美國家庭壽險 (AFL) 2003 Q1 法說會逐字稿

Good morning and welcome to the AFLAC first quarter earnings release conference call. All participants will be able to listen-only until the question and answer session of the call. This conference is being recorded. If you have any objection you may disconnect at this time.

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

Thank you for joining us today. Joining me in Columbus is Dan Amos, Chairman and CEO of AFLAC, Kriss Cloninger, President and CFO, Aki Kan, Executive Vice President of US Operations, Joe Smith, Senior Vice President and Chief Investment Officer and Allan O'Bryant who is President of AFLAC International is also join us from Tokyo.

Let me mention the Safe Harbor language contained in your financial statements you already have. As you know some of the statements in the teleconference are forward-looking statements within the meaning of the Federal Security Laws, although we believe Laws, although we believe these statements are reasonable we can give no assurance they prove to be accurate because they are perspective in nature. The results we discussed with you today could differ materially from those that emerge in the future. I would encourage you to look at our latest quarterly report an filings for some of the various risk factors that could materially impact these results.

Now I'd like to send the program over to Dan to comment a bit on the quarter and the outlook for the balance of the year and then I'll follow up with a few financials and then we'll take your questions. Dan?

Good morning and thank you for joining us. AFLAC continued a strong performance during the first quarter. AFLAC Japan sales were better than expected. While our growth in the U.S. slowed from the extremely rapid pace, we remain excited about the outlook for future sales growth and the overall financial performance of the U.S. business. Most importantly, we are pleased that we have surpassed our annual growth objective by increasing operating earnings per-share 22.2% excluding the effect of currency translation.

I'll begin this morning by talking about AFLAC Japan. We are pleased with the total new annualized premium sales for the quarter. New sales rose 12.1% which was better than the single digit growth rate we had expected. Our new medical product, Ever, continued to generate strong sales accounting for 25% of our new business. The more than 160,000 Ever policies sold during the quarter was a quarterly record for the product.

Rider Max was our biggest seller during the quarter. Accounting for about 30% of our sales. We also saw solid conversions from the old term Rider Max to the new whole wide product. However, conversion activity was lower than in the fourth quarter of 2002, and we expect conversions to continue to decline as the year progresses. Excluding conversion premium, new sales were up 8% for the quarter.

We continue to be pleased with the activity from our marketing partner, Dai-ichi Mutual Life. Dai-ichi sales of our Cancer Life product represented 10% of the total new sales for the quarter which was down from 14% a year ago. As I mentioned, following our year-end release, we expect Dai-ichi sells to be down for the year because it plans to focus on its own traditional products. Despite expected declines in Rider Max conversion and Dai-ichi Life sales, we believe the five to 10% increase in sales for the full year is a reasonable expectation.

One of the keys to our success over the years has been our distribution system. During the first quarter we recruited about 900 new sales agencies and for the year we expect to recruit about 3500 new agencies. As you know, we have been focusing on recruiting individual agencies which we believe will help us better penetrate the small business environment and individual markets in Japan.

In May, we began using new television commercials in Japan featuring the AFLAC duck. In 2001, we tested a Dove U.S. commercial featuring the duck for the launch of our accident product. Because the commercial tested well we have produced two new dove commercials. This time they will be done in Japanese, by Japanese, for Japanese. One commercial promotes our Ever product and it's set in a ramen noodles shop. The other pro promotes Rider Max which is set in a sushi bar. To maintain continuity of previous advertising campaigns, the AFLAC Japan duck ads feature Japanese celebrities who have previously appeared in our commercials. We believe these new commercials will help us effectively promote our medical products.

Overall, we are quite pleased with how AFLAC Japan began in 2003 and we're very optimistic we will achieve our sales and financial targets for the year. Even with the weak economy, we believe we will continue to see strong demands for our products in the Japanese market and the trends that have led to this need are not likely to change any time soon.

As we discussed before, Japan's population is aging. As the population ages, its healthcare costs will increase. Our products can help this aging population offset some of those costs. At the same time, Japan's national healthcare system faces continued financial difficulties which have resulted in burden shifting to Japan's consumers. For instance, co-payments increased from 20 to 30% on April the 1st for the majority of the population. We believe consumers of all ages who face higher out-of-pocket expenses associated with illness or injury will be attracted to our products.

Turning to our U.S. operation, total new sales grew at 8.8% to 256 million for the quarter. Although sales were lower than we expected, we do not believe that our U.S. story has fundamentally changed. In fact, we continue to see signs that suggest just how strong our U.S. business remains. For example, in looking at the sales results of the top ten producing states, several generated very strong sales growth. Our number two state, Florida, which had a 23% increase, California, our number three state, posted an 18% increase, Pennsylvania, our number seven state, and Illinois our number nine state, posted 23 and 30% increases, respectively. Other smaller state operations also had strong sales results in the quarter.

