Back to GetFilings.com

UNITED STATES
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, 2002
Commission file no. 1-7434

i

ii

Table of Contents

ITEM 1.  BUSINESS

     AFLAC Incorporated qualifies as an accelerated filer within the meaning of Exchange Act Rule 12b-2. Our internet address is www.aflac.com. We make available, free of charge on our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto as soon as reasonably practicable after those forms have been electronically filed with or furnished to the Securities and Exchange Commission.

General Description

     AFLAC Incorporated was incorporated in 1973 under the laws of the state of Georgia. AFLAC Incorporated (the Parent Company) is a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its principal business is supplemental health and life insurance, which is marketed and administered primarily through its subsidiary, American Family Life Assurance Company of Columbus (AFLAC). AFLAC operates in the United States (AFLAC U.S.) and as a branch in Japan (AFLAC Japan).

     Most of our insurance policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee. We believe AFLAC is the world's leading writer of individually issued policies marketed at worksites. We continue to diversify our product offerings in both Japan and the United States. AFLAC Japan sells cancer plans, care plans, general medical expense plans, medical/sickness riders to our cancer plan, a living benefit life plan, and an accident plan. AFLAC U.S. sells cancer plans and various types of health insurance, including accident and disability, fixed-benefit dental, personal sickness and hospital indemnity, hospital intensive care, long-term care, and short-term disability plans. We also offer several life insurance plans in Japan and the United States.

     We are authorized to conduct insurance business in all 50 states, the District of Columbia, several U.S. territories and foreign countries. Our only significant foreign operation is AFLAC Japan, which accounted for 75% of the company's total revenues in 2002, 78% in 2001 and 82% in 2000. The percentage of total assets attributable to AFLAC Japan was 84% at both December 31, 2002 and 2001.

How We Evaluate Our Operations

     We evaluate our operations using a non-GAAP financial performance measure called operating earnings and our business segments using pretax operating earnings. We define operating earnings as net earnings excluding the following items on an after-tax basis: realized investment gains/losses, the change in fair value of the interest rate component of cross-currency swaps beginning in 2001, the charge for the Japanese policyholder protection fund in 2002, and the gain from the termination of a retirement liability in 2000. We define pretax operating earnings as operating earnings excluding income taxes related to operations. We believe that the analysis of operating earnings and pretax operating earnings, in addition to net earnings as determined in accordance with GAAP, provides information that may enhance an investor's understanding of our underlying profitability and results of operations. Our discussion of earnings and comparisons thereof focuses on pretax operating earnings an d operating earnings. Unless stated otherwise, all references to per-share amounts are based on the diluted number of average outstanding shares.

I-1

Table of Contents

     Realized Investment Gains/Losses: In 2002, we recognized pretax impairment losses of $58 million. These impairment losses were primarily related to the corporate debt security of a Japanese issuer and various equity securities we believe experienced other than temporary declines in fair value. These impairment losses and other investment transactions in the normal course of business decreased 2002 net earnings by $15 million ($.03 per diluted share).

     In 2001, we recognized pretax impairment losses of $86 million. These impairment losses were primarily related to the corporate debt securities of a U.S. issuer and a European issuer, both of which experienced credit rating downgrades, and our investment in two human resource service companies. We also realized investment gains in connection with a change in the outside investment manager of a portion of our U.S. equity securities portfolio. These gains and impairment losses, when included with other investment transactions in the normal course of business, decreased 2001 net earnings by $34 million ($.06 per diluted share).

     During 2000, the North American issuers of two debt securities that we owned experienced credit rating downgrades. We sold one security reported as available for sale at a pretax loss of $34 million and recognized a pretax impairment loss of $57 million on the other security, which was then transferred from held to maturity to available for sale. These losses and other investment transactions in the normal course of business decreased 2000 net earnings by $69 million ($.12 per diluted share).

     Cross-currency Swaps: For the year ended December 31, 2002, we recognized an after-tax gain of $37 million ($.07 per diluted share) in connection with the change in fair value of the interest rate component of the cross-currency swaps on our senior notes payable, compared with an after-tax gain of $1 million (nil per diluted share) in 2001. This gain was included in other income in the consolidated statements of earnings.

     Japanese Policyholder Protection Fund Provision: In December 2002, the members of the Life Insurance Policyholder Protection Corporation approved the Financial Services Agency's (FSA) proposal, which requires the industry to contribute an additional 78 billion yen (approximately $651 million using the December 31, 2002 exchange rate) to Japan's policyholder protection fund. Our estimated share of the assessment decreased 2002 net earnings by $26 million ($.05 per diluted share).

