美國家庭壽險 (AFL) 2004 Q2 法說會逐字稿

Good morning and thank you for joining AFLAC's second quarter earnings release conference call. All participants will be able to listen only until the question and answer session of the conference. Today's conference 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 for today's conference. Mr. Ken Janke Senior Vice President of Investor Relations. Mr. Janke you may begin

Thank you and good morning everybody and welcome to our second 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. Operations, Joe Smith Senior Vice President and Chief Investment Officer and joining us from Japan today are Allan O'Bryant President of AFLAC International and Atsumi Yagai who is Executive Vice President and Director of Marketing and Sales for AFLAC Japan.

Before we start let me mention that some of the statements in this morning's teleconference are forward looking within the meaning of Federal Securities Laws. Although we believe these statements are reasonable we can give no assurance that will prove to be accurate. Because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at the quarterly report for some of the various risk factors that could materially impact our results.

Now I'll turn the program over to Dan who will begin this morning with some comments about the quarter and the outlook for the balance of the year. I'll follow up with some brief financial results and then we'd be happy to take your questions. Dan.

Thank you, Ken. Thank you for joining us this morning. AFLAC Incorporated financial performance remains strong during the second quarter. We were especially pleased to again achieve our primary financial objective. As you saw, operating earnings per diluted share rose 17.4% excluding currency translation which is in line with our full-year target for earnings growth.

And I remain very confident that we will achieve our objective for the year. My confidence is based on the underlying strength of the insurance operation. I'll begin by talking about AFLAC U.S. As reported, our total new annualized premium growth for new sales grew 6 .4% during the second quarter to 281 million. For the first half of the year total new sales were 573 million or 10% above a year ago which is in line with our yearly target of a 10% to 12% growth.

And through the first 6 months, new sales and earned premium for AFLAC U.S. were actually ahead of budget. After having a very strong first quarter many of you asked why we didn't raise our sales target for the year. My comment was that we needed a few more months under our belt before we re-evaluated our objective. My caution in raising our target was that I felt 2004 was a transition year for AFLAC U.S. because of significant changes we'd made to our sales management team. That is still my view.

But as I told you in February and again in April, I believe we've turned the corner in the United States and based on our first half result, I still believe that today. I also believe our sales will continue to improve because I'm confident and convinced that the changes we made last year have given us a solid foundation on which we can build. As we have discussed, we began expanding and strengthening our sales management infrastructure to better train and manage our sales force.

We increased the number of territories from 5 to 7 and we increased the number of state sales coordinators from 63 at the start of 2003 to 85 at the end of the second quarter. We've also expanded a number of regional sales coordinators who are responsible for recruiting and district sales coordinators who are are responsible for training. The other element to improving our sales infrastructure was to improve our training capacity.

As you know we introduced a web based program called AFLAC University which offers courses on AFLAC's products, sales tools, technology and career and personal development. We also rolled out a field training program called LEASE which is the acronym for larger earnings by acquiring smaller employers. LEASE is designed to help new sales associates get their careers off to a quick start by focusing on smaller payroll accounts.

Smaller businesses often cannot offer the richer packages to their employees making them more likely to need the types of products that we offer. Also, sales associates find it easier to contact the decision maker at small companies compared to large ones. We believe these programs will help our sales force be more productive.

In terms of distribution expansion, AFLAC U.S. was represented by 58,400 licensed sales associates at the end of the quarter which was 2.3% higher than a year ago. Recruitment of new sales associates in the second quarter was 5.2% below the second quarter of 2003. However, we did add more than 6,000 new sales associates in the quarter which was above the first quarter recruiting.

Because of our very successful recruiting effort was stressed our management infrastructure in the first place, it was important for us to have appropriate management and training platforms before we began to refocus on our distribution expansion. With that structure now in place, the next logical step is to ramp up recruiting. As I mentioned in our first quarter conference call, we don't need nor want to increase recruiting 20% to 25% as we had in the previous years.

However, we need to do a better job than we have in the last 18 months. To help focus sales and management on recruiting we implemented a new contest in the third quarter. We also have modified the bonus compensation for the 7 territory directors to emphasize recruiting activities.

Although it's very early in the quarter, recruiting has already shown signs of picking up in the first 3 weeks of July recruiting was up 6% above the same period in 2003. With our renewed emphasis on recruiting I expect to see better growth of our distribution as the year progresses. As we look ahead, we believe the competitive strengths that has positioned AFLAC as the leading producer of supplemental insurance products at the work site are firmly intact and we haven't seen any noticeable change in the competitive landscape.

We have broad product line that provides valuable and affordable benefits to consumers. We have a dedicated sales force that specializes in distributing products through the work site. We have sufficient systems for processing new business and we are improving our administrative systems for future efficiency gains. And we have a brand awareness now of around 90%.

