美國家庭壽險 (AFL) 2002 Q2 法說會逐字稿

Good morning. Thank you for joining AFLAC second quarter earnings conference call. All participants will be able to listen only, until the question and answer session of the conference. This call is being recorded at the request of AFLAC . If anyone has any objections, you may disconnect at this time. I would like to introduce your speaker for today's call, Mr. Ken Janke, Senior Vice President of Investor Relations. Mr. Jenke, you may begin.

Thank you, Michelle. Good morning, everybody. Welcome to our second quarter call.

Joining us this morning is Dan Amos, Chairman and CEO of AFLAC , Incorporated. Dan is actually up in Atlanta. He became a grandpa last night, and was unable to come back, so he's joining us from a remote location. [INAUDIBLE] we have Kriss Cloninger, President and CFO, [INAUDIBLE] Executive Vice President of U.S. operations, Joe Smith, Senior Vice President and CIO, and Al O'Brien, President of AFLAC International, joins us in Tokyo.

Before we begin, let me mention the safe harbor language. As you know, some statements in this teleconference are forward-looking within the meaning of Federal Securities laws, and although we believe these statements are reasonable reasonable, we can give no assurance that they will prove to be accurate because they are fact prospective in nature. Actual results could differ materially from those we discussed today. And I'd encourage you to look at our quarterly report for some of the various risk factors that could materially impact our results.

Now I'd like to turn the program over to Dan, we'll talk about the quarter in our business in Japan, and the United States. Then I'll follow up briefly with some financial highlights, and then we would be pleased to take your questions. Dan?

Good morning, everyone. And thank you for joining us.

AFLAC once again produced strong earnings and sales during the second quarter. As you can imagine, I'm especially pleased that AFLAC Japan sales were significantly better than we had expected. At the same time, AFLAC U.S. Also beat sales projections. Most importantly, we exceeded our primary financial objective, by increasing operating earnings per share 18.2 percent, excluding the impact of currency.

Let me begin with AFLAC Japan. As you may recall, we had expected our second quarter sales to be flat to up slightly. We expected flat sales in part because we knew the comparisons would be tough compared to last year. In addition, Dai-ichi Life did not have a push month planned in the second quarter as they did in the first quarter, and we sold a significant amount of business annuity products at the start of last year's second quarter, which was subsequently discontinued. Despite those objectives, sales were still up an impressive 15.9 percent during the quarter. Not only did sales dramatically exceed our expectations, the $29.6 billion yen of new annualized premium we produced, was the best quarterly sales results in the history of AFLAC Japan. Excluding Dai-ichi Life, sales were up 16.8 percent for the six months.

Total new annualized premium sales were up 10.5 percent. Our medical-related products were a major contributor to our better-than-expected sales. For example, Rider Max sales increased 87.2 percent in the quarter, benefiting from our new Whole Life Rider Max product.

Conversion from the term to the whole life product, represented about 45 percent of Max sales in the quarter. Keep in mind that conversions have a fairly short term impact on sales, and we would likely see them taper off in the coming quarters. Our newest product Ever did extremely well. In fact, Ever accounted for 19 percent of our sales in the quarter. You'll recall that Ever is basically a whole life standalone version of Rider Max. We developed Ever after conducting research last year which showed that interest in medical insurance was increasing among Japanese consumers. For example, the research indicated that 40 percent of the Japanese consumers preferred a standalone medical product, with no special benefits for cancer treatment. We also found that more than 70 percent of those surveyed, said they wanted whole life coverage, rather than term life coverage, which influenced our product design. We believe Ever will continue to be a popular product in light of the anticipated increases in the co-payments for Japan's healthcare industry.

The healthcare reform legislation passed the lower house in June, and we believe it will likely pass the upper house later this month. That means that co-payments should increase in April of 2003. I expect our experience with Ever to be similar to those companies that entered the Cancer Life market last year; that is, we should see an initial spike of sales followed by a decline and a leveling off. However, I believe our medical product will level off at a higher rate than our competitors, because we offer the best product value. Actually based on the data we collected, AFLAC has been the number one seller of standalone medical insurance in Japan since March. For those of you who might have been skeptical about our ability to develop new products I think the success of Ever, and the revision of the Rider Max, shows why Japanese consumers have rated AFLAC, number one in product development according to Nikkei Kenu. There is no doubt in my mind that Ever is a winner, and is going to be a strong contributor to future sales. With our agents focusing most of our attention on Ever and Rider Max sales, it's understandable that the Cancer Life sales declined during the quarter. As you have heard me say before, agents take the path of least resistance. When agents latch onto a new product, that is in high demand, the time they spend selling that product takes away from the time of other products.

That's not to say, however, that we're deemphasizing Cancer product. Our Cancer Life policies remain Japan's best Cancer insurance product, providing the best benefits, at the best price, with the highest commission to our agents. Because consumers identify our product as the best on the market, we don't anticipate losing ground to competition. But for now, Ever is the hot product that consumers want because it's an inexpensive medical product. So look for Cancer Life and medical insurance to be the two pillars of the Japanese business, just as Accident and cancer expense insurance are the two pillars for AFLAC U.S. Strong product line has helped us further strengthen our distribution system.

