美國家庭壽險 (AFL) 2002 Q1 法說會逐字稿

Good morning and thank you for standing by. All participants will be able to listen only until the question and answer session of the call. This call is being recorded at the request of AFLAC. If anyone has any objections, you may disconnect at this time. If you would like to ask a question during today's call, please press star one. You will be announced prior to asking your question. To withdraw your question, you may press star two. Once again, to ask a question during the call please press star one. I would like to introduce your host for today's call Mr. Ken Janke, Senior Vice President of Investor Relations. Sir, you may begin.

Good morning and thank you. Welcome to our first quarter conference call. Joining me this morning is Dan Amos, Chairman and CEO of AFLAC; Kriss Cloninger, President and CFO; Aki Kan, Executive Vice President of U.S. Internal Operations; and Joe Smith, Senior Vice President and Chief Investment Officer. Also joining us from Tokyo is Allan O'Bryant, President of AFLAC International.

Before we start today let me mention the Safe Harbor language, which you've heard before. As you know, some statements in this teleconference are forward looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give you no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. So I would encourage you to look at our latest quarterly reported SEC filings to see the various risk factors that could materially affect our results.

Now I'd like to turn the program over to Dan. We'll begin with some comments about our quarter in the United States and Japan, and then I'll follow briefly with a few financial results and we'd be happy to take your questions. Dan.

Good morning and thank you for joining us. I am pleased with the way we started 2002. We exceeded our sales expectations during the first quarter in both Japan and the United States. From a financial perspective, AFLAC Japan's operating trends, revenues, and pretax earning's growth were in line with our targets, and AFLAC U.S. again produced strong earned premium and earnings growth.

We met our primary financial objective by increasing operating earnings per share 15.2 percent, excluding the impact of the currency. Most importantly, we expect that kind of growth to continue in this year and beyond.

Let me begin with AFLAC Japan. As you know, we had initially expected first quarter sales to be down about five percent compared with last year's first quarter. After seeing January and February sales, I became confident that we would achieve our sales target or even do a little better, although I did not expect the positive sales comparison. So we are especially pleased that sales actually rose 4.4 percent in the first quarter.

Several factors contributed to our better than expected sales. Cancer Life sales continued the improvement that we saw in the fourth quarter of last year. Cancer Life sales were up 14.5 percent in the quarter including Rider PACK. Cancer Life sales again benefited from our marketing alliance with Dai-ichi Mutual Life.

Also benefiting sales during the quarter was a 5.7 percent increase in ordinary life sales. This product category, which comprises small face value whole life and term life coverage, has become a larger contributor to our sales as we've increased the number of individual sales associates in our distribution system.

In addition, Rider MAX sales were relatively flat. You may recall that Rider MAX sales declined 44 percent during 2001. In the first quarter of this year, they were down only .9 percent. In fact, Rider MAX sales in March were the largest since December of 2000. One reason for these improved results was the introduction of a new whole life Rider MAX product. Our market research indicates that consumers prefer whole life coverage to term because of the level of premiums.

Finally, our improved first quarter sales reflect the successful launch of our new supplemental medical product called EVER. We introduced EVER, which is basically a whole life standalone MAX policy toward the end of February. Even though it was available only in the last six weeks of the quarter, it contributed approximately five percent to the first quarter sales. The entire medical product category, which includes EVER and MAX, had sales of 19 percent in the quarter.

Our new director of marketing spent a great deal of time researching the market. We knew the public's interest in medical insurance had been increasing. And with the likely hike in the co-payments for Japan's healthcare system, we expect further increases in consumer demand. Through research we also learned that 40 percent of the consumers prefer a standalone medical product with no special benefit provisions for cancer treatment. That's a market we've not reached because most of the marketing emphasis has been on cancer, life, and medical riders.

In looking ahead, I believe EVER will be a winner. The great news is the research we conducted last fall suggests that more respondents would buy medical insurance from AFLAC than any other insurer. Our product is priced extremely competitively, yet anticipated profit margins is still much higher than that of the Cancer Life policy.

In addition, our sales force is very excited about the product. And consumers' response to the advertising during the first two weeks of availability was two times greater than when we introduced the 21st Century Cancer Life last year. As the year progresses we should see continued momentum with EVER, especially in the second half of the year.

In addition to adding new policies to AFLAC Japan's product line, improving our already strong distribution network is another important part of our strategy.

During the first quarter we recruited about 650 new agencies, bringing our total number of agencies to more than 10,100 at the end of March. We now have more than 53,100 licensed associates in Japan, and that doesn't count the 50,000 agents at Dai-ichi Mutual Life.

Our target is to recruit about 3,000 agencies this year, and our Japanese management has a portion of their 2002 incentive bonus based on achieving that number. We're especially interested in recruiting individual agencies because they give us better access to Japan's vast small business market, where we estimate that there are about 40 million potential customers.

