ITEM 1. BUSINESS
GENERAL DESCRIPTION
AFLAC Incorporated (the Parent Company) was incorporated in 1973 under the laws of the State of Georgia and acts as a general business holding company. The Parent Company is a management company principally engaged, through its insurance subsidiaries, in providing supplemental health insurance products in the United States and Japan. In addition, the Parent Company, through subsidiaries and a general partnership with American Family Life Assurance Company of Columbus (AFLAC), operates in television broadcasting. In 1994, AFLAC transferred its minor Canadian insurance subsidiary to the Parent Company. As a management company, the Parent Company oversees the operations of its subsidiaries and provides capital and management services.
AFLAC Incorporated and its subsidiaries (the Company) have only one significant industry segment - insurance. For financial information relating to the Company's foreign and U.S. operations, see Exhibit 13, pages 13-5 to 13-19 (Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)) and page 13-32 (Note 2 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference.
The Parent Company's principal operating subsidiary is AFLAC, which operates principally in the United States and Japan. AFLAC is a specialty insurer whose dominant business is individual supplemental health insurance with emphasis on cancer expense insurance plans. Management believes AFLAC is the world's leading writer of cancer expense insurance. In recent years, AFLAC has diversified its product offerings to include other types of supplemental health products in both the United States and Japan. The Japan Branch (AFLAC Japan) also sells long-term care plans, supplemental general medical expense plans and a living benefit life plan. The United States operation (AFLAC U.S.), in addition to cancer expense plans, also sells other types of supplemental health insurance, including hospital intensive care, accident and disability, hospital indemnity, long-term care, short- term disability and Medicare supplement plans. AFLAC U.S. also offers several life insurance plans.
The Company is authorized to conduct insurance business in all 50 states, the District of Columbia, and several U.S. territories and foreign countries. The Company's only significant foreign operation is AFLAC Japan, which accounted for 85% of the Company's total revenues in 1995.
On February 13, 1996, the board of directors declared a three-for-two stock split to shareholders of record as of February 29, 1996, payable on March 18, 1996. Share and per-share amounts have been adjusted to reflect this split.
Insurance premiums and investment income from insurance operations are the major sources of revenues. The Company's consolidated premium income was $6.1 billion for 1995, $5.2 billion for 1994 and $4.2 billion for 1993.
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The following table sets forth consolidated premiums earned by class offered by AFLAC in Japan and the United States for the three years ended December 31.
(In thousands) 1995 1994 1993 ---------- ---------- ---------- Premiums earned: Health insurance $ 6,037,206 $ 5,148,406 $ 4,192,259 Life and other insurance 17,937 15,149 14,488 ---------- ---------- ---------- Total U.S. and Japan premiums earned $ 6,055,143 $ 5,163,555 $ 4,206,747 ========== ========== ==========
The following table sets forth the changes in annualized premiums in force for AFLAC health insurance for the years ended December 31.
(In thousands) 1995 1994 1993 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 5,578,987 $ 4,460,076 $ 3,628,961 New issues including policy conversions 965,321 922,773 801,937 Change in unprocessed policies (107,287) 212,058 154,684 Lapses and surrenders (408,366) (347,020) (302,690) Other (11,676) (129,932) (143,432) Foreign currency translation adjustment (179,096) 461,032 320,616 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 5,837,883 $ 5,578,987 $ 4,460,076 ========== ========== ==========
INVESTMENTS AND INVESTMENT RESULTS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, issued by the Financial Accounting Standards Board. Under the provisions of SFAS No. 115, fixed-maturity securities available for sale are carried at fair value. Previously, fixed-maturity securities were carried at amortized cost. Prior year numbers have not been restated. The fair value of fixed-maturity securities available for sale exceeded amortized cost by $2.6 billion and $820.9 million at December 31, 1995 and 1994, respectively. For additional information regarding SFAS No. 115, see Exhibit 13, page 13-34 (Note 3 of Notes to the Consolidated Financial Statements).
The Company's investments (including cash) were $20.0 billion at December 31, 1995. Since December 31, 1994, total investments, including unrealized gains on fixed-maturity securities, increased $4.1 billion, or 25.3%. AFLAC Japan investments increased $3.6 billion (24.7%), while AFLAC U.S. investments increased $416.3 million (33.1%). Since December 31, 1994, total investments, excluding unrealized gains on fixed-maturity securities,
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have increased $2.3 billion, or 15.2%. AFLAC Japan investments increased $2.0 billion (14.7%), while AFLAC U.S. investments increased $265.4 million (20.3%). Net investment income of $1.0 billion in 1995 continued to be a growing source of revenues and earnings for the Company, increasing $186.1 million in 1995 over 1994 and $149.6 million in 1994 over 1993. It is generally AFLAC's policy to invest in high-grade investments, principally in government, and high-quality public utility and corporate bonds.
AFLAC primarily operates within the investment environments of the United States and Japan. Although aspects of these two financial markets are slowly converging, they remain fundamentally different. For example, differences in asset selection, liquidity, credit quality, accounting practices, insurance regulations and taxation affect the way the Company invests and purchases securities. The challenge is to integrate the varied market characteristics of Japan and the United States into a unified and coherent investment strategy. The Company has streamlined and integrated the organizational structure of investment operations into a single functional unit and has set specific worldwide criteria regarding credit quality, liquidity, compliance with regulatory requirements and conformance to product needs.
INVESTMENTS - JAPAN
During 1995, 90.3% of AFLAC Japan's yen cash flow available for investment was allocated to yen-denominated fixed-maturity securities, while the remaining 9.7% was invested in dollar-denominated securities. Of the total amount invested in yen-denominated securities in 1995, 26.0% was invested in Japanese government bonds at a yield of 3.84%, 33.7% was invested in the longer-dated private sector at a rate of 5.07%, 6.0% was invested in municipal bonds at a rate of 3.95%, and the remaining 24.6% was invested in assorted sectors of yen-denominated fixed-maturity securities at an average rate of 4.19%.
At year-end 1995, Japanese government bonds accounted for 37.7% of AFLAC Japan's total investments (at amortized cost). Twenty-year government bonds made up the majority of AFLAC Japan's government bond holdings. AFLAC Japan continued to use longer-dated corporate instruments in 1995, which provide a better match of asset and liability durations, and these instruments accounted for 20.3% of total investments in Japan at year-end. At the end of the year, municipal securities represented 5.3% of the total investments, while utility bonds represented 18.1%. Other assorted sectors accounted for 11.1%, and dollar-denominated securities represented 7.5% of AFLAC Japan's total investments.
The Company increased its commitment to the dollar-denominated portfolio of AFLAC Japan's invested assets during 1995. AFLAC Japan added $307.9 million to this portfolio at an average yield of 7.55%. AFLAC Japan's dollar-denominated portfolio represented 7.5% of total investments in Japan, or $1.3 billion at the end of 1995, compared with $951.3 million at the end of 1994. Investments in dollar-denominated fixed-maturity securities provide certain tax and yield advantages to the Company.
