美國家庭壽險 (AFL) 2005 Q1 法說會逐字稿

Hello and welcome to the Aflac 2005 first quarter earnings release conference call. All lines will remain in a listen-only mode until the question-and-answer session. At that time, if you have a question or a comment, simply press star, one on your telephone keypad. Today's conference is being recorded for instant replay purposes. I will now turn the call over to your host Mr. Ken Janke. Sir, you may begin.

Thank you, Kimberly. And good morning, everybody. Thanks for joining us on our first quarter call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, Executive Vice President of U.S. Operations; and Joe Smith, Senior Vice President and Chief Investment Officer; Aki Kan, President from Aflac Japan joins us from Tokyo.

Before we start this morning let me remind you of the Safe Harbor. Some of the statements we'll make in this conference call this morning are forward-looking within the meaning of Federal Securities Laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. The actual results in the future could differ materially from those that we discuss today. As a result, I'd encourage you to look at our most recent quarterly report for some of the various risk factors that could materially impact our future results. I'd also like to remind you as we addressed at the end of the year and in our Annual Report, we did adopt SFAS 123R, expensing a stock option on January 1 of this year and retrospectively adjusted a prior reported numbers to reflect stock option expensing. So the numbers we discuss today will be on an adjusted basis for prior periods. Now, I'd like to turn the program over to Dan. He'll begin with some comments on our business in the United States and Japan and our first quarter results. Then I'll follow up with a few financial highlights. And then we'll be happy to take your questions. Dan?

Thank you, Ken. Good morning and thank you for joining us. I'm very pleased with the way we started 2005. Our first quarter sales and financial results were in-line with or better than our expectations. I'm sure you noticed that we significantly exceeded our primarily financial objective of a 15% increase in operating earnings per share excluding the impact of the currency transaction.

Let me begin this morning with a discussion of Aflac Japan, which was a strong quarter. Revenues and earnings for the first quarter was strongly consistent with our targets. Total annualized premium sales were also in-line with our annual objective of a 5 to 10% increase. Total new sales rose 5.3% during the quarter to 29.8 billion yen or $285 million. From a sales perspective, we saw incredible strength from our medical line of products. We set a quarterly record for medical sales in terms of new annualized premium sales. Medical sales were up 28.5% and accounted for almost 40% of the total new sales in the quarter. Cancer insurance represented 22% of the sales. We had anticipated the possibility of another sharp falloff in cancer sales through Dai-ichi Life. Instead sales from Dai-ichi were a bit better than expected, declining 4.7 for the quarter. We have been and continue to be very pleased with our alliance with Dai-ichi as they continue to be the number two seller of cancer insurance behind us. For the full year, we expect Dai-ichi sales to be stable compared with last year.

The quarter was certainly highlighted by the success of Aflac Japan's two new medical products Ever Half and Ever Bonus. Since 2002, Ever has led the market for stand-alone medical insurance by offering a basic level of hospitalization coverage with the most affordable premiums in the industry. To meet the varied needs of consumers we developed Ever Half and Ever Bonus last year and released them in mid January. Ever Half is a whole life medical policy that offers benefits similar to the original Ever product, but the premiums are cut in half when the policyholder reaches 60 or 65. Ever Bonus has all of the same features as Ever Half, but also provides a bonus payment, a death benefit, and cash surrender value. Both of these new products have been well-received by our sales force in the market. With a very affordable premium, Ever Half has done exceptionally well. Based on their initial success and continued popularity of the original Ever product, we expect medical sales to be strong throughout the year.

We recognize that our challenge to sales growth this year is overcoming declining Rider MAX sales. As we have discussed on several occasions, conversions from the term life policy to the whole life Rider MAX product will continue to decline. Conversions tend to have a life cycle that is marked by a rapid rise in production followed by a long period of decline. We have been in that period of decline since early 2003. Sales of Rider MAX devote new and existing cancer policyholders have also declined. However, we've seen a steady increase in the percentage of consumers who are purchasing both our cancer and Ever compared with cancer plus Rider MAX. We believe this could be due to consumers' preference for greater flexibility that comes with owning two stand-alone policies. We believe it also reflects the visibility and popularity of Ever as Japan's number one medical product.

As we mentioned, after our year-end release, we are convinced that our advertising campaign that promotes our position as number one in medical sales has benefited our sales. Research suggests that being the leader influences consumers' perception and preferences. According to an independent consumer study by Macromill, 78% of consumers want to choose the most popular product. So even though the medical insurance product has become crowded, we believe promoting our number one position in the market will help us continue to stand out as will the quality of our products. Furthermore, we believe that we will maintain strong momentum in the medical category as more of the distribution system adapts our new medical products. The majority of Ever Half sales in the first quarter came from individual and independent corporate agencies. Beginning in the second quarter we expect to see sales of the two new medical products pick up through the affiliated corporate agency challenge.

