美國家庭壽險 (AFL) 2002 Q3 法說會逐字稿

Good morning. Thank you for joining AFLAC's third quarter earnings conference call.

All participates 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.

I would like to introduce your speaker for today's call, Ken Janke, Senior Vice President of Investor Relations. Mr. Janke, you may begin.

Thank you, Amber. Good morning everybody and welcome to our third quarter call.

I'm joined this morning by Daniel Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Aki Kan, Executive Vice President of US Operations, Joe Smith, Senior Vice President and Chief Investment Officer and Al O'Bryant, President of AFLAC International and Deputy CFO joins from us Tokyo.

Before we start, let me mention the Safe Harbor language as we said before, some statements are forward look within the meaning of Federal Securities Laws. Although we believe these statements are reasonable, we can give no assurance that they'll prove to be accurate because they are perspective in nature. The actual results that we produce in the future could differ materially from those we discuss today. I'd encourage you to look at our most recent 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 who will begin this morning with some comments about the quarter and our operations in Japan and the United States. Then I'll follow up briefly with a few financials and then we'd be happy to take your questions. Dan?

Thank you, Ken. Good morning and thank you for joining us. As I hope you know by now, AFLAC produced great results for the third quarter and for the first nine months of this year.

Our sales exceeded our expectations in both the United States and Japan. Our financial performance was also strong and consistent with our targets. And most importantly, the growth of our operating earnings per share for the quarter was in line with our 15% target for the year, excluding the impact of currency translation. For the nine months we also are on target for our earnings per share growth.

Let me start with AFLAC Japan. We are very pleased with the continued strength of our new sales in Japan. We expected third quarter sales to increase about 10% over the third quarter of 2001. Instead, sales rose an impressive 26.5% for the quarter to 25.4 billion yen.

For the nine months, total in new analyzed premium sales were up 15.2%. Obviously, we had a fairly easy comparison to last year. Yet we continue to see very encouraging signs in our sales, particularly with our supplemental medical business.

Our medical related products were again significant contributors to our sales. Rider Max sales rose 72.6% in the quarter and represented 32% of our sales. We continue to experience strong sales from our new whole life Rider Max product we introduced in February. And conversions from the term product to the whole life policy again benefited Rider Max sales in the quarter. Even without the conversions, our sales would have been ahead of target rising 11.1%. And as expected, conversions were down quite a bit from the second quarter, declining 32%.

Because it's been several years since we've had any significant conversion activity, let me say a few words about Rider Mac's conversion. First, a conversion from term product to whole life Max product does not change the policy benefits. The whole life Rider Max does not have a death benefit or a cash surrender value. It simply guarantees the policyholder a level premium through the life of the contract as opposed to a premium that increases sharply after the 10-year term. I think the greater than expected conversion this year validates our research that shows that more than 70% of the Japanese consumers prefer whole life coverage.

Secondly, we only recognize the difference between the term premium and the whole life premium when we report new analyzed premium sales. In addition, the commissions we paid and our accounting for the conversions are also on an incremental approach which is consistent with how we have treated conversions for the past 25 years.

Finally, I want to emphasize that the life cycle of conversion campaigns is typically fairly short. Our expectation is that Rider Max conversions will continue to taper off and represent a smaller portion of sales in future quarters. That means that this year's conversion activities will affect next year's sales comparisons.

Our newest product, EVER, also did extremely well with the stand alone medical sales accounting for 21% of our sales in the third quarter. AFLAC has been the number one seller of stand alone medical policies in Japan since March. And I believe our number one position points to the outstanding quality of EVER. You've heard us refer to EVER as basically a whole life stand alone version of Rider Max but I should point out that a stand alone version is not new to us.

To put that in perspective, we have been selling stand alone term life medical coverage since 1985. Prior to the launch of EVER, we had more than a quarter of a million medical policies in force.

As you know, medical indemnity insurance including cancer life is our specialty. As a result, our 17 years of experience in a stand alone medical business and several years of Rider Max experience helped us price our newest medical product. You'll recall that we developed EVER after conducting research last year that suggests that interest in medical insurance is increasing among Japanese consumers.

One reason for the increased interest is the change in Japan's national health care system that will lead to higher co-payments. Approximately 63% of the Japanese population will see their co-payments increase from 20% to 30% next April.

At the same time, there's evidence that consumers are questioning medical coverage they already have from other companies. A survey by the Japan research center showed that nearly half the respondents complained about their policies high premiums and inadequate benefits. They don't have the same complaints about our product. Supporting that belief is the July 13 issue of "Weekly Diamond", a leading Japanese business magazine. In that publication, EVER was identified as the best medical product in the industry.

