,202 6,589,625 --------- --------- --------- Earnings before income taxes 864,820 650,001 600,995 Income tax expense (benefit): Current 291,979 239,682 233,662 Deferred (12,182) 15,956 18,276 --------- --------- --------- Total income taxes 279,797 255,638 251,938 --------- --------- --------- Net earnings $ 585,023 $ 394,363 $ 349,057 ========= ========= ========= Net earnings per share: Basic $ 4.30 $ 2.81 $ 2.40 Diluted 4.16 2.73 2.33 ========= ========= ========= Common shares used in computing earnings per share: Basic 136,055 140,176 145,677 Diluted 140,798 144,461 149,492 ========= ========= ========= See the accompanying Notes to the Consolidated Financial Statements. EXH 13-29 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands) 1997 1996 ---------- ---------- ASSETS: Investments and cash: Securities available for sale, at fair value: Fixed maturities (amortized cost $19,121,128 in 1997 and $17,941,200 in 1996) $ 22,437,818 $ 20,327,726 Equity securities (cost $80,270 in 1997 and $86,249 in 1996) 146,326 136,328 Mortgage loans and other 16,747 20,801 Short-term investments 43,344 50,157 Cash and cash equivalents 235,675 209,095 ----------- ----------- Total investments and cash 22,879,910 20,744,107 Receivables, primarily premiums 215,653 226,981 Accrued investment income 264,956 253,850 Deferred policy acquisition costs 2,581,828 2,582,946 Property and equipment, at cost less accumulated depreciation 386,049 471,907 Securities held as collateral for loaned securities 3,034,241 573,911 Intangible assets, at cost less accumulated amortization of $27,122 in 1996 - 60,933 Other 91,368 105,749 ----------- ----------- Total assets $ 29,454,005 $ 25,020,384 =========== =========== See the accompanying Notes to the Consolidated Financial Statements. (continued) EXH 13-30 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) December 31, (In thousands) 1997 1996 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Policy liabilities: Future policy benefits $ 18,398,830 $ 18,697,173 Unpaid policy claims 1,010,519 1,039,257 Unearned premiums 276,673 288,976 Other policyholders' funds 199,046 208,799 ----------- ----------- Total policy liabilities 19,885,068 20,234,205 Notes payable 523,209 353,533 Income taxes 1,827,337 1,181,121 Payables for return of collateral on loaned securities 3,034,241 573,911 Payables for security transactions 215,654 99,408 Other 538,024 452,637 Commitments and contingencies (Notes 11 and 12) ----------- ----------- Total liabilities 26,023,533 22,894,815 ----------- ----------- Shareholders' equity: Common stock of $.10 par value. Authorized 400,000 shares; issued 158,190 shares in 1997 and 157,239 shares in 1996 15,819 15,724 Additional paid-in capital 227,292 208,994 Retained earnings 2,442,309 1,917,794 Accumulated other comprehensive income: Unrealized foreign currency translation gains 274,074 229,782 Unrealized gains on securities available for sale 1,284,717 280,154 ----------- ----------- Total accumulated other comprehensive income 1,558,791 509,936 Treasury stock, at average cost (812,672) (526,425) Notes receivable for stock purchases (1,067) (454) ----------- ----------- Total shareholders' equity 3,430,472 2,125,569 ----------- ----------- Total liabilities and shareholders' equity $ 29,454,005 $ 25,020,384 =========== =========== See the accompanying Notes to the Consolidated Financial Statements. EXH 13-31 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended December 31, (In thousands) 1997 1996 1995 --------- --------- --------- Common stock: Balance at beginning of year $ 15,724 $ 15,636 $ 15,600 Exercise of stock options 95 88 36 --------- --------- --------- Balance at end of year 15,819 15,724 15,636 --------- --------- --------- Additional paid-in capital: Balance at beginning of year 208,994 196,928 192,899 Exercise of stock options 6,490 6,461 3,199 Gain on treasury stock reissued 11,808 5,688 830 Cash in lieu of fractional shares - (83) - --------- --------- --------- Balance at end of year 227,292 208,994 196,928 --------- --------- --------- Retained earnings: Balance at beginning of year 1,917,794 1,577,605 1,277,487 Net earnings 585,023 394,363 349,057 Cash dividends ($.445 per share in 1997, $.387 in 1996 and $.338 in 1995) (60,508) (54,174) (48,939) --------- --------- --------- Balance at end of year 2,442,309 1,917,794 1,577,605 --------- --------- --------- Accumulated other comprehensive income: Balance at beginning of year 509,936 696,106 402,935 Change in unrealized foreign currency translation gains during year, net of income taxes 44,291 16,463 39,228 Unrealized gains (losses) on securities available for sale during year, net of income taxes and reclassification adjustments 1,004,564 (202,633) 253,943 --------- --------- --------- Balance at end of year 1,558,791 509,936 696,106 --------- --------- --------- Treasury stock: Balance at beginning of year (526,425) (351,117) (135,776) Purchases of treasury stock (314,252) (204,169) (224,204) Cost of shares issued to sales associates stock bonus plan and dividend reinvestment plan 28,005 28,861 8,863 --------- --------- --------- Balance at end of year (812,672) (526,425) (351,117) --------- --------- --------- Notes receivable for stock purchases (1,067) (454) (1,017) --------- --------- --------- Total shareholders' equity $3,430,472 $2,125,569 $2,134,141 ========= ========= ========= See the accompanying Notes to the Consolidated Financial Statements. EXH 13-32 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (In thousands) 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 585,023 $ 394,363 $ 349,057 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 2,309,714 2,482,615 2,539,406 Deferred income taxes (12,182) 15,956 18,276 Change in income taxes payable 67,776 14,915 79,785 Increase in deferred policy acquisition costs (226,651) (264,734) (248,522) Change in receivables and advance premiums 7,574 (32,083) 124,882 Gain on sale of television business (267,223) (60,264) - Other, net 134,419 143,553 81,214 ---------- ---------- ---------- Net cash provided by operating activities 2,598,450 2,694,321 2,944,098 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed-maturity securities sold 1,721,764 1,707,537 626,938 Fixed-maturity securities matured 421,530 560,305 506,043 Equity securities 63,846 17,057 42,247 Mortgage loans and other investments, net 3,696 4,314 4,470 Short-term investments, net 5,934 - 5,049 Costs of investments acquired: Fixed-maturity securities (4,938,661) (4,854,398) (4,082,021) Equity securities (55,365) (23,473) (44,459) Short-term investments, net - (5,733) - Additions to property and equipment, net (7,702) (9,183) (17,391) Proceeds from sale of television business 350,633 98,500 - ---------- ---------- ---------- Net cash used by investing activities $(2,434,325) $(2,505,074) $(2,959,124) ---------- ---------- ---------- (continued) EXH 13-33 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, (In thousands) 1997 1996 1995 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings $ 409,489 $ 135,940 $ 198,291 Principal payments under debt obligations (202,768) (76,492) (31,442) Dividends paid to shareholders (60,508) (54,174) (48,939) Purchase of treasury stock (314,252) (204,169) (224,204) Treasury stock reissued 39,813 34,549 9,693 Other, net 6,585 6,466 3,235 ---------- ---------- ---------- Net cash used by financing activities (121,641) (157,880) (93,366) ---------- ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (15,904) (12,719) 1,688 ---------- ---------- ---------- Net change in cash and cash equivalents 26,580 18,648 (106,704) Cash and cash equivalents, beginning of year 209,095 190,447 297,151 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 235,675 $ 209,095 $ 190,447 ========== ========== ========== Supplemental disclosures of cash flow information: Cash payments during the year for: Interest on debt obligations $ 12,133 $ 14,286 $ 12,764 Income taxes 222,274 223,851 154,011 Non-cash financing activities included capital lease obligations incurred for computer equipment totaling $6,348 in 1997, $8,524 in 1996 and $2,517 in 1995. Non-cash operating activities included advertising credits associated with the sale of the television business of $4,853 in 1997 and $1,429 in 1996. See the