     Gain from the Termination of a Retirement Liability: For the year ended December 31, 2000, the termination of an accrued unfunded liability for projected retirement payments increased 2000 net earnings by $99 million ($.18 per diluted share).

     For information on our results of operations and financial information by segment, see Exhibit 13, pages 13-3 to 13-30 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)), pages 13-45 to 13-48 (Note 2 of the Notes to the Consolidated Financial Statements) and page 13-76 (Note 12 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference.

Foreign Currency Translation

     The functional currency of AFLAC Japan's insurance operation is the Japanese yen. Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported financial position and results of operations. 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.

I-2

Table of Contents

     We translate financial statement accounts that are maintained in foreign currencies 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 security transactions are translated at the exchange rate on the trade date of each transaction. Other revenues, expenses and cash flows are translated using weighted-average exchange rates for the year. The resulting currency translation adjustments are reported in accumulated other comprehensive income. We include in earnings the realized currency exchange gains and losses resulting from transactions. The yen/dollar exchange rate at December 31, 2002 was 119.90, compared with 131.95 at December 31, 2001. Weighted-average yen/dollar exchange rates were 125.15 in 2002, 121.54 in 2001 and 107.83 in 2000.

     Our business, in functional currency terms, continued to be strong in 2002, and we believe it is more appropriate to measure our performance excluding the effect of fluctuations in the yen/dollar exchange rate in order to understand our financial position and the basic operating results of our business. In 2002, the effect of the yen increased total assets by $3.2 billion, increased total liabilities by $3.1 billion and decreased net earnings by $10 million.

     For further information regarding the effect of currency fluctuations on our business, see Exhibit 13, pages 13-9 to 13-10 (Foreign Currency Translation section of MD&A), Exhibit 13, pages 13-17 to 13-19 (Currency Risk section of MD&A) and pages 13-45 to 13-48 (Note 2 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference.

Insurance premiums

     The growth of earned premiums is directly affected by the change in premiums in force and by the change in weighted-average yen/dollar exchange rates. Consolidated earned premiums were $8.6 billion in 2002, $8.1 billion in 2001 and $8.2 billion in 2000. The following table sets forth the changes in annualized premiums in force for AFLAC's insurance business for the years ended December 31:

I-3

Table of Contents

Insurance - Japan

     AFLAC Japan earned premium income by major product categories is included in Note 2 of the Notes to the Consolidated Financial Statements, Exhibit 13, page 13-46. We translate annualized premiums in force into dollars at the respective period-end exchange rates. Changes in annualized premiums in force are translated at weighted-average exchange rates. The following table presents the changes in annualized premiums in force for AFLAC Japan for the years ended December 31:

     Our persistency has declined only slightly during the three-year period ending December 31, 2002, mainly due to the poor economic conditions in Japan and the increasing block of directly-issued business, which is generally less persistent. New annualized premium sales in yen were: 108.3 billion yen in 2002, up 17.9%; 91.9 billion yen in 2001, down 7.9%; and 99.8 billion yen in 2000, up 14.6%. The increases in annualized premiums in force in yen of 6.7% in 2002, 5.6% in 2001 and 6.3% in 2000, reflect the high persistency of AFLAC Japan's business and the sales of new policies. For further information regarding the Japanese economy and its effect on our operations, see Exhibit 13, page 13-14, which is incorporated herein by reference.

I-4

Table of Contents

Insurance - U.S.

     AFLAC U.S. earned premium income by major product categories is summarized in Note 2 of the Notes to the Consolidated Financial Statements in Exhibit 13, page 13-46. The following table sets forth the changes in annualized premiums in force for AFLAC U.S. insurance for the years ended December 31.

     New annualized premium sales were: $1.1 billion in 2002, up 16.4%; $919 million in 2001, up 29.1%; and $712 million in 2000, up 28.3%. The increases in annualized premiums in force of 19.5% in 2002, 20.3% in 2001 and 16.9% in 2000 were favorably affected by increased sales at the worksite primarily through cafeteria plans and a slight improvement in the persistency of several products.

Insurance Products - Japan

     AFLAC Japan's insurance products are designed to help consumers pay for medical and nonmedical costs that are not reimbursed under Japan's health insurance system.