During the second quarter, we recruited about 960 new agencies, bringing the total number of agencies to about 1500 so far this year. That means we're on track to achieve our goal of recruiting 3,000 new agencies this year. At the end of the quarter, AFLAC Japan was represented by 10,700 agencies, which is more than 54,000 licensed sales associates. Our relationship with Dai-ichi Mutual Life continues to be successful. Dai-ichi's sales increased 8.5 percent during the second quarter, compared with the second quarter of 2001, which was their first quarter of sales to external customers. As we look to the third quarter, comparisons to last year are a bit easier. But I think it's unlikely that we'll see another 16 percent increase. I believe that some third quarter production was accelerated into the second quarter because of incentive contest we conducted. As a result, it's likely that sales will be up 7 to 10 percent for the third quarter. However, based on the first half sales, I'm revising our sales expectations for this year. You can look for sales to be up 10 percent for the full year. Clearly, our results for the last 18 months, showed just how difficult it is to predict quarterly sales. Yet I have to say it's a lot easier to handle missing sales projections on the high side than on the low side.

One point I want to emphasize, is how our sales relate to our earnings per share targets. For those of how attended our analysts' meeting at Stone Mountain in May, you'll recall that our EPS targets for 2002 through 2004, included an assumption of a 7 percent annual sales growth for AFLAC Japan. You need to understand that all things being equal, if sales are up 10 percent this year and 5 percent next year, we'll make our EPS targets. And I think it's reasonable to assume that sales will be up 5 to 10 percent in 2003, as well. And most importantly, expect to generate the type of sales increases we need to achieve to achieve our earnings targets. As you will hear from Ken later, AFLAC Japan also performed well financially. As expected, our benefit ratio continued to improve as we discussed at our analysts' meeting. This just didn't happen by accident. This is part of the carefully planned strategy of developing new, and more profitable products that we initiated several years ago.

Turning to AFLAC U.S., sales rose 18.6 percent to $254 million in the second quarter, which puts us ahead of our sales target of a 15 percent increase. Keep in mind that this increase is on top of a 27.8 percent increase in the second quarter of 2001. Just to keep you, some additional perspective, our sales quarter, second quarter, were nearly double our second quarter of 1999. In fact, our sales in the quarter was the second best in the U.S. history trailing only the record-setting fourth quarter of 2001. Accident and disability remained our number one product, accounting for 51 percent of our new sales. We also had strong increases in sales of our fixed benefit dental product, up 21 percent for the quarter.

Our personal sickness indemnity policy, which is a new product we rolled out earlier this year, is selling very well. It is included in our hospital indemnity plan category, and it remains the category that has the sales increase of 96 percent for the quarter. Its success propelled hospital indemnity coverage, to the third best-selling category, which proves what I said about AFLAC Japan: Agents take the path of least resistance, and the hospital indemnity is our hot product. Just as we have continued to broaden our product line, we have also continued to expand our sales force. During the quarter, we recruited more than 6,100 new sales associates, which was a 26.5 percent increase over last year's second quarter. The average number of associates who produce business for us each month, increased 20.4 percent to more than 15,400 in the quarter. Our recruiting success is in part, because of our strong national advertising program.

During the second quarter for the first time, we featured a celebrity in our commercial with the AFLAC duck. I hope you have seen the new commercial featuring the New York Yankees Hall of Famer, Yogi Berra, the new commercial has been a tremendous success. We believe our advertising will help us extend our sales momentum through this year and beyond. This tremendous potential in the U.S. market, and we believe that we have the products and distribution to further tap into it. As we have said before, our 225,000 payroll deduction accounts, represent only about 4 percent of the small to medium-sized businesses in the United States. Like AFLAC Japan, AFLAC U.S. Also performed very well from a financial standpoint. As you may know, first-year business tends to be lower persistency than business in the later years. So U.S. persistency rates have been heavily influenced by our new sales growth, in addition to our product mix, but overall, persistency by line of business has been fairly stable. However, in the second quarter, our persistency improved despite strong sales. At the same time, earned premiums, rose at 20 percent rat,e and pre-tax earnings grew in line with our expectations.

During the second quarter, we acquired $1.3 million shares of AFLAC stock, which brings the total number of shares purchased in the first six months to $6.5 million. At the end of June, we had approximately $22.7 million shares remaining for purchase under the authorization of the Board of Directors. I'm very pleased with the overall direction of our company. Improving in our sales in Japan, and successfully address the issues that we faced last year. It is a tribute to the strength of our management, and our overall organization in Japan. And AFLAC Japan's reputation continues to get even stronger. The June 18th issue of Japan's economist magazine, rated AFLAC as the most reliable of Japan's top 15 life insurers. In the United States, we expect our success to continue as we further penetrate the vast and untapped market for our products. Our sales growth is especially impressive when you consider the different comparisons to a year ago. All of this means that AFLAC U.S. will continue to play an even greater role in helping our company meet its financial targets.

I believe we have set achievable earnings per share targets for 2002 and beyond. I am confident we will increase operating earnings per share 15 percent this year excluding the impact of the yen. I also believe we will meet our objectives of growing earnings per share, 15 to 17 percent in 2003, and 15 percent in 2004 before the effective currency translations.

