美國家庭壽險 (AFL) 2004 Q3 法說會逐字稿

Please standby for realtime transcript. Good morning, and thank you for joining AFLAC's third quarter earnings release conference call. All participants will be able to listen only until the question and answer session. Today's call is being recorded at the request of AFLAC. If anyone has none objections please, disconnect at this time. I would like to introduce your host, Mr. Ken Janke, Senior Vice-President of Investor Relations, thank you, sir, you may begin.

Thank you. Good morning, everybody, and welcome to our call. Joining me this morning is Dan Amos, Chairman and Chief Executive Officer. Kriss Cloninger, President and CFO, Aki Kan, Executive Vice-President of U.S. Operations, Joe Smith, Senior Vice-President and Chief Investment Officer, and Allan O'Bryant, President of AFLAC International. Now, before we begin, let me reference our Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 language. I'd like to point out that some of the statements in the conference call are forward-looking within the meaning of federal securities laws although we believe the statements are reasonable, we can give no assurance that they will prove to be accurate because they are perspective in nature.

The actual results could differ materially from those we discuss today. So, please, take time to look at our quarterly report and -- for some of the various risk factors that could materially impact our future results. Now, I'd like to turn this morning's program over to Dan, who will begin with comments about the quarter and the operations in Japan and the United States. Then I'll briefly follow-up with some financial highlights and we'll take questions, Dan?

Thank you, Ken. Good morning and thank you for joining us. I hope you've had a chance to review our third quarter report and press release. And while I know many of you focused on new sales activities in the United States and Japan, I hope you also noticed that we exceeded the primary financial target in the quarter. Operating earnings per diluted share rose 19.1%, excluding currency translation. And revenues from both the U.S. and Japan, were ahead of target for the first nine how months of the year. This should demonstrate to you that new sales need to be put in perspective.

All year long we showed that we have produced strong earnings growth even when new sales have been below our expectations, but let me make it clear. I am very disappointed that we have not had stronger production this year. We are capable of better new sales growth and I expect to see sales improve. Both Brad Jones and Atsushi Yagai are aware of that and they are on the call today to answer your questions. Let me start with AFLAC U.S. Total new annualized premium sales increased 2.7% in the third quarter to 270 million, which was extremely disappointing to me. For the first nine months of the year, total new sales were 843 million or 7.6% higher then a year ago. Even though we believe the rate of new sales growth in the fourth quarter will improve, compared with the the third quarter, we still expect a low to mid-single digit increase for the final quarter of the year.

Therefore, we do not expect to meet our full year's objective of a 10 to 12% increase in new sales, for 2004. And while we expect to see better new sales in 2005, you need to remember that the first quarter will also be tough comparison for us. In looking at the third quarter, let me start with what didn't affect new sales. First, we closely monitored the market and we can rule out competition. Believe me, if competition was an issue, the sales force would let us know. But we have not received any complaints from our sales force, nor have we seen any changes in the competitive environment from either old or new competitors. Second, we have not identified any change in the market that would suggest our products are not as valued as in the past.

And third, penetration is not an issue. I think it's noteworthy that we continue to have strong sales in many states including Georgia, Alabama, Oregon, Virginia, Wisconsin, to name a few. Georgia, one of our largest and most penetrated states, had an 18% increase in the third quarter, and Alabama, was up 15.8%. Because the market does not vary that much from state to state, I'm convinced that our success in several states shows our overall model is sound and that our products are needed by consumers. In looking at an issue that did impact new sales it's likely that the hurricane held back the sales growth a bit.

For example, Florida, our second largest state in terms of new sales, had a 10.9% decrease in the third quarter, compared to 6% growth for the first half of the year. And Alabama posted a 28.2% increase for the first six months, was on track for greater increase in the third quarter, but in September sales, were down 6.2%, due to the hurricane. The impact of the hurricane was isolated and was not the primary reason we did not achieve our double digit sales growth for the quarter. Instead, I believe the sweeping changes we made to our sales management team last year are continuing to hold down recruiting, productivity and therefore, sales. You'll recall that we made more changes in 2003 to our sales management then any time in the 50 year history. As such, I continue to feel the 2004 is a transition year for AFLAC U.S. because of the dramatic buildout of our sales management infrastructure.

From the state to the regional to the district level, we have significantly more sales coordinators then a year ago, and remember that we accomplished those changes through promotions. That means we took a lot of producers out of the field and gave them more management responsibilities. Because many new coordinators are still trying to build their book of business. They can not have adequate time to spend on their managerial duties. As a result, we have not yet remen nished and expanded the pool of producers who were promoted. Although changes we made were more disruptive then we initially thought, they were absolutely necessary for us to better manage and great our expand our sales force in the long run. And I believe that our larger coordinator base will ultimately benefit recruiting in new sales. For several quarters we have discussed the need for accelerating recruiting.

You'll remember that we started a recruiting bonus for the territory directors for the second half of the year, we also created drive-time radio recruiting advertisements that generated a lot of leads in the third quarter. Although we believe those actions were helpful, the real key to improving recruitment is to give the coordinators an adequate amount of time to build their sales team. I want to emphasize our focus is not just recruiting. Rather, we want to do more to help our new sales associates build successful careers with AFLAC. To that end, we are also concentrating heavily on training. In addition to traditional classroom training, we believe our field training program called LEASE, will prove to be an effective means for making our sales force more productive.

LEASE, which is the acronym for Larger Earnings by Acquiring Smaller Employers was designed to help new sales associates get their AFLAC careers off to a quick start by focusing on small pay roll account markets. It's easier for sales associates to contact the decision maker in a small company, compared to a large one. And because smaller businesses usually don't offer rich benefit packages to their employees, they're more likely to understand the need for our products.

I also believe that advertising will continue to play an important role at AFLAC, with brand recognition around 90%, AFLAC is obviously, well known to potential customers. The AFLAC duck ads were designed to improve our name recognition and they have certainly worked. Yet, our continued brand research has revealed that many people want us to further define the AFLAC brand and benefit for partnering with us. That's why we're moving into a brand definition phase.

