AFLAC INC — Annual Report 1995

Mar 28, 1995

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, 1994 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. X -------- The number of shares of the registrant's Common Stock outstanding at March 17, 1995, with $.10 par value, was 99,410,117. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 17, 1995 was $3,802,440,915. DOCUMENTS INCORPORATED BY REFERENCE PART I Item 1 Pages 13-5 to 13-18; 13-27 to 13-33 and 13-45 to 13-46 of Exhibit 13 (Notes 2, 3 and 10 of Notes to the Consolidated Financial Statements). The applicable portions of the Company's Annual Report to Shareholders for the year ended December 31, 1994, are included as Exhibit 13 Item 2 Pages 13-18 and 13-36 (Note 5) of Exhibit 13 PART II Item 5 Pages 13-1, 13-2 and 13-43 (note 9) of Exhibit 13 Item 6 Pages 13-3 and 13-4 of Exhibit 13 Item 7 Pages 13-5 to 13-18 of Exhibit 13 Item 8 Pages 13-19.1 to 13-52 of Exhibit 13 PART III Item 10 Incorporated by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 1, 1995 (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 AFLAC Incorporated Annual Report on Form 10-K For the Year Ended December 31, 1994 Table of Contents Page __ PART I Item 1. Business................................................ I- 1 Item 2. Properties.............................................. I-14 Item 3. Legal Proceedings....................................... I-15 Item 4. Submission of Matters to a Vote of Security Holders..... I-15 Item 4A. Executive Officers of the Company....................... I-16 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 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 PART I 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 1992, AFLAC transferred its minor United Kingdom insurance subsidiary and, in 1994, 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 13-18 and page 13-27 (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 has both U.S. and foreign operations (principally in 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 ("Super Care") and supplemental general medical expense plans. 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, American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, the Commonwealth of the Northern Mariana Islands and several foreign countries. The Company's only significant foreign operation is AFLAC Japan, which accounted for 83.9% of the Company's total revenues in 1994. Insurance premiums and investment income from insurance operations are the major sources of revenues. The Company's consolidated premium income was $5.2 billion for 1994, $4.2 billion for 1993 and $3.4 billion for 1992. I-1 The following table lists, for each of the last three years, the percentage of consolidated premiums contributed by each class of insurance sold: Percentage of Insurance Class Consolidated Premium Income - ---------------------- ----------------------------------- 1994 1993 1992 ------ ------ ------ Health insurance 99.7% 99.6% 99.2% Life and other insurance .3 .4 .8 The following table sets forth consolidated earned premiums by class and information with respect to the health insurance plans, primarily cancer, offered by AFLAC principally in Japan and the United States for the three years ended December 31. (In thousands) 1994 1993 1992 ---------- ---------- ---------- Earned premiums: Health insurance $ 5,164,665 $ 4,205,637 $ 3,342,439 Life and other insurance 16,067 19,753 26,762 ---------- ---------- ---------- Total earned premiums $ 5,180,732 $ 4,225,390 $ 3,369,201 ========== ========== ========== Health insurance plans: No. of policies issued 2,252,414 1,954,417 1,923,232 No. of policies terminated 1,169,990 1,122,952 1,002,020 No. of policies in force at year-end 16,560,892 15,478,468 14,647,003 INVESTMENTS AND INVESTMENT RESULTS FOR U.S. AND JAPAN 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 $820.9 million at December 31, 1994. For additional information regarding SFAS No. 115, see Exhibit 13, page 13-25 (Note 1 of Notes to the Consolidated Financial Statements). The Company's investments (including cash) amounted to $16.0 billion at December 31, 1994. Since December 31, 1993, total invested assets, including the effect of SFAS No. 115, have increased $3.5 billion, or 28.3%. AFLAC Japan investments increased $3.4 billion (29.5%), while AFLAC U.S. investments increased $162.2 million (14.8%). Since December 31, 1993, total invested assets, excluding the effect of SFAS No. 115, have increased $2.7 billion, or 21.7%. AFLAC Japan investments increased $2.5 billion (21.9%), while AFLAC U.S. investments increased $211.7 million (19.4%). Net investment income of $838.8 million in 1994 continues to be a growing source of revenues and earnings for the Company, increasing $149.6 million in 1994 I-2 over 1993 and $156.1 million in 1993 over 1992. It is generally AFLAC's policy to invest in high-grade investments, principally in high-quality government, 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 set of investment strategies. The Company has streamlined and integrated the organizational structure of the investment department into a single functional unit and has set specific worldwide criteria regarding credit quality, liquidity, compliance with regulatory requirements and conformance to product needs. During 1994, 88% of AFLAC Japan's yen cash flow available for investments was allocated to yen-denominated securities, while the remaining 12% was invested in dollar-denominated securities. Of the total amount invested in 1994, 10.5% was invested in Japanese government bonds at a yield of 4.73%, 53.3% was invested in the longer-dated private sector at a rate of 5.12%, 10.0% was invested in municipal bonds at a rate of 4.30%, and the remainder was invested in yen in assorted sectors at an average rate of 4.37%. At year-end 1994, Japanese government bonds accounted for 35.8% of AFLAC Japan's total invested assets (including cash). 