New agencies recruiting for Aflac Japan was strong. For the year, our goal is to recruit 4400 agencies. During the first quarter, we recruited about 1100 agencies which puts us on track to achieve our annual target. Of the agencies recruited in the first quarter, 84% were individual agencies. This illustrates Aflac Japan's successful effort of accelerating the development of individual agencies. At the same time, many corporate agencies have developed similar tactics as individual agencies to expand their reach of consumers outside their traditional markets. In addition to solid sales and recruiting Aflac Japan's persistency was better than last year. and its profit margin continued to expand in-line with our expectation. With aging population, rising healthcare costs, and consumers interests in living benefits, we believe more and more consumers are seeing the need for the products that Aflac Japan offers.

Just as I'm pleased with Aflac's achievements this quarter, I'm also pleased with the direction of our U.S. business. Although new sales declined 2.1% in the quarter, these results were actually a bit better than we had expected. We said in our year-end release that we expected sales to be down in the first quarter due in part to a difficult comparison to a year ago when sales were up 13.8%. Actually, we had anticipated a decline of up to 5% because we had more production days a year ago than we did in the first quarter of 2005. Had the number of our production days been the same in both quarters, sales would have risen within our 3 to 8% target range for the year. With that as a backdrop, let me say once again that we have not identified any issues in the marketplace that have caused us to rethink the market distribution system or products. To the contrary, I remain convinced that we're on track in terms of distribution and products.

We continue to grow our sales force leadership during the first quarter. We increased the number of territory directors from 7 to 8 to better distribute the market and improve our management capacity. For the same reason we also increased the number of state sales coordinators from 87 at the end of the year to 91 at the end of march. I want to emphasize that these recent changes reflect the natural progress of our business. We are not making this kind of sweeping changes that we made in 2003 and the start of 2004. Instead, we're simply keeping up with the overall growth of our sales force. And as a result, we do not expect any significant change in our business. Increasing our distribution has been a core part of the strategy for many years and recruiting will remain an important part of the distribution model. For the second consecutive quarter, we've had strong recruiting results. If the first quarter, we recruited more agents than any other quarter in our history. We recruited more than 6,400 new agents which was up 10.3% from a year ago. I'm very encouraged with the progress in our recruiting. And I believe you'll see that that success benefits future producer growth.

As we discussed at year end, we are also increasing our focus on field force training. We have new training initiatives under way that we believe will ultimately help us improve the success and retention of our sales force. In addition, we also want to improve coordinator development. With that in mind, we held our first ever State Sales Coordinator Forum just two weeks ago. The forum was attended by all the territory directors and state sales coordinators. We also included senior officers who had the greatest interaction with and provide the greatest support to our sales force. A lot of information was exchanged between the headquarters and our sales leadership. It also gave our state sales coordinators a chance to share ideas and best practices with each other on topics, such as recruiting, training, running effective sales contests. Based on the feedback from our state sales coordinators, I have no doubt that the SSC forum was the best informational event we've ever conducted. And I saw a level of enthusiasm among our sales leadership that I hadn't seen in quite a while.

I'm still convinced that our slower sales growth has been attributable to the distribution side of the model. I've said before and I don't believe that it's related to competition, the economy or products, however, we know that new product introductions can stimulate sales. As such, we've also focussed our attention on market research and product development. And we plan to have three new introductions this year. First, we developed a vision product that we plan to roll out during the third quarter. This innovative product not only covers exams and materials like the traditional plans, it also offers "eye" help, surgical and permanent impairment benefits. It's so unique, that we filed for a patent to protect the design. Vision Care has been the most requested product from our sales force for four years. They're excited about our new product and so are we. We believe it will benefit sales growth in the second half of the year.

The second product we plan to introduce is the new version of our Hospital Indemnity plan for the introduction later this year. It has three levels of coverage, starting with the basic level of consumers whose forecast concerns hospital stay benefits. This revision is intended to complete high deductible healthcare plans and health savings account combinations. And finally, our research has also shown a need to enhance our Life Insurance products by adding longer term, higher face amounts. Our goal is to have life products introduced in the mid fourth quarter.

In terms of the needs for our products, I'll remind you again of the recent Harvard study that suggests that half the bankruptcies in this country are medical related. This shows just how much medical events that interrupt lives can also interrupt financial well being. We strongly believe that if consumers like those mentioned in the study had the opportunity to purchase our products, their circumstances might have been different. And the likelihood of their bankruptcy may have been lessened. We know there's a market out there for our products and it's huge. Independent Research suggests that we have only mid single-digit penetration in the market with 10s of millions of potential customers. As a market leader with this kind of opportunity in front of us, we feel very positive about the long-term health of our business and the significant needs for our products. As employers and workers alike cope with the continual rising healthcare costs, I believe they will increasingly look to Aflac as the solution.