With this change, we're looking for advertising and communication to do more in growing our new sales. We are currently producing new commercials that will not only feature the AFLAC duck, but will also, clearly define the AFLAC brand message. We are planning to launch the new branding initiative and internal -- with internal audiences in December, and will roll it out to the external audiences shortly thereafter. The initial testing and research has shown that clearly communicating our new brand message can significantly increase the relevancy of our products to consumers which hopefully will translate into increased new sales.

In my opinion, this is the most important change to our advertising campaign since the AFLAC duck was introduced five years ago. While I am irritated with the current year's new sales growth in the United States, I am pleased that persistancy was better then expected. And even though I find this year's new sales results unacceptable I am not discouraged about our future opportunities. I am convinced that continued pressure on healthcare costs, makes this country a perfect market for products we sell. As we discussed before, there are millions of small businesses whose employees can benefit from the products and services we offer.

Furthermore, I believe that the competitive strengths that have led to our number-one market position are still intact. And I also believe that we will see better sales growth in 2005. Let me turn to AFLAC Japan, which had another strong quarter from a financial perspective. As I mentioned, revenues in the end were better then expected. However, I was disappointed with new sales. In the third quarter new sales declined 2.9% to 28.6 billion Yen. For the nine months, total new sales were down 0.4% to 800, I mean to 89.2 billion Yen.

It currently looks like fourth quarter new sales will increase at a low single digit, meaning sales will likely be flat to up, slightly, for the full year. As we discussed in previous quarters, we have been faced with declining Rider Max conversions and lower contributions from Dai-ichi Mutual Life this year. In the third quarter, conversion were down 54% from a year ago from Dai-ichi's production fell 32%. Excluding conversions and sales from Dai-ichi, new sales were up 4.5% for the third quarter, and 5.4% for the nine months.

For those of you who attended or listened to the Tokyo analysts meeting in late September, you will recall our comments about the third quarter. As we expect in new sales in July were down compared to last July. In July of 2003, we conducted a special advertising campaign that promoted the AFLAC becoming the number one insurer in terms of life insurance policies in force. The Success of the campaign resulted in very strong new sales, which create a difficult comparison for the year. Although new sales were up in August, we noted at the analyst' meeting we needed a strong September to achieve the target for the quarter. We actually had a good double digit increase in September, but unfortunately, it was not enough to overcome the drag from July.

One product that benefited September, was a newly revised Rider Wide, as a Rider to the popular cancer policy, Rider Wide provides benefits for heart attack and stroke. To kick off this new product we conducted a campaign targeted at existing policyholders. We sent out 4.3 million direct mailing pieces. But our response rate with the campaign was lower then expect and as a result, the Rider Wide sales were about 1.1 billion or 12% of September's production. While that's a good start for a new Rider, we had anticipated a better response from the campaign. AFLAC Japan continues to be the number one seller of medical insurance in Japan in terms of new policy sales.

Although medical insurance is a competitive market, we have not seen any product that represents a better value to the consumers and according to the independent research, we remain the most prefered company in Japan for medical insurance. In the fourth quarter, we are launching a new advertising campaign to promote our number one position in medical insurance. And we plan on introducing a new medical product after the first of the year, to appeal to different medical buyers who want to buy more than just the basic medical coverage like EVER.

We also continue in our effort at expanding our sales force in Japan. During the third quarter we recruited 830 new agencies, about 660 of which were individual agencies. Individual agencies give us better access to larger number of small businesses in Japan and for the first nine months of 2004, we've recruited more than 3100 agencies. You'll recall that our target is to recruit 4,000 new agencies for 2004. Although we expected to produce greater sales growth in the quarter, we are pleased with other aspects of our business in Japan. Our persistency has improved over the last year and investment yields are higher then we anticipated. As a result, premium income and investment income are both ahead of budget so far this year.

At the same time, the benefit ratio has declined in line with our expectations, leading to margin expansion. As we look ahead, comparisons should be more favorable due to more stable Dai-ichi production and conversion. With an attractive market in so many competitive strengths, we believe we are positioned for better new sales growth next year. Overall, we are confident in achieving our primary financial objective of increasing operating earnings earnings per diluted share by 17% in 2004, before the impact of the currency translation. For 2005 and 2006, our objective is to increase operating earnings by 15%,excluding the impact of the yen. We believe those objectives are reasonable and attainable.

Finally, I know that many of you have been closely following the current investigation by the New York State Attorney General's office. Certainly, the stock market's reaction to the news reports is a reflection of a seriousness of the issues that have been raised. First, let me say, that we have not had any communication with the New York Attorney General's office, or any other regulators concerning this matter. Based on the press reports it appears that a major focus of the investigation is with products where benefits and premiums are negotiated, which is not our business. Our benefits and premium rates are set on a statewide basis, and cannot vary.

AFLAC has a clear company policy requiring compliance with all laws, regulation and ethics that govern our industry. I can assure you we are committed to maintaining the highest degree of integrity on behalf of the customers, employees, the sales force and the shareholders. I'll turn the program back over to Ken. Thank you very much.

Thanks, Dan. Let me just briefly take you to some of the third quarter numbers beginning with AFLAC Japan. Starting with the top line in Yen terms, revenues were up 6.1% for the quarter. 5.8% for the first nine months. As Dan mentioned, persistancy did improve. The annualized ratet for the nine months was 94.5%, compared with 94% a year ago. It was the 94.3% for the first half of the year. In terms of quarterly operating ratios, the benefit ratio was 67.4% in the quarter, which was unchanged from a year ago due to the impact of the stronger Yen on investment income in Japan. With the percentage of premium income, the ratio declined 60 basis points compared with the third quarter of '03. The expense ratio for the quarter declined from 19.9 to 18.4%, as a result, the margin rose from 12.7 to 14.2%.

