美國家庭壽險 (AFL) 2004 Q1 法說會逐字稿

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

Thank you and good morning everyone, and welcome to our first-quarter call. Joining me this morning is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Aki Kan, Executive Vice President of U.S. internal operations and Joe Smith, Senior Vice President and Chief Investment Officer. Also joining us from Tokyo is Allan O'Bryant, President of AFLAC International. But before we begin let me mention the Safe Harbor.

As you know some statements in this teleconference will be forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are in fact prospective and nature. Actual results could differ materially from those we discuss today, and I would encourage you to look at the latest quarterly report for some of the various risk factors that could materially impact our future results. Our discussion this morning will also include references to operating earnings, a non-GAAP financial measure. We use operating earnings to evaluate our financial performance and believe it gives the investment community a better understanding of our profitability drivers.

I think you know that we define operating earnings as net earnings before realized investment gains and losses; the impact of SFAS 133 and non-recurring items and you can find a reconciliation of operating to net earnings in our first-quarter press release and quarterly report. Now I would like to turn the program over to Dan who will start with some comments about the U.S. and Japanese operations and then outlook, and then I'll follow up with some financial highlights, and then we will take your questions.

Thank you, Ken, and good morning everyone. Overall we are very pleased with our results for the first quarter. AFLAC U.S. performed exceptionally well, producing strong sales results while AFLAC Japan's sales and financial performance were in line with our expectations. Operating earnings per diluted share rose 17.4 percent, excluding currency translations, which is consistent with our annual target for earnings per share growth.

Let me begin with AFLAC U.S. We are especially pleased to see the continued improvement in new sales that we had expected. You may recall my comments following our year end release regarding U.S. sales. I was convinced that we had turned the quarter in fourth quarter and I am more confident today. As you saw, first-quarter sales were up 13.8 percent to 292 million. We were also pleased that our improved sales result was not confined to just a few states. Eleven of the top 15 states produced strong double-digit growth during the quarter. Three of the top five states, Georgia, Texas, Michigan, grew at 21, 17 and 18 percent, respectively.

It is important to note that we did not have any special contests, campaigns or changes in agent's compensation to aid sales in the first quarter. Instead, we believe our strong first-quarter sales result are an indication that the measures that we began taking last year to improve our sales are working. As we have previously discussed, we believe that one of the keys to improving our sales was to expand and enhance our sales infrastructure. You will recall that our sales force had grown very rapidly from 2000 to 2002. During that time we recruited nearly 55,000 salespeople, and the total number of licensed associates increased 73 percent.

Unfortunately, growth of our sales management didn't keep pace, which made it more difficult to properly train and manage sales associate's activities. As a result, we made significant changes to our sales management infrastructure last year. For example, we increased the number of territory directors from 5 to 7, and we also increased the number of state sales coordinators from 63 at the start of 2003 to 85 in 2004.

In the second half of 2003 we began to see better expansion and the number of regional sales coordinators responsible for recruiting and district sales coordinators who are responsible for training new recruits. The expansion of our coordinator base has continued into this year, as well, and the first quarter the number of regional sales coordinators increased 20.8 percent, and the number of district sales coordinators increased 11.9 percent.

Along with the strengthening of our infrastructure, we made strides in improving the training we provide for our sales associates. Two elements of training initiatives are the AFLAC University, which is a Web based program for our sales associates and LEASE which is the acronym for larger earnings by acquiring smaller employers. AFLAC University offers 65 courses to associates on everything from AFLAC products, sales tools and technology to career and personal development. Since AFLAC University's inception in August of 2003 there have been more than 100,000 hits on the website and more than 14,000 course reviews.

We believe that AFLAC University will become increasingly popular with agents, and it will help them develop more rewarding careers with our company. And that ultimately will strengthen our sales. LEASE is a field training program that was designed to get new sales associates off to a quick start by focusing their efforts on selling to employees at smaller payroll accounts that frequently do not have rich benefit packages for their employees. Calling on smaller accounts increases the likelihood of a new sales associate making a sale because that associate faces fewer obstacles in reaching the decision maker. As associates make quick sales and get money in their pockets, they develop confidence and become more productive. We believe LEASE will be a key in helping retain associates and laying the foundation for associates to have long, productive careers with our company.

Under Brad Jones' leadership we will continue to put strong emphasis on distribution. In fact, coordinator expansion and recruiting are integral parts of our back to basics approach, which also emphasizes on training and opening new payroll accounts. But we don't expect to recruit at the torrid pace that we had set in previous years. During the first quarter we recruited 5800 new associates, which was down 8.6 percent from the first quarter of 2003. I should point out, however, that the first quarter of 2003 was a record in terms of number of recruits, and it has slowed since. So comparisons will get easier as the year progresses.