Clearly, our strong sales growth in many states suggests that there is not one reason that sales did not increase at the double-digit rate. For instance, we do not believe that there was any negative overhang from the continued sluggishness in the economy or uncertainties resulting from the war. And we have not seen any changes in the competitive environment. In fact, as you may recall, the two well-branded companies have basically exited our market within the last six months.

Instead, we believe there are other reasons that led to lower first quarter sales growth. Many of which are results of the phenomenal sales growth we have produced over the last few years. To put our growth in perspective, you need to realize that our sales have compounded at 24.5% over the last three years while recruiting has compounded at 20.4% over the same period. I think that some elements of our sales force became complacent about putting up such huge numbers. I also believe that our phenomenal growth stressed our sales management organization in the field.

As we have suggested to you in the past, we need to expand the number of regional sales coordinators to increase recruiting activities and we need to grow the number of district sales coordinators to train those new recruits. And we also know that we do better when we increase the number of state sales coordinators by splitting states into smaller areas to address those issues and to extend our sales momentum in the long run, we have taken many actions since the first of the year that we believe will benefit us going forward. For example, we have recently split some of our top producing states into smaller state-sales organizations which increased state sales management. In the first quarter we split Texas, Michigan and New York.

In the short-term, sales sometimes slow as the new state sales coordinator built his or her organization. However, over the past experience shows that split states usually do significantly better in the long run before the split occurs. With these newly split states, we now have 68 state operations and we will split more states in the future.

In addition, we are also in the process of training many newly promoted district coordinators. This is critical because you'll recall we have tremendous growth in new recruits. In fact, recruiting was up 31% for the first nine months of last year. That kind of growth created a sort of bottleneck because the new agents needed to be trained and it is up to the district coordinators to conduct that training. With such an influx of new agents, we also in the number of district sales coordinators. However, when the new coordinators are trained, that means that they're not selling or training new recruits.

We're also redefining our larger territories within the United States Currently we now have five territories, northeast, north, south, west and Pacific. And each has a director. Affective May 3rd, we're creating the southwest and east territories. We believe the increase in number of territories will also strengthen our business. Like splitting states and coordinator expansion, we know these moves will likely be a bit disruptive for us in the short run. In the end it is likely sales will be up ten to 15% for the year rather than 15% increase we had as a target. However, I don't expect to miss any earnings targets because of the change in this year's sales outlook. And over the long-term, I believe the changes that we're making are necessary to reinforce our sales infrastructure to support continued growth in penetration of the market.

As you know, one of our strategies for growth of our business over the years has been the broaden our product line. This year we're continuing that strategy. We are now in the process of introducing a new conversion to our accident plan. The new accident plan is available in 13 states; by mid-year it should be available in 27 states. Later this year we'll also be rolling out a new cancer expense policy.

We were also pleased with our recruiting activity during the quarter. In the first quarter we recruited 6300 agents which was a quarterly record; although that number was only 5.5% above last year's first quarter, you'll have to remember that the recruiting in the first quarter of 2002 was up an incredible 36% over 2001. At the end of the first quarter, we had more than 55,300 licensed sales associates and the monthly averaged number of producing associates was more than 17,200 or 12.4% above the first quarter of 2002.

We believe our recruiting gains are directly related to our strong advertising campaign. During the first quarter, we introduced two new commercials featuring the AFLAC duck. The first one we called the "Hypno Duck" featuring the Amazing Kreskin, and the second one featuring the entertainer Wayne Newton and was staged in Las Vegas. Both of these commercials did very well in the testing. The average score of the insurance industry commercials is a 12. Our Hypno scored a 40, and the Las Vegas commercial scored a 33. In May, we will release another commercial featuring the actor comedian Chevy Chase and then we will release two more commercials to year-end.

To judge whether the commercials have been successful you have to look at our brand recognition. A flacks brand recognition is now 89% compared to 44% in 2000. The year in which we introduced the AFLAC duck. In 1991 our brand recognition was only 8%. There's no question in my mind that these commercials have improved our brand recognition which in turn has played a key roll in recruiting in sales growth.

As we look ahead our view for the U.S. market has not changed nor has our belief we will continue to maintain our leading market position. The U.S. market for supplemental insurance is vast and underpenetrated. Our 258,000 payroll deduction accounts represent only 4.5% of the total number of small businesses in the United States, and as you know, the small business market is our market. Also, we believe consumers will find our products attractive because insurance deductibles continue to increase and many employers are decreasing the coverage they provide.