With the expansion of the margin, pre-tax earnings increased 18.9% for the quarter in Yen, and excluding the impact of the stronger Yen on AFLAC Japan's dollar denominated investment income, pre-tax income were up 21.6% in the quarter. Investment yields were a bit lower then in the second quarter but well above 2003 level. The yield on the 20 year JGB average -- yield averaged 2.24% in the third quarter compared with 1.69% a year ago. The 20 year bond is currently yielding about 2.05%. For the quarter, we invested our cash flow in Yen securities at 2.27%, and including dollars, the blended rate was 343. The portfolio yield was 4.42% at the end of September, which was unchanged from June. But 18 basis points lower then a year ago. Through October 22 , we'd invested or committed to invest about 95% of this year's estimated cash flow at an average yield of 3.17%. That's quite a bit better then our initial plans and our budget of 2.75% for the year. Overall, the credit quality remains very high.

On a consolidated basis, securities rated double B or lower were only 1.9% at the end of the quarter, down from 2.6% at the end of June. In the unrealized losses on below investment grade holdings were $70 million at the end of the quarter, or 1.4% of equity excluding the FAS 115 unrealized gains. Let me comment a bit on AFLAC U.S. Total revenues rose 12.3% for the quarter. And 13.2% for the nine months. The annualized persistency rate for the nine months was 73.8%, compared with 74.3%a year ago, but it was higher then our plan. In looking at the operating ratios for the quarter, the benefit ratio was 54.2, compared compared 53.4% a year ago. The expense ratio improved from 31.1 to 30.7. And the margin was 15.1 compared with 15.5% a year ago.

As a result, pre-tax operating earnings rose 10% for the quarter and 13.6% for the nine months. In terms of U.S. investments, money yield for the quarter was 6.33%, compared with 6.29% a year ago. And the yield on the portfolio at the end of September was 7.45%, down 3 basis points from June, and 18 basis points lower then a year ago. Turning to some other items for the quarter, we did complete our annual profit transfer in the quarter from Japan to the U.S. It amounted to 23.9 billion Yen or 220 million dollars, which was consistent with the expectations for this year's transfer. We've had some calls from some of you that have asked about the impact of the recently signed tax legislation on profit transfers. Because of the branch structure of AFLAC Japan the tax law has no impact on our profit transfer -- on the profit transfers from our insurance operations.

However, as a result of the new law, we will no longer be a permanent AMT taxpayer, and as a result, will have a release of approximately $149 million in the fourth quarter of valuation allowances associated with certain deferred tax assets. We'll recognize that gain as lower income tax expense, in 2004 only, and as a non-recurring item it will not be including in operating earnings. We did purchase 2.5 million shares in the quarter. At an average price of $39.49 per share. That brings the total number of shares purchased for the first nine months to 6.9 million shares. Debt to total capital was 21.9% at the end of the third quarter, compared with 23.7% a year ago.

Non-insurance interest expense was unchanged at $5 million, parent company and other expenses were $13 million in the third quarter compared with $10 million a year ago. Because of the improvement in Japan's margin, the overall margins expanded. Pre-tax margin rose from 12.9 to 13.9%. The after-tax margin increased from 8.3 to 9%. On an operating basis the tax rate was 35.1%, versus 35.3% a year ago. As we reported, operating earnings per diluted share rose 23.4% to 58 cents which was slightly better then consensus. The stronger yen increased the operating earnings by 2 cents a share in the quarter and excluding the Yen's impact, as Dan mentioned, operating earnings-per-share increased 19.1% for the quarter. They were up 18% for the nine months.

In terms of the outlook for the balance of the year, you'll recall that our objective for this year is to produce $2.21 in operating earnings-per-share excluding the impact of the Yen. You'll recall also that the yen averaged 115.95 yen to the dollar in 2003.

As we've noted in our quarterly release, we expect to spend more money on marketing expenses in the fourth quarter, and believe fourth quarter operating earnings will be 57 cents per diluted share before the effect of the yen. That would result in us achieving our objective of a 17% increase in operating earnings-per-share for the year, and factoring in a Yen assumption of 110 to the dollar in the fourth quarter, we could expect purported operating earnings per share to be about 56 cents, That would put the full year earnings at $2.27 per share, as of last night, the first call estimate was 229.

And as you heard, our target for 2004, and 2006, is to increase operating earnings earnings per diluted share by 15% excluding the impact of the Yen. We now would be happy to take questions I would like to ask all of you since I'm sure there will be a lot of questions, limit questions to one so that everyone has a chance to ask a question. We'd now be happy to take questions. I would like to ask all of you since I'm sure there'll be a lot of questions, to please leave your -- limit questions to one so that everyone has a chance to ask a question. Hope, we'll be happy to take the questions now.

Okay. At this time, if you could like to ask a question, press star 1 on your touch tone phone. All questions will be taken in the order they are received. You will be announced by name when we are ready for your question. Again, star one to ask a question. One moment. David Lewis, you may ask your question and state your company name.

David Lewis, SunTrust operator, thank you. What is the persistancy outlook for both Japan and the U.S. or should we anticipate any improvement, best your guess in 2005? And based on that question, how weak could sales be in 2005, before it would have a material impact on '06 earnings earnings outlook?

Well, this is Kriss. I have a bit of a cold today, so bear with me. We've seen in Japan, some modest persistancy improvement throughout 2004. We normally, you know, do an annual plan for revenues and even though sales are below expectations, revenues are ahead of expectations in total. And the balancing item is persistancy. It appears that the improvement in persistancy is an industry-wide phenomenon in Japan as evidenced by some national statistics that say that amount of cash rendered values paid are down and the overall rate of policy cancellation is down so, we appear to be benefiting from that national trend. As far as the impact on '05 and '06, I mentioned that the analysts meeting in May, that we have stress tested our projections at 5% sales increases in Japan.

