-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FcYOUkB9tQY2Wf6xsbBo+zDKDEbgiXW6UdarGGwHBo19zDymH4TlcunNGXgTTMI5 0u7dEBPuVdeYbKH/2bV0/w== 0000004977-01-500058.txt : 20010510 0000004977-01-500058.hdr.sgml : 20010510 ACCESSION NUMBER: 0000004977-01-500058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFLAC INC CENTRAL INDEX KEY: 0000004977 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 581167100 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07434 FILM NUMBER: 1626791 BUSINESS ADDRESS: STREET 1: 1932 WYNNTON RD CITY: COLUMBUS STATE: GA ZIP: 31999 BUSINESS PHONE: 7063233431 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY CORP DATE OF NAME CHANGE: 19920306 10-Q 1 q301edg.txt 1ST QUARTER 2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarter ended March 31, 2001 Commission File No. 1-7434 AFLAC INCORPORATED ------------------------------------------------------ GEORGIA 58-1167100 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1932 WYNNTON ROAD, COLUMBUS, GEORGIA 31999 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code (706) 323-3431 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class May 4, 2001 - ---------------------------- ------------------ Common Stock, $.10 Par Value 525,812,832 shares AFLAC INCORPORATED AND SUBSIDIARIES INDEX Page No. ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001 and December 31, 2000. . . . . . . . . . 1 Consolidated Statements of Earnings - Three Months Ended March 31, 2001 and 2000 . . . . . . . 3 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2001 and 2000 . . . . . . . 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 . . . . . . . 5 Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2001 and 2000 . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . 8 Review by Independent Auditors . . . . . . . . . . . . . . 16 Independent Auditors' Review Report. . . . . . . . . . . . 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . 32 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 36 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . 37 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 38 Items other than those listed above are omitted because they are not required or are not applicable. i Part I. Financial Information AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (In millions) March 31, December 31, 2001 2000 (Unaudited) ------------ ------------ Assets: Investments and cash: Securities available for sale, at fair value: Fixed maturities (amortized cost $18,634 in 2001 and $20,405 in 2000) $ 21,696 $ 22,172 Perpetual debentures (amortized cost $2,668 in 2001 and $2,347 in 2000) 2,757 2,046 Equity securities (cost $139 in 2001 and $161 in 2000) 176 236 Securities held to maturity, at amortized cost: Fixed maturities (fair value $4,142 in 2001 and $3,702 in 2000) 3,915 3,645 Perpetual debentures (fair value $3,261 in 2001 and $3,323 in 2000) 3,131 3,442 Other investments 17 17 Cash and cash equivalents 1,075 609 -------- -------- Total investments and cash 32,767 32,167 Receivables, primarily premiums 324 301 Accrued investment income 316 380 Deferred policy acquisition costs 3,559 3,685 Property and equipment, at cost less accumulated depreciation 463 481 Other 212 218 -------- -------- Total assets $ 37,641 $ 37,232 ======== ======== See the accompanying Notes to Consolidated Financial Statements. (continued) 1 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions, except for share and per-share amounts) March 31, December 31, 2001 2000 (Unaudited) ------------ ------------ Liabilities and Shareholders' Equity: Liabilities: Policy liabilities: Future policy benefits $ 25,515 $ 26,114 Unpaid policy claims 1,704 1,745 Unearned premiums 360 361 Other policyholders' funds 383 346 -------- -------- Total policy liabilities 27,962 28,566 Notes payable 1,035 1,079 Income taxes 2,199 1,894 Payables for return of cash collateral on loaned securities 248 127 Payable for security transactions 169 - Other 810 872 -------- -------- Total liabilities 32,423 32,538 -------- -------- Shareholders' equity: Common stock of $.10 par value. In thousands: authorized 1,000,000 shares; issued 645,605 shares in 2001 and 644,813 shares in 2000 65 32 Additional paid-in capital 312 336 Retained earnings 4,112 3,956 Accumulated other comprehensive income: Unrealized foreign currency translation gains 200 194 Unrealized gains on investment securities 1,980 1,474 Unrealized gains (losses) on derivatives (1) - Treasury stock, at average cost (1,450) (1,298) -------- -------- Total shareholders' equity 5,218 4,694 -------- -------- Total liabilities and shareholders' equity $ 37,641 $ 37,232 ======== ======== Shareholders' equity per share $ 9.93 $ 8.87 ======== ======== See the accompanying Notes to Consolidated Financial Statements. Share and per-share amounts have been restated to reflect the two-for-one stock split distributed March 16, 2001. 2 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings (In millions, except for share and Three Months Ended March 31, per-share amounts - Unaudited) ---------------------------- 2001 2000 -------- -------- Revenues: Premiums, principally supplemental health insurance $ 2,029 $ 2,020 Net investment income 382 376 Realized investment losses (1) (2) Other income 11 4 ------- ------- Total revenues 2,421 2,398 ------- ------- Benefits and expenses: Benefits and claims 1,606 1,620 Acquisition and operating expenses: Amortization of deferred policy acquisition costs 80 69 Insurance commissions 250 255 Insurance expenses 184 189 Interest expense 5 5 Other operating expenses 22 17 ------- ------- Total acquisition and operating expenses 541 535 ------- ------- Total benefits and expenses 2,147 2,155 ------- ------- Earnings before income taxes 274 243 Income taxes 96 87 ------- ------- Net earnings $ 178 $ 156 ======= ======= Net earnings per share: Basic $ .34 $ .29 Diluted .33 .29 ======= ======= Shares used in computing earnings per share (In thousands): Basic 528,180 531,199 Diluted 541,767 544,523 ======= ======= Cash dividends per share $ .043 $ .038 ======= ======= See the accompanying Notes to Consolidated Financial Statements. Share and per-share amounts have been restated to reflect the two-for-one stock split distributed March 16, 2001. 3 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions, except for per-share amounts - Unaudited) Three Months Ended March 31, ---------------------------- 2001 2000 ------ ------ Common Stock: Balance at beginning of period $ 32 $ 32 Exercise of stock options 1 - Two-for-one stock split 32 - ------ ------ Balance at end of period 65 32 ------ ------ Additional paid-in capital: Balance at beginning of period 336 310 Exercise of stock options 2 7 Gain on treasury stock reissued 6 3 Two-for-one stock split (32) - ------ ------ Balance at end of period 312 320 ------ ------ Retained earnings: Balance at beginning of period 3,956 3,356 Net earnings 178 156 Dividends to shareholders ($.043 per share in 2001 and $.038 in 2000) (22) (19) ------ ------ Balance at end of period 4,112 3,493 ------ ------ Accumulated other comprehensive income: Balance at beginning of period 1,668 1,264 Change in unrealized foreign currency translation gains (losses) during period, net of income taxes 6 (51) Change in unrealized gains (losses) on investment securities during period, net of income taxes 505 176 ------ ------ Balance at end of period 2,179 1,389 ------ ------ Treasury stock: Balance at beginning of period (1,298) (1,094) Purchases of treasury stock (162) (81) Cost of shares issued 10 8 ------ ------ Balance at end of period (1,450) (1,167) ------ ------ Total shareholders' equity $ 5,218 $ 4,067 ====== ====== See the accompanying Notes to Consolidated Financial Statements. Per-share amounts have been restated to reflect the two-for-one stock split distributed March 16, 2001. 4 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions - Unaudited) Three Months Ended March 31, 2001 2000 ------ ------ Cash flows from operating activities: Net earnings $ 178 $ 156 Adjustments to reconcile net earnings to net cash provided by operating activities: Increase in policy liabilities 640 688 Deferred income taxes 39 38 Change in income taxes payable 327 147 Increase in deferred policy acquisition costs (76) (81) Change in receivables and advance premiums 38 12 Realized investment and derivative (gains) losses (2) 2 Other, net 137 (53) ------ ------ Net cash provided by operating activities 1,281 909 ------ ------ Cash flows from investing activities: Proceeds from investments sold or matured: Securities available for sale: Fixed maturities sold 618 207 Fixed maturities matured 150 121 Equity securities 58 15 Other investments, net - (1) Costs of investments acquired: Securities available for sale: Fixed maturities (960) (1,377) Perpetual debentures (509) (1) Equity securities (24) (27) Cash received as collateral on loaned securities, net 137 340 Additions to property and equipment, net (16) (1) Other, net (3) - ------ ------ Net cash used by investing activities $ (549) $ (724) ------ ------ See the accompanying Notes to Consolidated Financial Statements. (continued) 5 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In millions - Unaudited) Three Months Ended March 31, 2001 2000 ------ ------ Cash flows from financing activities: Principal payments under debt obligations $ (3) $ (4) Dividends paid to shareholders (21) (18) Purchases of treasury stock (162) (81) Treasury stock reissued 13 6 Other, net 1 7 ------ ------ Net cash used by financing activities (172) (90) ------ ------ Effect of exchange rate changes on cash and cash equivalents (94) (19) ------ ------ Net change in cash and cash equivalents 466 76 Cash and cash equivalents, beginning of period 609 616 ------ ------ Cash and cash equivalents, end of period $ 1,075 $ 692 ====== ====== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest paid $ 2 $ 3 Income taxes paid 1 - Impairment loss on available-for-sale security 42 - Noncash financing activities: Capital lease obligations 5 4 Treasury shares issued to AFL stock plan for: Shareholder dividend reinvestment 1 1 Associates stock bonus 3 4 See the accompanying Notes to Consolidated Financial Statements. 6 AFLAC INCORPORATED AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In millions - Unaudited) Three Months Ended March 31, 2001 2000 ------ ------ Net earnings $ 178 $ 156 ------ ------ Other comprehensive income, before income taxes: Change in unrealized foreign currency translation gains (losses) arising during the period 61 32 Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during the period 697 232 Reclassification adjustment for realized (gains) losses included in net earnings 1 2 Change in unrealized holding gains (losses) on derivatives arising during the period (1) - ------ ------ Total other comprehensive income, before income taxes 758 266 Income tax expense related to items of other comprehensive income 247 141 ------ ------ Other comprehensive income, net of income taxes 511 125 ------ ------ Total comprehensive income $ 689 $ 281 ====== ====== See the accompanying Notes to Consolidated Financial Statements. 7 AFLAC INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements of AFLAC Incorporated and subsidiaries (the "Company") contain all adjustments necessary to fairly present the consolidated balance sheet as of March 31, 2001, and the consolidated statements of earnings, cash flows, shareholders' equity and comprehensive income for the three month periods ended March 31, 2001 and 2000. Results of operations for interim periods are not necessarily indicative of results for the entire year. We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). These principles are established primarily by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. The preparation of financial statements in conformity with GAAP requires us to make estimates when recording transactions resulting from business operations, based on information currently available. The most significant items on our balance sheet that involve a greater degree of accounting estimates and actuarial determinations subject to changes in the future are: deferred policy acquisition costs and liabilities for future policy benefits and unpaid policy claims. As additional information becomes available (or actual amounts are determinable), the recorded estimates will be revised and reflected in operating results. Although some variability is inherent in these estimates, we believe the amounts provided are adequate. The financial statements should be read in conjunction with the financial statements included in our annual report to shareholders for the year ended December 31, 2000. Certain prior-year amounts have been reclassified to conform to the current-year presentation. 2. Accounting Pronouncements We adopted Statement of Financial Accounting Standards (SFAS) No. 133 as amended, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in investment securities and other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative is included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. This standard changed the accounting for our interest rate swaps and the interest component of the cross-currency swaps. In accordance with SFAS No. 133, we are required to recognize in net earnings the change in unrealized gains/losses on the interest component of our cross-currency swaps. Unrealized gains and losses in the fair value of our interest rate swaps will be reflected in accumulated other comprehensive income. 8 The cumulative transition effect of adopting this new accounting standard as of January 1, 2001, was immaterial. As a result of applying this new standard during the three months ended March 31, 2001, pretax earnings increased by $3 million for the change in fair value of the interest component of our cross-currency swaps, and accumulated other comprehensive income decreased by $1 million for the change in fair value of our interest rate swaps. See Note 5 for additional information on our derivative and nonderivative financial instruments. 3. Segment Information Information regarding components of operations for the three months ended March 31 follows: (In millions) 2001 2000 -------- -------- Revenues: AFLAC Japan: Earned premiums $ 1,591 $ 1,646 Net investment income 305 306 Other income (1) - ------- ------- Total AFLAC Japan revenues 1,895 1,952 ------- ------- AFLAC U.S.: Earned premiums 439 374 Net investment income 73 67 Other income 1 1 ------- ------- Total AFLAC U.S. revenues 513 442 ------- ------- Other business segments 8 6 ------- ------- Total business segments 2,416 2,400 Realized investment and derivative gains (losses) 2 (2) Corporate* 9 8 Intercompany eliminations (6) (8) ------- ------- Total revenues $ 2,421 $ 2,398 ======= ======= Earnings before income taxes: AFLAC Japan $ 204 $ 188 AFLAC U.S. 81 70 ------- ------- Total business segments 285 258 Realized investment and derivative gains (losses) 1 (2) Interest expense, noninsurance operations (4) (4) Corporate* (8) (9) ------- ------- Total earnings before income taxes $ 274 $ 243 ======= ======= *Includes investment income of $4 in 2001 and $3 in 2000. 