Finally, I want to assure you that we will continue to run this company with honesty and integrity. As you know, the SEC is requiring the CEO's and the CFO's of large U.S. companies to personally certify their corporation's financial statement. Kriss and I signed off an AFLAC's second quarter financial statements without hesitation. We will do the same when we're formally submitting our second quarter 10Q to the SEC, which will certify our year end and first and second quarter financial statements. Rest assured, we won't be operating any differently today than we have in the past. That is, we remain candid and transparent disclosure, to the investment community, and we will always be accountable to our shareholders.

Thank you for joining us. And I'll turn the program back over to Ken. Ken?

Thanks, Dan.

Let me briefly take you through some of the financial highlights for the quarter beginning with AFLAC Japan. Starting at the top line in yen terms, revenues rose 5.4 percent for the quarter, and 5.7 percent for the first six months. The persistency trended down a little bit versus a year ago, but continued to be very strong. The persistency rate was 94.2 percent through June, compared with 94.6 percent a year ago, but unchanged from the first quarter: In terms of operating ratios, as we expected the benefit ratio continued to improve over last year. It was 68.1 percent compared with 69.4 percent a year ago, and as we discussed, that decline primarily reflects our changing business mix in Japan, as well as improved claims trends in some lines of business.

The expense ratio for the quarter was 19.4 percent compared with 19.6 percent in 2001, and as a result, pre-tax margin improved from 11.0 to 12.5 percent, again reflecting the improvements in the benefit ratio. With the expansion of the margin pre-tax earnings increase 20.4 percent for the quarter and in yen terms, excluding the impact of the weaker yen on AFLAC Japan's dollar denominated investment income, pre-tax earnings rose 18.9 percent for the quarter. Investment yields in Japan as measured by the yield on the 20-year JGB, were slightly higher or so far this year. The 20-year JGB averaged about 2 percent in the quarter, was about 2.1 in the first quarter and it's about 1.9 percent right now. We continue to concentrate on other sectors, however, and for the quarter, we invested our cash flow in yen securities at 3.82 percent, and with dollar securities the blended rate was 4.11.

The portfolio yield was 480 at the end of June which was down 5 basis points from March and 15 basis points below a year ago, and through July 19th, we had invested or committed to invest, about 56 percent of estimated 2002 cash flow, at an average yield of 3.92 percent. Joe can talk in more detail about our investment activities, but let me emphasize that the credit quality of our portfolio remains very high. As I think most of you know we have avoided all the major issues that have come up in the investing world this year, including Worldcom. We did own Tyco and we exercised a credit [INAUDIBLE] late in the second quarter and have since received payment, at par for that, which brings our total Tyco exposure down to only $72 million. But at the end of June, our total holdings below investment grade for the entire company were only 1.1 percent.

Next let me turn to AFLAC U.S., which as Dan mentioned had a very good quarter. Earned premium growth was again strong, rising 20.5 percent in the quarter, and investment income was up 8.6 percent. As a result, total revenues rose 18.6 percent for the quarter and 18.3 for the first half of the year. As Dan mentioned persistency improved a little bit, and was 74.6 percent up from 74.2 percent a year ago. The benefit ratio was higher at 53.5 up from 52.3 percent, and that was somewhat offset by a lower expense ratio of 30.9 percent versus 31.6. Therefore, the profit margin for the quarter was 15.6 percent, down a bit from a year ago, which was 16.1. Pre-tax earnings rose 14.8 percent for the quarter, and in terms of U.S. investments, the new money yield for the quarter was 753 versus -- or 802, reflecting lower available yields. And the yield on the portfolio at the end of June was 798, which is down 2 basis points from March and 8 basis points from a year ago.

Turning to some other items for the quarter, as Dan mentioned, we purchased 1.3 million shares. The average cost was $30.73, which brings the total number of shares purchased for the first half of the year to 6.5 million shares. We still anticipate buying about 12 million shares for the entire year, meaning we're a little more than halfway done. As you may have seen, we issued $30 billion yen, or $250 million, of Samurai Bonds in the second quarter. The five-year maturity -- it's a five-year maturity with a fixed rate of .96 percent. That completed the $100 billion yen shelf registration we had filed in the fall of 2000. We used the proceeds to pay down debt, and then some for stock repurchase, and at the end of the quarter, the debt-to-total capital ratio was 25.5 percent, compared with 28.8 percent a year ago.

However, the Samurai actually settled in this quarter, so if you look at the debt payment we just made and the issuance of the Samurai notes, the ratio is about 26 percent, and by the end of the year we would expect it to be back down close to 25 percent. Non-insurance interest expense was unchanged at $4 million for the quarter. The parent company and other line was $17 million in the second quarter, up from $8 million a year ago. I should point out that corporate expenses included a charge of about $9 million for our share of the costs associated with closing HR Logic, which is a PEO that we had at 35 percent ownership interest in. The operating margins improved for the quarter. The pre-tax margin rose from 11 1/2 to 12.4 percent. The after tax margin was up from 7.5 to 8.1, and on an operating basis, the tax rate was little changed at 31.-- 35.1 percent. As you may have noted, the return on equity on an operating basis for the quarter was 22.0 percent. As we reported, operating earnings per diluted share rose 15.2 percent to 38 cents, which was slightly better than the consensus estimate. The weaker yen lowered operating earnings by 1-cent per share for the quarter, and excluding the yen's impact, earnings per share were up 18.2 percent for the quarter and 16.7 percent for the six months which is better than the 15 percent target.