Because of our potential growth we see in the United States and Japan, we believe we're on track to achieving this year's financial target. Our goal is to increase operating earnings per-share on a diluted basis by 15 to 17%, excluding the impact of the currency for the year. You may recall that within that range we had targeted $1.80 per-share or 15.4% increase for 2003. Although we have completed just one quarter, we are confident that we will achieve or exceed that earnings target.

Beyond 2003, we expect strong earnings growth will continue. Our objective for 2004 is to increase operating earnings per diluted share by 15% excluding the impact of currency. We believe our goals are realistic and achievable because we are committed to providing consumers with the best supplemental insurance value in the market. Thank you for being with us today and I'll turn the program over to Ken.

Thanks, Dan. Let me take you briefly to the financials beginning with Japan which had a very good quarter in yen terms. Beginning with the top line, AFLAC Japan produced improved earned premium growth of six and a half percent. Invest income rose 2% but was suppressed somewhat by the impact of the stronger yen on our dollar-denominated portfolio. If you exclude the impact of the yen on the dollar portfolio and investment income, investment income would have grown 5.3% on a neutral currency basis. As a result revenues for the quarter were up 6.1% in the yen terms.

Our persistency rate declined a bit but remains strong in the highest in Japan's life insurance industry. The annualized rate for the quarter was 93.9%, excluding the annuity businesses, versus 94.2% a year ago and 94.1% for the full year of 2002. This persistency continues to reflect changes in mix as well as changes in the distribution between payroll and direct business in Japan.

In terms of the operating trends as we had expected the benefit ratio which declined for the last several years continued to improve in the quarter. It decreased to 67.6% compared with 68 and a half percent a year ago. That decline primarily reflects a change in business mix, especially from the sales of new products like our Rider Max, Rider Wide and others.

The operating expense ratio improved slightly from 19% to 18.8% as a result of pretax margins showed further improvement rising from 12.5% to 13.6. Pretax operating earnings rose 15.8% for the quarter in yen.

Investment yields in Japan reached historic lows in the first quarter. For example, the 20 year JGB yield was 1.12% compared with 1.53% at the end of 2002. It's currently rated around 1%. We continue to investment in higher yield securities than government bonds would provide by looking outside of Japan. For the quarter we invested cash flow in yen denominated securities at 3.88%. Including dollars, the blended rate was 413.

The portfolio yield was 4.71% at the end of the quarter which was down two basis points for the end of the year and 14 basis points lower than last March. Through April 18 we invested -- or committed to invest -- about 42% of our estimated 2003 cash flow in an average yield of 4.12%.

Let me comment briefly on just a couple of other investment topics. At the end of the quarter our below investment holdings on a call dated basis were 4% of total debt investments compared with 2.3% at year-end. The increase is primarily attributable to our holdings of Ahold and Royal and SunAlliance. We had no debt impairments in the quarter and consolidated growth unrealized gains at the end of the March increased to four -- or $5.7 billion, and gross unrealized losses were $473 million down considerably from year-end. 261 million of those unrealized losses were attributable to below investment grade securities which represented 6.3% of shareholders equity excluding FAS 115 gains. If you have any more questions Joe can certainly comment on our investment activities.

Let me turn to AFLAC U.S. which also had a good quarter. Revenues rose 17.8%, earned premium was up 19% and investment income rose 9.9. The annualized persistency rate for the quarter was 73.1% down from 73.9 a year ago.

The operating ratios remain fairly stable for the first quarter the benefit ratio rose a little bit from 52.9 to 53.7 which primarily reflects a slow down in investment income growth. As a percentage of premium income it was up only slightly versus last year and actually down versus the first quarter of 2001.

The expense ratio improved from 31.8 to 31.3% in the quarter and that is due primarily to the timing of advertising expenses. You may recall that in last year's first quarter, we spent a lot more to take advantage of the advertising opportunity on the Olympics. With the higher benefit ratio somewhat offset by a lower expense ratio the margin was relatively stable and came in at 15% versus 15.3 a year ago. As a result pretax earnings were up 15.5%.

In terms of U.S. investments, the new money yield for the quarter was 7.05% versus 752 a year ago and the yield on the portfolio the end of March was 794 down two basis points from the year and six basis points lower than a year ago.

In turning to some other items for the quarter, non-insurance interest expense was unchanged for $4 million for the quarter. The debt total capital ratio was 24.1% compared with 25% a year ago and 24.8% at year-end.

During the quarter we purchased 1.7 million shares in an average cost of $31.05 per-share. At the end of the quarter that left 15 million shares available for purchase and we still anticipate purchasing about 12 million shares for the full year.

Parent company and other expenses were $11 million compared with 12 million a year ago and as a result of the improvement in Japan's margin the total company operating margins improved as well. Pretax margin rose from 12 and-a-half to 13.4% and the after-tax operating margin improved from 8.1 to 8.7%. On an operating basis the tax rate remained at 35.3% versus a year ago. And operating return on equity was 24% for the quarter on an analyzed basis.