I can tell you that Brad is still pushing for a 10 percent increase in recruiting for the year. During the quarter the monthly average producing associates rose 07.1 percent to a record 18,500, but more importantly the number of new producers increased 16.5 percent during the first quarter compared with last year, and the number of new associates earning the fast start designation was up 25.4 percent. We believe these numbers are an indication that our new training initiatives are taking hold.

We continue to believe that the new sales associates will be attracted to our brand. You heard me refer to a 90 percent brand recognition before. The most recent example of our brand strength was illustrated in the April 19 issue of Forbes magazine, which included us as one of the top companies in brand value in the United States. In the section titled Beyond the Balance Sheet, Power Brands, AFLAC was ranked 21st, ahead of such recognizable names as Nike, General Mills, Kellogg and Harley-Davidson. And we were the only insurance company on that list. Criteria used to help assess brand value included four intangible assets, reputation, innovation, management and human capital. I'm especially proud of the magazine naming of AFLAC to the top five companies in human capital. I believe the ranking speaks directly to the employees talent and diversity.

As we look to the remainder of the year, we believe our annual U.S. sales target of 10 to 12 percent is achievable. You may remember me saying last year that I was certain our model was not broken. Instead, it needed to be fine-tuned. I am convinced that those efforts are paying off. I am equally convinced that the market for the products in the United States is vast and under penetrated and that we are in a strong position to tap into that market.

Turning to AFLAC Japan, total new annualized premium sales were in line with our expectations, but slightly below our annual objective. Total new sales increased 4.7 percent during the quarter to 28.3 billion yen or $264 million. Sales comparisons were affected by a 42 percent drop in conversion activity, which primarily related to Rider MAX conversions. As we have discussed before, conversion campaigns tend to hit peaks productions quickly and then steadily decline over a period of time. As such, our program for converting our term life Rider MAX policies to whole life began to decline last year, and we expect the conversions to be much lower again this year. Excluding conversions, new sales rose 7.8 percent in the quarter.

In addition, our sales results were somewhat depressed by the lower sales contribution from Dai-ichi Mutual Life. As was the case in 2003. Dai-ichi is focusing more on the marketing efforts on the sale of their core products, which affects the resources that are available for selling our 21st century cancer life product. Dai-ichi Life sales declined 7.8 percent in the quarter compared with 2003 and represent 9.2 percent of total new sales. However, we are still very pleased with the relationship with Dai-ichi Life, and it's great sales channel for us. And don't forget the Dai-ichi remains the number two seller of cancer life insurance in Japan only behind AFLAC.

Excluding Dai-ichi Life sales, we are up 6.2 percent during the quarter, which suggests that our traditional sales channels continue to be effective. Clearly the sales highlight in the quarter was the continued success of EVER. Sales of stand-alone medical insurance rose 34.1 percent over the first quarter of 2003 and accounted for nearly 33 percent of the total production. And EVER is still the number one stand-alone medical policy in the life insurance industry.

Looking ahead, we anticipate that the increase in the second quarter sales will likely be similar to that in the first quarter. However, we do expect better sales growth in the second half of the year, and we believe the 5 to 10 percent increase for the year remains a reasonable objective. We are optimistic about the second half sales growth because we expect continued strong demand for our core product, and we have specific plans in place that we believe will stimulate sales.

For instance, we initiated a campaign late in the first quarter that promotes the increased coverage for EVER. This program is called the 10,000 Unit Campaign, which was created after research indicated that about half the consumers want a 10,000 yen daily hospitalization benefit rather than a 5000 per day that EVER provides. Currently only about 17 percent of the EVER buyers purchased the higher hospitalization plan. We believe that it will steadily move toward the 49 percent who indicated they want more coverage.

We also plan on introducing new products that we believe will benefit the second half sales. We are currently in the process of developing and seeking approval of the new version of the Rider MAX called Lady MAX. Lady MAX is a rider to our cancer life policy and will provide benefits for medical conditions that are unique to women. Based on part on our success at adding Lady rights to EVER we believe that there will be a strong demand for this product from existing cancer life customers who are under the age of 30.

We are also working on a revision to rider wide products. Rider Wide is a living benefit rider to the cancer policy that we sold since September 1995. This rider provide benefits in the event of a heart attack or stroke, and the new version will also include hospitalization benefits for those illnesses. We believe it will be attracted to the 12 million cancer life policy holders who do not have the current version of the rider wide.