And no increases in persistancy and we wouldn't have any problem making our earnings estimate under that scenario. You know, with some improvement in persistancy and considering that renewal premiums are 90% of our premium income in Japan and first year is only 10% of our total premium income in Japan, a modest improvement in persistancy offsets a more dramatic decline in new sales in Japan. So, that ought to give you a flavor for what's going on. In the U.S, persistency is -- is -- you know there's some indications that persistency is improving.

But in my judgment, we from an actuarial perspective, look the at it by policy type and policy year and we see a mixed bag some improvement to certain products. Some -- you know flat to slightly down in other products and the aggregate measures seem to be improving and I'll say that, but I'm not counting on persistency improvements in the U.S. to make our numbers.

Thank you.

The next question is from Jason Zucker, you may ask your question, and please state your company name.

Great, Jason Zucker at Fox-Pitt Kelton, good morning. I guess my one question i'm going to center on Japan. If I look back to my notes from second quarter, we had new products coming in August. We had some stepped up advertising in Japan. We had a sales contest running through the end of the year. Distribution is growing at a good clip, 18 % this quarter and a little bit better. So the question I have is, when we look into '05 and fourth quarter in '05, I mean, what else -- what other levers are there that you can pull out or what gives you the confidence that the sales in '05 can really come through when we've already got all this in the pipeline and sales are still disappointing?

Jason, I'd ask both directors of marketing to be on the telephone call today. Our sales managers to talk about it. So, Atsushi's on the line. I'll take any question you don't feel like was answered due to translation or something like that. But, Atsushi, did you understand that question?

You're asking about sales for 05, for next year? Correct.

Why are you confident you can make that?

Atsushi Yagai the biggest reason that we had to lower our projection for this year, the reason is to slow down of EVER sales -- and when we see the market as I mentioned in our last Tokyo analyst meeting, there are a different consumers demand segment emerging. Which is some people are now starting to prefer more richer benefits, medical products, even if they pay a higher premium. And currently, we only have around -- one single pilar product which is EVER.

There is a simple, very low premium product. And since there are different demands emerging in the market, we strongly feel that we need to launch another a new, more rich benefit product, so we can touch the new customers, we can not touch with existing EVER and we are planning to launch this new medical product from next January. And this product is a not a Rider. This is a stand-alone new medical product which I mean, it -- the impacts of new product launch is much bigger then the new product launch we did from this in August, which was Rider.

Let me say one other thing. If there was a mistake made, it was that we didn't introduce this product earlier. Unfortunately, things move very slow in Japan and it's hard to move things up. But, in retrospect, I which we had this new product ready for the fourth quarter versus January 1. But, I think that pretty much answers the question.

This -- this is Aki. Let me assist Atsushi a little bit. I just received this, this morning, the survey release that was done by my boss communication -- independent research firm in Japan, the situation right now in Japanese market is that there are a lot of companies getting into this third sector of field, and obviously, a lot of products are there, which are confusing a lot of consumers. But, in that situation, the survey says who is the most prefered company or product in terms of cancer life and at the same time, the separate products, the most prefered medical insurance.

And as you know, AFLAC has been a number one in these two categories. And we are, at this point. But, the difference that I received this morning is, while everybody else is, I mean from the second company of down below, everyone is going down in terms of the points that they are receiving. Only AFLAC is -- is going up. So, that's a very favorable thing that we are receiving right now. And that's one thing that we can make ourselves very assured that the market is getting better next year.

Let me follow-up on one point from that. And that is, the distribution has been growing fairly quickly in Japan. And I guess I'm curious as to why it has hadn't correlated with higher sales growth.

Atsushi?

We -- it is true that we are increasing our recruiting numbers. Dan mentioned we are targeting 4,000 agencies this year, which we believe we can achieve that. But, as Aki mentioned, currently, most of the life insurance companies and long life insurance companies are entering the third sector markets and ... For example, life insurance companies in Tokyo, has about 300,000 agencies, no life insurance companies has about 300,000 agencies.

And before they were focusing on the first sector product and the second sector product sales, but now, those sales forces are also starting to push third sector products. So, even though if we are increasing our agencies the [inaudible] is a big telling for us. And that is why we are planning to increase recruiting targets for next year.

Atsushi, let me make one more comment on that because, those -- the field forces in the life - traditional life industry and the non-life industry, they have been there.

Yes, that's right

And they're number of people are kind of flattened out for the last few years. But for our cases over here, our corporate affiliated market is getting smaller. Because of the huge social changes going on, more and more people want to buy their financial products not through their companies, but, through the -- their individual contacts. That's why we have been increasing our individual agencies in our in our market.

So, we are getting into the right direction and this -- we are, also, trying to revamp our corporate market, but, that's what's happening. That's why the entire -- our agency forces do not really look like we're getting stronger. But we will.

Jason, one last comment I'll make is that, as you know, over 90% of our business used to come from the corporate agency. We saw in the crystal ball that we needed to move more toward individual agencies and today, less then 50% of our business comes from corporate agencies. It's actually, I think, 34%, so, we're aware of that and corporate agencies has actually drug down our growth rate. It slowed it -- it slowed it significantly. And so, we've had to have these things to offset it. So I think that pretty much answers it.

Your next question is from Andrew Kligerman.

Yes. I'm with UBS. My question, Dan, is around the U.S. You mentioned that '04 is a transition year, I was under the impression last year, as well, that that was the transition year. Can you tell me what your challenge is in managing 17 -- roughly, 17,000 producing agencies? Is it just -- is it an elephant that you just can't lift? You know, what are your challenges there that you got to deal with?

Well, first of all, your absolute will you right. I had hoped 2003 would be the transition year and that 2004 we would be back on track. So, I am disappointed in that. Make no doubt about it. I'm going to ask the director of sales to comment on that because he's the one that has to get his hands around what's going on. So, Brad, I'll let you comment on that and I'll follow-up with anything else.

Thank you, Dan. Andrew, yeah, the one thing you need to understand, also, is that the majority of the changes that were made last year were near the end of last year, not the beginning of last year, so we generally see, you know, a cycle that takes a while for everybody to understand their position and their roles and to elevate themselves into those roles.

