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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, 1998 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
15, 1999, with $.10 par value, was 266,461,648. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of March 15,
1999 was $12,890,573,866.
DOCUMENTS INCORPORATED BY REFERENCE
PART I Item 1 Exhibit 13 - pages 13-5 to 13-30 (Management's
Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)),
pages 13-43 to 13-54 (Notes 2 and 3 of the
Notes to the Consolidated Financial
Statements), and pages 13-67 to 13-68
(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,
1998, are included as Exhibit 13
Item 2 Exhibit 13 - page 13-57 (Note 5 of the Notes
to the Consolidated Financial Statements)
PART II Item 5 Exhibit 13 - pages 13-1, 13-2 and 13-67
(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 13-30
Item 7A Exhibit 13 - pages 13-7 to 13-8, and
13-17 to 13-21
Item 8 Exhibit 13 - pages 13-31 to 13-75
PART III Item 10 Incorporated by reference from the
definitive Proxy Statement for the Annual
Meeting of Shareholders to be held May 3,
1999 (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, 1998
Table of Contents
Page
PART I
Item 1. Business................................................ I- 1
Item 2. Properties.............................................. I-20
Item 3. Legal Proceedings....................................... I-20
Item 4. Submission of Matters to a Vote of Security Holders..... I-20
Item 4A. Executive Officers of the Company....................... I-21
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 was incorporated in 1973 under the laws of the State
of Georgia. AFLAC Incorporated is a general business holding company, and
acts as a management company, overseeing the operations of its subsidiaries
by providing management services and making capital available. Its primary
business is supplemental health insurance, which is marketed and
administered primarily through its subsidiary, American Family Life
Assurance Company of Columbus (AFLAC). Most of AFLAC's policies are
individually underwritten and marketed at the worksite, with premiums paid
by the employee. Our operations in Japan (AFLAC Japan) and the United
States (AFLAC U.S.) service the two markets for our insurance operations.
We believe AFLAC is the world's leading writer of cancer expense
insurance. In recent years, we have diversified our 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, medical/sickness riders to our cancer plan, 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
and short-term disability plans. We also offer 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. Our only significant foreign operation is AFLAC Japan, which
accounted for 80%, 79% and 82% of the company's total revenues for 1998,
1997 and 1996, respectively, and 86% and 87% of total assets at December 31,
1998 and 1997, respectively.
For financial information relating to our foreign and U.S. operations,
see Exhibit 13, pages 13-5 to 13-30 (Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A)) and page 13-43 (Note 2
of the Notes to the Consolidated Financial Statements), which are
incorporated herein by reference.
Three significant items affected net earnings during the three-year
period ended December 31, 1998.
First, due to a corporate income tax rate reduction in Japan during
1998, the statutory tax rate for AFLAC Japan declined from 45.3% to 41.7%.
This tax rate decline resulted in a reduction in our deferred income tax
liability as of March 31, 1998, which increased net earnings by $121 million
($.46 per basic share and $.44 per diluted share) in 1998. For additional
information on the income tax reduction, see Exhibit 13, page 13-61, Note 8
of the Notes to the Consolidated Financial Statements.
The second factor affecting net earnings was a policyholder protection
fund system mandated by the Japanese government during the first quarter of
1998. The pretax charge for our obligation to the new protection fund was
$111 million ($65 million after tax, or $.24 per both basic and diluted
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shares). For further information regarding this policyholder protection
fund, see Exhibit 13, page 13-43, Note 2 of the Notes to the Consolidated
Financial Statements.
Also affecting net earnings was the sale of our television business,
which consisted of seven network-affiliated stations. The total pretax gain
from the sale was $327 million. The sale of one station closed on December
31, 1996. The pretax and after-tax gains recognized in 1996 on this sale
were $60 million and $48 million, respectively. The effect of the after-tax
gain on 1996 basic and diluted net earnings per share was $.17 and $.16,
respectively. The pretax and after-tax gains recognized during the second
quarter of 1997 on the closing of the six remaining stations were $267
million and $211 million, respectively. The effect of the after-tax gain on
1997 basic and diluted net earnings per share was $.77 and $.75,
respectively. For further information, see Exhibit 13, page 13-43, Note 2
of the Notes to the Consolidated Financial Statements.
The following discussion of earnings comparisons focuses on pretax
operating earnings and excludes realized investment gains/losses, the charge
for the mandated policyholder protection fund, the benefit of the Japanese
tax rate reduction and the gains from the sale of the television business.
Operating earnings per share referred to in the following discussion are
based on the diluted number of average outstanding shares.
Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar
exchange rate can have a significant effect on our reported 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.
The yen weakened in relation to the dollar throughout 1996, 1997 and
most of 1998. The average yen-to-dollar exchange rates were 130.89 in 1998,
121.07 in 1997 and 108.84 in 1996. The weakening of the yen during the
three-year period lowered operating earnings by $.05 per share in 1998
compared with 1997, $.09 per share in 1997 compared with 1996 and $.15 per
share in 1996 compared with 1995. Despite the weakening of the yen,
operating earnings per share increased 17.3% to $1.56 in 1998, 10.8% to
$1.33 in 1997, and 2.6% to $1.20 in 1996.
Our primary financial objective is the growth of operating earnings per
share before the effect of foreign currency translations. In 1996, we set
this objective at an annual growth rate of 15% to 17% through the year 2000.
In early 1998 we increased our goal for 1998 to 20% growth, which we
exceeded. Excluding the effect of currency fluctuations, operating earnings
per share increased 21.1% in 1998, 18.3% in 1997 and 15.4% in 1996.
In April 1998, we raised our 1999 objective for growth in operating
earnings per share to 20% excluding the impact of currency fluctuation. For
further information, see Exhibit 13, pages 13-7 to 13-8 (Foreign Currency
Translation section of MD&A).
Insurance premiums and investment income from insurance operations are
the major sources of revenues. Our consolidated premium income was $5.9
billion for each of the years in the three-year period ended December 31,
1998. For further information on our consolidated premiums earned by
business segment, see Note 2 of the Notes to the Consolidated Financial
Statements in Exhibit 13, page 13-43, incorporated herein by reference.
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The following table sets forth the changes in annualized premiums in
force for AFLAC's insurance business in Japan and the United States for the
years ended December 31.
(In millions) 1998 1997 1996
-------- -------- --------
Annualized premiums in force,
at beginning of year $ 5,811 $ 5,953 $ 5,873
New issues including
policy conversions 1,061 921 1,056
Change in unprocessed
policies (24) (65) 39
Lapses and surrenders (552) (479) (423)
Other 23 26 1
Foreign currency translation
adjustment 612 (545) (593)
------- ------- -------
Annualized premiums in force,
at end of year $ 6,931 $ 5,811 $ 5,953
======= ======= =======
INVESTMENTS AND INVESTMENT RESULTS
During the fourth quarter of 1998, we revised our investment management
policy regarding the holding-period intent for certain of our private
placement debt securities. Our past practice was to hold these securities
to their contractual or economic maturity dates. We have now made this our
formal policy. Accordingly, debt securities carried at a fair value of $6.4
billion were reclassified as of October 1, 1998, from the category
"available for sale" to the category "held to maturity." The related
unrealized gain of $1.1 billion as of October 1, 1998, on these securities
is being amortized over the remaining term of the securities. Securities
that are available for sale are reported in the balance sheet at fair value
and securities that are held to maturity are reported at amortized cost.
