美國家庭壽險 (AFL) 2004 Q4 法說會逐字稿

Good evening everybody and welcome. If I can get your attention, we’d like to go ahead and start. We had a little problem with our web cast line, but we’re back up and running. Let me welcome you to our 2004 year end investment presentation. Ands I’d like to start with evening with introductions of the people who are joining me today with AFLAC. Beginning with Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Aki Kan, Chairman of AFLAC International, Paul Amos, EVP, U.S. Operations, Robin Mullins, standing in the back of the room, VP Investor Relations, and if we haven’t met, my name is Ken Janke and I’m SVP, Investor Relations.

Before we start this evening’s program, let me remind you please that some of the statements we will make tonight are forward-looking within meaning of federal securities laws and although we believe the statements are reasonable, let me remind you that they may not prove to be accurate because they are perspective in nature. If you have any questions about things that could affect our future results, please refer to the quarterly report to see the risk factors there. And as you know, the meeting is being web cast. We will have a Q&A session following Dan’s comments and my comments and we’ll have a microphone to pass around for that.

So now I’d like to turn the program over to Dan who will talk about our operations in Japan and the United States and the outlook for 2005. I’ll follow up with some brief numbers and again then we’ll take your questions. Dan?

Thank you, Ken, and thank all of you for joining us this evening. I hope you’ve had a chance to review our fourth quarter report in the press release. 2004 marked the 15th consecutive year and the 60th consecutive quarter that we have achieved our financial objectives. During my tenure as CEO over the past 15 years, our growth rate in operating earnings per share has exceeded 15% annually, excluding the impact of the yen. And I’m proud of AFLAC’s track record of consistently meeting or exceeding those earnings objectives.

I’m also proud of the fact that we produced strong financial results for the quarter and for the year. Operating earnings per share on a diluted basis rose 17.5% excluding the yen, which was ahead of our target for the year. Earnings growth is also influenced by operating expenses, claims trends, investment activities and persistency of our business. And in those areas, 2004 was a very good year for AFLAC.

Although we did not meet our sales objectives for the year, I believe 2004 sales results are not representative of our capacity, the need for our products or the opportunities in Japan and in the United States. I know we can do better and I believe we will in the sales area. Let me begin by talking about AFLAC Japan. First, let me remind you that while we are proud of our U.S. operation, AFLAC Japan continues to be the primary driver of our earnings. And from a financial perspective, AFLAC Japan had a very strong year. Despite weak sales growth, AFLAC Japan’s revenue growth exceeded our budget projections through 2004 due to the improved persistency and that’s really what counts.

AFLAC Japan’s earnings continued, led by improvement on our benefit ratios and effective expense management. As you know, new sales rose 1.1% to 122.5 billion yen for the year which was below our original sales target. But most importantly, our revenues were ahead of target. I’m very pleased with the way we finished the year in new sales. After 2 quarters of sales decline, new sales beat our expectations and rose 5.3% to a record 33 billion yen in the fourth quarter. These positive results have given me more optimism and outlook for 2005.

New sales in the fourth quarter benefited from strong growth in our ordinary life product. Most encouraging in the fourth quarter was the solid improvement in our medical sales. After posting decline of 3.9% in the third quarter, medical sales rose 6.7% in the fourth quarter. You may recall that we launched a new advertisement late in the year that promoted our position as being number one in medical insurance. As you know, AFLAC Japan is the number one seller of medical insurance in the life insurance industry in terms of new policy sales. Our research reveals that 70% of the consumers want to choose the most popular product and we believe the impact of the number one medical campaign can be seen in the solid improvement in medical sales in the fourth quarter of 2004.

Although medical insurance is crowded and competitive market, we have not see any product that represents a better value to the consumer than what we are offering at AFLAC today and we believe that we are the best branded company for medical insurance in Japan. I’m sure many of you are curious about the new medical product that we introduced last month. We develop these new products to appeal to consumers who want to purchase the basic medical coverage and to buy additional amounts. One of the medical policies that we designed is called EVER Half. It reduces the premium by half when the policyholder reaches age 60 or age 65, although the coverage remains the same.

The other new product, EVER Bonus, provides the same benefits as EVER Half, but it includes additional benefits. One of those is a special bonus payment to the policyholder every 10 years that a hospital benefit was not paid for 10 days or more if it was consecutive. Although it’s too early to share our sales data with you, I’m encouraged by the initial reception to out new medical products. We have received positive feedback from our agencies who have said that customers are interested in these new products. And I still think there’s a lot of room for growth in the medical insurance today in Japan.

In addition to our product line, we are continuing our effort to expand our sales in Japan and grow our sales force. During the fourth quarter, we recruited more than 1,000 new agencies, 84% of which are individual agencies. As we discussed, individual agencies give us more access and better access to large numbers of small accounts in Japan. For the year, we recruited more than 4,100 agencies which exceeded our target of 4,000 new agencies for the year. Our goal is to recruit 4,400 in 2005. As you know, sales were held back in 2004 by a sharp decline in sales through Dai-ichi Mutual Life. Dai-ichi sales were down 30.3% in the quarter and 25.2 for the year. As we’ve discussed, we attribute the decline in Dai-ichi’s production to their increased focus on their own product line. As we look ahead, our view for the year hasn’t changed. We expect Rider Max conversions will continue to decline.

