美國家庭壽險 (AFL) 2003 Q3 法說會逐字稿

Good morning and thank you for joining AFLAC's 3rd quarter conference call. All participants will be able to listen only until the question and answer session of the call. This call is being recorded. If you have objections you can disconnect at this time. I would like to introduce your speaker for today's call, Mr. Ken Jenky, Senior Vice President of Investor Relations. Mr Jenky, you may begin.

Thank you, Jeannette. Good morning and welcome to the 3rd quarter conference call. Joining me in Columbus this morning is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Aki Kahn Executive Vice President of U.S. operations, Joe Smith, Senior Vice President and Chief Investment Officer, and Allan O'Bryant, President of AFLAC International joins us from Tokyo. Before we begin this morning, let me point out the safe harbor language.

Some of the statements in this teleconference are forward-looking within the meaning of federal securities laws and although we believe these statements are reasonable, we can give you no assurance that they'll prove to be accurate because they are prospective in nature. Obviously actual results could differ materially from those that we discuss today and 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. I would like to turn the program over to Dan and we'll talk about our quarter and the outlook for the remainder of the year in Japan and the United States. I will follow-up briefly with a few financials and then we would be pleased to take your questions.

Thank you, Ken. Good morning and thank you for joining us today.

I'm sure you saw AFLAC incorporated had a very strong 3rd quarter. Operations in Japan , again, produced better than expected sales and our fastest rate of revenue growth in yen since 2000. Although AFLAC U.S. sales increased only slightly over last year's 3rd quarter, our overall financial results exceeded our target. Operating earnings per diluted share rose 17.5% excluding currency translation, which was ahead of our expectations for the quarter.

Let me begin with AFLAC U.S. Total new annualized premium sales rose 1% to 263 million, which was consistent with our September 29th announcement. At that time we also said we expected our 4th quarter sales to be flat compared to the fourth quarter of 2002. Although I'm disappointed with our sales this year, I am confident we are heading in the right direction. I want to emphasize that no new issues emerged in the 3rd quarter which caused us to rethink our approach to the U.S. market. We do not believe that the need for our products has changed. Market saturation is not an issue nor is competition, and we do not think the economy had significant obstacles to growth. We believe the changes we made to help us better execute our model are simply taking longer than we had anticipated. You will recall that most of the changes relate to enhancing and expanding our sales management.

We increased the number of territories from five to seven and we're also increasing the number of state operations. At the end of 2002, we had 63 state operations. By the end of June, we had 71 and by end of this year, we anticipate 82. Of the 82 state coordinators who have been in place as of January 1, 2004, 31 will have been in their position for less than one year. It takes time for them to adjust to their new management responsibilities and territory. Another action I took recently to further improve our sales management was splitting the responsibilities of the Director of Sales and Marketing into two positions.

As we announced last month, Joe Kikenmeister, who continues as Director of Marketing while Brad Jones has been promoted to the newly created Senior Vice President, Director of Sales. Many met Joe at our analyst meeting. He has been part of AFLAC since joining the company as a sales associate in 1970. Joe has been our Marketing and Sales Director since 1990, and he undoubtedly has been the most successful Director of Marketing in the history of the company. Brad also started as a sales associate and joined AFLAC in 1984. He excelled in every level of sales management and most recently he was Vice President, Territory Director of the Northeast. Under Brad's leadership the Northeast territory stood out and produced strong rates of growth for this year. Brad brings a back-to-basic approach to his new job. His focus in the Northeast is on expanding coordinator base, opening up new accounts, recruit and training. Those activities are fundamental to our distribution. I believe his approach will play a role in helping us improve the business model that served us well for many years. In the last two weeks I met with sales coordinators and associates in 15 states and based on my experience in those meetings, as well as our national sales convention last week, I can tell you that our sales force views Brad's position as positive.

Beyond increasing the number of state operations, we have also been expanding our sales coordinator base. During the 3rd quarter, the number of regional sales coordinators, who are primarily responsible for recruiting, rose 10.7% and the number of district sales coordinators who conduct field training increased 11.5%. Recruiting continued to lag in the quarter and was basically flat with last year. I should point out we are still going against tough comparisons to last year. Recruiting was up 28% in last year's 3rd quarter and an incredible 31% for the nine months of 2002. Reflecting the slower sales growth, the number of monthly average producing associates increased 5.2% in the third quarter to 16,700. We believe these numbers will improve as the newly promoted coordinators become more seasoned.