In recent years, AFLAC Japan has purchased perpetual debenture
securities issued primarily by European and Japanese banks. These
securities are subordinated to other debt obligations of the issuer, but
rank higher than equity securities. Although these securities have no
contractual maturity, the issue-date fixed-rate interest coupons
subsequently increase to a market-interest rate plus 150 to 300 basis points
and change to a variable-interest rate basis, generally by the 25th year
after issuance, creating an economic maturity date.
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The following table shows an analysis of investment securities (at cost
or amortized cost) at December 31:
AFLAC Japan AFLAC U.S.
(In millions) 1998 1997 1998 1997
----------------- -----------------
Available for sale:
Fixed-maturity securities $12,886 $13,527 $ 2,813 $ 2,546
Perpetual debentures 1,344 3,011 70 37
Equity securities 22 7 79 73
------ ------ ------ ------
Total available for sale 14,252 16,545 2,962 2,656
------ ------ ------ ------
Held to maturity:
Fixed-maturity securities 3,947 - - -
Perpetual debentures 3,494 - - -
------ ------ ------ ------
Total held to maturity 7,441 - - -
------ ------ ------ ------
Total $21,693 $16,545 $ 2,962 $ 2,656
====== ====== ====== ======
Net investment income was $1.1 billion in both 1998 and 1997, and $1.0
billion in 1996.
AFLAC primarily invests within the United States, Japan and Euroyen
investment markets. We maintain a strong portfolio by investing in
investment grade securities that provide us with a predictable source of
investment income. When committing cash flows to new investments, we only
purchase securities that are rated investment grade by the Securities
Valuation Office of the National Association of Insurance Commissioners.
For information on the composition of our investment portfolio and
investment results, see Exhibit 13, pages 13-13 and 13-17 to 13-30
(discussions relating to investments, balance sheet and cash flow) and pages
13-48 to 13-56 (Notes 3 and 4 of the Notes to the Consolidated Financial
Statements), which are incorporated herein by reference.
INVESTMENTS - JAPAN
Approximately 90.8% of the 332.1 billion yen ($2.9 billion) that AFLAC
Japan had available for investment in 1998 was invested in yen-denominated
securities at an average yield of 3.84%. We invested 55.8% in longer-dated
securities at an average rate of 4.72%. The longer-dated sector includes
purchases of dual-currency bonds (yen principal securities that pay a dollar
coupon) at an average yield of 4.91%. An additional 35.0% was invested in
yen-denominated securities of various other sectors. Dollar-denominated
securities accounted for the remaining 9.2% of the purchases in 1998 at an
average yield to maturity of 7.61%.
We require that all private placement issuers have an initial rating of
class 1 or 2 as determined by the Securities Valuation Office of the
National Association of Insurance Commissioners. 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
I-4
credit analysis indicates that additional protective and/or event risk
covenants are required.
Following is the composition of total investments and cash (at cost or
amortized cost) for AFLAC Japan as of December 31:
1998 1997
-------- --------
Debt securities:
Government and guaranteed 31.3% 36.7%
Municipalities 4.0 4.5
Public utilities 16.3 15.7
Banks/financial institutions 35.9 31.9
Other corporate 10.9 10.0
Equity securities .1 .1
Cash and cash equivalents 1.5 1.1
------ ------
100.0% 100.0%
====== ======
AFLAC invests primarily within the Japanese, U.S. and Euroyen fixed-
maturity markets. We use specific criteria to judge the credit quality and
liquidity of our investments, and use a variety of credit rating services to
monitor these criteria. Applying those various credit ratings to a
standardized rating system based on the categories of a nationally
recognized rating service, the percentages of AFLAC Japan's debt securities,
at amortized cost, as of December 31 were as follows:
1998 1997
------ ------
AAA 41.7% 47.8%
AA 16.6 17.4
A 28.0 26.8
BBB 13.7 8.0
----- -----
100.0% 100.0%
===== =====
As of December 31, 1998, we held no debt securities rated below "BBB."
However, in January 1999, the credit ratings of several major Japanese
financial institutions were downgraded. We owned debt securities issued by
a Japanese bank in the amount of $454 million, or 1.8% of total company debt
securities at December 31, 1998. Following the downgrade, these securities
were rated "Ba1" by Moody's and "BB+" by Standard & Poor's.
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 1997 when Nissan Mutual
Life Insurance Company was declared insolvent. As a result, more attention
has been paid to the composition of the life insurance industry's assets.
Our asset allocation is much different than the industry as a whole and, we
believe, is better suited to a low interest rate environment. Based on
March 31, 1998, Japanese Financial Supervisory Agency (FSA) data, AFLAC had
the highest portfolio yield among all of Japan's major life insurers. AFLAC
earned this distinction without sacrificing the quality of its portfolio.
I-5
Our investments in the Japanese equity and investment real estate
markets continued to be immaterial in 1998.
INVESTMENTS - U.S.
Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $154 million
in 1998, compared with $347 million in 1997. The profit transfer in 1997
included $125 million of a non-recurring nature. Including profit
repatriation and bond swaps, AFLAC U.S. invested $1.1 billion in 1998. Of
that amount, approximately 6.2% was invested in U.S. government or agency
securities at an average yield of 6.89%, and 90.3% was invested in corporate
fixed-maturity securities at 7.26%. The remaining 3.5% was invested in
equities.
Following is the composition of total investments and cash (at cost or
amortized cost) for AFLAC U.S. as of December 31:
1998 1997
-------- --------
Debt securities:
U.S. Government 4.0% 7.3%
Municipalities - .5
Mortgage-backed securities .9 9.0
Public utilities 6.2 4.2
Sovereign and Supranational 4.0 4.0
Banks/financial institutions 50.6 43.1
Other corporate 31.0 27.9
Equity securities 2.6 2.7
Cash and cash equivalents .7 1.3
------ ------
100.0% 100.0%
====== ======
AFLAC U.S. debt securities, at amortized cost, as of December 31 were
rated as follows:
1998 1997
------ ------
AAA 11.2% 26.4%
AA 25.4 22.3
A 55.5 49.0
BBB 7.9 2.3
----- -----
100.0% 100.0%
===== =====
INSURANCE - JAPAN
AFLAC Japan's earned premiums by product lines are included in Note 2
of the Notes to the Consolidated Financial Statements, in Exhibit 13, page
13-43.
I-6
The following table presents the changes in annualized premiums in
force for AFLAC Japan health insurance for the years ended December 31:
(In millions) 1998 1997 1996
-------- -------- --------
Annualized premiums in force,
at beginning of year $ 4,595 $ 4,893 $ 4,919
New issues including
policy conversions 579 520 729
Change in unprocessed
policies (25) (62) 47
Lapses and surrenders (212) (193) (187)
Other (11) (18) (22)
Foreign currency translation
adjustment 612 (545) (593)
-------- -------- --------
Annualized premiums in force,
at end of year $ 5,538 $ 4,595 $ 4,893
======== ======== ========
We are experiencing a slight increase in lapses and surrenders due to
the poor economic conditions in Japan.
INSURANCE PLANS - JAPAN
AFLAC's insurance is supplemental in nature and is designed to provide
insurance to cover medical and nonmedical costs that are not reimbursed
under Japan's national health insurance system.
The cancer life insurance plans offered for sale 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 page
I-13) in that the Japanese policies also provide death benefits and cash
surrender values (we estimate that approximately 32% of the premiums earned
from all cancer life plans 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, we broadened our 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. Prior
to the introduction of this care plan, we marketed a plan that primarily
provided dementia care benefits.