     The cancer life insurance plans we offer in Japan provide a fixed daily 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 below) in that the Japanese policies also provide death benefits and most have cash surrender values. We estimate that approximately 25% of the premiums earned from all cancer life plans are associated with these benefits. In mid-2000, we began selling new, lower-premium cancer life and care products to meet the needs of cost-sensitive buyers. At the end of 2000, we introduced a major revision to our cancer life policy, called 21st Century Cancer Life. Cancer life sales accounted for 35% of total sales in 2002, 52% in 2001 and 40% in 2000.

     In 2002, we introduced a whole life version of our Rider MAX product. Sales of Rider MAX, which provides accident and medical/sickness benefits, improved in 2002 primarily as a result of conversions of the original riders from a term version to the newly introduced whole life version. Rider MAX accounted for 31% of total sales in 2002, 25% in 2001 and 41% in 2000. For policy conversions, new annualized premium sales include only the incremental annualized premium amount over the original term policy. We expect that these conversions will have less of an effect on total new annualized premium sales in future periods.

     We also introduced EVER, a whole life fixed-benefit medical product, in the first quarter of 2002. EVER accounted for 17% of total sales in 2002. We believe that consumer response has been favorably impacted by health care legislation in Japan that will increase out-of-pocket costs for approximately 63% of Japanese consumers beginning in April 2003. As a result, we believe that EVER will continue to be a popular product and a solid contributor to sales.

I-5

Table of Contents

     The ordinary life products that we offer in Japan provide death benefits and may also include cash surrender values. These products are available as stand-alone policies and riders. Our annuity plan is an individual deferred premium annuity providing death benefits prior to annuitization age and annuity benefits during the pay-out period. Ordinary life and annuities accounted for 14% of sales in 2002, compared with 19% in 2001 and 14% in 2000.

     We also offer a living benefit life plan and accident and care policies in Japan. Mainly sold as a rider, the living benefit life plan is a life insurance policy that provides lump-sum benefits when policyholders experience either heart attack or stroke. Our accident insurance policy provides benefits for inpatient and outpatient treatment and surgery due to accidents. Our care insurance provides periodic benefits to those who become bedridden, demented, or seriously disabled due to illness or accident. These products individually accounted for less than 5% of total new annualized premium sales in the three-year period ending December 31, 2002.

Insurance Products - U.S.

     Our U.S. insurance is designed to provide supplemental coverage for people who already have major medical or primary insurance coverage. Our health insurance plans are guaranteed-renewable for the lifetime of the policyholder (to age 70 for short-term disability policies). We cannot cancel guaranteed-renewable coverage, but we can increase premium rates on existing and future policies by class of policy in response to higher than originally expected claims experience (subject to federal and state loss-ratio guidelines) on a uniform, nondiscriminatory basis. Any premium rate increases are subject to state regulatory approval. With the exception of our Medicare supplement product, which is a closed block of business, none of our products have had any major rate increase activity in the last five years.

     AFLAC U.S. 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 as well as fixed benefits for hospital confinement. Optional disability riders are also available to the primary insured. Short-term disability policies provide disability benefits with a variety of elimination period/benefit period options. The longest such benefit period offered is two years. Accident/disability coverage continued to be our best-selling product category, accounting for 51% of total sales in 2002, 52% in 2001 and 55% in 2000.

     Our U.S. cancer plans are designed to provide insurance benefits for medical and nonmedical costs that are generally not reimbursed by major medical insurance. Benefits include a first-occurrence benefit that pays an initial amount when internal cancer is first diagnosed, a fixed amount for each day an insured is hospitalized for cancer treatment, and benefits for medical, radiation, chemotherapy, surgery and a "wellness" benefit applicable toward certain diagnostic tests. AFLAC periodically introduces new forms of coverage based on the anticipated needs of policyholders and our claim experience. Cancer expense insurance accounted for 21% of total sales in 2002, 24% in 2001 and 23% in 2000.

     We also offer a series of fixed-benefit dental policies, providing various levels of benefits for dental procedures, including check-ups and cleanings. Plan features include a renewal guarantee, no deductible and a choice of dentist. The policies are portable and pay regardless of other insurance. Our dental insurance generated 7% of total sales in 2002 and 2001 and 3% of sales in 2000.