As reported, diluted operating earnings per-share rose 27.8% to 46 cents per-share which was ahead of estimates by a couple of cents. The weaker -- the stronger yen helped improve operating earnings by two cents per-share for the quarter and excluding that impact operating earnings increased 22.2% again significantly better than our target.

As far as the outlook goes for the remainder of the year, Dan had mentioned that our objective for 2003 was to produce a $1.80 in operating earnings per-share excluding the impact of the currency. You may recall that last year's currency rate averaged 125.15. That would represent a 15.4% increase in earnings per-share over 2002. If we achieve that target and if the yen remains at its current level, which is about 120 yen the dollar for the remainder of 2003, we would expect that $1.80 would end up to be a reported number of about $1.84. Currently the first call consensus is $1.82.

As you heard our target for 2004 remains to improve delude operating earnings per-share 15% excluding the effect of currency translation. Currently the 2004 estimate among 18 analysts is $2.09, increase of 15% over the 2003 estimate.

Before we take your questions I would like to remind you in just a couple of weeks we'll hold our annual financial analyst briefing. This year in New York City it will be on May 12th and 13th. We hope you can attend and if not we sure would like you to join us on the webcast and you can call our department if you have any questions. In the past we have had several people who have tried to ask a question on a call and has been unable to just because of the number of questions. So in consideration of everyone on the call I would like to ask that you please limit your questions to one per person so we can try to get to everyone.

With that, Missy, I'll turn it back over to you and we'll be happy to take questions.

Thank you sir. At this time we will begin the question and answer session. If you would like to ask a question please press star then one. You will be announced prior to asking your question and to withdraw your question you may press star then two. Once again to ask a question, please press star one.

Our first question today is from Nigel Dally from Morgan Stanley. Ask your question.

A question on the division of territory, you said splitting of states is reason for the U.S. sales miss. You split territories before and you have been able to hit or exceed your US sales target. I was just wondering why this quarter was different?

Well, first of all, we have not split territories in 13 years that I have been here. This is the first time. I take that back, we did it in 1991. We split it but we haven't had any significant changes in years so long I can't remember I would have to actually check the number. I want to make sure of one thing. It's not just, you know, the territory splitting that is driving this. It's a combination of things. I think there is a certain amount of complacency that sales came so easily. We were stunned that we were up 28 and 29% back in 2001 and 2000. And last year we're up 16 and-a-half and we thought we would be up 15. I just think it's taken us to kind of sit back and refocus a little bit on what we do. And to give you an idea as we split territories, effective May 1, there are certain territories that because of the split today, they're going to end up having the same amount of people reporting to them that they had three years ago. That is how many splits that we have done. So the area of control was just getting too big. Some of these territories which normally we have about ten people reporting to them had gotten up to 20. This gets them back to ten which is more of a manageable number and we can have more direct control. So from that standpoint, we think it will be positive.

The reason that we chose to do it in the first quarter was we saw a lag in sales. We thought, you know, 40% of our sales come in the last three -- the last month of the quarter always because the last three weeks are so big. So I'm convinced this is the right change. This is the right time to do it and I think you'll see sales rebound and pick back up.

That's great. Thanks, Dan.

Sure.

Our next question is from David Lewis from SunTrust Humphrey.

Dan on the subject in the U.S., can you say whether the accident policy change has impacted sales or you think it will impact sales and if you can provide any expectations for sales as we look through the quarters of 2003 in the U.S.?

Yeah, Ken has got some numbers. The accident sales have improved in those states and everybody is waiting for it. It's very obvious. Ken?

I think like the issue about the states that we split in the first quarter going into the new accident policy is not an overriding reason why sales were a little light. We did introduce the new accident plan in 13 states in the states that had the new plan, accident sales were up 10.5% for the quarter. In the remaining states that did not have the new accident plan, sales of the accident policy were actually down 1.5% which suggests to us that there are states out there that are probably waiting for the new product. And it's important to note that this year we're going to be modifying the products that represent 70% of our new sales meaning accident, short-term disability and cancer. So we're going to see some significant improvements to the product line that ultimately we think will translate into better sales.

Any guidance on the quarter progression?

Any guidance on the quarter? I think, you know, we'll be probably in the 10% range in the second quarter along -- along where we were in the first quarter, but the third and fourth quarter I hope to see improvement.

Let me point out one thing. Never in the company have we ever had a bonus that was such that we had tied to U.S. sales. I have been worried about this compounding and it coming so easy that it would be not perceived as much of a problem to continue to grow the business so all of our officers, including Kriss and me are tied to new sales numbers for the first time ever in U.S. I have done that in Japan before but I have never done it in the U.S. and so there is going to be a lot of pressure because a lot of our people have made big bonuses in the U.S. to come through and make those numbers. My sense is we always said money drives things.