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 1994, which help maintain a favorable asset/liability match, accounting for 19.6% of our total invested assets in Japan at year-end. At the end of the year, municipal securities represented 5.5% of the invested assets, while utility bonds represented 18.5%. Other assorted sectors accounted for 14.2%, and dollar- denominated securities represented the balance of AFLAC Japan's invested assets. In January 1995, there was a major earthquake in Kobe, Japan. The Company's fixed-maturity portfolio includes securities issued by governmental units and public utilities located in that region. The amortized cost of these securities is approximately $541 million. These securities account for less than 4% of AFLAC Japan's fixed-maturities. While the earthquake may temporarily disrupt general business conditions, management does not expect any change in the credit quality of these bonds. The Company continued to avoid the Japanese equity and investment real estate markets in 1994. AFLAC Japan's equity portfolio accounted for only .1% of invested assets at year-end, and the Company does not expect this portion to increase in 1995. 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 invested assets at year-end. The Company increased its commitment to the dollar-denominated portfolio of AFLAC Japan's invested assets during 1994. AFLAC Japan added $303.6 million to this portfolio at an average yield of 7.39%. AFLAC Japan's dollar-denominated portfolio represented 6.4% of invested assets in Japan, or $951.3 million at the end of 1994, compared with $627.9 million at the end of 1993. This portfolio carries certain tax and yield advantages that make it attractive; however, the Company is careful to balance yield enhancement with I-3 its corporate goal of increasing profit repatriation from AFLAC Japan to AFLAC U.S. and to the Parent. Profits repatriated from AFLAC Japan to AFLAC U.S. totaled $132.9 million in 1994, up from $97.9 million in 1993. Of the $132.9 million in 1994, $51.9 million was transferred to the Parent Company and used primarily to pay down debt. The balance was invested by AFLAC U.S. in dollar- denominated fixed-maturity securities at an average yield to maturity of 7.86%. 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 profit repatriation to continue to have a positive impact on its consolidated net earnings in the future. The Company's portfolio allocation in the United States continued to emphasize investment-grade corporate bonds, which accounted for 56.5% of new money purchases in 1994, at an average yield of 7.62%. AFLAC U.S. maintained its overall investment quality throughout the year, with more than 51% of the fixed-income portfolio rated "AA" or better at the end of the year. The equity portion of the U.S. portfolio was $66.5 million, compared with $55.8 million in 1993. Equity investments accounted for 5.7% of U.S. invested assets in 1994. 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 13-14 to 13-15, 13-18 (discussions relating to Balance Sheet and Cash Flow) and pages 13-29 to 13-35 (Notes 3 and 4 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. I-4 INSURANCE - JAPAN The following table sets forth AFLAC Japan's earned premiums by product line for the last three years ended December 31. (In thousands) Earned premiums: 1994 1993 1992 ---------- ---------- ---------- Health insurance, principally Cancer expense $ 4,073,400 $ 3,275,915 $ 2,545,055 Super Care and other insurance 297,691 208,345 137,265 ---------- ---------- ---------- Total earned premiums $ 4,371,091 $ 3,484,260 $ 2,682,320 ========== ========== ========== The following table sets forth the reconciliation of annualized premiums in force for AFLAC Japan for the years ended December 31: (In thousands) 1994 1993 1992 ---------- ---------- ---------- Annualized premiums in force, at beginning of year $ 3,672,594 $ 2,914,428 $ 2,503,500 New issues 767,289 594,171 508,756 Lapses and surrenders (182,115) (163,441) (115,088) Foreign currency translation adjustment 461,015 327,436 17,260 ---------- ---------- ---------- Annualized premiums in force, at end of year $ 4,718,783 $ 3,672,594 $ 2,914,428 ========== ========== ========== 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 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 the 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). During 1990, AFLAC introduced the Super Cancer Plan. The Super Cancer Plan includes, for the first time in Japan, first occurrence and outpatient benefits in addition to the benefits of the previous cancer coverages. Sales of new policies and conversions of existing policies resulted in 58.2% of all cancer units in force being Super Cancer Plans as of December 31, 1994. 