美國家庭壽險 (AFL) 2005 Q2 法說會逐字稿

Good morning and welcome to today's Quack teleconference. Following today's presentation, there will be a formal question-and-answer session. At that time, instructions will be given should anyone wish to ask a question. Until that time, all lines will remain in a listen-only fashion. At the request of Aflac, today's conference is being recorded for replay purposes. Should you object, you may disconnect at this time. I would now like to turn the meeting over to today's host, Mr. Ken Janke. Sir, you may begin.

Thank you, Perry. Good morning, everybody and welcome to our second quarter conference 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; Joe Smith, Senior Vice President and Chief Investment Officer; and joining us from Japan is Aki Kan, President of Aflac Japan.

Before we begin this morning, let me mention the Safe Harbor, as I'm sure you expect, some of the statements we will make this morning are forward looking within the meaning of Federal Securities Laws. Although we believe these statements are reasonable, we can give you no assurance that they will prove to be accurate because they are perspective in nature. Actual results could differ materially from those we discuss today. I would encourage you to look at our quarterly report for some of the various risk factors that could materially impact our results.

Now I'd like to turn the program over to Dan. He'll start with some comments this morning about the quarter, and our operations in Japan and the United States, and our outlook. I'll follow up with some brief financial highlights for the quarter and then we would be happy to take your questions. Dan?

Thanks, Ken. Good morning, and thank you for joining us. I am very pleased with the momentum of our business through the first half of the year. In the second quarter our sales and financial results were in line with or better than our expectations. And based on our first half results, I'm confident that we're on track to achieving our primary financial objective for 2005 of a 15% increase in operating earnings per share, excluding the impact of currency translation.

I'd like to begin this morning's call with a discussion of Aflac U.S., which had a very good quarter. As we indicated during our first quarter conference call, and also at our analyst meeting, we believe that we have reestablished some momentum in the United States. I believe that momentum is reflected in our second quarter sales increase of a 9.2% increase to $307 million, for the first half of the year, new sales were 593 million, an increase of 30.5%. We saw a broad improvement in sales in terms of product and geographic.

Several products, including accident disability, specific event, dental, sold at double-digit increase. And 71 of the 95 state operations posted sales increases in the quarter. We also saw solid progress in growing our distribution in the quarter. In addition to expanding our state sales coordinators from 91 at the end of March to 95 at the end of June, we have strong recruiting results. New agent recruiting of more than 6,700 associates was a quarterly record. That represents 11.5% increase over the second quarter of 2004. And after two quarters of declines, we had an increase in monthly average number of producers, which were 2.2% to 17,400.

I'm encouraged with our progress in the distribution side of our business model, and I remain convinced that the effective distribution expansion is essential to our future sales. As we discussed at our analyst meeting in May, training is equally important to the distribution expansion. We've talked about some of the initiatives and we think we'll improve the success and retention of our newly recruited agents in all levels of our existing sales force alike.

To that end, we have several programs underway. The Coordinator in Training, or the CIT program, is currently being rolled out on a national basis. The CIT program gives an associate an opportunity to carry out management responsibilities without the pressure of a sales quarter before actually being promoted to a District Sales Coordinator, by providing a program that bridges the gap between the associate and the DSC level. We believe the trainee will be better equipped to handle the DSC duties if he or she is promoted. And if it turns out that the DSC position is not in their career path, this step provides more flexibility by allowing the CIT to remain with Aflac at the associate level. In June, all state training coordinators gathered in Chicago to be trained on the CIT program, so we can effectively launch the program to the field.

In order to take a grass roots approach to enhancing the training support and programs themselves, our field-based training teams have been visiting various state operations to assess and consult with these states on their needs for new associate training. We are reinforcing the LEASE program, that's larger earnings by acquiring smaller employers, and training our DSC's on the importance of matching classroom training only, with practical field training that compliments the program.

Although we're spending a lot of time on distribution, we also know that new product introductions can stimulate sales. Over the last four years, the most requested product of our sales force has been a vision care product, and just last week, we began rollout of Vision Now, our innovative new vision product. Vision Now has been approved in 45 states and by early August, we anticipate that this product will be available in all those states. Vision Now not only covers exams and materials like traditional plans, but it also offers eye help, surgical and permanent impairment benefits. The field is excited about having this new product in their portfolio and so are we.