AFLAC is well-known to potential agents and customers, states with strong sales gains in 2004 such as Georgia, Pennsylvania, Michigan and New York suggest that our approach to the market is working very well. I believe our competitive strengths and improvements we continue to make to our business will keep AFLAC U.S. in a strong position. In this transition year I continue to think our target of 10% to 12% sales growth is realistic and achievable.

However, I expect to see faster sales growth in 2005. Let me turn to AFLAC Japan which had an exceptionally strong quarter from a financial perspective despite sales that were a bit lower than we had expected. In the second quarter, sales declined 2.3% to 32.2 billion Yen. For the first 6 months total new sales increased .9% to 60.5 billion Yen. Coming into this new year we knew we faced significant headwinds in Japan because of the expected declines in Rider conversions and cancer life sales through Dai-ichi Mutual Life.

We had previously commented that conversion campaigns tend to hit a quick peak in production and then decline over a long period of time. After starting the conversion process in February of 2002 that is exactly what is happening with Rider MAX conversions which were down 23% for the quarter. As we also discussed Dai-ichi is focusing more of their sales efforts on their own products. Dai-ichi has also experienced a decline in the size of their sales force.

As a result, Dai-ichi sales were down 29% for the quarter excluding Rider MAX conversions and Dai-ichi sales, our sales for the quarter were up 2.5%. Despite the decline in Dai-ichi sales this year, we remained very pleased with our alliance. Remember, Dai-ichi is the number 2 seller of cancer insurance in Japan behind AFLAC. And recently we concluded discussions with Dai-ichi and agreed upon production targets for the next few years.

Our alliance with Dai-ichi has been and will continue to be beneficial for both companies. It allows Dai-ichi to sell the best cancer product on the market and it provides AFLAC with an important distribution channel. We expect Dai-ichi to continue selling our cancer product for years to come. Sales of EVER continue to do well although they were not strong enough to overcome the declines and conversions in Dai-ichi production.

We sold more than 210,000 medical policies in Japan during the second quarter. Which was up over both the first quarter of this year and the second quarter of 2003. Stand alone medical sales accounted for 30% of the new annualized premium sales in the quarter and increased 11.9% over a year ago. And EVER continues to be the number 1 selling stand alone medical product in the Japan life insurance industry.

You may remember from our first quarter and analyst meeting comments that we expected better sales growth in the second half of the year. That is still the case. However, based on our first half results and Atsumi's most recent estimate we now believe that total sales will likely increase 3% to 7% for the full year. I want to point out that if we achieve the 5 to 7 growth for the year, we will have still been in the range of our original target for sales growth and I would not count us out.

I also want to point out that the change in our sales target does not impact our earnings outlook. Atsumi has joined us from Japan this morning and I'd like for him to say a few words about how he plans to achieve our sales goal for this year. Atsumi

Thank you, Dan and good morning everybody. Please allow me to share with you what we are planning for the rest of the year in order to achieve a higher growth that we expect in the latter half of this year. First, we are planning to launch 2 new products from [Ara] one is a new version of Rider Wide according to our consumer research 63% of the current cancer policy holders answered that they want to add additional coverage for heart attacks and strokes.

But currently, only 9% of our accounts of policy holders have a current Rider Wide attached. We have implemented detailed consumer research in order to find out why our current policy holders of Rider Wide ratio is so low compared to consumers' potential needs. We found out that the key benefit that is they want is a hospitalization benefit and a lump sum benefit and they don't necessarily require large death benefit combined.

But our current Rider Wide doesn't have hospitalization benefits and it has a large death benefit combined. So we have revised our current Rider Wide and this new Rider Wide is basically focusing its benefits on the focused requirements of the consumers which are hospitalization benefits and lump sum benefits. Theoretically, 63% of our current cancer policyholders means 7.6 million policies and it means great potential for new Rider sales from August.

Also, another new product that we are planning to launch from August is Lady's MAX which basically provides the same benefits as Lady's EVER. Currently more than 60% of our women EVER purchasers are adding this rider on EVER with the wide range of age segments from early 00s to mid 50s. We believe the same demand exists for current cancer insurance women policy holders and in total, there are about 9.2 million of them.

We will implement a large scale national direct mail account campaign for these 2 new products from the beginning of September with providing support for their agencies for their mailing costs. We expect the total direct mail volume will be about 5 million mails and it will surely contribute to our sales especially in the fourth quarter. Another major that we are planning to push up this year's sales is the aggressive sales campaign for EVER and MAX 10,000 Yen per day hospitalization.

As I mentioned in the last AFLAC meeting at Atlanta, according to the consumer research, 49% of the consumers want 10,000 Yen hospitalization benefit rather than 5,000 Yen. But our current 10,000 yen ratio in our total EVER sales and total MAX sales are both still lower than 20%. We see a large potential in this gap. We have been promoting 10,000 Yen hospitalization from March of this year and the 10,000 Yen ratio has increased from last December 14% to current 20% for EVER.