The Company continued to avoid the Japanese equity and investment real estate markets in 1995. AFLAC Japan's equity portfolio accounted for only .1% of invested assets at year-end, and the Company does not expect this
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portion to increase in 1996. The Company also does not anticipate any change in the current level of mortgage loans on Japanese real estate, which was less than .1% of total investments at year-end.
INVESTMENTS - U.S.
Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $140.5 million in 1995, up from $132.9 million in 1994. Of the $140.5 million in 1995, $21.2 million was transferred to the Parent Company. Repatriation benefits consolidated operations because higher investment yields can be earned on funds invested in the United States. Also, income tax expense is presently lower on investment income earned in the United States. The Company expects future profit repatriation to continue to have a positive impact on its consolidated net earnings.
AFLAC U.S. continued to focus on purchasing securities that emphasize safety and liquidity. AFLAC U.S. maintained its overall investment quality throughout the year. Almost half of the fixed-maturity portfolio was rated "AA" or better at the end of the year.
Including profit repatriation, AFLAC U.S. invested $660.7 million in 1995. Of that amount, approximately 46.3% was invested in U.S. government or agency securities at an average yield to maturity of 7.82%, 42.4% was invested in corporate fixed-maturity securities at 7.66%, and 5.1% was allocated to various other sectors at an average yield of 7.17%. We also added approximately $41.1 million, or 6.2% of total funds available for investment, to the AFLAC U.S. equity portfolio.
At the end of 1995, fixed-maturity securities continued to dominate AFLAC U.S. total investments. Fixed-maturity securities represented 85.0% of total investments at the end of the year. Within that category, U.S. government and agency securities accounted for 17.7% of the holdings, while corporate securities were 58.9%. Equity investments made up 5.7% of total investments. Mortgage loans on real estate remained immaterial.
For information on the composition of the Company's investment portfolio and investment results, see Part IV, Schedule I, and Exhibit 13, pages 13-15 to 13-19 (discussions relating to Balance Sheet and Cash Flow) and pages 13-34 to 13-41 (Notes 3 and 4 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference.
INSURANCE - JAPAN
The following table sets forth AFLAC Japan's premiums earned by product line for the last three years ended December 31.
(In thousands) 1995 1994 1993 ---------- ---------- ---------- Premiums earned: Cancer expense $ 4,752,338 $ 4,054,697 $ 3,259,705 Other accident and health 440,635 316,395 224,555 Life insurance 2,378 - - ---------- ---------- ---------- Total AFLAC Japan premiums earned $ 5,195,351 $ 4,371,092 $ 3,484,260 ========== ========== ========== I-4
The following table sets forth the changes in annualized premiums in force for AFLAC Japan health insurance for the years ended December 31:
(In thousands) 1995 1994 1993 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 4,718,783 $ 3,672,594 $ 2,914,428 New issues including policy conversions 690,170 680,879 576,127 Change in unprocessed policies (105,496) 209,392 157,142 Lapses and surrenders (200,507) (163,047) (145,567) Other (23,075) (142,067) (150,152) Foreign currency translation adjustment (179,096) 461,032 320,616 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,900,779 $ 4,718,783 $ 3,672,594 ========== ========== ==========
INSURANCE PLANS - JAPAN
AFLAC's insurance is supplemental in nature and is designed to provide insurance to cover the medical and nonmedical costs that are not reimbursed by other forms of Japanese health insurance coverage.
The cancer expense insurance plans offered in Japan are basically daily indemnity plans, providing a fixed amount for each day the insured is hospitalized for treatment of cancer. The plans differ from the AFLAC U.S. cancer plans (described on pages I-9 and I-10) in that the Japanese policies also provide death benefits and cash surrender values (the Company estimates that approximately 28% of the premiums earned are associated with these benefits).
In 1992, AFLAC broadened its product line with the introduction of a new care product, "Super Care." Super Care provides periodic benefits to those who become bedridden, demented or seriously disabled due to illness or accident. This plan is offered with several riders, providing death benefits or additional care benefits to enhance coverage. Prior to the introduction of the Super Care plan, AFLAC marketed a plan that primarily provided dementia care benefits.
In 1995, the Company introduced two other products in Japan. The first product is an improved medical expense policy. It is similar to hospital indemnity insurance products in the United States and provides cash benefits to policyholders when they are hospitalized. The market for medical expense coverage in Japan is very competitive, but the Company believes the revised policy will give AFLAC Japan's agents greater flexibility in product offerings.
AFLAC Japan also introduced a new living benefit life plan. This product is a life insurance policy that provides lump-sum benefits when policyholders experience heart attack, cancer or stroke. The Company is offering this product in two forms - as a stand-alone policy or as a rider to the cancer plan. Marketing efforts for living benefit life primarily focus on the sale of the rider. Introduction of the rider began in late
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1995. AFLAC Japan sold more than 406,000 living benefit life riders in the last four months of the year. Sales of the rider for the year exceeded $77 million in new annualized premium. The Company anticipates very strong results from this new product in 1996, its first full year of availability.
Due to the continued low level of available investment yields in Japan, the Ministry of Finance has permitted insurers to increase premium rates on new policy issues in recent years. AFLAC Japan increased premium rates by an average of 16% on all cancer policy sales made after July 1, 1994. Premium rates on care policy new issues were increased by an average of 10% in both November 1993 and 1995. As a result of continuing low yields, the Company expects to increase premium rates on all new policy issues by an additional 10% beginning in the second half of 1996.
AGENCY FORCE - JAPAN
The development of a "corporate agency" system has been important to the growth of AFLAC Japan. Affiliated corporate agencies are formed when companies establish subsidiary businesses to sell AFLAC products to their employees, suppliers and customers. These agencies help AFLAC Japan reach the employees of almost all of Japan's large corporations. AFLAC has no ownership interest in these corporate agencies.
AFLAC products are also sold through independent corporate agencies and individual agencies that are not affiliated with large companies. At December 31, 1995, there were 5,224 agencies in Japan with 20,375 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 47 sales offices located throughout Japan.
COMPETITION - JAPAN
In 1974, AFLAC became the second foreign (non-Japanese) life insurance company to gain direct access to the Japanese insurance market by obtaining a license to do business in Japan. Through 1981, AFLAC was the only company in Japan authorized to issue a cancer expense insurance policy. Since that time, several other life companies have been permitted to offer cancer insurance. However, AFLAC remains the leading issuer of cancer expense insurance coverage in Japan, principally due to its lead time in the market, unique marketing system (see Agency Force), low-cost operations and product expertise developed in the United States. AFLAC has been very successful in the sale of cancer expense policies in Japan, with over 12.2 million cancer policies in force at December 31, 1995.