I-6

Table of Contents

     In 2002, we introduced a personal sickness indemnity plan, which provides a fixed daily benefit for hospitalization due to sickness as well as physician benefits for accident or sickness. Our hospital indemnity product provides a fixed daily benefit for hospitalization and physician services due to accident or sickness. Our hospital indemnity product category, which includes these plans, contributed 10% of total sales in 2002 and 6% in both 2001 and 2000.

     AFLAC U.S. offers term and whole life policies sold through payroll deduction at the worksite and various term and whole life policies on a direct basis. We also offer other health insurance products including qualified and non-qualified long-term care plans, a hospital intensive care policy, and a specified health event policy. These products individually contributed less than 5% of total sales in each of 2002, 2001 and 2000.

Distribution - Japan

     Our largest distribution channel is the "corporate agency" system. In 2002, affiliated corporate agencies contributed 37% of total new annualized premium sales. Affiliated corporate agencies are formed when companies establish subsidiary businesses to sell our products to their employees, suppliers and customers. These agencies help us reach employees at 95% of the companies listed on the Tokyo Stock Exchange.

     We also sell our products through independent corporate agencies and individual agencies that are not affiliated with large companies. In 2002, independent corporate agencies accounted for 24% of total new annualized premium sales, while individual agencies accounted for 28% of total new annualized premium sales. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 85 offices throughout Japan.

     As of December 31, 2002, there were approximately 12,050 agencies in Japan with more than 58,000 licensed agents, compared with approximately 9,840 agencies and more than 52,200 licensed agents a year ago. We believe that new agencies will continue to be attracted to AFLAC Japan's high commissions, superior products, customer service and brand image.

     In 2000, AFLAC Japan and Dai-ichi Mutual Life Insurance Co. (Dai-ichi Life) agreed to a marketing alliance that provides for sales of AFLAC Japan's cancer life product through Dai-ichi Life's sales force of 50,000 people. Sales commenced in April 2001. Dai-ichi Life sold approximately 359,500 of our cancer life policies in 2002, compared with 265,200 policies in 2001 and contributed 11% of total new annualized premium sales in both 2002 and 2001.

Distribution - U.S.

     Our 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 at the worksite. The average number of U.S. agents actively producing business on a monthly basis during 2002 was 15,800, compared with 13,000 in 2001.

     Agents' activities are principally limited to sales. Administrative staff in Columbus, Georgia, and Albany, New York, handles policyholder service functions, including issuance of policies, premium collection, payment notices and claims. Agents are paid commissions based on first and renewal-year premiums from their sales of insurance products. State, regional and district sales coordinators are also independent agents and are compensated by override commissions and bonuses.

I-7

Table of Contents

     We have concentrated on marketing our products at the worksite. This method offers policies to individuals through common media such as employment, trade and other associations. This manner of marketing is distinct from the "group" insurance sales approach, as our primary method of enrollment results from the individual insured being directly contacted by the sales associate. Policies are individually underwritten, with premiums generally paid by the employee. Additionally, AFLAC policies are portable, meaning 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 centralized billings. Worksite-marketed 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 is passed on to the polic yholder in the form of reduced premiums. Marketing at the worksite enables the agency force to reach a greater number of prospective policyholders and lowers distribution costs.

     Another valuable marketing and sales tool is the flexible benefits program, or cafeteria plan, which allows an employee to pay for many of AFLAC's products using pretax dollars. These programs help achieve increased penetration, as agents are required to present the program to all employees in a payroll account. They also help improve overall persistency levels due to the limited changes that are allowed during the plan year.

     In 2002, AFLAC U.S. collected premiums were $2.2 billion, 8.1% of which was collected in Texas, 6.7% in Florida, 5.8% in California and 5.0% in Georgia. Collected premiums in all other states were individually less than 5% of AFLAC U.S. premiums.

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 an operating license. Through 1981, we were the only company in Japan authorized to sell a cancer life insurance policy. In January 2001, Japan's insurance market was deregulated, and we experienced an increase in the number of companies selling products that compete with our policies. However, based on our growth of premiums in force, producing agents and customer accounts, we do not believe that our market position has been significantly impacted by increased competition as a result of deregulation. Furthermore, we believe the continued development and maintenance of operating efficiencies will allow us to offer affordable products at a better value to consumers.

     AFLAC has had substantial success selling cancer life policies in Japan, with 13.9 million cancer life policies in force at December 31, 2002. We believe we will remain a leading provider of cancer life insurance coverage in Japan, principally due to our long experience in the market, low-cost operations, unique marketing system (see Distribution - Japan above) and product expertise developed in the United States.