In addition, individual agencies are better suited to make face-to-face presentations, which are more effective in Japan's difficult economic environment. That can clearly be seen through the sale of our ordinary life product and Dai-ichi's success with the Cancer Life policy because individual agents are responsible for both.

Our first quarter sales results give us greater confidence that we will achieve our sales target of a five to 10 percent increase for this year. But please don't assume that we will see similar or greater rates of change in the second quarter.

As we said earlier in the year, we believe sales will likely be flat to up slightly in the second quarter, and our view on the second quarter sales hasn't changed for several reasons.

First, you'll recall that last year second quarter was the best quarter in terms of sales volume, meaning we faced tough comparison. Second, Dai-ichi Life does not have a push month planned in the second quarter as they did in the first quarter. And third, we sold a significant amount of business annuity product at the start of last year's second quarter. As you know, we discontinued selling that type of annuity product last May.

To help achieve our second quarter target, we're conducting a sales contest, and AFLAC Japan's management has special incentive bonus for positive sales comparisons in the second quarter. In the second half of the year, we expect to see greater improvement due in part to the optimism of our new EVER product, as well as easier sales comparison.

As you've heard me say many times, Japan remains a sizeable insurance market, and we believe it's perfectly suited for us even with the challenges resulting from the weak economy. It appears more likely that the healthcare reform will become effective in April of next year, which has already increasing the demand for our product. At the same time, Japan's aging population will also increase the need for private health insurance. And even though competition has increased over the last several years for our type of products, we believe we're in the best position to capitalize on Japan's vast market potential.

I know some analysts have recently visited Japan to meet with us and our competition. And I believe they came away with the same conclusion. We have the best products at the best price, and we pay the highest commissions. In addition, we also have the best distribution, and when it comes to supplemental insurance products, the best brand in the industry. I believe we can take advantage of those competitive strengths and continue to outgrow the industry.

Turning to our U.S. operations, sales grew 16.4 percent to $236 million in the quarter, which puts us ahead of our sales target of a 15 percent increase. I think that's especially strong when you realize that the 16.4 percent increase follows a 34.5 percent increase in the first quarter of 2001. In fact, first quarter sales were second only to our record smashing fourth quarter of 2001. We believe the surge in the new sales since 2000 has reflected the significant improvement in brand recognition from our popular advertising.

Accident and disability was again our number one product accounting for more than half of our total new sales. Cancer insurance also sold very well, posting a 17.1 percent increase. Our fixed benefit dental policy was again our third best selling product category, representing seven percent of the total sales for the quarter.

We also introduced a new personal sickness indemnity policy in the quarter. We developed this new product to help consumers pay for sickness and cope with rising deductibles and co-payments. It's available in 13 states in the first quarter and by the end of the month it should be available in an additional 21 states.

Growth of our distribution system will be an important driver of our sales results. And like sales, our sales force growth has also benefited from our advertising program. During the quarter, we had a recruiting push and recruited more than 6,000 new associates, and the average number of associates who produce business for us each month increased by 22 percent to more than 15,360 in the quarter. At the end of March, we had more than 45,700 licensed associates representing AFLAC in the marketplace in the U.S.

As we stated following the release of the fourth quarter results, we set a sales objective of 15 percent increase for 2002, which would put the U.S. sales above the billion-dollar mark for the year. Based on what we've seen so far this year, I think that remains a reasonable sales target.

All indicators suggest that we have another tremendous year planned in 2002 in the U.S. More importantly, I believe our success in tapping the huge U.S. market will extend far beyond this year. The United States is not only a very large market; we believe it's significantly under penetrated in terms of products.

As we've said before, the Small Business Administration estimates that they are 5.5 million businesses with fewer than 500 employees -- that's our primary market. And with more than 213,000 payroll deductions in client accounts, we are clearly the market leader for the sale of supplemental insurance products. Yet, our leading market position translates into less than four percent penetration of the number of small to medium businesses. In addition, our recent success enrolling employees at large work sites further suggest that we have just scratched the surface in that potential market.

I'm sure you noticed that we purchased 5.2 million shares during the quarter. Our buyback program enhances our earnings per share and our return on equity. And we continue to view it as the best use of excess capital. At the same time, I believe buying back our shares demonstrates our commitment to the company and our confidence in AFLAC's future.

Overall, I'm very pleased with the first quarter results and the direction of the company. As I've said following the fourth quarter earning's release, I hope that each quarter could prove to ourselves and to you that we are on track for renewed sales growth in Japan. I believe our first quarter is evidence that this has happened and that AFLAC Japan is posed for continued growth.

We offer the best value in our segment of Japan's insurance industry, and we believe we will continue to significantly outsell our competitors. At the same time, our ability to penetrate the U.S. market means that AFLAC U.S. should play an increasing larger role in AFLAC Incorporated. Together we believe the strength of our market positions in Japan and the U.S. puts us in a very good position to achieve our corporate earnings objectives.