We also continue to roll out our new accident and cancer policies to the market place. Our new accident disability product is available for sale in 34 states. The new cancer policy is in 24 states. We are also positioning ourselves to ride direct business with a process of making the cancer policy and accident plan available on a direct basis through Smart Ap, and we are adding more direct rates to Smart Ap in the future. This should not enable us to reach a huge market of microbusinesses, but improve field training and get new associates off to a quicker start.

Some asked me if the slow down might be indicative of the advertising campaign of the AFLAC duck has run its course. The answer is an absolutely no. There is no doubt the name recognition gains going forward will be small. That's because we have 89% name recognition. We came out of nowhere to become a household name in a few years. We believe the AFLAC duck is still an effective branding vehicle. Independent research tells us as long as we keep the commercials fresh, they will continue to be effective. We'll release the new AFLAC duck commercials later this year and in 2004 as well. We believe that our improved brand recognition, enhanced product line and expanded distribution will be keys to our future growth. We have found nothing to suggest that our business model is broken.

To the contrary. Strong sale and states such as Florida, California, Pennsylvania, Illinois and New York this year indicate that the model is still very effective, and I believe our success in these states is absolutely transferable to other areas of the country. We remain convinced that the United States is a vast and underpenetrated market for our products, and I'm confident the actions we took will ultimately improve our sales growth.

We are obviously pleased that AFLAC Japan has compensated for the slower growth in the United States. Total in new annualized premium sales increased by 15.9 percent during the quarter, again surpassing our expectations. Through the first nine months of 2003, new sales were up 13%.

Looking at the final quarter of the year, please remember we face tough sales comparisons in 2002. For the last year's 4th quarter sales rose 26% to more than 29 billion. We believe that a 5-10% increase in sales during this 4th quarter is a reasonable expectation. That will result in an increase of 11-12% for the full year compared with the initial expectation of a 5-10% sales growth for 2003.

There several reasons why we produced strong sales growth over the last six quarters. Certainly the personnel changes we made in 2001 played a key role. Strengthening the marketing management in particular as we have done in the United States this year helped bring a fresh perspective to our business. At the same time broadening our product line; this clearly helps spur sales growth. Our stand alone medical product EVER has been a tremendous success. Led by EVER, stand alone medical policies account for 31% of our total new annualized sales for the quarter and 28% of sales for the nine months. [Rider] Max continues to be very popular with consumers. Excluding conversions, [Rider] Max sales increased about 15% this year.

Distribution is another reason for the strong sales growth. We continue to grow and improve what we believe is an already--the best distribution system in Japan. During the 3rd quarter, we recruited 1,000 new associations, or agencies, bringing in the total number of new agencies to more than 3200 in nine months. That puts us on track to surpass our recruiting target of 3500 new agencies issued and we remained very pleased with the contributions from [inaudible] Mutual Life. In fact sales through [inaudible] Mutual, which accounts for about 11% of our sales in the quarter, have exceeded expectations so far this year.

We are also the best branding company in Japan for cancer, life, and medical products. We are improving awareness through the AFLAC duck commercials we produced specifically for the Japanese market. We created three duck commercials, one for EVER, another for [Rider] Max and a third emphasizing our becoming Japan's number one insurance company in terms of policies enforced. We have been very pleased with the response to these commercials. In fact, the commercials about our number one position in the industry clearly benefited the 3rd quarter sales.

Finally our strong sales growth reflect the increased burden of out of pocket expenses consumers face in Japan. The Japan health care system is financially strained because of rising medical costs and an aging population. As you know, that strain led to an increase in the copayments earlier this year. We don't believe the trends will change any time soon. In turn, that leads us to conclude that demand for AFLAC products will continue to increase.

Both our own and independent research indicate the Japanese consumers want affordable rather than expensive insurance. They also want to purchase policies that pay living benefits compared to death benefits. They prefer whole life products, the term life, and they want to do business with companies that are financially strong. I think those attributes fit AFLAC and its product line better than any other company in Japan. That's why we feel we are strongly positioned in the best segment of Japan's insurance industry.

In looking at other items for the quarter, we continue our share repurchase activities. We bought back 2.2 million shares during the third quarter, bringing the total number to 6.7 million for the first nine months of the year. At the end of September, we had about 10 million shares available for repurchase from under authorization from the board of directors. As you know, our ability to repurchase shares is closely related to the profit transfer from Japan.

We completed the 2003 profit repatriation from Japan in the 3rd quarter. This year we repatriated 45.6 billion yen or about 385 million, which was the largest profit transfer in our history. Since 1989 we remitted 2.5 billion from Japan with more than 1.3 billion coming in the last five years. Even with those substantial profit transfers, we still remain one of the strongest life insurance companies in Japan in terms of solvency margins. And remember that our initial investment in Japan was 1.6 million.