In 1995, we 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. This product is widely available
in the Japanese insurance marketplace, but AFLAC's policy is very
competitive. Our policy offers a maximum hospitalization benefit of 1,000
days, which is the longest period offered in the industry. Our medical
expense coverage accounted for 2.7% of total sales in 1998, and 10.8% of
total sales in 1997 compared with 3.1% in 1996.
I-7
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. We
are 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 life policy. Marketing efforts for living benefit
life primarily focus on the sale of the rider. Sales of the living benefit
life plan were $41 million and $146 million in new annualized premium in
1998 and 1997, respectively.
During 1997, AFLAC Japan began selling ordinary life products. Sales
for 1998 and 1997 were immaterial.
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, we believe AFLAC's products and riders
that provide supplemental medical benefits will be especially appealing to
consumers. As such, we began selling a new product called Rider MAX in
1998. Rider MAX provides accident and medical/sickness benefits to our
popular cancer life policy.
AFLAC Japan's sales mix is changing, although cancer life still
accounts for the majority of insurance in force. Cancer life sales
accounted for 49.4% of total new sales in yen in 1998, 52.5% in 1997 and
46.7% in 1996. We sold more than 948,000 riders of Rider MAX in 1998, which
was its first year of availability. Rider MAX accounted for 33.2% of our
sales for the year, and 39.9% of our cancer life policies were sold with
Rider MAX. The rider we introduced in the fourth quarter of 1995, living
benefit life, accounted for 7.2% of total new sales in 1998, 28.3% in 1997
and 39.5% in 1996. Care product sales represented 3.7% of total new sales
in 1998, 6.8% in 1997 and 10.6% in 1996.
Due to the continued low level of available investment yields in Japan,
the industry regulators have directed insurers to increase premium rates on
new policy issues in recent years. The last industry-wide increase was in
the fourth quarter of 1996. At that time we increased premium rates by
approximately 13% on new policy issues for all product lines. As a result
of continuing low yields, the government is again directing life insurers to
raise rates on new policy issues. We anticipate increasing premium rates in
July 1999.
JAPANESE ECONOMY
Japan's economy has been weak for several years. The economic downturn
has spread to several Asian countries since mid-1997. The financial
strength of many Japanese financial institutions has deteriorated, and some
have experienced bankruptcy. As we have indicated in the past, the weak
economy in Japan has resulted in a difficult marketing environment for AFLAC
Japan, declining available investment yields for new investments and
decreased consumer confidence.
Although the Japanese government has developed various economic
stimulus packages, the time required for the Japanese economy to recover
remains uncertain.
I-8
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 us reach the
employees of almost all of Japan's large corporations. We have no ownership
interest in these corporate agencies.
Our products are also sold through independent corporate agencies and
individual agencies that are not affiliated with large companies. As of
December 31, 1998, there were 7,010 agencies in Japan with 32,622 licensed
agents, compared with 5,427 agencies and 25,293 licensed agents in Japan in
1997. Agents' activities are principally limited to insurance sales, with
policyholder service functions handled by the main office in Tokyo and 60
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, we were the only company
in Japan authorized to issue a cancer life insurance policy. Now, 16 other
life companies offer cancer insurance. However, we remain the leading
provider of cancer life insurance coverage in Japan, principally due to our
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 13.0 million cancer life policies in force at December 31, 1998.
In 1998, AFLAC had a 89% market share of all stand-alone (non-rider)
care insurance sold by life insurance companies. We believe the future
demand for this product will be fueled by the Japanese government's plan to
introduce a national care 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 our 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. AFLAC has
inherent competitive advantages through its distribution, products,
administrative efficiency and financial soundness that should enable it to
continue to grow, even in a more competitive environment. The ultimate
impact, however, of deregulation still isn't known.
AFLAC's strategy for future growth in Japan centers on broadening its
product line and expanding the distribution system. Although the basic plan
for growth is the same in Japan as in the United States, we have had to
I-9
formulate a strategy specifically tailored for the Japanese insurance
marketplace, which is very different from the United States. There are only
45 life insurance companies in Japan, compared with more than 2,000 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. When deregulation is complete, we believe we will be able to sell
more products than we are currently offering.
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 $192 million in 1998, $386 million in 1997 and $254
million in 1996. 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 Japanese
statutory accounting basis, can be remitted each year to AFLAC U.S. after
satisfying various conditions imposed by Japanese regulatory authorities for
protecting policyholders. The Japanese Financial Supervisory Agency (FSA)
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 we do 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 FSA on a March 31 fiscal year basis each year. Such
regulatory basis earnings are determined using accounting principles that
differ materially from U.S. generally accepted accounting principles. Such
differences relate primarily to the valuation of investments, policy benefit
and claim reserves, acquisition costs and deferred income taxes. 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 1999 profit repatriation will approximate 20 billion
yen ($171 million using the December 31, 1998, exchange rate).
During the second quarter of 1997, Nissan Mutual Life Insurance
Company, a medium-sized Japanese insurer, was declared insolvent. All life
insurers doing business in Japan had previously agreed to contribute to a
voluntary policyholder protection fund that would be used to help offset
insurer insolvencies. During the second quarter of 1997, AFLAC Japan
recognized a pretax charge of 3.0 billion yen ($25 million) for its
obligation to this policyholder protection fund. The after-tax charge was
$14 million ($.05 per basic and diluted share). This assessment is payable
semiannually over 10 years beginning in 1998.
During the first quarter of 1998, the Japanese government enacted a
mandatory policyholder protection fund system. The life insurance industry
is required to contribute $4.2 billion to this fund over a 10-year period.
The total charge for our share of the contribution obligation was recognized
in the first quarter of 1998 and decreased pretax earnings by $111 million
I-10
for the year ended December 31, 1998. The after-tax charge was $65 million,
or $.24 per basic and diluted share.
Effective January 1, 1998, the Japanese government changed the income
tax provisions for foreign companies operating in Japan, increasing income
taxes on investment income and realized gains/losses from securities issued
by entities located in their home country. This change increases Japanese
income taxes on the income from most of AFLAC Japan's dollar-denominated
securities. In addition, the Japanese government enacted a reduction in the
Japanese corporate income tax rate in March 1998. The statutory rate for
AFLAC Japan declined from 45.3% to 41.7% beginning May 1, 1998. The net
effect of these two Japanese tax changes increased income tax expense on
consolidated operating earnings by approximately $10 million for the year
ended December 31, 1998 (an increase of approximately $22 million from
increased taxes on AFLAC Japan's dollar-denominated investment income, less
approximately $12 million from the benefit of the statutory tax rate
reduction).
The Japanese tax rate reduction also resulted in a benefit to 1998
earnings of $121 million ($.46 per basic share, $.44 per diluted share) from
the reduction of AFLAC Japan's deferred tax liability as of March 31, 1998
(the date of enactment of the reduced tax rate). The deferred tax reduction
represented the effect of recalculating Japanese deferred income taxes at
the new 41.7% rate on the temporary differences between the financial
reporting basis and the Japanese income tax basis of AFLAC Japan's assets
and liabilities.