9 Assets were as follows: March 31, December 31, (In millions) 2001 2000 ------------ ----------- Assets: AFLAC Japan $ 32,139 $ 31,882 AFLAC U.S. 5,247 4,964 Other business segments 78 46 -------- -------- Total business segments 37,464 36,892 Corporate 6,450 5,993 Intercompany eliminations (6,273) (5,653) -------- -------- Total assets $ 37,641 $ 37,232 ======== ======== 4. Notes Payable A summary of notes payable is as follows: March 31, December 31, (In millions) 2001 2000 ---------- ----------- 6.50% senior notes due April 2009 (principal amount $450) $ 449 $ 449 1.55% yen-denominated Samurai notes due October 2005 (principal amount 30 billion yen) 242 261 Unsecured, yen-denominated notes payable to banks: Reducing revolving credit agreement, due July 2001: 2.29% fixed interest rate 91 99 Variable interest rate (.83% at March 31, 2001) 13 14 Revolving credit agreement, due November 2002: 1.24% fixed interest rate 63 68 Variable interest rate (.78% at March 31, 2001) 146 157 Obligations under capitalized leases payable monthly through 2005, secured by computer equipment in Japan 31 31 ------ ------ Total notes payable $ 1,035 $ 1,079 ====== ====== For those loans denominated in yen, the principal amount of the loans as stated in dollar terms will fluctuate from period to period due to changes in the yen/dollar exchange rate. In September 2000, we filed a shelf registration statement with Japanese regulatory authorities to issue up to 100 billion yen of yen- denominated Samurai notes. These securities are not for sale to United States residents or entities. In October 2000, we issued in Japan 30 billion yen of 1.55% Samurai notes due October 2005 ($242 million using the March 31, 2001 exchange rate). These notes are redeemable at our option at any time with a redemption price equal to the principal amount of the notes being redeemed plus a premium. 10 In April 1999, we issued $450 million of 6.50% senior notes, due April 2009. The current outstanding balance after discount is $449 million. The notes are redeemable at our option at any time with a redemption price equal to the principal amount of the notes being redeemed plus a make-whole amount. We have entered into cross-currency swaps that have the effect of converting the dollar-denominated principal and interest into yen- denominated obligations (see Note 5). We have an unsecured reducing, revolving credit agreement that provides for bank borrowings through July 2001 in either U.S. dollars or Japanese yen. The current borrowing limit is $125 million. The debt is currently payable in Japanese yen. At March 31, 2001, 11.4 billion yen ($91 million) was outstanding at a fixed interest rate and 1.6 billion yen ($13 million) was outstanding at a variable interest rate under this agreement. We also have an unsecured revolving credit agreement that provides for bank borrowings through November 2002 in either U.S. dollars or Japanese yen. The current borrowing limit is $250 million. The debt is currently payable in Japanese yen. At March 31, 2001, 7.8 billion yen ($63 million) was outstanding at a fixed interest rate and 18.1 billion yen ($146 million) was outstanding at a variable interest rate under this agreement. At March 31, 2001, we had outstanding interest rate swaps on 19.1 billion yen ($154 million) of our variable-interest-rate yen-denominated borrowings (see Note 5). 5. Financial Instruments We have only limited activity with derivative financial instruments. We do not use them for trading purposes, nor do we engage in leveraged derivative transactions. Our risk management objectives are to minimize the exposure of our shareholders' equity to foreign currency translation fluctuations and also reduce our interest expense by converting the dollar- denominated principal and interest into yen-denominated obligations. We currently use two types of derivatives: interest rate swaps and cross- currency swaps. Derivative Hedging Instruments We have cross-currency swaps outstanding related to our $450 million senior notes (see Note 4). These cross-currency swaps have the effect of converting the dollar-denominated principal and interest into yen- denominated obligations. Our interest expense is reduced from 6.50% to 1.67%. The notional amount and terms of the swaps match the principal amount and terms of the senior notes. The cross-currency swaps have been designated as a hedge of the foreign currency exposure of our net investment in AFLAC Japan. The fair value of the cross-currency swaps includes three components: the effect of changes in foreign currency exchange rates, the accrued interest at the valuation date, and the effect of changes in interest rates. The currency portion of our cross-currency swaps is included at fair value in other assets at $2 million as of March 31, 2001, and in other liabilities at $34 million at December 31, 2000. The related $36 million increase in fair value during the three months ended March 31, 2001 11 (a $19 million increase during the three months ended March 31, 2000) is reflected in accumulated other comprehensive income - unrealized foreign currency translation gains (losses). The ineffective portion of the hedge instrument is the fair value of the interest components of the cross-currency swaps. At March 31, 2001, the accrued interest receivable was $10 million. The balance was $4 million at December 31, 2000. The change in the accrued interest receivable is included in interest expense. The increase in fair value related to changes in interest rates ($3 million) is reflected in other assets and other income. The fair value of the interest components, not related to accrued interest, was not reflected in the financial statements prior to January 1, 2001. At March 31, 2001, we had outstanding interest rate swaps on 19.1 billion yen ($154 million) of our variable-interest-rate yen-denominated borrowings (Note 4). These swaps reduce the impact of changes in interest rates on our borrowing costs and effectively change our interest rate from variable to fixed. The interest rate swaps have notional principal amounts that equal the anticipated unpaid principal amounts on a portion of these loans. After the effect of these swap agreements, we make fixed-rate payments at 2.29% on one loan and 1.24% on another loan and receive floating-rate payments (.13% at March 31, 2001, plus loan costs of 25 and 20 basis points, respectively) based on three-month Japanese yen LIBOR. The terms of these swap agreements expire in July 2001 and November 2002. For additional information on the credit agreements, see Note 4. Our risk management objective is to fix the net interest cash outflows on a portion of our debt obligations. We have designated these interest rate swaps as a cash flow hedge of our exposure to the variability in future cash flows attributable to the variable interest payments due. These interest rate swaps are included in other liabilities at a fair value of $1 million at March 31, 2001, and the change in such fair value during the three months ended March 31, 2001 is reflected in accumulated other comprehensive income. The fair value of the interest rate swaps was not reflected in the financial statements prior to January 1, 2001. For additional information on the adoption of SFAS No. 133 and our accounting for derivatives, see Note 2. Nonderivative Hedging Instruments The following yen-denominated debt instruments (see Note 4) have been designated as hedges of the foreign currency exposure of our net investment in AFLAC Japan - the 1.55% Samurai notes due October 2005, principal amount 30.0 billion yen; the reducing, revolving credit agreement due July 2001, currently payable in Japanese yen, principal amount 12.9 billion yen; and the unsecured, revolving credit agreement due November 2002, currently payable in Japanese yen, principal amount 25.8 billion yen. Other Nonderivatives We lend fixed-maturity securities to financial institutions in short- term security lending transactions. These securities continue to be carried as investment assets on our balance sheet during the term of the loans and are not recorded as sales. We receive cash or other securities as 12 collateral for such loans. These short-term security lending arrangements increase investment income with minimal risk. At March 31, 2001, and December 31, 2000, we had security loans outstanding in the amounts of $243 million and $123 million at fair value, respectively. At March 31, 2001, and December 31, 2000, we held cash in the amount of $248 million and $127 million, respectively, as collateral for loaned securities. For loans involving unrestricted cash collateral, the collateral is recorded as an asset with a corresponding liability for the return of the collateral. For loans collateralized by securities, the collateral is not recorded as an asset or liability. Our security lending policy requires that the fair value of the securities received as collateral and cash received as collateral be 102% and 100% or more, respectively, of the fair value of the loaned securities as of the date the securities are loaned and not less than 100% thereafter. 6. Investment Securities Realized Investment Gains and Losses In March 2001, we recognized a pretax impairment loss of $42 million in realized investment gains and losses on the corporate debt securities of a U.S. issuer, which experienced a significant credit rating downgrade during the first quarter of 2001. These debt securities are carried in the available-for-sale category. We also executed several bond sales and purchase transactions during the first quarter in an effort to increase investment income and extend investment maturities. The sales of these debt securities resulted in pretax realized investment gains of $21 million. Also, in the first quarter of 2001, we realized a pretax investment gain of $18 million related to the sale of a portion of our U.S. equity securities portfolio in connection with a change in outside investment managers. Unrealized Investment Gains and Losses The unrealized gains and losses on debt securities, less amounts applicable to policy liabilities and deferred income taxes, are reported in accumulated other comprehensive income. The portion of unrealized gains credited to policy liabilities represents gains that would not inure to the benefit of our shareholders if such gains were actually realized. 13 The net effect on shareholders' equity of unrealized gains and losses from investment securities at the following dates was: (In millions) March 31, December 31, 2001 2000 ------------ ------------ Unrealized gains on securities available for sale $ 3,188 $ 1,541 Unamortized unrealized gains on securities transferred to held to maturity 693 1,001 Less: Policy liabilities 643 - Deferred income taxes 1,258 1,068 --------- --------- Shareholders' equity, net unrealized gains on investment securities $ 1,980 $ 1,474 ========= ========= As of March 31, 2001, new Japanese accounting principles and regulatory requirements became effective, which impact investment classifications and solvency margin calculations on a Japanese accounting basis. As a result of these new regulatory requirements, we re-evaluated AFLAC Japan's investment portfolio and our holding period intent related to certain investment securities. In order to minimize future unfavorable solvency margin results under the new Japanese accounting methods, debt securities with amortized cost of $1.8 billion were reclassified from the held-to-maturity category to the available-for-sale category as of March 31, 2001. The related unamortized unrealized gain, included in accumulated other comprehensive income immediately prior to the transfer, was $327 million. We also reclassified debt securities with a fair value of $2.3 billion from the available-for-sale category to the held-to-maturity category as of March 31, 2001. The related unrealized gain of $118 million is being amortized from accumulated other comprehensive income to investment income over the remaining term of the securities. The related premium in the carrying value of the debt securities that was created when the reclassification occurred is also being amortized as an offsetting charge to investment income. 14 7. Common Stock The following is a reconciliation of the number of shares of our common stock for the three months ended March 31: 2001 2000 (In thousands of shares) ---------- ---------- Common stock - issued: Balance at beginning of year 644,813 640,698 Exercise of stock options 792 2,292 -------- -------- Balance at end of period 645,605 642,990 -------- -------- Treasury stock: Balance at beginning of year 115,603 109,216 Purchases of treasury stock: Open market 5,387 4,087 Other 165 95 Shares issued to AFL Stock Plan (460) (458) Exercise of stock options (332) (316) -------- -------- Balance at end of period 120,363 112,624 -------- -------- Shares outstanding at end of period 525,242 530,366 ======== ======== On February 13, 2001, the board of directors declared a two-for-one stock split, consisting of 323 million shares, payable to shareholders of record at the close of business on February 27, 2001. The stock split was distributed on March 16, 2001. Share and per-share amounts have been retroactively adjusted to reflect this split. 8. Litigation We are a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows. 15 REVIEW BY INDEPENDENT AUDITORS The March 31, 2001, and 2000, financial statements included in this filing have been reviewed by KPMG LLP, independent auditors, in accordance with established professional standards and procedures for such a review. The report of KPMG LLP commenting upon their review is included on page 17. 16 KPMG LLP Certified Public Accountants 303 Peachtree Street, N.E. Telephone: (404) 222-3000 Suite 2000 Telefax: (404) 222-3050 Atlanta, GA 30308 INDEPENDENT AUDITORS' REVIEW REPORT The shareholders and board of directors AFLAC Incorporated: We have reviewed the consolidated balance sheet of AFLAC Incorporated and subsidiaries as of March 31, 2001, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for the three-month periods ended March 31, 2001, and 2000. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying consolidated balance sheet of AFLAC Incorporated and subsidiaries as of December 31, 2000, and the related consolidated statements of earnings, shareholders' equity, cash flows and comprehensive income for the year then ended (not presented herein); and in our report dated January 26, 2001, we expressed an unqualified opinion on those financial statements. KPMG LLP Atlanta, GA April 24, 2001 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AFLAC Incorporated is the parent company of American Family Life Assurance Company of Columbus, AFLAC. Our principal business is supplemental health and life insurance, which is marketed and administered through AFLAC. Most of AFLAC's policies are individually underwritten and marketed at worksites through independent agents, with premiums paid by the employee. Our operations in Japan (AFLAC Japan) and the United States (AFLAC U.S.) service the two markets for our insurance business. On February 13, 2001, the board of directors declared a two-for-one stock split, effectively increasing the numbers of issued and outstanding shares by 100%. All share and per-share amounts have been restated for the split. RESULTS OF OPERATIONS The following table sets forth the results of operations by business segment for the periods shown. SUMMARY OF OPERATING RESULTS BY BUSINESS SEGMENT (In millions, except for per-share amounts) Three Months Ended March 31, -------------------------------------- Percentage Change 2001 2000 ----------------- ------------------ Operating earnings: AFLAC Japan. . . . . . . . . . . . 