I think one thing we have shown over the last few years is that we are not afraid to make changes. My management style is when things are going well, I try to stay hands off. But in 2001 when our sales slowed in Japan, I took the opportunity to make significant changes to our business, especially in our marketing personnel. I believe those changes are paying off and with the situation facing us in the United States this year, I have been much more hands on and made significant changes. In fact, I probably made more change this is year than in any year in the company's history and rest assures those if changes don't work, I will make more because I know there is a tremendous need for products that is we offer in the United States.

Based on the year end results, we are confident we will achieve our upward revised target of increasing operating earnings per share 17% this year, excluding the impact of the yen. As we announced on September 29 we raised our 2004 operating target objective from 15% increase to 17% excluding currency translation. Our objective for 2005 is to increase operating earnings per share by 15% excluding the impact of currency. We believe these objectives are reasonable and achievable and reflect the strength of our business and the significant opportunities for growth. I will turn it back over to you, Ken.

Thank you, Dan. Let me just take a couple of minutes to go through some of the financial highlights, then we'll take questions. Beginning with AFLAC Japan and the top line in yen terms, revenues were up 6.5% for the quarter and 6.2% for the first nine months. Our persistency rate remained very strong and declined only slightly versus a year ago. On an annualized basis, for the nine month, that rate was 94% excluding annuities versus 94.2 a year ago.

In terms of the quarterly operating ratios, as we expected the benefit ratio continued to improve over last year at 67.4% compared to 68.7% in the 3rd quarter of 2002. As you know this decline primarily reflects the change in business mix in Japan as well as some improvements in claims, trends and certain lines of business. The improvement in benefit ratio was somewhat offset by a higher expense ratio that rose from 19.3% to 19.9%. As part of our ongoing process, we regularly review obligation to the policy holder protection fund based on our anticipated growth rates visa vi the growth rate of the industry.

In the 3rd quarter of this year, we revised estimated obligation to the fund based on expected growth rate that is increased expense ratio. The amount of true open the quarter was 2.4 billion yen or 21 million dollars. As a result the pretax margin rose from 12.0% to 12.7 and with the expansion of the margin, pretax earnings increased 12.8% for the quarter in yen. Excluding the impact of the stronger yen on AFLAC Japan's dollar denominated investment income, pretax earnings were up 13.4% in the quarter and 16.2% for the nine months. After reaching historic lows in the second quarter as measured by the yield of the 20 year JGB, yields have improved significantly in Japan. For instance, the 20 year bond yield averaged about 1.7% in the third quarter, and has been in the 1.8 to 1.9% range for some time now.

For the quarter we invested our cash flow in yen denominated securities at an average rate of 2.99%. Including dollar denominated purchases, the blended rate was 3.96%. The portfolio yield was 4.6% at the end of September which was down five basis points from June and 16 basis points lower than a year ago. Through October 17, we invested or committed to invest about 81% of this year's estimated cash flow at an average yield of 3.98%. Joe can certainly talk in greater detail about what's going on on the investment side, but let me just say that overall the credit quality of the portfolio remains extremely high.

The securities rate at double b or lower were only 3.3% of fixed maturity securities at the end of September, which is down from 3.8% at the end of June, and the unrealized losses in the holdings were 185 million at the end of the quarter compared with 129 million at the end of the 2nd quarter. That 185 million if you exclude the unrealized gains from [Faz 115] on equity would represent only 4% of shareholder's equity at the end of the quarter.

Let me turn to AFLAC U.S. Financially we had a very strong quarter. Our premiums rose 16.3% for the third quarter; investment income was up 9.4%. Total revenues rose 15.3% for the quarter and 16.3 for the first nine months. Annualized persistency rate for the nine months was 74.3% compared with 74.8, and on a rolling 12 month basis there was actually little change from a year ago.

Looking at the operating ratios, the benefit ratio was unchanged at 53.4% and expense ratio was 31.1 compared to 31.3 and, as a result, the margin was 15.5%, up slightly from a year ago, which was 15.3. Pretax operating earnings rose 16.5% for the quarter and 12.7% for the nine months and in terms of U.S. investments, the new money yield for the quarter was 6.29 compares with 6.21 in the 2nd quarter, down significantly from 7.66% a year ago. The yield on the portfolio at the end of September was 7.63% down 16 basis points from the 2nd quarter and 35 basis points lower than a year ago.