The Japanese income tax change in 1998 described above, relating to the
income on AFLAC Japan's dollar-denominated securities issued by U.S.
entities, also impacted income tax expense for the two other-comprehensive-
income components for the year ended December 31, 1998. Deferred income tax
expense on unrealized gains (losses) for 1998 on debt securities includes
$76 million for AFLAC Japan's dollar-denominated securities, of which $59
million related to accumulated unrealized gains existing as of January 1,
1998 (the effective date of the tax law change). The deferred income tax
benefits of $29 million on changes in unrealized foreign currency
translation gains for 1998 represent Japanese income taxes on currency
translation gains that arise for Japanese tax purposes from conversion of
AFLAC Japan's dollar-denominated investments into yen. This tax benefit is
net of a deferred income tax expense of $51 million on accumulated currency
translation gains existing as of January 1, 1998.
In late 1998, the Japanese government proposed a further reduction in
the Japanese statutory income tax rate. The proposal would reduce AFLAC
Japan's income tax rate from 41.7% to 36.2% effective April 1, 1999. The
proposal is expected to be finalized in early 1999. Such tax rate reduction
is not expected to reduce AFLAC's future consolidated income tax expense.
Instead, it will largely result in a shift of income tax expense from Japan
to the United States as a result of the U.S. foreign tax credit provisions.
The insurance business in Japan, which is conducted as a branch office
of AFLAC, is subject to regulation by the FSA, 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
I-11
prescribed or permitted by the FSA. Also, financial and other affairs of
AFLAC Japan are subject to examination by the FSA.
Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets
determined on a Japanese regulatory accounting basis as of December 31 are
as follows:
(In millions - unaudited) 1998 1997
-------- --------
Net assets on GAAP basis $ 2,726 $ 2,541
Elimination of deferred policy
acquisition costs (2,340) (1,940)
Elimination of unrealized gains and
other adjustments to carrying value
of debt securities (2,856) (3,350)
Adjustment to policy liabilities 1,384 1,612
Elimination of deferred income taxes 1,478 1,635
Reduction in premiums receivable (128) (114)
Policyholder protection fund 175 29
Other, net (42) (13)
-------- --------
Net assets on Japanese regulatory
accounting basis $ 397 $ 400
======== ========
For additional information regarding AFLAC Japan's operations, see
Exhibit 13, pages 13-10 to 13-14 (AFLAC Japan section of MD&A) and pages 13-
43 and 13-67 (Notes 2 and 10 of Notes to the Consolidated Financial
Statements), which are incorporated herein by reference.
EMPLOYEES - JAPAN
AFLAC Japan had 2,038 employees at December 31, 1998. AFLAC Japan
considers its employee relations to be excellent.
INSURANCE - U.S.
AFLAC U.S.'s earned premiums by product line are summarized in Note 2
of the Notes to the Consolidated Financial Statements in Exhibit 13, page
13-43.
I-12
The following table sets forth the changes in annualized premiums in
force for AFLAC U.S. insurance for the years ended December 31.
(In millions) 1998 1997 1996
------ ------ ------
Annualized premiums in force at
beginning of year $ 1,216 $ 1,060 $ 954
New issues including policy
conversions 482 401 327
Change in unprocessed policies 1 (3) (8)
Lapses (340) (286) (236)
Other 34 44 23
------ ------ ------
Annualized premiums in force at
end of year $ 1,393 $ 1,216 $ 1,060
====== ====== ======
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. Our
supplemental health insurance plans are guaranteed renewable for the
lifetime of the policyholder. We cannot cancel guaranteed-renewable
coverage, but we can increase premium rates on existing and future policies
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. Any premium rate increases are 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. We currently offer a series of three different cancer
plans in the United States that vary by benefit amount. All three plans
provide a first occurrence benefit that pays an initial amount when internal
cancer is first diagnosed, a fixed amount for each day an insured is
hospitalized for cancer treatment, and benefits for medical, radiation,
chemotherapy, surgery and a "wellness" benefit applicable toward certain
diagnostic tests such as mammograms, pap smears, prostate exams, flexible
sigmoidoscopy, etc. These plans also contain benefits that reimburse the
insured for nursing services, home health care, extended care facilities,
hospice, second surgical opinion, experimental treatment,
evaluation/consultation from the National Cancer Institute, bone marrow and
stem cell transplant, family lodging, ambulance, transportation, anesthesia,
prosthesis, blood, and plasma expenses related to cancer treatments. We
also issue 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 our claim
experience.
We offer 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,
I-13
medical appliances and physical therapy are also provided. Optional
disability riders are available to the primary insured 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 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 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.
AGENCY FORCE AND MARKETING - U.S.
Our sales force is comprised of independent sales agents who are
licensed to sell accident and health insurance. Many are also licensed to
sell life insurance. Most agents' efforts are directed toward selling
supplemental health insurance at the worksite. The average number of U.S.
agents actively producing business monthly during 1998 was 7,918, compared
with 7,376 in 1997 and 6,665 in 1996.
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. The state, regional and district
sales coordinators are also independent contractors, and are compensated by
override commissions.
We have concentrated on the development of marketing at the worksite.
This method offers policies to individuals through common media such as
employment, trade and other associations. This manner of marketing is
distinct from "group" insurance sales in that each individual insured is
directly contacted by the sales associate. Policies are individually
underwritten, with premiums generally paid by the employee. Additionally,
AFLAC supplemental policies are portable so that individuals may retain
their full insurance coverage upon separation from employment or such
affiliation, generally at the same premium. A major portion of premiums on
such sales are collected through payroll deduction or other forms of
centralized billings. 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. Marketing at the worksite
enables the agency force to reach a greater number of prospective
policyholders than individual solicitation and lowers distribution costs.
Another valuable marketing and sales tool is the flexible benefits
program, or cafeteria plan, which allows an employee to pay for medical
I-14
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.
We continue to develop marketing arrangements with insurance brokers.
Insurance brokers generally have better access to larger groups than
independent agents. The core of our distribution network will remain
independent agents.
In 1998, AFLAC's U.S. premiums collected were $1.2 billion, 7.2% of
which was collected in Texas, 6.5% in Florida, 6.0% in Georgia, and 5.7% in
North Carolina. Premiums collected in all other states were individually
less than 5% of AFLAC's U.S. premiums.
COMPETITION - U.S.
The accident and health and life insurance industry in the United
States is highly competitive. AFLAC competes with a large number of other
insurers, some of which have been in business for a longer period of time.
In the United States, there are more than 2,000 life and accident and health
insurance companies.
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. Our 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, our 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. Thus we compete 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 our products. Accordingly, expansion of coverage by other
insurers or governmental programs could adversely affect our business
opportunities. Conversely, any reduction of coverages, such as increased
deductibles and copayments, by other insurers or governmental programs could
favorably affect our business opportunities.
We compete directly with other insurers offering supplemental health
insurance and believe that our 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, pages 13-14 to 13-16 (AFLAC U.S. section of MD&A), which is
incorporated herein by reference.
I-15
REGULATION - U.S.
The Parent Company and its insurance subsidiaries are subject to state
regulations in the United States as an insurance holding company system.
Such regulations generally provide that transactions between companies
within the holding company system must be fair and equitable. In addition,
transfer of assets among such affiliated companies, certain dividend
payments from insurance subsidiaries and material transactions between
companies within the system are subject to prior notice to, or approval by,
state regulatory authorities.
AFLAC and its 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 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.