Competition - U.S.

     There are approximately 2,000 life and accident and health insurance companies operating in the United States. We compete against 10 insurers on a national basis plus other insurers regionally. We believe that our policies and premium rates as well as the commissions paid to our sales agents are generally competitive with those offered by other companies providing similar types of insurance. However, we believe that our U.S. business is distinct from our competitors because of our product focus, distribution system, and name awareness. For most of the other companies that sell supplemental insurance, it represents a secondary business. For us, it is our only business and allows us to focus on exploring new product opportunities while also enhancing our existing products. By doing so, we believe we offer the best value in the

I-8

Table of Contents

market. We also believe that our growing distribution system of independent sales associates expands our business opportunities, while our advertising campaigns have increased our name awareness and branding efforts.

     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 accident and disability, cancer or other major illnesses. AFLAC's policies are designed to provide coverage that is supplemental to coverage provided by major medical insurance. Our benefits may also be used to defray nonmedical expenses.

     Primary insurers generally do not provide full coverage of medical expenses or any coverage of nonmedical expenses. Therefore, our supplemental insurance is not an alternative to major medical insurance. Rather, it is sold to complement (supplement) major medical insurance by helping to cover the gap between major medical insurance reimbursements and an individual's total health care costs. Thus, we compete only indirectly with major medical insurers in terms of premium rates and similar factors. However, the scope of major medical coverage offered by other insurers does represent a limitation on the market for our products. Accordingly, expansion of coverage by other insurers, or governmental programs, could adversely affect our business opportunities. Conversely, any reduction of coverage, such as increased deductibles and co-payments, by other insurers or governmental programs could favorably affect our business opportunities.

Investments and Investment Results

     The following table shows an analysis of investment securities at December 31:

I-9

Table of Contents

     Net investment income was $1.6 billion in 2002, 2001 and 2000. Net investment income has been relatively flat during the last three years primarily as a result of low available investment yields for new money in both Japan and the United States. In particular, Japan's life insurance industry has contended with low investment yields for a number of years. As a result, more attention has been paid to the composition of the life insurance industry's assets. Our asset allocation is much different than the industry as a whole and, we believe, is better suited to a low interest rate environment. Based on financial results determined in accordance with Financial Services Agency (FSA) requirements for the fiscal year ended March 31, 2002, AFLAC Japan had the highest portfolio yield among all of Japan's life insurers with assets in excess of 2 trillion yen for 2002, 2001 and 2000. AFLAC Japan earned this distinction while maintaining a debt security portfolio in which 97.9% and 98.7% of the securities were classified as investment grade at December 31, 2002 and 2001, respectively.

     For information on the composition of our investment portfolio and investment results, see Exhibit 13, pages 13-13, 13-15, 13-21 to 13-23, and 13-28 to 13-29 (discussions relating to investments, balance sheet and cash flow) and pages 13-49 to 13-60 (Notes 3 and 4 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference.

Investments - Japan

     Yen-denominated debt securities accounted for 93% of AFLAC Japan's total debt securities at December 31, 2002 and 92% of AFLAC Japan's total debt securities at December 31, 2001. The following table presents the composition, based on cost or amortized cost, of total investments and cash for AFLAC Japan ($31.0 billion in 2002 and $25.9 billion in 2001) as of December 31:

     Funds available for investment include cash flows from operations and funds generated from bond swaps, maturities and redemptions. AFLAC Japan purchased investments totaling approximately 565 billion yen in 2002 ($4.5 billion using the 2002 weighted-average exchange rate), 445 billion yen in 2001 ($3.7 billion using the 2001 weighted-average exchange rate) and 382 billion yen in 2000 ($3.5 billion using the 2000 weighted-average exchange rate). In 2002, 67.4% of the total yen-denominated purchases represented new money invested at an average yield of 3.65% to support our operational needs. Our bond swap activity accounted for 21.0% of yen-denominated purchases and shorter-dated investments used to manage cash flow needs represented the remaining 11.6% of yen-denominated purchases. Dollar-denominated new money, which represented 58.5% of total dollar-denominated purchases, was invested at an average yield of 7.39%. Dollar-denominated bond swaps accounted for the remaining 41.5% o f total dollar-denominated purchases. In 2001, 84.9% of the total yen-denominated purchases represented new money invested at an average yield of 3.58% to support our operational needs. Our bond swap activity represented the remaining 15.1% of

I-10

Table of Contents

yen-denominated purchases. Dollar-denominated new money, which accounted for 59.3% of total dollar-denominated purchases, was invested at an average yield of 7.69%. Dollar-denominated bond swaps represented the remaining 40.7% of dollar-denominated purchases. In 2000, 95.0% of the total yen-denominated purchases represented new money invested at an average yield of 3.57% to support our operational needs. Our bond swap activity accounted for the remaining 5.0% of yen-denominated purchases. Dollar-denominated new money represented 73.2% of total dollar-denominated purchases at an average yield of 7.88%. Dollar-denominated bond swaps accounted for the remaining 26.8% of dollar-denominated purchases.

