美國家庭壽險 (AFL) 2003 Q4 法說會逐字稿

If I can have your attention please, if my watch is anywhere near correct it's about 7:10, which was when we promised we would begin this evening's presentations, and as a reminder this is being webcast. Let me begin tonight with some introductions of the representatives from AFLAC that have joined us. Beginning with Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Aki Kan, Executive Vice President of the U.S. Operations; Joe Smith, Senior Vice President and Chief Investment Officer; Brad Jones, Senior Vice President and Director of U.S. sales; Robin Mullins, Vice President of Investor Relations, and I am Ken Janke, Senior Vice President of Investor Relations.

Before we begin I'd like to remind you of our Safe Harbor language as you know that some of the things we'll say tonight are forward-looking with in the meaning of Federal Securities Laws and although we believe the statements that we make tonight are reasonable we can give you no assurance that they will prove to be accurate, because they are perspective in nature and obviously future results can differ materially from those that we discussed tonight and I would encourage you to look please at our quarterly report for most recent SEC filings to see the factors that could cause those results to differ materially.

Now I would like to turn the program over to Dan, who will talk about our business in U.S. and Japan, the outlook for '04, I'll follow-up briefly with some financial results and then we will be happy to take your questions. Dan.

Thank you Ken and good evening everyone and thank you for joining us. We're pleased with AFLAC Incorporated's over all performance in the fourth quarter and for the year. AFLAC Japan produced strong sales and revenue growth throughout 2003. Although we were disappointed with the U.S. annualized premium sales for the year, fourth quarter sales exceeded our revised expectations. In fact, the U.S. produced the best quarterly sales in the Company's history. Reflecting the underlying strength of our business in terms of operating earnings per share, it rose 17.3% for the year excluding the impact of trade currency. That result was in line with our upwardly revised target of a 17% increase.

Let me begin with AFLAC U.S. Obviously, U.S. sales growth received a lot of attention from both you and us last year. As you will remember, we believe that the rapid expansion of our sales force from 2000 through 2002 stressed our sales management infrastructure. With a 20.4% compound annual increase in new associates during the three year period, we probably did too well at recruiting and we made very difficult decisions that needed to be made in order to handle our coordinator expansions to act and to make sure that we adequately trained and managed the activities for a much larger sales force. In response to the problems, we took aggressive actions to expand and enhance our sales management infrastructure. Actually, we made more changes to that infrastructure last year than anytime in the Company's history. For example, at the start of 2003 we had five territory directors and sixty-three state sales coordinators. Today, we have seven territory directors and eighty-five state sales coordinators.

We also increased the number of regional sales coordinators who were responsible for recruiting almost 11% in 2003 and we increased the number of district sales coordinators who were predominantly responsible for training by almost 13% last year. We also strengthened our sales team by promoting Brad Jones to Senior Vice President, Director of Sales. Brad started with the Company in 1984, as a sales associate. He excelled at every level of sales force management. Prior to his promotion he was Vice President and Territory Director of the Northeast territory. Under Brad's leadership the Northeast territory stood out and produced strong rates of growth. The success of the Northeast territory last year which produced the sales increase, of 21.9% for the year should tell you a couple of things. First our sales model has never been broken, and second for those of you who thought we were fully penetrated it is clear that that is not the case. Although our penetration in the Northeast territory, is lower than other territories the difference is not material. Further more we had space outside the Northeast including Wisconsin, Alabama, and Oregon, which produced better than 15% sales growth for the year.

Brad's challenge is to replicate that kind of success in other areas of the country and I think he is off to a very good start. I believe our fourth quarter sales give you a pretty good indication that our coordinator expansion efforts, has started to payoff. After missing our sales targets for three quarters, we told you that fourth quarter sales would likely be flat compared to 2002. Instead we were up 7.7% to a record 345m. In addition to demonstrating that we had turned the corner in the United States our fourth quarter sales reinforced another point that I made repeatedly in 2003. It is very difficult to accurately predict sales for a 13-week period. Keep in mind that we get input from 7 territory directors and nearly 3000 sales coordinators and yet even for us an inaccurate science at best. It can only be that we can predict the best way that we know how by using those numbers. That should tell you that it's impossible to draw an accurate conclusion and predict sales trend by speaking with a handful of sales associates in a few states. The fact is the ones you catch on the phone are not our best producers because they are not out selling.

As we go forward, Brad will focus on the basics of our business including opening up new payroll accounts, recruiting, and training. Those are the fundamental activities for growing our business. Recruiting was understandably slow last year, increasing 2.2% over 2002 to 23,000 new associates. However, we did see improvement in the numbers of the average monthly producing associates in the fourth quarter, which rose 5.8% to a record 17,700, and with the expansion of our coordinator base and the renewed focus on recruiting we expect to see better growth in our sales force in 2004. We also intensified our focus on training, to that end we have two important tools that we believe will be of great value to our sales associates. One program is called AFLAC University, which was launched last August.