Looking at some other items for the quarter, as Dan mentioned, we purchased 2.2 million shares at an average cost of 31.81 in the quarter which brings the year to date total to 6.7 million shares. Excluding the effect of 1.15, the ratio of debt to total capital was 22.8% at the end September, compared with 25% a year ago. Noninsurance interest expense was little changed with 5 million for the current quarter compared with 4 million a year ago. Parent company and other expenses were little changed. We're 10 million versus 11 million in the 3rd quarter of '03, excuse me, '02.

The pretax margins improved reflecting the better margins in Japan. The pretax margin rose from 12.2 to 12.9% and the aftertax margin increased from 7.8 to 8.3%. On an operating basis, the tax rate was 35.3 versus 35.8 which was consistent with our expectations. Operating return on average shareholder equity was 21.9% in the quarter. As reported and as you know, our operating earnings per diluted share rose 17.5% to 47 cents, which is a little better than our target, a little better than consensus.

The yen was slightly stronger than in the year ago quarter, but not enough to impact operating earnings per diluted share basis. The remainder of the year, our expectation is that we will increase operating earnings per share by 17% this year, before the effect of currency translation. In short that means we are on track to earn $1.83 before the yen. If we achieve that targer and if the yen averages 110 to 115 for the balance of 2003, we expect that to translate to reported earnings of $1.88 to $1.89 for the full year. The current consensus as of yesterday was $1.87 and the spot rate on a yen right now is right around 109 yen to the dollar. Under the scenario I just outlined, we would expect earnings to be about 49-50 cents.

Again, as you know we raised 2004 earnings objective to a 17% increase excurrency and we've retained our target of a 15% increase in operating earnings per diluted share before the impact of the yen. That concludes our formal comments for this morning. Jeannette, I turn it back to you for questions. As you do ask your questions, please try and limit them to one per customer so everyone has a chance to ask them. Thank and Jeanette will take the first question.

If you would like to ask a question press star 1. Questions & Answer To withdraw press star 2. To ask a question press star 1. The first question is Nigel Daley of Morgan Stanley.

With self growth guidance for the 4th quarter, can you provide color on what you expect in 2004 both in the U.S. and Japan. Thanks.

We have given guidance in the 4th quarter. I'm not willing to at this point give guidance on next year. I will closer to the year end give you some, but I want to look at the tracking for the next few weeks and see what's happening. Brad is on the phone and he doesn't have to talk to this one, but he will be doing all the talking at the next meeting. In the meantime, give us lead way to continue to track what's happening and then I will do it. I will tell you I will not be happy with anywhere near what we see now. A little bit longer and I will let you know.

David Lewis of Sun Trust Robinson Humphries.

A combined question for Joe and Kriss. We talked about if interest rates rose in Japan it could have a significant positive impact on business. Given the recent lift in rates, would you expect the new money blended deal to continue to rise in Japan and allow the current portfolio yields to stabilize in the 460 range? Also for Kriss, if rates do continue to rise, will that have a positive impact on results relative to budget as we looked to 2004?

This is Joe Smith. The rise in interest rates have been fairly significant in percentage terms, but you are looking at 10 year or 20 year governments in Japan at 1.752%, so we don't know see if the rise in rates will stabilize the portfolio yields. We looked at it projected out in our scenario based on what the new money rates are, and at current levels you lose from 10-15 basis points a year. Rates would have to almost double in Japan in a 10-20 year area to get to where our current portfolio yield is to prevent erosion in there. It will deteriorate although the decline will slow with the rise in interest rates in Japan.

What about the Euro Yen market; isn't that improving more?

It is, but you've also seen some credit spread compression. Yesterday you saw China come to market in the Euro dollar market with a bid of 53 basis points which is the same as Fanny May and Freddy Mac which I think is a a crazy level. So, you are seeing credit spread compression in here, plus the fact that the economy given where it is worldwide, whether it's turning or not, has made corporate treasurers hesitant to commit large sums to capital expenditures. It's a tight market now; we're gonna make our numbers for the year. I'm not worried about that. I don't think it will stabilize farce our portfolio yield going forward.

The other side of that, David, is that our investment mix also has determining factors on where the new money rate ends up. We will probably invest perhaps a lower percent of our money in reverse duals in 2004 as interest rates do rise to maintain a balance and over all mix of investments in the portfolio.

That being said, our plans historically have allowed for -- budgeted new money interest rates in the 3.5% neighborhood. We do sensitivity testing at 3.25 and 3% to make sure to meet our objectives if new money rates come in at those levels. Quite Frankly we are looking at the downside of money rates than the upside. Clearly increases in interest rates and the environment would be a net positive for AFLAC and its earnings going forward.