It's too early to know how this product will sell, but by the time we report third quarter earnings, we'll have a much better sense of how it's being received in the marketplace. We also intend to release a new version of our Hospital Indemnity Plan later in the third quarter. It has three levels of coverage, starting with a base level for consumers, whose foremost concern is coverage of hospital stays. This revision, intended to compliment the high deductible plans and the health savings account combination.

Because I reported that we enrolled Winn-Dixie several years ago, I thought it only fair that I mention that we have discontinued -- have been discontinued on payroll deduction effective January 2006. It's probably no surprise to you as Winn-Dixie filed for bankruptcy protection in February. As they've closed stores, our in-force business at that account has steadily declined and although it's a large account for us, it represents less than one-half of 1% of our annualized premium in force.

We will be making concerted efforts in the near future to conserve the business by encouraging the policy holders to retain their coverage on a direct basis, but please remember that our business model remains squarely focused on the small business market, where we enrolled an additional 43,500 new payroll accounts this year alone. And for good reason. There are 5.6 million businesses with fewer than 500 employees, and despite our leading position, our penetration of that market is only 6%. And the results of an independent study by the Bantam Group this year reported that 72% of the employers across the country said they had never been contacted by an Aflac agent.

In addition, there is evidence from every direction about the need for our products. I'll remind you again of the recent Harvard study that indicated about half of the bankruptcies in this country are medical related. This suggests just how medical events that interrupts lives can also interrupt financial well-being.

And just last month, the Wall Street Journal article indicated that spending on hospital care, physician services, and prescription drugs rose 8.2% in 2004. The article stated it's likely that the overall healthcare cost rise will continue and employers will see a shift in the burden to the employees. Rising deductibles, reducing healthcare plan coverage, or increasing co-pay. This research simply confirms what we already know. There's a huge need out there for our products.

I remain very optimistic when I think about the opportunities for Aflac U.S. for the balance of the year. For the second half of the year, I expect sales to be up 5 to 10%, which makes me more confident that we will achieve our goal of 3 to 8% increase in sales for the year, and I expect to see better growth in 2006. At the same time, I believe we will continue to see Aflac U.S. produce financial results that are in line with our expectations.

Let me turn to Aflac Japan, which also had a solid quarter. At our May analyst meeting, Japan management commented that the second quarter sales would likely increase at a low single-digit rate, and our sales results for the quarter were consistent with those expectations. Total new sales rose 1.2% during the quarter to 32.6 billion yen, or $302 million. Excluding conversions, total sales were up 6% for the quarter. For the first half of the year, total new sales in yen were up 3.1% above the same period a year ago, and excluding conversions, total sales for the six months were up 6.4%.

As we've discussed, our greatest challenge to growth for 2005 has been and will continue to be overcoming declining Rider MAX sales. Conversions from the old Rider MAX product to the newer Whole Life product were particularly weak in the quarter, declining 64.5% from the second quarter of 2004. You'll recall that the conversions tend to have a lifecycle that is marked by a rapid rise in production, followed by a long period of decline. We have been in that decline since early 2003. About 54% of our Rider MAX customer base has converted to the new MAX coverage.

We've also experienced declines in the sale of Rider MAX to both our existing and new cancer policy holders. Currently, 30% of our existing cancer life policy holders have added Rider MAX to their base cancer life policy. When we introduced Rider MAX in 1998, we said we expected 30 to 35% of the cancer life customer base to purchase MAX in the long run, so it's clear MAX has lived up to our expectations.

And while our new sales of Rider MAX combined with cancer life have also declined, customers now seem to prefer the package of cancer life and our EVER product. As we discussed last quarter, we believe that this may reflect consumer's desire, the flexibility of having two stand-alone products rather than a product with a rider. We also believe it reflects the visibility and popularity of EVER as Japan's number one medical product.