AFLAC University is a web-based training platform that offers sales associates online courses about products, sales tools, and technology. In addition, associates may participate in courses in career and personal development. AFLAC University has also certified training coordinators in every State operation. Based on our feedback from the sales force, our agents believe AFLAC University will help them better manage their business. We are also expanding a program called LEASE. LEASE is an acronym for larger earnings acquire smaller employees. This program was developed by one of our state coordinators in the Northeast with the assistance of the marketing department and was put into effect in 1999. This program is a detailed step-by-step plan that is designed to help new associates to generate earnings more quickly.

LEASE focuses on associates' attention on smaller accounts because they typically don't have rich benefit packages and there are fewer obstacles getting to the decision maker and making the sales. In short, calling on smaller accounts will increase the likelihood of new sales associate success. That should lead to better sales and agents retention. The effectiveness of LEASE is unmistakable. In 1998, the year before LEASE was implemented, the Philadelphia region had 42 career associates who signed up a 141 payroll accounts and generated 4.3m in new annualized premium sales that year. In 2003 that region which is now a State organization had 322 sales associates, who signed up more than 1,800 payroll deduction accounts and generated more than 24m in new sales or 6 times the amount. Up to that point, LEASE had been primarily used in the Northeast. And although Brad had stopped just short of calling the program mandatory, he has made it clear to our coordinator, that if they don't have successful programs that are in place, they need to use LEASE or find other jobs. So I think we can look for pretty high participation in LEASE in other territories. We also believe that our advertising campaign continues to play an important role in marketing. We haven't seen any drop in the popularity of the AFLAC Duck. Our research tells us that as long as the Duck is shown in different places and situations, he remains popular and effective. I want to take a minute to show you three of our newest commercials. I hope you have seen two of them, the Christmas commercial and the animated one featuring Looney Tune characters. But the third one, which I think is the best, will be released this spring, just in time for the Olympics. So if you'll roll it.

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So you now know that the Duck is a male. Although our name recognition gains going forward will be small that's to be pretty much expected because at 89% recognition we are already a household name and we have accomplished that in just a few years. However, we believe the AFLAC Duck will continue to be an effective branding vehicle to help us recruit and to sell. We will continue to view the U.S. market as one with great potential given our strong products, expanded sales infrastructure, improved training, and aggressive branding we are enthusiastic about the sales outlook for 2004 and beyond. For this year we believe we can produce a 10-12% increase in new annualized premium sales and as I said on CNBC yesterday morning that is a number that we are very comfortable with after seeing first month sales this year.

Now, let me turn to AFLAC Japan, we are very pleased with our overall performance in Japan, both from a financial perspective and a sales perspective. Despite difficult comparisons for the fourth quarter of 2002, total new annualized premium sales increased 8.7% in Yen for the fourth quarter, which was in line with our target of a 5-10% increase. The second quarter is typically our strongest quarter in Japan and last year was no exception and that compares to the U.S. where the fourth quarter is generally our strongest quarter. However, the fourth quarter sales in Japan were just $12m shy of setting a quarterly sales record for AFLAC Japan. For the year, total new sales were up 11.9%, which was ahead of the initial target of a 5-10% increase growth. Excluding conversion activities we were up 17.7%. Our success in Japan is directly linked to providing consumers with products that they want and need. Research indicates that consumers prefer living benefits to death benefits. They want affordable, not expensive products and they prefer whole life to term insurance. They want to purchase products from companies that are financially strong. We believe that describes AFLAC and its product line. Our medical product EVER has the product attributes that consumers want and continues to be very popular as we move forward. Standalone medical insurance accounted for about 30% of our sales in the fourth quarter and 28% for the full year.

Importantly nearly 60% of EVER buyers last year were new customers for AFLAC. With the intense focus on EVER last year, our cancer life sales declined as we had expected them to do and we were also not surprised to see Rider MAX sales decline due to the drop in conversion activities. I want to emphasize however, that the cancer life remains a pillar of our product line and Rider MAX will continue to be an important part of the medical plan line up. I know that some of you have speculated that the lifecycle of EVER will parallel the experience of Rider MAX. You'll recall that we launched Rider MAX in 1998 following an increase in the co-pays for Japan's National Healthcare System. When we looked at that about three years ago, we had explosive sales from our Rider MAX. Although the development of EVER was also related to an increase in the co-pay, there is an important distinction you all should make. Rider MAX is purchased only by cancer life policyholders and is a limited market appeal compared to EVER which is a standalone product. In fact, a survey by Manichi (ph) Press indicated that [78.7%] of the people in Japan believe that their private medical insurance is necessary and remember that EVER provides the best product value of any medical product in Japan today.

Another facet of the marketing success in Japan has been the strength of our distribution system. At the end of 2003, AFLAC Japan was represented by more than 64,900 licensed associates at 14,600 agencies. At the same time Dai-ichi Mutual Life remains an important part of our distribution.