Thank you.

Jason Zucker of Fox-Pitt, Kelton. You may ask your question.

Good morning. Dan, could you tell us why the territory directors were sof off in the 16% sales growth prediction last quarter, and as a follow-up, what was the prediction that won the $50,000 bonus.

I wish I could tell you it was Brad. It wasn't. It was the guy that called for a 5% increase. He ended up at 4.1. That was the guy that ended up winning it.

As far as why they missed their numbers. They are still grappling with that, trying to figure out how to get better attuned to what's taking place. One of the things is I have gone out of the states, the power weeks which are--we call it the last three weeks of the quarter-- but it's really almost the last five weeks of the quarter, have gotten to where they play such a large in the company and they work to our advantage over the years and then you bet on everything at the end it becomes nerve racking to us. We are trying to figure out how we can spread the production more equally as we move along to get better predictions on what we will do.

They give me all kinds of excuses. I really don't care what the excuses are. I just expect it. If they tell me certain groups got delayed for one reason or another or whatever it might be, all in all as I mentioned, a lot of the key states made their numbers. Illinois and Pennsylvania and New York and Florida and California all made their numbers. I really think if you boiled it down, you would have to say that a lot of the young people that just took over in the last three or four months just expected everything to turn on them on a dime and it just didn't do it as fast. Remember as we have all these promotion when is we take the states and regions to state and districts to regions, that all works fine. but where we run into the problem is when we take the agents to districts.

When you take agents to districts you are pulling top producers out and telling them to stop selling and start training. When they start training it slows them down to a degree. What we are having to do is through our recruiting efforts and through the other is to replace those people, and there is just a time lag there that we thought would be faster, but it's taking longer than we thought.

Are there any financial incentives in place right now for the district or the agents to incent them to speed up the progress?

Yes, there is in the fourth quarter for the territory directors and then also, there's quarter end bonuses and it's the same basic plan we've had, but it's very effective for those and they continue I believe in the 4th quarter we will see movement in that. We will have to wait and see. I know it's working to some degree. I have several people that wanted to be promoted and asked to wait because they will make such a big bonus at the end of the 4th quarter. So, it does have some impact.

Great. Thanks.

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

Dan, in the 4th quarter you have a lot of reenrollments from health care plans and you go back and revisit existing customers. Do you feel that the agent force which maybe has a lot of new people in it right now and all the effort to hire and promote manager and new agents that you have people focused on the reenrollment process?

I feel comfortable with sales being flat in the 4th quarter in terms of projections. I feel terrible that it isn't better than that. I think I took into account all that and tried to relieve the pressure. As I have been going to these states, the one thing I said is,"Go on and make the changes you want. If you are going to move from one office to another, move. If you are going to promote somebody, promote them. If you retire somebody, retire them, but get the changes out of the way." Come January 1, I expect to come out of the shoot at a fast pace. I have encouraged, ever since I realized we were not going to make the numbers in the third quarter, to do whatever you deem necessary to be prepared for next year. Within that scope, do I think we have enough reenrollment going on and things that will take place that will be I feel comfortable that we will end up where we projected? The answer is yes.

I guess there has been studies out recently that health care costs are up and copayments are up a lot. In the 4th quarter season where employees will see that point blank; what does that do to your business? Does it increase demand or is there a way it crowds out demand for your product?

Certain cases it can increase and certain cases it makes it harder. I think when the copayment and deductibles increase, that works to our advantage. If they just had a rate increase on the health care, it probably is harder for us. But the good news is from our perspective in the corporation they can't keep passing on the increases. It's just too much. Their answer is to increase the copayment and deductible and in almost every case they have at least done some combination or passed it all on and increased copay and deductibles.

Thank you, Dan.

Ed Spahar of Merrill Lynch, you may ask your question.

Good morning. Dan, can you expand on your confidence in flat sales in the U.S. in the 4th quarter given that the Asian trends -- given everything you talked about which is positive in the district and regional coordinators, but the recruiting trends still deteriorating. Why wouldn't that mean that the 4th quarter would perhaps be worse than what we saw in the 3rd quarter?

Well, I guess number one is that we were going against such big comparisons. Up 31% for the first nine months. If you compare that we are up slightly for this year, that's a compound growth rate of about 15% for the two years. That doesn't give us any solids going forward. We are going against the smaller number in the 4th quarter of last year and that will give encouragement.