As we continue to expand our product line, we are also expanding our distribution system. During the first quarter we recruited nearly 1200 new sales agencies, almost 1000 of which were individual agencies. Included in that number are some of the agencies that have been selling similar products for our competitors and are now selling for AFLAC. Based on our recruiting results so far, we believe we will meet or exceed our target this year of recruiting 4000 new agencies in Japan.

Like in the United States many of the new agencies are attracted to AFLAC because of its strong brand. Our name recognition is 97 percent in Japan, but we've been further strengthening our brand through the AFLAC duck commercials. Our advertising has been very well received by agencies and consumers. In fact, according to research firm of CM Databank Rider MAX and EVER commercials rate one and two in March, respectively among the 139 commercials in the life and nonlife insurance industry.

We believe that Japan remains an attractive market for AFLAC products. The country's population is aging rapidly, and the health insurance system is financially stretched. We believe our products will provide consumers with living benefits are perfectly suited to the needs of Japan's aging population. And we further believe that our competitive strengths put us in a great position to capitalize on those opportunities.

As I mention at the outset, we are pleased with the Company's overall performance during the quarter. Our financial results were strong and consistent with the expectation; at the same time we continue to repurchase our shares. We bought 3.2 million shares in the first quarter. At the end of March we had approximately 34 million shares available for purchase under the current repurchase authorization from the Board of Directors. We anticipate repurchasing 10 to 12 million shares in 2004.

For the full year we are confident that will meet our primary financial objective of growing operating earnings per share on a diluted basis by 17 percent before the impact of currency. For 2005 our objective is to increase operating earnings per share 15 percent excluding the yen. We believe our objectives are realistic and achievable, and they reflect the underlying strength of our business and our potential for continued growth in the two largest insurance markets in the world.

Again, thank you for joining us and I will turn the program back over to Ken.

Let me just briefly walk through some of the financial highlights beginning with Japan and yen, which had a good quarter. Beginning with the top line, AFLAC Japan produced solid (indiscernible) premium growth of 6.4 percent, (indiscernible) have seen investment income decline 0.6 percent. Investment income growth was impacted by our decision late last year to invest more cash flow in single-A and AA rated securities with lower yields. It was also suppressed by the impact of the stronger yen on our dollar-denominated investment income. And excluding the impact of the yen on the dollar portfolio, investment income rose 2.5 percent.

Our total revenues were up 5.2 percent in the quarter. Our persistency rate improved over last year. The annualized rate excluding annuities was 94.2 percent versus 93.8 percent a year ago. That rate was unchanged from the end of the year. In terms of the operating trends, as we expected the benefit ratio which has declined for the last several years continued to improve. It decreased to 67.2 percent compared with 67.6 percent a year ago, reflecting a continued change in business mix. The operating expense ratio improved from 18.8 to 18.5 percent, resulting in further improvement in the margin from 13.6 to 14.3 percent.

As a result, pre-tax earnings rose 10.4 percent for the quarter in yen. Excluding the impact from the stronger yen on the dollar investment income, pre-tax earnings were up 13.8 percent for the quarter. Investment yields in Japan have improved somewhat recently. For instance, the twenty-year composite yield for government bonds, Japanese government bonds, was 1.97 percent at the end of the quarter compared with 1.87 percent at the end of 2003. Right now it is a bit over 2 percent.

Even though we are purchasing higher quality credit, as I had mention we are still securing higher yields in government bonds. For instance in the quarter we bought yen-denominated securities at an average yield of 2.51 percent, including dollars the blended rate was 2.67 percent. And through April 23rd of this year we had invested or committed to invest about 64 percent of our estimated cash flow for 2004 at an average yield of 3.18 percent, which is ahead of our initial expectations of 2 and 3/4. The portfolio yield at the end of the quarter was 4.44 percent. That is down 10 basis points from the end of the year and 27 basis points lower than a year ago. And at the end of the quarter our below investment-grade holdings on a consolidated basis were 2.8 percent of total debt investments, which was unchanged from year end. The only new addition to below investment-grade holdings was Toys R Us Japan, which had an unrealized gain of $15 million.

We had no debt impairments in the quarter and consolidated growth and realized gains at the end of March were $4.6 billion, which was a bit higher than year-end and the growth in realized losses were 849 million, which was 24 million below the year end number. And Joe is here to comment more on investments if you have any additional questions.