I believe the strategic marketing alliance between AFLAC and Dai-ichi Life has been the best example of an alliance in the industry. Sales through Dai-ichi Life which accounted for about 10% of the sales last year, exceeded our expectations. By marketing our cancer life Dai-ichi Life is second only to us in selling cancer insurance in Japan. We also remained focused on expanding our distribution system in Japan. Our goal was to recruit about 3,500 new agencies last year. We actually recruited about 4000 new agencies for the year and we intend to recruit another 4,000 in 2004. One of the attractions for new and old agencies alike is the strength of the AFLAC brand. To that end we've been pleased with the initial reception of the AFLAC Duck commercials in Japan. AFLAC Japan's Duck commercials use celebrities to promote specific products. Our Rider MAX and our EVER Duck commercials were rated the best in the industry last year. These advertisements and related promotional items have been very popular with consumers and agencies. We will air new AFLAC Duck commercials in 2004. As we look ahead operations in Japan is not without its challenges. As I've said for the past dozen years, investing huge cash flows at attractive investment yields remains our primary concerns. However we are convinced that AFLAC remains a sizable and attractive market in Japan with the opportunities we have there. Japan's population continues to age and its healthcare system is financially stressed. Those trends are undeniable and should enhance the need for our products as we move forward. Reflecting that need we believe the sales increase of 5-10% in Yen term is a reasonable expectation for 2004.

One event from last year that we are not pleased with was the significant loss we realized in our investment in Parmalat. As you know, events at Parmalat unfolded very quickly, and we reacted quickly by applying the same credit review process we employ in any security that is downgraded to junk. As a result of that review and given the weak market liquidity that is typical at the end of the year, we concluded that we should sell our holdings. We sold the bonds for 40 cents on the dollar on December 17. At that time, we had no idea that there was a massive fraud involved. However, just one week later the Company filed for bankruptcy and the bonds that were sold, were offered in the teens. As a result to our experience with Parmalat, our investment department has analyzed the credit work for 30 of our largest holdings and we have also -- will determine if we need to alter our posture on investment concentration risks. However, we remain convinced that our overall approach to investing is sound and in the best interest of the policyholders and shareholders. We believe that realizing sizable investment losses at AFLAC would be an exception rather than a rue and with below investment grade holdings at only 2.8% of the total debt investments we still believe AFLAC has one of the most conservative position portfolios in the industry today.

Fortunately, our strong capital base was able to withstand the loss from Parmalat without any impact on our ratings. Even though, we did not finalize our statutory financials, we estimate that the risk-based capital at the end of the year will be around 350 compared to 401 in 2002. As a result, we do not see any major change in the share repurchase program. In fact on Monday, the Board of Directors authorized the purchase of up to 30m shares of stock. This authorization is in addition to the 7m shares that remained in our previous authorization at the year-end of 2003. Last year we bought back 10.2m shares and we anticipate purchasing somewhere between 10-12m shares in 2004. Our strong capital base also allowed us to increase the cash dividends twice in 2003 and our Board of Directors increased the quarterly cash dividend at 18.8% to 9.5 cents per share. That rate, our 2004 dividend will be 65.2% higher than the payout was in 2002. Overall, we are very pleased with our Company's performance last year and our outlook for continued growth. In Japan, we believe that AFLAC's products lines will remain valuable component of consumer health care coverage. In the United States, I am convinced that we have taken the necessary action for improved sales growth. Our primary financial objective for 2002 is a 17% increase in operating earnings per diluted share, before the impact of the Yen. In 2005 our objective is to increase operating earnings per share of 15% excluding the impact of foreign currency. We believe those objectives reflect the significant opportunities in our markets and our competitive strengths will enable us to tap the potential that we believe is out there today. Now I will turn the program over to Ken, thank you very much.

Thanks, Dan. Just in case you didn't know that was Dan. This is me, I hope you have the found the presentation notes we have in the kit, so that you can follow along and make some notes. As I mentioned, I will just briefly run through some of the financials, but before I do that though, I wanted to point out one thing, you will find in your fab supplement, for the first time this quarter, I don't how many of you have, heard of Reg G, or delved into its intricacies. But Reg G restricts the way that we can use non-GAAP financial measures; things like consolidated operated earnings per share that you and we have been so accustomed to using. The bottom line is, that on a going forward basis, we are going to have to modify a bit in the way that we report some of our numbers to you. If you look at page 7 on our current quarter fab supplement you will see an analysis of net earnings basically. And what you have here are the items that impact net earnings including gains and losses FAS 133, non-recurring items in currency and with this page, you will be able to get back to operating earnings without a problem. The -- in my humbly understated way, I would say that it is kind of silly, because we manage our Company on an operating basis. We have always reported to you the way that we manage our business, which is on an operating basis. We can give you these numbers as crazy as it seems, we can't do the math for you and label it. So you will and you are not just going to see this from us, you are going to hear from all over, for those of you on the buy side that cover a lot of sectors, you will hear it. If they use operating and those of you that like insurance, you are going to hear it too. We are going to try and make it as easy as possible and kind of use this week to transition but for the time being and tonight I will continue to talk about pre-tax earnings on a consolidated basis.