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. The new plan is offered with several riders, providing death I-5 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. The Ministry of Finance (MOF) in Japan recently permitted insurance companies to increase the premiums on new policy issues in response to the lower investment yields available in the Japanese market. AFLAC Japan increased the premiums on Super Cancer new issues by an average of 16% in July 1994. AFLAC Japan also increased the premiums on Super Care new issues by an average of 10% effective November 1993. The Company anticipates implementing a similar increase to the Super Care policies in the fourth quarter of 1995. Since the premium increases apply to new policies only, management does not expect any adverse impact on persistency of existing policies. The Company has filed two new products for approval and introduction in 1995. The first product is a medical expense policy similar to a U.S. hospital indemnity policy. It provides benefits for daily hospital confinement and surgery, as well as a death benefit. The second product is a life insurance product with living benefit features. Management believes these products will fill another niche in the supplemental insurance marketplace for consumers and AFLAC. AGENCY FORCE - JAPAN The development of a "Corporate Agency" system has been important to the growth of AFLAC Japan. This distribution method permits Japanese companies to form insurance agencies as subsidiaries that offer our insurance plans to the total affiliated group's employees, suppliers and customers. About 95% of all companies listed on the Tokyo Stock Exchange have either a corporate agency or allow payroll deduction of premiums for AFLAC's products. AFLAC has no ownership interest in these corporate agencies. AFLAC products are also sold through independent agencies that are not affiliated with large corporations and through agencies formed by individuals. At December 31, 1994, there were 4,961 agencies in Japan with 19,270 licensed agents. Agents' activities are principally limited to insurance sales, with policyholder service functions handled by the main office in Tokyo and 66 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, its unique marketing system (see "Agency Force"), its low-cost operations and its product expertise developed in the United States. AFLAC has been very successful in the sale of cancer expense policies in Japan, with over 11.8 million cancer policies in force at December 31, 1994. I-6 The Japanese government is continuing the discussions begun in 1991 with the insurance industry and other groups to explore various long-term deregulation approaches for the financial services businesses in Japan. The principles upon which deregulation of the Japanese insurance industry is based are: (1) to promote competition and to enhance efficiency through deregulation and liberalization; (2) to preserve soundness; and (3) to secure fairness and equity in business operations. This project is still in a preliminary stage and the ultimate changes and their effects are not presently determinable. Due to the Company's unique marketing distribution system in Japan, management believes that deregulation will not have an immediate material effect on the Company. 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. During 1994, Japan held a series of trade talks with the United States. The U.S.-Japan Framework Agreement negotiations looked at 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 companies, operate in the third sector. As a result, AFLAC should not be directly affected by deregulation in Japan in the immediate future. However, by building on the Company's strengths, management has prepared for increased competition. REGULATION AND REMITTANCE OF FUNDS - JAPAN Annual payments are made from AFLAC Japan for management fees to the Parent Company, and allocated expenses and remittances of earnings to AFLAC U.S. These payments totaled $167.9 million in 1994, $133.4 million in 1993 and $65.5 million in 1992. Management fees paid to the Parent Company are largely based on expense allocations. 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. Japanese earnings available for profit remittance reflect investments generally valued at the lower of market value or cost. Also, AFLAC Japan's statutory earnings reflect foreign exchange gains and losses on the translation of its U.S. dollar-denominated investments. Therefore, changes in interest rate levels, yen/dollar exchange rates and other factors that affect market values of investment securities can cause wide fluctuations from year to year in the amounts of regulatory earnings in Japan and, therefore, profit remittances to AFLAC U.S. As part of the deregulation process, the Japanese Ministry of Finance ("MOF") is developing new solvency regulations and standards that represent I-7 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 the proposed new standards, and management does not expect these requirements would adversely affect the repatriation of funds from Japan for the next several years. 