Turning to AFLAC U.S., we also had a good quarter. Revenues were up 13.4 percent on a 13.9 percent increase in earned premium and a 10.6 percent increase in investment income. The persistency rate of the business was 72.5 percent compared with 73.1 a year ago. The operating trends for AFLAC U.S. have remained pretty stable. The benefit ratio increased only slightly from 53.7 to 53.8 percent. The expense ratio improved slightly from 31 3 to 31 1 resulting in a slight improvement in the margin from 15.0 to 15.1 percent. That resulted in a 14.4 percent increase in pre-tax earnings.

In terms of U.S. investments the new money yield was 610 versus 705, and the yield on the portfolio was 752 at the end of March, down 4 basis points from year end and 42 basis points lower than a year ago. In terms of some other segments, our noninsurance interest expense for the quarter was 5 million versus $4 million a year ago. And debt to total capital was unchanged at 24 percent compared with a year ago. But it was down from 24.6 percent at year end.

Our parent company and other expenses were unchanged at 11 million, and resulting from the improvement in margins and AFLAC Japan, the consolidated pre-tax operating margin rose from 13.4 to 14 percent, and the after-tax margin improved from 8.7 to 9.1 percent. On an operating basis you will see that the tax rate declined 35.1 percent in the quarter compared with 35.3 percent a year ago. We expect it to remain in that area for the balance of the year. Operating return on equity for the quarter was 26.7 percent.

As reported, operating earnings per diluted share rose 23.9 percent to 57 cents, which was a bit higher than estimates. The stronger yen did help our operating earnings by three cents a share and excluding the yen's impact operating earnings rose 17.4 percent on a per-share basis, which was in line with our annual objective.

In terms of the outlook for earnings per-share growth for the balance of the year, you may recall that our objectives for 2004 is to produce $2.21 cents in operating earnings per share excluding the impact of the yen. And last year's yen averaged 115.95. If we achieve that target for this year and the yen remains at its current level of about 110 for the balance of the year, we expect that to translate into earnings per diluted share of about $2.27 which happens to be the current First Call estimate.

Under that scenario, second-quarter operating earnings per-share would likely be 55 to 56 cents. Our target for 2005 as Dan mentioned, remains increasing operating earnings per diluted share 15 percent excluding the impact of the yen. Currently the 2005 First Call consensus among 20 analysts is $2.62 cents, which is an increase of about 15 percent over the 2004 estimate.

We would be happy now to take your questions. I would like to ask you so that we can make sure everyone has a chance to ask a question that you limit yours to one question per analyst. Thank you, and Samantha I will turn it back to you for the question-and-answer.

(OPERATOR INSTRUCTIONS) Eric Berg from Lehman Brothers.

Thanks and good morning. Dan or whoever feels would be appropriate to answer, you have many products it seems now in the market in Japan, Rider MAX, Rider Wide and (inaudible) the two women's products one each for EVER and for Max and more, the dementia product, life insurance. Has it occurred to you that with so many products in the marketplace you might confuse consumers? Is there too much going on for the agents and for the customers to wade through it all and pick the right product? Thank you.

That's a good question, but we have got even more products in the United States because of all the other ways that we offer accident and other products. I would say no, because what we are trying to do is to match products with the needs of the consumers at whatever age or sex they might be. What we are finding in our research was for example younger women wanted additional coverage. And so we are matching it up. We are not offering the Rider MAX to males, Lay Rider MAX to males 50 years old. So we are marketing in a way that directly approaches that.

Also in our training process the agents pick and choose what they believe fits their needs. They will not go out and just bring all the products and say choose which one you want. They will narrow it down to what they believe fits that particular consumer. Then if the consumer LEASE them in another direction, they may pull another product to fit that particular need. But certainly it does require additional training. But I think in a deregulated market you have to have this to be able to fill all those needs. Also, no matter what in a deregulated market someone comes out, we can then by showing these other products we have be able to prove that our products are better because we can compare up a lot better. So no, I think it is fine, and I think we will continue to grow in that. But as in the case of the U.S., it does get more complicated just like in the financial services sector it has gotten more complicated and around the world in terms of offering products that fit the customers' needs.

David Lewis from SunTrust Robinson Humphrey.

Dan, can you talk about the spike in U.S. conversion? Obviously it has been fairly steady in the five-ish million area and then spiked up in the quarter. And kind of what the sequential guidance might be if you could provide any.

David, I didn't even pick up on it when I first got the numbers because we hardly ever look at conversions. But what we surmised since we looked at the numbers is that we introduced three new products last year. They were our main selling products, and it was the conversions that took place toward the end of last year that really getting did not get converted to the beginning of this year. I think it is just a onetime spike, and I think it will level off now and go back down to more of the normal range. And I just think it was very unusual for us and will not continue.