Again we just can't consolidate it, we still will evaluate AFLAC U.S. and AFLAC Japan on a pre-tax operating basis, you just cannot consolidate the numbers. So if you would just to try to consider this a transition as we get accustomed to this new kind of disclosure. Let me begin in looking at the largest component of our income statement, I mean, AFLAC Japan which represents about 72% of our pre-tax insurance earnings, obviously the comparisons to the prior year were affected by the 7.9% strengthening of the Yen and the increased 21.6%. Clearly you get a better view of AFLAC Japan if you look at in local currencies, it would be even better if you could see the bars.

Revenues were up 6.1% on a premium increase of 6.4%, investment income was up 3.1% now you know why we put these things in print too. The persistency of the business excluding annuity lines was unchanged at 94.2% including annuities that would have been down only slightly but for the first time we did pass one trillion Yen in revenues and I can't wait to see what this next one will look like. The operating trends continued to improve as we had expected as, you know, the story in Japan has been a steadily improving benefit ratio as a result of business mix changes. More of our business is coming from lower loss ratio products that continue through '03 and we expect it in '04 as well and the other operating ratio, the expense ratio has been fairly stable and as a result the margin was 13% and we would expect to see continued improvement in 2004 and '05 in the benefit ratio and better margins as well.

As a result pre-tax earnings were up 12.6%, one thing to remember when you look at Japan's income statement in Yen is that about 30% of their investment income comes from dollar sources and what that means is that as the Yen strengthens to the dollar, it suppresses the growth rates in Yen as we show you AFLAC Japan's P&L. Now it doesn't impact the total company because the dollar is a dollar and we are not actually converting currencies, but it does hold down growth of investment income, it affects the operating ratios, and it holds down the growth of pre-tax earnings. If you went on a currency neutral basis for instance and eliminated the stronger yen in '03, earnings would have been up 15.8% for the year.

In terms of investment yields we had a good year, we invested new money in Yen only instruments at 3.2% that was 3.61 including dollars. As we look ahead keep in mind that really since Enron in 2001 credit spreads have narrowed quite a bit. Particularly you see in the BBB as a result. After we had made our investment targets for the year we kind of backed off some of those instruments and reversed those currencies and bought more liquid Japanese government bonds. We'll probably do more of that this year because basically our BBB holdings are at a level where we like them and we probably, you won't see us buy nearly the same level of BBB's in '04 that we had in '03. That has implications obviously for new money and we expect to invest new money probably about 2 and 3 quarters this year, but rest assured we've done a sensitivity analysis and know we can do so and still achieve the corporate earnings targets. As Dan mentioned credit quality remains high, with only 2.8% of consolidated debt securities below investment grade and the unrealized losses on the below investment grade holdings amounted only to $86m, which is just 2% of equity excluding the $2.3b of unrealized gains from FAS 115. So, the quality of the portfolio does remain quite high.

In terms of AFLAC U.S., they had a good year despite weak sales with pretax earnings up 12%. In terms of revenue growth, we hit $3b, premium income rose 16.8%, we had a 9.3% increase in investment income and the persistency of the business declined a bit, overall it was 74% even versus 74.6 in '02. The operating ratios remained fairly stable. The benefit ratio rose slightly, but the expense ratio was relatively stable and the margin was 15.2 and we'd expect to see continued stability generally in these areas in 2004 in terms of the operating ratio. And again, our pretax earnings were up 12% to $451m.

The new money investments for the U.S. were clearly influenced by the lower level of yields available in the market. Keep in mind that about 66% of AFLAC U.S. investments were rated A or better at the end of the year. In new money purchases, we actually were at 82% for the U.S. in terms of A rated securities or better.

In terms of other segments and looking at interest expense, it rose from 16m to 19m. You may recall that all of our debt is either Yen denominated or swapped into Yen as a result when the Yen strengthens it magnifies the debt on the balance sheet as it does with every other balance sheet item. It also increases the interest expense, so part of that was influenced by that. Our debt-to-total capital ratio was well within line of our targets. It was 24.5% versus 24.8% in 2002. Our corporate and other declined to 42m, we'd expected to be up perhaps only slightly in 2004. And consolidated pretax operating earnings were up almost 20%, they were up 15.7 excluding the stronger Yen.

The tax rate on an operating basis remained unchanged to 35.3% and we really don't see it moving very much from there at all. Operating earnings were up 20% including the effect of the Yen. Obviously, there were some other items that went on in the quarter. One of those, the FAS 133 as we refer it to where we have to mark the interest rate component of our cross currency swaps on our dollar denominated debt that we swapped into Yen, to market every quarter. Now that we in all likelihood will hold those swaps until the bonds mature in 2009, at that point the accumulative gains and losses will be zero, but we are required to mark this non-cash item to market every quarter so it does add a bit of volatility to the net line. Of course the greatest volatility came on the realized loss line this year with Parmalat, in terms of gross realized gains on a pretax basis, they were 99m for the year. We had 400m in gross realized pretax investment losses.