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 page I-12 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) 1994 1993 ---------- ---------- Net assets on GAAP basis $ 1,564,938 $ 1,099,712 Elimination of deferred policy acquisition costs (1,951,549) (1,537,128) Reduction in carrying value of fixed- maturity investments for market value and foreign exchange adjustments (978,855) (113,349) Adjustment to liability for future policy benefits 500,952 40,943 Elimination of deferred income taxes and adjustment to prepaid Japan taxes 1,223,368 791,268 Reduction in premiums receivable (227,270) (83,064) Other, net 97,041 (14,010) ---------- --------- Net assets on Japanese regulatory accounting basis $ 228,625 $ 184,372 ========== ========= For additional information regarding AFLAC Japan's operations, see Exhibit 13, pages 13-8 to 13-11 and pages 13-27 and 13-45 (Notes 2 and 10 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. EMPLOYEES - JAPAN AFLAC Japan employed 1,527 full-time and 178 part-time employees at December 31, 1994. AFLAC Japan considers its employee relations to be excellent. I-8 INSURANCE - U.S. The following table sets forth AFLAC U.S. earned premiums by product line for the last three years ended December 31. Earned premiums (in thousands): 1994 1993 1992 -------- -------- -------- Cancer expense $ 384,943 $ 369,256 $ 356,732 Other accident and health 392,371 338,743 288,643 Life insurance 15,149 14,488 14,641 -------- -------- -------- Total AFLAC U.S. earned premiums $ 792,463 $ 722,487 $ 660,016 ======== ======== ======== HEALTH INSURANCE PLANS - U.S. AFLAC's insurance is supplemental in nature and is designed for persons who have major medical 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, state-wide 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 five different cancer plans in the United States that vary by benefit amounts and type. All five 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, nursing, blood, plasma, physician, transportation, prosthesis and ambulance expenses. Some of the plans currently offered contain benefits that reimburse the insured for anesthesia and surgical expenses incurred in connection with cancer treatment, as well as benefits for a second surgical opinion and a "wellness" benefit applicable toward certain diagnostic tests such as pap smears and mammograms. AFLAC also issues several riders that may be purchased, including one that increases the amount of the first occurrence benefit for each month until age 65 that the coverage remains in force. AFLAC periodically introduces new forms of coverage, revising benefits and related premiums based upon the anticipated needs of the policyholders and AFLAC's claims experience. 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 I-9 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, an accident and disability protection 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. LifeCare policies, which constitute the majority of life insurance sales, are written under master policies issued through several employer trusts. LifeCare policies are marketed in a manner similar to AFLAC's health plans, as described below. 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 1994 monthly average number of U.S. agents and brokers actively producing business was 5,692, compared with 5,437 in 1993 and 4,960 in 1992. 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 and issued to the insured, and most employers do not contribute to the payment of premiums. 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 such sales lower distribution costs. I-10 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. The U.S. Congress continues to address possible changes to the U.S. health care system. Some of the 1994 proposals included provisions that would have eliminated cafeteria plans. However, no action on health care reform was taken in 1994. During 1994 and 1993, 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 1994, AFLAC's U.S. premiums collected were $787.4 million, 7.3% of which was collected in Florida, 6.9% in Georgia, 6.8% in Texas, 5.5% 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 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. I-11 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 13-11 to 13-13, 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 regulatory authorities, and periodic examinations of the financial and other affairs of insurance companies. For further information concerning state regulatory and dividend restrictions, see Exhibit 13, page 13-45 (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 National Association of Insurance Commissioners ("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. I-12 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. Also, there are several ongoing regulatory initiatives being developed by the NAIC relating to investments, reinsurance, dividend restrictions, revision of the risk-based capital formula as it pertains to health organizations and other accounting requirements. Currently, four states have laws, regulations or regulatory practices that either prohibit the sale of specific 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. The Company continues to monitor developments in the U.S. Congress concerning possible changes to the U.S. health care system. No action on health care reform was taken in 1994; however, some of the 1994 proposals included provisions that could have unfavorably affected the Company's tax expense, product design and marketing techniques in the United States. Management believes that a more limited approach to health care reform will be on the legislative calendar in 1995. The future of health care reform and its impact on AFLAC U.S. cannot be readily predicted at this time. Despite the movement toward managed care in the U.S. health care system, management believes that opportunities for marketing high-quality, affordable supplemental insurance policies in the United States will continue. The Company believes that a reformed health care system will require individuals to assume responsibility for larger portions of their total health care expenses, which should increase the demand for supplemental insurance