8.1% $ 204 $ 188 AFLAC U.S. . . . . . . . . . . . . 16.7 81 70 ----- ----- Total business segments. . . . . 10.5 285 258 Interest expense, noninsurance operations. . . . . (4.8) (4) (4) Corporate and eliminations . . . . 2.5 (8) (8) ----- ----- Pretax operating earnings. . . . 11.0 273 246 Income taxes . . . . . . . . . . . 10.4 96 87 ----- ----- Operating earnings . . . . . . . 11.4 177 159 Nonoperating items: Derivative gains (losses), net of tax 3 - Realized investment gains (losses), net of tax . . . . . . (2) (3) ----- ----- Net earnings . . . . . . . . . . 14.0 $ 178 $ 156 ===== ===== Operating earnings per basic share . 10.0 $ .33 $ .30 Operating earnings per diluted share 13.8 .33 .29 ===== ===== Net earnings per basic share . . . . 17.2 $ .34 $ .29 Net earnings per diluted share . . . 13.8 .33 .29 ===== ===== ============================================================================ 18 The following discussion of earnings comparisons focuses on operating earnings and excludes realized investment and derivative gains/losses. Operating earnings per share amounts referenced in the following discussion are based on the diluted number of average outstanding shares and retroactively reflect the two-for-one stock split distributed March 16, 2001. For the first quarter of 2001, the weakening yen, or strengthening dollar, will mask our true operating performance. Our business, in functional currency terms, continues to be strong, and we believe it is more appropriate to measure our performance excluding the effect of the yen in order to understand the basic operating results of the business. FOREIGN CURRENCY TRANSLATION Due to the relative size of AFLAC Japan, fluctuations in the yen/dollar exchange rate can have a significant effect on our reported results. In years when the yen weakens, translating yen into dollars causes fewer dollars to be reported. When the yen strengthens, translating yen into dollars causes more dollars to be reported. The following table illustrates the effect of foreign currency translation by comparing our reported operating results with those that would have been reported had foreign currency rates remained unchanged from the comparable period in the prior year. AFLAC Incorporated and Subsidiaries Foreign Currency Translation Effect on Operating Results Three Months Ended March 31, 2001 Including Excluding Currency Currency Percentage changes over previous year Changes Changes* - ------------------------------------- ----------- ----------- Premium income .5% 8.6% Net investment income 1.5 7.4 Operating revenues .8 8.5 Total benefits and expenses (.4) 7.7 Operating earnings 11.4 16.1 Operating earnings per diluted share 13.8 17.2 - ---------------------------------------------------------------------------- *Amounts excluding foreign currency changes were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. ============================================================================ The yen weakened in relation to the dollar during 2000 and the first quarter of 2001 after a period of strengthening beginning in 1998. The average yen-to-dollar exchange rates were 118.14 and 107.13 for the three months ended March 31, 2001 and 2000, respectively. The weakening of the yen in 2001 decreased operating earnings by approximately $.01 per share for the three months ended March 31, 2001. Operating earnings per share increased 13.8% to $.33 for the three-month period ended March 31, 2001, compared with the same period in 2000. Operating earnings per share, excluding the effect of foreign currency translation, increased 17.2%, to $.34 for the quarter ended March 31, 2001 compared with the same period in 2000. 19 Our primary financial objective is the growth of operating earnings per share excluding the effect of foreign currency fluctuations. Our objective for 2001 and 2002 is to increase operating earnings per share by 15% to 17% excluding the impact of currency translation. We expect to achieve the high end of our objective for 2001. If we achieve a 17% increase, the following table shows the likely results for operating earnings per share in 2001 using various yen-to-dollar exchange rate scenarios. 2001 Operating EPS Scenarios ---------------------------- Annual Average Yen Annual Operating % Growth Yen Impact Exchange Rate Diluted EPS Over 2000 on EPS ------------- ---------------- --------- ---------- 100.00 $ 1.45 20.8% $ .05 105.00 1.42 18.3 .02 107.83* 1.40 16.7 - 110.00 1.39 15.8 (.01) 115.00 1.36 13.3 (.04) 120.00 1.33 10.8 (.07) 125.00 1.30 8.3 (.10) 130.00 1.28 6.7 (.12) *Actual 2000 average exchange rate. We believe we will achieve the high end of our earnings objective for the year. If we reach that target and the yen averages 120 to 125 to the dollar for the remainder of the year, we would expect operating earnings for the full year to be in the range of $1.33 to $1.30 per share. SHARE REPURCHASE PROGRAM During the first quarter, we purchased approximately 5 million shares of our stock. As of March 31, 2001, we had approximately 11 million shares available for repurchase under the share repurchase program authorized by the board of directors. INCOME TAXES Our combined U.S. and Japanese effective income tax rates on operating earnings for the three months ended March 31, 2001 and 2000 were 35.2% and 35.4%, respectively. INSURANCE OPERATIONS, AFLAC JAPAN AFLAC Japan, a branch of AFLAC and the principal contributor to our earnings, ranks number one in terms of premium income and profits among all foreign life and non-life insurance companies operating in Japan. Among all life insurance companies operating in Japan, AFLAC Japan ranked second in terms of individual policies in force and 12th in terms of assets according to Financial Services Agency (FSA) data as of September 30, 2000. 20 The following table presents a summary of AFLAC Japan's operating results. AFLAC JAPAN SUMMARY OF OPERATING RESULTS THREE MONTHS ENDED MARCH 31, (In millions) 2001 2000 --------------------------- Premium income. . . . . . . . . . . . . $ 1,591 $ 1,646 Investment income . . . . . . . . . . . 305 306 Other income. . . . . . . . . . . . . . (1) - -------- -------- Total revenues. . . . . . . . . . . . 1,895 1,952 -------- -------- Benefits and claims . . . . . . . . . . 1,334 1,385 Operating expenses. . . . . . . . . . . 357 379 -------- -------- Total benefits and expenses . . . . . 1,691 1,764 -------- -------- Pretax operating earnings . . . . . $ 204 $ 188 ======== ======== - ---------------------------------------------------------------------------- Percentage changes in dollars over previous period: Premium income. . . . . . . . . . . . (3.4)% 17.7% Investment income . . . . . . . . . . (.4) 17.1 Total revenues. . . . . . . . . . . . (2.9) 17.6 Pretax operating earnings . . . . . . 8.1 19.1 - ---------------------------------------------------------------------------- Percentage changes in yen over previous period: Premium income. . . . . . . . . . . . 6.6% 8.2% Investment income . . . . . . . . . . 9.9 7.4 Total revenues. . . . . . . . . . . . 7.0 8.0 Pretax operating earnings . . . . . . 19.3 9.1 - ---------------------------------------------------------------------------- Ratios to total revenues: Benefits and claims . . . . . . . . . 70.4% 70.9% Operating expenses. . . . . . . . . . 18.9 19.5 Pretax operating earnings . . . . . . 10.7 9.6 ============================================================================ The average yen/dollar exchange rate used to translate AFLAC Japan's income statement was 118.14, compared with an average rate of 107.13 in the first quarter of 2000. This 9.3% weakening of the average exchange rate for the quarter held down rates of growth for AFLAC Japan in dollar terms and inflated rates of growth in yen terms. Despite a difficult economic environment, AFLAC Japan performed very well in the first quarter. Premium income in yen rose 6.6%. Because approximately 25% of AFLAC Japan's investment income is dollar denominated, increases as reported in yen for total revenues, net investment income and pretax operating earnings were magnified. 21 The following table illustrates the effect of foreign currency translation on AFLAC Japan by comparing certain operating results with those that would have been reported had foreign exchange rates remained unchanged from the comparable period in the previous year: Including Excluding Currency Currency Changes Changes* ----------- ----------- Percentage changes in yen over previous year Net investment income 9.9% 7.2% Total revenues 7.0 6.6 Pretax operating earnings 19.3 15.3 - ---------------------------------------------------------------------------- *Amounts excluding foreign currency changes on dollar-denominated investment income were determined using the same yen/dollar exchange rate for the current period as the comparable period in the prior year. ============================================================================ The operating expense ratio decline is due to the decrease in the commission expense ratio resulting from a shift to newer products which have lower commissions and the implementation of our alternative commission structure which pays higher first year commissions but lower renewal commissions for a limited time period. Partially offsetting the decrease in commission expenses, amortization of deferred acquisition costs increased during the quarter due to a slight decline in persistency in Japan. The benefit ratio has decreased slightly as the mix of business continues to shift to newer products, which have lower loss ratios than the earlier versions of our cancer life products. JAPANESE ECONOMY For the last several years, Japan has been working to overcome its depressed economy. The financial strength of many Japanese businesses continued to deteriorate with some experiencing bankruptcy or requesting financial protection or assistance. As we have indicated in the past, Japan's weak economy has created a challenging environment for AFLAC Japan, as yields available for new yen-denominated investments remain at historically low levels and consumer confidence continues to lag. The time required for the Japanese economy to fully recover remains uncertain. AFLAC JAPAN SALES AFLAC Japan's new annualized premium sales in the first quarter rose 3.6% to 23.1 billion yen, or $194 million. The cancer products and related riders continued to lead our production. The cancer life product accounted for 27.6% of total sales. Rider MAX, the popular rider to our cancer life coverage, represented approximately 27.3% of total sales. Ordinary life and annuities, which showed solid gains, represented 28.8% of sales during the quarter. In addition to strong sales growth, we also continued to grow our distribution system in Japan. At the end of the first quarter, AFLAC Japan 22 was represented by more than 45,000 licensed sales associates at 9,100 corporate and individual agencies. We believe that additional agencies will continue to be attracted to AFLAC Japan's high commissions, superior products, customer service and brand image. We continued to invest in marketing to improve sales. An improved incentive pay system for AFLAC Japan's employed sales managers was introduced in 2000 to provide better rewards for sales performance. We introduced a new optional commission contract in July 2000 that was structured to attract new agents. The new contract pays a higher first-year commission and limits renewal commissions to nine years. Our original contract pays renewal commissions for the life of the policy. We also increased expenditures for expanded sales promotion efforts in Japan and will continue to do so throughout 2001 and we will continue to aggressively promote our brand and products through advertising. We plan on improving the products we offer and introducing new ones. We will invest in new technologies, including our laptop sales aid, to maintain our cost and service advantages. We also continued to refine our product line. In mid-2000, we began selling new, lower-premium cancer life and care products to meet the needs of cost-sensitive buyers. At the end of 2000, we introduced 21st Century Cancer Life. This new cancer life product offers a variety of coverage choices and low monthly premiums to our customers. As a result, employers will be able to customize an AFLAC cancer life policy that best suits the needs of their workers. In the third quarter of 2000, AFLAC Japan and Dai-ichi Mutual Life Insurance Company (Dai-ichi Life) agreed to a major marketing alliance that anticipates the sale of each company's products through their respective distribution systems. The initial focus will be the sale of AFLAC Japan's cancer life and Rider MAX products through Dai-ichi Life's sales force of 50,000 people. Dai-ichi Life began its initial sales of AFLAC products at the end of March with sales of approximately 7,800 policies to its employees. We expect to see increased sales contributions as this alliance matures. AFLAC JAPAN INVESTMENTS Reflecting the continued weakness in Japan's economy, rates of return on yen-denominated debt securities remained low in the first quarter. For instance, the yield of a composite index of 20-year Japanese government bonds averaged 1.84% during the first three months of the year, compared with 2.37% in the fourth quarter of 2000. However, we purchased yen- denominated securities at an average yield of 3.47% in the quarter by focusing on selected sectors of the fixed-maturity market. Including dollar-denominated investments, our blended new money yield was 3.74% for the quarter. At the end of the first quarter, the yield on AFLAC Japan's fixed- maturity portfolio was 5.00%, compared with 5.14% a year ago. The return on average invested assets, net of investment expenses, was 4.79% for the three months ended March 31, 2001, compared with 4.88% a year ago. 23 INSURANCE DEREGULATION IN JAPAN Trade talks in 1994 and 1996 between the governments of the United States and Japan, and Japan's 1996 plan for a financial "Big Bang," produced a framework for the deregulation of the Japanese insurance industry. These measures called for the gradual liberalization of the industry through the year 2001 and included provisions to avoid "radical change" in the third sector of the insurance industry. AFLAC and other foreign-owned insurers, as well as many small to medium-sized Japanese insurers, operate primarily in the third sector. As of January 1, 2001, additional insurance companies were permitted to sell the type of third-sector products that AFLAC Japan currently offers. We anticipate that by July 1, 2001, all insurance companies will be permitted to compete in the third sector. We recognize that we will face increased competition in the future, however, we continue to believe we will be a very strong competitor because our low-cost structure allows us to provide competitive benefits and services to policyholders and above-average compensation to our sales force. 24 INSURANCE OPERATIONS, AFLAC U.S. The following table presents a summary of AFLAC U.S. operating results. AFLAC U.S. SUMMARY OF OPERATING RESULTS THREE MONTHS ENDED MARCH 31, (In millions) 2001 2000 -------------------------- Premium income. . . . . . . . . . . . . $ 439 $ 374 Investment income . . . . . . . . . . . 73 67 Other income. . . . . . . . . . . . . . 1 1 ----- ----- Total revenues. . . . . . . . . . . . 513 442 ----- ----- Benefits and claims . . . . . . . . . . 272 235 Operating expenses. . . . . . . . . . . 