The second quarter our agents spent the majority of their time selling EVER and Rider Max. As a result, cancer life sales declined in the quarter. That doesn't mean we're de-emphasizing cancer insurance nor does it mean that competitors are taking business from us or that the market is fully penetrating. As I've said in the past, it simply means our agents are taking the path of least resistance by selling our newest product.

We remain absolutely convinced there is a significant market for cancer life insurance in Japan. In fact, survey conducted by the Japan research center last December revealed that 80% of the people who did not have cancer insurance were interested in buying the product in the future. And we believe that we're in the best position to sell them a policy.

Our 21st Century cancer life policy has been repeatedly named the best cancer policy in the industry because it provides consumers with the best benefits at the best price and pays the highest commission to our agents. With consumers indicating that they are more likely to buy both medical and cancer life insurance from AFLAC than any other insurance company in Japan, we expect these two product categories will be our top contributors to sales in the future. Another reason we believe we're in a strong position to further penetrate medical and cancer life insurance is our distribution system.

During the third quarter, we recruited about 900 new agencies, bringing the total number of new agencies to about 2, 400 so far this year. That means that we're on track to achieve our goal of recruiting 3,000 new agencies for the year.

At the end of the quarter, AFLAC Japan was represented by 11,400 agencies with more than 56,100 licensed sales associates. An important component of our distribution is the AG Mutual Life. The AG sales increased 5.8 % during the third quarter compared with a year ago. The AG represented approximately 12% of the third quarter sales.

Since our strategic marketing alliance began at the end of last year's first quarter, Dai-Ichi has produced new sales of about 20 billion yen. Given the strength of our sales force for the first nine months of the year, I think it's reasonable to assume that sales will be up about 13-15% for the year, which is significantly better than our original target for 2002. Although we have not yet finalized our sales budget for 2003, I think we will see sales growth in the area of 5-10% for next year.

You may remember that our sales assumptions for achieving our earnings per share targets in 2002 through 2004 is 7% annual growth. So from that perspective, the sales results we have generated in the last nine months and our expectations for next year give us even greater confidence in meeting our earnings target.

Turning to AFLAC U.S. New analyzed premium sales rose 23.2% to $260 million in the third quarter. For the nine months new sales were 750 million, which is a 19.4% above last year. Not only is that significantly better than our 15% growth target for the year, it also follows a 27.7% increase in sales for the nine months of last year. Accident and disability remain our number one products, accounting for 50% of the new sales in the quarter.

Our newest product, personal sickness indemnity, is part of a hospital indemnity product category. Because of the success of this new product, hospital indemnity is our third best-selling product category. Sales of hospital indemnity products were up an incredible 116% in the third quarter. We also had a strong increase in the sales of our fixed benefit dental policy which rose 27% for the quarter.

In keeping with our long-standing strategy for growth, we continue to expand our sales force. We recruited more than 5,700 new sales associates in the third quarter, which was a 29% increase above last year. At the same time, the average number of associates who produced business for us each month increased 22% in more than 15,900 in the quarter.

I believe our ongoing success at recruiting and sales is a direct reflection of the growing need for the quality insurance products that we can conveniently be purchased at the worksite.

There is also no doubt that our marketing success has resulted from the effective branding of the AFLAC name. We continue to view advertising as an important competitive strength and a key component to our future sales growth. Following the outstanding reception of our first 11 AFLAC duck commercials, we began production on more commercials for next year. We believe they will help further penetrate the vast market of more than 5.5 million small businesses in the United States.

In looking at our sales expectations for the remainder of this year and beyond, please remember that last year's fourth quarter was the best quarter in our history. Benefiting from the two largest enrollments in our history of Wal-Mart and Win-Dixie in last year's fourth quarter. Sales were up an incredible 32% to $291 million. Clearly that makes for a tough comparison this year. However, I still expect to exceed our 15% sales target for the year, and we look for increases in sales of about 15% in 2003 as well.

From a financial perspective, our insurance operations in Japan and the United States continue to meet or exceed our targets. As expected, our benefit ratio improved in Japan due primarily to ongoing change in the business mix. As a result, our margins were up over last year. AFLAC U.S. also performed very well, producing strong increases in premium income, revenues, and pretax operating earnings.

At the corporate level we continue to repurchase our shares, buying three million shares in the third quarter at an average cost of $29.46 per share. That brings the total number of shares we purchased for the first nine months to 9.5 million. At the end of September we had roughly 19.7 million shares remaining for purchase under the authorization from the Board of Directors.

Overall, I remain very pleased with the direction of the company. We operate in the two largest insurance markets in the world and we believe we're well positioned in the most attractive segment of those markets. It's the significant market opportunities that give us confidence that our growth will continue.

I am very confident that we will achieve our targets this year of increasing operating earnings per share 15%, excluding the impact of the yen. I also believe we will meet our objectives of growing earnings per share by 15-17% in 2003, and 15% in 2004 before currency translations. Thank you for joining us. Ken.