As you're aware, our objective is to grow operating earnings per share 15 to 17 percent in 2002 and 2003 before of the yen. Our guidance remains unchanged as we expect to increase operating earnings per share 15 percent this year, excluding currency fluctuation. And I believe we will achieve our target in 2003 as well.

I know many of you are waiting for us to unveil our 2004 earnings per share target at the May analyst meeting. We'll talk about it in more detail in a few weeks, but I can tell you now that we think 15 percent earnings per share growth in 2004 is a reasonable target. In other words, we expect our strong earnings growth to continue. Ken.

Thank you, Dan. As I mentioned, let me just briefly go through some of the financial highlights, and then we'll take your questions.

Starting with Japan, I think we got off to a good start in 2002 in yen terms. In looking at the top line, AFLAC Japan produced earned premium growth of 5.2 percent. Investment income rose 10.5 percent, benefiting from the impact of the weaker yen on our dollar denominated investment portfolio as income. As a result, revenues rose six percent for the quarter.

Our persistency rate declined but remained strong and the highest in the Japanese life insurance industry. Our total persistency on an annualized basis was 94.2 percent for the first quarter compared with 94.8 a year ago. Note that like many things, persistency is influenced by business mix because newer products may have lower persistency rates than the other ones. Chance of persistency does remain above 95 percent, and the persistency is also being influenced by the amount of directives that we're writing in Japan, which does have higher lapse rates.

Let me comment also on the operating trends. As we expected, the benefit ratio, which has declined for the last several years, continued to improve in the quarter. It decreased to 68.5 percent compared with 70.1 percent a year ago. The decline primarily reflects changing business mix, which we've discussed before, especially because of the sale of riders. It also reflects improvements in claims experience on certain products, including Rider MAX and Cancer Life.

The operating expense ratio was unchanged in the quarter at 19 percent, and as a result the pretax profit margin showed further improvement rising from 10.9 to 12.5 percent. Excluding the impact of the weaker yen on our dollar income, the pretax margin was 12 percent for the quarter. Pretax earnings rose 21.7 percent in yen, and again had the yen remained unchanged compare with 2001, they would have been up 16.6 percent in yen terms.

Investment yields in Japan actually improved slightly in the first quarter over last year. The 20-year JGB averaged a yield of 2.1 percent in the quarter, compared with two percent in the fourth quarter. We continue to invest at higher rates than the government bond yields would suggest.

For the quarter, we invested cash flow in yen denominated securities at 3.51 percent. Including dollars, the blended rate was 386. That portfolio yield was 485, which was down about four basis points from the end of the year.

As of Monday, we had invested or committed to invest about 46 percent of our estimated 2002 cash flow at an average yield of 3.91 percent, which is quite a bit ahead of our budget of a 3.5 new money yield for the year.

Next, let me turn to AFLAC U.S., which you've heard had an excellent quarter. Revenues rose 18 percent on a 19.5 percent increase in earned premium growth. That's the 23rd consecutive quarter of double-digit growth for earned premium. Investment income was up 9.3 percent.

The persistency of our U.S. business was 73.9 percent, which was down from 74.8 a year ago. Persistency is still heavily influenced by changes in business mix, but more recently the very rapid growth of new sales because business has higher lapse rates than older business.

The operating ratios remain stable. In the first quarter, the benefit ratio declined slightly from 53 percent to 52.9. The expense ratio increased from 31.1 to 31.8, reflecting higher advertising expenses and higher DAC amortization. Due to the higher expense ratio the margin declined slightly from 15.9 to 15.3 percent. And as a result, pretax operating earnings were up 13.5 percent for the quarter.

In terms of U.S. investments, the new money yield for the quarter was 752 versus 787 a year ago. And the yield on the portfolio has been very stable at eight percent, which is exactly what it was a year ago, and it was 8.02 at the end of the year.

In looking at some other items for the quarter, non-insurance interest expense was unchanged at four million. The debt to total capital ratio, excluding unrealized gains on our fixed maturity securities, was 25 percent, which is line with our target and compares with 25.4 percent at the end of the year.

During the quarter, as Dan mentioned, we purchased $5.2 million shares. We did so at an average cost of 25.5 per share. We had 24 million shares for purchase at the end of the quarter, and we anticipate still that we will purchase $12 million shares for the full year.

Parent company and other expenses were up slightly from $8 million to $12 million. The biggest movement there is the lower level of investment income at the parent company level because of our share repurchase activity.

Total company operating margins rose, reflecting the improved profitability of AFLAC Japan with a pretax margin arising from 11.3 to 12.5 percent, and the after-tax margin increasing from 7.3 to 8.1 percent.

The tax rate remains stable at 35.3 percent versus 35.2 a year ago, and operating return on equity was 21.6 percent for the quarter.

As reported, diluted, operating, and earnings per share rose 9.1 percent to $0.36, which was slightly better than estimates. The weaker yen penalized our earnings per share by $0.02 in the quarter. So excluding the yen's impact, operating earnings per diluted share rose 15.2 percent, which is, you know, is in line with our target for this year.