With each passing month this year, I have become more optimistic about the outlook for U.S. business. We have talked repeatedly about our competitive strengths, which include our product line, technology, brand awareness, and distribution. I believe those streaks are in tact and I feel that our distribution is getting stronger. Remember that momentum is very important to commission-only sales force. I believe our momentum is building with our first quarter results on target. We view our U.S. sales objective as reasonable. Our goal is to increase new annualized premium sales 3 to 8% this year. As sales comparisons become easier in the future quarters and if, in fact, our momentum is truly building, we should be able to achieve that target. At the same time, I believe we're taking the right steps to position Aflac for better results beyond 2005.

As I mentioned from the outset, we are pleased with our Company's performance during the first quarter. And we remain very confident in our capital position and overall strength and the quality of our balance sheet. Because of that strength, we were able to continue buying back our shares. We bought 2.9 million shares -- excuse me. We bought 2.9 million shares in the first quarter. At the end of March, we had approximately 24 million shares available for purchase under the current repurchase authorization from the Board of Directors. Like last year, we anticipate purchasing about 10 million shares in 2005.

As we look ahead, we have confidence in our business model. In addition, we have two sizable blocks of business with fairly predictable benefits and expense trends. As a result, we are also confident that we will achieve our primary financial objective for 2005, a growing operating earnings per diluted share by 15% before the impact of currency transactions. In fact, based on our first quarter results, we believe we will have an opportunity to spend additional funds on sales promotion activities for the remainder of the year while still reaching our earnings goal. And for 2006, we have retained our objective of increasing operating earnings per share about 15%, excluding the impact of currency translation. We believe our objectives are realistic and achievable, and we also believe that they reflect the underlying strength of our business and our potential for continued growth in the two largest insurance markets in the world. Ken?

Thank you, Dan. Before we get to the questions, let me briefly go through some of the first quarter numbers beginning with Aflac Japan. Starting at the top line in yen terms, revenues were up [6.6%] [background noise] for the quarter. Our persistence [indiscernible] improved again rising from 94.2% a year ago to 94.7% on an annualized basis this year excluding the annuity business. In terms of the quarterly operating ratios as we expected the benefit ratio continued to improve over last year. It declined from 67.2% a year ago to 66.9% due primarily to the changing business mix to lower benefit ratio products. The expense ratio also improved. It was 18.2% in 2005 compared with 18.9% a year ago. It benefited from lower debt amortization as well as lower option expense compared with 2004. As a result, the pretax profit margin showed further improvement rising from 13.9% to 14.9% this year. Pretax operating earnings rose 14.5% for the quarter in yen excluding the impact from the stronger yen in net investment income, pretax would have been up 15.4% on a currency-neutral basis.

Available yields in Japan declined from the fourth quarter. For instance, the 20-year bond level -- or bond yield averaged 2.03 in the first quarter comparable with 2.08% in the fourth quarter. The current yield on a 20-year Japanese government bond was about 1.9%. But for the quarter, we invested our cash flow and yen securities at 2.84% and including dollars, the blended rate was 3.06. The portfolio yield at the end of the period was 4.3%, which was 5 basis points lower than year end and 14 basis points below March 31, 2004. Overall, the credit quality of the portfolio remains extremely high. On a consolidated basis, securities rated BB or lower were only 1.7% of invested assets at the end of March, that's down from 1.8% at the end of December and down from 2.8% a year ago. Unrealized losses on our below investment grade holdings were $61 million at the end of the quarter.

Turning to Aflac U.S., revenues were up 10.1% for the quarter coming from an earned premium increase of 10.7%. Investment income was up 5.2%. The annualized persistency rate for Aflac U.S. in the quarter was 73.2%, that compared with 72.5% a year ago. The operating ratios were very stable. The benefit ratio increased only slightly from 53.8 to 53.9%. The expense ratio was unchanged at 31.2 and as a result, the pretax profit margin was 14.9%, a little change from the 15% we posted a year ago. Pretax operating earnings rose 9.7% for the quarter. And in terms of U.S. investments, the new money yield in the quarter was 6.04% versus 6.1 a year ago. The yield on the portfolio was 731 at the end of March, which is down 8 basis points from year end and 21 basis points lower than a year ago.