accompanying Notes to the Consolidated Financial Statements. EXH 13-34 AFLAC INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (In thousands) 1997 1996 1995 ---------- ---------- ---------- Net Earnings $ 585,023 $ 394,363 $ 349,057 Other comprehensive income, before income taxes: Foreign currency translation adjustments: Change in unrealized foreign currency translation gains during year 43,782 16,463 38,578 Reclassification adjustment for realized currency (gains) losses on sale of subsidiary included in net earnings 509 - (1,527) Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during year 1,693,389 (314,050) 214,274 Reclassification adjustment for realized (gains) losses included in net earnings 4,158 (4,788) (1) --------- --------- --------- Total other comprehensive income, before income taxes 1,741,838 (302,375) 251,324 Income tax expense (benefit) related to items of other comprehensive income 692,983 (116,205) (41,847) --------- --------- --------- Other comprehensive income, net of income taxes 1,048,855 (186,170) 293,171 --------- --------- --------- Total comprehensive income $1,633,878 $ 208,193 $ 642,228 ========= ========= ========= EXH 13-35 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 and marketed at the work site, with premiums paid by the employee. AFLAC Japan, which conducts most of its transactions in Japanese yen, accounted for 79%, 82% and 85% of the Company's total revenues for 1997, 1996 and 1995, respectively, and 87% and 88% of total assets at December 31, 1997 and 1996, 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 information currently 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 changes in the future 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 exchange 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 in the accumulated other comprehensive income component of shareholders' equity. Realized currency exchange gains and losses resulting from foreign currency transactions are included in earnings, but were immaterial during the three-year period 1995 through 1997. 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 in the accumulated other comprehensive income component of shareholders' equity. Interest expense is translated at average exchange rates for the period the borrowings are outstanding. EXH 13-36 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 are 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 remain in force. 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 that are not recoverable are charged against earnings. CASH AND CASH EQUIVALENTS: Effective for 1997, the Company changed its method of reporting cash to include cash equivalents. Cash and cash equivalents include cash on hand, money market instruments and other debt instruments with a maturity of 90 days or less when purchased. Prior to 1997, cash equivalents were included in short-term investments. All prior year amounts have been reclassified to reflect this change. 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 the accumulated other comprehensive income 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. Included in fixed maturities are investments in collateralized mortgage obligations whose amortized cost is determined using the interest method, which includes anticipated prepayments. Prepayment assumptions are obtained from Bloomberg. The retrospective adjustment method is used to adjust for prepayment activity. 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 Consolidated Statements of Earnings. EXH 13-37 Purchases and sales of securities are recorded on the trade dates of the transactions. 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 year ended December 31, 1997. 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. Beginning in 1998, the Company will no longer recognize securities held as collateral as an asset, nor the related liability for the return of such collateral due to recently enacted accounting standards (see Accounting Changes Adopted). Interest is recorded as income when earned and is adjusted for amortization of any premium or discount. Dividends on equity securities are recorded as income on the ex-dividend dates. DEFERRED POLICY ACQUISITION COSTS: The costs of acquiring new business and converting existing policies are deferred and amortized, with interest, over the premium payment periods in proportion to the ratio of annual premium income to total anticipated premium income. Anticipated premium income is estimated by using the same mortality and withdrawal assumptions used in computing liabilities for future policy benefits. In this manner, the related acquisition expenses are matched with revenues. Costs deferred include first-year commissions in excess of renewal 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 $407.8 million in 1997, $427.2 million in 1996 and $413.5 million in 1995. Of the policy acquisition costs deferred, commissions represented 69.7% in 1997, 67.3% in 1996 and 63.8% in 1995. 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 EXH 13-38 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: 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 the Company's related interest rate from variable to fixed. The Company uses short-term foreign currency forward contracts (usually five months or less) in connection with annual profit transfers from AFLAC Japan. These contracts are designated at inception as hedges of the Company's investment in AFLAC Japan and are accounted for using the deferral method. Gains and losses during the period that the contracts are outstanding and at termination of the contracts are reflected on the Consolidated Balance Sheets in unrealized foreign currency translation gains of the accumulated other comprehensive income component of shareholders' equity. TREASURY SHARES: Shares purchased are recorded at cost and 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. Realized gains or losses on the disposition of treasury shares are recorded in additional paid-in capital. EARNINGS PER SHARE: As required, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, in 1997. All previously reported earnings per share data have been restated to reflect this new accounting requirement. SFAS No. 128 requires the presentation of two earnings per share (EPS) calculations, basic EPS and diluted EPS, in the Consolidated Statements of Earnings. Basic EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the weighted-average number of shares outstanding for the period plus the shares for the dilutive effect of stock options and other common stock equivalents. Diluted EPS as computed under SFAS No. 128 were the same as the Company's previously reported EPS for each of the years in the three- year period ended December 31, 1997. EXH 13-39 The components of the weighted-average shares used in the earnings per share calculations are as follows: (In thousands) 1997 1996 1995 ---------- ---------- ---------- Average outstanding shares used for calculating basic EPS 136,055 140,176 145,677 Effect of stock options 4,743 4,285 3,815 ---------- ---------- ---------- Average outstanding shares used for calculating diluted EPS 140,798 144,461 149,492 ========== ========== ========== At December 31, 1997, options to purchase 725,525 shares of common stock were outstanding, but were not included in the computation of diluted EPS because the exercise price for these options was greater than the average market price during the fourth quarter of 1997. ACCOUNTING CHANGES ADOPTED: The Company adopted 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 established criteria for determining whether transfers of financial assets are sales or secured borrowings and must be applied to all applicable transactions that occurred after December 31, 1996. The adoption of the 1997 provisions of SFAS No. 125 had no effect 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, related to the Company's security lending program, as an asset, nor the related liability for return of such collateral. This change will have no effect on the Company's net earnings or shareholders' equity. As required, the Company adopted SFAS No. 128, Earnings per Share, in 1997 as described above in this Note under the caption, "Earnings Per Share." SFAS No. 129, Disclosures of Information about Capital Structure, was effective in 1997. No changes in the Company's present disclosures regarding its capital structure were required under SFAS No. 129. The Company also adopted 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. The Company's presentation of comprehensive income includes, in addition to net earnings, changes in unrealized foreign currency translation adjustments and changes in unrealized gains and losses on securities available for sale. Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 established accounting standards for the EXH 13-40 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 must 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 the carrying amount or fair value less related selling costs. The adoption of this accounting standard had no material effect on the financial statements. SFAS No. 123, Accounting for Stock-Based Compensation, was effective for 1996. This Statement provides a choice of accounting methods for employee stock compensation plans, including employee stock option plans. This accounting standard had no effect on earnings as the Company 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 at the grant date over the amount an employee must pay upon exercise to acquire the stock. For further information regarding SFAS No. 123, see Note 9. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued in June 1997. This Statement requires that companies disclose segment data on the basis that is used internally by management for evaluating segment performance and allocating 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's current definition of its business segments will not change. SFAS No. 131 is effective beginning in 1998. RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to conform to the current year presentation. EXH 13-41 (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) 1997 1996 1995 --------- --------- --------- Total revenues: Insurance: Japan $5,697,387 $5,848,751 $6,115,689 U.S. 1,243,193 1,066,364 960,443 Realized investment gains (losses) (4,367) 1,759 (270) --------- --------- --------- Total U.S. and Japan insurance 6,936,213 6,916,874 7,075,862 Broadcast operations - U.S. 16,107 92,380 81,569 Gain on sale of television business 267,223 60,264 - Corporate and other operations 72,344 69,611 74,392 Intercompany eliminations (41,185) (38,926) (41,203) --------- --------- --------- Total $7,250,702 $7,100,203 $7,190,620 ========= ========= ========= Earnings before income taxes: Insurance: Japan $ 504,146 $ 532,798 $ 561,361 U.S. 184,346 128,532 104,459 Realized investment gains (losses) (4,367) 1,759 (270) --------- --------- --------- Total U.S. and Japan insurance 684,125 663,089 665,550 Broadcast operations - U.S. 3,532 25,591 18,953 Gain on sale of television business 267,223 60,264 - Corporate and other operations (79,604) (86,399) (72,189) Interest expense (non-insurance operations) (10,456) (12,544) (11,319) --------- --------- --------- Total $ 864,820 $ 650,001 $ 600,995 ========= ========= ========= EXH 13-42 (In thousands) 1997 1996 1995 --------- --------- --------- Depreciation and amortization expense: Insurance: Japan $ 27,861 $ 26,405 $ 21,353 U.S. 10,865 12,780 10,656 --------- --------- --------- Total U.S. and Japan insurance 38,726 39,185 32,009 Broadcast operations - U.S. 501 8,198 8,725 Corporate and other operations 2,132 2,354 2,547 --------- --------- --------- Total $ 41,359 $ 49,737 $ 43,281 ========= ========= ========= Advertising expense - insurance: Japan $ 23,948 $ 13,580 $ 19,883 U.S. 22,853 22,038 15,044 --------- --------- --------- Total $ 46,801 $ 35,618 $ 34,927 ========= ========= ========= Total expenditures for long-lived assets: Insurance: Japan $ 1,420 $ 2,806 $ 2,009 U.S. 6,308 9,093 12,150 --------- --------- --------- Total U.S. and Japan insurance 7,728 11,899 14,159 Broadcast operations - U.S. 471 3,864 5,851 Corporate and other operations 2,857 2,730 1,200 --------- --------- --------- Total $ 11,056 $ 18,493 $ 21,210 ========= ========= ========= Total assets at December 31 were as follows: (In thousands) 1997 1996 ---------- ---------- Total assets: Insurance: Japan $25,588,751 $22,117,213 U.S. 3,763,173 2,673,678 ---------- ---------- Total U.S. and Japan insurance 29,351,924 24,790,891 Broadcast operations - U.S. - 115,709 Corporate and other operations 4,323,361 2,834,343 Intercompany eliminations (4,221,280) (2,720,559) ---------- ---------- Total $29,454,005 $25,020,384 ========== ========== EXH 13-43 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, 1997, $121.2 million, or 56.2% of total receivables, were receivables related to AFLAC Japan's operations ($126.3 million at December 31, 1996). SALE OF TELEVISION BUSINESS: In 1997, the Company completed the sale of its broadcast business, which consisted of seven network-affiliated television stations. The total pretax gain from the sale of the broadcast business 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 by the Company over a five-year period with a fair value of $6.3 million. The Company also received cash for various current assets and liabilities. The sale of one station closed on December 31, 1996. The pretax and after-tax gains recognized on this sale in the fourth quarter of 1996 were $60.3 million and $48.2 million, respectively. The after-tax gain amounted to $.34 basic earnings per share and $.33 diluted earnings per share in 1996. 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, respectively. The 1997 after-tax gain amounted to $1.55 basic earnings per share and $1.50 diluted earnings per share in 1997. Broadcast revenues and operating expenses were included in other income and other operating expenses, respectively, in the Consolidated Statements of Earnings. Intangible assets reflected in the Consolidated Balance Sheets prior to 1997 were associated with the broadcast business. INSOLVENCY OF JAPANESE INSURER: 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, that would be used to help offset insurer insolvencies. 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 pretax charge of 3.0 billion yen ($24.9 million) for this policyholder protection fund. This assessment will be paid over 10 years beginning in 1998. The after-tax charge was $13.6 million ($.10 per share for both basic and diluted earnings per share). EXH 13-44 YEN-TRANSLATION EFFECTS: AFLAC Japan owns U.S. dollar-denominated securities (including accrued investment income), which the Company has designated as an economic currency hedge of a portion of the Company's investment in AFLAC Japan. In addition, the Parent Company has designated its yen-denominated bank borrowings (Note 7) as a hedge of its net investment in AFLAC Japan. The Company's dollar values of yen-denominated net assets subject to foreign currency translation fluctuations for financial reporting purposes were as follows at December 31 (translated at end-of-year exchange rates): (In thousands) 1997 1996 ---------- ---------- AFLAC Japan net assets $2,540,932 $1,697,003 Less: AFLAC Japan dollar-denominated assets less liabilities 1,555,219 1,369,600 Parent Company yen-denominated liabilities less assets 497,493 312,893 --------- --------- Total yen-denominated net assets subject to foreign currency translation fluctuations $ 488,220 $ 14,510 ========= ========= The year-end yen/dollar exchange rate is used to translate yen- denominated balance sheet items to U.S. dollars. The average yen/dollar exchange rate is used to translate revenues, expenses and cash flows. The following table shows the exchange rates used for the three-year period ended December 31, 1997, and their effect on selected financial data. 1997 1996 1995 ------ ------ ------ Balance Sheets: Yen/dollar exchange rate at December 31 130.10 116.10 102.95 Yen percent weakening 10.8% 11.3% 3.0% Exchange effect on assets (billions) $ (2.9) $ (2.6) $ (.7) Exchange effect on liabilities (billions) $ (2.8) $ (2.6) $ (.7) Statements of Earnings: Average exchange rate for the year 121.07 108.84 94.10 Yen percent weakening (strengthening) 10.1% 13.5% (8.7)% Exchange effect on net earnings (millions) $(24.1) $(42.7) $ 23.0 Exchange effect on diluted net EPS $ (.17) $ (.30) $ .15 OTHER: 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 $386.0 million in 