During 1994, the governments of Japan and the United States held a series of trade talks. The U.S.-Japan Framework Agreement negotiations discussed the possibility of opening various Japanese market sectors, including insurance, to expanded foreign competition. During the discussions, the Japanese government agreed to avoid any radical changes in the third sector of the insurance market until a substantial portion of the life and non-life insurance sectors are deregulated. AFLAC and other foreign-owned insurers, as well as some small to medium-sized Japanese insurers, operate in the third sector.
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In 1996, the Japanese government will adopt a framework for long-term deregulation of the financial services businesses in Japan. The principles upon which deregulation of the Japanese insurance industry is based are: to promote competition and to enhance efficiency through deregulation and liberalization; to preserve soundness; and to secure fairness and equity in business operations. As Japan begins gradually deregulating the insurance industry, the marketplace should become more competitive; however, the ultimate changes and their effects on AFLAC Japan are not presently determinable. But, due to the Company's unique marketing distribution system and low-cost operations in Japan, AFLAC believes it should not be directly affected by deregulation in Japan in the immediate future.
AFLAC's strategy for future growth in Japan centers on the expansion of the Company's product line. Although the basic plan for growth is the same in Japan as in the United States, management has had to formulate a strategy specifically tailored for the Japanese insurance marketplace, which is very different from the U.S. system. There are only 31 life insurance companies in Japan, compared with more than 2,000 life insurers in the United States. In Japan, insurers have traditionally been restricted in the types of policies they could offer. However, as Japan begins deregulating the insurance industry, the marketplace should become more competitive, with insurers able to offer more types of products as they do in the United States.
REGULATION AND REMITTANCE OF FUNDS - JAPAN
Payments are made from AFLAC Japan to the Parent Company for management fees, and to AFLAC U.S. for allocated expenses and remittances of earnings. These payments totaled $179.5 million in 1995, $167.9 million in 1994 and $133.4 million in 1993. Management fees paid to the Parent Company are largely based on expense allocations.
A portion of AFLAC Japan annual earnings, as determined on a Japan statutory accounting basis, can be remitted each year to AFLAC U.S. after satisfying various conditions imposed by Japanese regulatory authorities for protecting policyholders and obtaining remittance approvals from such authorities. These conditions include compliance with risk-based capital guidelines for Japanese insurers. Profit remittances to the United States can fluctuate due to changes in the amounts of Japanese regulatory earnings. Among other items, factors affecting regulatory earnings include Japanese regulatory accounting practices and fluctuations in currency translations of AFLAC Japan's U.S. dollar-denominated investments into yen. It is expected that profit remittances will continue in future years, based on projected annual earnings of AFLAC Japan as computed on a Japanese regulatory accounting basis.
Japan statutory accounting practices differ in many respects from U.S. generally accepted accounting principles. Under Japan statutory accounting practices, policy acquisition costs are charged off immediately, policy benefit and claim reserving methods are different, deferred income tax liabilities are not recognized, and investment securities are generally carried at cost.
As part of the deregulation process, the Japanese Ministry of Finance (MOF) is developing new solvency regulations and standards that represent a form of risk-based capital requirements. AFLAC Japan must meet these
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requirements to continue profit transfers to AFLAC U.S. At this time, AFLAC Japan is in compliance with the proposed new standards, and management does not expect these requirements to adversely affect the repatriation of funds from Japan in the foreseeable future.
The insurance business in Japan, which is conducted as a branch office of AFLAC, is subject to regulation by the MOF, similar to the regulation and supervision in the United States as described on pages I-12 and I-13 under "Regulation - U.S." AFLAC Japan files annual reports and financial statements for the Japanese insurance operations based on a March 31 year- end, prepared in accordance with Japanese regulatory accounting practices prescribed or permitted by the MOF. Also, financial and other affairs of AFLAC Japan are subject to examination by the MOF.
Reconciliations of AFLAC Japan net assets on a GAAP basis to net assets determined on a Japanese regulatory accounting basis as of December 31 are as follows:
(In thousands - unaudited) 1995 1994 ---------- ---------- Net assets on GAAP basis $ 1,817,106 $ 1,564,938 Elimination of deferred policy acquisition costs (2,067,409) (1,951,549) Reduction in carrying value of fixed- maturity investments for fair value and foreign exchange adjustments (2,613,600) (978,855) Adjustment to policy liabilities 2,205,072 500,952 Elimination of deferred income taxes 1,211,187 1,223,368 Reduction in premiums receivable (237,929) (227,270) Other, net 98,378 97,041 ---------- --------- Net assets on Japanese regulatory accounting basis $ 412,805 $ 228,625 ========== =========
For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-8 to 13-11 (AFLAC Japan section of MD&A) and pages 13- 32 and 13-50 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference.
EMPLOYEES - JAPAN
AFLAC Japan employed 1,571 full-time and 157 part-time employees at December 31, 1995. AFLAC Japan considers its employee relations to be excellent.
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INSURANCE - U.S.
The following table sets forth AFLAC U.S. premiums earned by product line for the last three years ended December 31.
(In thousands) 1995 1994 1993 -------- -------- -------- Premiums earned: Cancer expense $ 402,789 $ 384,943 $ 369,256 Other accident and health 441,444 392,371 338,743 Life insurance 15,559 15,149 14,488 -------- -------- -------- Total AFLAC U.S. premiums earned $ 859,792 $ 792,463 $ 722,487 ======== ======== ========
The following table sets forth the changes in annualized premiums in force for AFLAC U.S. health insurance for the years ended December 31.
(In thousands) 1995 1994 1993 --------- --------- --------- Annualized premiums in force, at beginning of year $ 860,204 $ 787,482 $ 714,533 New issues including policy conversions 275,151 241,894 225,810 Change in unprocessed policies (1,791) 2,666 (2,458) Lapses (207,859) (183,973) (157,123) Other 11,399 12,135 6,720 --------- --------- --------- Annualized premiums in force, at end of year $ 937,104 $ 860,204 $ 787,482 ========= ========= =========
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. All of AFLAC's supplemental health insurance plans are guaranteed renewable for the lifetime of the policyholder. Guaranteed-renewable coverage may not be cancelled by the insurer, but premium rates on existing and future policies may be increased by class of policy in response to claims experience higher than originally expected (subject to federal and state loss-ratio guidelines) on a uniform, nondiscriminatory, statewide basis subject to state regulatory approval.