Currently, prescribed or permitted statutory accounting principles
(SAP) used by insurers for financial reporting to state insurance regulators
may vary between states and between companies. The National Association of
Insurance Commissioners (NAIC) has recodified SAP to promote standardization
throughout the industry. These new accounting requirements are presently
planned by the NAIC to be effective for 2001. They must also be adopted by
the individual state insurance departments. The most significant change to
AFLAC is the requirement that insurance companies establish a deferred
income tax liability for statutory accounting purposes. We estimate AFLAC's
deferred tax liability would be approximately $165 million at December 31,
1998, under the provisions of the recodified SAP. AFLAC's capital and
surplus, as determined on the present U.S. statutory accounting basis, was
$1.6 billion at December 31, 1998.
For further information concerning state regulatory and dividend
restrictions, see Exhibit 13, page 13-67 (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 based on 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
I-16
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. Our NAIC risk-
based capital ratio exceeds all regulatory action levels and continues to
reflect a very strong statutory capital and surplus position.
Two states have laws, regulations or regulatory practices that either
prohibit the sale of specified disease insurance, such as our cancer expense
insurance, or make its sale impractical. These states are Massachusetts and
New Jersey. Regulations in New York and Connecticut were recently changed
to allow the sale of specified disease insurance. We are now marketing
cancer insurance in New York and Connecticut. The remainder of the states
do not impose prohibitions or restrictions that prevent us from marketing
cancer expense insurance. AFLAC U.S. is marketing several of its other
products in Massachusetts and New Jersey.
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 us in
the past. We believe 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 the U.S. insurance operations, we had 2,156 employees at December
31, 1998. We consider our 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
In 1997, we sold our Canadian insurance subsidiary and on December 31,
1998, we sold our insurance operation in Taiwan. Both transactions produced
nominal gains.
The Company's other operations had 256 employees at December 31, 1998.
YEAR 2000
The term "year 2000 issue" generally refers to incorrect date
calculations that might occur in computer software and hardware as the year
2000 approaches. The use of computer programs that rely on two-digit date
fields to perform computations and decision-making functions may cause
I-17
systems to malfunction when processing information involving dates after
1999. For example, any computer software that has date-sensitive coding
might recognize a code of "00" as the year 1900 rather than the year 2000.
Our efforts to address year 2000 issues began in 1997. We established
a Year 2000 Executive Steering Committee, made up of senior management and
representatives of our information technology, financial, legal, internal
audit and various operational areas to identify and address year 2000 issues
throughout our U.S. and Japanese operations. We also established a Year
2000 Project Office consisting of department coordinators from Information
Technology, Worldwide Headquarters business operations and AFLAC Japan. The
Project Office established both domestic and Japanese plans to address year
2000 readiness and minimize the risk of business disruption caused by year
2000 issues. We also engaged third party consultants to assist AFLAC U.S.
and AFLAC Japan with their year 2000 efforts.
The plans contain five phases: (1) the assessment phase, which
includes creating awareness of the issue throughout the company and
assessment of all systems, significant business processes, facilities and
third party dependencies; (2) the remediation phase, which includes updating
or modifying systems which are identified as critical to our efforts to
become year 2000 ready; (3) the testing phase, which includes the testing of
systems that have been updated or modified; (4) the implementation phase,
which includes placing systems into the production environment, as well as
additional comprehensive testing to identify and resolve any remaining year
2000 issues; and (5) contingency planning.
We have remediated substantially all of our critical production systems
in both the United States and Japan. Verification that the critical
production systems have been correctly remediated will continue through the
third quarter of 1999 in a year 2000 test environment. The additional
testing may raise new issues that require further remediation and
implementation activities, all of which are scheduled to be completed in the
third quarter of 1999. We intend to develop contingency plans for any
critical systems that we determine may not be fully remediated during the
second and third quarters of 1999 as testing is finalized. Testing and any
further remediation and implementation activities required for non-critical
systems will continue through the end of 1999.
We rely on a widely distributed customer base in the United States and
Japan for continued payment of premiums. Many of the systems utilized by
our group accounts are automated and date dependent. We randomly surveyed
group accounts in the United States to determine their year 2000 readiness.
AFLAC Japan depends heavily on substantial premium payments that are
electronically transmitted by third-party payment agents from employers of
the insured. We have surveyed our more significant customers in Japan to
determine whether such customers expect their ability to pay premiums or
transmit policy and claims data in this fashion to be impacted by year 2000
issues. We have not yet conducted any tests with those customers in a year
2000 test environment and have no assurance that they will achieve year 2000
compliance. We intend to contact certain significant Japanese customers
during the first quarter of 1999 to recommend data transmission testing. If
a large number of customers (in the U.S. and/or Japan) are unable to submit
premium payments in a timely or accurate manner due to year 2000 issues, the
resulting delays could have a material adverse effect on our financial
condition or results of operations. It is not currently possible to predict
the probability of any delays occurring or the extent of such delays.
I-18
AFLAC owns publicly traded and privately placed fixed-maturity and
equity securities in the U.S. and Japan, and other foreign countries. If a
material portion of such securities are adversely impacted by year 2000
issues, our investment portfolio may also be adversely impacted.
Since the inception of the year 2000 project, we had incurred costs of
approximately $18 million for system upgrades or modifications through
December 31, 1998. Of this amount, approximately $6 million was
capitalized. The remaining cost to complete the various projects is
currently estimated to be $14 million, of which $7 million is expected to be
capitalized. We may determine that additional expenditures are necessary as
testing continues. Company personnel have spent considerable time and
effort on the project, and we intend to continue to devote additional
internal resources and personnel to work on the project. However, we
believe that any deferral of information technology projects due to the year
2000 effort will not have a material adverse effect on our operations or
financial condition.
Due to the uncertainty inherent in year 2000 issues, particularly with
regard to Japanese customers' year 2000 readiness and the various
governmental functions, public utilities, financial infrastructures and
similar outside facilities on which we depend in both the United States and
Japan, we are unable to determine at this time whether the consequences of
external year 2000 failures will have a material impact on our financial
condition or results of operations. Although a year 2000 failure with
respect to any single internal or external system may not have a material
adverse effect on AFLAC, the failure of multiple systems may cause a
material disruption to its business.
All statements made herein regarding our year 2000 efforts are "Year
2000 Readiness Disclosures" made pursuant to the Year 2000 Information and
Readiness Disclosure Act, and to the extent applicable, are entitled to the
protections of such act.
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. We desire 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 Form
10-K, and in any other statements made by company officers in oral
discussions with analysts and contained in documents filed with the
Securities and Exchange Commission (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. AFLAC undertakes no
obligation to update such forward-looking statements.
We caution readers that the following factors, in addition to other
factors mentioned from time to time in our reports filed with the SEC, could
I-19
cause actual results to differ materially: regulatory developments,
assessments for insurance company insolvencies, competitive conditions, new
products, ability to repatriate profits from Japan, 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
AFLAC's investment activities, significant changes in interest rates,
fluctuations in foreign currency exchange rates, and the ability of AFLAC,
and third parties with whom it does business, to achieve year 2000 readiness
for significant systems on a timely basis.
ITEM 2. PROPERTIES
AFLAC owns an 18-story office building, which is the worldwide
headquarters, and a new five-story administrative office building, which was
completed in 1998 at a cost of $17 million, located on approximately 14
acres of land in Columbus, Georgia. We also own a six-story parking garage,
two additional buildings located on the same property and additional
administrative office buildings located nearby. An insurance subsidiary
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
We are 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, we believe the outcome of the litigation
still pending will not have a material adverse effect on our financial
position.