You get a gut feel in this business and as I go around, I have really gone out to a lot of states. I'm going out to more in the next two weeks. I'm meeting with what we call the regional, right under the state. Just asking them,"What's going on?" and saying,"Explain to me," and, "Go into detail," and,"I want to know." Also explaining that Brad's coming in and what his role will be. You just begin to get a sense of what you think will take place and it's truly subjective to some degree.

We know how we plan on doing it and where the production will come and we can even tell you the last five weeks what we expect to write by state and all the details. Then it has to come together. It has over the years. There is no guarantees, but I'm as comfortable with this number as any number I have ever given you and I realize in the 3rd quarter we didn't make that number. If it makes you feel better, I'm much more comfortable with this number than the 2nd quarter or the 3rd quarter. I low-balled it. What I hope to be a fairly safe number to choose. I don't want to have to say we missed a number again. It drives me nuts to miss numbers.

I will just kick in and say we haven't seen Dan at Headquarters for a couple of weeks. He spent all his time on U.S. sales out in the field and that ought to give you some comfort.

Thank you very much.

Liz Werner of Sanber O'Neil, you may ask your question.

I was hoping you might be able to talk about capital and specifically if you can give a sense for the amount of excess that you might be generating. The numbers, I guess I was focusing on and trying to project in the quarter were the amount of continued repatriation from Japan as well as book value growth. It seems the book value growth excluding mark to market adjustments was pretty significant in the quarter.

This is Kriss. Let me talk about the various capital issues we look at. We look at solvency margins in Japan and the solvency margins continue to be high in the 1300 to 1400% plus category. Those margins include the substantial unrealized gain on the fixed maturity portfolio we got in Japan. That is subject to fluctuations depending on interest rates.

The capital positions at AFLAC U.S., regulator wise, continues to be very strong. We were at roughly 400% RBC ratio at the end of the year. We had a very strong first six months on the statutory basis; our pretax earnings were up 73% to 695 million or after tax earnings were up 156% to almost $550 million.

All that said, part of that is yen is strengthening and part is favorable claims from Japan part of it is no special charges like policy holder protection fund in the first six months of the year, part of it's timing of taxes. We don't necessarily expect stat earnings to increase quite at that rate for the whole year, but it will be strong.

On a GAAP basis, we slowed down share repurchase a little bit for the first nine months of this year. We've only repurchased 6.6 million shares compared to a 12 million share target for the year. I'm probably going drop it down to maybe 10 at most for this year. We don't really need the extra share repurchase for [inaudible] BPS and our stock price hadn't been very volatile over the first nine months. Fortunately it has been volatile upwards, but anyway that share repurchase reduces book value per share. Excess capital, we are generating some excess capital and we tend to reinvest in the business and we don't have any acquisition targets inside or anything like that.

Do you have any inclineations to lock in any of those unrealized gains in Japan where we think interest rates may go there?

This is Joe Smith. I don't think we are going to lock in the unrealized gains. It's like unrealized loss. It doesn't work one way or another against you. It's just--it's what it is. Unrealized. We look at numbers exclusive of those gains at this point. To take those in would greatly reduce-- You would have to reinvest at current rates at 2-2.5% or 3. You would slam your portfolio yield to do that.

Okay. Thank you.

Alan Devine of Smith Barney, you may ask your question.

Good morning. I wanted to talk about sales. In the U.S., you talked about the promotions you have gone on and the push and in some states things have gone quite well and over all, sales are still flat across all product lines and if they are doing well in some states, maybe we can expand more in where they are not going well. That doesn't seem to come across. Also, flipping to Japan and talk about how product sales are going and replacements on how things are going there. A concern we have if sales start to slow down, what's going to keep this 15% growth going?

In the U.S., the places where sales are slowing down, we have new managers. Those new managers are just getting in place and getting their staff in place. Their management team in place. That's what's taking place. I'm sitting here looking at the top 30 states and the ones at the bottom is where the changes are taking place. The ones at the top are the ones I named to you. So that's pretty much the case. So, I think it will be reflected as we move forward in 2004, but, of course, there's no guarantees. That's my sense of what will happen.

For example, Texas is down 2%, our number one state. That's the state we have put in eight new state managers. So all those changes have taken place will be reflected hopefully in the coming year. Then I can go on and name all of them, but you get the gist of how it's only up 1% and that state coordinator, who's a great one, but he happens to be retiring this year. That will be opening up area. That's an example.

Virginia is down 3% and that coordinator is retiring. He has been a great man and done a great job for us. All of that will be reflected. North Carolina, the same thing, it has been our number one state organization, but he is retiring, being basically flat and we are putting three new people in there right now. I think you will see that reflected.