Beginning in the second quarter, comparisons for Dai-ichi sales will be more favorable. As a result, we expect to see fairly stable production from Dai-ichi in 2005 compared to 2004 and we’re hopeful that we will see improved sales of our medical product line. Our sales objective for 2005 remains in the 5 to 10% range in terms of increase in yen. Beyond 2005, we remain enthusiastic about the opportunities in the Japanese market. We believe that healthcare costs will continue to rise, and with financially stretched national healthcare and an aging population, consumers’ out of pocket expenses for healthcare will continue to increase. We believe that our products are suited to meet the needs of the environment and our competitive strength will enhance our market leadership position.

Now let me turn to our U.S. Operations. Total new annualized premium sales were flat during the fourth quarter with $343 million and for the year, new sales rose $1.2 billion or 5.1$ higher than the year before. As we have previously discussed, the first quarter of this year represents a tough comparison to 2004 and it’s likely that we will see a sales decline for the first 3 months of the year. Knowing that, we have given current lack of momentum in the United States, I felt it was prudent for our sales to be at a more realistic target of a 3 to 8% growth for 2005. It is still accurate to say that we have not identified any new issues that have caused us to rethink the market or our approach. We have not heard any complaints from our sales force about competition nor have we seen any change in the market that would suggest our products are no longer needed by the consumers.

In fact, new sales in existing accounts were up 15.2% last year which points to the strong need for our product. We don’t see market penetration as an issue. Research conducted in late 2004 shows the percentage of consumers who expressed an urgent need for our product had more than tripled since 2003. At the same time, we had double digit sales growth in several states, including states like New York, Missouri, Alabama and Indiana, just to name a few. If we can produce strong sales results in those states, we can do it elsewhere.

We have a solid sales management infrastructure in place and we will continue to make changes to our field management as needed and we will continue to expand our coordinator base so we can grow our business. I am convinced that our larger coordinator base will ultimately benefit the activities that result in sales. Although new sales were strong at existing account last year, new accounts declined by 9.3% in 2004. The reason for that decline was slower growth of new payroll accounts which we believe was attributed to our recruiting. As a rule, new account growth comes from the newer sales associates. As you know, growth in recruiting has been weak for the last two years, but we still believe that the coordinator expansion will help improve recruiting.

As we’ve discussed before, our regional sales coordinators, they have the primary responsibility for recruiting. And as we expand our regional coordinator base, we will also increase their recruiting capacity. We were encouraged that recruiting picked up in the fourth quarter. Recruiting was up 5.9% which was the best rate of growth since the fourth quarter of 2002. Just as regional sales coordinator growth adds to our recruiting capacity, our district sales coordinator growth increases our training capacity. District has the primary responsibility for field training along with a limited amount of personal production. And while we’ve had strong state and regional sales coordinator growth in 2004, we only had a 0.7 increase in the district coordinator growth last year.

It’s important for us to improve that number. We realize that the combination of recruiting and training is the key to our future growth. Not just recruiting, but recruiting and training. There is no doubt that the expansion of our district coordinator base is an area that we need to focus on more intensely this year. However, we have learned that not all producers make good district sales coordinators. We must cultivate that district base in such a way that we increase the opportunity for promoting only those who are likely to succeed at the district level.

We will do that by creating a larger candidate pool to promote only the most qualified associates to the district level. We have established a national coordinator in training, or CIT, which allows associates to have a trial run at management before being promoted to a district sales coordinator. If it turns out that the coordinator in training is not suited for management, if he or she just needs more time before pursuing a management role, then that person can just simply stay at the associate level.

We will also be rolling out new training and leadership programs for our state and regional sales coordinators this year. In addition to the training of our sales coordinators, we are intensifying our focus on training new associates in terms of training. We remain committed to AFLAC University which offers more than 100 courses to associates, Everything from products, sales tools, technology, to career and personal development. We also believe that LEASE, which we talked about last year which stands for Larger Earnings By Acquiring Smaller Employers, is an effective field training program. LEASE was designed to get new sales associates off to a quick start by focusing their efforts on selling to employees at smaller payroll accounts that often do not have the rich benefit packages that larger employers have. We believe LEASE will help increase the likelihood of early success for new associates and lay the foundation for associates to have long, productive careers with AFLAC.

In addition to these established programs, Paul has already restructured the AFLAC U.S. Training Department. He has brought in successful numbers from the U.S. sales force to lead our training efforts. These field grown trainers, who have had tremendous success and credibility and experience, will be responsible for training the state trainers and the sales management. Our training will be more structured in the future and will be more effective.

Growing our distribution is one aspect of the strategy that we can clearly execute best. However, I am very pleased with the other element of our strategy which is expanding our product line. We have shortened the time that it takes for new products to be developed and taken to the market place. Overall, I believe we have done a good job in staying in touch with the consumers in terms of their wants and needs. By refining existing products and developing new ones based on those needs, we’re been able to maintain our market leadership.