Remember that compared with Japan where we actually orchestrate conversion activities as a marketing strategy or tactic, we don't do that in the U.S. We leave it up to the individual sales associates to know their customer account and customer as to whether they need to promote a conversion to that person. So that's why we really do not look at U.S. conversions in the same way we look at Japanese conversions.

Thank you very much.

Nigel Dally from Morgan Stanley.

(indiscernible) U.S. recruiting, I know it is a tough year-over-year comparison but the decline in recruiting was cut more than what some of us expected. So I was hoping you could comment on how the recruiting numbers compared to your own internal expectations? Was there any specific initiatives you have in place to accelerate the rate of recruiting over the course of the year? And whether the 10 percent growth in recruiting you laid out was still a reasonable (inaudible).

I think I could say that our director of sales Brad is not happy with that number. He wants recruiting to be up 10 percent. On the other hand, I've got to tell you that although the quality of recruits I believe are the same it is obvious that by hiring less people we've been able to train them better. And when you are doing that you run into a lot less conflicts that can occur from overlapping of agents calling on different accounts. So I would like to see recruiting up, not been negative, but more than anything I want to see those producer numbers continue to grow. And I forgot the number I quoted, what was it, Ken?

Monthly producers were up 7.1, the new recruits were up 16.5 and fast start 25.4.

Okay, so those are the numbers I am really going to start looking to. But specific answer to your question is I still think its achievable to have a 10 percent increase in new recruits. But I look at it going from the second quarter forward. So that would mean a little bit less than 10. Again, I don't monitor that. I am mainly looking at these sales numbers right now. I will let Brad monitor it but we will keep you updated. And I will tell you he will not be happy if it is below 10. I can tell you that for sure.

That's great. Thanks, guys.

Jason Zucker from Fox-Pitt, Kelton.

Thank you and good morning. Just want to continue on the same theme and the question as it stands, I guess historically recruiting growth is usually a good predictor of future sales growth and what it sounds to me is that maybe this relationship is decoupling a bit and the numbers we are going to start to focus on more closely now are sort of these productivity numbers. You agree?

I agree. I think you're going to see that to some degree, but I still think the recruiting numbers have to be positive. I don't think we want to see the recruiting -- I think you will see this year will be and last year is a changing over to concentrating on just volume of people even though they are good people, to concentrating on making sure we have the ability to train the people we are bringing on board. And that's the difference. And so that limits us to some degree until even though I said the regions are up 20 percent and the districts are up 12 percent it takes a while for us to catch up on that. But yes, I agree with that to some degree.

All right, good. So looking forward then probably the more important numbers for us and yourself are to make sure that these monthly producing agent numbers continue to increase and maybe you will keep giving us these new producing agent numbers as well?

We will. We will give them to you and we will also keep you updated on the recruiting number because it still is a gauge on something we want to watch. But again, we've got to get the managers up to the level to get them trained. We made the mistake the previous year of hiring too many people and not getting them trained and there were some good people we lost that we probably shouldn't have lost. And that was our mistake. But we won't do that this year.

Liz Werner from Sandler O'Neill.

I was wondering with respect to Japan market if you could talk about what the competition is like and if you could speak to whether or not Dai-ichi has introduced any new products this year? And whether or not you expect Compo (ph) to see any change in its status with regards to how it is regulated and its tax treatment and things like that. And then secondly I just wanted to know with regards to your cash flow in Japan; I think you said 64 percent had been invested at 3.18. Given your target of 2.75 will the balance of cash flow be invested in possibly higher quality, lower yielding assets, or is there some sort of incremental earnings that we should expect from that cash flow in being invested at a rate above that 2.75 percent?

I am not sure I got all those questions, but I will respond to the -- you asked about compo (multiple speakers) Dai-ichi has told us that right now they have not offered our EVER product. We are in hopes that at some point in time they might do it. I spoke -- I've been to Japan two times this year already. I spoke at their management meeting of Dai-ichi Life with Mr. Morita who was there with me, encouraging them to continue to sell our products. The relationship is very strong and I think will continue but whether or not they are going to offer the EVER product I don't know but I am still in hopes that Rider MAX -- they sell about 1000 Rider MAX policies a month. And the agents do not make any commission off of it. But I'm hoping that we will be able to at some point in time to get them to do that, but I am working hard on that. The investment questions I will get Joe to answer.