1997, $253.6 million in 1996 and $179.5 million in 1995. See Note 10 for information concerning restrictions on remittances from AFLAC Japan. EXH 13-45 (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, 1997 -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Government and government guaranteed: Japan $ 5,406.9 $ 1,570.2 $ .1 $ 6,977.0 Other foreign 623.6 126.0 2.5 747.1 Municipalities: Japan 517.6 71.5 - 589.1 Other foreign 241.2 51.8 - 293.0 Public utilities: Japan 2,324.2 445.8 .4 2,769.6 Other foreign 214.4 23.1 - 237.5 Banks/financial institutions:* Japan 427.0 64.7 - 491.7 U.S. 230.6 48.0 - 278.6 Other foreign 4,194.0 510.4 5.2 4,699.2 Other corporate: Japan 484.3 106.6 .3 590.6 U.S. 346.9 31.3 - 378.2 Other foreign 131.1 7.8 .1 138.8 -------- -------- -------- -------- Total yen-denominated 15,141.8 3,057.2 8.6 18,190.4 -------- -------- -------- -------- *Primarily consists of private placement securities. (continued) EXH 13-46 December 31, 1997 (continued) -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- U.S. dollar-denominated: U.S. government direct obligations 31.3 1.0 - 32.3 U.S. agencies (FNMA, etc.) 282.8 14.5 - 297.3 Municipalities 13.4 .9 - 14.3 Mortgage-backed securities 312.4 11.2 .1 323.5 Sovereign and Supranational: Japan 14.0 .8 - 14.8 U.S. 40.9 3.7 - 44.6 Other foreign 94.6 6.8 - 101.4 Public utilities: U.S. 147.4 11.2 - 158.6 Other foreign 49.6 2.9 - 52.5 Asset backed 19.4 .7 - 20.1 Banks/financial institutions: Japan 15.6 .8 - 16.4 U.S. 1,036.8 78.4 .4 1,114.8 Other foreign 589.0 43.4 - 632.4 Other corporate: Japan 31.7 .9 - 32.6 U.S. 1,073.3 85.1 .2 1,158.2 Other foreign 216.0 13.2 6.7 222.5 -------- -------- -------- -------- Total dollar-denominated 3,968.2 275.5 7.4 4,236.3 -------- -------- -------- -------- Other foreign securities 11.1 - - 11.1 -------- -------- -------- -------- Total fixed-maturity securities available for sale 19,121.1 3,332.7 16.0 22,437.8 Equity securities 80.3 67.9 1.9 146.3 -------- -------- -------- -------- Total securities available for sale $19,201.4 $ 3,400.6 $ 17.9 $22,584.1 ======== ======== ======== ======== EXH 13-47 December 31, 1996 -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- Fixed-maturity securities: Yen-denominated: Government and government guaranteed: Japan $ 6,097.9 $ 1,242.2 $ 1.4 $ 7,338.7 Other foreign 499.8 92.8 - 592.6 Municipalities: Japan 618.3 78.8 - 697.1 Other foreign 280.6 23.3 - 303.9 Public utilities: Japan 2,708.6 399.4 - 3,108.0 Other foreign 68.9 13.4 - 82.3 Banks/financial institutions:* Japan 400.1 36.7 - 436.8 U.S. 258.4 35.9 .6 293.7 Other foreign 3,037.3 269.2 5.3 3,301.2 Other corporate: Japan 545.6 102.2 - 647.8 U.S. 388.8 24.2 1.8 411.2 Other foreign 43.1 .5 - 43.6 -------- -------- -------- -------- Total yen-denominated 14,947.4 2,318.6 9.1 17,256.9 -------- -------- -------- -------- *Primarily consists of private placement securities. (continued) EXH 13-48 December 31, 1996 (continued) -------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair (In millions) Cost Gains Losses Value --------- ---------- ---------- --------- U.S. dollar-denominated: U.S. government direct obligations 81.4 1.2 - 82.6 U.S. agencies (FNMA, etc.) 291.5 7.4 .8 298.1 Municipalities .5 - - .5 Mortgage-backed securities 235.8 3.2 2.3 236.7 Sovereign and Supranational: Japan 14.1 1.0 - 15.1 U.S. 16.3 .8 - 17.1 Other foreign 91.1 4.9 - 96.0 Public utilities: U.S. 157.4 2.4 3.8 156.0 Other foreign 10.0 .5 - 10.5 Asset backed 148.8 5.2 - 154.0 Banks/financial institutions: Japan - - - - U.S. 917.6 35.2 3.9 948.9 Other foreign 126.4 4.3 .4 130.3 Other corporate: Japan 3.3 .2 - 3.5 U.S. 846.9 26.3 7.2 866.0 Other foreign 34.8 2.3 .2 36.9 -------- -------- -------- -------- 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 ======== ======== ======== ======== 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 13-49 The amortized cost and fair values of investments in fixed-maturity securities available for sale at December 31, 1997, by contractual maturity are shown below. (In millions) AFLAC Japan AFLAC U.S. -------------------- --------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 556.4 $ 571.2 $ 20.1 $ 20.2 Due after one year through five years 1,946.2 2,253.2 277.9 294.9 Due after five years through 10 years 2,265.3 2,731.9 267.3 288.7 Due after 10 years 11,700.7 14,063.4 1,774.9 1,890.8 U.S. mortgage-backed securities 69.2 72.4 243.1 251.1 --------- --------- --------- --------- Total fixed-maturity securities available for sale $16,537.8 $19,692.1 $ 2,583.3 $ 2,745.7 ========= ========= ========= ========= Expected maturities will differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. 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, 1997, the average duration of the yen- denominated policy liabilities was approximately 13 years, unchanged from 1996. The average duration of the yen-denominated invested assets was approximately nine years at both December 31, 1997 and 1996. The weighted- average period to maturity of fixed-maturity securities of AFLAC Japan at December 31, 1997, was 13.5 years, compared with 12.2 years at December 31, 1996. EXH 13-50 Realized and unrealized gains and losses from investments for the years ended December 31 were as follows: (In thousands) 1997 1996 1995 ---------- ---------- ---------- Realized gains (losses) on sale or redemption of investments: Fixed-maturity securities: Gross gains from sales $ 24,417 $ 20,994 $ 7,561 Gross losses from sales (33,002) (17,508) (16,293) Net gains from redemptions 227 112 924 ---------- ---------- ---------- (8,358) 3,598 (7,808) Equity securities: Gross gains from sales 16,345 2,529 9,471 Gross losses from sales (12,145) (1,339) (1,662) Other long-term assets, net (1,282) (2,808) (271) ---------- ---------- ---------- Net realized gains (losses) $ (5,440) $ 1,980 $ (270) ========== ========== ========== Changes in unrealized gains (losses): Fixed-maturity securities $ 930,164 $ (183,737) $ 1,749,389 Equity securities 15,977 22,929 14,362 ---------- ---------- ---------- Net unrealized gains (losses) $ 946,141 $ (160,808) $ 1,763,751 ========== ========== ========== 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 the accumulated other comprehensive income 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 relate to policy reserve interest requirements and reflect the difference between market investment yields and estimated minimum required interest rates 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) 1997 1996 ------------ ------------ Securities available for sale - unrealized gains $ 3,382,746 $ 2,436,605 Less: Policy liabilities 1,271,701 2,023,107 Deferred income taxes 826,328 133,344 ----------- ----------- Shareholders' equity, net unrealized gains on securities available for sale $ 1,284,717 $ 280,154 =========== =========== EXH 13-51 The following fixed-maturity securities individually exceeded 10% of shareholders' equity at December 31: 1997 1996 ------------------- ------------------- Amortized Fair Amortized Fair (In millions) Cost Value Cost Value ------------------- ------------------- Japan National Government $5,178.0 $6,715.8 $5,787.7 $6,987.9 Tokyo Electric Power Company, Ltd. 741.6 884.6 850.3 974.1 Chubu Electric Power 444.3 518.0 552.8 621.9 Province De Quebec * * 299.5 323.3 Tohoku Electric Power * * 223.7 254.7 ASLK-CGER IFICO * * 215.3 224.3 BIL Asia Group * * 215.3 221.5 Generale Bank N.V. * * 215.3 219.4 Abbey National PLC * * 215.3 249.5 Societe Generale * * 214.6 236.5 Tokyo Metropolitan Government * * 211.5 237.5 Kyushu Electric Power Company, Ltd. * * 211.3 245.6 *Less than 10% AFLAC Japan's investments in Japanese government bonds (at amortized cost) constituted 28.3% and 34.0% of total fixed-maturity securities available for sale at December 31, 1997 and 1996, respectively. Private placement investments held by AFLAC Japan (at amortized cost) accounted for 34.2% and 27.7% of total fixed-maturity securities available for sale at December 31, 1997 and 1996, respectively. The components of net investment income for the years ended December 31 were as follows: (In thousands) 1997 1996 1995 --------- --------- --------- Fixed-maturity securities $1,076,246 $1,026,611 $1,030,224 Equity securities 1,821 1,705 1,466 Mortgage loans and other 