We recently developed Today’s Vision, we call it. A new and truly unique vision care product that address more than just exams and vision correction materials. In fact, there’s no product like it in the market place today. It also provides benefits for eye health. It will be rolled out in the middle of 2005 and we think it should benefit our sales in the second half of the year. We’re also working on a revision to our hospital indemnity plan. We are continuing to work on what we believe will be an effective solution to micro account market, or those accounts with fewer than 5 employees or workers. Micro accounts make up the largest portion of small businesses in the United States, and we believe it’s that market that is truly an untouched market for us. Our approach to this market is to offer our product line on a direct basis with enrollment through Smart App.

In addition to the sales opportunities, we think this direct approach will work well with LEASE as a means for helping new associates build confidence and hone their presentation skills. Overall, we know that tremendous potential exists for AFLAC products. A recent independent survey indicated that we have a penetration in the United States of 7%. That same survey showed that 8% of employees nationwide would buy AFLAC products today if it was offered to them. So that means we can increase the in force premium. We could double it overnight if we could get to those people. That’s why I believe that branding and advertising will play an even more important role in the U.S. business going forward.

Building a successful national advertising presence for AFLAC has always been one of my goals. In the future years as CEO, my goal is to expand beyond name recognition to better define the AFLAC brand. With brand recognition around 90% in the United States, AFLAC is obviously well known to employers and potential customers. The AFLAC duck ads were specifically designed to improve and increase name recognition. That has been accomplished.

In a relatively short period of time, AFLAC has emerged as a household name and the AFLAC duck has truly become a pop icon. Yet our continued brand research has revealed that many people want us to further define the AFLAC brand and the benefit of owning our product. As we move from brand recognition to brand definition, we are looking for our advertising and communications to do more than ever before. Specifically, we are trying to educate potential consumers on how AFLAC policies can benefit their lives.

Our new commercials for 2005 will not only feature the AFLAC duck, but it will also better define the AFLAC brand message. The initial testing and research has shown that clearly communicating our new brand message can significantly increase the relevancy of our products to the consumer. We believe this will further establish AFLAC as a category leader while translating into stronger new sales.

I thought you might find it interesting if I give you a sneak preview of our new commercial that we have not run yet. I’m going to show it two times so where you’ll get it, so bear with me.

[commercial plays]. Hey. Hey. You look relaxed for somebody in your condition. Yeah, because I have AFLAC. What do you mean? Well I’m hurt and miss work, AFLAC gives me cash to help pay bills and health insurance costs. You mean like car payments? Electric bills? The rent? Yeah, even food. [door bell rings]. Chinese is here. Great, I love duck. AFLAC. Ask about it at work.

I think you can see that there’s definitely a message there more than just remembering the name and showing what we actually do. In your packets you have got a story that was run in the New York Times this morning. And it says study ties bankruptcy to medical bills. And I want to just read one little part of it. It says, one person cited in the bankruptcy study, for example, broke a leg, missed a couple of months or work, and then had $13,000 in unpaid medical bills, though his employer paid healthcare medical plan had already paid for most of his care. Now that sounds like an AFLAC commercial you just saw. And I think the point of the article as you read it, is that AFLAC’s products are needed in the healthcare environment and specifically in an employer/employee relationship. And this gives more validity than anything that I’ve seen. In fact this morning, 3 CEOs that I know well I sense that do not have AFLAC, I sent them this article and I said this is why your company ought to put it in right now. And I sent an e-mail to every sales associate in the country with this and told them they need to put it out and send it to people because it explains what will happen. This is a reality check of really what’s happening in the marketplace today.

In looking ahead, though, our view of the U.S. market has not changed. The United States remains a vast and under penetrated market that is well suited for the products as employers and workers alike cope with continually rising healthcare costs, I believe that they will find increasingly that it is to their advantage to buy AFLAC products. Obviously, we’re a much larger company today than we were when we introduced the duck. In fact, sales have more than doubled in the last 5 years. We are confident that the sales outlook and AFLAC’s potential in the U.S. remains broad. Today AFLAC is stronger than it’s ever been from a financial perspective. Our investment portfolio is in excellent shape. We are very comfortable with the reserves on our balance sheet and our capital position. In fact, we estimate that our risk based capital ratio improved from 3.61 in 2003 to 4.2 in 2004.

We’re also generating strong cash flows that we can use to benefit our shareholders. We remain committed to purchasing our shares on a consistent basis. We’ve bought shares in every quarter since initiated our share repurchase program in 1994. In 2004, we purchased 10 million shares bringing the total number of shares purchased to 177 million shares since the program’s inception. We anticipate buying another 10 million shares in 2005. We have also consistently raised our cash dividends. Cash dividends paid per share in 2004 were up 26.7% higher than in 2003. And just this week, the board of directors approved a 15.8% increase in the quarterly cash dividend which marked the 22nd consecutive year of cash dividend increase. But the primary driver of improving shareholder value is strong and consistent growth in our operating earnings.