Lastly, let me comment on the EPS outlook for the balance of the year. As Dan mentioned our objective specific target for this year is a 15 percent increase in earnings excluding the impact of the yen, that would suggest $1.54 in earnings at last year's exchange rate of 121.54. If the yen stays in the range of 115 to 120 for the remainder of the year, we would expect that to translate to reported earnings of about $1.52 to $1.54, the current first call estimate being $1.53. Under that scenario, we would expect third quarter earnings per share to be about 39 cents, which is right where the first call estimate is. And again, as Dan mentioned, our objective for '03 is to increase operating earnings per diluted share 15 to 17 percent, before the effect of the yen, and then 15 percent excluding the yen in 2004.

And now we would be happy to take your questions, Michelle if you can begin that process.

Thank you, Mr. Janke. At this time we are ready to begin the formal question-and-answer session. If you would like to ask a question, please press star 1 on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question you may press star 2. Once again to ask a question, please press star1. One moment, please. [ pause ] Our first question comes from David Lewis of Suntrust Robinson Humphrey.

Good morning. Question on Japan sales, clearly much stronger than guidance than most of us had anticipated despite the Dai-ichi sales campaign being absent from the quarter. Do you think that rise in sales is largely because of the medical product demand, and does that reflect the likelihood of the rise in co-pays, or is it more just the attractiveness of of the products?

I personally think, David, this is Dan, I personally think it's a combination of different issues. I think, first and foremost, I think it's becoming clear in consumers' minds that in April, they are going to have more out-of-pocket expenses so they have become very attuned to that. And justifiably so, they realize they have to pay the additional cost. And so they are reviewing what to do to cover those expenses. In doing so, this new Ever is clearly the best product out there today. The reason they like it is, it's not term but, rather, it's a level premium, and then it's the cheapest in the product that's out there, in terms of medical insurance. So I think that's driving it. I think second of all, I think our marketing department did a -- an excellent job in packaging and marketing this. If you look back at Cancer Life last year, it's just as good a product as the medical Ever product is. The difference is is how it was carried out in terms of true marketing. I think the advertising campaign they are using is better. And it's not confusing, and I think that is driving it. Finally, I wanted sales up in the second quarter. And so we have put an additional bonus of 10 percent over what their normal bonus would be if sales were up in the second quarter. So people focused on it and there's no question in my mind, that some of the business in the third quarter that would have been serviced was moved to the second quarter. At the same time, the third quarter is such an easy comparison. It still should be fairly easy to beat next year. But I think those three issues are what's driving it.

Just on the 21st century Cancer Life now that you have kind of revamped that product, can you say whether you are actually seeing improved response rates yet?

They are still studying it. I know that they have seen some improvement, in terms of the response rate from a direct basis. But if you're specifically talking about the major corporate accounts, and that part, it's -- we are still having to go through the cycle of getting to them all, so it's hard for us to tell, you about there is no doubt that the less complicated version has a better hit rate than the complicated one.

Thanks very much.

Operator: Our next question comes from Nigel Daly of Morgan Stanley.

Great. Thank you. Three different questions. First, [INAUDIBLE] an update on where you are with regards to potentially getting Dai-ichi as a sales product other than just Cancer insurance. Second with regard to new sales initiatives. At your analyst conference you talked about the use of more face-to-face selling techniques. Can we get some details on how this initiative is working? And then just lastly with employee stock options, just wanted to get your view on [INAUDIBLE] expensing those going forward.

Hi. This is Dan again. Let's see. I'll start with the stock options, and go backwards, because the stock options would -- last year would have effected a six cents per share. Kriss and I have had a lot of discussion about this with the other management team, and frankly, we don't have any problem if the -- if they want to expense the stock options. We have looked at our competitors. It would have less impact on us as a percentage of earnings, than it would others. So it will be okay with us. At the same time, if we do it today, we can't reverse it if we change our minds. So we want to wait and see what's going to take place in terms of the legislative agenda and other issues before we totally show our hands, but understand, it is not something that we are worried about, it's something that we can handle and will handle. So that's basically our position on it. In regard to Dai-ichi life, there are no guarantees. In fact, they have told us that they are not interested in selling medical at this particular time. But there will be peer pressure as our product continues to do well, that their salespeople want to offer it. But that will be a call they have to make. They have another product that they sell that -- from what I understand, they make a good profit margin on. But they don't sell a lot of it. So we're continuing to negotiate with them. Our relationship is stronger today than the day it was we set it up. And I only see good things ahead, but that's a great opportunity for us, and one we're going to continue to work on. In terms of face-to-face selling in Japan, I'm hoping that it will continue to play a larger role as we move forward. It's too early for us to tell at this particular time, but what we're seeing right now as I told you about the path of least resist, we are getting calls more so than we have ever gotten about people wanting to know about our medical insurance, because of the ads that are running, and tell us about Ever, and our people are following up on it. Our response rate is good on Ever, and so that's kind of driving us right now versus the face-to-face being as -- but we have a group of people that it's their responsibility. I got a -- I have been to Japan three times this year already. I got an update on it when I was over there about three weeks ago. And it's just too early to tell at this particular time. But I think long term, face to face, is the highest opportunity for us to write business and one we'll continue to push.