But we will further accelerate the promotion of 10,000 Yen hospitalization in the latter half of this year by implementing various campaigns for 10,000 Yen EVER sales. Also we will implement a large scale TV campaign called AFLAC is Number 1 in Medical Insurance Sales" from the beginning of October. As you already know, we are the number 1 stand alone medical insurance sales company for the 2 consecutive years.

According to the consumer research, one of the key reasons for consumers to choose a medical insurance product is whether that product has the large market share or not. Large market share relates to the credibility of the product. Since many consumers are not confident about which product they should purchase because of the low knowledge of insurance. That is why we are planning to aggressively announce the fact that we are the number one medical insurance seller on international TV by effectively using the AFLAC duck and the 2 celebrities currently we are using for for EVER and MAX.

In one sales campaign simultaneously in order to increase the impact of the message. Lastly, since this year is AFLAC Japan's 30th anniversary, and we will implement 30th year anniversary sales campaign targeting our agencies from August to December in addition to our current annual sales contest. This will have 2 effects.

One is that those agencies who had already achieved enough sales for that yearly sales contest award might slow down in the latter half of the year, but this - - another contest can keep them running til the end of the year. Another effect is to revitalize the current slumping agencies who had almost given up their effort to achieve their necessary sales volume for the annual sales contest award. By implementing the previously mentioned various measures we expect to increase the increase 3% to 7% for the full year. Now I will pass back to Dan.

Thanks Atsumi. We will also continue to focus on expanding our sales force in Japan. During the second quarter we recruited more than 1100 new agencies. About 900 of which were individual agencies. We believe individual agencies are best suited to sell the vast number of small businesses in Japan.

For the first 6 months of 2004, we've recruited nearly 2300 agencies which puts us in great shape for meeting or exceeding this year's recruiting target of 4,000 new agencies. In addition to recruiting, we're encouraged to see the persistency of AFLAC's Japan's business improve. At 93.4% our overall persistency rate is the highest level since the end of 2001.

We're also pleased to see a significant increase in the available investment yields in Japan. As measured by the index of 20 year Japanese Government Bonds, investment yields are at their highest level since the fourth quarter of 2000. If the yields remain at these levels or further improve, AFLAC Japan's investment income growth should benefit.

Although we would have liked to have produced better sales in the quarter we remain very optimistic about the opportunities in Japan for our products. As you've heard us say before, the country's population is aging rapidly. The health care system is financially stressed.

We believe our products which provide consumers with living benefits are perfectly suited to the needs of Japan's aging population. Our understanding of consumers' needs, our formidable distribution system, our low-cost expense structure, and a reputation for financial strength are just some of the reasons we believe we're in a great position to capitalize on those opportunities. I am confident that we will achieve our primary financial objectives of increasing operating earnings per diluted share by 17% in 2004 before the impact of the currency translation.

For 2005, our objective is to increase operating earnings per share by 15% excluding the impact of the Yen. And as you'll remember from our May analysts' meeting that we set a 2006 objective of a 15% increase before the effect of the Yen as well. We believe these projections are reasonable and reflect the underlying strength of our Company. Thank you for joining us and now I'll turn the program over to Ken. Ken.

Thanks, Dan. Let me briefly go through some of the second quarter numbers beginning with AFLAC Japan. Starting with the top line in Yen terms revenues were 6% for the quarter and up 5.6% for the first 6 months. As Dan mentioned our persistency rate improved. And the 94.3% he mentioned compares with 93.8% a year ago excluding our annuity business. In terms of quarterly operating ratios, as we expected the benefit ratio continued to improve over last year.

It was 66.8% in the quarter compared with 67.8% a year ago. As we discussed repeatedly the declines primarily reflect the changing business mix in Japan. The expense ratio for the quarter was 19% compared with 18.9 in 2003. As you may know we've been working on a new administrative system in Japan for the past few years. We successfully converted to our new claims system last year and we're also administering our ordinary life products on the new system.

However because of the many third sector products that are currently under development we've decided to temporarily stop systems development in the second quarter. And in doing so we determined it was appropriate to write off 2.85 billion Yen or about $26 million of previously capitalized expenses. Despite these increased expenses however the pretax margin rose from 13.3% to 14.2% in the quarter due to the favorable benefit ratio. With the expansion of the margin, pretax earnings increased 13.1% for if quarter in Yen.

Excluding the impact of stronger Yen on AFLAC Japan's dollar denominated investment income pretax earnings were up 16% in the quarter. As you heard from Dan, invest yields have improved sharply in recent months. As mentioned by the index of 20 year Japanese Government Bonds, yields reached a high of 2.49% in June which was the highest in 4 years. In June of 2003, that same index was yielding .76%.