     We use specific criteria to judge the credit quality and liquidity of our investments and a variety of credit rating services to monitor these criteria. The percentage distribution of AFLAC Japan's debt securities, at amortized cost, by credit rating as of December 31 was as follows:

     Debt security purchases were as follows:

I-11

Table of Contents

Investments - U.S.

     The following table presents the composition, based on cost or amortized cost, of total investments and cash for AFLAC U.S. ($4.6 billion in 2002 and $4.1 billion in 2001) as of December 31:

     Funds available for investment include cash flows from operations and funds generated from bond swaps, maturities and redemptions. Purchases of investments by AFLAC U.S. were approximately $1.2 billion in 2002, $1.6 billion in 2001 and $704 million in 2000. In 2002, of the total available funds, 92.6% was invested in corporate fixed-maturity securities at an average yield of 7.58% and 1.0% was invested in U.S. government or agency securities at an average yield of 6.01%. AFLAC U.S. invested 93.9% in corporate fixed-maturity securities in 2001 at an average yield of 7.78% and .6% in U.S. government or government agency securities at an average yield of 6.32%. In 2002 and 2001, we directed more funds to the corporate fixed-maturity security market due to the low yields available on U.S. government and government agency securities. AFLAC U.S. invested 73.2% in corporate fixed-maturity securities in 2000 at an average yield of 8.36% and 22.6% in U.S. government or government agen cy securities at an average yield of 7.66%.

     We use specific criteria to judge the credit quality and liquidity of our investments and a variety of credit rating services to monitor these criteria. The percentage distribution of debt securities for AFLAC U.S. and the Parent Company, at amortized cost, by credit rating as of December 31 was as follows:

I-12

Table of Contents

     Debt security purchases were as follows:

Regulation - Japan

     A portion of AFLAC Japan's annual earnings, as determined on a Japanese statutory accounting basis, can be transferred (repatriated) each year to AFLAC U.S. after complying with solvency margin provisions and satisfying various conditions imposed by Japanese regulatory authorities for protecting policyholders. Payments are also made from AFLAC Japan to the Parent Company for management fees and to AFLAC U.S. for allocated expenses. Repatriated profits represent a portion of the after-tax earnings reported to the FSA on a March 31 fiscal year basis. Japanese regulatory basis earnings are determined using accounting principles that differ materially from accounting principles generally accepted in the United States of America (GAAP). Under Japanese statutory accounting practices, premium income is recognized on a cash basis, policy acquisition costs are charged off immediately, policy benefit and claim reserving methods and assumptions are different, policyholder protection fund o bligations are not accrued, and deferred income tax liabilities are recognized on a different basis.

     The FSA maintains its own solvency standards, a version of U.S. risk-based capital requirements, which are used by regulators in Japan to monitor the financial strength of insurance companies. AFLAC Japan's solvency margin continues to significantly exceed regulatory minimums. The FSA may not allow transfers of funds if the transfers would cause AFLAC Japan to lack sufficient financial strength for the protection of policyholders. We do not expect these requirements to adversely affect the funds available for remittances of earnings and payments of allocated expenses and management fees.

     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 FSA. Also, financial and other affairs of AFLAC Japan are subject to examination by the FSA. Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets determined on a Japanese regulatory accounting basis as of December 31 were as follows:

I-13

Table of Contents

     In 1998, the Japanese government established the Life Insurance Policyholders Protection Corporation (LIPPC). For further information regarding the policyholder protection fund, see Exhibit 13, page 13-42, Note 2 of the Notes to the Consolidated Financial Statements.

     For additional information regarding AFLAC Japan's operations and regulations, see Exhibit 13, pages 13-10 to 13-14 (AFLAC Japan section of MD&A) and pages 13-45 to 13-48 and 13-70 to 13-71 (Notes 2 and 9 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. Our branch in Japan is also subject to regulation and supervision in the United States as described below.