Finally, let me comment on the outlook for the remainder of the year and next year. As you know, our target is to increase operating earnings 15 percent for this year before the effect of the yen. If you assume that we achieve our target, which is at last year's exchange rate of 121.54, that suggests we'd earn a $1.54 in earnings this year compared with $1.34 last year. However, the yen is obviously weaker and if it remains in the 130 to 135 area for the rest of the year, we would expect that to translate into reported earnings per share of about $1.47 to $1.49 for the year. The current first call consensus is $1.48. Under that scenario, second quarter earnings would likely be in the area of $0.36 per share, which happens to be the first call estimate at this point.

And as you've heard our target for 2003 remains to increase operating earnings per share 15 to 17 percent excluding the impact of the yen. Currently, the 2003 consensus estimate among 20 analysts is $1.70, or a 15 percent increase over the 2002 estimate.

That concludes our comments, and we do have quite a bit of time left remaining for your questions. So, , we'll be happy to go to the Q&A now.

Thank you, if you'd like to ask a question please press star one. You will be announced prior to asking your question. To withdraw your question you may press star two. Once again, to ask a question please press star one. Our first question comes from Ed Spehar of Merrill Lynch.

Good morning everyone.

Good morning.

A couple questions, I was wondering could you comment at all about what the margins on EVER look like compared to Rider MAX?

And, if you could give us any sense of looking at your mix of sales--your mix of sales today, or what you think sales are going to look like in Japan this year and next.

What would your margins look like if your in-force book looked similar to your current mix of sales? Thank you.

Ok, I'm going to let Kriss--

First of all, regarding the profit margin on EVER. EVER profit margin is somewhere between our traditional cancer policy and Rider MAX. It's somewhere in the middle of those two. We priced EVER to be more competitive than Rider MAX.

Actually, when we initially priced Rider MAX, we wanted to charge a lower rate, but the FSA thought we would be unfairly competitive and made us use something closer to the industry average. So when we priced EVER, we were able to use the benefit of some of our own AFLAC medical experience to convince the FSA that our morbidity assumptions were appropriate, and we could justify our competitive posture on that product, so somewhere in between traditional cancer, which was around 10 percent of premium, and Rider MAX, which is higher.

I haven't really taken a look to see what our aggregate profit margin would be if our total in-force were represented by our new sales, but it would be materially higher than what we presently have. You know, as we've said our benefit ratio has been constantly improving since about, you know, the mid '90s, and that impacts the product mix changes that we've had going on since that time. And we're also made changes to the core cancer policy through low or no cash values, and the profit margins of the core cancer business has improved also since the mid '90s, but I can't give you a specific number, Ed.

One other thing, Ed, is the new EVER product is doing quite well. In fact, our marketing department told me that although Rider MAX -- we've always said if you look at that as a standalone, we were selling the most medical policies in Japan. But now if you look at just EVER as a standalone product and compared to all of our competitors, we believe the first month coming out of the shoot -- although we don't have the numbers to substantiate it -- but based on patterns we've seen, we believe we've already captured the number one in terms of standalone medical policy sales, and believe we'll hold that for the year. So it's going to continue to play an important role.

Thank you very much.

Jason Zucker of Banc of America Securities. You may ask your question.

Thank you, a related question on margins. I was hoping you could perhaps give us some guidance on what margins might look like in Japan in 2002 and 2003. The surge we just got in this past quarter, I was wondering if that was sustainable.

And you certainly have signaled that margins will expand, and I was hoping you could just tighten that up a little bit and give us a sense over the next two or three years of perhaps where it might go to?

Well, I expect to see continued improvement in the benefit margin over the next couple of years. Last year for the year we averaged 69.4 on the benefit ratio to total revenues. This first quarter we were 68.5, which was only about a half a point below the third and fourth quarter from last year. And I think we'll be in the 68 to 68.5 for the remainder of 2002. Depending on the sales of EVER and the like, I expect to see some additional improvement in 2003. Probably, you know, it's realistic to expect a half a point. It could be a little more than that.

I want to point out that another impact -- a significant impact on our pretax profit margin has been not only the benefit ratio improvement, but the effect of the yen weakening on our investment income. Now that's impacted our margin to some extent and also our increase in growth of yen-denominated earnings.

On the yen earnings, increase comprises roughly five percent of the 20 percent increase. So the yen weakening may not always be there, Jason. And you kind of have to take that out when you're looking at margin improvement and increase in yen-denominated earnings improvement because dollars are dollars, and that doesn't translate up when the yen weakens in our dollar reporting.

Is there a comment that'd you be willing to make based on sort of the 12.5 percent margin numbers -- so looking at the full gross margin number. And I guess perhaps the question is how much flexibility do you have over that margin going forward? Because we know where the benefits ratio now stands, and perhaps the rest is just in the way that expenses are going to be allocated.

Well, I'm not sure I understand exactly what you're getting at, but I think the 12 percent margin for the year is probably roughly in line with expectations under a constant yen scenario.