Great. Thank you.

Sure.

Operator: Our next question comes from Michelle Giordano of J.P. Morgan.

Good morning. Couple of questions. First, on the corporate affiliated agents, can you give us a little bit more commentary on how the sales are improving through that channel? Do they get promotions in the quarter like the independent agents? And then secondly, could you give us a little bit more color on agent recruiting in the quarter? It looks like it's up pretty dramatically from the first quarter.

Well, I think regarding agents recruiting, that there is an opportunity for us to work on our recruiting. 3,000 is a lot better than 2,000 was a couple of years ago. But I think there's an opportunity to take it even higher in 2003. At [INAUDIBLE], our Director of Marketing is working on that, trying to find ways to fine-tune it and enhance our recruiting efforts. Because in a poor economy, it's usually the best time to be recruiting because whereas people would never consider a commissioned job, they have to because they can't find a salary job. And that's one of the things I have been pushing because we have seen at the U.S. over the years, that when the economy is weak, our recruiting goes up. So we're going to continue to work on that and we are -- we are happy with the second quarter and feel that it's a reflection of [INAUDIBLE] working on it, and trying to improve that. Our contribution from corporate affiliated agencies was 37 percent in the first quarter, and it was 42 percent in the second quarter. So we have seen corporate affiliated agencies pick up sales. Again, I think that's a direct reflection on the Ever, and what's taking place with that, because they are getting telephone calls -- I don't think it's so much them going out and calling one on one but, rather, it's the telephone call they are getting in, because they realize that this product is such a good product. And was there another question?

Yeah. Do the corporate affiliated agencies get the promotions like the independent agents do?

The promotions. The additional incentive -- I'm sorry, I don't know what promotions.

The additional incentives.

The bonus. No, they don't get the additional bonus. This was an internal -- the corporate agencies are paid a commission. This additional bonus is based on our internal people which is a large number. But it would be equivalent in our U.S. operation to our agency or territory managers. It would be the management system, not the agents themselves. But obviously, that had a big impact, because that's what I think helped push up to the increase we had. I think we still had a good month and quarter no matter what, but it helps some.

Thank you.

Sure.

Operator: Our next question comes from Jason Zucker of Bank of America Securities.

Thank you. Good morning. Couple of questions on Ever. Really one question. I was hoping you could address Ever in the competitive marketplace with respect to three different factors. The price of Ever versus the competitive products out there, the benefits that Ever offers versus the competition, and the commissions you're paying on Ever versus the competition.

I don't have, Jason, all the specifics. I can tell you our price is cheaper, our benefits are better, and the commissions are higher, but the specifics I'll get Ken to maybe talk to you afterwards and go into the details. I can tell you that somebody else was number one in stand alone medical products, and since we have introduced this product, we have captured that position as number one every month we have been in it. As I have said all along, there is going to be a spike in our business, and then it's going to level off. I personally think that it's going to level off where we stay number one. It's just that much better. -- than the competition. And people understand that, and it's making a difference.

Why do you think you have -- well, how about this: Do you have the price advantage in this product for the same reasons that you have the price advantage in the Cancer products?

Absolutely. It's the operating expense ratios we run, is the only way we're able to be competitive. Again, we have become less competitive the higher the price of the product, because we don't have the -- they don't have the expense controls and they don't become as much a part of it, overall. So again, what I said all along is what drives this company, is price.

Great. Thank you.

Okay

Operator: Our next question comes from Joanne Smith of UBS Warburg.

Good morning. I had a couple of questions. One is just back on the Ever product. I was wondering if there was any indication that the competition is in the process of developing a whole life stand alone medical product. And if not, why do you think that they are not, given the success of your Ever product to date. And the second question concerns the U.S. market. In terms of the sales growth in the quarter, was there any large accounts, new large accounts that were signed up in the quarter? And if not, can you just give us a little bit more color in terms of how your -- you continue to achieve these high teen growth rates in the U.S.?