Regulation - U.S.

     The Parent Company and its insurance subsidiaries are subject to state regulations in the United States as an insurance holding company system. Such regulations generally provide that transactions between companies within the holding company system must be fair and equitable. In addition, transfer of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and material transactions between companies within the system are subject to prior notice to, or approval by, state regulatory authorities.

     AFLAC and its subsidiary, in common with all U.S. insurance companies, are subject to regulation and supervision in the 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 financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by regulatory authorities, and periodic examinations of the market conduct, financial, and other affairs of insurance companies.

     Also, there are various ongoing regulatory initiatives by the National Association of Insurance Commissioners (NAIC) relating to insurance products, investments, revisions to the risk-based capital formula and other actuarial and accounting matters.

     The NAIC has revised and codified statutory accounting principles to promote standardization throughout the industry. We adopted these new accounting principles effective January 1, 2001. The transition adjustments to reflect the prior years' effects increased AFLAC statutory capital and surplus by approximately $130 million.

     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. 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 remains high and reflects a very strong capi tal and surplus position.

I-14

Table of Contents

     Under insurance guaranty association laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to us in the past. We believe that future assessments relating to companies in the United States currently involved in insolvency proceedings will not materially impact the consolidated financial statements.

     For further information concerning AFLAC U.S. operations, regulation and dividend restrictions, see Exhibit 13, pages 13-14 to 13-15 (AFLAC U.S. section of MD&A) and pages 13-45 to 13-48 and 13-70 to 13-71 (Notes 2 and 9 of the Notes to the Consolidated Financial Statements), which are incorporated herein by reference.

Policy Liabilities - Japan and U.S.

     The reserves for policy liabilities reported in the financial statements have been computed in accordance with GAAP. These reserves differ from those reflected in the various regulatory financial statements filed by AFLAC and AFLAC Japan. Such differences arise from the use of different mortality, morbidity, interest and lapse assumptions, and actuarial reserving methods as required by regulatory authorities in the U.S. and Japan.

Employees

     AFLAC Japan had 2,661 full-time employees at December 31, 2002. AFLAC U.S. had 3,136 full-time employees at December 31, 2002. We consider our employee relations to be excellent.

Other Operations

     Our other operations include the Parent Company and a printing subsidiary. These operations had 289 full-time employees at December 31, 2002. We consider our relations with these employees to be excellent. For additional information on our other operations, see Exhibit 13, page 13-16 (Other Operations section of MD&A), which is incorporated herein by reference.

Forward-Looking Information

     This report includes certain forward-looking information that is based on current expectations and is subject to a number of risks and uncertainties. For information on forward-looking information, see Exhibit 13, page 13-30, which is incorporated herein by reference.


ITEM 2.  PROPERTIES

     AFLAC owns land and buildings that comprise two primary campuses located in Columbus, Georgia. The first campus, located on approximately 54 acres of land, includes buildings that serve as our worldwide headquarters and house administrative support functions for our U.S. operations. The approximate square footage of the buildings on this campus is 600,000 square feet. The second campus, located on approximately 104 acres of land, includes a building with approximately 270,000 square feet that provides additional support functions for our U.S. operations. AFLAC also leases administrative office space in Albany, New York, and Omaha, Nebraska.

I-15

Table of Contents

     In Tokyo, Japan, AFLAC owns an administrative office building and a training facility with approximately 344,000 square feet. AFLAC also leases additional office space in Tokyo along with regional sales offices located throughout the country.


ITEM 3.  LEGAL PROCEEDINGS

     We are a defendant in various lawsuits considered to be in the normal course of business. Some of this litigation is pending in states where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows.

I-16

Table of Contents

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to the security holders for a vote during the quarter ended December 31, 2002.


ITEM 4A.  EXECUTIVE OFFICERS OF THE COMPANY

I-17

Table of Contents

I-18

Table of Contents

I-19

Table of Contents

     Pursuant to General Instruction G to Form 10-K, Item 5 is incorporated by reference from the Company's 2002 Annual Report to Shareholders, pages 1, 59 to 60 (Note 9 of the Notes to the Consolidated Financial Statements), 64 and 67. This information is included herein as Exhibit 13, pages 13-1, 13-2, and 13-70 to 13-71 (Note 9 of the Notes to the Consolidated Financial Statements).

II-1

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

(continued)

II-2

Table of Contents