In looking at some other items for the quarter, as you heard, we did purchase 2.9 million shares in the quarter. The average price was 38.48 a share, excluding unrealized gains from FAS 115. The ratio of debt to total capital was 20.8% at the end of march that compared with 24% a year ago. Non-insurance interest expense was unchanged at 5 million for the quarter, and parent company and other expenses were also unchanged from a year ago at 11 million. The total Company operating margins rose, reflecting the improved profitability of Aflac Japan. The pretax margin rose from 13.6 to 14.4% and on a consolidated basis, the aftertax margin increased from 8.7 to 9.4. On an operating basis, the tax rate was 35% this year compared with 36% a year ago. As reported, operating earnings per diluted share rose 20% to $0.66 a share, which was $0.03 above estimates. The stronger yen helped operating earnings by $0.01 per share for the quarter and excluding the yen's impact, operating earnings were up 18.2% for the quarter, again, significantly better than our annual target.

Let me finally comment on the outlook for the balance of the year. As Dan mentioned, our objective for 2005 is a 15% increase in operating earnings per diluted share before the impact of currency. As we stated at our year-end meetings and in our Annual Report, our 2005 target is based on an adjusted 2004 operating EPS number of $2.23 per diluted share which reflects option expensing. That would equate to a target of 256 per share this year on a currency-neutral basis. If we achieve our objective and if the yen remains at its current level of 106 for the balance of 2005, we would expect that reported earnings per share would translate to about $2.59 for the year. The last time I checked First Call was at 2.60. As Dan mentioned, we expect to spend more for the balance of the year, but we still expect to hit our target. As a result we would look for the second quarter's earnings per share to likely be around $0.64 per diluted share. And our target does remain at 15% increase in operating earnings per diluted share for 2006. Now, we'd be happy to take your questions. We do want to make sure that everyone has a chance to ask a question. So please do limit yourself to one question, so we can be fair to everybody. Kimberly, let me turn it back over to you to take the questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from David Lewis with SunTrust Robinson Humphrey.

Thank you. Good morning.

Good morning.

I have one question for either Dan or Paul on the U.S. sales. Monthly average producers declined over the difficult year-ago period. Do you expect that the monthly producers will actually be up for the balance of the year on a quarterly basis? And can you discuss any meaningful changes you've seen in previously underperforming states as you've seen in the first quarter results?

I'll let Paul take that. We know that average weekly producers or average monthly producers is a direct correlation to production. In this case, we had a downturn in sales and we also had a downturn in a number of producers. Obviously, the number of producers was slightly larger than the number of -- I'm sorry, the reduction in the number of producers was slightly larger than the reduction in the number of sales. We attribute that to a few things, but we believe it's all within the statistical balance and, but long-term we are looking to grow our producer base. I do believe that the lack of recruiting in the last few quarters contributed to that -- the lack of producers. And the recruiting turnaround we've had I think will contribute to growth in that number for the remainder of the year. The second half of your question, David?

It's just kind of -- look at some of the previously underperforming states and how you might have seen some improvements throughout the first quarter?

Yes. We have seen some improvements. Florida is an example, our second largest state has seen a turnaround and is having a strong first half -- strong first quarter. I do believe that many of the states that had large splits within the beginning of 2000 -- end of 2003, beginning of 2004 are starting to make that turn. As Dan mentioned, we're no longer going to be in a dramatic growth mode. We're now just growing to keep up with our distribution system and the long-term effects of that. And I believe we will see stability in growth in states, such as Florida.

Has Texas turned?

Texas has not turned as of yet.

All right. Thank you.

Thank you. Our next question comes from Nigel Dalley with Morgan Stanley.

Great, thank you. Good morning. Can you give us an update on competition in Japan? Are you continuing to see conditions intensify or are you beginning to see some stabilization? Also, if you can comment on how AIG losing its AAA ratings changes a competitive landscape? Thanks.

Well, I'll make a few comments and then I'll let Aki take it. Certainly, all of our field forces told us that AIG having a AAA rating was an enormous competitive advantage for them and it was showing up on everything they did. They've recently had to remove it from all of their TV brochures, any print advertising they have. And as you could imagine, not only does it hurt to go back to AA+, which would -- but also people question all the other things that are going on. So it's probably been a positive for us to some degree. At the same time, having any competitors have problems ultimately undermines the industry and it's not good for anyone. So as far as competition goes, we still have the best product at the best price and we haven't seen anything out there. Aki, you want to make any comments?

Yes. I think what Dan just told us is exactly right. Right after the ratings were kind of lowered, they immediately sent out their notice within the company so that they removed all the AAA ratings on their promotional materials. So that was done already. But one fact in this country, in Japan, is that AIG -- the name of AIG is not really that much famous than the company's subsidiaries like ALICO or some other companies. So even if the articles of AIG a scandal was pretty much announced in Japan also, that doesn't mean necessarily actually those subsidiary companies got hurt that much unless those people involved be the directly involved insiders.

Can you comment, Aki about competition?

Oh, competition on cancer?

Any medical products.