AFLAC's cancer plans are designed to provide insurance benefits for medical and nonmedical costs that are generally not reimbursed by major medical insurance. AFLAC currently offers a series of four different cancer plans in the United States that vary by benefit amount and type. All four plans provide a first occurrence benefit that pays an initial amount when internal cancer is first diagnosed, a fixed amount for each day an insured is hospitalized for cancer treatment, and benefits for medical, radiation, chemotherapy, surgery and a "wellness" benefit applicable toward certain diagnostic tests such as mammograms, pap smears, flexible sigmoidoscopy, etc. Two of the plans currently offered contain benefits that reimburse the insured for nursing services, anesthesia, prosthesis, blood, plasma, second
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surgical opinion, ambulance, transportation, family lodging, extended care facility, bone marrow transplant and hospice. The remaining two plans make these benefits available as an optional schedule of benefits rider. AFLAC also issues several riders, including one that increases the amount of the first occurrence benefit on each rider anniversary date until the covered person reaches age 65 or until internal cancer is diagnosed. AFLAC periodically introduces new forms of coverage, revising benefits and related premiums based upon the anticipated needs of the policyholders and AFLAC's claim experience.
AFLAC offers an accident and disability policy to protect against losses resulting from accidents. The accident portion of the policy includes lump sum benefits for accidental death, dismemberment and specific injuries. Fixed benefits for hospital confinement, emergency treatment, follow-up treatments, ambulance, transportation, family lodging, wellness, prosthesis, medical appliances and physical therapy are also provided. Optional disability riders are available to the primary insured only and include choices of a sickness disability rider, on-the-job disability rider and off-the-job disability rider. These benefits are payable up to a maximum benefit period of one year and for one disability at a time.
AFLAC currently markets five of the Medicare Supplement Standardized Plans, with the majority of sales being for Plans F and C. The plans are priced on an issue-age basis. Under this method, rates are revised due to changes in the Medicare program and medical inflation. There is no automatic rate increase due to the aging of the insured. Premium rates are determined based on zip code groupings, which are adjusted for increases in costs for each area. The benefits provided range from the basic plan, covering Part A and B coinsurance, to plans with more extensive coverage, including Part A and B deductibles, skilled nursing coinsurance, Part B excess and other benefits. AFLAC U.S. does not market the standardized plans covering prescription drug benefits.
AFLAC also issues other supplemental health insurance, such as intensive care, which is a low-premium policy that provides protection against the high cost of intensive care facilities during hospital confinement, regardless of reimbursements from other insurers. Other types of health insurance issued by AFLAC include a long-term convalescent care policy, long- and 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.
AFLAC's sales agents are licensed to sell accident and health insurance, and many are also licensed to sell life insurance. Most agents' efforts are directed toward selling supplemental health insurance. The 1995 monthly average number of U.S. agents actively producing business was 6,121, compared with 5,489 in 1994 and 5,110 in 1993.
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Agents' activities are principally limited to sales, with all policyholder service functions, including issuance of policies, premium collection, payment notices and claims handled by the staff at headquarters. Agents are paid commissions based on first-year and renewal premiums from their sales of health and life insurance products. AFLAC's state, regional and district sales coordinators, who are independent contractors, are compensated by override commissions.
AFLAC has concentrated on the development of "payroll marketing" in marketing its policies. Payroll marketing offers policies to individuals through common media such as trade and other associations or place of employment. This manner of marketing is distinct from "group" insurance sales in that each individual insured is directly contacted by the sales associate. Policies are individually underwritten in the payroll market, with premiums generally paid by the employee. Additionally, individuals may retain their full insurance coverage upon separation from employment or such affiliation, generally at the same premium. A major portion of premiums on such sales are collected through payroll deduction or other forms of group billings. Group-billed plans normally result in a lower average age of the insured at the time of policy issuance and also result in certain savings in administrative costs, a portion of which are passed on to the policyholder in the form of reduced premiums. Management believes that payroll marketing enables the agency force to reach a greater number of prospective policyholders than individual solicitation and that this method lowers distribution costs.
Another valuable marketing and sales tool is the flexible benefits program, or cafeteria plan, which allows an employee to pay for medical insurance using pretax dollars. These programs help achieve increased penetration as agents are required to present the program to all employees. They also help improve overall persistency levels due to the limited changes allowed during the plan year.
During 1995 and 1994, AFLAC continued to develop marketing arrangements with insurance brokers. Also, AFLAC has signed joint-marketing agreements with several large companies within and outside of the insurance industry. The core of the Company's distribution network will remain independent agents. The Company has improved its access to large payroll groups through insurance brokers and joint-marketing alliances.
In 1995, AFLAC's U.S. premiums collected were $846.4 million, 7.1% of which was collected in Florida, 6.8% in both Georgia and Texas, 5.6% in North Carolina and 5.1% in Tennessee. 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 or have greater financial resources. In the United States, there are more than 2,000 life and accident and health insurance companies, most of which compete in the states AFLAC conducts business.
Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield, provide insurance for meeting basic hospitalization
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and medical expenses. Much of this insurance is sold on a group basis. The federal and state governments also pay substantial costs of medical treatment through Medicare and Medicaid programs. Such major medical insurance generally covers a substantial amount of the medical (but not nonmedical) expenses incurred by an insured as a result of cancer or other major illnesses. AFLAC's policies are designed to provide coverage that is supplemental to coverage provided by major medical insurance. AFLAC's benefits may also be used to defray nonmedical expenses.
Since other insurers generally do not provide full coverage of medical expenses or any coverage of nonmedical expenses, AFLAC's supplemental insurance is not an alternative to major medical insurance, but is sold to complement major medical insurance by covering the gap between major medical insurance reimbursements and the total costs of an individual's health care. AFLAC thus competes only indirectly with major medical insurers in terms of premium rates and similar factors. However, the scope of the major medical coverage offered by other insurers does represent a limitation on the market for AFLAC's products. Accordingly, expansion of coverage by other insurers or governmental programs could adversely affect AFLAC's business opportunities. Conversely, any reduction of coverages, such as increased deductibles and copayments, by other insurers or governmental programs could favorably affect AFLAC's business opportunities.
AFLAC competes directly with other insurers offering supplemental health insurance and believes that its current policies and premium rates are generally competitive with those offered by other companies selling similar types of insurance.
For additional information regarding U.S. insurance operations, see Exhibit 13, page 13-12 to 13-14 (AFLAC U.S. section of MD&A), which is incorporated herein by reference.
REGULATION - U.S.
The Parent Company and its insurance subsidiaries are subject to state regulations in the United States as an insurance holding company system. Such regulations generally provide that transactions between companies within the holding company system must be fair and equitable. In addition, transfer of assets among such affiliated companies, certain dividend payments from insurance subsidiaries and material transactions between companies within the system are subject to prior notice to, or approval by, state regulatory authorities.