OK, that was what I was getting at, thank you.

OK.

Tom Gallagher of Dresdner, you may ask your question.

Good morning. First a question, just how you should be looking at the--I'm just looking at a ratio, claims to total revenues. I know that moved up a bit in the quarter, and I know that's primarily due to the makeshift in terms of products. But can you just comment on where we should expect to see that going? It moved up to 46 1/4, and I know at the same time your total benefits to total revenues ratio has fallen. Is that sort of in line with where we should expect to see this stabilize, or should the paid claims continue to go up from here?

Well, the medical products, the Rider MAX and the EVER, both have more current benefits as compared to future benefits vis-à-vis the Cancer Life policy. You know, the Cancer Life policy, the claims incur way on out in the policy life. And so, we have a significant provision for future policy benefits relative to current cash.

On the medical-type products you get more cash up-front. So you have a higher cash loss ratio or incurred loss ratio in the early policy years, and that impacts the incurred benefit ratio that's going through P&L right now.

As a matter of fact, Cancer Life is down to roughly 70 percent of our in-force premiums at the end of 2001, compared to about 83 percent at the end of '97. So you see that we've got a significant mix change there between policies with benefits way in the future and policies that are keyed more to current benefits. So I think you're going to see incurred benefits to total revenues continue to increase as our cancer business ages, and as we add more medical business to our total portfolio.

OK, and then just a follow up on that.

OK.

When you look at the 46 percent ratio in the quarter, if you just look at past averages it was more in the low 40's. Is 46 more indicative of the right number going forward, or is that going to bounce around a lot?

I don't think it will bounce around a lot. Actually, I think it will probably continue to trend up a little bit. I can't think of anything that caused it to be particularly high this quarter, but I think for the year it's going to be in that ballpark.

OK and then one follow up just on affiliated corporate agency channel. Can you just how the one-on-one selling is going, and whether it's helping the response ratio?

It's still a little too early to tell, but I can probably report back on that at the end of the second quarter and have more insight into it.

Ok, thanks.

It's just too early; there's no real numbers.

David Lewis of SunTrust, you may ask your question.

Good morning, congratulations on a great quarter. Kriss, too much on the margins but just some numbers based on when you gave us with the benefit ratios. It looks like to me that in 2003, coming off a 12 percent margin in '02, you could probably get to a 12.5 maybe even a 13 percent margin, and clearly a 13 percent margin in 2004. And you know as we come off of a 70 percent of Cancer Life in-force book of business, where does that peak out at?

Well, it all depends on how much medical business we sell relative to the cancer business. But I'll also say that our new cancer business has a higher margin than the old cancer business. So we've got several factors, and we're going to cover this at the analyst meeting in more detail, David, but we've got higher margins on the medical. We've got higher margins on the cancer. We've got some modestly improving trends on the old cancer, and the 13 percent you suggested for 2004 is not unreasonable.

Good, that's helpful. Dan, can you talk about the proposed co-pays, when will that become law, if you can call it that, and when will it be fully approved? I understand it's been, kind of gotten the nod already for in April 2003.

That's right. It's got a nod, but it's not approved. But almost every paper or news TV show you see is mentioning it and talking about it. And I tried to relate to it. I said it's much like a hurricane, that when someone tells you off the coast, "A hurricane's coming," a group automatically leaves. And what we're seeing is many of our customers or potential customers are already talking to us about buying the medical product. But when the winds really pick up is when you'll really see the interest occur. And so I think that as we move into the second half of the year and certainly into 2003, more and more people are going to be interested in medical insurance.

What I said is even if we had everybody in Japan insured, when you go from a 20 percent to a 30 percent co-pay and deductible, that means there's 50 percent more insurance to be written. So there's huge potential out there. And with this product that we priced to be competitive, we believe that there's great potential. Again, I want to go back to -- but still I say it will be five to ten percent increase this year, but I think that supports why it's looking good. And certainly 2003 looks like it will be a good year for us too, but it's a little too early to tell.

Well, if there's a 50 percent greater need of coverage and someone a year ago bought the old Rider MAX part, do you go back to them and try to get them to buy another half unit or full unit, how does that work?

Oh yeah, that's what will happen. We'll have to go back and offer them additional coverage to cover that. And remember that even if you buy today, ours pays the cash. And so even if you -- you actually could be over insured in terms of having additional funds. Now we know you're really never over insured because there are so many out-of-pocket expenses that are associated with medical costs that you can use the funds, but it's not like it pays . So if you bought a policy, that basically would set it up in a way to where you had the 30 percent coverage, but yet it doesn't go in effect until April, and in that meantime you had a claim, we would pay you the equivalent of the entire amount. And because our policies are age-specific, you get it at a cheaper rate if you buy it this year than you would if you got a year older and waited until next year.

Good, thanks very much.

Caitlin Long of Credit Suisse First Boston, you may ask your question.