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, 1998.
I-20
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
NAME PRINCIPAL OCCUPATION (*) AGE
- ------------------- ------------------------------------- ---
Paul S. Amos Chairman, AFLAC Incorporated and 72
American Family Life Assurance
Company of Columbus (AFLAC)
Daniel P. Amos Chief Executive Officer of AFLAC 47
Incorporated and AFLAC; President,
AFLAC Incorporated and AFLAC;
Director, The CIT Group, Inc.,
Livingston, NJ; Director, Georgia
Power Company, Atlanta, GA
William J. Bugg, Jr. Senior Vice President, Corporate 59
Actuary of AFLAC
Monthon Chuaychoo Vice President, Financial Services, of 55
AFLAC Incorporated and AFLAC
Kriss Cloninger III Executive Vice President, Chief 51
Financial Officer of AFLAC
Incorporated and AFLAC, and
Treasurer of AFLAC Incorporated
Martin A. Durant, III Senior Vice President, Corporate 50
Services, of AFLAC Incorporated
and AFLAC
Norman P. Foster Executive Vice President, Corporate 64
Finance, of AFLAC Incorporated
and AFLAC
Kenneth S. Janke Jr. Senior Vice President, Investor 40
Relations, of AFLAC Incorporated
Akitoshi Kan Executive Vice President of AFLAC Japan 51
since January 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
I-21
Nobuo Kawamura Senior Vice President, AFLAC Japan, 54
ABC Promotion, Policy Maintenance,
Premium Accounting since January 1999;
Senior Vice President, AFLAC Japan,
Underwriting, Policy Maintenance,
Premium Accounting, Customer Service,
Administration Support until January 1999
Joseph P. Kuechenmeister Senior Vice President, Director 57
of Marketing of AFLAC
Joey M. Loudermilk Senior Vice President, General Counsel 45
and Corporate Secretary of AFLAC
Incorporated and AFLAC, and Director,
Legal and Governmental Relations of
AFLAC
Hidefumi Matsui President, AFLAC Japan, since January 54
1995; Executive Vice President of AFLAC
Japan until 1995
Shoichi Matsumoto Executive Vice President, Director 53
of Marketing, AFLAC Japan, since January
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. 57
Yoshiki Otake Chairman, AFLAC Japan, since January 59
1995; President, AFLAC Japan, until
December 1994; Vice Chairman, AFLAC
International, Inc.
E. Stephen Purdom Executive Vice President, 51
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 45
Officer of AFLAC
I-22
Gary L. Stegman Senior Vice President, Assistant Chief 49
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-23
PART II
Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are
incorporated by reference from the Company's 1998 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 13-67 59 and 62
MATTERS (Note 10)
ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 20 - 21
ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 22 - 24;
ANALYSIS OF FINANCIAL CONDITION 13-30 26 - 35
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE 13-7 to 22 - 23;
DISCLOSURES ABOUT MARKET RISK 13-8, 13-17 29 - 30
to 13-21
ITEM 8. FINANCIAL STATEMENTS AND 13-31 to 36 - 59
SUPPLEMENTARY DATA 13-75
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 1999 Annual Meeting of Shareholders, which was
filed with the Securities and Exchange Commission on March 16, 1999,
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Refer to the Information Refer to
Contained in the Proxy Printed
Statement under Captions Proxy
(filed electronically) Statement
Pages
------------------------ ---------
ITEM 10. DIRECTORS AND EXECUTIVE Security Ownership of 3 - 7
OFFICERS OF THE COMPANY Management. 1. Election
Directors of Directors
Executive Officers -
see Part I, Item 4A
herein
ITEM 11. EXECUTIVE COMPENSATION Board and Committee 8 - 19
Meetings and Directors
Compensation; Summary
Compensation Table; De-
fined Benefit Pension
Plan; Retirement Plans
for Key Executives;
Employment Contracts and
Termination of Employ-
ment Arrangements
ITEM 12. SECURITY OWNERSHIP OF Voting Securities and 2 - 7
CERTAIN BENEFICIAL Principal Holders
OWNERS AND Thereof. Security Owner-
MANAGEMENT ship of Management.
1. Election of Directors
ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 19
AND RELATED and Relationships
TRANSACTIONS
III-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS Page(s)
-----------
Included in Part II of this report and
incorporated by reference to the following
pages of Exhibit 13:
AFLAC Incorporated and Subsidiaries:
Consolidated Statements of Earnings, for 13-31
each of the years in the three-year
period ended December 31, 1998
Consolidated Balance Sheets, at 13-32 -
December 31, 1998 and 1997 13-33
Consolidated Statements of Shareholders' 13-34
Equity, for each of the years in the
three-year period ended December 31,
1998
Consolidated Statements of Cash Flows, 13-35 -
for each of the years in the three-year 13-36
period ended December 31, 1998
Consolidated Statements of Comprehensive 13-37
Income, for each of the years in the
three-year period ended December 31, 1998
Notes to the Consolidated Financial 13-38 to
Statements 13-72
Report of Independent Auditors 13-74
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Auditors' Report on Financial Statement Schedules IV-5
Schedule II - Condensed Financial Information of IV-6 -
Registrant, at December 31, 1998 IV-11
and 1997 and for each of the
years in the three-year period
ended December 31, 1998
Schedule III - Supplementary Insurance Information IV-12
for each of the years in the three-
year period ended December 31, 1998
Schedule IV - Reinsurance, for each of the IV-13
years in the three-year period
ended December 31, 1998
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. We agree to furnish a copy
of any 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* - AFLAC Incorporated Supplemental Executive Retirement Plan,
as amended, effective January 1, 1998, filed with the 1998
Form 10-K.
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.
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.
IV-2
10.7* - 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.
10.8* - 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.
10.9* - 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.
10.10* - AFLAC Incorporated Deferred Compensation Agreement with
Paul S. Amos, dated July 15, 1997 - incorporated by
reference from 1997 Form 10-K, Commission file
number 1-7434, Accession No. 0000004977-98-000006,
Exhibit 10.11.
10.11* - 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.
10.12* - AFLAC Incorporated Executive Deferred Compensation Plan,
effective January 1, 1999 - incorporated by reference
from Form S-8 Registration Statement No. 333-69333,
Accession No. 0000004977-98-00024, Exhibit 4.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1998.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG 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 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 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 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 LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
IV-3
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-69795 with respect to the
AFLAC New York Associate Stock Bonus Plan.
27.0** - Financial Data Schedule for December 31, 1998.
* 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, 1998.
(c) EXHIBITS FILED WITH CURRENT FORM 10-K
10.3* - AFLAC Incorporated Supplemental Executive Retirement Plan,
as amended, effective January 1, 1998.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1998.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG 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 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 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 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 LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-69795 with respect to the
AFLAC New York Associate Stock Bonus Plan.
27.0** - Financial Data Schedule for December 31, 1998.