1,724 1,786 2,023 Short-term investments and cash equivalents 15,634 9,543 13,472 --------- --------- --------- Gross investment income 1,095,425 1,039,645 1,047,185 Less investment expenses 17,710 17,690 22,225 --------- --------- --------- Net investment income $1,077,715 $1,021,955 $1,024,960 ========= ========= ========= At December 31, 1997, fixed-maturity securities with a market value of $3.8 million were on deposit with regulatory authorities in the United States. As of December 31, 1997, $40.4 million, at fair value, of AFLAC Japan's investment securities had been pledged to the Japan policyholder protection fund. The amount of securities pledged is based on relative company size. Also, fixed-maturity securities with a market value of $9.5 million were on deposit with the Central Bank of China, R.O.C., as required by the Ministry of Finance in Taiwan. The Company retains ownership of these securities on deposit and receives the related investment income. EXH 13-52 (4) FINANCIAL INSTRUMENTS NONDERIVATIVES: The carrying amounts for cash and cash equivalents, 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 were estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings. The fair values for notes payable with fixed interest rates were 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, 1997 and 1996, 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, except for short-term hedges of its annual profit repatriations. See Note 1 for a description of the Company's accounting policies for derivative financial instruments. See Note 2 for additional information on the Company's yen-denominated net assets. The Company has outstanding interest rate swaps on all 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 the Company's interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the anticipated unpaid principal amounts. Under these agreements, the Company makes fixed-rate payments at 2.29% on one loan and 1.24% on another loan and receives floating-rate payments in return (1.15% at December 31, 1997 plus loan costs of 20 or 25 basis points) 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 counterparties to these interest rate swap agreements. All counterparties are credit-worthy financial institutions. EXH 13-53 The carrying values and estimated fair values of the Company's financial instruments as of December 31 were as follows: 1997 1996 ------------------------ ----------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value ------------------------ ----------------------- Assets: Fixed-maturity securities $22,437,818 $22,437,818 $20,327,726 $20,327,726 Equity securities 146,326 146,326 136,328 136,328 Mortgage loans 14,137 17,248 17,802 21,151 Policy loans 1,288 1,288 1,273 1,273 Securities held as collateral for loaned securities 3,034,241 3,034,241 573,911 573,911 Liabilities: Notes payable (excluding capitalized leases): 505,223 505,223 328,141 328,825 Derivatives - interest rate swaps* - 8,108 - 8,802 Payables for return of collateral on loaned securities 3,034,241 3,034,241 573,911 573,911 *Off-balance sheet financial instrument. (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31: (In thousands) 1997 1996 -------- -------- Land $110,517 $124,264 Buildings 289,912 327,757 Equipment 147,400 188,272 ------- ------- 547,829 640,293 Less accumulated depreciation 161,780 168,386 ------- ------- Net property and equipment $386,049 $471,907 ======= ======= EXH 13-54 (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 1997 1996 Issue Years ------ -------- -------- -------- --------- Health insurance: Foreign: 1997 $ 96.9 $ - 3.5% 3.5% 1995-96 67.0 59.2 4.0 4.0 1994-96 1,227.3 1,025.8 4.5 4.5 1990-94 7,595.1 7,457.7 5.5 5.5 1988-93 1,071.0 1,103.5 5.25 5.25 1987-88 1,144.7 1,203.9 5.5 5.5 1985-87 168.3 189.5 5.65 5.65 1985-86 891.0 936.5 6.75 5.5 1978-84 2,390.8 2,565.8 6.5 5.0 1974-79 616.0 597.0 7.0 5.0 Other 64.0 46.3 U.S.: 1988-97 589.9 481.5 8.0 6.0 1986-97 489.4 440.0 6.0 6.0 1985-86 25.7 25.4 6.5 6.5 1981-86 260.6 264.4 7.0 5.5 Other 158.3 157.3 Life insurance: Foreign: 1995-97 242.3 93.4 3.5-4.0 3.5-4.0 U.S.: 1956-97 28.8 26.9 4.0-6.0 4.0-6.0 Adjustment for market value of securities (Note 3) 1,271.7 2,023.1 -------- -------- Total $18,398.8 $18,697.2 ======== ======== The weighted-average interest rates reflected in the Consolidated Statements of Earnings for health insurance future policy benefits for Japan policies were 5.5% in both 1997 and 1996 and 5.6% in 1995, and for U.S. policies, 6.4% in both 1997 and 1996 and 6.3% in 1995. EXH 13-55 Changes in the liability for unpaid policy claims are summarized as follows for the years ended December 31: (In thousands) 1997 1996 1995 --------- --------- --------- Unpaid supplemental health claims - beginning of year $1,029,708 $1,014,736 $ 916,139 --------- --------- --------- Add claims incurred during the year related to: Current year 2,356,595 2,378,211 2,411,025 Prior years (160,401) (158,418) (130,882) --------- --------- --------- Total incurred 2,196,194 2,219,793 2,280,143 --------- --------- --------- Less claims paid during the year: On claims incurred during current year 1,514,259 1,478,673 1,503,922 On claims incurred during prior years 627,172 618,340 632,267 --------- --------- --------- Total paid 2,141,431 2,097,013 2,136,189 --------- --------- --------- Effect of foreign exchange rate changes on unpaid claims (92,229) (107,808) (45,357) --------- --------- --------- Unpaid supplemental health claims - end of year 992,242 1,029,708 1,014,736 Unpaid claims for life and other business 18,277 9,549 1,559 --------- --------- --------- Total liability for unpaid policy claims $1,010,519 $1,039,257 $1,016,295 ========= ========= ========= Amounts shown for prior year claims incurred during the year result from differences between actual claim settlement amounts and the original estimates thereof. EXH 13-56 (7) NOTES PAYABLE A summary of notes payable at December 31 follows: (In thousands) 1997 1996 --------- --------- Unsecured, yen-denominated notes payable to banks: 2.29% (2.74% in 1996) reducing, revolving credit agreement, due annually through July 2001 $ 348,962 $ 284,238 1.24% revolving credit agreement, due October 2002 149,116 - Variable interest rate, paid in full - 17,453 Short-term line of credit - 9,850 9.60% to 10.72% unsecured notes payable to bank, due semiannually, through September 1998 6,944 15,389 Obligations under capitalized leases, due monthly through 2002, secured by computer equipment in Japan 17,986 25,392 Other 201 1,211 -------- -------- Total notes payable $ 523,209 $ 353,533 ======== ======== The Company has a reducing, revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. The current borrowing limit is $400 million. Under the terms of the agreement, the borrowing limit will reduce to $325 million on July 15, 1998, $250 million on July 15, 1999, and $125 million on July 15, 2000. At December 31, 1997, 45.4 billion yen ($349.0 million) was outstanding under this agreement. In 1997, the Company entered into an unsecured revolving credit agreement with a borrowing limit of $250 million, payable in either Japanese yen or U.S. dollars. At December 31, 1997, 19.4 billion yen ($149.1 million) was outstanding under this agreement. Interest rate swaps related to the 2.29% and 1.24% (fixed rates after swaps) loans are described in Note 4. The aggregate contractual maturities of notes payable during each of the five years after December 31, 1997, are: 1998, $39.6 million; 1999, $80.0 million; 2000, $128.2 million; 2001, $126.2 million and 2002, $149.2 million. The Company was in compliance with the covenants of the various credit agreements at December 31, 1997. EXH 13-57 (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) 1997 1996 ---------- ---------- Deferred income tax liabilities: Deferred acquisition costs $ 974,658 $ 972,678 Unrealized gains on securities available for sale 1,332,170 949,978 Difference in tax basis of investment in AFLAC Japan 85,877 - Premiums receivable 73,017 73,353 --------- --------- Total deferred income tax liabilities 2,465,722 1,996,009 --------- --------- Deferred income tax assets: Other basis differences in investment securities 153,287 62,855 Foreign tax credit carryforwards 64,052 116,607 Policy benefit reserves 