products. EMPLOYEES - U.S. In its U.S. insurance operations, the Company employed 1,627 full-time and 33 part-time employees at December 31, 1994. The Company considers its employee relations to be excellent. I-13 OTHER OPERATIONS At December 31, 1994, the AFLAC Broadcast Division owned seven network- affiliated television stations with total assets of $152.1 million. The Broadcast Division employed 539 full-time and 108 part-time employees at December 31, 1994. The Broadcast Group considers its employee relations to be excellent. The Broadcast Division produced increased revenues and earnings during 1994 as compared with 1993. Revenues increased 12.5%, to $77.0 million. Pretax earnings before interest expense rose 28.1%, to $17.2 million. Stations benefited from advertising related to the off-year political elections, 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, which is incorporated herein by reference. The Company's other operations employed 307 full-time and 2 part-time employees at December 31, 1994; employee relations are considered to be excellent. 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 an administrative office building located nearby. The Parent Company, AFLAC and AREH also own and lease office space and warehouse facilities at other locations in the United States. In Tokyo, Japan, AFLAC owns a new 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 and computer facility in Tokyo. For further information concerning the new building in Japan, see Exhibit 13, pages 13-18, (discussion concerning cash flow) and 13-36 (Note 5 of Notes to the Consolidated Financial Statements), which are incorporated herein by reference. Other foreign affiliates of the Company also have leased office space. The Broadcast Division owns and leases land, buildings, transmission towers and other broadcast equipment in the cities where its seven television stations are located. I-14 ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in various litigation considered to be in the normal course of business. Management does not believe the outcome of any pending litigation in which it is a defendant will have a material effect on the Company. 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, 1994. I-15 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY NAME PRINCIPAL OCCUPATION () AGE ___ _____ ___ Paul S. Amos Chairman of the Board of the Company 68 and AFLAC since August 1990; Vice Chairman of the Company and AFLAC until August 1990 Daniel P. Amos Chief Executive Officer of the 43 Company and AFLAC, Vice Chairman of the Company, since August 1990; President of the Company since August 1991; President of AFLAC and Deputy Chief Executive Officer of the Company, until August 1990; Chief Operating Officer of AFLAC, until August 1990 William J. Bugg, Jr. Senior Vice President, Corporate 55 Actuary of AFLAC Monthon Chuaychoo Vice President, Financial Services, of 51 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 47 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, 46 of the Company and AFLAC since August 1993; Vice President and Controller of the Company, from 1990 to August 1993, and of AFLAC from June 1991 to August 1993; President of Rebuilding Service, Inc., until 1990 I-16 Norman P. Foster Executive Vice President, Corporate 59 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 David Halmrast Senior Vice President, Corporate 55 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 1992 Kerry W. Hand Senior Vice President, Home Office 42 Administration, of AFLAC Kenneth S. Janke Jr. Senior Vice President, Investor 36 Relations, of the Company since August 1993; Vice President, Investor Relations, of the Company, since 1990; Second Vice President, Investor Relations, of the Company until 1990 Akitoshi Kan Vice President, AFLAC Japan, Accounting 47 Department, since 1992; Manager, AFLAC Japan, Accounting Department, until 1992 Kyoichi Kasuya Vice President, AFLAC Japan, Actuary, 57 since 1992; General Manager, AFLAC Japan, Actuarial Department, until 1992 Joseph P. Kuechenmeister Senior Vice President, Director 53 of Marketing of AFLAC, since December 1990; Vice President, Agency Director of AFLAC, October 1990 until December 1990; Second Vice President, Director of Direct Product and Sales Development of AFLAC until October 1990 I-17 Joey M. Loudermilk Senior Vice President, General Counsel 41 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, from 1990 until May 1992; Senior Vice President, Corporate Counsel and Assistant Secretary of the Company and Senior Vice President, Director, Legal and Governmental Affairs of AFLAC, from August 1989 until 1990; Vice President of the Company, and Vice President, Legal and Regulatory Department of AFLAC, until August 1989 Hidefumi Matsui Executive Vice President of AFLAC Japan, 50 since January 1992; Senior Vice President, Director of Marketing of AFLAC Japan, from January 1990 until January 1992; Senior Vice President of AFLAC Japan, until January 1990 Minoru Nakai President of AFLAC International, Inc., 53 since October 1991; Senior Vice President, U.S.