The other thing I want to point out to you is -- that is different from Japan because of these corporate agencies we have in Japan, they're all on commission - the agency is - but the actual sales people are all salary. When sales drop off only increase 9% roughly in the U.S., then it effects their income of the agents and the sales coordinators themselves so they get a financial hit. In Japan they don't get a financial hit to those corporate agencies for the individuals themselves. So, you know, there is going to be shared pain here with the sales people without -- which I think will ultimately invigorate sales and pick it back up in the second half.

Thank you.

Our next question is come Ed Spehar of Merrill Lynch.

Good morning, everyone. I was wondering if Joe could give us any update on his five-year outlook on net investment income growth in Japan. He had given us some guidance and I think the number was 5% annual growth. Now that we have rates again at another low level, have you changed your expectation in Japan? Thank you.

Well, Ed, not at this point. You know, I sort of view the first quarter -- this is sort of a strange situation in Japan and we have been here before and we have bounced back up. And what we did in the last quarter of last year was invested forward and we sort of do that in the fourth quarter if we see available deals but at this point I don't see a reason to change that 5% growth rate. You can see where the number Ken quoted and we were still targeted at 5% and we're on target as far as bundle new money this year. You'll see that 4.12 probably trend back toward the target of 3.5, given where rates are. But I think that we -- we're still seeing good deal flow. We will have more reliance on currency area obviously but that has been helpful to the company in the past and right now I don't see any reason to change that perfectionist going out five years.

Thank you.

Our next question is from Liz Werner of Sandler O'Neil. You may ask your question.

Good morning. I just had a follow up on the -- I guess the structure of motivating the sales people in the U.S. I understand they're very commission-tied. When you look at their total comp, is there a mix that's based on renewals which are almost like an annuity I would think versus new business and has that mix changed at all or will it change going forward?

Well, the answer is yes. But the newer people that come into the positions, for example, as they're promoted, they pick up a lot more cost that are associated with their new position because they're total commission. And the first year it usually -- they need the new sales especially during that period of time to offset the cost of taking on that -- these particular operations no matter what level are you. So, yes, it does have some impact but basically at the age of level or the associate level as we call it, they're still very driven by new sales. They cannot -- we really count on the people who have been with us less than five years. They have to have new sales to -- to continue their style of living.

Great. Thank you very much.

Okay.

Our next question is from Tom Gallagher (ph) from Legg Mason. You may ask your question.

Good morning. A question for Kriss and I know you have answered this before but I wanted to get an update based on where rates are in Japan. Let's assume that rates stay here for a while in Japan and let's also assume that sales in both the U.S. and Japan stay where guidance is for the next couple of years. How much longer do you think you can maintain 15% EPS growth? How many years based on those data points?

Well, we're going to update you on that at the analyst meeting in May. Right now we're comfortable that we'll make the 15% in 2004 and we'll update you on a forecast in 2005 at the analyst meeting.

Okay, thanks.

Our next question is from Steven Schwartz from Raymond James and Associates. You may ask your question.

Good morning. Following up on Nigel's question I'm going to beat this dead horse some more, Dan, it's not clear to me from what you're saying, was the split in the states a result of slow sales or which was the chicken and which was the egg?

Again, I don't want to -- the main thing that I want all of you to realize is that the sales problem is execution. It's not the economy; it's not -- it's not the war. It's things that we have done internally and need to correct to get it going. Whether it be a split state, whether it be complacency on existing people, what I know about 8.8% increase is, if it was the same number across the board, I would be very worried. But when I see that five of the top ten states are over an 18% increase, I realize that there are -- there are strong performers out there that are getting the job done and it means that some people are not pulling their load and it has to be corrected. It's either got to be corrected with splitting states, changing states, doing whatever is necessary.

The difference in the U.S. and in Japan is that we do not -- we're not in a position where we have to wait. We do not have lifetime employment. Our people are paid very well, and for that being paid very well, they're expected to perform, no, ifs, ands, or buts, they have got to perform and we will not accept anything less than that. And they understand that is the way the game is played.

Now, going back to your question about the split states, I'm not exactly sure. What I can tell you is that we have -- we have accelerated the number of split states and started doing it in the first half or in the first quarter and we made those changes in the second half of last year saying they will take effect January 1. Since sales were not as strong as we had hoped, we went ahead and did more and, so, I think it's a combination of both. I'm not trying to be a politician here but the main thing I'm telling you is it is execution on our part and something that is correctable.