We have produced strong earnings growth and have consistently achieved our earnings target. As I’ve said, we are proud of the fact that we have achieved our earnings objective of a minimum of a 15% increase annual growth for the last 15 years. That 15 year track record is one of the strongest, if not the strongest records in business today. And I believe we will continue that pattern in the 15% growth and operating earnings per share in both 2005 and in 2006, excluding the impact of currency. I am confident that our ability to achieve our earnings objectives because they reflect the strength of our business and the opportunities for growth in both the U.S. and Japan. Thank you very much and I’ll now turn the program back over to Ken. Ken?

Thank you, Dan. Let me just take a few minutes to run through the financial highlights. I think most of you have found copies of these slides in presentation notes in your kit. Let me start with our Japanese business. You can see we had a very strong increase in pre-tax operating earnings. Obviously this reflects the strengthening of the yen which was a little more than 7$ for 2004 over 2003’s rate. Japan does account for about 74% of pre-tax operating earnings. At least it did in 2004. But to give you a little bit better idea of the growth on a functional currency basis, Japan’s revenues were up 6%. That came on a 6.7% increase in premium income and a 2.3% increase in net investment income.

As Dan mentioned, the persistency of the business improved for the year and that rate was 94.5% versus 94.2% for the prior year. The benefit ratio has continued to improve as it has for several years and as we expected that it would. We did see improvements also in the operating expense ratio, especially in the second half of the year, in part because of the discontinuation of a development of an IT system we were working on. But basically all of these margins, or these ratios, emerged as we had expected or a little bit better throughout the year.

As a result of the margin expansion, we saw very strong growth in pre-tax operating earnings on a yen basis. You may recall that about 30% of Japan’s investment income is denominated in dollars, to get a true picture of Japan’s underlying performance on a neutral currency basis, you have to unwind that effect as well. And when you do that you’ll see that pre-tax earnings were actually up 17.5% on a currency neutral basis for the year.

In terms of our investment activities in Japan, you may recall our comments from last year at this time and throughout the year, that we backed off purchases of BBB securities during the year. They represented a lower portion of new money investments. That’s one of the reasons that the new money yield in yen only was down even though interest rates improved a little bit in 2004. But the blended rate of 313 was higher than our plan. Last year we started off thinking we’d invest at 2.75. Rates improved and we moved that up to about 3% and we did a little bit better than we had.

The quality in the investment portfolio remains very high. On a consolidated basis, below investment based securities are only 1% of total debt securities and the unrealized loss on those securities in only $67 million, which is about 1.3% of equity excluding FAS115 gains. So the quality of the portfolio remains very, very high. Our target amount for investing new money this year is basically 3% as we approach 2005.

Looking at AFLAC U.S., you can see we had 11.5% increase in pre-tax operating earnings. A 12.6% increase in total revenues coming on a 13.1% increase in premium income and a little over 9% increase in investment income. The persistency of the U.S. business is actually fairly stable. We had some product lines that did a little bit better, some that did not. Overall the rate was 73.7% in 2004 versus 74% in 2003. And the ratios also remain fairly stable. Debt ratio was a little bit higher at 54% offset at least in part by a lower expense ratio and as a result, the margin was fairly comparable to what it was in 2003. Again, that resulted in the 11.5% increase in pre-tax earnings.

In terms of U.S. investment activities, the new money yield reflects obviously lower available investment yields for dollar denominated securities. You’ll note at the bottom, and we had a few questions on Monday night after we released earnings, there was a huge jump in invested assets, particularly on the U.S. side of the balance sheet. We do have a securities lending program that’s managed outside and loan securities at the end of the year were $2.8 billion, which is significantly higher than normal. Since that time, most of those positions have been unwound and the balance is actually about $180 million. So we do generate additional investment income by lowering those securities, collecting cash collateral and then investing it in short term instruments. But that did drive down the return on average invested assets to 668. Had we not had those loan securities, the return on average invested assets would have been 722, kind of in line with the trends that we had seen for the last few years.

Looking at some other items - - interest expense fairly stable over 2003. That relates to the $1.4 billion of debt we have on the books, all of which is either yen denominated or has been swapped from dollars into yen, which is why the interest expense is so low. Looking at the debt to total capital ratio at the end of the year, it was 21.7%, excluding FAS115 gains. That compares with 25.6% in 2003, so that’s come down a bit. Our corporate and other expenses rose. We did make an adjustment to un-funded to our pensions plan, an un-funded pension from the fourth quarter. We’ve lowered the discount rate on the plans from 6.5 to 6%. That resulted in an adjustment of $12 million in corporate expenses. Absent anything like that in 2005, we would expect corporate expenses to go back somewhere where they were, perhaps a bit above the 2003 level.