You are correct; we are looking at 64 percent of the portfolio or cash flow this year being invested at 3.18, and that is above what we were anticipating at 2.75, which was where the market was at the end of the year when we were formulating our new investment strategy. Thirty-year JDVs are up over the lows in the quarter over 35 basis points and the high on that occurred right at the end of the quarter. So we have sort of slowed down the investment process. We were behind, we are behind probably investing a little bit in the first quarter because communicating the change in our investment policy to the Street and get our deals done and that slowed us down a little bit. Then when we called back up and gotten ahead of ourselves. So we're going to slow down a little bit as we go forward in the rest of the year because we see rates sort of gradually rising in Japan as the economic recovery actually seems to have some legs and is real at this point.

Does that answer your question?

Yes. It just sounds as though when you were thinking about it the earnings outlook you were assuming the 2.75. And I don't want to kind of draw too many conclusions without going back and looking through all the numbers, it sounds like you are investing, you expect to invest at a higher rate than that.

Keep in mind that even though we are 64 percent invested, some of those are forward commitments and won't actually hit earnings until the money actually gets applied. So the higher rates are yet to come in the future. All that being said, we will have some more comments on earnings outlook at our analyst meeting in May. And I will tell you sort of as a foreshadowing to that, we believe that we can hit 3 percent in money this year in the aggregate for the full year as opposed to the 2.75 we initially targeted. So that would be an incrementally favorable impact on overall earnings.

I will say if we do a lot better I will tend to want to advertise more in Japan to continue to push sales. So don't look for any real changes in the earnings projections.

That's great. This is very helpful.

Andrew Kligerman of UBS securities.

In Japan in the second quarter of '03 sales were particularly robust at 32.9 billion yen versus 27 billion in the prior quarter of '03. So the question is Dan you had indicated that sales in the second quarter of '04 would be up by a similar amount. Do you expect some type of a robust, something robust to happen to get that 4 or 5 percent growth in the second quarter of '04?

Yes, we've got some contests going on. You've also got the new introduction of the 10,000 yen that I mentioned in my speech about going from 5,000 to 10,000 with the EVER, and we're going to be advertising it. I think those things will be, will make a difference. But that's exactly why we said in December of last year that the first half would be a tougher comparison than the second half. So we expect sales to be higher the second half as a percentage more so than the first half. So we know we're going against tougher numbers and it is predominantly due to the conversions.

Remember, too, Andrew if you look at the sales chart by quarter you will see that historically the second quarter in Japan is typically the best and the fourth quarter is the next best quarter. So there is a pattern there largely a function of the timing of campaigns. But you can't look at quarterly numbers sequentially; you do need to consider the year-over-year.

Great. Thanks a lot.

Ed Spehar of Merrill Lynch.

My question is on the recruiting versus training of agents. And I guess the question is the benefit that you seem to be getting from a better training, is this sort of a onetime bump in sort of growth rate, and then if we think about sort of going forward and I think maybe Dan you were alluding to this that once we get to this new higher level of production for new recruits, because of better training, we are still looking at recruiting kind of driving the growth trend long-term, or is there some reason to believe that training is going to be an incremental positive to sales growth beyond sort of this transition period? Thanks.

Ed, I think every CEO wants to think that training will ultimately improve productivity. And we want to think that all the programs we put in place will improve productivity. We have seen that because as we started some of these programs they started years earlier in like a region and then to a state and then to a territory. So we've seen some success with the LEASE program. So we know that that can be done. We've just got to wait and see how it evolves. But my sense is that I still want to see recruits long-term grow by 10 percent a year. I don't want to see recruits grow 25 percent a year where we can't train them. But I think a double-digit recruiting growth is something that we ought to look for long-term. And again, but I think we are catching up getting the managers ahead of double-digit to catch up where they should be, and then it will move together hopefully. Does that answer your question?

That's very helpful. Thank you.

Vanessa Wilson of Deutsche Bank.

Just wanted a clarification first of all, when you answered David Lewis' question about the conversions, I got the impression that some of the conversions should have been booked in '03 and came into '04. Is that correct?

It is possible. What we are saying is conversions take longer for us to process. And the way we close out the end of the year for our cafeteria plans, it could have happened. We're not exactly sure, we are trying to get into that. As I told you we were kind of shocked with the number. We will find out, but we didn't carry any business over. It is just however it fell is what we did with it.

And then just in terms of very good sales (indiscernible) here in the first quarter for the U.S. with those conversions. Just reiterate what your sense is for second, third kind of going forward.