Thanks, Dan.

Let me briefly go through some of the financials for the third quarter beginning with AFLAC Japan. At the top line in yen terms, earned premium growth 5.6%, which was its fastest rate growth in seven quarters. As a result revenues were up 5.4% in yen for the quarter and 5.6% for the nine months. The persistency of our business in Japan was unchanged from the six months but down a bit from a year ago. The rate was 94.2% through September compared with 94.7% in 2001.

In terms of quarterly operating ratios, as we expected, the benefit ratio continued to improve over last year. It was 68.7% compared with 69.1% a year ago. As you heard, the decline primarily reflects a change in business mix. The expense ratio for the quarter was 19.3% compared with 19.7% a year ago. And as a result, pretax margin improved from 11.2% to 12%. Reflecting improvement in both the expense and benefit ratios. With the expansion of the margin pretax operating earnings increased 12.2% for the quarter in yen terms.

Excluding the impact of the stronger yen on AFLAC Japan's dollar denominated investment income, pretax earnings were up in the quarter. Investment yields in Japan, as measured by the yield on the 20 year Japanese government bond index, were slightly lower in the third quarter than they were in the second quarter.

For instance, that yield averaged about 1.88% in the third quarter compared with 202 in the second quarter. Currently, the 20 year JGB is at about 1.75%. However, we continue to concentrate in other sectors and we invested in the quarter in yen dominated securities at an average rate of 3.52%, including dollars the blended rate was 3.76.

The portfolio yield was 4.76 at the end of September, which was down four basis points from June and 17 basis points from a year ago. And through October 21st, we had invested or committed to invest about 95% of this year's estimated cash flow at an average yield of 3.91%.

The credit quality of our portfolio remains very high on a consolidated basis. Securities rated below BBB for only 1.8% of investments at the end of the period.

Let me turn to AFLAC U.S. which also had a very good quarter.

Earned premium growth was again strong, rising 20.5% and investment income growth solid at a 9.4% increase. Total revenues rose 19.0% for the quarter and 18.5% for the first nine months. The persistency or our U.S. business was 74.8%, which was slightly higher than the 74.4% from a year ago.

In terms of operating trends for the quarter the benefit ratio was up from 52.6% a year ago to 53.4% this year but down slightly from the second quarter. That was somewhat offset by a lower expense ratio of 31.3% versus 31.9%. The profit margin was 15.3% compared with 15.5% a year ago. And, as a result, pretax earnings rose 17.2% for the quarter.

In terms of U.S. investments, the new money yield for the quarter was 766 versus 760 a year ago, and the portfolio yield was unchanged from the second quarter in six basis points below where we were a year ago.

Turning to some other areas of interest for the company. Dan mentioned our share repurchase activities. We also repatriated 45.3 billion yen or $383 million dollars from AFLAC Japan to AFLAC U.S. We were able to repatriate a bit more than we had originally expected because we were able to maintain our very high strong solvency margins in Japan.

I should point out we used the proceeds from our Samurai bond offering to pay down debt early in the quarter so we'll have most of the profit repatriation available for future share repurchase activity. Our debt-to-total capital ratio was 25% at the end of September compared with 27.2% a year ago.

Noninsurance interest expense was unchanged at $4 million, and parent company and other expenses were $11 million in the third quarter compared with $8 million a year ago.

The pretax profit margin on a consolidated basis rose from 11.7% to 12.2% and the after tax margin also improved from 7.6% to 7.8%.

On an operating basis, the tax rate was 35.8% compared with 35.2% a year ago. We expect it to come back to the 35.2 or 3 area. Return on equity for the quarter was 22%.

As we reported, operating earnings per diluted share rose 17.6% to 40 cents per share, which was in line with expectation. The stronger yen benefited earnings by approximately one cent per share for the quarter. And excluding the yen's impact, operating earnings per share were up 14.7% for the quarter and 16% for the nine months.

Lastly, let me comment on the EPS outlook for the year.

As you've heard, our objective for 2002 is to increased operating earnings per share by 15% excluding the yen's impact. Our target is therefore about $1.54 at last year's exchange rate of 121.54. If the yen remains in the range of 120-125 for the balance of the year, we would expect to earn $1.52 to $1.53 this year. The current first call estimate is $1.55.

Under that scenario, fourth quarter earnings would likely be 38 or 39 cents. I'd like to point out the yen is 125 yen right now that's about what it's averaged so far in October so I hope you'll take that yen rate into consideration in your modeling and your expectation.

As you've heard, our objective for 2003 is to increase operating earnings per share 15-17% before the yen. And we're also focused on achieving a 15% increase in '04 excluding the effect of currency translation.