AFLAC and its insurance subsidiaries, in common with all U.S. insurance companies, are subject to regulation and supervision in the states and other jurisdictions in which they do business. In general, the insurance laws of the various jurisdictions establish supervisory agencies with broad administrative powers relating to, among other things: granting and revoking licenses to transact business, regulating trade practices, licensing agents, prior approval of forms of policies and premium rate increases, standards of solvency and maintenance of specified policy benefit reserves and minimum loss ratio requirements, capital for the protection of policyholders, limitations on dividends to shareholders, the nature of and limitations on investments, deposits of securities for the benefit of policyholders, filing of annual reports and financial statements prepared in accordance with statutory insurance accounting practices prescribed or permitted by the
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regulatory authorities, and periodic examinations of the financial, market conduct, and other affairs of insurance companies. In addition, the National Association of Insurance Commissioners (NAIC) is currently working on regulatory initiatives relating to investments, reinsurance, dividend restrictions, revision of the risk-based capital formula, recodification of statutory accounting principles and other related matters.
For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-50 (Note 10 - Statutory Accounting and Dividend Restrictions of Notes to the Consolidated Financial Statements), incorporated herein by reference.
A risk-based capital formula was adopted by the NAIC in 1992 for U.S. life insurance companies that established capital requirements relating to insurance risk, business risk, asset risk and interest rate risk. These requirements are intended to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The levels are company action, regulatory action, authorized control and mandatory control.
Companies that have triggered a company action level event are required to submit a detailed comprehensive financial plan to the domiciliary state insurance department. In the regulatory action level, in addition to submitting the comprehensive financial plan, a company may be subjected to a detailed regulatory investigation. The domiciliary state insurance department is permitted, but not required, to place the insurance company under regulatory control when it falls to the authorized control level; regulatory control is required in the mandatory control level. AFLAC's NAIC risk-based capital ratio continues to reflect a very strong statutory capital and surplus position.
Currently, four states have laws, regulations or regulatory practices that either prohibit the sale of specified disease insurance, such as AFLAC's cancer expense insurance, or make its sale impractical. These states are Connecticut, Massachusetts, New Jersey and New York. The remainder of the states do not impose prohibitions or restrictions that prevent AFLAC from marketing cancer expense insurance. AFLAC U.S. is marketing several of its other products in these states, directly or through a subsidiary.
Under insurance guaranty fund laws in most states in the United States, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies with similar lines of business. Such assessments have not been material to the Company in recent years. The Company believes that future assessments relating to companies currently involved in insolvency proceedings will not materially impact the consolidated financial statements.
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The Company continues to monitor developments concerning possible changes to the U.S. health care system at both the federal and state levels. The future of health care changes and its impact on AFLAC U.S. cannot be readily predicted at this time.
EMPLOYEES - U.S.
In its U.S. insurance operations, the Company employed 1,613 full-time and 39 part-time employees at December 31, 1995. The Company considers its employee relations to be excellent.
OTHER OPERATIONS
At December 31, 1995, the AFLAC Broadcast Division operated seven network-affiliated television stations with total assets of $159.6 million. The Broadcast Division employed 554 full-time and 123 part-time employees at December 31, 1995. The Broadcast Division considers its employee relations to be excellent.
The Broadcast Division produced increased revenues and earnings during 1995 as compared with 1994. Revenues increased 5.1%, to $81.6 million. Pretax earnings before interest expense rose 10.4%, to $19.0 million. Stations benefited from advertising related to an improved U.S. economy and strengthened cost controls.
The Broadcast Division has succeeded despite significant changes in the industry. With the emergence of new cable networks and stations, there are more outlets for advertising dollars than ever before. Despite the segmentation of television entertainment and news, network-affiliated stations continue to effectively deliver mass audiences to advertisers. As a result, the AFLAC Broadcast Division is able to successfully compete in a crowded, competitive marketplace.
For additional information regarding broadcast operations, see Exhibit 13, page 13-14 (Other Operations section of MD&A), which is incorporated herein by reference.
The Company's other operations employed 332 full-time and four part- time employees at December 31, 1995; employee relations are considered to be excellent.
ITEM 2.

ITEM 2. PROPERTIES
AFLAC owns an 18-story office building, which is the worldwide headquarters of the Parent Company and AFLAC, along with a six-story parking garage. These structures are located on approximately 14 acres of land in Columbus, Georgia. In addition, AFLAC Real Estate Holdings, Inc. (AREH), a wholly owned subsidiary of the Parent Company, owns a two-story building located on the same property. AFLAC also owns administrative office buildings located nearby. AFLAC New York also 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,
I-14
along with regional sales offices located throughout the country, and owns a training and computer facility in Tokyo. For further information concerning the building in Japan, see Exhibit 13, pages 13-18, (discussion concerning cash flow) and 13-55 (Note 12 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. Other foreign affiliates of the Company also occupy leased office space.
The Broadcast Division owns land, buildings, transmission towers and other broadcast equipment in the cities where its seven television stations are located.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. During 1995, the Company settled certain litigation in Alabama related to an ancillary line of business. However, the settlement was not material to the Company's consolidated net earnings for the year. Although the final results of any litigation cannot be predicted with certainty, the Company believes the outcome of the litigation still pending will not have a material adverse effect on the financial position of the Company.
ITEM 4.

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, 1995.
I-15
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION (*) AGE - ------------------- ------------------------------------- --- Daniel P. Amos Chief Executive Officer of the 44 Company and AFLAC, Vice Chairman of the Company; President of the Company since August 1991
Paul S. Amos Chairman of the Board of the Company 69 and AFLAC.