For the quarter we invested our cash flow in Yen securities at 3.51% and including dollars the blended rate was 3.63. The portfolio yield at the end of June was 4.42% which is down 2 basis points from the end of March and 23 basis points lower than a year ago. Through last Friday, July 23rd, we had invested or committed to invest about 75% of our estimated cash flow for this year at an average yield of 3.21%.

We expect to be at about 3% for the full year which is higher than our initial budget of 2.75%. The overall credit quality of our portfolio remains very high. On a consolidated basis securities rated BB or lower were only 2.6% at the end of June which is down from 2.8% at the end of March.

The unrealized losses on our below investment grade holdings were 202 million at the end of the quarter or 4.3% of equity excluding the unrealized gains from FAS 115. But we had no bond impairments in the quarter, however subsequent to the quarter Royal and Sun Alliance offered to repurchase our debt at 90 cents on the dollar. That compared with pricing of 71 cents on the dollar at the end of June. As a result, we recently made a decision to sell all of our holdings in RSA. And the sale will result in an after tax investment loss of approximately $15 million or 3 cents per share in the third quarter before any other investment transactions that may occur.

Now, let me turn to AFLAC U.S. which had a very good quarter financially. Earned premium income rose 14% in the quarter. Investment income was up 12.7%. Total revenues were up 13.8 for the quarter and 13.6% for the first half of the year. The annualized persistency rate for the 6 months was little changed at 73.4% compared with 73.8% a year ago.

And looking at the operating ratio the benefit ratio compared with 53.9% compared with 53.5. The expense ratio improved a bit from 32.2 to 31.5% in the quarter. As a result the profit margin for the quarter was 14.7% compared with 14.3% a year ago. Pretax operating earnings rose 16.8% for the quarter and were up 15.6% for the 6 months. In terms of new money investments for the U.S., our new money investment for the quarter was 6.74% reflecting higher interest rates compared with 6.21% a year ago.

The yield on the portfolio at the end of June was 748 which is down 4 basis points from the first quarter and 31 basis lower than a year ago. Turning to some other items for the quarter we did repurchase 1.3 million shares in the quarter at an average rate - - or an average price of $40.04 per share. That brings the total number of purchase shares for the first half of the year to 4.4 million. The debt to total capital ratio was 22.9% at the end of June. ex 115 gains compared with 23.4% a year ago.

Noninsurance interest expense was unchanged at 5 million and parent Company and other expenses were 11 million in the quarter compared with 10 million a year ago. The operating margins improved. Pretax basis the margin rose from 13% to 13.8 and the after tax margin increased to 8.4 to 8.9%. The tax rate on an operating basis was 35.1% versus 35.4 a year ago.

As reported and as you heard, operating earnings per diluted share rose 21.7% to 56 cents per share. That was in line with our consensus estimate. The stronger Yen increased operating earnings by 2 cents per share in the quarter and excluding the Yen's impact operating earnings were up 17.4% on a per share basis for both the quarter and the 6 months. Finally let me comment on the outlook for the balance of the year and the full year.

Our objective for 2004 is basically generate $2.21 in operating earnings per diluted share excluding the impact of the Yen. You'll recall that last year the Yen averaged 115.95 to the dollar. If we achieve that target and the Yen remains at a level of about 110 for the balance of the year, we would expect that to translate into reported earnings per share of about $2.27 for the full year. The Yen spotlight is right now is about 111. The current first call estimate is $2.37.

Under the scenario I just discussed, we would expect third quarter operating earnings per share to be about 56 cents for the third quarter. And as you heard our target for both the 2005 and 2006 is to increase operating earnings per diluted share 15% excluding the impact of the Yen. That concludes our formal comments this morning. We'll stop the call right at 10:00 so that leaves us about a half an hour for questions so Christine if you could start the polling please.

Thank you, sir. At this time I would like to begin the formal question and answer session of the conference. If you would like to ask a question please press star then 1. You will be prompted to record your first and last name. To withdraw your question you may press star then 2. Once again if you would like to ask a question please press star then 1. The first question comes from Mr. Nigel Dally with Morgan Stanley. Sir you may ask your question.

Great, thank you and good morning. 2 questions first on Dai-ichi sales there were clearly disappointing this quarter. What can be done to turn this around? And if there isn't anything, is it time to start thinking about bringing either a new life or property casualty partner to distribute some of the policies? Second, with earnings guidance, excluding this recent write down this quarter seems earnings are running at a rate above your guidance should we expect margins in Japan to remain strong in the second half of the year? And if so, doesn't that imply EPS will grow at a rate well ahead of you guys?