160 137 ----- ----- Total benefits and expenses . . . . . 432 372 ----- ----- Pretax operating earnings . . . . . $ 81 $ 70 ===== ===== - ---------------------------------------------------------------------------- Percentage changes over previous period: Premium income. . . . . . . . . . . . 17.4% 13.4% Investment income . . . . . . . . . . 9.1 15.2 Total revenues. . . . . . . . . . . . 16.2 13.7 Pretax operating earnings . . . . . . 16.7 11.4 - ---------------------------------------------------------------------------- Ratios to total revenues: Benefits and claims . . . . . . . . . 53.0% 53.3% Operating expenses. . . . . . . . . . 31.1 30.9 Pretax operating earnings . . . . . . 15.9 15.8 ============================================================================ AFLAC U.S. SALES New annualized premium sales rose 34.5% in the first quarter to $202 million, marking the second best quarter in AFLAC's history. Accident/disability insurance again led our sales for the quarter, accounting for more than 53% of total sales. Cancer expense insurance also produced strong results, accounting for nearly 22% of total sales. AFLAC's indemnity dental product continued to sell extremely well, accounting for more than 7% of sales for the first three months of the year. Introduced in July 2000, the dental product is the most successful product introduction in our history. AFLAC U.S. continues to rapidly expand its sales force. During the first quarter, the average number of associates producing business on a monthly basis increased 25.8%, compared with the three months ended March 31, 2000, to more than 12,500 agents. We believe the expansion of our distribution system has benefited from our current advertising campaign, which has dramatically increased awareness of AFLAC and its products. 25 AFLAC U.S. INVESTMENTS During the first three months of 2001, available cash flow was invested at an average yield-to-maturity of 7.87% compared with 8.11% during the first three months of 2000. The overall return on average invested assets, net of investment expenses, was 7.71% for the first three months of 2001 compared with 7.60% for the first three months of 2000. AFLAC U.S. OTHER Management expects the operating expense ratio, excluding discretionary advertising expenses, to remain relatively level in the future. By improving administrative systems and controlling other costs, we have been able to redirect funds to our advertising programs without significantly affecting the operating expense ratio. The aggregate benefit ratio has been relatively stable. The mix of business has shifted toward accident/disability policies, which have lower benefit ratios than other products. We expect future benefit ratios for some of our supplemental products to increase slightly due to our ongoing efforts to improve policy persistency and enhance policyholder benefits. Management expects the pretax operating profit margin to be approximately 16% for the full year. FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS We adopted Statement of Financial Accounting Standard No. 133 effective January 1, 2001 and recognized $3 million of gains in earnings for the quarter ended March 31, 2001 from the change in the fair value of the interest component of our cross-currency swaps. This new accounting standard will increase volatility in reported net earnings in the future. For additional information, see Notes 2 and 5 of the Notes to the Consolidated Financial Statements. ANALYSIS OF FINANCIAL CONDITION Since December 31, 2000, our financial condition has remained strong in the functional currencies of our operations. The investment portfolios of AFLAC Japan and AFLAC U.S. have continued to grow with 99.5% classified as investment-grade securities. The yen/dollar exchange rate at the end of each period is used to translate yen-denominated balance sheet items to U.S. dollars for reporting purposes. The exchange rate at March 31, 2001, was 123.90 yen to one U.S. dollar, or 7.4% weaker than the December 31, 2000 exchange rate of 114.75. The weaker yen decreased reported investments and cash by $2.1 billion, total assets by $2.4 billion, and total liabilities by $2.3 billion, compared with the amounts that would have been reported for 2001 if the exchange rate had remained unchanged from year-end 2000. 26 INVESTMENTS AND CASH The continued growth in investments and cash reflects the substantial cash flows in the functional currencies of our operations. Net unrealized gains of $3.5 billion on investment securities at March 31, 2001, consisted of $3.8 billion in gross unrealized gains and $301 million in gross unrealized losses. AFLAC invests primarily within the Japanese, U.S. and Euroyen debt securities markets. We are exposed to credit risk in our investment activity. Credit risk is a consequence of extending credit and/or carrying investment positions. We require that all securities have an initial rating of Class 1 or 2 as determined by the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC). We use specific criteria to judge the credit quality and liquidity of our investments and use a variety of credit rating services to monitor these criteria. Applying those various credit ratings to a standardized rating system based on the categories of a nationally recognized rating service, the percentages of our debt securities, at amortized cost, were as follows: March 31, December 31, 2001 2000 ------------ ------------ AAA 3.7% 25.0% AA 43.0 22.4 A 37.0 36.8 BBB 15.8 15.1 BB .5 .7 ----- ----- 100.0% 100.0% ===== ===== The decrease in AAA-rated debt securities during the first quarter is primarily due to a credit rating change on Japanese government bonds. In March 2001, we recognized a pretax impairment loss of $42 million in realized investment gains and losses on the corporate debt securities of a U.S. issuer, which experienced a significant credit rating downgrade during the first quarter of 2001. These debt securities are carried in the available-for-sale category. We also executed several bond sales and purchase transactions during the first quarter in an effort to increase investment income and extend investment maturities. The sales of these debt securities resulted in pretax realized investment gains of $21 million. Also, in the first quarter of 2001, we realized a pretax investment gain of $18 million related to the sale of a portion of our U.S. equity securities portfolio in connection with a change in outside investment managers. As of March 31, 2001, new Japanese accounting principles and regulatory requirements became effective, which impact investment classifications and solvency margin calculations on a Japanese accounting basis. As a result of these new regulatory requirements, we re-evaluated AFLAC Japan's investment portfolio and our holding period intent related to certain investment securities. In order to minimize future unfavorable solvency margin results 27 under the new Japanese accounting methods, debt securities with amortized cost of $1.8 billion were reclassified from the held-to-maturity category to the available-for-sale category as of March 31, 2001. The related unamortized unrealized gain, included in accumulated other comprehensive income immediately prior to the transfer, was $327 million. We also reclassified debt securities with a fair value of $2.3 billion from the available-for-sale category to the held-to-maturity category as of March 31, 2001. The related unrealized gain of $118 million is being amortized from accumulated other comprehensive income to investment income over the remaining term of the securities. See Note 6 of the Notes to the Consolidated Financial Statements. Private placement investments, at amortized cost, accounted for 52.6% and 51.5% of our total debt securities as of March 31, 2001 and December 31, 2000, respectively. Of the total private placements, reverse-dual currency debt securities (principal payments in yen, interest payments in dollars) accounted for 30.1% and 31.5% of total private placement investments as of March 31, 2001 and December 31, 2000, respectively. AFLAC Japan has invested in the private placement market to secure higher yields than those available from Japanese government bonds. At the same time, we have adhered to prudent standards for credit quality. Most of AFLAC's private placements are issued under medium-term note programs and have standard covenants commensurate with credit rankings, except when internal credit analysis indicates that additional protective and/or event-risk covenants are required. 28 The following table presents an analysis of investment securities: AFLAC Japan AFLAC U.S. ------------------------- ------------------------- March 31, December 31, March 31, December 31, (In millions) 2001 2000 2001 2000 ------------------------- ------------------------- Securities available for sale, at fair value: Fixed maturities $18,110 $18,616 $ 3,586* $ 3,556* Perpetual debentures 2,580 1,877 177 169 Equity securities 74 68 102 168 ------ ------ ------ ------ Total available for sale 20,764 20,561 3,865 3,893 ------ ------ ------ ------ Securities held to maturity, at amortized cost: Fixed maturities 3,915 3,645 - - Perpetual debentures 3,131 3,442 - - ------ ------ ------ ------ Total held to maturity 7,046 7,087 - - ------ ------ ------ ------ Total investment securities $27,810 $27,648 $ 3,865 $ 3,893 ====== ====== ====== ====== *Includes securities held by the parent company of $92 at March 31, 2001, and $262 at December 31, 2000 Mortgage loans on real estate and other long-term investments remained immaterial at both March 31, 2001 and December 31, 2000. Cash, cash equivalents and short-term investments totaled $1.1 billion, or 3.3% of total investments and cash, as of March 31, 2001, compared with $610 million, or 1.9% of total investments and cash, at December 31, 2000. POLICY LIABILITIES Policy liabilities decreased $602 million, or 2.1%, during the first three months of 2001. AFLAC Japan decreased $683 million, or 2.6% (5.1% increase in yen), and AFLAC U.S. increased $81 million, or 3.2%. The weaker yen at March 31, 2001, compared with December 31, 2000, decreased reported policy liabilities by $2.0 billion. The decrease in policy liabilities was partially offset by increases from new business, the aging of policies in force, and the market value adjustment for securities available for sale (see Note 6 of the Notes to the Consolidated Financial Statements). DEBT The ratio of debt to total capitalization (debt plus shareholders' equity, excluding the unrealized gains on investment securities) was 24.2% and 25.1% as of March 31, 2001 and December 31, 2000, respectively. 29 See Note 4 of the Notes to the Consolidated Financial Statements for information on debt outstanding at March 31, 2001. SECURITY LENDING AFLAC Japan uses short-term security lending arrangements to increase investment income with minimal risk. For further information regarding such arrangements, see Note 5 of the Notes to the Consolidated Financial Statements. POLICYHOLDER GUARANTY FUNDS Under insurance guaranty fund laws in most U.S. states, insurance companies doing business in those states can be assessed for policyholder losses up to prescribed limits that are incurred by insolvent companies with similar lines of business. Such assessments have not been material to us in the past. We believe that future assessments relating to companies in the United States currently involved in insolvency proceedings will not materially impact the consolidated financial statements. In 1998, the Japanese government established the Life Insurance Policyholders Protection Corporation. Funding by the life insurance industry, as determined by government legislation, is made over a 10-year period. We recognize charges for our estimated share of any assessment as funding legislation is enacted. We periodically review our estimated liability for policyholder protection fund assessments based on updated information and any adjustments are reflected in net earnings. Since October 2000, three Japanese life insurance companies have filed for court protection under a special reorganization law for financial institutions. Japanese government officials have indicated that they do not expect to impose any additional protection fund assessments for the financial problems of these insurers. SHAREHOLDERS' EQUITY Our insurance operations continue to provide the primary sources of liquidity. Capital needs are also supplemented by borrowed funds. The principal sources of cash from insurance operations are premiums and investment income. The primary uses of cash for insurance operations are policy claims, commissions, operating expenses, income taxes and payments to AFLAC Incorporated for management fees and dividends. Both the sources and uses of cash are reasonably predictable. Our investment objectives provide for liquidity through the ownership of investment-grade debt securities. AFLAC insurance policies generally are not interest-sensitive and therefore are not subject to unexpected policyholder redemptions due to investment yield changes. Also, the majority of our policies provide indemnity benefits rather than reimbursement for actual medical costs and therefore generally are not subject to the risks of medical-cost inflation. The achievement of continued long-term growth will require growth in AFLAC's statutory capital and surplus. We may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by AFLAC Incorporated from funds generated 30 through debt or equity offerings. We believe outside sources for additional debt and equity capital, if needed, will continue to be available for capital expenditures, business expansion and the funding of our share repurchase program. AFLAC Incorporated capital resources are largely dependent upon the ability of AFLAC to pay management fees and dividends. The Georgia insurance department imposes certain limitations and restrictions on payments of dividends, management fees, loans and advances by AFLAC to AFLAC Incorporated. The Georgia insurance statutes require prior approval for dividend distributions that exceed the greater of statutory earnings for the previous year, or 10% of statutory capital and surplus as of the previous year-end. In addition, the Georgia insurance department must approve service arrangements and other transactions within the affiliated group. These regulatory limitations are not expected to affect the level of management fees or dividends paid by AFLAC to AFLAC Incorporated. A life insurance company's statutory capital and surplus is determined according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance department in the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to emphasize policyholder protection and company solvency. The NAIC has recodified Statutory Accounting Principles (SAP) to promote standardization throughout the industry. These new accounting principles were effective January 1, 2001, and are to be applied prospectively. Previously, prescribed or permitted SAP could vary among states and among companies. The transition adjustments to adopt the new accounting principles increased AFLAC statutory capital and surplus by approximately $130 million as of January 1, 2001. The NAIC uses a risk-based capital formula relating to insurance risk, business risk, asset risk and interest rate risk to facilitate identification by insurance regulators of inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. AFLAC's NAIC risk-based capital ratio remains high and reflects a very strong capital and surplus position. Also, there are various ongoing regulatory initiatives by the NAIC relating to insurance products, investments, revisions to the risk-based capital formula and other actuarial and accounting matters. In addition to restrictions by U.S. insurance regulators, the Japanese Financial Services Agency (FSA) may impose restrictions on transfers of funds from AFLAC Japan. Payments are made from AFLAC Japan to AFLAC Incorporated for management fees and to AFLAC U.S. for allocated expenses and remittances of earnings. Total funds received from AFLAC Japan were approximately $12 million for both the first three months of 2001 and 2000. The FSA may not allow transfers of funds if the payment would cause AFLAC Japan to lack sufficient financial strength for the protection of policyholders. The FSA maintains its own solvency standards, a version of risk-based capital requirements. AFLAC Japan's solvency margin significantly exceeds regulatory minimums. For additional information on regulatory restrictions on dividends, profit transfers and other remittances, see Note 9 of the Notes to the Consolidated Financial Statements in our annual report to shareholders for the year ended December 31, 2000. 