Well, I'll start with the U.S. just to have a change of pace here. The U.S. did not have any major accounts that I know of, but we are continuing to have opportunities to open accounts that are large that we never had in the past. I think again it goes back to ask about it at work and our ads, employees are asking about it at work. The HR people are contacting us, as well as we're contacting them, and that's a driving factor. Another factor is, is we have always said that this year's recruiting is next year's sales and the next year's sales are the next year's profits. We recruited 25 percent more people last year, and I think we're up about 25 percent this year. So, that's what's driving it is the number of recruits. The penetration and opportunities are still strong out there. Again, I still think we are a -- a small to medium-sized business company in terms of our products. I always worry that as we speak, someone is calling on the Wal-Marts trying to take it away from us, but they can't get to 10,000 small businesses and -- it's much harder to switch the business out. So I still believe that with only 4 percent penetration, we can continue to grow that market. And that's where our strength lies in the future in regard to the U.S. As far as competition, -- goes, both in the U.S. and in Japan, I think again it's the operating expense ratio that drives it. There are competitors out there that sell a level premium medical product. But it's not as good as ours, because of the expense ratio, and that's why we continue to watch that, and we'll continue to do so going forward. We can never lose sight of that's what drives our company. Without it, we just would be like everybody else. So we are going to continue to keep our expenses tight and watch them, and it will drive us moving forward.

Dan, Dan, I think I remember you saying something about a 20 to 25 percent expense advantage? -- on the Ever product versus the competition? Can you just clarify that and just update us on that?

It depends on the price, but it's anywhere, I think, from about 10 to 20. I'd have to get the number again. I think Ken can get it for you. All I can tell you is, is that, uhm, it's -- it's, uhm, it's significant enough that it's making a difference with the competitors. But again, it's more profitable than the stand-alone cancer. -- in all of our research, and all the work that we have done from a statistical standpoint. Kriss, you got any comment about that?

Yeah. The main competitors, the major life companies over there seem to be packaging their health products as part of kind of a universal life policy that has a significant asset accumulation feature in addition to the health product feature. So it's hard to achieve direct comparability to our plan that's medical only and no asset accumulation, then a more packaged approach where you have some asset accumulation in addition to the health product. You know, the main -- the big Japanese companies are more focused on a small volume of high premium products, and we're focused on a large volume of low premium products.

Right.

And that's the difference.

Okay. Great. Thank you very much.

Joanne, let me add one thing. You may recall in our analysts meeting and to Jason before you, we had a chart that we have published in our analysts plug that shows a comparison of AFLAC's new whole life standalone product compared with other whole life standalone products, and there you'll see the difference in our benefits versus our competitors' as well as the premium rates.

Joanne, I think one other point that can't be underestimated, is how we do research and try to really get what the consumers want. A lot of the Japanese companies aren't attuned as much to what consumers want. We go out and do a lot of research, ask our agents, ask the customers. Most American companies do that, or foreign companies outside Japan. But we have really tried to do a good job at that, and I think we have. And I think that's making a difference. And I don't think the other companies as Kriss talked about, are as interested in what the consumers want as how they can make profits and what they need to do to attain their profit margins.

Great. That was very helpful. Thank you.

Operator: Our next question comes from Caitlin Lamong of Credit Suites First Boston.

Good morning. Just want to get some feel from you for, what the market the -- real market potential could be for the Ever product, and for the medical products in general, given the co-pay's going to be going up in April. Do you have any idea what portion of the Japanese population would buy such a product, what portion has already bought such a product, et cetera?

Well, all I can tell you is, as you know Caitlin, you are smart, that the 20 percent to 30 percent is 50 percent more. It's going to cost in terms of out of pocket expenses. And that -- if you just look at that and forget, -- let's assume that the entire country is insured 100 percent to cover the 20 percent, it means now that everybody in the country has to buy 50 percent more coverage to cover that. So the market potential is tremendous. What they will do yet, it's too hard to tell. The economy, people don't want to spend as much. We know all those things. But if you really look at the business environment in Japan, I had rather be doing what we are doing than anything else, because that's where the opportunity is to grow the business is in the medical area, because of the increase in the co-payments and deductibles. So it has enormous potential for us, I believe.

Sure.

Caitlin, this is Ken. You know, the belief is that the market penetration level of Cancer insurance in Japan is about 30 percent. It's about 60 percent for medical insurance and 90-plus percent for ordinary life. We think the medical probably falls somewhere between the Cancer and the Accident policy. And you may recall from meetings we have conducted earlier, that some of the research that we have had that we conducted last year, revealed that 40 percent of the respondents wanted the medical insurance, as opposed to a policy that provided special benefits for cancer insurance, which we believe was a market then that we were just missing, which was a good part of the rationale for giving them that business.

Okay. That's helpful. Thank you.

Operator: Our next question comes from Collin Divine of Salomon Smith Barney.

Good morning. Couple questions. First, Dan, over the last couple of year, obviously, you have rolled out a lot of new products in Japan. And it would seem to me that your, I guess, reporting it really hasn't kept pace. In the past AFLAC was one product in Japan, Cancer, and it was pretty easy to keep track of sales. Are we going to see, and you commented on keeping the accounting rate transparent, that you're going to start breaking out sales by product. I was wondering if you could review that on a year-over-year basis, particularly with respect to Cancer Life, at the analysts meeting in Stone Mountain you showed Cancer Life sales were up in April. So I'm curious if they-- what caused them to fall off so much in the last two months, and if you ca give us some figures.

Collins, I thought I made it very clear that it was due to agents timing and their ability to sell whatever was hot out there. You know, we can -- we can break out anything. We are not going to go into the detail where our competitors get all of our information. That's the main issue. But we give you cumulatively cancer sales. We'll give you medical insurance breakdowns. I think we give as much as anyone else. But we're not going to break out every little detail of this, because it gives competitors too much of an advantage.