I also answer the first one Nigel, this is Dan and then I'll have Chris follow up with the second one. We just renegotiated with Dai-ichi Mutual. They just changed CEOs. Mr. [Marita] has retired and we have negotiated with the new people. We are very happy with our negotiations. We think the level of production will pick up. But when a new person goes into power, their interest at the moment is to make sure that the - - their existing product line at their company looks good. So they were pushing their own products. So I would I believe that next year for sure, you'll see a stabilized number if not possibly a little tick upwards. But at this point we've still got to watch it. So - - but I am - - and in regard to another alliance, we're always looking for that and checking into it. We just haven't been able to find anything that met our criteria to where there wasn't too much of a conflict with channels in terms of the nonlife side. But I am convinced that Dai-ichi will stabilize and will be in good shape. The new President is the one that originally helped negotiate this contract, so he's very pro AFLAC and what's going on. So I'm encouraged by that as well. Kriss.

We expect the margins in Japan and the U.S., in fact will stay strong during the second half of the year. With regard to the - - you know, the IT write-off we took the 2.8 billion Yen in the second quarter, keep in mind that that was somewhat offset by reduced spending once we took time out on our systems development project. So some of our expenses were under budget and that offset some of that write-off. And in addition in the second half we're going to spend more money on marketing promotions than we originally planned. So I think that will eat up some of the expense savings and prevent us from significantly overearning versus our targets.

I think it's reasonable to say we've been very conservative over the years.

Right. Thanks a lot.

The next question comes from Mr. David Lewis with Sun Trust Robinson Humphrey. Sir you may ask your question.

Thank you. Dan or Atsumi just on the Japan sales can you give us any thoughts on why you're confident that medical products really aren't maturing. And two back to Dai-ichi, Dan, you indicated that you expected it to stabilize next year. Do you anticipate in the second half that Dai-ichi sales will still be down roughly 30% and then restabilize kind of off the new level in '05?

I'm going to let Atsumi take that.

This is this is Atsumi. Let me answer to your 2 questions. First we don't think that medical insurance market of Japan is maturing. Because of when we consider about the decrease of the government insurance and also the aging population. And besides that, there are more and more needs from consumer coming from our market research. And we are not planning to pike in this medical insurance market. We only our current product. We are now aggressively implementing that development of new product in this medical market. 1. is as I mentioned in my previous speech, we will launch new product from August. And also from the beginning of next year we are planning to launch new version of EVER to improved version and this - - how to say - - multiplication of our medical insurance portfolio will revitalize our medical insurance growth rate. And regarding Dai-ichi, my projection for the latter half of the year and taking about minus 30% growth rate very similar to this second quarter. And that will make the total year of Dai-ichi cancelled sales about minus 25%. And as Dan mentioned, we have just agreed with some target numbers with Dai-ichi's top management. And especially Mr. [Fidu] the new President was head of Dai-ichi's team that negotiated with us. So from next year, we believe this minus 25% is the bottom number and this will start to increase.

Thank you.

The next question comes from Mr. Jimmy [Buler] with J.P. Morgan. Sir, you may ask your question.

Hi, Dan. I have a question on your Japan sales. Your new guidance is 3%-7% growth in 2004. If I look back the last 3 - 4 years, the second half sales have been - - for you to have 3% second half sales would have to be 64 billion Yen 6% higher than the first half. Historically sale in the second half have been roughly equal to the first half sales. So just - - my question is what sort of confidence do you have in the new numbers? And I know you outlined the initiatives at the beginning of the call. But what are some of the things that are going to make your sales go up so much in the second half versus where they were in the first half?

Well, first of all, I would just say that we've never had these new products that are going to be so specific. And we're going to focus in on this large amount of existing policyholders to add the riders to. So that within itself. Now, I also want to make sure that you understand that the majority of these things are going to take place in the fourth quarter. Our sales probably for the third quarter are going to be in the lower single digits. I expect the second of the fourth quarter to be in the higher single digits to the lower double digits. So I want to make sure y'all understand that

Okay.

In going into this. I think it's all the things that Atsumi has talked about. We're putting incentives in financially because we're doing so well, we have these additional funds available that we can incentivize the agent to do mail outs that we've never done before. We can - - we know that when we ran the "Number 1" campaign in terms of policies in force back in the second quarter of last year, we had a real surge in business. By running that we're "Number 1 in Medical Insurance", we think it also will create a surge in business. So it's the additional funds that we're putting into it that we haven't done before. And that's strictly because the operations are doing so well and we continue to offer the best product at the best price. And that's what's driving everything here.

Okay. Thank you. And then to follow up just on the U.S. sales, they were in the second quarter they were a little bit lower than where I was expecting them to be. And I again had mentioned that it was partly because of lower sales during the power rig. Is there anything else that's driving weaker sales or that drove weaker sales in the second quarter in the U.S.?