We're seeing some results of the changes that we have made that have been positive. We've seen some of the changes that we made maybe were not positive. We'll continue to valuate those changes that were made. At the same time we will make measura -- measurable inc -- measureable changes as we go along, as we evaluate the result that everybody is happening, also, too, I would like to mention, that we have made two new territory director promotions this past quarter.

Which we feel is the right move for our organization. So, we definitely feel that the moves that we have made at the end of last year are the benefits for our long term growth and we fully expect to see that long term growth with the changes that we have made.

Andrew, I would also say that, in getting our hands around the number of producers, we did need more management in place, and so, expanding this management base has taken us a while. And what you've really seen is that, we had a group that retired and then, we also expanded the amount of sales coordinators. When we did that, these agents that were producing for us, took on these new rolls and they're on total commission. There. So they had to still produce some, and then they also had to turn around and try to recruit and train. And it's just taken us longer then we anticipated. But, I think, having more managers in place is the answer to how you're able to have more sales people in the field organization.

And what is your regional and district coordinator? Are your -- are those counts versus last year? Regional coordinators and district coordinators to get a sense of the change?

Andrew, on that, currently our change in the regional sales coordinator is almost 12% change. And our district sales coordinator is a almost 3% change.

How many district people do you have?

How many districts do we have?

The currently, on the district sales coordinators, we have almost 2400.

And then, the regional coordinators are--

A little over 500.

Excellent. Thank you very much.

Sure.

Eric Berg, you may ask your question and state your company name.

Thanks very much. It is Eric Berg from Lehman Brothers. Dan, maybe you want to argue with me that I'm not looking at the right numbers but it seems to me that the continuing operation in Japan with respect to cancer insurance and Rider Max is not getting better, it's getting worse. What -- what we did just to very, very succinctly take you through the analysis, we looked at the trend over time last night, in your cancer sales excluding the impact of Dai-ichi, and in your Max sales excluding the impact of conversions.

It looks like 2002 was lower then 2001s and 2003 was lower then 2002. And we're going still lower from here. So I'd like to know why the cancer business continues to decline in a country that is aging and where you say, the demand should be greater then ever and what you're doing about fixing that problem? After all, cancer and Max combined still represent 40 percent of your sales.

I'll try to answer that, then I'll let Atsushi take up on it. Number one is the demand for medical insurance has been so big, that our sales force has asked for the EVER product. And as we've said many, many times, the agents take the path of least resistance in sales. Because there has been a natural tendency on our part, to fill whatever void was out there or whatever consumers were asking for. I think your point is well taken. And one thing that I'll let Atsushi address is, how we do plan on ramping up our sales of cancer, especially knowing that some high-profile team people in Japan, without calling them by name, have been struck with cancer.

It has a great opportunity so we do feel like the market we have gotten away from to some degree, simply, because of the demand for the other products. The other thing I will say is, that the profit margin on the other products are higher then the cancer. So, that has driven us, also, if you had to ask us whether or not we have one sale of EVER or one sale of cancer, we make more money on EVER, so from our standpoint, at the profit level, it's more conducive for us to sell the EVER product. So, that has driven us -- those two things have driven it.

Saying that, we don't want to lose market share, although we have seen a decline in the number of cancer sales, we've seen no one pick up the difference. The numbers two seller is definitely Dai-ichi Life, and although they have declined to a great degree, where we're seeing our competitive threat is not when they try to compare cancer to cancer.

But cancer to medical. And that's why we had to counter with the EVER and that's also why we're countering with a brand new product to start the year, which will be a new medical. Does that kind of answer it? Then I'll let Atsushi say some stuff.

It does. I'm equally interested in knowing about the specific initiatives you're undertaking to revive the cancer business.

Okay. Atsushi, would you like to comment?

Yes. First of all, as I mentioned, we are still par number one company in the cancer sales in Japan and according to the consumer research, we are always number one for the most prefered cancer insurance company and this rate is the only increase in the company is AFLAC..

And the reason why our traditional cancer sales excluding Dai-ichi, is staggnating, is because currently, in addition to what Dan said, most of the insurance companies are heavily broadcasting medical insurance advertising and doing the sales promotion from medical insurance. And consumers interest or recognition is totally now shifted.

Now they are -- the mind is pulled to medical insurance, and that is why as I mentioned in Tokyo analyst meeting, I -- we are also shifting our advertising budget about 2/3 for the EVER, EVER tv commercial film, and even the rest of the 1/3, we are broadcasting cancer plus Max commercial film. Not only for focusing on cancer but we are making the cancer plus medical Rider Max.

But from next year, even though there is no significant competitive margin yet, we want to revitalize our cancer sales and we are thinking about two things. One is focus our cancer TV commercial more on only cancer, not the medical Rider Max part, but more on stand-alone cancer part, in order to stimulate consumers that cancer insurance is important because it is number one cause of death in Japan.

And second thing, what is -- what we are planning in the near future, is since we haven't renewed our cancer product since we launched from 2001, and I cannot say from when, but there will be in the near future, that we will revise and add on as a benefit to make our cancer product more attractive.

This is is Aki again. Let me make one short comment. We're not forgetting cancer -- cancer policies. I mean, that's our -- our original products, we never really forget about that but, last of three years. The medical policies sold in the whole entire insurance industry over there, has doubled up. So, this is a starting point of the new medical insurance industry and everything has the right timing. If we lose this timing we -- we going have a problem in the future. So we have been concentrating on this market.

And I think, Eric, the short answer is, we're going to advertise more. But I want to reiterate, that it isn't coincidental that we were able to all the sudden capture the medical market and become the most prefered medical insurance company in all of Japan. And we just couldn't let that pass by.

Very complete answer, Dan. It helped me a lot, thank you.

Your next question is from Colin Devine. You may ask your question and state your company name.