31 For the Japanese reporting fiscal year ending March 31, 2002, AFLAC Japan will be required to adopt a new Japanese statutory accounting standard regarding fair value accounting for investments. Previously, debt securities were generally reported at amortized cost for FSA purposes. Under the new accounting standard AFLAC Japan will be required to record debt securities in four categories: at fair value in an available-for-sale category, at amortized cost in a held-to-maturity category, at amortized cost in a special category for policy-reserve-matching bonds, or at fair value in a trading category. Under this new regulatory accounting standard, the unrealized gains and losses on debt securities available for sale will be reported in FSA capital and surplus and reflected in solvency margin calculations. This new accounting standard may result in significant fluctuations in FSA equity, in the AFLAC Japan solvency margin and in amounts available for annual profit repatriation. OTHER On February 13, 2001, the board of directors approved an increase in the quarterly cash dividend from $.043 to $.05 per share. The increase is effective with the second quarter dividend, which is payable on June 1, 2001, to shareholders of record at the close of business on May 17, 2001. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our financial instruments are exposed to primarily three types of market risks. These are interest rate, equity price, and foreign currency exchange rate risk. INTEREST RATE RISK Our primary interest rate exposure is a result of the effect of changes in interest rates on the fair value of our investments in debt securities. We use modified duration analysis, which provides a measure of price percentage volatility, to estimate the amount of sensitivity to interest rate changes in our debt securities. We attempt to match the duration of our assets with the duration of our liabilities. For AFLAC Japan, the duration of policy benefit liabilities is longer than that of the related invested assets due to the unavailability of acceptable long-duration yen-denominated securities. Currently, when our debt securities mature, the proceeds are reinvested at a yield below that of the interest required for the accretion of policy benefit liabilities on policies issued in earlier years. However, the investment yield on new investments exceeds interest requirements on policies issued in recent years. Since 1994, premium rates on new business have been increased several times (the latest occurred in April 2001 for ordinary life and annuity contracts) to help offset the lower investment yields available. At March 31, 2001, we had $3.5 billion of net unrealized gains on total debt securities. The hypothetical reduction in the fair value of our debt securities resulting from a 100 basis point increase in market interest rates is estimated to be $2.9 billion based on our portfolio as of 32 March 31, 2001. The effect on yen-denominated debt securities is approximately $2.5 billion and the effect on dollar-denominated debt securities is approximately $424 million. We have outstanding interest rate swaps on 19.1 billion yen ($154 million) of our variable-interest-rate yen-denominated borrowings. These swaps reduce the impact of fluctuations in interest rates on borrowing costs and effectively change our interest rates from variable to fixed. Therefore, movements in market interest rates should have no material effect on earnings. At March 31, 2001, we also had yen-denominated bank borrowings in the amount of 19.6 billion yen ($158 million) with a blended variable interest rate of .78%. The effect on net earnings in the first quarter of 2001 due to changes in market interest rates was immaterial. For further information on our notes payable, see Note 4 of the Notes to the Consolidated Financial Statements. EQUITY PRICE RISK Equity securities at March 31, 2001, totaled $176 million, or .5% of total investments and cash on a consolidated basis. We use beta analysis to measure the sensitivity of our equity securities portfolio to fluctuations in the broad market. The beta of our equity securities portfolio is .88. For example, if the overall stock market value changed by 10%, the value of AFLAC's equity securities would be expected to change by approximately 8.8%, or $15 million. CURRENCY RISK Most of AFLAC Japan's investments and cash are yen-denominated. When yen-denominated financial instruments mature or are sold, the proceeds are generally reinvested in yen-denominated securities and are held to fund yen- denominated policy obligations. In addition to the yen-denominated financial instruments held by AFLAC Japan, AFLAC Incorporated has yen-denominated notes payable that have been designated as a hedge of our investment in AFLAC Japan. The unrealized foreign currency translation gains and losses related to these borrowings are reported in accumulated other comprehensive income. AFLAC Incorporated entered into cross-currency swaps to convert the dollar-denominated principal and interest into yen-denominated obligations on its $450 million senior notes that were issued in 1999. The cross- currency swaps have a notional amount of $450 million (55.6 billion yen). These swaps have also been designated as a hedge of our investment in AFLAC Japan. The unrealized foreign currency translation gains and losses related to these swaps are reported in accumulated other comprehensive income. For information regarding new accounting requirements for derivative instruments as of January 1, 2001, see Notes 2 and 5 of the Notes to the Consolidated Financial Statements. 33 We attempt to match yen-denominated assets to yen-denominated liabilities on a consolidated basis in order to minimize the exposure of our shareholders' equity to foreign currency translation fluctuations. The table below compares the U.S. dollar values of our yen-denominated assets and liabilities at various exchange rates. Dollar Value of Yen-Denominated Assets and Liabilities At Selected Exchange Rates (March 31, 2001) 108.90 123.90* 138.90 (In millions) Yen Yen Yen - ---------------------------------------------------------------------------- Yen-denominated financial instruments: Assets: Securities available for sale: Fixed maturities $ 18,600 $ 16,348 $ 14,583 Perpetual debentures 2,733 2,402 2,142 Equity securities 85 75 67 Securities held to maturity: Fixed maturities 4,455 3,915 3,493 Perpetual debentures 3,563 3,131 2,793 Cash and cash equivalents 1,030 905 807 Cross-currency swaps (60) 2 50 Other financial instruments 3 4 3 ------- ------- ------- Sub-total 30,409 26,782 23,938 ------- ------- ------- Liabilities: Notes payable 1,081 1,005 945 ------- ------- ------- Sub-total 1,081 1,005 945 ------- ------- ------- Net yen-denominated financial instruments 29,328 25,777 22,993 Other yen-denominated assets 3,776 3,319 2,960 Other yen-denominated liabilities (31,874) (28,014) (24,989) ------- ------- ------- Consolidated yen-denominated net assets subject to foreign currency fluctuation $ 1,230 $ 1,082 $ 964 ======= ======= ======= *Actual March 31, 2001 exchange rate For information regarding the effect of foreign currency translation on operating earnings per share, see Foreign Currency Translation beginning on page 19. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" to encourage companies to provide prospective information, so long as those informational statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those 34 discussed. We desire to take advantage of these provisions. This report contains cautionary statements identifying important factors that could cause actual results to differ materially from those projected in this discussion and analysis, and in any other statements made by company officials in oral discussions with the financial community and contained in documents filed with the Securities and Exchange Commission (SEC). Forward- looking statements are not based on historical information and relate to future operations, strategies, financial results or other developments. In particular, statements containing words such as "expect," "anticipate," "believe," "goal," "objective" or similar words as well as specific projections of future results, generally qualify as forward-looking. AFLAC undertakes no obligation to update such forward-looking statements. We caution readers that the following factors, in addition to other factors mentioned from time to time in our reports filed with the SEC, could cause actual results to differ materially: regulatory developments, assessments for insurance company insolvencies, competitive conditions, new products, ability to repatriate profits from Japan, general economic conditions in the United States and Japan, changes in U.S. and/or Japanese tax laws or accounting requirements, adequacy of reserves, credit and other risks associated with AFLAC's investment activities, significant changes in interest rates, and fluctuations in foreign currency exchange rates. 35 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS We are a defendant in various litigation considered to be in the normal course of business. Some of this litigation is pending in Alabama, where large punitive damages bearing little relation to the actual damages sustained by plaintiffs have been awarded against other companies, including insurers, in recent years. Although the final results of any litigation cannot be predicted with certainty, we believe the outcome of pending litigation will not have a material adverse effect on our financial position, results of operations, or cash flows. 36 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Shareholders was held on May 7, 2001. Matters submitted to the shareholders were: (1) Election of 18 members to the board of directors; (2) Ratification of the appointment of independent auditors for 2001. The proposals were approved by the shareholders. Following is a summary of each vote cast for, against or withheld, as well as the number of abstention and broker non-votes, as to each such matter, including a separate tabulation with respect to each nominee for office. VOTES - ---------------------------------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes - ---------------------------------------------------------------------------- (1) Election of 18 members to the board of directors: Daniel P. Amos 461,821,433 N/A N/A 4,638,104 None J. Shelby Amos, II 464,498,974 N/A N/A 1,960,563 None Michael H. Armacost 460,993,547 N/A N/A 5,465,990 None Kriss Cloninger, III 464,392,078 N/A N/A 2,067,459 None M. Delmar Edwards, M.D. 460,741,333 N/A N/A 5,718,203 None Joe Frank Harris 463,510,314 N/A N/A 2,949,223 None Elizabeth J. Hudson 464,362,810 N/A N/A 2,096,727 None Kenneth S. Janke, Sr. 464,558,375 N/A N/A 1,901,161 None Charles B. Knapp 464,334,260 N/A N/A 2,125,277 None Takatsugu Murai 464,674,241 N/A N/A 1,785,296 None Yoshiki Otake 464,631,432 N/A N/A 1,828,105 None E. Stephen Purdom 463,337,938 N/A N/A 3,121,599 None Barbara K. Rimer 464,461,591 N/A N/A 1,997,946 None Marvin R. Schuster 464,440,549 N/A N/A 2,018,988 None Henry C. Schwob 463,460,853 N/A N/A 2,998,684 None J. Kyle Spencer 464,259,068 N/A N/A 2,200,469 None Glenn Vaughn, Jr. 464,215,948 N/A N/A 2,243,589 None Robert L. Wright 464,422,492 N/A N/A 2,037,044 None VOTES --------------------------------------------------- Absten- With- Broker For Against tions held Non-Votes - ---------------------------------------------------------------------------- (2) Ratification of appointment of KPMG LLP as independent auditors 462,883,902 2,513,903 1,061,731 N/A None 37 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.2 - Bylaws of the Corporation, as amended 4.0 - There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of AFLAC Incorporated and its subsidiaries on a consolidated basis. We agree to furnish a copy of any long-term debt instruments to the Securities and Exchange Commission upon request. 12.0 - Statement regarding the computation of ratio of earnings to fixed charges (b) Reports on Form 8-K: We filed a Form 8-K on February 14, 2001, regarding the two-for-one stock split declared by the board of directors on February 13, 2001. Items other than those listed above are omitted because they are not required or are not applicable. 