William J. Bugg, Jr. Senior Vice President, Corporate 56 Actuary of AFLAC
Monthon Chuaychoo Vice President, Financial Services, of 52 the Company and AFLAC since September 1993; Second Vice President, Assistant Controller of the Company and AFLAC from June 1991 to September 1993; Second Vice President of AFLAC until June 1991
Kriss Cloninger III Executive Vice President, Chief 48 Financial Officer and Treasurer of the Company, and Executive Vice President, Chief Financial Officer of AFLAC since March 1993; Senior Vice President, Chief Financial Officer and Treasurer of the Company, and Senior Vice President, Chief Financial Officer of AFLAC from March 1992 until March 1993; Principal, KPMG Peat Marwick LLP, Atlanta, GA until March 1992
Martin A. Durant, III Senior Vice President, Corporate Services, 47 of the Company and AFLAC since August 1993; Vice President and Controller of the Company until August 1993, and of AFLAC from June 1991 to August 1993
Norman P. Foster Executive Vice President, Corporate 61 Finance, of the Company and AFLAC since March 1992; Senior Vice President, Chief Financial Officer and Treasurer of the Company, and Senior Vice President and Chief Financial Officer of AFLAC until March 1992
I-16
David Halmrast Senior Vice President, Corporate 56 Development, of AFLAC since December 1993; Senior Vice President, Corporate Development of the Company from April 1993 to December 1993; Senior Vice President and Chief Financial Officer of Colonial Companies, Inc. until July
Kenneth S. Janke Jr. Senior Vice President, Investor 37 Relations, of the Company since August 1993; Vice President, Investor Relations, of the Company until August
Akitoshi Kan Senior Vice President, AFLAC Japan, 48 Accounting, Corporate Planning, Audit, and Legal Affairs since January 1995; Vice President, AFLAC Japan Accounting Department, from 1992 through 1994; Manager, AFLAC Japan, Accounting Department, until 1992
Kyoichi Kasuya Vice President, Chief Actuary, AFLAC 58 Japan, since 1992; General Manager, AFLAC Japan, Actuarial Department, until 1992
Nobuo Kawamura Senior Vice President, AFLAC Japan, 51 Underwriting, Policy Maintenance, Premium Accounting, Customer Service, Administration Support since January 1992; Deputy Director of Marketing, AFLAC Japan, until 1992
Joseph P. Kuechenmeister Senior Vice President, Director 54 of Marketing of AFLAC
Joey M. Loudermilk Senior Vice President, General Counsel 42 and Corporate Secretary of the Company, and Senior Vice President, General Counsel and Director, Legal and Governmental Relations and Corporate Secretary of AFLAC since May 1992; Senior Vice President, Corporate Counsel and Assistant Secretary of the Company and AFLAC and Director, Legal and Governmental Affairs of AFLAC until May 1992
I-17
Hidefumi Matsui President, AFLAC Japan, since January 51 1995, Executive Vice President of AFLAC Japan, from January 1992 to 1995; Senior Vice President, Director of Marketing, AFLAC Japan, until January 1992
Minoru Nakai President of AFLAC International, Inc., 54 since October 1991; Senior Vice President, U.S.-Japan Operations, of AFLAC, until October 1991
Yoshiki Otake Chairman, AFLAC Japan, since January 56 1995, Vice Chairman of AFLAC International Inc., since October 1991, President of AFLAC Japan from October 1991 until 1995; Executive Vice President of AFLAC from January 1991 until October 1991
Thomas L. Paul President of AFLAC Broadcast Group, Inc.; 66 Vice President, Corporate Development, of the Company until 1993
E. Stephen Purdom Executive Vice President of AFLAC since 48 October 1994; Senior Vice President, Medical Director of AFLAC until October 1994, and also Medical Director, Columbus Clinic, Columbus, GA until September 1994
Tsuneo Shioiri Senior Vice President, Director of Sales 57 Administration, AFLAC Japan, since January 1992; Deputy Director of Marketing, AFLAC Japan, until 1992
Joseph W. Smith, Jr. Senior Vice President, Chief Investment 42 Officer of AFLAC since August 1991; Senior Vice President, Investments of AFLAC, until August 1991
Gary L. Stegman Senior Vice President, Assistant Chief 46 Financial Officer of the Company and AFLAC since June 1991; Senior Vice President, Treasurer of AFLAC until June 1991
(*) 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-18
PART II
Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1995 Annual Report to Shareholders, the appropriate sections of which are included herein as Exhibit 13. Exhibit 13 Annual Report Pages Pages __________ _____________
ITEM 5.

ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 24; EQUITY AND RELATED SHAREHOLDER 13-48 46 (Note 9); MATTERS (Note 9) and 50
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 32 - 33
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 25 - 31 ANALYSIS OF FINANCIAL CONDITION 13-19 AND RESULTS OF OPERATIONS
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND 13-20 to 34 - 50 SUPPLEMENTARY DATA 13-58
ITEM 9.

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 to the Company's definitive Proxy Statement relating to the Company's 1996 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 1, 1996, 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.

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.

ITEM 11. EXECUTIVE COMPENSATION Board and Committee 8 - 18 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.

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.

ITEM 13. CERTAIN RELATIONSHIPS Certain Transactions 18 - 19 AND RELATED and Relationships TRANSACTIONS
III-1
PART IV
ITEM 14.

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 13-20 - each of the years in the three-year 13-21 period ended December 31, 1995 Consolidated Balance Sheets, at December 13-22 - 31, 1995 and 1994 13-23 Consolidated Statements of Shareholders' 13-24 - Equity, for each of the years in the 13-25 three-year period ended December 31, Consolidated Statements of Cash Flows, 13-26 - for each of the years in the three-year 13-27 period ended December 31, 1995 Notes to the Consolidated Financial 13-28 to Statements 13-55 Report of Independent Auditors 13-57
2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report: Auditors' Report on Financial Statement Schedules IV-5 Schedule I - Summary of Investments - Other IV-6 Than Investments in Related Parties, at December 31, 1995 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1995 IV-11 and 1994 and for each of the years in the three-year period ended December 31, 1995 Schedule IV - Reinsurance, for each of the IV-12 years in the three-year period ended December 31, 1995
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 1991 Form 10-K, Commission file number 1-7434, Exhibit 3.0; and Bylaws of the Company, as amended - incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 3.0. 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. 10.0* - American Family Corporation Incentive Stock Option Plan (1982) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1* - American Family Corporation Stock Option Plan (1985) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - American Family Corporation Supplemental Executive Retirement Plan - incorporated by reference from 1989 Form 10-K, Commission file number 1-7434, Exhibit 10.9. 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.3.1. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5.
IV-2
10.6* - AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7* - AFLAC Incorporated Management Incentive Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit B. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9. 10.10* - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 - incorporated by reference from form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only). 28.0* - AFLAC Incorporated 401(K) Retirement Plan incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 28.0.
*Management contract or compensatory plan or agreement.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended December 31, 1995.
IV-3
(c) EXHIBITS FILED WITH CURRENT FORM 10-K
13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only).