515,913 720,755 Unfunded retirement benefits 71,593 63,292 Other accrued expenses 63,235 66,824 Difference in tax basis of investment in AFLAC Japan - 2,354 Other 118,909 125,120 --------- --------- Total gross deferred tax assets 986,989 1,157,807 Less valuation allowance 123,319 162,903 --------- --------- Total deferred income tax assets 863,670 994,904 --------- --------- Net deferred income tax liability 1,602,052 1,001,105 Current income tax liability 225,285 180,016 --------- --------- Total income tax liability $1,827,337 $1,181,121 ========= ========= 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 non-insurance loss carryforwards that exceed projected future offsets. Only 35% of non- insurance losses can be offset against life insurance taxable income each year. During 1997, the valuation allowance for deferred tax assets decreased by $39.6 million (increased by $11.5 million in 1996) due to changes in carryforwards of foreign tax credits and non-insurance losses. Foreign tax credit carryforwards available at December 31, 1997, expire as follows: $50.9 million in 2000 and $13.1 million in 2001. EXH 13-58 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): 1997: Current $ 202,661 $ 89,318 $ 291,979 Deferred (5,407) (6,775) (12,182) ---------- ---------- ---------- Total $ 197,254 $ 82,543 $ 279,797 ========== ========== ========== 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 ========== ========== ========== Income tax expense in the accompanying consolidated financial statements varies from 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) 1997 1996 1995 --------- --------- --------- Income taxes based on U.S. statutory rates $ 302,687 $ 227,500 $ 210,348 U.S. alternative minimum tax 50,026 26,333 12,558 Unrecognized foreign tax credits (91,096) (11,331) 11,992 Non-insurance losses generating no current tax benefit - 12,344 7,010 Other, net 18,180 792 10,030 -------- -------- -------- Income tax expense $ 279,797 $ 255,638 $ 251,938 ======== ======== ======== EXH 13-59 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) 1997 1996 1995 -------- -------- -------- Statements of earnings $279,797 $255,638 $251,938 ------- ------- ------- Other comprehensive income: Change in unrealized foreign currency translation gains arising during the year - - (2,177) Unrealized gains on securities available for sale: Unrealized holding gains (losses) arising during the year 688,197 (112,951) (40,263) Reclassification adjustment for realized (gains) losses included in net earnings 4,786 (3,254) 593 ------- ------- ------- Total income taxes allocated to other comprehensive income 692,983 (116,205) (41,847) ------- ------- ------- Additional paid-in capital, exercise of stock options (1,345) - - ------- ------- ------- Total income taxes $971,435 $139,433 $210,091 ======= ======= ======= Realized investment losses incurred by AFLAC Japan on dispositions of securities are generally deductible for Japanese income tax purposes. Accordingly, the income tax effects recognized for net realized and unrealized investment gains and losses reflect such tax benefit of any losses related to AFLAC Japan operations. Also, AFLAC Japan received certain Japanese income tax benefits from foreign exchange translation losses on its dollar-denominated investments. These tax benefits are included directly in shareholders' equity in the unrealized foreign currency translation gains component of accumulated other comprehensive income. 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. Management has mitigated some of the tax impact through investment alternatives and by restructuring portions of the existing investment portfolio. Management estimates the net impact of this tax change will decrease 1998 net earnings by $13 million. Most of the Company's income tax expense represents Japanese income taxes on AFLAC Japan's operating results calculated at Japan's corporate tax rate of 45.3%. In December 1997, Japanese government leaders announced proposals to stimulate the Japanese economy. If enacted as presently proposed, the Japan corporate tax rate would be reduced beginning in 1999. The proposals also included tax-base broadening provisions whereby certain accrued expenses would no longer be deductible for tax purposes until paid. These new proposals are expected to be finalized in March 1998. EXH 13-60 (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) 1997 1996 1995 -------- -------- -------- Common stock - issued: Balance at beginning of year 157,239 156,358 155,999 Exercise of stock options 951 881 359 -------- -------- -------- Balance at end of year 158,190 157,239 156,358 -------- -------- -------- Treasury stock: Balance at beginning of year 19,354 14,384 6,544 Purchases of treasury stock: Open market 6,369 5,925 8,223 Received from employees for taxes on option exercises 195 140 - Shares issued to sales associates stock bonus plan and dividend reinvestment plan (763) (937) (311) Exercise of stock options (183) (158) (72) -------- -------- -------- Balance at end of year 24,972 19,354 14,384 -------- -------- -------- Shares outstanding at end of year 133,218 137,885 141,974 ======== ======== ======== In May 1997, the shareholders of the Company approved an increase in the number of authorized shares of common stock from 175 million shares to 400 million shares. SHARE REPURCHASE PROGRAM: During 1997, the Company's board of directors authorized the purchase of up to an additional 4.0 million shares of the Company's common stock. Since the inception of the share repurchase program in February 1994, the board of directors has authorized the purchase of up to 32.4 million shares, and as of December 31, 1997, the Company had purchased 26.8 million shares. The differences in percentage increases in net earnings and net earnings per share primarily reflect the impact of the share repurchase program. STOCK OPTIONS: In May 1997, the shareholders of the Company approved the AFLAC Incorporated 1997 Stock Option Plan. The maximum number of shares of common stock authorized for the grant of options under this plan is 7.0 million. At December 31, 1997, 6.3 million shares were available for future grants. 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 a maximum of 10 years. The exercise price must be equal to 100% of the fair market value at the date of grant; therefore, no compensation expense is recognized by the Company. The options are exercisable immediately unless they are placed under a vesting schedule which is determined by the compensation committee of the board of directors. EXH 13-61 The following table summarizes stock option activity: Weighted-Average Option Exercise Price Shares per Share --------- ---------------- 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 Granted 725,525 53.45 Canceled (17,813) 29.75 Exercised (1,270,985) 11.56 --------- Outstanding at December 31, 1997 8,240,798 $ 23.01 ========= ======= 1997 1996 1995 --------- --------- --------- Shares exercisable at end of year 6,628,043 6,776,583 7,676,624 ========= ========= ========= Weighted-average fair value per share of shares granted during the year $ 53.45 $ 32.79 $ 28.08 ========= ========= ========= The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable ----------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Yrs) Price Exercisable Price - --------------- ----------- ------------ ---------- ----------- ---------- $ 3.57 - $ 7.13 587,380 2.2 $ 4.40 587,380 $ 4.40 7.33 - 8.00 571,004 2.1 7.90 571,004 7.90 8.07 - 16.13 885,449 3.5 11.81 885,449 11.81 18.83 2,861,269 5.5 18.83 2,861,269 18.83 19.20 - 28.21 827,436 6.9 25.23 818,436 25.24 31.67 1,352,985 8.1 31.67 446,566 31.67 33.94 - 42.94 429,750 8.7 36.47 143,285 36.47 49.50 - 55.38 725,525 9.6 53.45 314,654 53.34 --------- --------- $ 3.57 - $55.38 8,240,798 5.9 $ 23.01 6,628,043 $ 19.35 ========= ========= EXH 13-62 The Company does not recognize compensation cost in the Consolidated Statements of Earnings for employee stock options. Had compensation cost for the Company's stock options granted in 1995 through 1997 been determined using the fair-value-based method as described in SFAS No. 123, the Company's net earnings and net earnings per share would approximate the following pro forma amounts: (In