Oh. Obviously, --.

Are you [multiple speakers] expanding any new products out there, have you, that you're worried about?

No, not really. The only -- the general feeling -- well, I've been here just about the four months, but my feeling right now is just because a lot -- just too many products are now our way. People are getting more cautious or careful in selecting the right product they consider. So the issue here is that it would take much longer time for the potential buyers to select to be able to select the right product at the right time. That's probably one comment that I want to make.

And the last comment I'll make is that the more confusion in the marketplace, the more people are going to move toward buying the number one product. And that's why we are increasing our advertising on being number one.

That's true.

Okay?

That's great. Thanks, guys.

Our next question comes Edward Spehar from Merrill Lynch.

Thank you. I was wondering in terms of the new product introductions in Japan, is there anyway you could give us a sense of -- by looking at the trends if those products had been available for the full quarter, you know, if you had full productivity for the individual agencies, if the corporate agencies had been selling it? And then maybe also factoring in this issue of the longer purchase decisions because of the number of products that are out there in the medical area. And is there any way you could give us some sense about what sales could have looked like? Somewhere along the lines of what you said in the U.S. in terms of if production days had been the same in both the quarters. Thank you.

Well, Ed, I still think that the best indicator that we've given you is that 5 to 10% range. We tried to take into account for the year the start time on everything. In other words, we're not exactly sure we in the second quarter we plan on getting corporate agencies more involved with Ever, and the new Ever Half and the Ever Whole. But sometimes it can be slower than we anticipated. So all of those have really taken every aspect into account to the best of our ability. And so that's about the only thing I can tell you. I wish I could give you more detail, but I think that range is our best guess at what we think we'll do for the year.

Let me give you one more detail about the first quarter. And the first quarter, we actually announced the product announcement January the 7th, but actually most of the big offices or the government offices opened their doors sometime around the middle of January. So the actual business did not really pick up until probably January the 15th. So the whole month result of January is not really the full capacity of our ordinary month. And that's one thing.

And in the second quarter, as Dan just told us, it's not really automatic that we can sell -- we can put the Ever Half on the corporate market immediately because we have to get a -- they're approval for us to be able to sell each product and each company. So it depends on the timing. For instance, Hitachi Company would allow us to sell a certain product at certain timing like at August or September, and maybe February or March, so we cannot really try to sell our product any time we want, and sometimes they have their own thing in their mind. So we have to have a specific approval from those corporations for us to sell the new product.

Okay. Just so it's reasonable to assume then in terms of sort of the life cycle of this new product intro that we've got a number of quarters here where it seems like for a variety of these various factors that you're going to be getting more and more sales related to these products?

Yes. I think it would develop gradually. Not really a kind of blast in the second quarter or third quarter, but it's going to grow gradually from the second quarter.

And again, Ed, you know, it's a cannibal desolation to some degree, too, in determines of -- the Ever product, more consumers are buying Ever and the cancer versus buying Rider MAX and cancer. So we tempered our remarks about being 5 to 10 because one does offset the other. But the fact is the consumers like the stand-alone medical because we can run that number one ad campaign and it makes it -- people never look stupid if they buy the number one product.

Let me say one last thing, too, with respect to the new product. We in no way meant for the new products to be a replacement for the base Ever. We're going to continue to sale the base Ever. And in fact, in the first quarter, the experience is that the people that are closer to the retirement age, the older people were buying the base Ever and the younger market was going for Ever Half because there's less of a premium differential in Ever versus Ever Half at the younger ages. So not all of the success in the medical line lies with Ever Half and Ever Bonus. Ever -- the basic Ever is still going to be a contributor.

Okay. Thank you very much.

Thank you. Our next question comes from Joan Zief with Goldman Sachs.

Thank you. Good morning. I was wondering if you could talk a little bit more about the persistency in Japan, whether you think this level is sustainable because if the persistency in Japan has picked up a bit, it enabled the DAK amortization right to slow a little bit? And I guess what I was wondering is if there is a one-for-one relationship as well to the DAK amortization if the persistency were to go back to, like 94.3 or 94.4? So that's the question. If you could give us a little more color on persistency in Japan, the sustainability, and exactly what the sensitivity is to the DAK amortization?

Joan this is Kriss. You may recall that persistency deteriorated over a, say a three to four-year period where it was running at 95% plus, maybe low 95s, and it gradually went down to, you know in the 93s or so. And over the last year or so it's come back and it's in the 94s. So we're seeing -- we saw a depth and we're seeing a recovery. I don't, you know, it's a positive thing for us. It helped us achieve a higher growth in premium income last year than we would have had. I think it gives us a favorable win for this year.