I understand that and trust me, I think anybody would be an idiot to bet against you given your record. What you're really saying here is you decided to do this. You announce it to the sales force in the fourth quarter so at least one of these states that you split, I think three is the total, was going to be split maybe you saw a little weakness and decided to split another two?

Yes, but I actually split more than that. I gave the example of the top ten but we have actually split a lot more. We probably split ten more that have taken place. For example, I just give you one is that when we just split an area into the Southwest territory, the guy that is in charge of one of our Texas areas, we're going from one to four. And so it was writing 40 million in premium and now there is going to be four doing 10 million in premium. That is just one example of what will take effect on May the third. So it gives you an idea and so these guys with 10 million in premium to make the kind of money they want, they're going to have to get to 20 million in premium to be satisfied in terms of what they want to do.

Okay. I didn't want to get into the actual splitting of the overall U.S. territories but 13 states were split.

I'll get you the exact number. I can't remember the exact number of what we've got but we have 68 now compared to it was in the 50's last year about this time.

Okay. I'll get together with Ken. Thanks.

Okay.

Our next question is from Michelle Giordano of Morgan Stanley.

On the Dai-ichi sales I recognize that you were expecting sales to slow down. It looked like it was a fairly dramatic slow down in Dai-ichi sales. Is there anything you can do to reinvigorate that at all through this year or maybe even next year and not to belabor the territory and state issue but how many more states or territories are you planning to split true through the remainder of the year?

I'm going to split more if sales don't pick up if that is your question I'll have to wait and see, but certainly we -- I can think of -- I can think of seven for sure that will take place before year-end. So I know that will -- that will be impactful. As far as Dia-ichi Life, they're pretty much on plan in terms of what we anticipated. I think the positive thing here is that sales are up 12.2% and the Dia-ichi Life sales are down and we have been able to make up that difference. So I'm very proud of what we have been able to do in that respect.

We never anticipated that Dia-ichi was going to carry our load but at the same time they are the number two seller of cancer insurance in Japan. We of course being number one. So I would love for them to sell Rider Max. We continue to try to work with them on doing that, but with all the changes that are taking place in the healthcare system and other issues, they felt a need to push their products and certainly I can understand that. But as long as they're the number two seller and really dominating the market from their perspective of their market and what is taking place, we have to be pretty satisfied.

I guess, you know, should we expect that this channel will become less and less important or is there some hope that maybe, you know, something will change in the next year and they'll decide to be more aggressive either in selling the Rider Max or getting back to selling the AFLAC products?

In our projection, even from day one we never projected that it would get stronger but rather it would be the initial surge and then level off so that has always been in all the projections that we've got. And when you're writing the premium they're writing, you know, we're just excited. At the end of five years we're probably going to have close to 400 million in premium in force with them. That is a small company. So we're thrilled to death with that. At the same time, we're going to constantly try to get Rider Max. If the Rider Max comes it will just be a bonus and something that I think ultimately benefits them. I know it benefits us and we're just working on trying to convince them of that and we think along -- you know, there is still some 400 policies a month the Rider Max and not paying commission to agents. So we're hoping that sooner or later that they might consider that. We just have a great working relationship with them and I'm encouraged that that is a potential but we're not about to put it in our projections.

Thank you.

Okay.

Our next question is from Colin Devine from Smith Barney. You may ask your question.

Good morning and I'll direct my question to Joe this morning. Joe, I was wondering if you could give a better reconciliation for us on gross unrealized losses. My understanding is those are 1,000,000,031 at the end of last year if I heard Ken correctly I believe he said there were 473 million at the end of the first quarter and yet you also had the Ahold position I guess go south if you like. What was going on there? Did you sell a bunch of stuff or what happened?

Well, after Ahold went, the problems with Ahold came into the market, the tank went down into the 60's and since that time the long Ahold bonds have traded up into the mid 70's so there was not as huge of unrealized loss on Ahold as you would think. And part of the reason that you've got such a large unrealized gain versus a smaller loss in this quarter is you have to remember that most of our securities are longer dated and when you get the move you've had and the interest rates in Japan where they have moved down 50 basis points in a quarter, the sensitivity of (inaudible) securities through that decline is going to cause a disproportionate rise in the price. So that has really boosted the unrealized gain and trimmed down the unrealized loss in there.

Now, we take each of our noninvestment rate securities and price those specific securities with outside sources so we're comfortable with the loss number of $260 million on the total 4% of the portfolio at this time. But that is the reason that the unrealized loss came down so much in there.

Actually maybe you can just be a little more explicit and let's do some numbers. How did we get from a billion thirty-one? What more did you have an unrealized loss on? I thought the Ahold position would have added to it this quarter and if so how much and then are you saying that the rest of it was simply from the rally in the bond market?

