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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
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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
========== ========== ==========
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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.
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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.
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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
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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
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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