I think things are going back maybe to where they were about three or four years ago is what's happening. I don't see that it's going to improve from the present amount to, say, 96%. I think it'll level out probably around 95 is my best guess because we're writing more business through individual agents as opposed to corporate agencies. And while the individual agent business is producing better persistency than we originally anticipated relative to the business collected via payroll deduction, it's still not quite as good as corporate agencies. So I don't think you're going to see any major factors in the financials relative to the improvement that we haven't accounted for in our projections.

Is there any major reasons that we should be looking at that will give us some clue as to what is the major driver of persistency? Is it pricing? Is it lack of competition? I mean, is it -- I mean, is there anything in particular or is it just the nature of the business in Japan that products of this nature just have 95% persistency?

Well, I'll tell you there are really two major factors. One is an internal factor. And we've got several programs that Aflac Japan's been working on to attempt to improve customer service and customer retention and contact the policyholders that have lapsed in recent periods to remind them of the value of their coverage and, like, and encourage them to reinstate their coverage. So that's had some impact.

But I think there's also an external factor that the trust or the lack of trust in the insurance industry is moderated to some extent. I think the cash or render values, and lapse rates have improved in most of the domestic companies, in addition, to Aflac. There hadn't been as much negative press about insurance company failures and, the like, and I think that's moderated the trend to worst persistency. So there are both things.

Thank you.

Thank you. Our next question comes from Mark Lane with William Blair.

Good morning. Given the pricing differentials for Ever Bonus and Ever Half, can you give us some idea of what unit growth was for the Ever products in Japan?

Hold on. Let us see if we've got that here. If we haven't, we'll call you back.

Well, I'll tell you we have to compare the three versions of Ever to what the single version of Ever was. Obviously, Ever Half and Ever Bonus are new products and have no implicit growth rates by themselves, that is, Ever Half compared to Ever Half. But I will tell you that Ever Half has been very popular among the young people. The essence of Ever Half is that you pay a slightly higher premium before the retirement age and then 50% of the premium after the retirement age. So the longer the period of time to retirement, the lower the percent inquiries then the initial premium compared to the Ever product. So what we saw was more popularity among the young people. The Ever Bonus product was not as big a seller as Ever Half. But Ken's just showed me that overall we were up 4.9%, in terms of policy production on Ever, in total policies the fist quarter of '05 compared to the first quarter of '04.

And just as a follow-up. I think the -- either you've shared the pricing on sort of the core Ever base price and then the Ever Bonus price, but the Ever Half price will vary with age, correct --?

Yes. But to put it in perspective, for a person that are in the 30s, it's only going to run about 5 to 7% more for your premium to be cut in half at age 60 or 65. Compared to if they're in their 50s, it would be an enormous premium they basically couldn't afford to do it.

Right. Okay. So you're not even selling it to anybody in, you know, above 45 or --?

Well, they're buying the regular Ever.

They're buying the regular Ever. They're not really buying the Ever Half.

Right. Is there a break point kind of age that you think, you know, like --?

I don't know that. Aki, do you know if there is a break point age? [multiple speakers]. It's so new we really haven't got it yet.

Not really clear. [multiple speakers]. But what I've been hearing from our field force is that the people very close to the -- somewhere around 58 or 57, they usually want to buy the original Ever. And before that age, most people want to buy the new Ever Half.

Yes. Okay. Thanks so much.

Thank you. Our next question comes from Eric Berg with Lehman Brothers.

Yes, thanks. And by the way, thanks for this one question rule. I think it makes it -- it's a great idea. It makes it fair for everybody. My question relates to the U.S. sales picture and maybe Paul or Dan could field this one.

Certainly, I understand that recruiting was really very, very strong and I acknowledge that in the March quarter. But the fact is the number of agents, the number of people who are contracted to do business with you has been growing. Granted recruiting has been weak until recently, but the number of agents has been growing. And yet if we look back over the last, say, three years, the number of producing agents has been essentially unchanged. I think it has been in the 17,000 area. What's your sense of why that is happening? More people licensed to sell your products than ever, but not a meaningful increase in the number of people actually selling the product.

Well, I think part of it's the advertising campaign. You have with the advertising campaign a lot of independent agents who will tell us that they are interested in selling for us. They meet all of our criteria and we may license them and they write a few policies and then they go back and do what they normally do. And so we end up cancelling their license because they end up not being that productive. So I think the interest in our branding and what all has taken place has brought an influx of short-term people. And so you have to kind of go through that and then look down at the other recruits and, of course, with the new recruits, the program that we put in place about better training that we hope to -- we started and will ultimately have an impact on us.

Thank you.

Thank you. Our next question comes from Colin Devine with Smith Barney.