As far as Japan goes, I don't look at sales, and never have, as long as the profit margins are fairly close in the U.S. and breaking them apart. In Japan we look at it a little bit more so. I think that EVER will continue to have a strong year next year, because we won't be into one year that the copayment and deductibles change. We look for it to continue to be strong. I don't have a break out in front of me. Sales by product, but Ken looks like he has something here and may want to make comment. I never cared whatever it was in terms of growth as long as we hit projections. We will give you our estimates for next year as we get closer to the year end as we have done in the past by for the total number.

Part only thing I would add is Dan said in many occasions that is agents plan to follow the path of least resistance. This year it's the medical product. It's new and something we are aggressively promoting with the duck advertising as well as Rider Max. It's still going to be the path next year. It's really what we are directing people to sell. As we said before, when you direct the sales force, to sell product A, it usually comes at the expense of product B. At some point, the efforts will be redirected to a new product whether it's brand-new or a freshened up medical product or freshened up cancer product and that will get sales attention and that's what we will emphasize.

Maybe we can take that line of thought back to the U.S. and you can tell us what is going to be the path of least resistance in the U.S.? You have given us sales by product line for the last seven quarters. We can look at it with cancer has gone nowhere, H.I.P. has gone nowhere, and dental has gone nowhere. I guess the accident short-term is rising a bit. Is that the path of least resistance? Where are we going to see this turn in the U.S.?

First of all, we don't have the cancer or the accident in all the states. We have only got them in about half the states. I think as we get them in all the states, the new change in the policies will make a difference. As you know we have to file by state and it can take some while to do that.

We will be introducing a new dental plan. I think they are expecting business from smaller accounts too. We never emphasized accounts under 25 like we have been doing and we think that's a great market for us. We will push that to a great degree too, but it will be accident, short-term disability and cancer that will drive the company in the U.S. Those three products.

Thank you.

Dutch Hopson of AG Edwards.

I wanted to hit the issue of recruiting in Japan. You have been really successful out there recently. Can you talk about where those agencies are coming from and as you look out if you think it's going to slow any time soon.

Well, what we concentrated on is not the corporate agencies, but the individual agencies. When you have higher unemployment, that's one advantage in terms of recruiting. People who never considered coming to work for us because they are salaried people now have trouble finding jobs. They are more likely to look at a commission basis. That has actually worked to our advantage. I would say that would be the case. I would like to see us move up. I haven't pushed that sushi that hard, but I would like to see us continue to move up. I think 3500 is the number this year and I would like to see 4,000 or better next year. So, I think you will continue to see an increase.

That's exactly right. Most of the agents are coming from the individual markets. As Dan said because of higher unemployment rate, we recruit there easily and we feel the pressure to recruit more next year and we set an internal target for about 4,000 next year.

If I can follow-up, are these new to the industry or are you benefiting from dislocation with the other companies?

Both. Most are new to the industry, but we do have a lot of people coming from others because they see the ability to sell AFLAC products because of the increased advertising and the brand and name recognition. They see that they can sell our products easier by selling visa vi selling some of the other products that are focused on death benefits versus living benefits. That's a harder sell. So, we're seeing some recruiting from within the industry, but mostly people new to the industry.

It's still predominantly new to the industry, but us being number one in policies in force, I promise you caught Japan off-guard. It has been an enormous plus for us and people that were not interested in selling with us before are much more interested and even ones with other companies. It is impacting us to the degree, but still it's predominantly the individual that has never been this it first.

thank you.

Tom Galagher of Credit Suisse First Boston, you may ask your question.

Is your sense that the success of EVER is much above where the competition is trending, or are they seeing real strong growth as well, and do you have any idea of what your market share for this product is?

My sense is the product so much better than everyone else's. Although the profit margin is better than our cancer product. It's still so much better than everyone else's, they don't try to compete with us from the perspective of comparison. They just come up with other angles for riders, for other things, kind of a slight of hand because they can't truly compete with us from that perspective. As far as market share, I don't have any numbers, but my sense is it will continue to grow and we said there will be two pillars of the company going forward in Japan. One will be the cancer, but the medical business we expect to be big from now on. It is not going to be a spike and go away. We may not see an enormous increases we're seeing, but medical insurance will be there forever.

Dan, as a follow-up, if we look at the analogy of Rider Max and how it had strong momentum for about three year and fell off, it appears that was an issue of because you were selling to your existing customer base. This appears different. Can you compare and contrast the way you would expect those two cycles to play themselves out?