-Japan Operations, of AFLAC, until October 1991 Yoshiki Otake President of AFLAC Japan; Vice 55 Chairman of AFLAC International, Inc., since October 1991; Executive Vice President of AFLAC from January 1991 until October 1991 Thomas L. Paul President of AFLAC Broadcast Group, Inc.; 65 Vice President, Corporate Development, of the Company until 1993 E. Stephen Purdom Executive Vice President of AFLAC since 47 October 1994; Senior Vice President, Medical Director of AFLAC until October 1994 I-18 Joseph W. Smith, Jr. Chief Investment Officer of the Company 41 and AFLAC since August 1991; Senior Vice President, Investments of AFLAC, until August 1991 Gary L. Stegman Senior Vice President, Assistant Chief 45 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-19 PART II Pursuant to General Instruction G to Form 10-K, Items 5 through 8 are incorporated by reference from the Company's 1994 Annual Report to Shareholders, the appropriate sections of which are included herein as Exhibit 13. The page numbers of the selected information from the Annual Report (as well as the Annual Report) containing the required information are set forth below: Refer To Refer To Exhibit 13 Annual Report Pages Pages _ ___ ITEM 5. MARKET FOR THE COMPANY'S COMMON 13-1; 13-2; 1; 24; 46 (Note EQUITY AND RELATED SHAREHOLDER 13-43 9); and 50 MATTERS (Note 9) ITEM 6. SELECTED FINANCIAL DATA 13-3; 13-4 32 - 33 ITEM 7. MANAGEMENT'S DISCUSSION AND 13-5 to 25 - 31 ANALYSIS OF FINANCIAL CONDITION 13-18 AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND 13-19.1 to 34 - 50 SUPPLEMENTARY DATA 13-52 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 1995 Annual Meeting of Shareholders, which was filed with the Securities and Exchange Commission on March 10, 1995, 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 - 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. 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 Refer to 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 13-19.1 - each of the years in the three-year 13-19.2 period ended December 31, 1994 Consolidated Balance Sheets, at December 13-20.1 - 31, 1994 and 1993 13-20.2 Consolidated Statements of Shareholders' 13-21.1 - Equity, for each of the years in the 13-21.2 three-year period ended December 31, 1994 Consolidated Statements of Cash Flows, 13-22.1 - for each of the years in the three-year 13-22.2 period ended December 31, 1994 Notes to the Consolidated Financial 13-23 to Statements 13-49 Report of Independent Auditors 13-51 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, 1994 Schedule II - Condensed Financial Information of IV-7 - Registrant, at December 31, 1994 IV-12 and 1993 and for each of the years in the three-year period ended December 31, 1994 Schedule IV - Reinsurance, for each of the IV-13 years in the three-year period ended December 31, 1994 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. 10.2 - 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. 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. 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. IV-2 10.8 - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9 - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 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. 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. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the quarter ended December 31, 1994. IV-3 (c) EXHIBITS FILED WITH CURRENT FORM 10-K 10.3.1 - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.5 - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.8 - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9 - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 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. 27.0 - Financial Data Schedule (electronic filing only). * Management contract or compensatory plan or arrangement. IV-4 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Shareholders and Board of Directors AFLAC Incorporated: Under date of January 30, 1995, we reported on the consolidated balance sheets of AFLAC Incorporated and subsidiaries as of December 31, 1994 and 1993, 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, 1994, as contained in the 1994 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 1994. 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 30, 1995 IV-5 SCHEDULE I AFLAC INCORPORATED AND SUBSIDIARIES Summary of Investments - Other than Investments in Related Parties December 31, 1994 (In thousands) Amount in Fair Balance Type of Investment Cost Value Sheet ----------- ---------- --------- Fixed maturities available for sale: Bonds: United States Government and government agencies and authorities $ 373,215 $ 355,406 $ 355,406 States, municipalities and political subdivisions 806,036 839,346 839,346 Foreign governments 6,200,319 6,724,439 6,724,439 Public utilities 2,878,286 3,108,117 3,108,117 Convertibles 25,053 26,804 26,804 All other corporate bonds 4,426,911 4,476,582 4,476,582 ---------- ---------- ---------- Total fixed maturities available for sale 14,709,820 15,530,694 15,530,694 ---------- ---------- ---------- Equity securities: Common stocks: Public utilities 1,540 1,829 1,829 Banks, trusts and insurance companies 3,295 4,830 4,830 Industrial, miscellaneous and all other 66,750 77,714 77,714 ---------- ---------- ---------- Total equity securities 71,585 84,373 84,373 ---------- ---------- ---------- Total securities available for sale 14,781,405 15,615,067 15,615,067 Mortgage loans on real estate 25,104 29,104 25,104 Policy loans 1,202 1,202 1,202 Other long-term investments 3,836 3,836 3,836 Short-term investments 330,916 330,916 330,916 ---------- ---------- ---------- Total investments $15,142,463 $15,980,125 $15,976,125 ========== ========== ========== IV-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets AFLAC Incorporated (Parent Only) (In thousands) December 31, 1994 1993 ---------- ---------- Assets: Investments: Investments