You know, I wish that sales had been stronger in the second quarter too, but the fact is, March was better than I expected. And June was lower than I expected. And if you'd averaged it out, the - - you know, you're worried about trends and so do I. But I think the trend is that this is a transitional year. And I expect to have 10 to 12 and I expect to do better the next year. That's the reason I've said all along given some breathing room so 10 to 12, but the market's there. And I won't accept anything less than that. It is an enormous market. We don't have any competition to speak of. I mean, we just don't have any issues. So it's just - - we've got to get back to recruiting now because we've got the infrastructure in place with the management team, and Brad's working on that, and I talk to him every day. Every day I talk to him and sometimes 2 times a day. Any time I think about him I call him. And so I'm on top of it, and I'm going to continue to be as I am with at Atsumi who can tell you that I'm constantly wanting to know what's happening and we're monitoring it as best we can. But I am convinced that the U.S. operation is fine.

Okay. Thank you.

The next question comes from Mr. Jason Zucker with Fox-Pitt, Kelton. Sir, you may ask your question.

Great. Thank you and good morning. One on Japan and one on the U.S. in Japan Atsumi maybe you can comment on this. The individual agency growth has been very strong over 20% over the last few quarters. And I was wondering why that number doesn't translate better into Japan sales growth? In the U.S., Dan, I was hoping you could comment a little more on recruitment and perhaps talk about anticipation for a second half sales growth number. And then in particular, you had mentioned that the territory directors' compensation was modified. Could you be a little bit more specific in terms of what their bonus targets are going to be?

All right. I'll start with mine and Atsumi's be translated for a second.

Thank you.

I expect third quarter and fourth quarter to be about the same. I expect to be in the 10% to 12% range in those quarters. I don't - - whereas in Japan I expect it to get stronger. I expect the U.S. to be around the 10% or without any trouble.

For recruiting right?

I'm sorry?

I'm sorry. For recruiting right

No for sales. For overall sales. For recruiting we know we're up 6% for the 3 weeks. I would hope that recruiting would improve. 30% of their bonus is now based on recruiting. And it kicks in at 7%. So they have to have 7% recruiting before they get anything. And then it goes up from there at a dramatic rate. So I would look for recruiting to move - - to be above 7 and I would hope that it would be even higher than that. It's like anything else. It takes a little while to get the engines going again and then running at the level we want. But I would be very disappointed below 7% increase in recruiting for the third quarter. And then I hope maybe it will do a little better than that in the fourth. And then I'd like to see us run and Brad would tell you the same thing run 10% every year at LEASE.

And then, Dan, is there any seasonality to those numbers so you did about 6,000 recruits in the second quarter? Is it simple enough to assume that you can continue at that pace for the next 2 quarters?

Yeah I think so. I don't have the specifics on that and we may have to follow up, but you know. I can go back to what I said is I still think we ought to do 7 in the third and I want to do a little better than that in the fourth quarter. And what those compare to I don't have them in front of me. I'm sorry.

Hello? This is Atsumi and let me answer to your first question. I understand that you asked me why even though individual agents are increasing that didn't contribute to our sales in the first half of the year.

Yes.

And the answer for that is that if I look back at the first half of the year, the 2 major negative impacts was the increase of Dai-ichi cancelled sales which was about minus 80% for the first half of the year. And also the decrease of the MAX conversion which had minus 30% for the first half of the year. And these 2 issues does not relate at all with the new agencies. Because MAX conversion basically is a sales coming from current agencies who has a - - certain number of policies. And this - - since this MAX conversion is gradually going down, the new sales - - new agency increase does not contribute to stop this MAX conversion decline. For that latter half of the year, the impact of this MAX conversion comparison will become smaller because if I look at last year's number, about 60% of MAX conversion came in the first half of the year, and 40% from the second half of the year. So this MAX conversion negative effect will be smaller in the second half of the year. And we are now strengthening the trending of the new agencies. So we believe compared to the first half of the year, the new agency- - new individual agents increase will start contributing to the total AP.

Jason, I think what you're looking for is our individual agents overall sales in the second quarter was up 6% whereas our corporate agency was down 7%.

Okay. Great.

So the agencies are in fact impacting us and that's basically what Atsumi's saying and it will continue to. So the recruiting is making a difference.

Great. Thanks.

All right.

The next question comes from Ms. Liz Werner with Sandler O'Neil. Ma'am, you may ask your question.

Good morning. I just wanted to get more insight into your outlook for the persistency and benefit ratios in Japan. And specifically if persistency looks like it's getting a little bit better in the older block of business and maybe you can talk about that a little bit more, wouldn't that imply, then, that the benefit ratios don't go down quite as fast as maybe in this quarter because the - - if the lower benefit ratios correlate to the new business - - I guess I'm just trying to sort out how quickly benefit ratios can continue to decline versus hopefully at least a maintained persistency rate at this 94%?