thousands, except for 1997 1996 1995 per-share amounts) --------- --------- --------- Net earnings: As reported $ 585,023 $ 394,363 $ 349,057 Amortization of fair value of options granted after 1994 (12,137) (8,479) (1,786) --------- --------- --------- Pro forma net earnings $ 572,886 $ 385,884 $ 347,271 ========= ========= ========= Earnings per share: Basic, as reported $ 4.30 $ 2.81 $ 2.40 Amortization of fair value of options granted after 1994 (.09) (.06) (.01) --------- --------- --------- Pro forma basic earnings per share $ 4.21 $ 2.75 $ 2.39 ========= ========= ========= Earnings per share: Diluted, as reported $ 4.16 $ 2.73 $ 2.33 Amortization of fair value of options granted after 1994 (.09) (.06) (.01) --------- --------- --------- Pro forma diluted earnings per share $ 4.07 $ 2.67 $ 2.32 ========= ========= ========= The fair value of each option granted during 1995 through 1997 was estimated on the date of grant using the Black-Scholes multiple option approach with the following assumptions: 1997 1996 1995 --------- --------- --------- Expected life from vesting date (years) 3.4-6.1 3.7-6.1 2.5-7.1 Dividend yield 1.0% 1.0% 1.0% Expected volatility 20.2% 19.3% 21.3% Risk-free interest rate 6.0% 7.0% 6.5% EXH 13-63 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. The provisions of SFAS No. 123 were 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. VOTING RIGHTS: 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 $4.2 billion at December 31, 1997, on a generally accepted accounting principles basis. AFLAC Japan accounted for $2.5 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 $335.5 million in 1997, $256.6 million in 1996 and $194.3 million in 1995, and capital and surplus was $1.8 billion and $1.4 billion at December 31, 1997 and 1996, 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) 1997 1996 ----------- ----------- Net assets on GAAP basis $ 4,174,818 $ 2,644,408 Adjustment of fixed-maturity securities from fair value to amortized cost (3,315,880) (2,385,328) Elimination of deferred policy acquisition costs (2,576,867) (2,580,682) Adjustment to policy liabilities 2,110,730 2,992,056 Elimination of deferred income taxes 1,642,431 1,030,111 Reduction in premiums receivable (83,664) (83,946) Establishment of asset valuation reserve (116,915) (188,131) Elimination of statutory non-admitted assets (84,378) (73,321) Difference in translation adjustment 67,523 (477) Difference in accrued expenses 24,293 63,244 Other, net (70,786) (12,413) ----------- ----------- Net assets on U.S. statutory accounting basis $ 1,771,305 $ 1,405,521 =========== =========== 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 EXH 13-64 fees (see Note 2) and other payments to the Parent Company by its insurance subsidiary are subject to various regulatory restrictions and approvals related to safeguarding the interests of insurance policyholders. One of the primary considerations is that the insurance subsidiary must maintain adequate risk-based capital. Also, the maximum amount of dividends that can be paid by insurance companies domiciled in the State of Georgia to shareholders without prior approval of the Commissioner of Insurance is the greater of the net gain from operations for the previous year determined under statutory accounting principles or 10% of statutory surplus as of the previous year-end. Dividend payments by AFLAC during 1998 in excess of $329.7 million would require such approval. Dividends paid by AFLAC during 1997 were $66.5 million. A portion of AFLAC Japan annual earnings, as determined on a Japanese 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 $347.0 million in 1997, $217.3 million in 1996 and $140.5 million in 1995. 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 $400.0 million and $466.9 million at December 31, 1997 and 1996, 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. 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 and their beneficiaries. EXH 13-65 The components of retirement expense and significant actuarial assumptions for the years ended December 31 are shown below. 1997 1996 1995 -------------- -------------- -------------- (In thousands) Japan U.S. Japan U.S. Japan U.S. ------ ------ ------ ------ ------ ------ Basic employee plans: Service cost for benefits earned during the year $ 2,224 $ 2,450 $ 2,169 $ 2,591 $ 2,610 $ 1,880 Interest cost on projected benefit obligations 982 3,132 1,031 3,142 1,148 2,686 Less actual investment return on plan assets (894) (7,166) (1,117) (4,429) (518) (6,344) Net amortization and deferral 620 4,057 702 1,861 696 4,370 Net curtailment gain - (377) - - - - ----- ----- ----- ----- ----- ----- Total retirement expense for basic employee plans 2,932 2,096 2,785 3,165 3,936 2,592 Officers, retirees and beneficiaries - unfunded supplemental plans 1,326 27,350 1,369 35,806 1,395 35,634 ----- ------ ----- ------ ----- ------ Total retirement expense $ 4,258 $29,446 $ 4,154 $38,971 $ 5,331 $38,226 ===== ====== ===== ====== ===== ====== Significant actuarial assumptions: Discount rate for: Net periodic pension costs 4.0% 7.0% 4.0% 7.0% 4.0% 8.0% Benefit obligations 4.0 7.0 4.0 7.0 4.0 7.0 Projected increase in salary levels 3.5 5.0 3.5 5.0 3.5 5.0 Expected long-term return on plan assets 2.5 9.0 2.5 9.0 4.5 9.0 EXH 13-66 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: 1997 1996 ---------------- ---------------- (In thousands) Japan U.S. Japan U.S. ------- ------- ------- ------- Plan assets, at fair value (primarily bonds, stocks and insurance contracts) $18,547 $45,530 $18,445 $37,574 ------ ------ ------ ------ Actuarial present value of benefit obligations: Accumulated benefit obligations, based on employee service to date and present salary levels: Vested benefits 13,531 35,677 15,768 32,557 Non-vested benefits 1,158 3,067 94 1,167 Effect of assumed future salary increases 10,938 11,721 8,789 13,945 ------ ------ ------ ------ Projected benefit obligations 25,627 50,465 24,651 47,669 ------ ------ ------ ------ Projected benefit obligations in excess of plan assets (7,080) (4,935) (6,206) (10,095) Unamortized net losses (gains) from plan experience variations and changes in actuarial assumptions 1,160 3,539 (170) 9,731 Unrecognized prior service cost (credit) 932 182 1,119 (222) Unamortized net transition (gain) loss 523 (961) 673 (1,083) ------ ------ ------ ------ Prepaid retirement liability recognized in consolidated balance sheets $(4,465) $(2,175) $(4,584) $(1,669) ====== ====== ====== ====== 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, 1997 and 1996, was $195.4 million and $165.7 million, respectively. The actuarial present value of projected benefit obligations for these plans was $198.9 million and $170.2 million at December 31, 1997 and 1996, respectively. The discount rates used were 4.0% for AFLAC Japan, and 7.0% for AFLAC U.S. 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 and retirees are eligible for nonmedical benefits. The accumulated benefit obligation as of December 31, 1997 and 1996, was $10.1 million and $9.4 million, respectively, based on an assumed discount rate of 7.0% for both years. EXH 13-67 Net postretirement benefit cost for the years ended December 31 included the following components: (In thousands) 1997 1996 1995 ------ ------ ------ Service cost $ 313 $ 296 $ 229 Interest cost 674 630 536 Amortization of unrecognized gains (34) (41) (207) ----- ----- ----- Postretirement benefit cost $ 953 $ 885 $ 558 ===== ===== ===== The discount rate used in 1997 for the periodic cost was 7%, and the projected health care cost trend rate was 11%, graded to 7% over four years. A one percentage point increase in the health care cost trend rate would increase the postretirement benefit obligation and the aggregate of service and interest costs by approximately 7.0% and 9.4%, respectively. 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 $10.5 million in 1997, $8.9 million in 1996 and $8.0 million in 1995. (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. 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, 1997, the fair value of the leased land was estimated to be 1.9 billion yen ($14.8 million). EXH 13-68 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 13-69 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, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three- year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Atlanta, Georgia January 29, 1998 EXH 13-70 Unaudited Consolidated Quarterly Financial Data (In thousands, except per-share amounts)