Good morning. I was wondering if we could talk a little about what's happening with the cancer products in Japan and also in the U.S. Specifically starting in Japan. If I'm looking at sales this quarter, that's certainly the weakest level we've seen in -- what over -- four years. I think it's the weakest since you've ever reported, Japanese sales, Dan. Are we just seeing a cannibalization going into the medical products or is it, frankly, the cancer business over there mature and we should expect sales to remain more in the 6.5 to 7 range going forward?

Well, frankly, we want to continue to stay number one in the cancer business. But every time I had an opportunity, if an agent asked us do you want us to write a medical policy or a cancer policy, we're always going to say medical because the profitability is so much higher. And so from our standpoint, we don't want to lose what we built, but at the same time, the money is in the new products. Aki, you want to make any comments?

Yes. And also at the same time, this stand-alone medical product market is really emerging and developing right now in a very rapid place. And unless we have to -- we focus on this market and grab the market. And probably four or five years from 2002, 2003 to 2006 or 7, it's going to be very difficult for us to grab that much market after 2007. So we believe that this is the time that we really have to focus on this medical product to gain the momentum and the market in Japanese market right now. So that's why we have focussed our resources and time on the medical product intentionally last one or two years. That's why you can see a big increase of medical product rather than cancer product. But that doesn't mean necessarily we don't do anything on cancer.

We just started the TV commercials for cancer only starting from March because there are a lot of people who has the same kind of opinion just like what you said. So we thought that we have already gained an absolute amount of a market of the medical product in the market. So it's about time for us to gradually set aside our resource for cancer product as well.

Okay now to follow -- Okay. Thanks. I get the strategy going forward. Dan, you've continued to talk about the benefit of the product mix shift. And you referenced in your comments. I'd like to follow-up with that. Let's put some numbers on the table here. What is the difference in profitability? Whether you want to measure it by benefit ratios, frankly, combined ratios, going down, your basic types of products. How much more profitable is cancer versus Rider MAX versus medical versus life? It's all talked up under the generic sense. I think it would be very helpful [multiple speakers] --.

I'll let Kriss answer that.

I think Colin, you can get a sense from that from the information we presented at the financial analyst briefing and the table of loss ratios by product category where I say, you know, the medical products have an anticipated benefit ratio in the 55 to 60% range. In the traditional cancer policy with full cash values and the like had a benefit ratio of more in the -- it's closer to 70%. I think the range I showed was 68 to 73.

Now, we have taken steps in recent years to bring down the intrasensitivity of the cancer policy that has a longer ratio liability by minimizing the cash surrender values available to the policyholders and by decreasing the death benefit portion of the policy and increasing the health benefit portion of the policy. And those actions have dropped the anticipated benefit ratio on new cancer versions down closer to the -- I think it's the 60 to 65% range with an anticipated increase in margin on those products.

So what Dan said is essentially right. Medical's somewhat more profitable then new cancer, but the current cancer being sold is more profitable then the old traditional cancer. So, you know, the commission structure is essentially the same on the products and the administrative costs is very similar. As I said, the duration on the cancer business is longer then on medical. So there's more of an impact of investment income, but on new business we have a positive spread investment income-wise.

And one other comment about the cancer, Colin, is that, you know, basically, we dominate that between Dai-ichi and Aflac, and no one's really in the business anymore. The talk in all the papers all deals with medical insurance and so everyone's been moving in that direction more than the cancer. So we actually have created the market and we've kept the market going.

Thank you. That was very helpful. Did you want to make any comments on cancer in the U.S.?

Well, I think the only comment I would make on the cancer is that, you know, I think the new products that we constantly introduce takes emphasis off. But our profit margins are culture by a product line in the U.S. than they are in -- in fact, I had to go pull it up while we were sitting here talking. And it's basically been flat for the last three years or so. And I've never -- we've always said we don't care which product you sell, we just want to see the overall sales numbers achieved because the profit margins are so closely related. So other than that, I wouldn't make another comment.

Thank you very much.

Sure.

Thank you. Our next question comes from Vanessa Wilson with Deutsche Bank.

Thank you. Good morning. Can you talk -- I know, Dan, you said in your preliminary comments that you felt the competition was not the issue in the United States. Could you talk a little about what you're seeing from competition? A number of the companies are talking about what an attractive market, voluntary benefits, and supplemental products is. And just give us a sense and maybe there's some color from your recent sales management meeting that you have that's very fresh that you could help us with?

I think I'm going to let Paul answer that. Vanessa, I spent 20 of the last 30 days in the field including our time with the SSC forum that Dan mentioned. Our competition was obviously one of the things that we wanted to discuss in that meeting because while our department here at headquarters gets a certain number of questionnaires and certain number of competitive situations that they help us bid on, we wanted to know if there were things out there that we were not hearing about. And we just honestly are not hearing things.