Are you saying candidly that breaking out Ever, Cancer Life, Rider Max, per quarter is providing a real advantage to your competitors? I'm sorry, I guess I have a problem with that.

The breakout within Cancer Life, every detail, if we break out all the others within details --

Nobody's asking for that, Dan. Now, the second question.

Tell me what you're asking for.

A breakout of your Cancer Life sales, Rider Max, and Ever, your major products. Sales by quarter. [ pause ]

Well, we'll give what you Cancer Life -- Ken, don't we give what --

We've -- what we have not done is given product by-product by quarter. We can give you the major chunks that account for the majority of the business. Rider Max was 34 percent, Cancer was 29 percent of sales, and Ever was 19. That covers the majority of it.

I'm curious as to why that's not in your statistical supplement. That's what I'm asking for, so we get this on an ongoing basis. And then second, if we can roll to the U.S., obviously, the duck campaign has been hugely successful, and yet that hasn't translated into higher persistency rates which, you know, by our measure remain amongst the highest in the industry. Perhaps you can comment on why you're not getting improved persistency given the, you know, outstanding success of the duck campaign?

First of all, persistency improved in the second quarter. In the first quarter it was down. But what we said it was going to stay close. The obvious reason is new business. When you are putting on new business, it has a higher lapse rate. And our business, for example, in the second quarter, was double what we did in 1999. And so that is part of the reason. But at the same time, persistency did improve in the second quarter. So I think when you are seeing an earned premium growth of 20 percent, and you look at the industry as a whole, I think we're doing great, and I think anything else taken from that would be taken out of context.

But until the persistency rate starts to improve, how are you meaningfully going to increase the proportion of AFLAC U.S.' earnings to the total?

Earned premium was up 20 percent. The Japan operations' earned premium was not up anywhere near that. That changes the percentages toward more the U.S.

All right. Thank you.

Let me just comment on one or two things there, Collin. First of all, the persistency in the U.S. is largely a function of job turnover, because of the dominance of our marketplace is worksite sales, over 95 percent of our sales are worksite oriented. And employee turnover in the -- hasn't changed much, and while we have had various initiatives over the years to get people to take advantage of the portability of our products, which allows them to continue paying direct, when they leave a payroll account, people just don't take advantage of that to the extent we would encourage them to do. The other thing is, that when we talk about aggregate persistency, that's greatly affected by the mix of new sales versus renewals, and it's affected by differences in persistency on Cancer versus Accident and things like that. In our actuarial group, we do periodic studies of persistency by product and by policy year and the like, and those statistics are very stable, by policy year, if we compare third policy year to third policy year, and the like over time. We see very few changes. So I'd say the aggregate persistency is a function of what's going on in the marketplace, but if you break it out by policy year and product, you aren't seeing many changes. I don't know why the duck hasn't impacted persistency as much as it has sales, but I'd attribute that to no major changes in the employee turnover rate and American industry. The easiest way for to us improve persistency and for any insurance company is just to stop selling.

Maybe, Kriss, let's come back on that. In terms of your, uhm, assumed lapse rates then, for first year, second year, third year, on the Cancer product, what are you experiencing?? Let's put some hard numbers on it.

I'm not sure that we have disclosed this before on a detailed level. We did roughly on our Cancer business, it's around 30 percent first year lapse. Okay? And then it goes down to somewhere between 15 and 20 second year, and it ends up around -- 6 to 8 percent in the ultimate year. So order of magnitude, that's what the numbers are.

By comparison in Japan, how would those compare?

In Japan, our first year lapse rates on payroll oriented business are in the neighborhood of 6 percent. And the ultimate lapse rates are in the neighborhood of 3 percent. That's why we end up with a composite around 94 1/2.

Great, thank you.

Operator: Our next question comes from Eric Berg of Lehman Brothers.

Thanks very much. And good morning. Dan, help me feel that this sales increase in Japan was really, really, uhm, solid and robust. And what I mean by that is, while obviously, pardon me, the numbers were very strong, whatever the sales increase was, the percentage increase was very strong, there were a lot of things that you said that sort of make me sort of wonder a little bit. Rider Max was up dramatically. But it was -- it did benefit importantly from what might be called a one-time benefit, i.e. the conversions you can only convert once. Ever was a huge success in the marketplace, but sales were stoked by a -- an internal promotion, that you'll probably not continue, or at least that my sense, and Cancer Life was weak because the agents were focusing on the hot product. I guess what I'm getting at is this sort of sustainability of this success. And then relatedly, these questions are all sort of one and the same, just different versions, maybe a little bit of nuance on them. Is it a problem that Cancer Life continues to decline, or is the goal here to get sales up on a composite basis, irrespective of whether one product is lagging?

We have never as a company, since I started the product broadening almost 15 years ago, said that we needed to concentrate on one product.

Okay.