And I guess one other thought, if you would, please make a note. We will conduct our analyst meeting next May in New York on May 12th and 13th and because the calendars tend to fill up fairly quickly, I do hope you'll make a note of those dates of May 12 and 13 so we can see you then.

Now Amber, that concludes our formal comments. We'd be happy to take questions.

Thank you, sir. At this time if would you like to ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question, press star two. Again, if would you like to ask a question, press star one.

Our first question comes from Nigel Daley with Morgan Stanley. You may ask your question.

Right. Thank you. I've got a couple of questions.

First, just looking at investment yields in Japan. If we assume the exchange rate doesn't move from here, what should we expect for total portfolio yields in had Japan in 2003?

Second, with debt ammortization in Japan. It rose about 30%. I was wondering what was driving such a steep increase when the decline in persistency appeared relatively modest?

And lastly, just in regard to reporting. I noticed you changed the reporting on conversion premiums. Given this change, I was hoping you could clarify what determines whether a sale was recorded as a conversion premium or a new premium? Thanks.

Starting with -- this is Joe Smith. Starting with the investment question. As we talked in Japan at the mini FAB meeting last month, we projected out our yields based on current new money rates for the next five years. And depending upon the scenario that we end up with, as far as the mix of securities in there, we expect this year to end about 4.70 as a total portfolio yield in Japan and next year, depending on the asset allocation, it could range anywhere from at 4.54 to a 4.59 at the end of 2003. And as I stated in Japan, we expect that portfolio yield to decline about 40 basis points from that 4.7% level over the next 5 years where we'll end up somewhere around 4.25 to 4.30 at the end of 2007.

Great.

Kriss, you wanna?

As far as ammortization in Japan. One of the things that's going on with ammortization, Nigel, as you'll recall that two years ago we switched our commission contracts, or we made available an alternative commission contract to pay a higher or first-year commission and to limit renewals to a 10-year period as opposed to the whole lifetime term of the contract. Under accounting rules that higher excess commission is being capitalized and amortized and reported as ammortization.

In the aggregate, this new commission scale is more economically advantageous to the company. At reasonable patterns of lapse rates, that is the present value of the new commission contract is slightly less than the present value of the original commission contract. So we have roughly the same or less total expense over the life of the contract, but more of it gets capitalized. Therefore, more of it gets reported as ammortization. Roughly 30% of our sales now are on the new commission contract. So if you look at total expense, basically for ammortization and what we call net commissions, that we look at internally, it's the same as it was but there's a shift in the reporting between operating expense and amortization. It's really not up 30% due to lapses or anything. It's more of a reclassification issue.

And Nigel, we're encouraging people to take that contract. I think long term it's going benefit us.

We've been very conservative in our pricing because we didn't want to be in a position to find out that it had a higher lapsation rate. So we've assumed that it would - a little bit higher lapsation rate before we show them the profits the same. But we believe it's going to be the same. Because once a person is on it for 10 years, the policy, we don't think they're going to lapse it.

We think they'll keep it because if they lapse it, because our policies are age specific, it would cost the consumer so much more they can't afford to do that compared in the U.S. it would be easier to do it because they would pay the same premium.

Nigel, this is Ken.

Let me answer your last question in terms of reporting. We really have not changed the way we report conversions.

Unfortunately in the second quarter we did find that our systems were only picking up cancer conversions and so - because that's all we've had in the last 15 or 20 years. So we had to go back and make some systems changes to capture the Rider Max conversions as well and we had put out a new statistical supplement on the day we released second quarter earnings to reflect that. But basically, as Dan said, all we're doing is capturing the incremental portion of the premium between the older product and upgraded product. That's what we report as conversion premium on page 23 of our statistical supplements. But prior to this year it was almost exclusively cancer/life and this year it's almost exclusively Rider Max.

And the Rider Max, over the long period, has an opportunity for us to improve persistency because what happens is, the people that have the policy now, at the end of 10 years they're going get a rate increase that will be significant. And a certain amount will drop it at that point in time. But what's happened is the consumers are saying I don't want that rate increase. I can pay a little bit higher premium right now and they want that level premium.

So I believe that overall the change from the Rider Max that's termed to the new one, which is whole life which gives a level premium, will ultimately improve our persistency . It only makes sense. But we're not calculating that in the numbers. But I think it will.

So I think the additional business is probably better business than our existing business that they write on term basis.

Just a follow up on that. Is there any difference in the benefits ratio being generated from your term versus your whole life Rider Max quotas?

No. They're roughly the same.

That's great. Thanks a lot.

Thank you.

Next question?

Our next question comes from David Lewis with SunTrust Robertson Humphrey.

Good morning.

Dan, can you give us an idea of what the outlook in your assumptions for Japan sales is for conversions in both 2002 and 2003? I know it's somewhat of a guess, but if you can give us some guidance there.