I think Rider Max is a conversion to some degree. They are buying rider max from the existing policy holder base and then they are also buying it to some degree with the cancer as a new policy. We talked about this untapped market and I hadn't prepared for this, but if you go back to when we originally introduced EVER, we talked about, that there was this market of people that did not have cancer and did not really care for, but were still interested in a whole life policy. This is a big, big market of about 50%. Is that right, Ken?

50%.

So that's going to give us what I think is a surge moving forward. I'm very encouraged about that.

In a sense, we are going to have medical products that is have extra benefits for cancer and medical product that is don't have extra benefits for cancer. That is sort of how the products will look going forward. Rider Max put medical benefits on a cancer policy, but in the future we will more likely have a medical policy that provides extra benefits for cancer.

In making the parallel to Rider Max and the copayment change back in 97 in contrasting that, I are on to something, because to me the most important distinction is 66% of the people buying EVER from us this year are brand-new customers for AFLAC Japan. We are not only growing sales, but increasing the customer base. That suggests there is probably wider market appeal for that stand alone product than for the rider.

If what I think will continue to happen is that as people analyze in a deregulated market, the different products, we may even see more customers switch from the products they have with other insurance companies to us.

If you look back at it now, 2001 for all of you that were following us and most of you were that are on the telephone conference, know we were all scared including me about what would happen in deregulation. We had a downturn and if you look back now, deregulation has been a real plus for us. If we didn't have deregulation, we would never be in the medical business the way we are today. We are taking market share and no one is taking it away in terms of the cancer in any great degree. I think there was a real blessing there that it turned out to be and going forward, I think you will see medical insurance continue to help the profit margin and also help our growth.

Thanks.

Andrew [Inaudible] of UBS Securities, you may ask your question.

Going to the policy holder protection protection fund, I see a reserve increase of $21 million. Dan, can you talk about the likelihood of further requirements to contribute and were you surprised by this?

I will let Kriss take it. Then, if you want me, Andrew, I will answer anything you got.

Let me emphasize that we look at the liability or protection fund in two pieces. The first liability comes about when there is a new assessment to the industry as a whole. The last industry assessment was a couple of years ago. We did not have a new industry assessment this period. What we are looking at this period is a true-up of our share of the total obligation the industry has been assessed.

What happened was there was a request by some of the major domestic companies to extend the payment period, so to speak, for the amount they were currently obligated to. So whoever had to approve that approved in a period of time over which the current obligation would be paid. Because we are growing as a percent of the industry total in other domestic companies or flat to shrinking and extending the period to 12 years, it meant we will have probably more to pay in that 11th and 12th year than we originally anticipated. We anticipated paying our share over 10 year and now has to be spread over 12. The extra charge was really to extend our growth rate compared to an industry shrinkage rate to say how much more of the current obligation we expect to pay.

We accrued for our share based on anticipated growth rate versus what we anticipate the industry rate would be. We paid true ups of the current obligation through operating earnings. In the past we said that an additional assessment for the industry as a nonrecurring item; it's something that's unpredictable. Once we know what the obligation is, we feel compelled to true-up our estimate of the total, and that's what we did this quarter. This is something since we had to contribute to the protection fund, we regularly evaluate the liability and true it up. We trued it up several times. This one just happened to be a bit more sizable because of the change in facts that were dictated by extending the time period over which the payments will be made.

Do you feel good about the likelihood of there won't be required contributions or significant true ups?

I felt good about it before we had one since then. I will tell you this. If you look at it every time it's on a decreasing amount.

Plus the acquisitions would have been done, the company failures have tended to be covered by acquirers that, along with changes to policy holder obligations, didn't take any additional commitment from the policy protection fund, I know the FSA wants to continue on that basis because they are getting strong resistance from the domestic industry about the domestic industry's ability to absorb additional charges.

Do you see insolvencies coming?

Part of the reason, the margins have been improved because of the stock market increase. You had some of the pressure taken off those. One of the companies mentioned earlier is a candidate for insolvency, now has an insolvency margin in the 600 range has been helped out by the rising stock market. That eased a lot of concern as far as insolvencies in the industry in Japan.

I think the answer is do we think you will have impact on the company, the answer is no. We don't see any of these changes. We will be able to it or the government won't do it or the other companies that acquire the company, but we don't see as impactful to the overall corporation.

Jeanette, by my watch that takes us to the top of the hour. We will have to conclude the call at this time. If anyone did not get a chance to ask a question, I hope you'll call our 800 number and ask for Robin or myself. We'd be happy to take your questions. We appreciate you joining us and listening in this morning. Thanks.