We were especially pleased with the continued strength of our medical product sales. Medical sales were up 29.4% and accounted for almost 38% of our total new sales in the quarter. The original EVER product and EVER Half accounted for roughly 95% of the stand-alone medical policy sales and premium in the quarter, with EVER Bonus making up the balance. We view the success of these medical products as very encouraging because we expect consumer demand for medical products to continue to grow. And although the market for medical insurance is very competitive, Aflac Japan retains the distinction of being the No. 1 seller of stand-alone medical insurance in Japan.

We continued to strengthen our product line during the quarter. In late June, we enhanced our cancer life product through the addition of a rider called "Medical Check." This new rider incorporates a wellness benefit consumers want. While also increasing the daily output benefit to the same level as hospitalization benefits. We believe the new rider will enhance the value of the cancer product to consumers.

We were also very pleased with the strong sales of the cancer life policy by Dai-ichi Mutual Life. Sales improved through Dai-ichi improved significantly, rising 19.2% over the second quarter of 2004. We believe Dai-ichi is positioned to exceed their initial Aflac sales goal for the year. And because Dai-ichi's sales effort for Aflac center on cancer life product, we anticipate Dai-ichi sales will benefit from the new Medical Check rider in the second half of the year.

New agency recruiting for Aflac Japan was, again, on target in the second quarter. As we discussed, our goal is to recruit 4,400 agencies for the year. During the second quarter, we recruited about 1,100 agencies, bringing the total number of agents recruited for the first half to 2,200. This puts us on track to achieve our annual target. Of the agencies recruited in the second quarter 82% were individual agencies, which helped better position Aflac Japan to reach consumers who wish to consult with agents before purchasing insurance.

With an aging population, rising healthcare costs, consumer interest in living benefits, we believe consumers in Japan will continue to look to Aflac as the solution to reduce the financial risk of illness and accident. From a sales perspective, Aflac Japan has a target of a 5 to 10% growth for the year and we believe it is achievable.

In addition to sales and financial performance of our insurance operations, I'm also pleased with the overall strength of our balance sheet. It's that strength that has allowed us to enhance per share results by purchasing our shares on a regular basis. In fact, we bought shares in every quarter since initiating our share repurchase program in 1994. We bought 2.6 million shares in the second quarter. We're on track to purchase another 10 million shares in 2005. At the end of June, we had approximately 21 million shares available for purchase under the current repurchase authorization by the Board of Directors.

Above all, I have a lot of confidence in our business model. We have two large blocks of businesses with fairly predictable benefit and expense trends. That gives me good reason to believe that we're well positioned to achieve our primary financial objective for 2005 of growing operating earnings on a per diluted share by 15% before the impact of currency. Actually, we're ahead of our annual target, with a half of the year complete. However, keep in mind that we continue to expect additional expenditures in the second half of the year, particularly for Aflac Japan sales and promotion.

We've also maintained our goal for 2006 of increasing operating earnings per share by 15%, excluding the impact of the yen. And at the analyst meeting in May, we established an objective for 2007 of a 13 to 16% increase in operating earnings per share before currency. We believe our objectives are reasonable and achievable, and we believe they reflect the strength of our business and our leading position in the two largest insurance markets in the world. Ken?

Thank you, Dan. Let me briefly go through some of the second quarter financial numbers beginning with Aflac Japan. Starting at the top line in yen terms, revenues were up 6.5% for both the quarter and the first six months. Our persistency rate continued to improve and was 94.7%, excluding annuities for the first six months, that compares with a rate of 94.3% a year ago.

In terms of the quarterly operating ratios, as we expected, the benefit ratio continued to improve. It was 65.8% in the quarter compared with 66.8% a year ago. As we've discussed repeatedly, the decline primarily reflects our changing business mix in Japan.

The expense ratio for the quarter was 19.5% compared with 19.2% in 2004. The higher expense ratio reflected primarily our decision in the quarter to write off 2 billion yen, or $18 million before taxes of costs related to software that we will no longer use in our IT strategic project in Japan. But despite the increased expenses, the pre-tax margin rose from 14% to 14.7% in the quarter, due to the favorable benefit ratio. With the expansion of the margin, pre-tax earnings increased 11.9% for the quarter in yen. And excluding the impact of the stronger yen on Aflac Japan's dollar denominated investment income, pre-tax earnings were up 12.5% in the quarter.