* 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 28, 1999, we reported on the consolidated balance
sheets of AFLAC Incorporated and subsidiaries as of December 31, 1998 and
1997, 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, 1998, as contained in the 1998 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 1998. 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 LLP
Atlanta, Georgia
January 28, 1999
IV-5
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
AFLAC Incorporated (Parent Only)
(In millions, except for share amounts)
December 31,
1998 1997
-------- --------
ASSETS:
Investments and cash:
Investments in subsidiaries* $ 4,614 $ 4,205
Mortgage loans and other 3 11
Cash and cash equivalents 15 9
-------- --------
Total investments and cash 4,632 4,225
Due from subsidiaries* 29 7
Other receivables 3 3
Property and equipment, net 7 8
Other assets 6 3
-------- --------
Total assets $ 4,677 $ 4,246
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Due to subsidiaries* $ 1 $ -
Notes payable (note A) 578 505
Employee and beneficiary benefit plans 235 207
Income taxes, primarily deferred 68 58
Other liabilities 25 46
-------- --------
Total liabilities 907 816
-------- --------
Shareholders' equity:
Common stock of $.10 par value: (In thousands)
Authorized 400,000 shares; issued
317,971 shares in 1998 and 316,380
shares in 1997 32 16
Additional paid-in capital 235 227
Retained earnings (note D) 2,862 2,442
Accumulated other comprehensive income:
Unrealized foreign currency
translation gains 219 274
Unrealized gains on investment securities 1,332 1,285
Treasury stock, at average cost (910) (813)
Notes receivable for stock purchases - (1)
-------- --------
Total shareholders' equity 3,770 3,430
-------- --------
Total liabilities and
shareholders' equity $ 4,677 $ 4,246
======== ========
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
IV-6
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Earnings
AFLAC Incorporated (Parent Only)
(In millions)
Years ended December 31,
1998 1997 1996
-------- -------- --------
Revenues:
Dividends from subsidiaries* $ 173 $ 118 $ 138
Management and service fees
from subsidiaries* 28 32 30
Other income 2 3 4
------- ------- -------
Total revenues 203 153 172
------- ------- -------
Operating expenses:
Interest expense 10 10 11
Other operating expenses 61 83 83
------- ------- -------
Total operating expenses 71 93 94
------- ------- -------
Earnings before income taxes and
equity in undistributed earnings
of subsidiaries 132 60 78
Income tax expense (note C):
Current 9 1 -
Deferred - 14 13
------- ------- -------
Total income taxes 9 15 13
------- ------- -------
Earnings before equity in
undistributed earnings of
subsidiaries 123 45 65
Equity in undistributed earnings
of subsidiaries 364 540 329
------- ------- -------
Net earnings $ 487 $ 585 $ 394
======= ======= =======
* 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 Cash Flows
AFLAC Incorporated (Parent Only)
Years ended December 31,
(In millions) 1998 1997 1996
------ ------ ------
Cash flows from operating activities:
Net earnings $ 487 $ 585 $ 394
Adjustments to reconcile net
earnings to net cash provided
from operating activities:
Equity in undistributed
earnings of subsidiaries* (364) (540) (329)
Deferred income taxes - 14 12
Change in income taxes payable 9 - -
Increase in employee and
beneficiary benefit plans 27 24 36
Other, net (2) 30 16
----- ----- -----
Net cash provided by
operating activities 157 113 129
----- ----- -----
Cash flows from investing activities:
Proceeds from sale of mortgage loans 10 - -
Purchase of mortgage loans from subsidiary* - (10) -
Purchase of subsidiary (note B) (8) - -
----- ----- -----
Net cash provided (used) by
investing activities 2 (10) -
----- ----- -----
Cash flows from financing activities:
Proceeds from borrowings 124 409 136
Assumption of debt from affiliate* - - 15
Principal payments under debt obligations (115) (191) (58)
Dividends paid to shareholders (67) (61) (54)
Net change in amount due to/from subsidiaries* (21) (4) -
Purchases of treasury stock (125) (314) (204)
Treasury stock reissued 44 40 35
Proceeds from exercise of stock options 7 5 7
Other, net - - (1)
----- ----- -----
Net cash used by financing activities (153) (116) (124)
----- ----- -----
Net change in cash and cash equivalents 6 (13) 5
Cash and cash equivalents at beginning of year 9 22 17
----- ----- -----
Cash and cash equivalents at end of year $ 15 $ 9 $ 22
===== ===== =====
* 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 Comprehensive Income
AFLAC Incorporated (Parent Only)
(In millions)
Years ended December 31,
1998 1997 1996
-------- -------- --------
Net earnings $ 487 $ 585 $ 394
-------- -------- --------
Other comprehensive income,
before income taxes:
Foreign currency translation
adjustments:
Change in unrealized foreign
currency translation gains
during year - Parent only (64) 44 38
Equity in change in unrealized
foreign currency translation
gains (losses) of subsidiaries
during year (20) (1) (22)
Reclassification adjustment for
realized currency (gains) losses
on sale of subsidiary included
in net earnings - Parent only - 1 -
Equity in unrealized gains (losses)
on investment securities held
by subsidiaries:
Unrealized holding gains (losses)
arising during year 171 1,693 (314)
Reclassification adjustment for
realized (gains) losses included
in net earnings 3 4 (5)
-------- -------- --------
Total other comprehensive
income, before income taxes 90 1,741 (303)
Income tax expense (benefit) related
to items of other comprehensive
income 98 692 (117)
-------- -------- --------
Other comprehensive income, net
of income taxes (8) 1,049 (186)
-------- -------- --------
Total comprehensive income $ 479 $ 1,634 $ 208
======== ======== ========
See the accompanying Notes to Condensed Financial Statements.
See the accompanying Auditors' Report.
IV-9
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Notes to Condensed Financial Statements
AFLAC Incorporated (Parent Only)
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
AFLAC Incorporated and Subsidiaries (see Part II - Item 8).
(A) NOTES PAYABLE
A summary of notes payable at December 31, 1998 and 1997 follows:
(In millions) 1998 1997
------ ------
Unsecured, yen-denominated notes payable to banks:
Reducing, revolving credit agreement, due
annually through July 2001:
2.29% fixed interest rate..................... $ 294 $ 349
Variable interest rate (.95% at
December 31, 1998).......................... 35 -
Revolving credit agreement due November 2002:
1.24% fixed interest rate..................... 134 149
Variable interest rate (.90% at
December 31, 1998).......................... 115 -
Other............................................. - 7
------ ------
Total notes payable........................... $ 578 $ 505
====== ======
The aggregate contractual maturities of the notes payable for each of
the years after December 31, 1998, are as follows:
(In millions)
1999............................................ $ 79
2000............................................ 125
2001............................................ 125
2002............................................ 249
For further information regarding notes payable, see Exhibit 13, page
13-60 (Note 7 of the Notes to the Consolidated Financial Statements).
(B) PURCHASE OF SUBSIDIARY
In 1998, we purchased a small Japanese insurance agency. Its main
functions will be policyholder-related services and direct marketing
programs for AFLAC Japan.
IV-10
(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 13-61,
Note 8 of the Notes to the Consolidated Financial Statements.
(D) DIVIDEND RESTRICTIONS
See Exhibit 13, page 13-67 (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
Cash payments for interest on debt obligations were $10 million in each
of the years during the three-year period ended December 31, 1998.
(F) ACCOUNTING CHANGES
For information concerning new accounting standards recently adopted,
see page 13-42 of Exhibit 13, Note 1, section on Accounting Changes Adopted,
of Notes to the Consolidated Financial Statements.