Well, the numbers still look good. I'm watching them every week. And I'm still very confident in the 10 to 12 percent increase. And as I told you all along, I want to get back to 12 to 15 long-term. And I still believe that we will do that. And I believe we've turned the corner. I told you that in the fourth quarter, and obviously a lot of you believed it, because the stock showed that. And we appreciate that confidence, and we're just going to continue to do the best we can. And I think it's a great market and it will grow.

My question was on the new money rate in the U.S., the 6.1 percent. Just what are you buying, what sort of duration and credit quality to get that number?

It's in line with our investment policy, its all going to be A rated or better. You are still seeing the credit spread compression in here because that is just a fact of the way the markets are. You are not getting paid to buy triple B credits, and we're sticking to that strategy. These have been longer dated 20, and 25 year type maturities because as you know we really don't have an asset liability matching problem that you have in Japan in the U.S. so we are able to move around the curve more.

And are you doing 144 As to get a little more yield as well?

No, 144s don't really trade any premium versus regular deals in the market. For us they are the same thing. So we are just doing plain vanilla bonds like we've always done.

Thank you very much.

Mark Lane from William Blair.

Chris, on the benefits ratio in Japan maybe you can take a step back and talk about what the longer-term opportunity there is. I know you stated back at the analyst meeting in Japan in late '02 about the 100 basis point improvement over the next two or three years. But what about the next three years plus given the change in the product mix and the favorable claim trends which are arguably long-term secular trends? Where can that benefits ratio go over the next three to five years?

We will give you a little more color again in May, but right now I'd say that over the three to five year period if we continue selling the mix of business we're selling, the benefit ratio should continue to decline at, I'd say a decelerating pace, not an accelerating pace because ultimately it is going to level out. I'd say probably in the low 60s is my guess. But it will take a long time to get there. It partly depends on underlying claims experience, too and how much pressure the Japanese government puts on the healthcare delivery system in Japan to continue to reduce days in hospital and the like that our claims are based on. So their are mix of business issues involved, as well as fundamental underlying claim characteristics involved. I'd say overall the trends are going to continue for some time.

What about follow-up question on Rider MAX. Rider MAX excluding conversions were up year-over-year in each quarter last year. You mentioned the success of the advertising campaign; first quarter sales excluding conversions looked a little bit light. Is there anything specifically going on there that would change that trend?

Rider MAX is being attached to a percent of our cancer new business as regular new issues that you recall that Rider MAX converts our cancer only policy to an all calls medical policy. And our agents continue to package Rider MAX with cancer to give a person the medical benefits policy with extra benefits for cancer. And that's one of the ways it is being presented.

Some of them may be buying EVER and already own the cancer, too. So that can have an impact.

It seems like in the first quarter year-over-year growth it was a pretty sharp fall off versus the trend last year. You are saying there is nothing specific that you saw in the quarter that would explain that?

No.

Okay, thank you.

Jeff Hopson from A. G. Edwards.

Curious if in your market research there is any impact to buying behavior on consumers from the improvement in the economy and whether or not if the economy continues to improve whether or not you think that will have an impact on sales moving forward.

We haven't seen any results so far. Now the way that you would see improvement in the economy would impact us is for interest rates to continue to move up. And when interest rates move up there will be an opportunity for us to introduce new products with a better value to the consumer, which ultimately would have them buy more coverage. That's where I think you could see it. But right now we haven't seen anything that has impacted nor did we see anything specifically when there was a downturn that it was dramatic. People generally are going to keep their coverage. They have got a propensity to save. They are worried about economic disasters that could affect their lives. And so there are just no dramatic terms that we've seen at this particular time.

Very good thank you.

Tom Gallagher from CSFB.

Just a question on Japan's sales. I noticed Dan you had mentioned Dai-ichi is a bit of a headwind here. But the bigger decline was in actually in the affiliated corporate agency channel. Can you just comment on what's going on there and whether or not you were expecting that?

Well that has been trending down for some time as we emphasized recruiting more individual agents to go after the small to medium-sized market. And I think that is just a trend that has been continuing, Tom.

At that particular group (inaudible) more conversions than any other group because they have the biggest block in force. And so they went back last year and converted more policies than anyone else. And so that would have been the predominant reason for it. But as we saw, the overall was up 7.9 excluding the conversions. And that's what we've really been looking at. And then with EVER being up 34 percent.

So you don't see any issues with that channel?

No, I don't. Other than just continuing to push them to write more business as we always do and try to penetrate it further, but there is no problems out there.

Okay, thanks.

Jeff Schuman from KBW.