On the investment side, yields in Japan were a bit below first quarter levels. For instance, the index of 20-year JGBs showed the yields were average 1.93% in the second quarter compared with 2.03 in the first quarter. They are a little below 2% currently. For the quarter we invested our cash flow in yen securities at 2.7%, and including dollars, the blended rate was 2.85%. The portfolio yield at the end of June was 4.28%, which was down 2 basis points from the end of March and 14 basis points lower than a year ago. And through July 22nd, we had invested or committed to invest about 74% of estimated 2005 cash flow at an average yield of 3.03%, which is right in line with our target for the year.

On an overall basis, credit quality remains very high. Securities rated a BB or lower were only 1.8% at the end of June compared with 1.7% of assets at the end of March on a consolidated basis. The only addition to the below investment grade holdings in the quarter was General Motors, which was only about $30 million. The unrealized losses on our below investment grade holdings were 79 million at the end of the quarter.

Let me turn to Aflac U.S., which also had a good quarter from a financial standpoint. Earned premium rose 10.6% in the quarter and investment income was up 6.2%. Total revenues rose 10% in the quarter and 10.1% for the first half of the year. Like Japan, the annualized persistency rate improved for the six months, it was 74.1% compared with 73.4% a year ago.

In looking at the operating ratios, the benefit ratio was 54.2% compared with 53.9% a year ago. And the expense ratio improved slightly from 31.6 to 31.5%. As a result, the profit margin for the quarter was 14.3% compared with 14.5% in 2004. Pre-tax operating earnings rose 8.3% for the quarter and they were up 9% for the six months.

In terms of U.S. investments, new money yield for the quarter was 6.06%, which compares to 6.74% in the second quarter of '04. And the yield on the portfolio at the end of June was 7.3%, down 1 basis point from the first quarter and 18 basis points below 2004.

In looking at some other items, as Dan mentioned, we purchased 2.6 million shares in the quarter. The average cost was 41.33. That brings the total number of shares purchased to the first -- for the first half of the year to 5.6 million shares. The debt-to-total capital ratio at the end of June was 19.9%, excluding FAS 115 gains at the end of June a year ago, it was 22.8%. And some of you may have noted that subsequent to the end of the quarter, we did issue 40 billion yen, or approximately $360 million of five-year Samurai bonds. It's our intent to use most of the proceeds to repay the debt that is due in October of this year.

Non-insurance interest expense in the quarter was unchanged at $5 million. And parent company and other expenses were $11 million in the quarter compared with 12 million a year ago. The operating profit margins continued to improve for the quarter. The pretax margin rose from 13.5 to 14.1%, and on an after-tax basis, margins increased from 8.7 to 9.2%. Also on an operating basis, the tax rate was 35% compared with 35.6% in '04.

As reported, operating earnings per diluted share rose 16.4% to $0.64, which was in line with consensus. The stronger yen increased operating earnings by $0.01 per share in the quarter, and excluding the yen's impact, operating earnings per share increased 14.5% for the quarter and 16.4% for the first six months.

Finally, let me say a couple of words on the outlook for EPS for the balance of the year. As you heard from Dan, our objective for 2005 is a 15% increase in operating earnings per diluted share, excluding the impact of the yen. As we previously stated, our 2005 target is based on 2004 operating earnings of $2.23 per diluted share, which was adjusted for FAS 123R. That would equate to a target this year of $2.56 on a currency neutral basis.

Although we're running ahead of our annual target so far this year, we still expect to increase spending in the second half of the year. As a result, operating and EPS growth excluding the yen will likely be below 15% in the remaining six months of 2005. And as you have undoubtedly noticed, the yen has weakened a bit in the last several weeks. If we achieve our target for this year and the yen remains at 1.10 to 1.15, it's currently close to 1.13, we would expect that that would translate to reported earnings per share of about 2.54 to 2.56 for the year. And under that scenario, third quarter operating earnings per share would likely be $0.62 to $0.64 per diluted share. The current First Call estimate, at least prior to last night's release, was $0.65 in the third quarter. And, again, as you heard, our target for '06 is another increase of 15% before currency translation, and our goal for '07 is a 13 to 16% rate of EPS growth on the same currency neutral basis.