IV-4
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Shareholders and Board of Directors AFLAC Incorporated:
Under date of January 29, 1996, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 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 1995. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in Item 14. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia January 29, 1996
IV-5
SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1995
(In thousands) Amount in Fair Balance Type of Investment Cost Value Sheet ----------------------- ----------- ----------- ---------- Securities available for sale: Fixed maturities: Bonds: United States Government and government agencies and authorities $ 497,357 $ 519,761 $ 519,761 States, municipalities and political subdivisions 872,673 962,966 962,966 Foreign governments 6,809,934 8,201,769 8,201,769 Public utilities 3,272,635 3,735,385 3,735,385 Convertibles 29,749 33,465 33,465 All other corporate bonds 5,622,395 6,221,660 6,221,660 ---------- ---------- ---------- Total fixed maturities available for sale 17,104,743 19,675,006 19,675,006 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 3,264 3,698 3,698 Banks, trusts and insurance companies 7,033 9,297 9,297 Industrial, miscellaneous and all other 70,615 95,067 95,067 ---------- ---------- ---------- Total equity securities 80,912 108,062 108,062 ---------- ---------- ---------- Total securities available for sale 17,185,655 19,783,068 19,783,068
Mortgage loans on real estate 22,213 28,825 22,213 Policy loans 1,230 1,230 1,230 Other long-term investments 2,113 2,113 2,113 Short-term investments 232,201 232,201 232,201 ---------- ---------- ---------- Total investments $17,443,412 $20,047,437 $20,040,825 ========== ========== ==========
IV-6
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1995 1994 ---------- ---------- Assets: Investments: Investments in subsidiaries* $ 2,573,606 $ 1,988,329 Other investments: Money market funds 17,346 2,489 Mortgage loans and other 2,548 2,468 ---------- ---------- Total investments 2,593,500 1,993,286 Due from subsidiaries* 3,910 9,574 Other receivables 4,478 4,851 Property and equipment, net 9,231 8,961 Other 1,291 267 ---------- ---------- Total assets 2,612,410 2,016,939 ========== ========== Liabilities and Shareholders' Equity: Liabilities: Cash overdraft 160 82 Due to subsidiaries* 1,237 714 Notes payable (note A) 272,158 111,970 Employee and beneficiary benefit plans 147,319 117,145 Income taxes, primarily deferred 33,577 25,399 Other 23,818 9,862 Commitments and contingencies (note B) ---------- ---------- Total liabilities 478,269 265,172 ---------- ---------- Shareholders' equity: Common stock of $.10 par value: Authorized 175,000; issued 156,358 shares in 1995 and 155,999 shares in 1994 15,636 15,600 Additional paid-in capital 196,928 192,899 Unrealized foreign currency translation gains 213,319 174,091 Unrealized gains on securities available for sale 482,787 228,844 Retained earnings (note D) 1,577,605 1,277,487 Treasury stock (351,117) (135,776) Notes receivable for stock purchases (1,017) (1,378) ---------- ---------- Total shareholders' equity 2,134,141 1,751,767 ---------- ---------- Total liabilities and shareholders' equity $ 2,612,410 $ 2,016,939 ========== ==========
* Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. IV-7
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Statements of Earnings AFLAC Incorporated (Parent Only) (In thousands)
Years ended December 31, 1995 1994 1993 ---------- ---------- ---------- Revenues: Dividends from subsidiaries* $ 82,343 $ 109,533 $ 71,268 Management and service fees from subsidiaries* 30,509 26,391 30,357 Other income from subsidiaries, principally rental and interest* 196 683 992 Other income 1,069 1,327 (620) --------- --------- --------- Total revenues 114,117 137,934 101,997 --------- --------- --------- Operating expenses: Interest expense - subsidiaries* 30 22 162 Interest expense - others 8,419 6,070 3,362 Capitalized interest - (2,419) (3,250) Other operating expenses 70,921 65,635 53,595 --------- --------- --------- Total operating expenses 79,370 69,308 53,869 --------- --------- --------- Earnings before income taxes, equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 34,747 68,626 48,128
Income tax expense (note C) 8,583 874 1,063 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 26,164 67,752 47,065
Equity in undistributed earnings of subsidiaries 322,893 225,038 196,824 --------- --------- --------- Earnings before cumulative effect of accounting changes 349,057 292,790 243,889
Cumulative effect on prior years of accounting changes (including a $46,100 credit related to subsidiaries) (note F) - - 11,438 --------- --------- --------- Net earnings $ 349,057 $ 292,790 $ 255,327 ========= ========= =========
* Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements.
IV-8
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Statements of Cash Flows AFLAC Incorporated (Parent Only) (In thousands) Years ended December 31, 1995 1994 1993 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 349,057 $ 292,790 $ 255,327 Adjustments to reconcile net earnings to net cash provided from operating activities: Cumulative effect on prior years of accounting changes - - (11,438) Equity in undistributed earnings of subsidiaries (322,893) (225,038) (196,824) Deferred income taxes 8,178 (578) (300) Employee and beneficiary benefit plans 30,174 32,700 18,195 Other, net 17,017 4,307 190 --------- --------- --------- Net cash provided by operating activities 81,533 104,181 65,150 --------- --------- --------- Cash flows from investing activities: Net (increase) decrease in other investments (14,325) 18,998 (14,703) Additional capitalization of subsidiaries - (3,592) - Additions to property and equipment, net - - (75) --------- --------- --------- Net cash (used)/provided by investing activities (14,325) 15,406 (14,778) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 198,250 84,000 - Principal payments under debt obligations (11,507) (26,541) (11,419) Proceeds from exercise of stock options 3,235 2,163 6,975 Dividends paid to shareholders (48,939) (44,928) (40,057) Purchases of treasury stock (224,204) (131,734) (1,325) Treasury stock reissued 9,693 2,761 - Net change in amount due to/from subsidiaries 6,186 (5,331) (3,866) Other, net - - (1,072) --------- --------- --------- Net cash used by financing activities (67,286) (119,610) (50,764) --------- --------- --------- Net change in cash (78) (23) (392) Cash (overdraft) at beginning of year (82) (59) 333 --------- --------- --------- Cash (overdraft) at end of year $ (160) $ (82) $ (59) ========= ========= ========= See the accompanying Notes to Condensed Financial Statements. 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 serviced by the Parent Company at December 31, 1995 and 1994 follows:
(In thousands) 1995 1994 -------- --------
2.71% unsecured, yen-denominated notes payable to banks under reducing revolving credit agreement, due annually, July 1996 through July 2001........................................ $ 230,695 $ - 5.965% unsecured notes payable to banks, due semiannually through 1997.................... 39,167 49,000 8.3% note payable, due monthly through 1997, secured by equipment............................. 2,296 3,970 Unsecured notes payable to banks under revolving credit and term-loan agreement, variable interest rate (6.75% at December 31, 1994), refinanced into the 2.71% notes payable in 1995.. - 50,000 6.63% short-term note payable to bank under unsecured line of credit......................... - 9,000 -------- -------- Total notes payable $ 272,158 $ 111,970 ======== ========
The aggregate maturities of the notes payable for each of the five years after December 31, 1995, are as follows:
(In thousands)
1996............................................ 59,934 1997............................................ 58,427 1998............................................ 38,449 1999............................................ 38,449 2000............................................ 38,449
(B) CONTINGENCIES
In prior years, the Parent Company executed promissory notes to banks and transferred the proceeds to its broadcast subsidiaries for the acquisition of television broadcasting stations. The outstanding balances on these notes assumed by a partnership formed by the Broadcast Group and AFLAC were $23.8 million as of December 31, 1995, and are not included in the accompanying condensed balance sheet.
IV-10
In addition, the Parent Company has also guaranteed repayment of bank borrowings by its subsidiary, AFLAC. The related outstanding loan balance at December 31, 1995, was $1.0 million.
(C) INCOME TAXES
The Company and its eligible U.S. subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or benefits are recorded by each principal subsidiary based upon separate return calculations, and any difference between the consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial statements.
The Internal Revenue Service has proposed adjustments to the Company's U.S. consolidated federal income tax returns for the years 1989 through 1991. The proposed adjustments relate primarily to the computation of foreign-source income for purposes of the foreign tax credit that, if upheld, would have a significant effect on the Company's operating results relating to both the years under examination and subsequent years. Management does not agree with the proposed tax issues and is vigorously contesting them. The Company filed a formal protest with the IRS during 1995. Although the final outcome is uncertain and will likely take several years to resolve, the Company believes that its position will prevail and that the ultimate liability will not materially impact the consolidated financial statements.