But, rather, let's look at the entire package and what we're bringing in. If anything, product diversification, especially in Japan, benefits us because it has higher profit margins. So we are -- we are doing better when we see this. At the same time, you always want to protect what you've got. So we do try to balance where we don't lose too much focus. But at the same time, next year, it will be another product. And we've seen it in Japan. But we have also seen it in the U.S. for the last 15 years. I mean, what better example, than a hospital indemnity policy that we weren't selling hardly anything two or three years before, we revise it, it's basically got 100 percent increase in sales, and so, you know, now another product slows down but it picks up. So that's part of product broadening. An agent needs to have a reason to go back into an account, to have something fresh to look at. You do that in your business.

Yes.

You're always say, okay, here's a new stock, here's a new something or another that changes the consumer's look, to where it says, oh, well you came and brought that to me last year, what's different? So you do that to get an excitement and enthusiasm going, and people pick up on it. As they do, they then add as a lead-in, but then they go back to the bread and butter of what they have been selling all along, as well. But that's a process we have always gone through, and we'll continue to do. The answer to why I think that -- why should you have confidence because I raised the estimate from the lower end of 5 percent, to say sales now are going to be up 10 percent for the year in Japan.

Okay. And this notwithstanding -- I guess -- I guess my -- my first question was really, uhm, focusing on the Rider Max, and the fact that the -- I don't remember the specific percentage that either you or Ken referenced, but I do recall that an important percentage of the sales gain on Rider Max was conversion.

Well, I think that's going to continue into this year to some degree. The reason we are being conservative about 5 percent next year, is because I said all along that a 7 percent increase in sales compound gets our number, in terms of making our earnings. So if we do 10 this year and we do five next year, that's actually better than the 7 and 7. So my point is, is that we're going to make 10 this year and one -- I think Rider Max will carry on for the remainder of the year to help us. It might help us next year as well, but being conservative and saying it won't count as much, that still is in the number of being up 5 to 10 next year.

Thank you.

Okay

Your next question comes from Andrew Kligerman of Bear Sterns.

Good morning. On the Rider Max whole life inversion, I'm curious as to what the dollar amount of the whole life sales were, and what the dollar amount of the, I believe you said, term life product it replaced, what was -- what were those two dollar amounts?

Kriss, you know that? I'm in Atlanta, I don't have it in front of me.

I think Ken may have it. Let me just say first, though, that as far as the way we count production, we only count the excess of the whole life premium over the term premium for the policy --

Oh.

That got replaced. In other words, we take the excess of the whole life premium, versus the premium they were already paying, and we count that incremental part as production. We don't count the other.

I see. So there is no surrender of a product and there is no -- that makes a lot of sense. Okay.

We said that I think 45 percent of Rider Max sales were related to conversions, and Rider Max sales were 7 percent of the total. Would you have to kind of work the numbers out from there. I don't have it in front of me, either.

Okay. I'll work that with that.

We only count the excess.

Rider -- there are total Rider Max category was about 34 percent of sales. And the Rider Max conversions from the term to whole life, were about 45 percent of Rider Max sales. Was about $4.5 billion yen.

Got ya. And then moving over to, uhm, Wal-Mart, which I believe the enrollment occurred in the fourth quarter of last year, can you give a little overview on how the comps might play out in 4Q of this year? Will you be able to increase new Wal-Mart sales? Will they go down because you did a big enrollment in the fourth quarter? How will that work?

What you'll -- the sales of Wal-Mart most likely will be lower than last year, because of the initial enrollment. But, you know, and then our numbers of being up 15 percent, we were up 18 for the quarter this quarter, we have taken into account that the fourth quarter is going to be a very difficult quarter for comparison in the U.S. At the same time, they will do a re-enrollment. But your re-enrollment is never as strong as your initial enrollment as a general rule. So -- but we think we can offset that, and it won't be any problem, and later we hope to add additional products to Wal-Mart. Right now, we only have the Cancer Life and although we won't get it this year, we hope one day they will consider other products, as well. But all in all, I think we'll make our numbers. That's been taken into account.

And one last question, Dan. Do you see any more Wal-Marts on the near-term horizon?

You know, I'm really having a problem with our sales force getting everybody wanting to go what I call big game hunting and shoot the big one. Our agents have to make a living, especially the new ones. -- on -- because their total commission, they've got to made--they've got to sell something daily or weekly. And that is small business. So, we have tried to discourage the large accounts. They take time, sometimes months, sometimes years to get. They just don't fall in your lap overnight. And the worst thing can happen is for our people to concentrate on the big group, and they starve to death in the meantime. And so, we try to really downplay the big accounts. We love 'em because they give us third party influence to open other accounts. I always say it's kind of like being the anchor in a shopping center. Once you get that, you begin to get all the things around it. So they are great to have. But at the same time, I don't want our people to lose too much focus on small business. That's what our accounts are designed --I mean our policies are designed to do. If you look at true group, you get a better deal. But true groups are not in the small business environment. You generally see individual sales, and then we're a much better deal, when you compare it to individual sales.

Thanks a lot.

Sure.

Michelle, I'm showing almost right around the top of the hour, so we are going to have to call this conference call quits. -- at 10:00. If we missed your question, I apologize, but I hope you'll call on the 800 number, or email me, and we would be happy to answer your questions. And we appreciate you joining us this morning.