We would like to make sure that everyone has an opportunity to ask a question this morning, so I'd like to ask you to please limit yourself to one question and then you can get back in the queue. That way we can be fair to everybody. We would be more than happy now to take any questions that you might have. So, Perry, if you could begin the polling process.

Thank you. At this time, we will begin the Q&A portion of the call. [OPERATOR INSTRUCTIONS] Our first question comes from Jason Zucker from Fox-Pitt and Kelton.

Good morning, and thank you. Dan, I was hoping you could just comment a little bit further. You had said that 71 of the territories were in positive sales growth. I was hoping you could just refer back to a slide that you guys had given us back at the Investor Day when you talk about how many of the states are at 10% or greater, how many are growing between zero and 10% and how many are showing negative growth. And I was hoping you could give us those numbers for the second quarter and compare them to the slide that you gave us that showed the 12 months for 2004.

Yes. Okay.

Yes.

Is that it?

Well, just a clarification, Dan, also, you said something about purchasing another 10 million shares in 2005. You didn't mean 10 million shares --

No, I'm sorry, a total of 10 and we've --

Total of 10, okay.

That's what we said, right. I'm going to let Paul answer that. But let me just say that the trends look good everywhere in U.S., and I'm going let him specifically address that one. You've got that information? Yes, absolutely. Okay. Jason, to your question, we had 49 of our 95 state operations exceed a 10% greater -- rate of growth in the second quarter. We had 22 between 0 and 10%, and we had 24 operations that had a negative sales growth. I do not have the numbers from the slide that you were given at the analyst briefing in front of me. However, I think it's somewhat similar. I think we've seen -- if anything, we've seen it skew more towards the 10% growth being stronger, but I think that the numbers on the 10% growth have significantly improved.

Terrific. Thank you.

Our next question comes from Andrew Kligerman of USB Securities.

UBS. Anyway, the one question I would ask, Dan, is we've have read about, heard about a number of competitors coming out with medical products, Yasuta [ph], Dai-ichi, Asahi [ph]. Could you give us the sense of how they are doing and how you feel, given potentially a more crowded landscape.

I'm going to let Aki answer that, Andrew. But let me just say that, we're still by far the number one seller of medical insurance, and I do believe there's going to continue to be more and more, but we're used to that because we've always seen that in the United States. So, Aki, why don't you specifically address that.

Yes. This is Aki. I've been in Japanese market in the last six months and I've seen about eight new products coming in, into the market just for this year so far. But most of the products that the big traditional life companies introduced are a very big face value policies at this point, which allows the kind of substandard -- substandard policy holders such as [inaudible] of Sumitomo. And those big face value life -- healthcare policies are not really exactly competing with our policy like EVER because EVER has much smaller face value policies. So at this point, the big traditional life companies are pursuing a kind of more richer people along with their first sector products, which covers the death benefits, while Aflac's model is still pursuing the smaller face value health policies that covers majority of Japanese people. Does that answer your question, Andrew?

It does, and there a chance that you might come out with some of the larger face amount down the road? Is that something that could be in the plan?

Again, I think we have to understand the difference in business model between Aflac and all other big traditional life companies. They -- they have sold a big death policies ever since the World War II and they just cannot quickly change their business model from the big face value policies to small policies like Aflac does. I'm sure they have been trying to change their business model, but not as quickly as we all anticipated. And from Aflac's perspective, we've been selling the small face value policies for last 30 years and we have been making our business model stronger every year. So I would -- I would think that the difference between the two different business models are getting bigger, in a sense.

But, Andrew, the answer to your question is we have gradually upped the amount of coverage that can be bought. In terms of units, you can buy additional units and so we're moving the direction to make sure that if there is a market out there for large premiums that are wanted, we can address that. It's much easier for us to address that, as you could well imagine than for them to address the small premium.

Got it.

So we can certainly do that and we'll continue to look at it. But the point I think Aki's making is that our agents are used to selling volume and it takes much more time to sell high premiums.

Yes, right.