And as a result net earnings were down 3.1% again attributable primarily to realized losses, from Parmalat and Levi Strauss. In terms of operating earnings, Dan had mentioned we had achieved our target for the year excluding the 6 cents from the stronger Yen, earnings were up 17.3%. We have started out the year at 15% and raised it to 17 as the year had progressed, excluding or including the effect of the Yen earnings were $1.89 a share, which gets us to our earnings objective for next year -- this year or next year to reiterate what Dan said, operating earnings growth should be in the area of 17% this year and 15% in '05, excluding the effect of currency changes. Or to put it another way and this will probably be our biggest challenge is communicating guidance under a Reg G environment. But we will do it the best we can and we will get you back to the original numbers that we had talked about on an operating basis. This basically says the same thing in a different language. If you look at it from a net basis where an increase in net earrings per diluted share of 17%, this year 15%, next year under the assumption that there were no realized gains, losses, nonrecurring items, FAS 133. I know it sounds crazy and no currency impact in '04 and '05, but that's just the hoop that we have jump through to give you the same quality disclosure we have done in the past.

In terms of the outlook for this year specifically; you have seen this chart for the last several years that kind of gives you an insight into the sensitivity of our income statement to currency changes. Last year's Yen averaged 115.95 and if that rate persists through '04, we would expect operating earnings per share to be up 17%. Our official target is $2.21. With the growth of the business and with more earnings coming from Japan and their expanding margins, our sensitivity we estimate to be about one penny per one yen move on the cumulative or the average exchange rate for the year. And that's basically how these scenarios come about. They are a bit preliminary. They may change by a penny or so, but you can use that 1 cent per 1 Yen move generally as rule of thumb for this year. Currently, the First Call that's at least, as I check this morning were 224 for this year and 258 for next year, which seems reasonable assuming we achieve our targets and the Yen remains a bit stronger than it was in 2003. Well that wraps up what I had to say and I would like to ask Dan, Kriss, Aki, Joe, Brad, if you will come and join me here. Again, to be fair to the people that are listening to this on the worldwide web, if you would please wait for a microphone before you ask your question, but we will be happy to take your questions.

Yes. Back there you guys, alright go ahead. There first and then we will come up here.

My advantage, I grabbed the mike off the rack. Dan could you talk about recruiting growth and monthly producing agent growth because in the past those have been great leading indicators of sales growth, you know, a little flow this quarter and what are our expectations there to see that pick up?

Well I can answer it but I brought Brad specifically for that reason. I thought all of you wanted to get to know Brad and so let's let him earn his money and we will let him start to talking. So, Brad have at it.

Alright. Could you repeat the question again, I didn't hear it fully.

Recruiting growth and how recruiting generally dictates sales and it was softer recruiting, so how is that going to reflect going forward and that basically it --?

Okay and we have -- our focus right now is heavily on recruiting and will always be on recruiting. So, as I was explaining to few of the analysts earlier tonight, if you would run into an AFLAC people at all and you would ask them to give their impression of who I am, by just using one word and that word would be recruit. I mean that is our major, major focus and that's why I think you already start to see good -- nice turnaround in the fourth quarter because our recruiting will be there and it will continue to grow.

[Tom].

I wanted to talk a little bit about the portfolio repositioning and the lower new money yield discussion, can you just comment on whether or not that's being dictated by the rating agencies, and why to Parmalat or is this just something that you really have been planning on all along?

We have been planning on it, but Joe, I am going to let you take it.

At looking at all of that, we have sat down since Parmalat, we have been through all 30 of our largest investment concentrations. With Moody's we've reviewed all those credit analysis, and we don't see it being driven by the rating agencies at this point. What is driving is it the low credit spread, the compression of credit spread that has occurred over the last year. When you saw the new money rate in the fourth quarter being lower. That was a result of us having already met our net investment income targets for the year, and taking the rest of the funds in that year, and putting it into Japanese government bonds to preserve liquidity and quality of the portfolio. Starting out here in the first quarter of 2004, we see that same probable credit spreads you are just not getting paid to hold BBB bonds, particularly for the long-term nature of what we would hold them, we don't see it as the safest course for AFLAC, and so this year probably BBB bonds will make up maybe 20% of the portfolio, excuse me, 20% of new purchases whereas more than 8% of what we are going to buy this year is going to be A rated or better. But it's mainly dictated by the credit spreads and not the credit rating agencies, at this point.

And we didn't know Parmalat, till December the 17, so we had already being doing it probe prior to that.