Colin Devine from Smith Barney. I was wondering, we talked about Japan and specifically address the comments made earlier that now, there are the big large mutuals getting into the third sector. And I guess, the part that I'm having difficulty with, Dan, is I certainly recognize the marginal return that you currently earn in Japan is probably about a 35% ROE.

May be you give us some comfort as to how you can maintain that, against the new competitors who have pricing objectives, well below that. Probably 5%. They'd consider to be acceptable. That has extremely large sales forces that dominate this sector you're trying to move into, which is the non-agency part. How are you going to keep these margins up for or are the best of times behind you?

Well I'm going to let Kriss do that. ButI will tell you that the margins were set by the FAS. Remember that we, in fact, wanted to sell lower profit margins and they wouldn't allow us to do that. That was a requirement that they had. So, from that standpoint, I don't want I don't see that -- that happening. And we've been -- that's been dictated by them. Kriss, I'll let you follow-up on the other one.

Just one second though, Dan, you said numerous times, including on this call, that the third sector products are extremely price competitive. So, what is to stop a Nippon or whoever from competing with you on price now?

Let me -- well, this is Aki Kan. Let me make a comment on that. Again, our business model is very different from other big, traditional life companies and the non-life companies, they have their own core products and they have to spend enough amount of time and money to make their core products going on. So -- but we, at AFLAC, we can still focus on our own third sector of products most of our time and the resource. So, that's a very different competition between those two different -- I mean, three different industries.

Okay. I'm going to let --

Well just one second on that. If we go back --

- the debt ratio and how that is the competitive advantage we've got. Kriss?

Well, Colin, just in response to your comment, I don't know about your sited ROE objectives of 5% as it relates to third sector products in Japan. Dan mentioned the pricing is pretty much controlled by the FSA and it's been my observation that prices have gotten more competitive, but that only means that other companies have had to come down to our prices. Our prices have always been the lowest in the industry. And that's been, primarily, driven by our low operating expense ratios.

We still believe that we provide the best benefits and pay competitive commissions at a return that's highly acceptable to us. Particularly, on the medical policies. Even vis a vie the cancer policies. So, we think we can maintain our margins. Now, what Aki alluded to, is that third sector medical is not the primary business of these other large companies and to the extent they allocate all their expenses, they're not used to producing a high volume of low-premium policies.

Their cost structure is not geared to that and ours is, and that's why we don't think we can field competitive price pressures. Even if we have the competitive price pressures, our margins on the medical business are presently significantly higher then our margins on the cancer business. And if they're forced down over time, then we'll have opportunities to increase our expense efficiencies which we think we can do.

One follow-up then to Aki Kan's comment though. Looking at the slides, and maybe I'm misinterpreting this, that you presented at the analyst day in Japan, the third sector, now represents, I believe, about 50 or a little over 50% of total insurance sales. It is now a meaningful market for the the domestic Japanese life insurance companies. Is it fair to -- do you think it's reasonable to presume the future is really going to be representative of the past given the shrinkage in the overall life insurance market in Japan and the rapid emergence of the third sect?

Well, I don't know what kind of numbers presented before, but the third sector--

That sounds way high.

50% sounds way high.

Maybe on policies not on premium --

It was your slide.

It's relatively a very small market compared to the traditional life and nonlife. And again, this is just a scratch point right now, that is -- that is just about to expand, along with the aging population. I think you might be referring to number of policies in sales or in in force, I don't know. But, in terms of policies, there may be a lot of policies because the average premium size is very, very low, I mean, there's -- for instance, Nippon Life, the average price for the policy is probably, ten times over our size. So, if you look at the policies, and then, the whole picture would look a little bit different.

Hello. This is Atsushi speaking. And I also don't have the exact number at my hand, but, in terms of the monetary term, first sector of market is much bigger then first sector market in my rough guess, about 7% or 75% of the total insurance market in Japan right now. And since that first sector market is so big and this is a core market for the Japanese life insurance mutual companies. They cannot lose this market, in order to maintain their high cost employee sales forces. That is why they know third sector products is growing. But, they cannot totally shift their business and sales forces to the third sector markets which is low price and small business compared to the core business.

Okay, thank you.

Vanessa Wilson, you may ask your question and state your company name.

Vanessa Wilson with Deutsche Bank. Dan, could you walk through maybe a little bit of a case study for us on the U.S. side just so we can understand, maybe, the timing and the cycle that Brad talks about? Last year, and I believe it was early in '03, you made significant change in your state of Texas. In terms of management changes, carving up the number of operations there and could you talk through what you did, what has worked, what hadn't worked and really, how Texas, specifically, is doing right now?

Well, I've got Brad here, I'm going to let him kind of go on that. You know, the one thing I want to stress is that, you know, it's behind what I thought it would be. Make no doubt about that this. That this is something that was unexpected. I had hoped by now it would be back on target so, it has been a slower process and Texas is an example of one that has been slower. There are others that have done very well for us, but, Brad, I'll let you answer those questions.

Thank you, Dan. Yes, Vanessa, the -- in reference to Texas, surely, we thought that they would be further along then they are. But the one thing that we have known or I have known over the years, is that we firmly believe that, yes, we don't have the right people in place. Sometimes you have to be patient and have to give people maybe a little bit longer then others to achieve the objective. We feel confident in the moves that we made in Texas, that they're the right moves. I feel very good about our organization there.

We have other organizations across the country that we made similar moves. That done very well. But, again, I want to emphasize there are certain times that we have to be a little patient with individuals for them to achieve their objectives. But again, I want to emphasize we feel like we made the right moves.

Let me say this. There are four basics -- four states that in year, had they been up 10%, we would be at almost at a 10% increase right now. And that is Illinois, Texas, Florida, and North Carolina. Now, every year, we have four state that is don't do well. The other issue is that normally, we have some states that are up 25, you know, 30%.

I mean, Georgia north's up over 25%. You know, we've got Alabama up over 25%. So we've had states. But, of those -- those are very big states production-wise. And in those cases, one was a hurricane. And the other three have been changes in management that we're having to fill those voids so that's whats created it in those particular ones.