38 SIGNATURES Pursuant to the requirements 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 May 9, 2001 /s/ KRISS CLONINGER, III ------------------------ --------------------------- KRISS CLONINGER,III President; Treasurer and Chief Financial Officer Date May 9, 2001 /s/ NORMAN P. FOSTER ------------------------ --------------------------- NORMAN P. FOSTER Executive Vice President, Corporate Finance 39 EXHIBITS FILED WITH CURRENT FORM 10-Q: 3.2 - Bylaws of the Corporation, as amended 12.0 - Statement regarding the computation of ratio of earnings to fixed charges 40 35 EX-3.2 2 bylawsexh3.txt AMENDED BYLAWS EXHIBIT 3.2 EXH 3.2 BYLAWS OF AMERICAN FAMILY CORPORATION ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be in the State of Georgia, County of Muscogee. SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Georgia as the Board of Directors may from time to time determine and the business of the Corporation may require or make desirable. ARTICLE II SHAREHOLDERS MEETINGS SECTION 1. ANNUAL MEETINGS. The annual meeting of the shareholders of the Corporation shall be held at the principal office of the Corporation or at such other place in the United States as may be determined by the Board of Directors, on the fourth Monday in April of each calendar year (or on the next succeeding business day if said fourth Monday in April is a legal holiday in any year) or at such other time and date as shall be determined by the Board of Directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders shall be held at the principal office of the Corporation or at such other place in the United States as may be designated in the notice of said meetings, upon call of the Chairman of the Board of Directors or the Chief Executive Officer and shall be called by the President or the Secretary when so directed by the Board of Directors or at the request in writing of the holders of shares representing all of the votes entitled to be cast by the holders of all the issued and outstanding capital stock of the Corporation entitled to vote thereat. Any such request shall state the purpose for which the meeting is to be called. SECTION 3. NOTICE OF MEETINGS. Written notice of every meeting of shareholders, stating the place, date and hour of the meeting, shall be given personally or by mail to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with first class postage thereon prepaid addressed to the shareholder at his address as it appears on the Corporation's record of stockholders. Attendance of a shareholder at a meeting of shareholders shall constitute a waiver of objection to: (a) lack of notice or defective notice of such meeting unless the shareholder at the beginning of the meeting, objects to holding the meeting or transacting business at the meeting, and (b) consideration of a particular matter at the meeting which is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. Notice need not be given to any shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting. SECTION 4. QUORUM. The holders of shares representing a majority of the votes entitled to be cast by the holders of all the issued and outstanding stock of the Corporation entitled to vote thereat, present in EXH 3.2-1 person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the shareholders except as otherwise provided by statute, by the Articles of Incorporation, or by these Bylaws. If a quorum is not present or represented at any meeting of the shareholders, the holders of shares representing a majority of the votes entitled to be cast by those present in person or represented by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. SECTION 5. VOTING. When a quorum is present at any meeting, the vote of the holders of stock representing a majority of the voting power, as defined in the Articles of Incorporation, present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of law or of the Articles of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of the question. Each shareholder shall at every meeting of the shareholders be entitled to vote, as defined, in person or by proxy for each share of the capital stock having voting power registered in his name on the books of the Corporation, but no proxy shall be voted or acted upon after 11 months from its date, unless otherwise provided in the proxy. SECTION 6. CONSENT OF SHAREHOLDERS. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if all of the shareholders entitled to vote on the action consent thereto in writing, setting forth the action so taken, and signing and delivering such consent to the Secretary of the Corporation. Such consent shall have the same force and effect as a unanimous vote of shareholders. SECTION 7. LIST OF SHAREHOLDERS. The Corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and series, if any, of the shares held by each. The officer who has charge of the stock transfer books of the Corporation shall prepare and make, before every meeting of shareholders or any adjournment thereof, a complete list of the shareholders entitled to vote at the meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number and class and series, if any, of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting for the purposes thereof. The said list may be the Corporation's regular record of shareholders if it is arranged in alphabetical order or contains an alphabetical index and otherwise conforms with the requirements specified by law. ARTICLE III DIRECTORS SECTION 1. POWERS. The property, affairs and business of the Corporation shall be managed and directed by its Board of Directors, which may exercise all powers of the Corporation and do all lawful acts and things EXH 3.2-2 which are not by law, by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. SECTION 2. NUMBER, ELECTION AND TERM. The number of directors which shall constitute the whole Board shall be not less than three (3) or more than twenty-five (25). The specific number of directors within such range shall be fixed or changed from time to time by a majority of the Board of Directors then in office. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. Except as otherwise provided in these Bylaws, shareholders shall elect directors by a vote of not less than a plurality of the votes present in person or represented by proxy at the meeting. Each director elected shall hold office until his successor is elected and qualified or until his earlier resignation, removal from office or death. Directors shall be natural persons between the ages of 21 and 75 years, inclusive, but need not be residents of the State of Georgia or shareholders of the Corporation. SECTION 3. RESIGNATION. Any director who shall miss three or more regular meetings of the Board of Directors within any twelve month period, whether or not the meetings missed are consecutive, shall be deemed to have automatically resigned as a director, provided that the automatic resignation may be waived by resolution adopted by a majority vote of the remaining directors with the written consent of the resigned director, in which event said director shall remain on the Board. SECTION 4. VACANCIES. Vacancies, including vacancies resulting from any increase in the number of directors, but not including vacancies resulting from removal from office by the shareholders (except as provided in Section 9 of this Article III), may be filled by the shareholders, by the Board of Directors, or by the affirmative vote of a majority of the directors remaining in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual election and until his successor is duly elected and qualified unless sooner displaced. If there are no directors in office, then vacancies shall be filled through election by the shareholders. SECTION 5. MEETINGS AND NOTICE. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Georgia. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by resolution of the Board. Special meetings of the Board may be called by the Chairman of the Board or Chief Executive Officer or by any two directors on one day's oral, telegraphic or written notice duly given or served on each director personally, or three days' notice deposited, first class postage prepaid, in the United Sates mail. Such notice shall state a reasonable time, date and place of meeting, but the purpose need not be stated therein. Notice need not be given to any director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when the director states, at the beginning of the meeting (or promptly upon his arrival), any such objection or objections to holding the meeting or the transaction of business at the meeting and does not subsequently vote for or assent to action taken at the meeting. SECTION 6. QUORUM. At all meetings of the Board a majority of directors in office immediately before the meeting begins shall constitute a quorum for the transaction of business, and the act of a majority of the EXH 3.2-3 directors present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by law, by the Articles of Incorporation, or by these Bylaws. If a quorum shall not be present at any meeting of the Board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 7. CONSENT OF DIRECTORS. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, setting forth the action so taken, and the writing or writings are filed with the minutes of the proceedings of the Board or committee. Such consent shall have the same force and effect as a unanimous vote of the Board. SECTION 8. COMMITTEES. The Board of Directors may by resolution passed by a majority of the whole Board, designate from among its members one or more committees, each committee to consist of one or more directors. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the Corporation, except that it shall have no authority with respect to (1) amending the Articles of Incorporation or these Bylaws; (2) adopting a plan of merger or consolidation; (3) the sale, lease, exchange or the disposition of all or substantially all the property and assets of the Corporation; and (4) a voluntary dissolution of the Corporation or a revocation thereof. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of each committee may determine its action and may fix the time and places of its meetings, unless otherwise provided by the Board of Directors. Each Committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. SECTION 9. REMOVAL OF DIRECTORS. At any shareholders' meeting with respect to which notice of such purpose has been given, any director may be removed from office, with or without cause, by the vote of the holders of a majority of the stock having voting power and entitled to vote for the election of directors, and his successor may be elected at the same or any subsequent meeting of shareholders, or by the Board as permitted by law. SECTION 10. COMPENSATION OF DIRECTORS. Directors shall be entitled to such reasonable compensation for their services as directors or members of any committee of the Board as shall be fixed from time to time by resolution adopted by the Board, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending any meeting of the Board or any such committee. SECTION 11. EXECUTIVE COMMITTEE. The Executive Committee will consist of at least five directors, including the Chief Executive Officer, the Deputy Chief Executive Officer, the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, the President, and such number of other directors as the Board of Directors may from time to time determine. The Executive Committee shall have and may exercise, during the intervals between meetings of the Board of Directors, all of the powers of the Board of EXH 3.2-4 Directors which may be lawfully delegated. Meetings of the Executive Committee shall be held at such times and places to be determined by the Chairman of the Executive Committee. At all meetings of the Executive Committee, a majority of the members thereof shall constitute a quorum. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it may deem necessary. The Chief Executive Officer (or another member of the Executive Committee chosen by him) shall be the Chairman of the Executive Committee. During the intervals between meetings of the Executive Committee, the Chief Executive Officer shall possess and may exercise such of the powers vested in the Executive Committee as from time to time may be lawfully conferred upon him by resolution of the Board of Directors or the Executive Committee. ARTICLE IV OFFICERS SECTION 1. NAME AND NUMBER. The officers of the Corporation, who shall be chosen by the Board of Directors are as follows: Chief Executive Officer, Deputy Chief Executive Officer, Chairman of the Board of Directors, Vice Chairman of the Board of Directors, President, Executive Vice President, Secretary, Assistant Secretary, Treasurer, and Assistant Treasurer. The Board of Directors may appoint additional specially designated vice presidents, assistant secretaries and assistant treasurers. Any number of offices, except the offices of President and Secretary, may be held by the same person. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. The Board may, in its discretion, leave any of the above offices vacant for any length of time. SECTION 2. COMPENSATION. The salaries of all officers set forth in Section 1 of this Article IV shall be fixed by the Board of Directors or a committee or officer appointed by the Board. Salary payments made to an officer of the Corporation that shall be disallowed in whole or in part as a deductible expense by the Corporation for Federal Income Tax purposes shall be reimbursed by such officer to the Corporation to the full extent of the disallowance. It shall be the duty of the Board of Directors to enforce payments of each such amount disallowed. SECTION 3. TERM OF OFFICE. Unless otherwise provided by resolution of the Board of Directors, the principal officers shall serve until their successors shall have been chosen and qualified, or until their death, resignation or removal as provided by these Bylaws. SECTION 4. REMOVAL. Any officer may be removed from office at any time, with or without cause, by the Board of Directors. SECTION 5. VACANCIES. Any vacancy in an office resulting from any cause may be filled by the Board of Directors. SECTION 6. POWERS AND DUTIES. Except as hereinafter provided, the officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors to the extent consistent with these Bylaws. (a) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall keep the Board of Directors fully informed, and shall make a statement EXH 3.2-5 of the affairs of the Corporation at the annual meeting of the shareholders. He shall have the general superintendence and direction of all the other officers of the Corporation and of the agents, independent contractors and employees thereof and to see that their respective duties are properly performed. He shall, for and on behalf of the Corporation, exercise the voting powers of all stock of other companies owned by the Corporation. He may sign and execute all authorized bonds, notes, drafts, checks, acceptances or other obligations, reinsurance contracts and other contracts in the name of the Corporation. He shall operate and conduct the business and affairs of the corporation according to the orders and resolutions of the Board of Directors, and according to his own discretion whenever and wherever such discretion is not expressly limited by such orders and resolutions. He shall have the power to sue and be sued, complain and defend, in all courts, and to participate and bind the Corporation in any judicial, administrative, arbitrative, settlement or other action, litigation or proceeding. All officers may be removed with or without cause at any time by the Chief Executive Officer whenever the Chief Executive Officer, in his absolute discretion, shall consider that the best interests of the Corporation will be served thereby. (b) DEPUTY CHIEF EXECUTIVE OFFICER. In the absence of the Chief Executive Officer, or in the event of his temporary disability or inability to act, or in the event the Chief Executive Officer expressly so directs, the Deputy Chief Executive Officer shall perform the duties of Chief Executive Officer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. Upon the death, permanent disability, or resignation of the Chief Executive Officer, the Deputy Chief Executive Officer shall become Chief Executive Officer and shall succeed to such duties and powers subject to such restrictions. In the event the office of Vice Chairman shall become vacant for any reason, the Deputy Chief Executive Officer shall, in addition to his then current duties, become Vice Chairman and shall succeed to the duties and powers of such office. The Deputy Chief Executive Officer shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors or by the Chief Executive Officer. (c) CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall preside at all meetings of the Directors and shareholders and shall perform such other duties as may be assigned by the Board of Directors. (d) VICE CHAIRMAN OF THE BOARD OF DIRECTORS. In the absence of the Chairman of the Board of Directors, or in the event of his inability to act, the Vice Chairman of the Board of Directors shall perform the duties of the Chairman of the Board of Directors, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chairman