Good morning, just two quick questions, could you verify that there were no reserve releases that helped the margins at AFLAC Japan this quarter?

And then also talk a little bit about the U.S. expenses, those are a little bit higher than we anticipated, where might those be going? Thanks.

First of all, there were no reserve releases either this quarter or in any prior quarters that benefited Japan earnings. I'll just say that categorically.

Good.

Aki, do you want to comment on expenses?

The U.S. expense side there's -- fundamentally there has been no change. The only change made was like what Ken said the DAC amortization came up because of our huge increase in our new business and an intensive weight on the first quarter for the advertising expenses. But advertising is more like a seasonal thing, and it will come down a little bit later half of the year -- so especially in the summer season. I would not assume that the advertising expense would keep going like that. I'm sure that we're going to have somewhere around 2.3 percent of revenue percentage for advertising expenses for this year, just like years before. And for other operating expenses, I think everything is fine right now.

Did the huge increase in recruiting have something to do with first quarter numbers as well?

Recruiting we do not really spend much amount of money because most of the recruiting is done by our field force. And we do some incentivize things for our recruiting agencies, but we are not really spending much expenses for recruiting.

But, Caitlin, it does have an indirect in that when we advertise heavily, people are more interested in talking to us about coming to work. So it's indirect but not -- there are no direct ads for recruiting, but it does help us.

And also for the expense side, what we are trying to do right now is we are focusing on the per-policy efficiency for the entire campus over here, and we are making sure that per-policy productivity will increase for the future. So I don't think there is any problems for that.

Okay, that's great, thank you.

Caitlin, I have a just a follow up comment on your question about Japan reserve releases. I gave you a very short answer, but it was accurate. But I do want to explain that every quarter and every year we constantly look at the estimates we make in terms of plan reserves and to some extent reserves for future policy benefits, and we assess whether or not the amounts we provided are adequate or they're overly adequate and the like. And most of you know that in the fourth quarter of last year, that we reached the conclusion that our claim reserves in Japan were more than adequate to reasonably provide for expected future claims, and we did release or reduce some claim reserves.

However, at the same time in an unrelated area, we also concluded that our assumed interest rates on certain closed blocks of benefit reserves were too high relative to the investment yield rates we were obtaining on new money, and we made a reserve strengthening for some of those old closed blocks that might otherwise create an on-going profit drain on the company. And we strengthened reserves on those blocks.

So we do changes in estimates for time to time, and we tend to take all those -- as a matter of fact, we always have taken those through operating earnings. We don't operate like some other companies that anytime they have a reserve strengthening, they count it as a non-recurring item. We tend to believe that non-recurring items ought to be non-recurring. And if they belong in operations, they belong in operations, and that's where we take our changes and estimates. So the changes and estimates regarding claim reserves in the fourth quarter of last year were all set by changes in estimate on future policy.

Benefit reserves -- that was what happened in the fourth quarter last year. This quarter there was nothing in the way of an extraordinary change in estimate that impacted the numbers.

That's great. I was just trying to verify if the margin expansion was real and it's clear. Thank you.

Lisa Fasano of Salomon Smith Barney, you may ask your question.

Good morning. I just had a question about sales in Japan. I thought maybe we could look at that a little more closely by distribution channel as opposed to product. If I looked at the sales in this quarter, which were $24.1 billion, and Dai-ichi accounted for 14 percent of that, so that equates to about $3.4 billion yen. That would leave the non Dai-ichi sales force with about $20.7 billion worth of yen sales. And if I compare that to first quarter of 2001 -- which I believe the Dai-ichi alliance started at the end of the quarter -- that would imply that those sales were down about 10.4 percent from the non-Dai-ichi agents.

I just wondered if you wanted to comment on that, and maybe provide us with some guidance going forward as to how you think those two distribution channels will perform?

Well, going forward we try to look at it as one. We some of our existing management team, and we moved them to Dai-ichi and asked them to help with that. So it's a matter of moving management around to fill the channel voids in terms of what we had. I think ultimately as we've managed this, we've look at it in terms of just reaching the five to 10 percent growth, and we think that is achievable. And we have not worried about whether or not it came directly from Dai-ichi or not.

Now the EVER product is a product that has totally come from our traditional sales channel. And I think that they, in fact, will focus more on the EVER product than they will the Cancer Life this year and even next year as well, because as I mentioned to you earlier, 40 percent of the people said they wanted to buy a standalone medical policy. So you're going to see a move in that direction, and I think you're going to see it pick up in the -- certainly in the second half of the year. And even in the second quarter, it's still going to be strong sales even though we said, you know, it'll be flat to up slightly.

So you don't have any goals or plans by this different distribution channel, as far as how many agents you're going to add, or how much you think that's going to add to your total sales?

Well, you know, as I told you, we expect to hire 3,000 new sales people, and that will be just in the traditional sales channel.

Right.

And the Dai-ichi number, of course, we don't look at how many people they hire. In terms of the sales, no, I just don't have the breakdown at this time.