Well, I'll say that the persistency improvement in the second quarter was pretty much across the board in terms of products. I don't really know whether it was older policies versus younger policies. Woe don't have that sort of analysis prepared yet on the second quarter numbers. But I did know that for example, cash surrender values were paid out were 4 billion Yen below planned. Which indicates - - I mean, that's the strongest evidence of improved persistency. It's not necessarily true that the benefit ratio decline would slow down because of improved persistency on the whole block. I guess it would marginally because a big part of the decline of benefit ratio is due to the mix of business change and the lower benefit ratio on the new business. So yeah, it might slows down some but I don't think it's going to be that perceptible, Liz.

Okay so the rate of decline in the quarter is something that would be - - a normal rate of decline in future quarters?

Well, - - oh, yeah. As far as the benefit ratio. I was thinking about the improvement in the persistency but you're right. I think - - actually it went down about a point and then it tends to stabilize throughout the calendar year. So the benefit ratio we saw in the second quarter is probably about what it's going to be in the third and the fourth.

All right. Thanks very much.

Okay.

The next question comes from Mr. Andrew Kligerman with UBS Securities. Sir you may ask your question.

Yes. Thank you. I have 2 questions. One, with respect to sales in Japan, last quarter I sensed a great deal of optimism. In fact, I went and checked a question that I asked on the transcript. And my sense from what I read in the transcript was that sales would be up in Japan and maybe even more than 5% in line with your original annualized goal. So the question to you is what surprised you in Japan this quarter? What kind of caught you off guard that you didn't expect? And then the second question is that the average monthly producing agent count decreased to 17,000 in the U.S. And that's down from 18.5 thousand in the first quarter. What -- what was going on there?

Andrew this is Ken. Let me - - I'm going to make a comment and then turn it over to Atsumi on your first question. But we did tell to the best of our ability that in the second quarter we expected a - - an increase at best like we had in the first quarter which was 4.7%. You know, we'd said all along we expected second half growth to be stronger than first half. We reiterated that at the analyst meeting. And I think there's several people out there that expected relatively weak sales in Japan. No one expected our sales included to have a down quarter. We did expect it to be up but we never expected it to be up over 5%.

Okay.

But let me turn it over to at Atsumi and he can give a little more color on that.

This is at Atsumi. One thing that has not been my expectation was the more than expected decline of Dai-ichi cancelled sales. In the second quarter it had declined about 30% compared to the first quarter it was about down 10%. And this was more than my expectations.

And there was a second question.

The question Andrew about the monthly producing agents.

Yeah, could you talk about the monthly producing agents?

Yeah, they were down sequentially but sales were down sequentially.

And they usually tie together

They're going to move kind of in the same direction because the monthly average producers and sales are kind of coincidental indicators.

That's the reason Andrew we've got to have recruiting backup in the third and fourth quarter and that's why we changed the bonuses with the territory directors focus in on this 30%. And if there's anything I've learned in this Company is put the money where you want it and the numbers will come. And we've put them there. And I think you're going to see it reflected in the third and fourth quarter which with the recruiting comes I'll tell you those other numbers will go up with it.

Thanks very much.

The next question comes from Mr. Mark Lane with William Blair & Company. Sir, you may ask your question.

Good morning. My questions are all directed at Japan's sales. On EVER 30% growth in the first quarter 12% growth in the second quarter, was that in line with your expectations? And was there any impact by looking at the second half in trying to develop some sales promotions et cetera et cetera? Does that impact the growth rate at least temporarily in the second quarter?

Atsumi? This is an answer by the way folks. Just hold on a second for the translation. All right. Atsumi you got it?

Sorry for the wait. To keep you waiting.

That's okay.

Yes. Because we had a quite a successful number of agency recruiting in the first half of the year and since we are strengthening the training of the newly hired agency from this January, we are sure that the - - we are quite confident that this will generate a positive effect for the second half of the year.

So the second quarter was maybe temporarily depressed is what you're saying?

He expects better sales growth of EVER in the second half of the year.

That's your real question right Mark?

Right. What about the product that was introduced in February that had twice the benefits of EVER? You mentioned that additional --

I think that's going from the 5,000 Yen to 10,000 and the answer is it has picked up our sales in terms, but it nowhere near what the potential is. I can't remember what the number is.

10,000 Yen now makes up about 20% of sales but we think we can increase it to even a higher percentage of total EVER sales

We had started a campaign for the 10,000 Yen for EVER and at the beginning of the year, about 14% of the total EVER sales was sold with 10,000 Yen hospitalization benefits and the rest was 5,000 Yen. And we had a special programs to push this 10,000 Yen from March. And gradually effective coming up and we believe the major - - major results would have come in the second half of the year. And at the end of the year, we believe --- we aim to increase this 10 ,000 Yen percentage from current 20% to 23%, 25%. And that will again, push up the AP of EVER sales.