Three Months ended, March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------- Amount % Change Amount % Change Amount % Change Amount % Change - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $ 1,707,543 (1.3)% $ 2,008,687 15.3% $ 1,789,620 .8% $ 1,744,852 (5.8)% Net earnings 90,157 4.2 302,793 253.1 96,079 8.8 95,994 (28.2) - ----------------------------------------------------------------------------------------------------------------------------- Per common share: Net earnings (basic) $ .66 8.2% $ 2.22 263.9% $ .70 11.1% $ .72 (25.8)% Net earnings (diluted) .64 8.5 2.14 262.7 .68 9.7 .69 (25.8) Cash dividends .10 .115 .115 .115 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Three Months ended, March 31, 1996 June 30, 1996 September 30, 1996 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 (basic) $ .61 7.0% $ .61 (3.2)% $ .63 3.3% $ .97 64.4% Net earnings (diluted) .59 5.4 .59 (3.3) .62 3.3 .93 63.2 Cash dividends .087 .10 .10 .10 - ----------------------------------------------------------------------------------------------------------------------------- EXH 13-71
72 EX-21 4 SUBSIDIARIES EXHIBIT 21 EXH 21 AFLAC INCORPORATED SUBSIDIARIES The following list sets forth the subsidiaries of the Company: Company Jurisdiction ------- ------------ AFLAC Broadcast Partners Georgia AFLAC International, Inc. Georgia AFLAC Broadcast Group, Inc. Georgia AFLAC Real Estate Holdings, Inc. Georgia American Family Life Assurance Company of Columbus (AFLAC) Georgia American Family Life Assurance Company of New York (AFLAC-NY) New York Communicorp, Inc. Georgia Hotel Columbus, Inc. Georgia The above subsidiaries are 100% directly owned by the Company, except: AFLAC-NY is 100% directly owned by AFLAC. AFLAC Broadcast Partners is 99% owned by AFLAC and 1% owned by AFLAC Broadcast Group. Hotel Columbus, Inc. is inactive and is 30% owned by the Company EXH 21-1 EX-23 5 KPMG CONSENT Exhibit 23 EXH 23 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. 33-64535 and 333-16533 on Form S-3, and 33-41552, 33-44720, 33-53737, 333-01243 and 333-27883 on Form S-8 of AFLAC Incorporated of our report dated January 29, 1998, relating to the consolidated balance sheets of AFLAC Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 annual report to shareholders and is incorporated by reference in the December 31, 1997, annual report on Form 10-K of AFLAC Incorporated. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1998 EXH 23-1 EX-27.0 6 1997 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, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 22,437,818 0 0 146,326 14,137 0 22,644,235 235,675 0 2,581,828 29,454,005 19,409,349 276,673 0 199,046 523,209 0 0 15,819 3,414,653 29,454,005 5,873,661 1,077,715 (5,440) 304,766 4,833,077 180,417 1,372,388 864,820 279,797 585,023 0 0 0 585,023 4.30 4.16 0 0 0 0 0 0 0 Includes $267,223 gain from the sale of the television business. Includes $211,190 after-tax gain ($1.55 basic earnings per share, $1.50 diluted earnings per share) from the sale of the television business.
EX-27.1 7 RESTATED FDS 9/97
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended September 30, 1997. This information is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 22,773,606 0 0 151,810 15,817 0 22,992,054 224,783 0 2,672,684 29,808,634 21,184,683 278,577 0 240,574 413,511 0 0 15,808 2,777,967 29,808,634 4,412,040 798,946 (5,703) 300,567 3,632,839 133,381 1,019,740 719,890 230,861 489,029 0 0 0 489,029 3.58 3.46 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Includes $267,223 gain from the sale of the television business in 1997. Includes $211,190 after-tax gain ($1.55 basic earnings per share, $1.50 diluted earnings per share) from the sale of the television business in 1997. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.2 8 RESTATED FDS 6/97
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended June 30, 1997. This information 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 22,614,774 541,605 0 2,745,129 30,188,858 21,099,438 291,516 0 206,842 539,249 0 0 15,782 2,628,519 30,188,858 2,903,343 518,630 (1,135) 295,392 2,391,749 87,475 672,926 564,080 171,130 392,950 0 0 0 392,950 2.87 2.77 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Includes $267,223 gain from the sale of the television business in 1997. Includes $211,190 after-tax gain ($1.55 basic earnings per share, $1.50 diluted earnings per share) from the sale of the television business in 1997. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.3 9 RESTATED FDS 3/97
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended March 31, 1997. This information is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 19,535,132 0 0 137,044 16,772 0 19,739,498 919,452 0 2,517,646 27,107,769 19,078,960 279,398 0 191,436 496,153 0 0 15,735 2,281,321 27,107,769 1,436,087 251,629 (443) 20,270 1,187,069 41,662 329,693 149,119 58,962 90,157 0 0 0 90,157 .66 .64 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.4 10 RESTATED FDS 12/96
7 This restated 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. Certain items have been restated in Form 10-K for the year ended December 31, 1997. This information 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 20,535,012 209,095 0 2,582,946 25,020,384 19,736,430 288,976 0 208,799 353,533 0 0 15,724 2,109,845 25,020,384 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 2.81 2.73 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Includes $60,264 gain from the sale of a television station on December 31, 1996. Includes $48,211 after tax gain ($.34 basic earnings per share, $.33 diluted earnings per share) from the sale of a television station on December 31, 1996. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.5 11 RESTATED FDS 9/96
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended September 30, 1996. This information is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 20,099,428 0 0 130,751 18,262 0 20,301,924 153,953 0 2,594,188 25,590,045 19,679,468 283,549 0 216,128 370,516 0 0 15,687 2,017,983 25,590,045 4,405,081 761,993 3,921 76,161 3,651,644 123,413 1,027,713 444,386 183,771 260,615 0 0 0 260,615 1.85 1.80 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.6 12 RESTATED FDS 6/96
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended June 30, 1996. This information is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 19,159,359 0 0 121,847 19,164 0 19,349,150 448,612 0 2,558,524 24,670,879 18,922,912 289,060 0 196,150 412,997 0 0 15,683 2,011,603 24,670,879 2,917,847 504,284 (429) 49,875 2,417,060 82,564 680,528 291,425 119,155 172,270 0 0 0 172,270 1.22 1.18 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.7 13 RESTATED FDS 3/96
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-Q for the quarter ended March 31, 1996. This information is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 19,284,739 0 0 117,956 20,324 0 19,469,222 374,195 0 2,557,914 25,375,910 18,861,350 296,898 0 195,927 436,095 0 0 15,666 2,072,179 25,375,910 1,456,363 251,399 (643) 22,801 1,209,009 41,216 332,512 147,183 60,660 86,523 0 0 0 86,523 .61 .59 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
EX-27.8 14 RESTATED FDS 12/95
7 This restated schedule contains summary financial information extracted from the Company's consolidated financial statements as filed in Form 10-K for the year ended December 31, 1995. Certain items have been restated in Form 10-K for the year ended December 31, 1997. This information is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 19,675,006 0 0 108,062 22,213 0 19,854,517 190,447 0 2,565,027 25,216,509 19,016,591 301,452 0 195,461 327,268 0 0 15,636 2,118,505 25,216,509 6,070,830 1,024,960 (270) 95,100 5,034,266 168,779 1,386,580 600,995 251,938 349,057 0 0 0 349,057 2.40 2.33 0 0 0 0 0 0 0 Restated to reflect change in method of reporting cash to include cash equivalents. Restated for Statement of Financial Accounting Standard No. 128, Earnings Per Share.
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