of the Board of Directors. Upon the death, permanent disability, or resignation of the Chairman of the Board of Directors, the Vice Chairman shall become the Chairman of the Board and shall succeed to such duties and powers subject to such restrictions. The Vice Chairman of the Board of Directors shall do and perform such EXH 3.2-6 other duties as may from time to time be assigned to him by the Board of Directors or by the Chairman of the Board. (e) PRESIDENT. The President shall keep the Board of Directors fully informed. He may sign and execute all authorized bonds, contracts, notes, drafts, checks, acceptances or other obligations in the name of the Corporation, and with the Secretary he may sign all certificates of shares in the capital stock of the Corporation. The President shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors or by the Chief Executive Officer. (f) EXECUTIVE VICE-PRESIDENT. In the absence of the President or in the event of his inability or refusal to act, the Executive Vice- President (or in the event there be more than one Executive Vice- President, the Executive Vice-Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Executive Vice-Presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. (g) SECRETARY. The Secretary shall attend all meetings of the Board of Directors and all meetings of the Shareholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or Chief Executive Officer, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. (h) ASSISTANT SECRETARY. The Assistant Secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (of if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. (i) TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse EXH 3.2-7 the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. (j) ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. (k) For purposes of this Section 6, "disability" shall mean the significant impairment, resulting from any physical or mental condition, of the Chief Executive Officer's ability to perform his duties, for a period of six or more consecutive months. SECTION 7. VOTING SECURITIES OF CORPORATION. Unless otherwise ordered by the Board of Directors, the Chief Executive Officer shall have full power and authority on behalf of the Corporation to attend and to act and vote at any meetings of security holders of corporations in which the Corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation might have possessed and exercised if it had been present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. ARTICLE V CERTIFICATES OF STOCK SECTION 1. FORM OF CERTIFICATE. Every holder of fully-paid stock in the Corporation shall be entitled to have a certificate in such form as the Board of Directors may from time to time prescribe. SECTION 2. LOST CERTIFICATES. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. EXH 3.2-8 SECTION 3. TRANSFERS. (a) Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as in Section 5 of this Article provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. (b) The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. (c) Shares of capital stock may be transferred by delivery of the certificates therefore, accompanied either by an assignment in writing on the back of the certificates or by separate written power of attorney to sell, assign and transfer the same, signed by the record holder thereof, or by his duly authorized attorney in fact but no transfer shall affect the right of the Corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the Corporation as herein provided. (d) The Board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these Bylaws or the Articles of Incorporation, concerning the issue, transfer, and registration of certificates for shares of the capital stock of the Corporation. SECTION 4. RECORD DATE. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to demand a special meeting, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the proposal of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 70 days and,. in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed by the Board for the determination of shareholders entitled to notice of and to vote at any meeting of shareholders, the record date shall be at the close of business on the day next receding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record date is fixed for other purposes, the record date shall be at the close of business on the day next preceding the day on which the Board of Directors adopts the resolution relating thereto. A determination of Shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors shall EXH 3.2-9 fix a new record date for the adjourned meeting, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 5. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer agents or one or more transfer clerks and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. ARTICLE VI GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock, subject to the provisions of the Articles of Incorporation and applicable law. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 3. SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal" and "Georgia." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the Corporation followed by the word "Seal" enclosed in parentheses shall be deemed the seal of the Corporation. SECTION 4. ANNUAL STATEMENTS. Not later than four months after the close of each fiscal year, and in any case prior to the next annual meeting of stockholders, the Corporation shall prepare: (a) A balance sheet showing in reasonable detail the financial condition of the Corporation as of the close of its fiscal year, and (b) A profit and loss statement showing the result of its operations during its fiscal year. Upon written request, the Corporation promptly shall mail to any shareholder of record a copy of the most recent such balance sheet and profit and loss statement. SECTION 5. BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS. All of the requirements and provisions of Article llA, Chapter 2, Title 14 of the Georgia Business Corporation Code of the Official Code of Georgia Annotated, or as the same may be amended or re-codified from time to time, shall apply to the Corporation. EXH 3.2-10 SECTION 6. SHAREHOLDERS' RIGHT TO INSPECT RECORDS. To the extent such limitation is permitted by law, a shareholder owning two percent or less of the outstanding shares of the Corporation shall have no right to inspect or copy excerpts from minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors while acting in place of the Board of Directors on behalf of the Corporation, minutes of any meeting of the shareholders, records of action taken by the shareholders or the Board of Directors without a meeting, the accounting records of the Corporation, and the record of shareholders. ARTICLE VII INDEMNIFICATION OF DIRECTORS & OFFICERS SECTION 1. INDEMNIFICATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to, any action, suit or proceeding by or in the right of the Corporation), whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, advisory director, officer, employee or agent of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise, and shall advance expenses to such person reasonably incurred in connection therewith, to the fullest extent permitted by the relevant provisions of the Georgia Business Corporation Code, as such law presently exists or hereafter may be amended. SECTION 2. PURCHASE OF INSURANCE. The Board of Directors may authorize the Corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII or the Georgia Business Corporation Code. ARTICLE VIII ADVISORY DIRECTORS The Board of Directors of the Corporation may at its annual meeting, or from time to time thereafter, appoint any individual to serve as a member of an Advisory Board of Directors of the Corporation. Any individual appointed to serve as a member of an Advisory Board of Directors of the Corporation shall be permitted to attend all meetings of the Board of Directors and may participate in any discussion thereat, but such individual may not vote at any meeting of the Board of Directors or be counted in determining a quorum for such meeting. It shall be the duty of members of the Advisory Board of Directors of the Corporation to advise and provide general policy advice to the Board of Directors of the Corporation at such times and places and in such groups and committees as may be determined from time to time by the Board of Directors, but such individual shall not have any responsibility or be subject to any liability imposed upon a director or in any manner otherwise deemed a director. The compensation paid to members of the Advisory Board of Directors shall be determined from time to time by the Board of Directors of the Corporation. Each member of the Advisory Board of EXH 3.2-11 Directors, except in the case of his earlier death, resignation, retirement, disqualification or removal, shall serve until the next succeeding annual meeting of the Board of Directors and thereafter until his successor shall have been appointed. ARTICLE IX EMERITUS DIRECTORS Any director of the Corporation who is not an officer or employee of the Corporation and who has served as a director in such capacity for five or more years and has attained fifty-five (55) years of age shall be eligible to be appointed as a director emeritus upon his retirement or resignation. A director emeritus shall be entitled to serve for a term equal to said director's length of service as a member of the Board of Directors. The director emeritus shall have the right to attend and participate in discussions of the business of the Corporation at regular and Special meetings of the Board of Directors but shall not be entitled to vote on any matter. The director emeritus shall be a goodwill ambassador on behalf of the Corporation and shall hold himself or herself available at mutually convenient times for consultation with members of the Board and senior management of the Corporation concerning the business and affairs of the Corporation. ARTICLE X AMENDMENTS The Board of Directors shall have power to amend or repeal the Bylaws or adopt new Bylaws, but any Bylaws adopted by the Board of Directors may be altered, amended or repealed, and new Bylaws adopted, by the shareholders. The shareholders may prescribe that any Bylaw or Bylaws adopted by them shall not be altered, amended or repealed by the Board of Directors. Action by the shareholders with respect to Bylaws shall be taken by an affirmative vote of a majority of the voting power of all shares entitled to elect directors, and action by the directors with respect to Bylaws shall be taken by an affirmative vote of a majority of all directors then holding office. EXH 3.2-12 EXHIBIT "C" RESOLUTION OF THE BOARD OF DIRECTORS OF AMERICAN FAMILY CORPORATION RESOLVED that the following amendments to the Bylaws of American Family Corporation are hereby adopted: ARTICLE VII INDEMNIFICATION OF DIRECTORS & OFFICERS SECTION 1. INDEMNIFICATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including, but not limited to, any action, suit or proceeding by or in the right of the Corporation), whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, advisory director, officer, employee or agent of the Corporation or is or was acting at the request of the Corporation, or who was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall advance expenses to such person reasonably incurred in connection therewith, to the fullest extent permitted by the relevant provisions of the Georgia Business Corporation Code, as such law presently exists or hereafter may be amended. Adopted April 4, 1990 EXH 3.2-13 EXHIBIT "C" RESOLUTION RESOLVED, That the Board of Directors of American Corporation deems it advisable and in the best interest of the Corporation for the name of the Corporation to be changed to "AFLAC Incorporated"; and RESOLVED FURTHER, That Article I of the Articles of Incorporation be, effective January 1, 1992, amended to read in full as follows: "I. The name of the corporation is AFLAC Incorporated"; and RESOLVED FURTHER, That the appropriate officers of the Corporation be, and each of them hereby is, authorized and directed to prepare, execute and file with the Georgia Secretary of State Articles of Amendment to the Articles of Incorporation and to take any and all other action necessary or appropriate to effect such amendment; and RESOLVED FURTHER, That the form of certificate for fully paid and nonassessable shares of Common Stock of the Corporation presented to the Board of Directors be, effective January 1, 1992, adopted as the certificate to represent fully paid and non-assessable shares of common Stock of the Corporation and that a specimen of such certificate be attached hereto as EXHIBIT "A"; and RESOLVED FURTHER, That outstanding certificates representing issued and outstanding shares of common Stock of the Corporation shall continue to represent shares of Common Stock of the Corporation; and RESOLVED FURTHER, That the title of the Bylaws of the Corporation be, effective January 1, 1992, amended to read as follows: "Bylaws of AFLAC Incorporated"; and RESOLVED FURTHER, That the proposed Corporate Seal, an impression of which is affixed to this page in the margin opposite this resolution, be, effective January 1, 1992, adopted as the Corporate Seal of the Corporation; and RESOLVED FURTHER, That there is incorporated herein by reference, as fully as though set forth at length herein, any resolutions of the Board of Directors that may be required by any exchange upon which securities of the Corporation are listed, by any banks, by any transfer agents or registrars or by any government or regulatory authorities in connection with the change in corporate name of the Corporation if, in the opinion of the proper officers of the Company, the adoption of such resolutions is necessary or appropriate and that such resolutions be, and they hereby are, deemed adopted IN HAEC VERBA with the same force and effect as though set forth herein; and RESOLVED FURTHER, That the appropriate officers of the Corporation be, and each of them hereby is, authorized and directed to take or cause to be EXH 3.2-14 taken all such other and further actions and to execute and deliver any and all instruments, certificates, applications, consents and other documents and to incur all such fees and expenses as in their judgment shall be necessary, appropriate or advisable in order to carry out fully the purpose and intent of the foregoing resolutions; and RESOLVED FURTHER, That all actions heretofore taken by any officer of the Corporation in connection with the actions contemplated by the foregoing resolutions be, and they hereby are, approved, ratified and confirmed in all respects. Adopted December 10, 1991 EXH 3.2-15 EXHIBIT "E" RESOLUTION WHEREAS, The Board of Directors has deemed it appropriate to reduce the retirement age for Directors for the first time on or after April 27, 1992, from 75 years of age to 70 years of age; and WHEREAS, The Board of Directors has decided that the retirement age for Directors first elected prior to April 27, 1992, shall remain at 75 years of age; NOW, THEREFORE, BE IT RESOLVED, That Article III of the Bylaws of the Corporation be and hereby is amended by amending Section 2 thereof such that it reads as follows: "Section 2. Number, Election and Term. The number of Directors which shall constitute the whole Board shall be not less than three (3) or more than twenty-five (25). The