Pretty much so. That is the way it is. I had to sit down and go through the exact numbers. I mean, I'm not an accounting person but looking at the pricing of the securities, you know in the sensitivity of long dated, Ahold all the securities that are not investment grade are available for sale. They're accounted in that unrealized loss number. The pricing, the unrealized loss on Ahold was at $65 million based on the current market values now.

Was that in the year-end numbers? Was there an unrealized loss from Ahold that you were reporting at the end of the year?

Probably a small one because the bonds were trading at 90, 95 before this concern over the accounting came to light.

Okay. Then just a quick follow-up. Given the SEC's it would seem to be increased focus on life insurance, I guess investment impairments with some other companies in the industry in general, has AFLAC received any inquiries from the SEC about its investment portfolio?

No, not about that or any other issues, Colin.

Thank you.

Our next question is from Vanessa Wilson of Deutsche Bank. You may ask your question.

Thank you. Dan, if we could go back to your example where you had the manager with 40 million of premium and the other managers -- the new managers now will have ten because you split the regions, that manager who had 40 million premium, I would assume maybe had a lot of renewals as Liz had asked and maybe is very comfortable financially on those renewals. If you split them down to ten and then they don't move that ten up, is there anything to limit you from just firing that manager?

No. One thing I have always tried to do is create job security within our organization. We've always put people on notice, given them a time period in which to pick it up. We have never walked in and just said, you're gone tomorrow. We've always given people written notice and usually a quarter to pick up the production or six months if we could possibly do it. And that has generally worked to our advantage over the time. And the way we have done it if we just didn't feel like they were getting in and they were on the borderline is we would split something. From that perspective I think it's important to note that one of the things that I think has built our company is that we have had to be very aggressive and they're paid according for that. At the same time, they all understand that they have to perform.

Now, going back to the split stages you asked the question about, the answer is, if they don't perform would we change them and the answer is yes. We would give them usually a year to get things going. But they're generally hungry people and as you can imagine four people can work a lot faster and accomplish more than one. And they're going to be driven by that and we believe it will ultimately produce strong results.

Dan, if you just carry the example through, you're going to have three new people and they're going to each have regions that could produce ten, but you have to hire those people. They have to hire their staff. Then they have to hire the associates and train them and get them to make their first sale. What kind of time line is involved from the new person being found and put in place and the associates making that first sale?

It's already done. When we really -- when we finished in March, we made all the changes. What happened is the guy that was in charge of that Texas got promoted to be the territory director. Within the day that he was promoted within two days he had made all the promotions to the state level and within a week we had all the state level people promote the regional people and within another week we had all the districts pro mode. Now they have to get out and hire like crazy and that is what we expect them to do. It works very fasted. Our system is if the agent does well everybody up the chain does well. So the key is hiring lots of agents and getting them trained.

There is just enough depth in the system you don't get into a long time lag?

There is not a long -- there is not a long time lag here. We don't have time for it. We understood that we're expected to perform and there will not be a long time lag. If there is a lag in production it is generally the person and we have to go in and see if we made a mistake in who we chose.

Thank you, Dan.

Okay.

Our next question is from Andrew Kligerman from UBS Warburg. You may ask your question.

Yes, thank you. Dan in the past you to have a slide on your competitors in Japan, what their market share was, what it was doing. Could you comment on the market share and what your competitors are doing in Japan and likewise could you do the same thing in the U.S.?

Ken Janke Andrew, this is Ken. We're preparing that material now for our presentations in a couple of weeks where you'll have an opportunity to see comparative sales data of us versus our competitors in Japan for both cancer life and medical products. We just don't have that right now.

Could you give more general color on what is going on without the numbers?

Well, no one has climbed up our back, I can tell you that. We are absolutely still leading the market and our primary products, cancer and medical in Japan, accident and short-term disability and cancer here. There are no competitive changes we have seen at all.

Yeah, ironically in the U.S., I don't want to call any names but one of the competitors that I was scared of has pulled out of the market. They're very well-known company with great brand and market capitalization and they have totally gotten out of it. So I've been shocked. As you know, one of our other competitors has had a lot of negative publicity from another side of their business.

The interesting thing about the U.S., with everybody else is it is a secondary product what we sell and it is our primary product and it actually amazes me that more aren't in our business than are. And that is why I think it's such huge potential for us. And I believe that it's an execution more than a real problem with the economy or anything else.