I think you said Al was on the line, I have a question for Allan. I was wondering if you could give us an update on Japan operationally. Couple years ago when you and (indiscernible) and (indiscernible) and others seemed (indiscernible) made a number of changes including pretty significant changes culturally in terms of incentive based management and that sort of thing. Can you give us an update on retention, recruitment update, how they've changed over the last couple years?

Yes. Recruiting continues, recruiting employees continues to increase. Just last year or I guess just last month we hired another 120 employees, which is one of our largest classes ever. And we've been able to also actually recruit a better quality group of employees because our name recognition and brand recognition has gone up so much because of the duck and our advertising that we've been able to go out to college campuses and talk to a better group of employees.

With regard to our changes in our employment system in our evaluations, that has all been very well received, particularly among our younger group of employees that are looking for greater challenges and recognition of their efforts. And we've gone through that process over the last year and a half, and we've completed it. And overall the employee morale I would say is very high.

Thanks a lot.

Stephen Schwartz from Raymond James and Associates.

Good morning, everybody. I like to follow-up with Allan. Allan, the (indiscernible) survey came out a couple of weeks ago. That looks very positive. There is a Shinko Research Institute, which came out with a study that was on one of the websites this morning that said that TSC pretax profit will probably hit a record. I'm wondering if you can talk about your sense of Japan and what's happening with the economy and maybe someday soon we might actually see a growth in employees at the large corporations which are served by the affiliated agencies that Tom mentioned.

Actually I had a chance to meet with a couple of economists last week and then another one today. The sense that I am getting is there is general optimism, particularly among consumers and among the businesses in Japan about the economic recovery actually having some traction and growth expanding beyond or GNP expanding beyond the one percent growth over the last couple of years. But having said that, particularly large corporations do not seem to be committed to actually hiring employees. Hiring is going to probably trend after some actual growth in sales. So while there is general optimism, I don't think that -- my sense is that we're not going to see a significant improvement in the employment rate anytime particularly this year.

I do not think you answered this, but Liz Warner mentioned Campo earlier. What is new with that?

We will talk a little bit more about this at the analyst meeting but basically privatization is continuing. But the prime minister's advisory council has taken a very slow and conservative approach to this and has extended out the timeline or is recommending to extending out the timeline for privatization. So we don't see a whole lot of quick movement on that. The prime minister's council is still continuing to study this, and by the time we get to the analyst meeting in a couple of weeks there may be some additional information forthcoming on that. But really there's not a whole lot new to discuss at this point.

All right. Thanks.

(technical difficulty) Walsh from Smith Barney.

A couple questions, first one on EVER sales. So you know strong year-over-year growth, but the last few quarters have been pretty flat sequentially. Is this a product that is running out of steam? Secondly, wanted to know why the RBC ratio is declined almost 30 percent the last two years despite very strong statutory earnings and what RBC level can you go down to? Thank you.

Absolutely not on EVER sales. It depends on how we enroll the accounts. We have said that all along; great example is second-quarter sales is our largest quarter followed by fourth. Then third and first.

It is a mistake to look at sales sequentially.

It will never sell that way and it has never -- it has not tracked that way for the last ten years if you look at it. So if EVER as well as every other product regarding the other --. RBC ratios, this last year was obviously negatively impacted by the Parmalat loss to some extent. And then also we get negatively impacted When we have a stronger yen just because we maintain more of our capital in dollars than we do in yen. Whenever the yen strengthens against the dollar, we do lose some leverage there in RBC ratio. That being said, RBC was down to around 400, 361 at the end of last year. We anticipate it will come back next year at a relatively level yen because our statutory earnings as you alluded to had in fact been very strong. Also we had a recent review by Standard & Poor's, and they affirmed our AA financial strength rating for the insurance operations.

(indiscernible) from J.P. Morgan.

Could you discuss the (inaudible) sale to Dai-ichi and whether you think that will turn around? And also your talked about sales out of Japan for the remainder of 2004. I want to see what you think the long-term sales growth potential is for the Japanese market beyond this year? That's it.

I think that Dai-ichi sales will continue to be in the flat area. I thought that ever since we signed the agreement that there would be an enormous spike and then they would just move to other things. Because of the pressure of their own financial reporting and although it helps them financially when they report sales, they really don't show that. So they are mainly interested in their products and what is going on in their industry. But it shows that our products are wanted and needed because they really don't put that hard an emphasis on it and yet they continue to sell a lot of it.

In regard to sales, we haven't made any projections yet for next year. But I certainly think that we should do better next year as a percentage increase than we do this year because we're not going against those conversions. So I would hope that next year will be better. I'm not sure what number, but maybe we will be able to give you some insight to that at the analyst meeting in a few weeks.

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