And second with the slowdown in conversions in 2003, does management believe they can see a very strong acceleration in the primary, AFLAC product sales in Japan?

I'm going to let Ken go to the details. But I will tell you that the conversions have shocked us.

We never expected as many conversions as we've gotten because I guess we were thinking too much as an American. There's no way Americans would pay a much larger premium or go up some anyway.

It's about 80%.

That they would go up that much for no increase in benefits. So that caught us offguard from that perspective. But on the other hand, it will have some impact in next year because we probably won't write as many conversions. But if -- we're taking that into account with our sales target of being up 5-10% next year. So, Ken, do you want to go on?

Yeah, David, I talked with, Atsumi Yagai, our Marketing Director a couple of nights ago about this.

His best estimate is for the full year that we would have about 750,000 conversions, which would translate into roughly $11 billion yen or a little more. And next year expect them to be in the area of 350 to 450,000 conversions which would be somewhere between, you know, 5.5 and 6.5 billion yen roughly. So we'll probably, in the fourth quarter, see very similar conversion activity to what we had in the third quarter. And then beginning next year maybe a strong first quarter and then seeing it taper off.

Thanks. And is the EVER policy, refresh my memory, is that a term policy?

No. No. EVER is available in both term and whole life versions. But the primary seller right now is whole life.

Ok. And just on the U.S. persistency where you've seen some improvement there. I know Aki Kan talked at the analyst meeting about putting in some initiatives to improve that. Do you think that's helping or do you think they're just kind of bouncing around from quarter to quarter on the persistency side?

Well, right now we recognize that the persistency ratio is improving a little bit in all lines of business. But although we have been working on it the last 12 months, I think it's a little premature to identify exactly where that is coming from. And we are happy to see improvement at this point. And basically that's all I can say.

I want to make one comment. All of our numbers reflect no change -- our forecast is no change in persistency. If we get it, it's just additional to - it's just additional I should say.

Great. Thanks very much.

Our next question from Michele Giodonna with JP Morgan. You may ask your question.

Good morning. I've got three questions.

First, I was wondering if you can share with us how much of an impact in the quarter do you think you've seen as a result of the projected increase in co-pay. And when should we see sort of the real spike up in sales related to co-pay.

Secondly on Dai-Ichi, I know that they have their own medical product. But is there any chance of them wanting to sell your medical product?

And then third, could you address the possibility of other alliances like Dai-Ichi?

I'll address those. Let's see. The first question was --

Co-pay increase.

The co-pay. You're seeing the effect of it right now. There's no question. Because it became the law. People realize it's going to go into effect.

If they buy the product or convert a product or whatever it is right now, our policy will pay as of this moment even though the co-pay going from 20-30 doesn't take effect until April.

Because it's product specific, they get a better buy if they buy this year than next year because they're a year older so there's no question in my mind you're seeing it right now. And so that's part of the thing that caught us offguard.

You know, again, we were shocked with as big an increase as we had. We were shocked last year that we had a decrease when we thought we were going to have an increase. And we were shocked with the increase being this much.

We were very optimistic that we would make the 10 but I don't think any of us dreamed it would be 26. So I think you can use that as the point.

The Dai-Ichi. The CEO of Dai-Ichi came down and stayed with me here in Columbus and that relationship has continued to grow. Mr. Morita is very happy with our relationship. He told me that one of the things that they're doing with the profits they are making from the sale of our products is allowing them to advertise more of their other products. And also that it's opening the door -- a door opener for them to go in with their life insurance. So I believe that that's as close in terms of a great reliance as you'll ever see anywhere. That alliance just continues to grow.

Whether or not they're going to sell the medical force or not is something that we -that I continue to work on and see if that's an opportunity.

They originally would not allow any Rider Max to take place. They now allow Rider Max to take place, but they don't pay the agents' commissions. And yet we're still selling policies. With Dai-Ichi doing that, although that's small.

That to me gives me some hope that at some point we may be able to negotiate with them on doing that. But things are going so well in the cancer life and everyone seems happy. I'm not trying to push too hard. So I'm just being very cautious and letting that relationship grow.

As far as a third - an additional from the non-life side, it's never going to be as good as the Dia-Ichi even if we can find one. It's just been a perfect relationship. We don't really have conflicts in distribution channels.

The non-life side we realize we're going have a lot of conflict with that but we're still working on it. We're still meeting with some people, talking to them. It's real funny. The interest is real high early on when everybody was going to get in the market and just tear us up. Now they realize they can't do it because our products are truly better and so there isn't as much interest, and people are concentrating more on their area.

Again, I think it's that specialization element that gives us a distinct competitive advantage. And the short answer is we're going to work on and see if we can do it, but I don't see anything happening in the short term.