specific number of Directors within such range shall be fixed or changed from time to time by a majority of the Board of Directors then in office. A decrease in the number of Directors shall not have the effect of shortening the term of any incumbent Director. Except as otherwise provided in these Bylaws, shareholders shall elect Directors by a vote of not less than a plurality of the votes present in person or represented by proxy at the meeting. Each Director elected shall hold office until his successor is elected and qualified or until his earlier resignation, removal from office or death. Directors shall be natural persons between the ages of 21 and 70 years, inclusive; provided, however, that any Directors who were elected to the Board for the first time before April 27, 1992, and who are subsequently re-elected shall be natural persons between the ages of 21 and 75 years, inclusive. Directors need not be residents of the State of Georgia or shareholders of the Corporation." Adopted 12/10/91 EXH 3.2-16 EXHIBIT "E" RESOLUTION WHEREAS, management has recommended that the annual meeting of share- holders be rescheduled to more closely coincide with the release of first quarter earnings; and WHEREAS, it has been suggested that the Bylaws be amended to reflect this change in the annual meeting date, effective for the 1993 annual shareholders meeting. NOW THEREFORE, BE IT RESOLVED, that Article II, Section 1 of the AFLAC Incorporated Bylaws be amended by striking said Section 1 in its entirety and inserting the following: "SECTION 1. Annual Meetings. The annual meeting of the shareholders of the Corporation shall be held at the principal office of the Corporation or at such other place in the United States as may be determined by the Board of Directors, on the first Monday in May of each calendar year (or on the next succeeding business day if said first Monday in May is a legal holiday in any year) or at such other time and date as shall be determined by the Board of Directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting." Adopted November 10, 1992 EXH 3.2-17 RESOLUTION RE: AMEND BYLAWS WHEREAS, the Board of Directors is authorized to amend and alter the Corporation's Bylaws pursuant to Section 14-2-1020(a) of the Business Corporation Code of the State of Georgia and Article X of the Corporation's Bylaws; and WHEREAS, the Board of Directors has determined that such amendment of the Bylaws is in the best interest of the Corporation and its shareholders; NOW, THEREFORE IT IS HEREBY: RESOLVED, that Article II of the Corporation's Bylaws be and hereby is amended and altered by redesignating Section 1 as Section 1(a) and adding the following new Sections 1(b), (c), (d), (e) and (f): "(b) No business may be transacted at an annual meeting of shareholders, other than business that is either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (ii) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (iii) otherwise properly brought before the annual meeting by any shareholder of the Corporation (A) who is a shareholder of record on the date of the giving of the notice provided for in this Section 1 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (B) who complies with the notice procedures set forth in this Section 1. "(c) In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation, which notice is not withdrawn by such shareholder at or prior to such annual meeting. "(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. "(e) To be in proper written form, a shareholder's notice to the Secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at EXH 3.2-18 the annual meeting, (ii) the name and record address of such shareholder, (iii) the class and number of shares of capital stock of the Corporation which are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. "(f) No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 1, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 1 shall be deemed to preclude discussion by any shareholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted." FURTHER RESOLVED, that Article III of the Corporation's Bylaws be and hereby is amended and altered by redesignating Section 2 as Section 2(a) and adding the following new Sections 2(b), (c), (d), (e) and (f): "(b) Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of shareholders (i) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (ii) by any shareholder of the Corporation (A) who is a shareholder of record on the date of the giving of the notice provided for in this Section 2 and on the record date for the determination of shareholders entitled to vote at such annual meeting and (B) who complies with the notice procedures set forth in this Section 2. "(c) In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. "(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure EXH 3.2-19 of the date of the annual meeting was made, whichever first occurs. "(e) To be in proper written form, a shareholder's notice to the Secretary must set forth (i) as to each person whom the shareholder proposes to nominate for election as a director (A) the name, age, business address and residence address of the person, (B) the principal occupation or employment of the person, (C) the number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (D) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (ii) as to the shareholder giving the notice (A) the name and record address of such shareholder, (B) the number of shares of capital stock of the Corporation which are owned beneficially or of record by such shareholder, (C) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (D) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (E) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. "(f) No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2. If the Chairman of the annual meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded." FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized to restate the Bylaws of the Corporation to incorporate the amendments adopted hereby. FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized, empowered and directed to attest to the approval of the foregoing amendments, and to make such filings and execute and deliver any agreement, document, certificate or other instrument which such officer may deem necessary or desirable to carry out the purposes of these resolutions, with such modification and amendments to such filings and such certificates, agreements, instruments or other documents as they, in their discretion, may deem necessary or desirable and in the best interest of the Corporation, their taking any such action for and on behalf and in the name of the Corporation, and/or their execution and delivery, for and on behalf and in the name of the Corporation, of any such certificate, EXH 3.2-20 agreement, instrument or document, incorporating any such notification or amendment, to be conclusive evidence of approval thereof by the Board. FURTHER RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized, empowered and directed to pay all fees and expenses incurred in connection with carrying out the purposes of these resolutions including, but not limited to, fees and expenses of legal counsel, as they, or any of them, shall determined to be necessary or appropriate, such payment to be conclusive evidence of approval thereof by the Board, and to perform all other acts and do all other things as they, in their discretion, may deem necessary or desirable and in the best interest of the Corporation in connection with the foregoing resolutions. FURTHER RESOLVED, that all acts and things heretofore done by any appropriate officer, director or by any employee or agent of the Corporation, on or prior to the date of these resolutions, in connection with the action contemplated by these resolutions, be, and the same hereby are, in all respects ratified, confirmed, approved and adopted as acts and deeds of the Corporation. Adopted 4/8/96 EXH 3.2-21 EXHIBIT "I" RESOLUTION WHEREAS, the Board of Directors is authorized to amend and alter the Corporation's Bylaws pursuant to Section 14-2-1020(a) of the Business Corporation Code of the State of Georgia and Article X of the Corporation's Bylaws; and WHEREAS, the Board of Directors has determined that such amendment of the Bylaws is in the best interest of the Corporation and its shareholders; NOW, THEREFORE IT IS HEREBY: RESOLVED, that Article II, Section 3 of the Corporation's Bylaws be and hereby is amended and altered as follows: "Notice of every meeting of shareholders, stating the place, date and hour of the meeting, shall be given to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid addressed to the shareholder at his address as it appears on the Corporation's record of stockholders. Attendance of a shareholder at a meeting of shareholders shall constitute a waiver of objection to: (a) lack of notice or defective notice of such meeting unless the shareholder at the beginning of the meeting, objects to holding the meeting or transacting business at the meeting, and (b) consideration of a particular matter at the meeting which is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. Notice need not be given to any shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting." FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized to restate the Bylaws of the Corporation to incorporate the amendments adopted hereby. FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized, empowered and directed to attest to the approval of the foregoing amendments, and to make such filings and execute and deliver any agreement, document, certificate or other instrument which such officer may deem necessary or desirable to carry out the purposes of these resolutions, with such modification and amendments to such filings and such certificates, agreements, instruments or other documents as they, in their discretion, may deem necessary or desirable and in the best interest of the Corporation, their taking any such action for and on behalf and in the name of the Corporation, and/or their execution and delivery, for and on behalf and in the name of the Corporation, of any such certificate, agreement, instrument or document, incorporating any such notification or amendment, to be conclusive evidence of approval thereof by the Board. FURTHER RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized, empowered and directed to pay all fees and expenses incurred in connection with carrying out the purposes of these resolutions including, but not limited to, fees and expenses of legal counsel, as they, or any of them, shall determine to be necessary or appropriate, such payment to be conclusive evidence of approval thereof by the Board, and to perform all other acts and do all other things as they, in EXH 3.2-22 their discretion, may deem necessary or desirable and in the best interest of the Corporation in connection with the foregoing resolutions. FURTHER RESOLVED, that all acts and things heretofore done by any appropriate officer, director or by any employee or agent of the Corporation, on or prior to the date of these resolutions, in connection with the action contemplated by these resolutions, be, and the same hereby are, in all respects ratified, confirmed, approved and adopted as acts and deeds of the Corporation. Adopted February 13, 2001 EXH 3.2-23 EXHIBIT "H" RESOLUTION AMEND BYLAWS AFLAC INCORPORATED WHEREAS, the Board of Directors is authorized to amend and alter the Corporation's Bylaws pursuant to Section 14-2-1020(a) of the Business Corporation Code of the State of Georgia and Article X of the Corporation's Bylaws; and WHEREAS, the Board of Directors has determined that such amendment of the Bylaws is in the best interest of the Corporation and its shareholders; NOW, THEREFORE IT IS HEREBY: RESOLVED, that Article II, Section 1(d) of the Corporation's Bylaws be amended by striking said Section 1(d) in its entirety and inserting the following: "(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty- five (25) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting made, whichever first occurs." FURTHER RESOLVED, that Article III, Section 2(d) of the Corporation's Bylaws be amended by striking said Section 2(d) in its entirety and inserting the following: "(d) To be timely, a shareholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty- five (25) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs." FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized to restate the Bylaws of the Corporation to incorporate the amendments adopted hereby. EXH 3.2-24 FURTHER RESOLVED, that the appropriate officers of the Corporation be, and each of them hereby is, authorized, empowered and directed to attest to the approval of the foregoing amendments, and to make such filings and execute and deliver any agreement, document, certificate or other instrument which such officer may deem necessary or desirable to carry out the purposes of these resolutions, with such modification and amendments to such filings and such certificates, agreements, instruments or other documents as they, in their discretion, may deem necessary or desirable and in the best interest of the Corporation, their taking any such action for and on behalf and in the name of the Corporation, and/or their execution and delivery, for and on behalf and in the name of the Corporation, of any such certificate, agreement, instrument or document, incorporating any such notification or amendment, to be conclusive evidence of approval thereof by the Board. FURTHER RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized, empowered and directed to pay all fees and expenses incurred in connection with carrying out the purposes of these resolutions including, but not limited to, fees and expenses of legal counsel, as they, or any of them, shall determine to be necessary or appropriate, such payment to be conclusive evidence of approval thereof by the Board, and to perform all other acts and do all other things as they, in their discretion, may deem necessary or desirable and in the best interest of the Corporation in connection with the foregoing resolutions. FURTHER RESOLVED, that all acts and things heretofore done by any appropriate officer, director or by any employee or agent of the Corporation, on or prior to the date of these resolutions, in connection with the action contemplated by these resolutions, be, and the same hereby are, in all respects ratified, confirmed, approved and adopted as acts and deeds of the Corporation. Adopted May 7, 2001 EXH 3.2-25 EX-12 3 q301exh12.txt 1ST QUARTER RATIO OF EARNINGS EXHIBIT 12.0 EXH 12.0 AFLAC INCORPORATED AND SUBSIDIARIES Ratio of Earnings to Fixed Charges (In thousands) Three Months Ended March 31, 2001 2000 ---------------------------- Fixed charges: Interest expense $ 5,106 $ 4,866 Rental expense deemed interest 118 133 -------- -------- Total fixed charges $ 5,224 $ 4,999 ======== ======== Earnings before income tax $ 274,201 $ 243,265 Add back: Fixed charges 5,224 4,999 -------- -------- Total earnings before income tax and fixed charges 279,425 248,264 Adjustments: Realized (gains)/losses 1,385 2,456 -------- -------- Total earnings before income tax and fixed charges and realized (gains)/losses $ 280,810 $ 250,720 ======== ======== Earnings before income taxes and fixed charges 53.5x 49.7x Earnings before income taxes and fixed charges, as adjusted 53.8x 50.2x EXH 12.0-1 -----END PRIVACY-ENHANCED MESSAGE-----