Here you can see pre-tax operating earnings and income tax. The tax rate was stable, it was 35.1% on an operating basis versus 35.3% in 2003. As a result, operating earnings were up 19.9% as reported or 15.9% excluding the effect of currency. As you know, there’s some reconciling items to get you from operating earnings to net earnings, realized investment losses absent the significant loss we had last year on Carmalot were sharply lower, $5 million in 2004 versus $191 million a year ago. We had $13 million in losses related to FAS133 which are basically losses on the swaps for our dollar denominated debt.

We did have one item in the fourth quarter that we talked about after our third quarter conference call and that was the release of evaluation allowance on deferred tax assets that resulted from the passage of the American Job Creation Act in 2004. That was a one time event. And then in addition, we had a very small event in the first quarter where we transferred some pension assets in Japan to the government and realized a $3 million on the transfer. So as a result, we had a significant increase in net earnings last year of about 63%.

Back to operating earnings, we reported $2.30. That was a penny better than the street. It was also a penny better than our target. We had been targeting $2.21 ex currency. We came in at $2.22 and we benefited by $.08 a share due to the franc and the yen in the year which resulted in the $2.30 which was a 17.5% increase excluding the effect of currency. And as you heard from Dan, our outlook and our objectives have not changed at all.

We expect to generate 15% growth in operating earnings per diluted share in both ‘05 and ‘06. And let me give you just a quick glimpse at how 2005 might play out. I’d like to point out to the subhead at the top of the page. We have adopted FAS123R which is related to expensing equity based compensation or stock options and restricted stock. We adopted that effective January 1, 2005 and we will retrospectively adopt. What that means is you go back to the $2.30 that we reported for 2004, had we adopted or included in compensation expense the option related expenses, that would have $2.23 which really represents the starting point in growing the business in ‘05. So starting with $2.23, if you apply a 15% increase, that translates to $2.56, 15% above 2004. That represents our official target for 2005 on a constant currency basis of 108.26 which is what the exchange rate for 2004.

The stock market, the last time I looked, was a little bit less than 104 yen to the dollar so there could be a little pick up from the yen, but it’s obviously very early in the year, but I hope you’ll take this all into consideration when you rework your models to reflect year end numbers and again, our decision to adopt 123 at the start of the year rather than midway through the year. That concludes my brief comments on the financials. I’d like to ask Dan, Kriss, Paul, Aki to come up here and join me for questions. Again, I want to remind you this is web cast and we do have microphones. We’ll take as many questions as we can, but please with until you get the microphone for the benefit of the people listening on the web cast.

You mentioned that on recruiting - - just a question on there whether you are seeing more competition for the recruits that you are targeting and from what companies are you getting that? And second on the rapid growth of HSAs. Does that present an alternative product or is that an opportunity for you as that business grows?

I didn’t get the second part on that.

Second just on HSAs.

Ok, the HSAs. The recruiting numbers - - I think if you really go back, what drove the recruiting numbers was the name recognition. When you go from zero name recognition to 90% name recognition, we had such an influx of people wanting to come to work for us, we were compounding at 25% growth in terms of new recruits. There is - - we don’t run into competition almost anywhere in terms of if we’re recruiting for the person. It’s a matter of just getting them into our business because it’s commission driven verses salary or some type of set up that allows them to get started.

So from day one, they’re living on their own commission. But we’ve seen nothing from any of our people that would suggest that. It’s just a matter of getting to the people. And the numbers ran up so high with the name recognition to 90% through 2002, that’s what really did it more than anything. And so we’re just now beginning to come back and seeing that almost 6% increase in the fourth quarter and hopefully moving forward.

The second part of your question, the HSA - - HSA is much like many things that happen in the market are, an attempt to lower some of the costs of major medical to America. We’ve seen it with HMOs, that was going to be the savior to the rising cost of medical insurance. And now we’re seeing it with HSAs as the next vehicle. Do I think it’s a long term trend that will exist? I personally do not. However, as a person who’s in charge of AFLAC’s strategic U.S. operation, I have to take it seriously and so we are moving into preparing for that.

The revamping of our HIP plan was one. We’re also going to be marketing certain of our plans that we’ll parallel to work with HSAs. We’re just not seeing a lot of HSAs in the market. We’re seeing a lot of talk about it, but we’re not actually seeing them be executed. There are two areas where we’re seeing the most volume of discussions about that. Number one is from independent contractors who can’t get major medical. And that’s our own field force. I mean some of the people who are out there and using an HSA for that particular purpose. The other is the largest insurance companies in America. And again, our bread and butter in the market that we’re focusing on is the small employers. However, we are going to have the products to focus on the HSAs. I think that we’re going to be perfectly set for that market in the future.

Dan, first of all what did the CEOs say in response to your e-mails today?

I don’t know. I wrote them and left. I was on my way, but I promise you I‘ll follow up.

So you’re going to be one of the monthly producers next month?

Well, you know, that’s part of our job. We’re always selling something and so I’m always selling AFLAC. And I also really believe everybody should offer it, so every time I get a chance and I serve on the board with these three particular people of Children’s’ Healthcare in Atlanta. So it gives me chance to put a shot across the bow, so I take it.