The one point I want to make to you is as I talked to the sales force and I have probably been to a third of the states this year, I think now is a better time to join our company than ever before. The reason I think it is we have got this great name recognition. You know, you've got where we were -- 25% of the life insurance industry was downgraded. We were upgraded by Moosy's (ph) and then in addition to that, we're moving at a period of time -- you know, this is my 30th year and I have seen a lot of things take place in this company. And cyclically, when I first join the company in the 70's, we saw great health insurance, great hospitalization and healthcare and we saw run-away inflation on healthcare costs and so we came in as a business and said, that's too much. We can't afford it. The business is dead. And they said, we've got to find a way. So HMO's came into play. Then the HMO's stopped the runaway healthcare cost and therefore insurance premiums got under control. Now we're moving -- then we have seen all this negative stuff on HMO's and what has taken place there and all of a sudden they're moving away from it and now we're seeing a move back to more coverage of everything. And with that we're now beginning to see healthcare costs rise again which is going to affect insurance premiums on their healthcare plans and what is taking place. That plays right into our hand. And that is as the -- a weak economy in the U.S., employers are looking for ways to control cost. When they do that, they certainly don't want their healthcare cost to go up too much so they allow us to put in our products to help fill those voids. And so I just think it's a great time for people to be joining us and a great opportunity for our U.S.

And I am disappointed that sales were not up more and I think -- I think we've got their attention and I believe long-term is going to rebound but, you know, this is what we're paid to do. When everything -- my dad used to say that it isn't -- it isn't when things are going right that you earn your money. It's when you have problems. And the U.S. sales, although up 9% and although, you know, earned premiums up 18%, the fact is in the long-term we want to see this trend pick back up and that is what we're working on right now and I think it's achievable but we have to do a lot of hard work and get a lot of attention to people and I think we have done that and I think it will rebound because I think the market is there. I really think it's a great opportunities.

Excellent. Thanks a lot.

Our next question is from Joan Zief from Goldman Sachs. You may ask your question.

Good morning, it is Steven Crone (ph). A quick question on Japan persistency. That number has been trending down a little bit down over the past few quarters and I guess our question is, how quickly should we expect this to go lower? I know you attributed it to the change in mix of products. How low do you think it can go and still maintain your top line premium growth targets?

We do have, you know, a shift in sales from our payroll accounts to more of our direct sales through individual agents and historically the persistency has been lower on our direct business and our payroll business and that is reflected in our premium rates and our profit projections and the like. We expect the trend toward individual sales to continue to increase for the next few years and, therefore, I expect persistency to continue to decrease somewhat in Japan. But, you know, it is a long term trend and it is a modest decrease and it's not anything we're alarmed about from a profit projection point of view. In fact, it's included in our profit projection. It could go down another point over the course of the next two or three years, I'd say, and I wouldn't be alarmed.

Okay, great. Thanks.

Our next question is from Eric Berg of Lehman Brothers. You may ask your question.

Thank you and good morning to everyone. Dan, I have a question that is similar to but just a little twist on the question that was asked by Vanessa and it is this. Couldn't you argue that if you're having problems with certain individuals who are not pulling their weight that the right thing to do is not to cut up their territories but simply to replace them? In other words, isn't there a risk here that by cutting -- by replacing them and by cutting up their territories, you are reducing the incentive for everyone to perform since there is no longer the opportunity to have a big territory and for a highly motivated single individual to get rich?

Well, first of all, compensation is not a problem. They do very well and that is not an issue. We don't -- the thing I think you need to understand is that we're not arguing if they're making their quota and doing well. The problem is it's gotten to be a much faster pace. Remember, think of it in terms of this is that when you -- when you were up 20% just two years ago you were -- you know, and everybody was up 29%, look how poorly you looked like you were performing compared to the others. So it wasn't that 20% wasn't good.

It was that you were not keeping up with the same rate of everyone else. I don't want to mislead you. Most of our splits have come through promotions or through demotions. They have not come through splitting the territory and taking it away from existing people. That has been what has taken place over the years. In terms -- a great example was the Texas one that I gave you. But when we have put people in to the territory, certain ones we have said to them, you can have this position but at a later date we are going to split it once we have got the depth and management to do that. So people understand that we're going to do that when they take over the territory that eventually we think it can hold that but right now going back to one of the things that Vanessa said it couldn't support it. For example, we have four states now that -- in Texas that each will do 10 million a piece. Five years ago they were not doing a million a piece. It couldn't support a state at that time no matter whether we wanted to do it or not. So we can't split unless we know it can support it from a financial perspective as well. But they understand that when they go into their new position but again I want to reiterate, 90% of them are based on demotions or promotions.

As opposed to what, Dan?

They're based on promotions or demotions, not on splitting, a person is still staying in the position.

Thank you.

Missy, that brings us to our hour time limit and we do have another engagement we we're going to have to end the call at this time. If there is any one left in the queue we apologize for not getting your question but I hope you call us on our toll free number or shoot us an E mail. We appreciate your time this morning and thank you for joining us and we'll see you at our analyst meeting. Thank you.