Thank you.

Our next question comes from Colin Devine with Salomon Smith Barney. You may ask your question.

Good morning. With respect to the situation in Japan in the sales for the fourth quarter in this conversion, I guess if I look at page 23, there's a bit of a disconnect between that and the text of the release which referred to new analyzed premium sales being up 26.5%. I think that actually the release should have written total new premiums which reconciles to your stat supplement.

Looking at that at 22.3 billion for the quarter, that's still down about 10% from fourth quarter year ago. Perhaps you could discuss what we may see in the fourth quarter for this year.

And then also on this conversion situation, Kriss, perhaps you could discuss the impact on your DAC amortization such from this. And I'm not just thinking how you're treating the DAC on the old policy, but I presume you've changed your persistency assumption on the new policies so are you now extending the DAC over a longer period of time?

Colin, this is Ken. Your comment is duly noted.

I will tell you based on how we responded to David's question, we'll probably see similar conversion activity in the fourth quarter, meaning right around three billion yen or so from Rider Max, termed life to whole life conversion simply because that's the opportunity that a lot of our agents see. It's very timely. It's still a fairly fresh and new product.

The way those conversions are conducted to a great degree are out of our hands, 'cause they're really direct mail campaigns conducted by these agencies. They're rather large agencies and they conduct the campaign. They pay the expenses of the campaign. Which is why we pay them a commission, a small commission for doing it. But we do expect those to taper off.

Ken, just getting back to that. That really wasn't the question I was getting at. I guess I didn't express it right.

New analyzed premium sales, using I think industry convention the way you're expressing it on page 23, 22.3 billion for the quarter of. That's below the 23.1 billion you had fourth quarter year ago. That's really what I'm looking at.

Do you think -- are we looking at potentially a down sales quarter in the fourth quart I'm also comparing that 22.3 to the 25 billion that we had in the second quarter where they're also down about 10% sequentially and about 10% year over year. I'm trying to understand what's happening there.

I don't know that you can make a lot of sequential comparisons though. Because the summer months, especially in the third quarter, you can see historically are typically a bit lower. So the fourth quarter has nationally more activity in it. So I don't know that you can look at the -- compare the third quarter sales excluding conversions to the fourth quarter and draw -- fourth quarter of last year and draw any conclusions from it. Or comparing it to the second quarter. I don't know where you're going with that.

I guess I'm look at what they were fourth quarter a year ago and looking at where they were second quarter this year. Then trying to figure out are we look at a down quarter year over year for the fourth quarter and trying to better understand what's happening there, given this is the new analyzed premium sales is the number with EVER in there?

Right.

And I would have expected -- you know, as you pointed out, obviously exceptionally strong growth from EVER. Even with that it seems on the new analyzed basis we're - are we slowing down?

Well, again, it goes back to our issue about agents taking the path of least resistance. The profit margin is the same on the conversions as it is on the new sales. So from that perspective it's up, as we told you.

I guess the other part of that, Colin, is we're not managing that number. The contributor to analyzed premiums, our inventory of future earned premium income, comes from the total contribution of all new issues whether they come from a new policy sale or a conversion or the sale of a Rider.

They've been doing that for 30 years.

Are we double -- hold on for a second. The conversion premiums, you know, is that 3.1 billion simply the incremental amount over what you were collecting on the old term version?

Yes.

Or is that the full amount you're collecting on the new stuff?

No. that is the answer. The incremental portion, as we've reported for the last couple of quarters, the 3.1 billion yen, you see on page 23, is the difference between the premium on the old product that we were collecting and what we're collecting now on the newer model?

Ok. Then what is the face amount -- or if you want to express it perhaps on the total collected premiums sent on the base? If this is the increment, that's relative to some base, what is that base?

It's an increment on a per unit basis, Colin. The benefits don't change. That's part of what surprised us.

We're getting 60-08% higher premium per unit of benefit then we originally had. We were just surprised that people would pay the higher premium to lock in the rate for life. But there's no change in benefits. Benefits are the same on the old contract, new contract. If you want to look at it that way.

Okay. But two things I'm trying to understand here. What premium -- levels of premiums are you collecting on the Rider Max term?

25,000 yen per unit, it was. Now it's about 45,000 yen per unit.

All right. Then let's talk about the DAC on this. Are you now ammortizing the DAC over a longer period of time?

On the original contract where premiums changed every 10 years, the contract was renewable to an age like age 85.

We amortized DAC and calculated benefit reserves over the entire anticipated renewal period of the contract to age 85. We reflected the premium increases that would occur prior to age 85. And we had anticipated extra lapses when premiums increased. So it's called a unitary policy basis. That's what we used. That's what we use for all of our term type contracts.