My question relates to spending on training. In 2000, you decided to really focus on the duck and you were so efficient in your operations, you could recycle some of the costs into spending on advertising. Are you spending more heavily on training or are you just more focused on training? And don’t you have a real opportunity here to recycle dollars in that direction?

Yes, we are spending more on training. Obviously bringing in 20 plus people into our training department is an increase in capital expenditure, However, we have cut in other areas. When I came in to look at our operation, there were certain things that we were doing that were not operationally efficient and so we’ve been able to balance that to some extent. I believe that the short term cost of adding these people will be greatly outweighed by the long term effect of the growth and so I think it’s a wonderful strategic decision.

I guess the point I was making is I’d like you to spend more. [cross talk]. Thank you.

Hi. The past 2 years you were here, you kind of mentioned that U.S. sales were at an in inflection point. Looking back, what do you think in hindsight you may have missed and why, other than recruiting, is this time going to be different once we get through the difficult times of the first quarter?

Well, I was confident a year and a half ago that we had turned the corner. You learn from your experiences. I will say this. That we had one of the most likeable, loved directors of marketing ever. And any time someone like that leaves, whoever comes into those shoes, it can be very difficult shoes to fill. And that within itself was a challenge to replace that individual and get it going. I think it’s been a lot of small things. Is there any one point that I can go back to and say, other than better training, which is what Paul talked about, and focusing more on recruiting, I think it’s the law of numbers. I think just the enormous increase in the number of recruits during those couple of years, made the compounding tough. But those years are over. We’ve got no excuses for that going forward.

We’ve had 2 easy years so now it’s time for things to take off and I believe they will, but running accompany is like a recipe. If it doesn’t taste tight, you keep changing it a little bit to get it to where it tastes right. Well, the same is true with getting our sales. If it’s not right, you make adjustments here and you make adjustments there till it looks like they’re going to sell the way we want it to sell. And that’s all of our responsibility and what we’re going to work on. And I feel very strongly about the people we have in place and what we’re going to do going forward. And the main thing to me is consumers should drive it more than the company. The products are warranted, the products are needed. I’ve given you those statistics and it’s a matter of us getting to those people and that’s what we’ve just got to do. And we’ve got to have a passion to do it and we’ve got to work toward it.

The last comment I’ll make about sales that I think is pertinent to the situation is that in 2000 through 2002, we had people, that - - I look back at our sales force - - all sales people, I’m a sale person, we tend to be very positive. Some people can say arrogant. Whatever term you want to use about the situation. Well when I asked them back in those years why our sales were so strong and if they felt the advertising had any impact, they’d say, oh no, it’s all us. We now know that the advertising had enormous impact. And as I look back, I realize that sales were coming in at a pace because of that name recognition growing. And we were dropping the ball in other areas. But it was hidden because of these strong sales coming in. And what happened is, when sales backed off, a lot of our people that were in management - - I won’t say a lot, but a significant amount of people, just said, hey, I’ve got all the money I need, I’ve been through the great years, I’ve got to go back to blocking and tackling and I don’t want to do that, and we had some retirements. Quite a few as you saw through the state sales coordinators and positions. Just by themselves. If they want to go, so be it. Just get out of our way and let us move forward and do what we need to do. But we have to have people that are hungry and want to accomplish our objectives and move forward. We’ve got those people in place, but they don’t have the financial backing when they first start. And they are now getting their feet set and we should see that growth. So I’m encouraged by that.

Could you back up on the HSA and explain to me, assume tomorrow that the entire business were on HSAs. What is the implication of that? Walk me through what that means to you.

By looking at higher co-pays and deductibles in America, by looking at a higher Volume of that, that means people are associating that they’re capable of covering more risk. I think the average person in America lives paycheck to paycheck. Average blue collar worked does not have the money to cover a major accident or illness or certainly not a co-pay or deductible at the HSA level. Now, they’re putting money into a health savings account, but that comes out on a periodic basis. It doesn’t come out in a lump sum. So they’ve got to build that up over time.

I think that our products by purchasing insurance, you’re immediately covered for the future. We actually represent what I think is a better purchase to cover that risk than by putting it in over time into an HSA account. So I think we’re poised better there. We also can potentially cover more things. There are risks associated with the HSA and what they will cover and I think our policies packaged together in the right way can sit with an HSA policy and that high deductible or co-pay and benefit that person more in the long term by veering more of the risk that may be associated with in their particular line.

It conceptually works like the idea of buy term and invest the difference. For these HSAs, you’ve got to save the money. We’ve got a situation - - if you want to be as direct as to look at us, even look at our employees at AFLAC to the 401(k). We can’t even get people to invest in the 401(k) totally and we’re matching it. So the HSAs, they are not, or we are not seeing or believe - - why would they do that when they won’t even do something that matches? And so it they have the propensity to save and will follow all those things and would like, for example, buy term and invest the difference and do all those things, then it makes more sense. But most of America. and especially blue collar and especially these small accounts, they’re just not going to do it. It’s just a fact. If they won’t do it with 401(k) where we match, they’re not going to do it with the other where there’s no match.