in subsidiaries $ 1,988,329 $ 1,489,961 Other investments: Money market funds 2,489 20,823 Mortgage loans and other 2,468 3,132 ---------- ---------- Total investments 1,993,286 1,513,916 Due from subsidiaries 9,574 6,674 Other receivables 4,851 6,472 Property and equipment, net 8,961 10,107 Other 267 1,924 ---------- ---------- Total assets 2,016,939 1,539,093 ========== ========== Liabilities and Shareholders' Equity: Liabilities: Cash overdraft 82 59 Due to subsidiaries 714 3,145 Notes payable (note A) 111,970 54,511 Employee and beneficiary benefit plans 117,145 84,445 Income taxes, primarily deferred 25,399 25,977 Other 9,862 5,332 Commitments and contingencies (note B) ---------- --------- Total liabilities 265,172 173,469 ---------- --------- Shareholders' equity: Common stock of $.10 par value: Authorized 175,000; issued 104,000 shares in 1994 and 103,710 shares in 1993 10,400 10,371 Additional paid-in capital 198,099 195,730 Unrealized foreign currency translation 174,091 123,294 Unrealized gains on equity securities 228,844 14,811 Retained earnings (note D) 1,277,487 1,029,625 Treasury stock (135,776) (6,568) Notes receivable for stock purchases (1,378) (1,639) ---------- ---------- Total shareholders' equity 1,751,767 1,365,624 ---------- ---------- Total liabilities and shareholders' equity $ 2,016,939 $ 1,539,093 ========== ========== * 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, 1994 1993 1992 ---------- ---------- ---------- Revenues: Dividends from subsidiaries $ 109,533 $ 71,268 $ 46,657 Management and service fees from subsidiaries 26,391 30,357 28,227 Other income from subsidiaries, principally rental and interest 683 992 828 Other income 1,327 (620) 693 --------- --------- --------- Total revenues 137,934 101,997 76,405 --------- --------- --------- Operating expenses: Interest expense - subsidiaries 22 162 293 Interest expense - others 6,070 3,362 2,743 Capitalized interest (2,419) (3,250) (1,333) Other operating expense 65,635 53,595 48,760 --------- --------- --------- Total operating expenses 69,308 53,869 50,463 --------- --------- --------- Earnings before income taxes, equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 68,626 48,128 25,942 Income tax expense (note C) 874 1,063 1,103 --------- --------- --------- Earnings before equity in undistributed earnings of subsidiaries and cumulative effect of accounting changes 67,752 47,065 24,839 Equity in undistributed earnings of subsidiaries 225,038 196,824 158,528 --------- --------- --------- Earnings before cumulative effect of accounting changes 292,790 243,889 183,367 Cumulative affect on prior years of accounting changes (including a $46,100 credit related to subsidiaries) (note F) - 11,438 - --------- --------- --------- Net earnings $ 292,790 $ 255,327 $ 183,367 ========= ========= ========= * 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, 1994 1993 1992 ---------- ---------- ---------- Cash flows from operating activities: Net earnings $ 292,790 $ 255,327 $ 183,367 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 (225,038) (196,824) (158,528) Deferred income taxes (578) (300) 1,103 Employee and beneficiary benefit plans 32,700 18,195 12,659 Other, net 4,307 190 8,020 --------- --------- --------- Net cash provided by operating activities 104,181 65,150 46,621 --------- --------- --------- Cash flows from investing activities: Additions to property and equipment, net - (75) (1,368) Cost of other investments 18,998 (14,703) (9,301) Additional capitalization of subsidiaries (3,592) - (10,430) --------- --------- --------- Net cash used by investing activities 15,406 (14,778) (21,099) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings/assumption of subsidiary debt 84,000 - 11,300 Proceeds from exercise of stock options 2,163 6,975 7,534 Principal payments under debt obligations (26,541) (11,419) (3,598) Dividends paid to shareholders (44,928) (40,057) (35,283) Net increase in amount due to/from subsidiaries (5,331) (3,866) (2,338) Purchases of treasury stock (131,734) (1,325) (3,067) Treasury stock reissued 2,761 - - Other, net - (1,072) --------- --------- --------- Net cash used by financing activities (119,610) (50,764) (25,452) --------- --------- --------- Net change in cash (23) (392) 70 Cash (overdraft) at beginning of year (59) 333 263 --------- --------- --------- Cash (overdraft) at end of year $ (82) $ (59) $ 333 ========= ========= ========= 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, 1994 and 1993 follows: (In thousands) 1994 1993 -------- -------- 6.63% short-term note payable to bank under unsecured line of credit, due January 13, 1995. $ 9,000 $ - Unsecured note payable to bank under revolving credit and term-loan agreement, variable interest rate, due in quarterly installments, beginning June 1995 through March 2000......... 50,000 - 5.965% unsecured note payable to banks, due in semiannual installments beginning October 1995 through 1997...................... 49,000 49,000 8.3% note payable, due in monthly installments through 1997, secured by equipment........................... 3,970 5,511 ------- ------- Total notes payable $111,970 $ 54,511 ======= ======= The aggregate maturities of the notes payable for each of the five years after December 31, 1994, are as follows: (In thousands) 1995............................................ $ 28,007 1996............................................ 31,485 1997............................................ 29,978 1998............................................ 