OK, thank you.

Steven Schwartz of Raymond James, you may ask your question.

Hi, good morning everybody.

Good morning.

A couple of questions. First off, I think that a better comparison for sales is x fixed annuity. Does somebody have handy what percent of sales were fixed annuity in the first quarter of last year?

Well, Steve, last year -- this is Ken -- last year we sold a little over 2 billion yen of the annuity product. A large majority of which was the business product that we subsequently discontinued. In the first quarter of this year, we sold 420 million yen of the individual annuity, a product that we're very comfortable with, which we've been selling for the past few years. So clearly the sales comparisons were affected by that sharp decline in annuities, and without it we would have had a sizeable increase in sales.

OK, Ken, while you're on, could you touch on the share repurchase and maybe some share repurchase guidance? Obviously, it was very, very large in the first quarter.

Well, I think we were just trying to take advantage of the relative value. I mentioned the average cost was 25.5, we thought that was very attractive. I think we would caution to everyone not to get carried away with the 5.2 million shares and annualized that. Our modeling internally was predicated on a purchase of 12 million shares for the year, and we're still going to stick with that.

OK, great. And for Dan, my understanding is that Dai-ichi has a medical product, is that correct?

Yes, they do but they don't pay a commission on it, and it's not something that their field force is excited about, and we're constantly trying to find a way here to be able to get them to offer Rider MAX. And although we haven't reached any agreement with them at this point, it's something that we are working on, and it has an enormous potential if we can find a way to work into that. Because they pay almost, I'd say, no commission -- such a small commission -- they do make a profit on it. But it's really not a competitive product in relationship to our products. And their field force realizes that, and so we're analyzing how we could do that now.

But is there -- I guess that other question I had is obviously there seems to be some chance at some type of alliance on medical products or with Dai-ichi. If not with Dai-ichi, is there a chance with somebody else on that product?

You know we're constantly monitoring on the non-life level whether or not there would be anybody to do business with. On the life, you know, basically we're in with Dai-ichi, and it would be very difficult for us to do it with another company. At the same time, I think pressure is mounting for them to consider medical, and I'm cautiously optimistic at some point they may consider it. But I don't want to, you know, at this particular point tell you they'll do it, because I just--if you had to tell me would they do it today, the answer is no. But as we continue to advertise, as they continue to talk about the increased co-payments and deductibles, I think there's an opportunity to get their attention and be able to work out something. But at this point, I have to tell you no.

OK, great. That's what I had for this morning.

Mark Lane of William Blair & Company, ask your question.

All my questions have been answered, thanks.

Vanessa Wilson of Deutsche Bank, you may ask your question.

Thank you, good morning. Could you give us a sense, maybe a little bit more color on the competitive landscape for EVER? What are the types of companies that offer competing products, and how big is that market? Is it a relatively new market, or are you entering a fairly, fairly mature market in taking share?

Well, the EVER product is really very similar to the MAX policy itself. The whole life element is the thing that people are attracted to. You know, our MAX policy is a ten-year term, and so that's one reason we've introduced a whole life Rider MAX as well. It's initially more expensive but it's a level premium, and so that offers a lot of opportunity for us. All I can really talk about specifically is is the leader in standalone medical sales, and their particular product is about, it depends on the age, but let's just say conservatively ours is 10 percent better, a cheaper premium. And I think the best way to prove that is what I said about April numbers, is that in that short period of time of only having it six weeks on the market, all of the sudden now we think we're the number one seller of standalone medical, and I think that speaks volumes about it.

Dan that just brings up one additional question. You've launched a new MAX product with a whole life chassis in the first quarter, and you also launched EVER in the first quarter, and you also had the continuation of sort of the re-launch of the 21st Century Cancer. That's the first time in my memory that you've done so many things in a single quarter. And, you know, you had a lot of balls in the air and it really played out beautifully. How is your marketing department different? I mean we know Akitoshi is there, but what has been changed in Japan that now you can juggle that many balls in one quarter?

Well, first of all, the medical standalone policy and the Rider MAX are not that different in terms of the concept itself. You're still trying to fill a void, and so the presentation you make is almost identical. Whether it be -- and the only difference is whether or not they own a cancer policy when you presented it to them. But you wouldn't present the EVER to the people that have the cancer, even though they could buy it. You generally would just present the other, so I don't see it as that different. The Cancer Life, 21st Century Cancer Life, I think it's just been building and people now get it. I don't think there's just a surge of something brand new with it.

But the final point is how is the marketing department changed? And I think the answer is that, you know, any time you have a tough year for whatever it might be, in our case it was sales last year, what did you learn from it? And the change is we went in, and we made a lot of changes. One is we put in somebody that really understood marketing. We had sales managers before, very good. Vanessa, you know, I told you that in the past it was much easier for us to know what sales were going to be because all we had to do in the past was figure out how many applications we mailed out to figure out what the head rate was, and that's what our sales were going to be.