But Dan, and Brad, my specific question was; Go through with us, when you changed the management in Texas. And what has happened there? Because according to my memory, this has been 18 months now. And I want to understand, you know, where -- when did you start with Texas. Because, Brad, you said a lot of the changes were made last last year at the end of the year. I believe Texas was at the very beginning of the year. And I want to understand what do you think that is worked and what hadn't worked?

Sure, Vanessa. I understand. What, we did in Texas is that the state manager that was -- had the bulk of Texas, was promoted to one of our territory directors?

What state?

He was promoted to the southwest territory.

The southwest territory.

And that was done around June, I believe it was.

Yeah.

Okay.

So, he actually went into place in May of last year. And then, he promoted several of his individuals that he had as regional sales coordinators to state sales coordinators in Texas and divided it up. So it's really been about 15 to 16 months or so, that they have been in place. And, again, some of them have started quicker then others. That's why any time we have a new promotion, generally, we're going to look at them over a two-year period of time and continue to evaluate their performance and if they're not performing then we need to make a change again. And get the right people in the right place.

I will say this. Texas came out of the -- in the first -- if I'm not mistaken. I don't have all the break downs, Vanessa, but Texas was up like 20%, in the -- that was in the first quarter. And our territory director, at the, had some health issues he's now well, but, he was out with opened heart surgery. And so it set us back to some degree. So you know, I expect to see improvement going on and Texas was, then, up 20 something percent then like a you know, 6 or 7% and it was the territory with the smallest increase, and, in fact, had a decrease in the third quarter.

I think that they've got the turn in, I think you're going to see improvement, I think and frankly, they've got to. The Southwest has to show improvement in the fourth quarter and in the first quarter. It's part of the game and how it works. There is never been a more successful state sales coordinator then the person that's now in charge of the southwest. So, I have confidence in them, but, you know, you get so long and you've got to show improvement. So it has to turn. Those are -- that's the breakdown by quarter, roughly.

So -

Vanessa, if I may -- this is Brad again. I just want to make a comment also. Is that almost half of the State organizations in Texas for the first three -- for the first three quarters, are above 10% increase for the year. The other half that are not above 10% increase for the year, those were actually adjustments that we made as of 1/1 of this year, so, some of these individuals have only been in place for nine months. And those are those individuals there. So, again, we'll continue to monitor over the next several months.

But there, make no doubt. There is enormous pressure for people to perform and the bonuses are tied to it. You know, we have to have a 7% increase in the fourth quarter in the U.S, for any officer to make a bonus on that. The sales people in the sales department, have got to make a 10% increase in the fourth quarter to make any money. So, that just gives you an idea of what we're working towards. So their bonuses are tied to what, I believe, is in the shareholder's best interest.

Hope, this is Ken. I'm showing we're at 10:00. We can go about ten minutes longer and then we have some other comittments. If we can extend the call a little bit, assuming there's more questions in the queue, we'd be happy to take a few more questions.

Okay. Steven Schwartz, you may ask your question and state your company name.

Good morning, Steven Schwartz, Raymond, James. It's a little bit better to be lucky than good. I to ask a quick follow-up to comment by Eric Berg and then I want to ask a real question. First, to Don-- am I figuring this our right -- without -- with -- excluding Dai-ichi, cancer sales were flat year-over-year, is that correct?

That's correct.

Okay, I just want to make sure I was figuring that out. And secondly, maybe, Brad, you know, here's, here's -- here's what I'm not getting. All right, the district sales coordinators do the training and as I understand it, there. Also have a book of business, which they have to manage it, of course.

If they got moved up a little bit early and you're are trying to produce themselves and the training isn't going on, although that doesn't quite seem to be the problem, my understanding is that the regional sales coordinators are the guys who do the recruiting, and presumably, they are already -- already successful -- producers? And they've got a successful group of people of production below them already? So, I don't understand why they don't have time to do recruiting.

Steve, that's a good question. The regional sales coordinators primary function is recruiting. Any time you promote somebody to a new position, there is a learning curve. I know, myself, as I went through every level of management with AFLAC through my career, every time I went into a new position, there was a learning curve.

Generally, the first 12 months there is a fairly large learning curve in fully understanding what your responsibilities is or what your responsibilities are, your confidence level, your education level, and that's why I feel very confident that the moves we made, we will start seeing results of those come next year. And the confidence level of these individuals we promoted to regional sales coordinators, will continue to get better. And I feel good that we will see the results that we want to see.

Are you just saying that these guys didn't know how to recruit and that's the whole process in and of itself?

No Ididn't say they didn't know how to recruit. But it's a known fact that the better their confidence becomes, they become stronger and stronger at recruiting.

One other comment about recruiting is, because everyone is on total commission, when they go to that district level, they may not have built up a block of business to where they can afford to just constantly get out and recruit and train and they pick up additional expenses. There's probably an office that's there that all the sudden, they've got to handle with some secretarial costs, and so they're out selling at the same time.

So, I just want to make sure that you get a sense for it. There's no guarantee on our part, there's no support on our part at the company level in terms of when this person gets promoted that all the sudden we're going to pick up part of their expenses. They are totally independent and all the sudden those new costs are automatically added on top of what they're doing.

Your next question is from Sudet Kammath. You may ask your question and state your company name.

Hi, DenisThomas from Sanford Bernstein. Just a question on the U.S. sales again. It seems like you're painting a picture a lot of the challenge is based on people and training and all that. And I just want to understand or make sure that, you know, we're not seeing something bigger here, in terms of perhaps, weakness in the the economy or energy prices or the war or anything like that, that might be influencing people's decision to, you know, to add business?

I don't think so. Because of the way sales are broken out, some states are doing well -- I mean, we've got Massachusetts up 100%, because we just got licensed there to do business in the last few years. I just think it's a matter of -- of us getting back to the fund mens and get these people in these new positions and get them hired and trained.