10,000 1999............................................ 10,000 Thereafter...................................... 2,500 IV-10 (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 $32,277,779 as of December 31, 1994, and are not included in the accompanying condensed balance sheet. In addition, the Parent Company has also guaranteed repayment of bank borrowings by its subsidiary, AFLAC. The related outstanding loan balance at December 31, 1994, was $1,400,000. The Company has also guaranteed to AFLAC repayment of intercompany borrowings from affiliates, which approximated $650,198 at December 31, 1994. (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. Management does not agree with the proposed tax issues and is vigorously contesting them. Although the final outcome is uncertain, the Company believes 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 13-40, Note 8 of the Notes to the Consolidated Financial Statements. (D) DIVIDEND RESTRICTIONS See Exhibit 13, pages 13-45 and 13-46 (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) 1994 1993 1992 -------- -------- -------- Cash payments during the year for: Interest on debt obligations $ 6,302 $ 3,588 $ 2,781 Income taxes 400 - 139 In 1993, non-cash investing activities included issuance of common stock for purchase of a company amounting to $8,730,381. For further information see Note 9, Other, page 13-43 of Exhibit 13. IV-11 (F) ACCOUNTING CHANGES For information concerning the cumulative affect of new accounting standards adopted in 1994 and 1993, see page 13-25 of Exhibit 13, Note 1, section on Accounting Changes Adopted, of Notes to the Consolidated Financial Statements. IV-12

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 28, 1995 By /s/ PAUL S. AMOS ------------------------ ----------------------------- (Paul S. Amos) Chairman of the Board 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 28, 1995 - ------------------------ President and Vice ----------------- (Daniel P. Amos) Chairman Board of Directors /s/ KRISS CLONINGER, III Executive Vice President, MARCH 28, 1995 - ------------------------ Chief Financial Officer ----------------- (Kriss Cloninger, III) and Treasurer /s/ NORMAN P. FOSTER Executive Vice President, MARCH 28, 1995 - ------------------------ Corporate Finance ----------------- (Norman P. Foster) IV-14 /s/ J. SHELBY AMOS, II Director MARCH 28, 1995 - ------------------------------ ----------------- (J. Shelby Amos, II) Director March 28, 1995 - ------------------------------ ----------------- (Michael H. Armacost) /s/ M. DELMAR EDWARDS, M.D. Director MARCH 28, 1995 - ------------------------------ ----------------- (M. Delmar Edwards, M.D.) /s/ GEORGE W. FORD, JR. Director MARCH 28, 1995 - ------------------------------ ----------------- (George W. Ford, Jr.) /s/ CESAR E. GARCIA Director MARCH 28, 1995 - ------------------------------ ----------------- (Cesar E. Garcia) /s/ JOE FRANK HARRIS Director MARCH 28, 1995 - ------------------------------ ----------------- (Joe Frank Harris) Director MARCH 28, 1995 - ------------------------------ ----------------- (Elizabeth J. Hudson) /s/ KENNETH S. JANKE, SR. Director MARCH 28, 1995 - ------------------------------ ----------------- (Kenneth S. Janke, Sr.) IV-15 /s/ CHARLES B. KNAPP Director MARCH 28, 1995 - ------------------------------ ----------------- (Charles B. Knapp) /s/ HISAO KOBAYASHI Director MARCH 28, 1995 - ------------------------------ ----------------- (Hisao Kobayashi) /s/ PETER D. MORROW Director MARCH 28, 1995 - ------------------------------ ----------------- (Peter D. Morrow) Director MARCH 28, 1995 - ------------------------------ ----------------- (Yoshiki Otake) /s/ JOHN M. POPE Director MARCH 28, 1995 - ------------------------------ ----------------- (John M. Pope) /s/ E. STEPHEN PURDOM, M.D. Director MARCH 28, 1995 - ------------------------------ ----------------- (E. Stephen Purdom, M.D.) /s/ HENRY C. SCHWOB Director MARCH 28, 1995 - ------------------------------ ----------------- (Henry C. Schwob) /s/ J. KYLE SPENCER Director MARCH 28, 1995 - ------------------------------ ----------------- (J. Kyle Spencer) /s/ GLENN VAUGHN, JR. Director MARCH 28, 1995 - ------------------------------ ----------------- (Glenn Vaughn, Jr.) IV-16 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. 10.2 - 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. 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. 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. (i) 10.8 - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9 - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 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. 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. Exhibits Filed with Current Form 10-K: 10.3.1 - AFLAC Incorporated Supplemental Executive Retirement Plan, as amended, effective September 1, 1993. 10.5 - American Family Life Assurance Company of Columbus Employment Agreement with Yoshiki Otake, dated January 1, 1995. 10.8 - American Family Life Assurance Company of Columbus Employment Agreement with Hidefumi Matsui, dated January 1, 1995. 10.9* - American Family Life Assurance Company of Columbus Employment Agreement with Dr. E. Stephen Purdom, dated October 25, 1994. 13.0 - Selected information from the AFLAC Incorporated Annual Report to Shareholders for 1994. 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. 27.0 - Financial Data Schedule (electronic filing only). * Management contract or compensatory plan or agreement. (ii)