So we anticipated rate increases. We anticipated extra lapses of rate increase. Now going to the whole life versions we're doing both DAC amortization and benefit reserves over the whole life period of the contract.

Basically we've got a level premium no extra lapses because the premium doesn't change. And actually, Colin, I think we're going to get a more rapid amortization under the whole life contract than we had under the term contract because more of the premiums occur earlier in the policy life under the new version of the contract than under the term version.

Under the term, the premiums were backloaded. Under the whole life premiums were front loaded and amortization occurs in proportion to premium. So in absolute amounts, more amortization is going to occur in the early years under the converted contracts than occurred under the original contract.

Thank you. Just to be clear. There's not the shock lapse, whatever it was you were pricing for in year 11 is gone?

Yes. We don't anticipate any shock lapse associated with the premium rate change.

Ok. Maybe, Kriss a final point.

Ken I think was pretty candid about forecasting an earnings drop in the fourth quarter. Perhaps you can give us a little more color on why you think that's going to happen.

An earnings drop?

38 cents a share.

It's not an earnings drop at all. If y'all need to make sure you use a good yen assumption. Our target -- all you got to do is look at what our target is and you can do what we've done year to date and back into the fourth quarter which would suggest 39 cents. Then you yen effect it right now it looks like the yen will be weaker in the fourth quarter this year than it was last year. And we're kind of on the cusp.

We may lose a penny on the yen in the fourth quarter, we may not.

But excluding currency it stays the same.

Ok. Thank you.

Our next question from Jason Fiskar with Bank of America Securities. You may ask your question.

Thanks. I have a couple of questions.

In September, as I recall, the corporate agencies were going to begin selling ever. I was hoping you could update us with the progress in this channel. And perhaps where you think it will go next year.

And then also what percent of the in force Rider Max do you think is going to convert?

I really don't know on the in force Rider Max other than we project that the Rider Max will slow down next year. There's still -- they're still working on the plan. They are supposed to have it within the next week or so. But we have not seen the forecast. I do not believe there will be an enorm yaus rate of conversions to it because of that 80% higher premium. But then again, they've already done more than I thought they would. So it's hard for me to predict.

Jason, Allan may have some comment about the corporate agencies and how their success is. But for the second quarter in a row they were bigger contributors than in the prior year, accounting for about 42% of sales at Dai-Ichi.

I will say that our advertising is playing an important role. One question asked earlier was how long would it be before we might get Dai-Ichi to sell our medical insurance.

I had told them in the marketing that we needed to advertise it smacks we possibly could and sma tha would ultimately put pressure ton to offer the rider because the agents would -- I mean the consumers would be asking the agents for it. That has worked and that continues to play a role. Allan?

Yes, Jason, the sales of them are all 100% consumer drifts.

The agents are not out there actively selling, but they are being asked by their policyholders for EVER and for Max. So they're able to sell that under those scenarios.

The initial information that we get from the corporate sales of it is that they expect strong, positive results. But this is just the middle of October. We don't have all the applications in. They're still running some of those sales campaigns because they run two or three for weeks. But we're anticipating the strong response from them.

Any reason to believe, though, that the sales from the corporate agencies should look any different from those in the individual agencies?

No. We expect them to be quite positive and strong.

Great. Thank you.

Our next question from JoAnne Smith with UBS Warberg. You may ask your question.

Good morning. I have two questions.

The first -- I just want -- I'd like it if you could remind us of how the stand alone medical product works in terms of benefits and the actual out of pocket costs of the customer. And also, can you talk about if there's any impact from unitization rates and how they've been tracking if there is an impact?

And also, in the U.S., can you talk a little bit about your progress and landing some new large company accounts? You know, last year you had Wal-Mart and Win-Dixie. I was just wondering if there was any potential prospect out there that could be a big win for you in the future? Thanks.

As far as benefits on the medical plan, the EVER plan, it's similar to Rider Max and our original stand alone medical plan.

Basically it's an indemnity-oriented plan that pays fixed amounts of benefits per day of hospital confinement or a fixed benefit for various other conditions or procedures like injury and outpatient benefit. So the statistics we have for hospital confinements, etc., under Rider Max can be used to price and were used to price ever. It's really nothing new and terribly innovative. I must admit.

The only difference, though, JoAnne, is that the benefits are about half of those of Max. That's one reason the price is so cheap compared to other policies. As compared to the Max policy.

I was just looking for you to confirm that it's a fixed benefit per day of coverage.

It is.

Ok. Great. And then on the second question?

The question about big accounts. The big accounts in the U.S. is again, Jo Anne, our strength has got to come from strong business. The answer is we are working on some big accounts.

I'm not sure that they've made the announcement, but there's one nice-sized account that I think they're going to announce in the fourth quarter. I can't mention it but I don't want people to lose focus on -- that's not our niche. It has been great that they've come in and the campaign of asking about it at work has changed everything for us.