And Mark, I've told him I want to see it next year in 50% range. I don't know if we're going to get there but I think that research shows it's there and I think we in marketing have got to do a better job of getting that number up so I'm trying to get it to 50.

Okay, so you said Dan, you said you'd be disappointed with the U.S. not being stronger sales growth '05 versus '04. But with conversion premiums leveling, Dai-ichi stabilizing the 2 new products coming out in August, the promotion of the EVER product would double the benefits you know et cetera et cetera continued distribution expansion why wouldn't sales growth also accelerate in Japan in 2005?

Well, I certainly hope that 2005 we'll be in the 5%to 10% range. So I don't know where our number will finally come out. But that's what we said our projection is and of course the other thing is the banking and whether or not it deregulates and what happens there. We think that has a lot of potential for us too. But I certainly expect - - I think it's reasonable to say that I'm going to expect better numbers next year in new sales than this year but how big those numbers I'm not willing to commit to at this point.

Okay. Thank you.

The next question comes from Mr. Ed [Sehar] with Merrill Lynch. Sir, you may ask your question.

Thank you, good morning. My question is about U.S. sales in the second half of the year. Dan, you said that you thought that the growth rate would be similar in the third and fourth quarter. And I guess the question is given that the recruiting was down this quarter, why would you think that the third quarter sales would be as strong as you're suggesting? Why wouldn't the third quarter continue to be a little bit more challenged?

Well, we're going against a weak quarter. We only had a 1% increase in the third quarter of last year. That's one reason. And the other reason is, is that you know, I just think that my Director of Marketing who hadn't even been in charge a year yet gets the picture and he has always been driven by recruiting and I think that's going to reflect the numbers. I've just got confidence in him and believe they'll get it. And he's not going to put up with anything less. You know, if this doesn't work he'll overhaul some more changes. But I just - - you know, you just get a gut feel on something and we are on target year to date and I just believe we'll make it. Now Ed, there's no guarantee in any of this business. But if I'm a betting man I'm going to bet we're going to do it. And I bet strongly because I just think we'll come in that 10% to 12% but it is a guess. It's a - - you know, calculated guess but it is a guess.

Okay. Thank you very much.

The next question --

I hope you heard that Brad.

The next question comes from Ms. Vanessa Wilson with Deutsche Bank. Ma'am, you may ask your question.

Thank you. Good morning. You had the earnings target of 17% growth this year 15 next year and 15 the following year. Where do sales level out that the earnings would be at risk in either Japan or the U.S.?

Well, we said at the FAB meeting in May that we had stress tested the AFLAC Japan projections at a compound growth in sales of 5% over that 3 year period. I'm not saying earnings are in jeopardy below that point. But you know, I've always said we've got a significant number of offsetting factors in our ability to make the earnings. And certainly encouraged us that persistency is better in Japan and investment yields are up in Japan. So the number on sales may be a little lower than 5. But 5 was the report I gave in May and I'm going to stick with that.

And that was based on we were up almost 12 last year. So we're running ahead the last year a little behind this year.

So it's a 1 year lag so the '03 sales affect the '04 earnings

Yeah. That's generally true. We don't get much contribution to earnings from the business in the year it's written because of nondeferrable acquisition costs and things like that. The profits tend to come in, you know, in the year after the business is written.

And then Dan,as I sat back and listened to what all of you have talked about on this call and your comments on the U.S. and Japan, it sounds to me like you are very confident that the fix is moving forward in the U.S. and you're comfortable with the market and with your strategies there, but I feel that you're less comfortable with Japan. Is that the case?

Well, no, because I believe in Atsumi's leadership. I believe he understands the market. If you go back to 2001, I never felt like our Marketing Department really had a grasp of what was happening. I really believe that they understand the market, they know how to specifically apply products that meet certain consumers' needs and I believe they're on top of it. We just spent last week in product development where we shut down the entire AFLAC operation in Japan and did nothing but work on new products going forward. They came up with some brilliant ideas that I think will take us into 2005 that will be very positive. But every time I'm around them, the fundamental strategy and understanding that they have of the business gives me great solace in believing that they know what they're doing. Because I've spent 30 years in the U.S., spent 10 years selling myself in the U.S., have a son in the business that calls me every day and tells me what's going on in his sales in the U.S., I just have a little bit more confidence because I've done it so long. But I believe that AFLAC Japan will do well within itself.

Thank you.

Christine, my watch is showing top of the hour, which means we're going to conclude today's call. If anyone else any has additional questions or comments I hope you'll call me at our toll free number or send me an e-mail. We thank you for joining us today. Good-bye.