And just a related question for Kriss, can you just talk about your margin goals looking at, you know, roughly at 100 basis points of margin expansion this year. Is that still going to be sustainable with lower new money yields looking out to '04 '05, what would be expectation for margin expansion?

I think for Japan our benefit ratio will continue to decline may be, you know, in that order of magnitude that's what it's averaged over the last 5 years roughly 100 basis points a year. That's going to be offset to some extent by slower investment income growth but not enough to impair our ability to meet our projections and we are comfortable, we will be able to make those projections for '04 and 05.

Would you be able to quantify ballpark terms how much you think margins can go up by per year for the next few years?

I've said somewhere between, you know, 50-75 basis points. Generally, we've had some offset to the benefit ratio either through expenses or through lower investment income growth in the low interest rate environment, but that's a problem we've been dealing with for the last 10 years and we've managed our way through it. So we anticipate we'll be able to continue to do that.

Back to back.

Welcome.

Hi, Niger Greg with Bear Stearns. For Joe Smith, with the recent inflection in U.S. interest rates, how does that impacts the job you have to do? I know that you've always said the big challenge is the very low rates in Japan, is it positive, negative the impact of move in interest rates up in the U.S. overtime? Thanks Joe.

It is not really been that big a deal for us in the U.S. We have seen rates move up in Japan also, since the June of last year, I mean when rates have basically tripled since then. But in the U.S. market we do not at this point that interest rates -- I think they are where they need to be for where the economy is at this point in time and it has not proven to be a huge effect on our investments in the U.S. even though the new money rate is lower. But I don't think it's going to have that big an impact yet.

Okay however if we were to go into a different interest rate environment where rates were basically moving up instead of going down, would that be a positive or negative for you Joe?

Well for me it's a positive both in the U.S. and Japan. I have always said that, you know, my dream job is being able to invest in A rated securities in Yen at 5%. Doing what I have to do requires an intensive amount of work and that would be the best scenario for the Company. Yes, you're going to lose your unrealized capital gain on the portfolio, but it enhances the earning power of the Company over the long run with higher rates both in the U.S. and in Japan.

And as you all know, you know we'd rather see a half point move in Japan then a full point move in the U.S. because of the way our portfolio is structured and cash flow [yes].

Andrew (ph.).

Yeah, just a follow up on the prior questions. I didn't quite get the answer to Jason's question about recruiting. What percentage wise -- just one number -- percentage wise how much do you want to increase the agent recruit and following up on the margin question, how many years do you think you will get that continuous margin improvement and then now we've --

[Got you].

On the recruiting, our objective is a 10% increase in recruiting and we feel very confident that we will reach our objective in 2004.

And gross margin?

Margin improvement will continue for some time, but as you know, you know we only go out on record for up to three-year period in terms of projecting operating earnings increases and I am not willing to go beyond that.

We'll let Heidi kind of dictate who we point to since she has got the -- go ahead Heidi?

Hi Dan, it is Vanessa Wilson.

Hi, Ms. Vanessa.

When you talked about the LEASE program, I got the impression that that was going to increase productivity or the amount per agent. I might have written the numbers down incorrectly but when I take the millions of dollars in sales divided by the number of people the first 42 people get 102,000 per person and then 322 people get 74,000 per person. So, there is actually less being sold per person in that Philadelphia example. Is this LEASE program designed to hire more people that can get out and sell? Or is it designed to get more sales per person?

normally answer these. But I am going to keep referring to these folks and let them enjoy their evening --.

What the LEASE program really does is it allows people that are getting -- that are brand new into the business start earning an income right away. And in the sales force, that's one of the major, you know focal point as you look at it getting an individual earning and income right way. The LEASE teaches that. The LEASE actually has really taken our business back to the basics as Dan said earlier, and allows -- it teaches the people the basics of our business. And so that's the LEASE program that is getting people into the business quicker. So our retention is better with our new associates.

Okay, so it allows you to expand the base. If you look at your New England region, which you've been running which has been highly successful. What's the dollars per agent there? Is there some kind of CAP that they get to in terms of productivity?

No, there is no real CAP. Everybody is -- each individual is separate. I mean everybody wants a different earning income. Once you get over that income, you get out of our comfort level whatever so. Each individual is different. I don't know the exact number that you requested or that you are asking, but again it's, [inaudible] would be hard to say.

It is kind of like same-store sales. You know, this is a growing program and these people hadn't been in place for a full calendar year in many cases, this was a fairly new program to us so, it's not fair to say each new agent has been with us a full year in your computation.

Okay thank you.

Joe (ph.).

Thank you. Could you talk about your cash flow generation, what you think you're going to be generating in cash flow -- in free cash flow, I mean do you actually collect in premiums and investment income, more money than you actually have to pay out in claims, commissions, and expenses? And what are you projecting over a period of time is a good cash flow type of growth or a level that we should be thinking about?