I’m just trying to understand - - I understand your point of view, but I’m just - - let’s say you’re wrong. I’m just trying to understand if it all went to HSAs tomorrow, do your premiums have to come out of the deductible? How does that work?

No. Understand -- the first thing, the Health Savings Account is a personal account just like a 401(k) where an employee is saving money so that when they have a healthcare expenditure they can reduce that account and use it to pay the doctors visit, drugs, whatever. That’s taken out on pretax basis. Legislatively, legally, our products can work side by side with those HSA accounts. They can deduct it on a pretax basis right along side with that HSA.

Remember what our products are - - they are vehicles for giving a person cash as quickly as possible once a health even occurs. Now whether that comes from - -gets triggered by a co-payment of a deductible or some other out of pocket expense that’s not covered by a major medical plan, it doesn’t matter. But they will get the cash directly. If they have our product - - you know, what happens if you have an HSA and this is your fist claim year, January 1, and you haven’t had time to save or you’ve chosen not to save. January 30th you have a serious health event and you’ve got to pay the first $5,000 our of your own pocket for your healthcare treatment. You’re either going into debt, you’re going to become bankrupt, or you need a partner. We’re the partner.

So if there is - - does that mean you will cover that deductible?

No, remember our plans don’t pay specifically for a deductible. We pay cash based on a health event that can be used for a deductible, a co-payment, a non medical expense, meaning - -

Let’s say I have an event and I’ve got a deductible of $2,000. So that I have to pay $1,000 out of pocket for that event. Will you cover that?

Well, remember, what makes up that $1,000 is you’ve gone to the doctor, you’ve had a CT Scan, you’ve gone to see aback specialist. Those are all out of pocket expenses that are working towards your plan deductible.

Correct.

And depending on the product that you have with us, you go and you have that CT Scan or whatever it is, and we’ll pay a fixed amount of cash for that treatment, whatever that treatment is, so that you can take then and use, in effect, for that stuff. It’s not specifically stated You’re using it for deductible. Do you understand? Because remember all the deductible is is an aggregate of out of pocket expenses.

I’m sorry. One last one. So what is exactly different? If I’m on HSA today and I wasn’t on HSA tomorrow and I have that $1,000 event what is the economic difference for you and for the customer?

well, remember the difference with san HSA is HSAs, Health Savings Accounts, are sold in conjunction with, or administered in conjunction with high deductible major medical plans. So instead of paying the first $5090 out of your own pocket for an individual and $1,000 for your family, it may be $3,000 for an individual and $5,000 for your family. So you’ve got a significantly higher deductible major medical plan which results in a lower premium for the consumer. But they’re still paying that first whatever it is, say $5,000 our of their own pocket based on whatever might happen to them, whether it’s drugs, some kind of other medical treatment, hospitalization, whatever it might be. And based on what those health even triggers are, our product will pay cash that they can use to make themselves whole.

Thanks. Three questions. First with Kriss about stock buybacks. Given where [inaudible] ended up at the end of the year, [inaudible] how do you address that? Second, with Aki, can you give us an update on where you stand with the term product on the medical side. And then lastly, for Paul, do you have a recruiting growth target in mind for the year?

With regard to share repurchase, we’ve publicly stated for several years that our target was in the 10 to 12 million share range. We bought 10 million this last year. We’ll be in the 10 to 12 million share range in the years to come. That’s what we anticipate. We’ve got enough free cash flow to handle that in conjunction with our revised dividend and it helps support the EPS growth. So all other things being equal, that’s where we’ll be.

But why couldn’t that be a higher amount, more towards sat the 12 this year given where you are this year?

Well, it could be toward the 12, but quite frankly, we don’t need to increase it very much to support the targeted EPS growth. Now if we have a stock price event that makes it particularly attractive, then we’ll be on the high side. Well we are - - we try to be somewhat opportunistic in the way we execute share repurchase. So if there’s not a great deal of volatility in the stock, we’ll probably be in the low end of the range. If there’s more volatility in the stock, we’ll probably be on the high end of the range. So it depends on market conditions and given that we have the cash flow. Let me ask you, just to clarify your question to Aki because I didn’t totally get it. Did you say - - [cross talk]. You already did? Okay, sorry.

It’s a term product, right?

Yes.

Well, we’ve been certainly discussing about this term policy for medical policies and we are working on it at this point, we’ve started. But at this point, our focus is on the EVER Half because we already have a series of medical policies including the Max and Wide and EVER and EVER Half and EVER Bonus. And in this condition, if we add one more thing, we’re going to de-focus our field forces immediately. So we are working on it for the term policies, but at this point we do not consider that this is the right time for us to introduce this term product immediately. Does that answer your question?

Yeah, thank you.

In terms of the recruiting, recruiting is one of two facets. You have to recruit people and you have to train people. So the bigger number I’m focused on is producer growth. I want to see recruiting continue to climb so there’s no hard and fast number. If you want a goal, it’s between 5 and 10%. What I’m more concerned about is are we training the people that we’re recruiting. Now, you can’t cut off that recruiting pipeline. You have to continue to train people accurately once you bring them in but tem convert them into full time AFLAC producers and that’s the ultimate goal.