I took a look at the total number of times that we've been asked to place a competitive bid situation, that number is down. Although, I don't believe it's necessarily statistically valid because if we get those requests on a random basis. However, all of our SSCs across the country have stated that they do not believe there's increased competition. We're just not feeling it. I'm sure they think it's an attractive market, but it's also a difficult market to enter and with us being the low-cost provider, I think it helps us tremendously.

Thank you.

Thank you. Our next question comes from Jeff Hopson with A.G. Edwards.

Good morning. I was wondering if you could elaborate a little bit on the sales promotion that you'll be investing in Japan later this year?

Well, we haven't finalized all of that as of this point. But certainly the number one ad campaign when we wrote them, Kriss approved it and I started correspondence with them. I've told them that I think the majority of the money should be spent on TV advertising just beating in people's mind being number one. And I think there's also an opportunity to talk about financial security.

When other insurers get in trouble, although strong, sometimes it can undermine the credibility of everyone. And so talking about our financial strength in Japan has great opportunities for us, too. But we have not come up with a plan on exactly how to spend it other than to tell them that it is available and that we want the plan back. And in fact, I'm looking forward in the next couple of weeks in terms of what they'll do. We wouldn't give them the money until we got the fist quarter numbers in. So now that we see it, we were willing to do. So we've just recently told them that.

Okay. And just not to put a specific number, but in terms of sales capacity on the new product, it sounds like you are about 50% of the distribution. Is that about fair?

Aki?

50% of the sales force? Can you --?

Yes. That's what I mean.

If 50% of your sales are coming from the medical, that's what you're asking.

Oh, I see. No, not really that much. I would assume this 40% at this point would be pretty much stable for this year.

Jeff, the corporate agencies in the first quarter represented about a third of our total new sales. And it's that channel of distribution that really hasn't come online yet, and that will build momentum as the year progresses.

Okay. Very good. Thank you.

Thank you. Our next question comes from Jason Zucker with Fox-Pitt Kelton.

Thanks. Good morning. Two things. Very quickly, could you talk about margins on the new products in the U.S.? And secondly, could you talk about why you have confidence that the Dai-ichi sales will remain flattish this year?

Jason, this is Kriss. The margins on the new products in the U.S. are going to be very consistent with the other products we're presently selling. We do that as a matter of course so we don't have to ration new business by product type or be overly concerned about what the agents are selling. All we care about is that they're selling something. Not necessarily what they sell.

As far as Dai-ichi Life, we have had a lot of conversation with Dai-ichi in the last -- over the course of the last year. And we have refreshed the original agreement between Dai-ichi and Aflac to -- and they were interested in extending that agreement. So we think we're going to see some renewed interest in the part of Dai-ichi and selling the half like cancer policies that they are currently selling. Dai-ichi's sales were down of their core products last year by close to what the Dai-ichi sales of Aflac cancer policies were, so we don't feel like we were being discriminated against necessarily in terms of what Dai-ichi produced.

But hopefully the sales environment among the Dai-ichi sales force will improve and the Dai-ichi sales with Aflac cancer policies will improve right along with it. But basically, no major developments. Like Dan said, it was going to turn down. It turned down. Now it sort of looks to be flattening out. And that's our expectation for the year.

Right. Thank you.

Kimberly, we're getting close to the top of the hour. We'll take one more quick question, please, and then we'll conclude the call.

Thank you. Our next question comes from Suneet Kamath with Sanford Bernstein.

Great. Thank you. A couple questions on the U.S., first on the 10% recruiting growth. I was just curious if there were any trends in terms of location, in particular, was there growth in some of your larger states in terms of recruits? And then on the Sales State Coordinator Forum, if you could just talk a little about what you found out? I think Paul, you mentioned earlier that you heard it wasn't competition. But I guess I'm more curious as to what you actually found out from those folks. Thanks.

In terms of the recruiting is up company-wide. There are small pockets and you're always going to have variation when you are looking at 91 different operations. However, the thing I'm most pleased about is it's not pocketed. Is that we are seeing consistent growth in our recruiting. And I think that that would be a good thing for us in the future.

As to the SSC open forum I believe it was a phenomenal event because for the first time we really started to breakdown that barrier between headquarters and our sales team that had started to exist due to our growth. Some of the things that we heard were as minor as the internal issues and the things that we need to do to better service our field force, to better service our accounts. At the same time, we were focussed on listening to the new product ideas and the sales generation ideas that our field force had. It'll be hard to quantify those numbers, but I can tell you that that is the type consistent action that I want to take to make sure those two groups are getting together and really driving the sales strategy for the U.S. long-term.

Thank you very much for attending today's call. If you have any additional questions and want to follow-up, please feel free to call Robin Mullins or myself on the toll free numbers. Thank you.

And that concludes today's conference. Have a great day. You may disconnect.