As our business becomes more on an individual basis or on a one-on-one basis, there's more volatility but there's more potential too. But our marketing person understands that and has much better research and can analytically understand what the potential is, and what we should do. The next thing is we retired a lot of that first generation. Great people, did a lot of wonderful things for the company, but it was time for them to move on and let us have an opportunity to put new and aggressive people in there. Those people understand that they've got to produce. They also have stock options and realize if the stock goes down that it hurts them, and it would really make a different in their standard of living when they retire.

So all of those things together, I think have impacted our marketing department. But the marketing department is still learning. As even in the U.S., we're constantly learning. You never figure the market out totally, but you do it to the best of your ability. And my sense is though that they are much more market savvy, understand what they've got to do to fill the customer's needs and the agent's needs and are doing a better job of it.

And my final question is there was some concern that the EVER product might cause cannibalization of another product, that doesn't appear to have happened?

No, we haven't seen that. Now, granted, we're just into eight, nine weeks of selling, but there's nothing we've seen that supports that. Again, I think one of the reasons might be the co-payments and the deductibles going up, people don't think of dropping anything. They think they need more coverage for everything.

Thank you.

o'bryant: One of the things, Vanessa, that we've seen early on, and again it's just been a few weeks since we've introduced the product, but we found that EVER has actually opened up the doors to allow us to sell the MAX product along with cancer. So we believe that it's helping sell. So again those are early trends, but something that we noted.

Thanks Allan and Dan.

Eric Berg of Lehman Brothers, you may ask your question.

Thanks, good morning. I actually have two questions, one for Dan and one for Kriss. Dan, let me just for a minute play devil's advocate on this EVER issue. I suppose the skeptics would say it's early days, they're just getting started, you've been in the market for a grand total of four weeks. Competitors really haven't had a chance to respond.

It's a much cheaper product than the hybrid product that you've sold until now, mainly, the product that combines cancer insurance and Rider MAX, and therefore the cost savings might be only $1.00 or $2.00 per month for the average individual. Therefore, your advantage is not nearly as great as would be the case if we were talking about a larger product or a higher-priced product. It's a product that's very, very similar to MAX, which has clearly gotten into trouble.

Again, not to be in any obnoxious but to try to challenge you on some of these issues, because I really think it's important we deal with them. Why are you not declaring victory too soon? That's my first question.

My second question for Kriss is just of a more technical nature. Going back to this --

Well, let me answer your first question.

OK, go right ahead.

Well, first of all, I'm not declaring victory. If I was declaring victory, I would raise the sales estimate from 5 to 10 percent upward, and I haven't done that.

OK.

So I am not projecting this enormous -- but my sense is that -- again goes back to our surveys. And there's even been and you've seen this, Eric, the research from outside publications that have said if they're going to buy a policy from any company, who are you most likely to buy it from? And it was AFLAC in terms of third-sector products. So those are the things that give me great comfort in thinking that it will be successful.

It is too early to tell, and you can't be for sure. But all indications are and once we start , you know what the law of numbers will do and they're there. And whether or not they'll hold, we'll still have to see. But our competitors -- because the product is cheaper that's exactly the reason they're having difficulty fighting with us and matching our policies. They want to sell more expensive products to help cover their fixed cost of doing business.

And so any time we get into a fight -- if we get into a fight regarding low premiums we're going to win. If we get in fights with big premiums, we may not. But if it's low premiums, we generally win that battle, and that's why EVER is exciting to us, and why we think it has potential for the future.

Very good, that was helpful.

Kriss, a real quick technical question. If, you know, if one can think about the concept of profit margins as essentially the relationship between expenses and revenues for any business, whether it's a service business such as yours or a manufacturer, why would -- and that concept is in local currency terms, sort of the relationship between expenses in yen and revenues in yen. Why would the value of the currency affect that relationship? Why would the end value affect profit margins in Japan? You sort of follow my question?

Yeah, I got you and the reason is that while we do benefits and expenses in yen, some of our investments carry dollar-denominated coupons--

Sure.

--and investment income is a significant part of our overall profit stream and contributes to the profit margin. So when you're doing financial reporting in yen, if you have dollar that last year was measured at a 120 yen, this year it's counted as a 130 something yen. So, therefore, the profit reported in yen increases relative to what it was in the prior year. And as I pointed out, it's the same in dollar terms but when you're expressing your margin in yen and your increases in yen, the change in the yen dollar exchange rate through the investment income item, a dollar denominated portion of investment income has an impact on it.

Thank you.

That was the reason for doing some of those dollar denominated --

That's exactly right to offset.

-- to offset the weakness in the yen and the impact on our benefit ratios.

, ladies and gentlemen, that takes us to the hour mark, and we'll be concluding the call at this time. I apologize if not all of you got your questions in, but if you still do have questions, please call me on our 800 number 235-2667 option three, and we certainly look forward to seeing you at our analyst meeting in about five weeks. Thank you again.