Thank you. I had a couple of questions. First, I was wondering when you might resume the technology expenditures in Japan that you deferred this year. And then secondly, I was hoping you could speak to product differentiation in Japan given how crowded the marketplace is what is the role of price versus product in the decision making in Japan?

With regard to the IT development process, we decided to take a timeout on our IT development process this year for 2 reasons. One was some business priorities we ere running into in terms of satisfying product development initiatives and the like. And the second really was certain technological developments that occurred since we first started doing that, the development process. And the IT technical guys, and I’m not an IT technical guy, so excuse me, but from what they tell me, we determined that based on some of the developments in the technological capabilities, we were better off reconsidering some of the assumptions we initially made.

We might be able to convert from one operating platform to another but certain technological achievements may allow us to interface the two operating platforms. And so we’re going through a process of re-evaluating the assumptions on which our original plan was based. Now a lot of stuff happens in IT very quickly and we started 3 years ago and the situation and the environment has changed. So we’re going through that and we think that’s a prudent business tack because you’re talking about big investments. But our biggest priority is to make sure operations are not impacted by any of the development activities and as long as we can keep the trains running, so to speak, then we try to look at how to improve our operating platform going forward. So that’s kind of our overall strategy. I don’t have a specific date yet.

About the budget for the overall IT, it will not change that much because we have spent a lot of money in the infrastructure product the last couple of years. And even if we timed out one product, that doesn’t mean necessarily we stopped this infrastructure product. So we’re going to continue this infrastructure project and also as Kriss said, we’re going to make our operation intact. So the overall spending on the IT side would be pretty much the same.

The second part of your question deals with the competitive environment. We still have the best product at the best price in Japan. Everybody has now got a product for some form or fashion in terms of medical product. We still don’t really have any trouble with the cancer insurance. But in regard to medical, we have set up a rapid response time that looks - - anytime a new product comes out and we watch it on a weekly basis, we check to see whether or not there’s anything out there that’s better. We have not seen anything. We have seen people [inaudible] Japan was the most unique one yet. Our policy was a better policy.

The real thing that’s driving medical sales is consumers want the most popular product. And that tends to be true with Japanese and other products as well. That number one campaign and also having the best product and really being number one, adds validity to having the best product is really what’s driving us right now. And we’ve got to constantly stay on top of it. But no one really tries to undermine us because our operating expense ratio is low and it keeps going lower as you saw in the numbers and that ultimately is going to do it. And I’ve got to say that having Aki over there I have never felt better in anything in my life. I know he’s not going to stay there forever. But he’s helping us eventually find a replacement in the next 3 years or so. But he is a stickler for understanding expenses and what to do and that ultimately means better products. In addition to that, he also understands the marketing side because of his expertise being in the U.S., especially during the heyday of all those big increases we had in 2000 through 2003.

Let me add one more point. The first sector of the Japanese life insurance area has been decreasing annually by 11% last of 3 years. And the second sector, which is the P&C area, has been decreasing, the size of the market, by about 5% annually during last three years. However, the first sector market has been increasing about 16% every year last of 3 years. So what do you expect? Everybody is trying to come into the first sector and that’s why we have a tremendous amount of the new products that’s playing around in the market. And that’s why it confuses our consumers in Japan all the way around. So that’s the reason why we came up with the number one campaign in Japan. Not only for the entire life insurance imports, but also in terms of the policies we are selling for medical area. And that certainly would have screwed up the whole consumers last quarter and that really gave us a good result in our production, too.

Let’s take one more.

Well, if you don’t mind, I know a couple of people have asked about HSAs but I want to ask you about that again. I guess I don’t understand the premise. Your opinion is that it HSA is not likely to be widely accepted by employers And that’s fine. I guess the premise seems to be from some of the questions that it would be a negative for you if it were. And I guess I’m not quite sure why that would be. If the premiums are lower for HSAs, that would have less crowding out of [inaudible] premiums, and it the HSA as known in consumerism to healthcare, that may actually decrease utilization and may actually help the frequency of your claims. So I guess I’m not sure where the negative is.

Well, I don’t think there is a negative on it. The question was whether or not we thought it would take off in major. Not so much directly how it relates to us. We’ve worked in HMO environments, we’ve worked in environments of national healthcare, we’ve worked in environments where 100% of their medical coverage, medical bills were covered by some program that they had in their particular group. We worked in every environment and no matter what, as it shows in the New York Times, there are co-payments and deductibles that are being created. It doesn’t matter if you go with the other plans. Their trying to figure out a way to bring down the cost of major medical. You still need ours in addition to that. So whether you figure out a way to bring down healthcare costs a little bit here or there, you’re still going to need ours in addition. And that’s the summation of the whole point that I think is important.

Okay, well listen, thank you very much for joining us tonight. Some of us will be around for a few minutes longer if you want to follow up with anything else. And as usual, anytime you have any questions, please call us on the 800 number. We’d be happy to talk with you.

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