IV-11
SCHEDULE III
AFLAC INCORPORATED AND SUBSIDIARIES
Supplementary Insurance Information
Years Ended December 31,
Amorti-
Future zation of
Deferred Policy Deferred
Policy Benefits Other Net Policy Other
Acqui- & Unpaid Policy- Invest- Benefits Acquisi- Opera-
sition Policy Unearned holders' Premium ment and tion ting Premiums
(In millions) Costs Claims Premiums Funds Revenue Income Claims Costs Expenses Written
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
1998:
AFLAC Japan $ 2,340 $ 21,507 $ 217 $ 229 $ 4,738 $ 917 $ 4,119 $ 111 $ 924 $ 4,756
AFLAC U.S. 727 1,974 92 15 1,198 216 749 90 349 1,197
All other - - - - 7 5 9 - 202 8
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 3,067 $ 23,481 $ 309 $ 244 $ 5,943 $ 1,138 $ 4,877 $ 201 $ 1,475 $ 5,961
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
1997:
AFLAC Japan $ 1,940 $ 17,589 $ 181 $ 187 $ 4,803 $ 893 $ 4,156 $ 103 $ 934 $ 4,818
AFLAC U.S. 641 1,773 92 11 1,062 180 667 77 315 1,065
All other 1 48 4 - 9 5 10 - 124 9
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 2,582 $ 19,410 $ 277 $ 198 $ 5,874 $ 1,078 $ 4,833 $ 180 $ 1,373 $ 5,892
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
1996:
AFLAC Japan $ 2,023 $ 18,095 $ 194 $ 189 $ 4,952 $ 896 $ 4,294 $ 98 $ 924 $ 4,973
AFLAC U.S. 559 1,588 90 19 946 119 591 64 283 946
Broadcast - - - - - - - - 7 -
All other 1 53 5 1 12 7 11 - 178 13
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 2,583 $ 19,736 $ 289 $ 209 $ 5,910 $ 1,022 $ 4,896 $ 162 $ 1,392 $ 5,932
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
IV-12
SCHEDULE IV
AFLAC INCORPORATED AND SUBSIDIARIES
Reinsurance
Years Ended December 31, 1998, 1997, and 1996
(In millions)
Percentage
Ceded to Assumed of amount
Gross other from other assumed
Amount companies companies Net amount to net
----------- ----------- ----------- ---------- ----------
Year ended December 31, 1998:
Life insurance in force $ 28,182 $ 566 $ - $ 27,616 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 5,435 $ - $ - $ 5,435 -
Life insurance 510 2 - 508 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 5,945 $ 2 $ - $ 5,943 -
=========== =========== =========== ========== ==========
Year ended December 31, 1997:
Life insurance in force $ 26,382 $ 511 $ - $ 25,871 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 5,401 $ 1 $ - $ 5,400 -
Life insurance 475 1 - 474 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 5,876 $ 2 $ - $ 5,874 -
=========== =========== =========== ========== ==========
Year ended December 31, 1996:
Life insurance in force $ 23,509 $ 416 $ - $ 23,093 -
=========== =========== =========== ========== ==========
Premiums:
Health insurance $ 5,577 $ 1 $ - $ 5,576 -
Life insurance 335 1 - 334 -
----------- ----------- ----------- ---------- ----------
Total earned premiums $ 5,912 $ 2 $ - $ 5,910 -
=========== =========== =========== ========== ==========
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, 1999 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, 1999
- ------------------------ President and Vice ----------------
(Daniel P. Amos) Chairman of the Board
of Directors
/s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1999
- ------------------------ Chief Financial Officer ----------------
(Kriss Cloninger, III) and Treasurer
/s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1999
- ------------------------ Corporate Finance ----------------
(Norman P. Foster)
IV-14
/s/ J. SHELBY AMOS, II Director MARCH 26, 1999
- ----------------------------- ----------------
(J. Shelby Amos, II)
- ------------------------------ Director ----------------
(Michael H. Armacost)
/s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1999
- ------------------------------ ----------------
(M. Delmar Edwards, M.D.)
/s/ GEORGE W. FORD, JR. Director MARCH 26, 1999
- ------------------------------ ----------------
(George W. Ford, Jr.)
/s/ JOE FRANK HARRIS Director MARCH 26, 1999
- ------------------------------ ----------------
(Joe Frank Harris)
/s/ ELIZABETH J. HUDSON MARCH 26, 1999
- ------------------------------ Director ----------------
(Elizabeth J. Hudson)
/s/ KENNETH S. JANKE, SR. Director MARCH 26, 1999
- ------------------------------ ----------------
(Kenneth S. Janke, Sr.)
/s/ CHARLES B. KNAPP Director MARCH 26, 1999
- ------------------------------ ----------------
(Charles B. Knapp)
IV-15
/s/ HISAO KOBAYASHI Director MARCH 26, 1999
- ------------------------------ ----------------
(Hisao Kobayashi)
Director
- ------------------------------ ----------------
(Yoshiki Otake)
/s/ E. STEPHEN PURDOM Director MARCH 26, 1999
- ------------------------------- ----------------
(E. Stephen Purdom)
Director
- ------------------------------- ----------------
(Barbara K. Rimer)
/s/ HENRY C. SCHWOB Director MARCH 26, 1999
- ------------------------------ ----------------
(Henry C. Schwob)
/s/ J. KYLE SPENCER Director MARCH 26, 1999
- ------------------------------ ----------------
(J. Kyle Spencer)
/s/ GLENN VAUGHN, JR. Director MARCH 26, 1999
- ------------------------------ ----------------
(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. We agree to furnish a copy of any
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* - AFLAC Incorporated Supplemental Executive Retirement
Plan, as amended, effective January 1, 1998, filed with
the 1998 Form 10-K.
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.
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.
IV-17
10.7* - 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.
10.8* - 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.
10.9* - 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.
10.10* - AFLAC Incorporated Deferred Compensation Agreement with
Paul S. Amos, dated July 15, 1997 - incorporated by
reference from 1997 Form 10-K, Commission file
number 1-7434, Accession No. 0000004977-98-000006,
Exhibit 10.11.
10.11* - 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.
10.12* - AFLAC Incorporated Executive Deferred Compensation Plan,
effective January 1, 1999 - incorporated by reference
from Form S-8 Registration Statement No. 333-69333,
Accession No. 0000004977-98-00024, Exhibit 4.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1998.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG 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 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 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 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 LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
IV-18
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-69795 with respect to the
AFLAC New York Associate Stock Bonus Plan.
27.0** - Financial Data Schedule for December 31, 1998.
* 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
10.3* - AFLAC Incorporated Supplemental Executive Retirement Plan,
as amended, effective January 1, 1998.
13.0 - Selected information from the AFLAC Incorporated Annual
Report to Shareholders for 1998.
21.0 - Subsidiaries.
23.0 - Consent of independent auditor, KPMG 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 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 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 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 LLP, to Form S-3
Registration Statement No. 33-64535 with respect to the
AFL Stock Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-16533 with respect to the
AFLAC Associate Stock Bonus Plan, as Amended and Restated
as of January 1, 1999.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-27883 with respect to the
AFLAC Incorporated 1997 Stock Option Plan.
- Consent of independent auditor, KPMG LLP, to Form S-8
Registration Statement No. 333-69333 with respect to the
AFLAC Incorporated Executive Deferred Compensation Plan.
- Consent of independent auditor, KPMG LLP, to Form S-3
Registration Statement No. 333-69795 with respect to the
AFLAC New York Associate Stock Bonus Plan.
27.0** - Financial Data Schedule for December 31, 1998.
* Management contract or compensatory plan or agreement.
** All Financial Data Schedules are submitted in the electronic filing only.
IV-19