You know, I want to go back to something that -- and I use this as an analogy, is that when you go to a doctor's office and something's sick, the first thing an Internist does is he rules out what's not wrong. You know is it cancer? Is it whatever? Well in our case, our sales are sick. So, what is is it that's wrong? The obvious question is, is it competition? No, it's not. Believe me our agents would love to complain about that if it really was and it's not. Is it the economy? I don't know get that complaint. We see pockets -- is it penetration? It's not. So then when we rule out what it's not, then you've got to rule out, well what could it be? And it becomes instead of major issues it becomes minor issues but, no matter what, you're still not healthy. So, we believe that these are the issues that are confronting it and we've just got to make it well. So, hopefully, we'll be able to fix that and move forward. But, again, make no doubt, I am disappointed that it's taken over a year now to do that.

Liz Warner, you may ask your question and state your company name. Good morning. It's Liz Warner, Sandlier Oneill

I had a question with respect to your marketing plans and I was wondering if you could put any numbers around marketing expenditures in the U.S. and Japan in the the third versus the the fourth quarter, particularly in light of the fact of you're increasing them in the fourth quarter. And, how do you assess the saturation of marketing, if you will? Is it as simple as the more money you spend the more sales you get? Or is there a saturation point for marketing and advertiseing?

I'll handing the first part of that regarding marketing expenses in the fourth quarter. We do have some room to make additional investments and grow on the top line, both in the U.S. and Japan. Still hit the earnings targets. So, like I said, I don't want to reveal my negotiating position with the marketing department, so, I won't give you specific numbers, but we do have significant amount of room. That being said, we aren't going to spend money on things that Dan and I don't think will be cost effective. I don't want to just throw money at a problem unless I feel like we going to get a good return off of it. So, I'll let somebody else handle the second part of the question regarding market saturation and the like.

This is Atsushi speaking from Japan. Regarding Japan, I'm shifting the the highest portion of advertising budget in the fourth quarter, compared to other three quarter of this year. Because we are implementing medical number one campaign in this fourth quarter, in order to generate momentum and continue that momen -- connect to that momentum through the new product launch waiting in January. And regarding the saturation, it's very difficult to say how much is enough and how much is not enough.

But, what I'm always considering is share of voice in the insurance industry, when the total GRP, that is broadcasted by total life insurance companies, then we need to maintain certain -- certain take of the -- within the total voices. So if the total voices are bigger, we need to invest. But if the total voices are smaller, we need to spend smaller money in order to maintain the same care of voice.

Okay. Thank you very much.

Bill, you may ask your question and state your company name.

Bill Lenal Devine Capital Markets. Can you give me the annual premiums in force at the end of the nine months in Japan? And Yen, billions?

946.8 billion Yen.

946.

Point 8 billion Yen.

Thank you, Ken.

Your welcome.

Michael Goldberg you may ask your question and state your company name.

Thanks, good morning. Dejardin Securities. When I attended your Tokyo presentation, one clear impression that I came away with was that your product there has been undergoing an enrichment process with EVER and the new Riders leading to improved margin. Now my question to you is whether, given this enrichment process, the -- you know, using new annualized premium sales alone, as a yard stick of your progress, is adequate or whether, in addition, you'll also monitoring the value of new business in terms of present value future profit of that new business. And if you do, can you tell us what the growth trend in value of new business has been like in both Japan and the United States? Thanks.

This is Kriss. I'll -- I'll say that the growth in profitability of the business is been enough to cause us to be able to sustain a 15% growth rate in operating earnings earnings on a Yen basis in Japan. I can't give you the exact numbers on percent inquiries and present value profits. Because I don't have it in front of me. But I'll just suffice it to say, that the growth and current profits and future profits is adequate to sustain that growth rate.

Mark Lane, you may ask your question and state your company name?

Mark lane, from William Blair. Just - on Japan, a couple of follow-ups. The Dynamic in the market in 2001 on the cancer side was that the new competitors went after the cancer market very hard and backed off from the market. In the medical market, are you seeing any sort of similar dynamic are are there just so many companies coming at the market right now or? They're seeing it as a bigger market opportunity so they're willing to stick there longer? What do you see sort of the intermediate turn outlook.

This is Atsushi speaking from Japan.

Wait a minute Atsushi.

Look, before we answer that, Hope, let me just say, we're about out of time, that's our last question but we will go ahead and answer it.

Mark, I'm going to let Atsushi comment, too. But, let me just say that there was a spike as I had predicted would happen with cancer insurance it fell off. There is also a spike in medical that comes down. But, the difference is everyone seems to want to try the medical because the consumers are the ones that are really driving this. We always drove the cancer to some degree. But consumers are interested, because of the changes in the co-payments and deductibles constantly being in the press and on TV, that is a -- that is being -- that is resonating with, with Japanese consumers that they've got to fill those voids. Whereas the cancer, they felt like they needed to, in the case of medical, they feel like they've got to. So, Atsushi, you want to make a comment?

Yes, only thing that I want to add to, Dan , is other life insurance companies are still entering -- still present in the medical markets. But, there are not -- I don't see a significant sense from Japanese mutual life insurance companies in the medical insurance market, although, many of them are launching new products in terms of policies -- policies sold volume or in terms of premium competitiveness or in terms of the commission level. There is no significant competititor from mutual life insurance companies.

And mark, one last -- and Mark, one last comment I'll I'll make. Dai-ichi Life's a good example. They really want to use our cancer insurance or whatever, to be a lead-in to get more policyholders so they can ultimately sell them more of the life insurance products. They're -- they've never brought on cancer insurance or whatever, to be the main stay. But they see it as expanding their customer base way. So, I think that's important to note because they just don't see they didn't see the profitability this these products and that's why they've always sold for us. So, we don't see any major change on those horizons.

Thank you.

Okay. Thank you all for joining us today. I hope we answered most of questions, if you have remaining questions, please e-mail me or Robin or call us, we'll be around for the rest of the day. Thank you. This concludes today's conference. Thank you.