Let me answer that separately for the U.S. and the Japanese operation. U.S. operation, you could say we are in roughly a breakeven, posture from an underwriting standpoint and most of our profits are from pure investment income that has been order of magnitude through historically, it's not to say you know, we don't need investment income at all, but if you just look at it from sort of a [PMC] perspective it looks that way in the U.S. In Japan, we've got substantial cash flows in excess of the current needs for cash represented by current benefits and expenses, that's why our future policy benefits grows like it does, and let me see, we probably -- I mean it's somewhere, I don't have the number right in my head, but 15-20% of premiums you know, in the future policy benefits each year. Our positive cash flow in Japan, order of magnitude has been about $3b a year, and I think that's going to be somewhat 394b Yen this year. So at a higher Yen the dollar that's almost $4b. So we have done -- we do cash flow testing all the time to, you know, validate our liabilities and our net position and -- for those of you so inclined to measure value-added and the like to our portfolio. And we -- if we closed off our new business today, we'd have positive cash flows from Japan for the next 20 years.

Okay. Two questions on investment yield. If we look at the fact that you are sticking with your '05 growth guidance, despite the lower new money yields, what is the lever that's allowing you to stay there, what's better than what maybe you had thought? And Joe, I think in the past you said that, maybe investment income growth in Japan long term, like a five-year number might be 5% a year, how does that change if new money rates stay where they are today?

Well, if new money yields go down, if we use a lower new money yield assumption for this year, that lowers your growth rate for this year, but in the projections we are looking at -- it starts growing in the 3-5% range for every year thereafter. Yes, it's starting from a lower base, but the growth rate is still there as we move forward even at the lower investment yield that we are assuming for next year.

You asked a little bit about, you know, how much pressure of the investment, -- the decreased investment yield is going to put on our ability to meet our projections. And I have said before, you know, when we do our projections, we have always got some margins for conservatism in those estimates, that's why we've earned more than our objective for each of the last five years. If our objective is 15-17, we've been at 17.3% plus for really the last 10 years, have a quarterly for the last 5. This year one element of conservatism in our plan for 2004 was Japan sales in 2003. We had it built-in at roughly 7%, came in 11.5, so that is going to give us some momentum going into 2004. That by itself will offset to some extent the impact of reduced yields in 2004. And there are similar things we are going to apply to 2005.

When a new agent enters the system and it doesn't work out, say the agent leaves eventually, terminates the contract; I am sure it's -- you can't really say whether the person wasn't right for the job in the first place, or whether there was something at the company that prevented him from succeeding. It's probably hard to know, but for sure, but my question is as you look back, you know, you've done a tremendous amount of information gathering about 2003; as you think about the problem that happened, what was the real -- the core of the problem, was it that you hired too many people who probably never should have been hired in the first place, or they were fine, and there was something in your training process that broke down?

I will take that one. I think that if you really look back, it goes back to the advertising. The advertising, you know, took our name recognition from 13% to 89%. It caught all of us off-guard. Everywhere we turned, people knew who we were, wanted to talk to us about the Company, and people were coming in wanting to come to work and you know, one thing about our business, because its total commission, you know, versus a draw or a salary, they leave on their own. When they are not making money after X amount of time in their own total commission, I mean, they are on a draw or they are on you know, a salary, you have to cut them off. They are cut off, if they didn't make the money. So your question about them leaving, they are just kind of leave in generally, because its commission. We -- there is generally no hard feelings because that's the way commissions have always been, but I think, if you go back to specifically us, I just think we have recruited so many people and we have never experienced that. We never had people coming in the door saying, I want to come to work for you, and they all looked good and so I think it ultimately boils down to us, and our ability to train them all. Would we hire them all again, if it happened the way that it did, the answer is probably yes because if we didn't hire them and they liked it they might go to our competitor. So, we would rather hire him, and figure out how it do. I think what we do is jump on training a lot faster and try to solve the problem. To be perfectly honest with you, I wouldn't mind having the problem again. It's just I hope; we could do a better job with it, this time, then next time. And I think, through AFLAC University, and I think, through the lease program, I think, we will jump on it much faster and be able to handle it. So yes.

Could you tell -- you had a remarkable turnaround in U.S. sales. Could you talk about what incentive programs you had going?

There were no new incentive programs in the fourth quarter that we didn't have in the third quarter. The only real incentive program we had was for the Territory Directors, they got to make a bonus, if they made it in the fourth quarter. They were given that same opportunity in the third quarter didn't make it. I think the difference was Brad's leadership. Brad made them a deal they couldn't refuse, so I think that's what it basically boiled down to and it just takes a while -- going back to what I reacted to in terms of Eric is that business came in from a recruiting standpoint much easier but it also came in from a sales point and if you look back at the company, I have been CEO for 14 years, there is only been 2 years we've had less than a 12% growth in U.S. sales, 2 years out of 14, and I am convinced that that compound growth that we saw in, you know 28, 24 whatever it was and 16.5 just caught up with us a little bit, and so I think we will regain and I think the 10 and 12 can go on for infinity. I really believe that because I believe the marketplace in the United States is that strong. You know, I have said this last year and now I can say it because we are beginning to see a turnaround, now granted it is only one quarter and anything can happen in the quarter, but I always thought the U.S. was much easier to fix than Japan. I was 10 times more worried about Japan in 2001 then I was in the U.S. because I was in the field for 10 years myself on total commission, and so I know how they think. And so, I really believe all along and I truly believe with all my heart it still an enormous market out there for us and as healthcare continues to be in a position where they are going to make the consumer have more out of pocket expenses, it's only going to get better for us moving forward.