For further information on income taxes, see Exhibit 13, page 13-45, Note 8 of the Notes to the Consolidated Financial Statements.
(D) DIVIDEND RESTRICTIONS
See Exhibit 13, pages 13-50 and 13-51 (Note 10, Statutory Accounting and Dividend Restrictions, of Notes to the Consolidated Financial Statements) for information regarding dividend restrictions.
(E) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
(In thousands) 1995 1994 1993 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 7,807 $ 6,302 $ 3,588 Income taxes 406 400 -
In 1993, non-cash investing activities included issuance of common stock for purchase of a company amounting to $8.7 million. For further information see Note 9, Other, page 13-49 of Exhibit 13.
(F) ACCOUNTING CHANGES
For information concerning the cumulative effect of new accounting standards adopted in 1995, 1994, and 1993, see page 13-30 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated Financial Statements.
IV-11
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, 1996 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, 1996 - ------------------------ President and Vice ----------------- (Daniel P. Amos) Chairman of the Board of Directors
/s/ KRISS CLONINGER, III Executive Vice President, MARCH 26, 1996 - ------------------------ Chief Financial Officer ----------------- (Kriss Cloninger, III) and Treasurer
/s/ NORMAN P. FOSTER Executive Vice President, MARCH 26, 1996 - ------------------------ Corporate Finance ----------------- (Norman P. Foster)
IV-13
/s/ J. SHELBY AMOS, II Director MARCH 26, 1996 - ------------------------------ ----------------- (J. Shelby Amos, II)
/s/ MICHAEL H. ARMACOST Director MARCH 26, 1996 - ------------------------------ ----------------- (Michael H. Armacost)
/s/ M. DELMAR EDWARDS, M.D. Director MARCH 26, 1996 - ------------------------------ ----------------- (M. Delmar Edwards, M.D.)
/s/ GEORGE W. FORD, JR. Director MARCH 26, 1996 - ------------------------------ ----------------- (George W. Ford, Jr.)
/s/ CESAR E. GARCIA Director MARCH 26, 1996 - ------------------------------ ----------------- (Cesar E. Garcia)
/s/ JOE FRANK HARRIS Director MARCH 26, 1996 - ------------------------------ ----------------- (Joe Frank Harris)
/s/ ELIZABETH J. HUDSON Director MARCH 26, 1996 - ------------------------------ ----------------- (Elizabeth J. Hudson)
/s/ KENNETH S. JANKE, SR. Director MARCH 26, 1996 - ------------------------------ ----------------- (Kenneth S. Janke, Sr.)
IV-14
/s/ CHARLES B. KNAPP Director MARCH 26, 1996 - ------------------------------ ----------------- (Charles B. Knapp)
/s/ HISAO KOBAYASHI Director MARCH 26, 1996 - ------------------------------ ----------------- (Hisao Kobayashi)
/s/ YOSHIKI OTAKE Director MARCH 26, 1996 - ------------------------------ ----------------- (Yoshiki Otake)
/s/ E. STEPHEN PURDOM Director MARCH 26, 1996 - ------------------------------ ----------------- (E. Stephen Purdom)
/s/ BARBARA K. RIMER Director MARCH 26, 1996 - ------------------------------ ----------------- (Barbara K. Rimer)
/s/ HENRY C. SCHWOB Director MARCH 26, 1996 - ------------------------------ ----------------- (Henry C. Schwob)
/s/ J. KYLE SPENCER Director MARCH 26, 1996 - ------------------------------ ----------------- (J. Kyle Spencer)
/s/ GLENN VAUGHN, JR. Director MARCH 26, 1996 - ------------------------------ ----------------- (Glenn Vaughn, Jr.)
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Exhibit Index
3.0 - Articles of Incorporation, as amended - incorporated by reference from 1991 Form 10-K, Commission file number 1-7434, Exhibit 3.0; and Bylaws of the Company, as amended - incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 3.0. 4.0 - The registrant is not filing one instrument evidencing indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. 10.0* - American Family Corporation Incentive Stock Option Plan (1982) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1* - American Family Corporation Stock Option Plan (1985) - incorporated by reference from Registration Statement No. 33-44720 on Form S-8 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 10.1.1* - AFLAC Incorporated Amended 1985 Stock Option Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit A. 10.1.2* - AFLAC Incorporated Amended 1985 Stock Option Plan, as amended August 8, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10. 10.2* - American Family Corporation Retirement Plan for Senior Officers, as amended and restated October 1, 1989 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.2. 10.3* - American Family Corporation Supplemental Executive Retirement Plan - incorporated by reference from 1989 Form 10-K, Commission file number 1-7434, Exhibit 10.9. 10.3.1* - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.3.1. 10.4* - AFLAC Incorporated Employment Agreement with Daniel P. Amos, dated August 1, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.4. 10.5* - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.5.
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10.6* - AFLAC Incorporated Employment Agreement with Kriss Cloninger, III, dated February 14, 1992, and as amended November 12, 1993 - incorporated by reference from 1993 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-94-000006, Exhibit 10.6. 10.7* - AFLAC Incorporated Management Incentive Plan - incorporated by reference from 1994 Shareholders' Proxy Statement, Commission file number 1-7434, Accession No. 0000004977-94-000003, Exhibit B. 10.8* - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.8. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994 - incorporated by reference from 1994 Form 10-K, Commission file number 1-7434, Accession No. 0000004977-95-000006, Exhibit 10.9. 10.10* - AFLAC Incorporated Employment Agreement with Paul S. Amos, dated August 1, 1995 - incorporated by reference from Form 10-Q for September 30, 1995, Commission file number 1-7434, Accession No. 0000004977-95-000023, Exhibit 10.1. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only). 28.0* - AFLAC Incorporated 401(K) Retirement Plan incorporated by reference from 1992 Form 10-K, Commission file number 1-7434, Exhibit 28.0.
*Management contract or compensatory plan or agreement.
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Exhibits Filed with Current Form 10-K:
13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1995. 21.0 - Subsidiaries. 23.0 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-44720 with respect to the AFLAC Incorporated (Formerly American Family Corporation) Incentive Stock Option Plan (1982) and Stock Option Plan (1985). 23.1 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-41926 with respect to the AFLAC Associate Stock Bonus Plan. 23.2 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-8 Registration Statement No. 33-41552 with respect to the AFLAC Incorporated 401(K) Retirement Plan. 23.3 - Consent of independent auditor, KPMG Peat Marwick LLP, to Form S-3 Registration Statement No. 33-64535 with respect to the AFL Stock Plan. 27.0 - Financial Data Schedule (electronic filing only).
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