But if you look at that time in relationship to how will it impact sales because we had that one-two punch and both of them in the fourth quarter of last year, it was significant. But I don't look for major accounts to impact sales in a big way going forward. It still has to be the accounts less than 500 that's going to drive it but to answer your question, there is one in particular.

I don't know how much they'll write, but it's going to be a prestigious account if all comes in. But I'm scared to mention it because I don't know if the business is in but I'll tell about it in the fourth quarter.

Just as a followup. I just wonder if there's one thing that you can point to besides the increase in the monthly producing GTS that continues -- in the producing agents that continues to drive your sales in the U.S. when everybody is clearly aware of the economic situation that we're in.

You give me one statistic. You give me how recruits are up, and I'll tell you what sales will be. It's just amazing. It tracks.

But if I had to tell you the second thing is, it's the tag line of ask about it at work. It has made a real difference in terms of people mentioning to the employer.

And you know, as a company that is one of the 100 best places to work for in America, I poll our employees. And my theory has always been, try to give them what they want. If it doesn't cost anything, as in the case of our policies, there's no cost other than the payroll slot, if I got a bunch of people asking me for something as employees, I'd be inclined to do it. So I think that's helping us.

Our HR department even is pushing that issue as they go around and are asked to speak about great places to work and benefits they can add at no additional costs and improve the employees satisfaction with the corporation.

Thank you very much.

Sure.

Our next question comes from Joan Fieff Goldman Sachs. You may ask your question.

Thank you. I have two questions. I wanted to know from Joe, what are some of the restrictions you think about when it comes to increasing your dollar denominated investments in Japan or increasing your duel currency investments in Japan. That's my first question.

The second question is you have a 25% debt-to-capital ratio, you said. Do any of the rating -- agencies in the U.S. talk to you about that? Do you think you're at a debt-to-capital ratio which is at a -- really at a high limit relative to your credit ratings? And are you going to be restricted in the amount of buy backs that you can achieve because of that?

Joan, of the dollar portfolio, that's restricted by gap accounting princes with our yen net hedge. I don't see that increasing anytime soon.

As far as the reverse duel currencies, they're always an option. If we were to go back to the all-time lows of .75% on 10-year government bonds, we might reconsider that. But currently given where we are in what we've accomplished in new money this year and what we're seeing in the pipeline as far as yen only bonds for next year that meet our criteria, I don't see that they're going to be on the front burner anytime soon.

What kind of yield pickup? What's the spread between the duel currency and the type of euro / yen securities that you're currently able to buy?

It's really hard to make a comparison in this market given the credit volatility of what's going on. But generally, that would be in the neighborhood of probably 150-200 basis points depending on the credit and time and the volatility in the market in which it was executed.

The reverse currencies again, we viewed them as sort of a emergency measure when rates got low in Japan and it would probably be viewed the same way. Though they do work well for us. We don't consider that to be a main stay going forward.

Do you find there's any issue in finding enough of these euro / yen bonds? Is the supply plentiful at the kinds of rates you need continue to vest in? At the credit quality you need?

They've never been hugely plentiful because we're basically the only investor in these types of securities and look for them. But given where the credit markets are and the ability of creditors to get deals done in the market, yes, we have seen an ample supply at the credit quality levels that we want to have in the portfolio. And what we have in front of us right now going forward in the 2003 meets the credit quality and the criteria of yield that we want in our portfolio.

Great. And on the debt-to-capital ratio?

I'll handle that. We are at about 25% right now. Our total rating agencies, we expect to stay in the 25-30% zone. But I always tell them keep in mind that our primarily yen denominated and our capital is primarily dollar denominated. So yen-dollar relationship cause influence that.

Also I point out to the rating agency that our debt has such low interest costs that we can tolerate higher debt-to-capital ratio without having a drain on earnings or economic leverage. So that's important, too.

But I think at the bottom line, the way we've got our operations forecast out and with the earnings we expect that of AFLAC, Japan. And the way we use proper repatriation we'll be able to continue share repurchase at about the 12 million share per year rate at least through 2004 and quite frankly on beyond that. Of we're in sort of a -- I'd characterize it as a steady state between profit and share repurchase and debt service.

Great. Just the last thing. Ken, I'm sorry, I just didn't hear what the persistency was in the U.S.

It was 74.8 versus 74.4.

Okay. Thank you very much.

Amber, I note that brings us to the top of the hour. So I'm afraid we're going have to conclude the call at this time. We do appreciate you all joining us this morning. If do you have any additional questions, something that wasn't covered, please feel free to call us on the toll-free number or send us an e-mail. We'll be happy to talk with you. Thanks and thanks again for joining us.