Danny, historically our group size in United States has been around 50 or less has that changed at all in the last couple of years?

It really hadn't changed -- in fact with the LEASE program we'll move more to those smaller accounts. But I'll tell you what's happened. The Wal-Mart's and the American Expresses and the UPS's have been great for us. But it makes everybody want to come to work for the company and go shoot an Elephant. I mean everybody wants to go for the big game and they want to nail it and everybody wants to call on it, I have said from day one that is not what this company is all about. It is small and Middle America that will build it, that's where the weakest benefits are provided to employees and that's the place we can fill it the fastest. And I have never varied from that in my 14 years as CEO, and I still believe that's what's going to be our growth. It's going to be in less than a 100 in he's specifically talking about less than 25.

And one other question, I am testing my memory on this, but didn't we and Japan also buy some private placements in the past.

Yes.

To try and improve our yield a little bit.

We have, we have bought private placements over the years. Who wants to handle it?

Most of what we've done in Japan over the last 5 or 6 year has been in the private market because we could obtain better yields then we could on publicly traded bonds in the low interest rate environment. With that being said, the private placements offer us a lot of advantages and if we can get better covenants as far as safety of the issue goes, we can negotiate with the issuer to get better terms on the yield. All in all, it worked out very well for us and I think as far as the liquidity in those types of issues, you can see that in the case of Parmalat, which believe me was not a lot of fun, but we were able to move over $400m worth of bonds [that were] "prior replacements" in a one day time frame in a market the week before Christmas. So, the liquidity of those issues to me is not an issue, it's just that it enables us to give better yields and negotiate better terms with the issuer to our advantage.

And can you talk about the repatriation from Japan and also about the ultimate dividend GAAP ratio, will it go higher and balance out with the stock repurchase?

What was the second? The first one was repatriation.

Repatriation and the dividend GAAP ratio.

Okay, first I thought you said penetration, and I was thinking sales. So, repatriation in Japan will continue to be a percentage of the after tax regulatory earnings in Japan. During 2004, those regulatory earnings were going to be impacted by the after-tax Parmalat loss, so they will be lower to some extent by roughly 80% of the 175m after-tax loss that we realized in Parmalat. But our regulatory earnings in Japan before realized losses were very strong and so we saw some enquiries, we will see a dip in repatriation this year but it won't be enough to impact our ability to meet our share repurchase objectives and the like and it won't be a danger to our cash flow to U.S. operations including our ability to dividend, money from the like to the holding company to pay the dividend to the corporate level. For repatriation, it'll probably be in the $250-300m range. Yes it will go back up the following year, to the extent of roughly you know, 125m, 150m something like that without any increase in regulatory earnings over and above 2004. Payout ratio on the dividend, we'll pay roughly you know, 180m to $200m on after tax income of close to $1b this year.

What we have said all long about dividends is that we will try to increase the dividend rate generally inline with the earnings growth and that's what we have done last year because of the tax changes, that we saw coming with the dividend. We accelerated that because we had a strong year and decided to go ahead and do that but generally that's been our approach for the last 14 years and will continue to be going forward.

Our share repurchase is about 3 times our dividend and we keep those things in relatively [inaudible] rough relationship.

It is almost quarter after eight and I know traffic and trains and everything else for whatever reason has been a mess tonight so let's take one more question and then we will stick around just a bit longer.

Dan you mentioned employers passing along the cost of health benefits to employees, if an individual is seeing more and more of their pay check are seeing more coming out of their pay check, pay too for medical coverage how does that impact their ability to allocate dollars to an AFLAC product?

Well, you know, our approach has always been that if you buy our products you wont have as much out of pocket expenses for those needs, because they'll be covered under our particular products. So that's been our approach, generally what happens is our whole system in the U.S. is worked on the employer employee, and once the employer gives or his -- or she or he gives their approval on this particular thing, it sets the tone with employees. They are basically saying it's a third party endorsement, even though we don't say that it is, that's in essence what it becomes. And they are saying that we've got weakness in our system and this will help to fill the voids that you have in your healthcare program. So generally, once we have that payroll deduction, it generally applies in a way that it enhances our sales overall. Well listen thank -- thank you all for coming. We do have holiday Duck and understand that the ones we've brought with us are the last on the face of the earth that aren't spoken for, so there is only one per customer but Hiedi will give you one on your way out and thanks for coming tonight.