And that's the difference, is we sell a lot in a short amount of time versus spending a lot of time with one individual.

Thanks a lot.

Sure enough.

Our next question comes from Suneet Kamath of Sanford Bernstein.

Great. A question on Dai-ichi. First, was there anything unusual in the second quarter given the strong sales were up around I think around 2.3? I was just wondering if there was anything unusual there. And then is there any possibility as you move forward with Dai-ichi for them to start selling either Rider MAX or your EVER products?

Yes, there was. In fact, I spent quite a bit of time with Dai-ichi and their president, and we did some ceremonial things where in essence we set out to have a contest and he and I were doing all these particular incentive item promotional things, and all of that is to say, yes, that had some positive impact. There's no question. Not so much because -- he's a brand new CEO, he wanted that first year to concentrate on traditional line of business, but he had said that hits second year he would help increase Aflac sales, and so by doing what he did, putting his name on the line, saying that he was involved with it, that did escalate.

As far as other new sales, I've always wanted to get Rider MAX or EVER in with them and we have not been able to do that, but this new cancer rider that we're adding, we believe has some potential for them to go back and offer it. So there are other things on the horizon. And I think what you should get out of Dai-ichi Life is, a lot of people wonder if it was the declining new sales force always, and it's obvious that it did bottom out and it has now picked up. And I think we'll have good years and not as good of years simply because they may be focusing on their own products, but this year's going to be a good year in terms of sales with Dai-ichi Life.

Okay. Thank you.

Our next question comes from Nigel Dalley of Morgan Stanley.

Great, thank you. My question is on Winn-Dixie. I was hoping you could give us some color on how large that block of business is in terms of annualized premiums? And despite your retention efforts, if we're very likely to see some impact on overall U.S. persistency ratios and the like amortization in 2006.

This is Kriss. I think the block overall's approximately 15 million of annualized premium in force, and what happens as far as amortization and the like, obviously it will increase to the extent we get excess lapses out of that block. On the other hand, overall persistency has been improving. So we will have conservation efforts and the real effect probably won't occur until 2006 when payroll deduction is forecast to be terminated, but I'm sure there will be some fallout before then as the stores close and the employees leave and that sort of thing. So I think it will be gradual more than a one-time hit, Nigel.

Let me say one other thing about Winn-Dixie or any other account. We told you three years ago about Winn-Dixie and Wal-Mart and others because that was the first time we had ever landed big accounts. The Aflac duck advertising campaign put us in the forefront and all of a sudden it was great to write these big accounts. Since then, we've been writing big accounts and we just don't tell you about them anymore. Because it's not significant to the overall block of business, nor to the new sales numbers when, for example, I mentioned that we've already written 43,500 accounts in the first six months of this year. So -- but I thought it only appropriate to mention it to you because we had mentioned it earlier. But I don't think it's going to have any impact in terms of us meeting any financial objectives we've got going forward.

Okay. That's helpful. Thanks, Dan.

Our next question comes from Thomas Gallagher of CSFB.

Good morning. Just a question on U.S. sales, I guess for Dan or Paul. Dan, I heard you say 5 to 10% sales growth guidance for the second half of the year to get to the 3 to 8% annualized. Just in terms of looking at the third quarter, is there any reason to think that 3Q won't be higher than 2Q, given that you have the launch of the Vision product?

It's just too early to tell. I -- we are encouraged that things are positive, but we don't want to go out on a limb at this particular point because it's just too early to tell. You know, we made a mistake a year ago, or year and a half ago when we thought everything had turned and everything was in the positive manner, and then it came back and bit us, and we're not going do that again. We're going to cautiously be optimistic. I will say that the fundamentals are there, and so I'm much more encouraged than I was before, but I just want to see a gradual recovery back to above 10% long-term is what we're shooting for. Paul, do you have anything? The only comment I'll add to that is 40% of our sales come in the last three weeks of the quarter and, since they are back-end weighted, we want to make sure we have a good grasp of what's going on, so I feel confident we'll be within the range that we projected.

And just one follow-up, is there -- do you have any kind of leading indicators whether or not the Vision product is going to become substantial, or any other things you've looked at so far just to get an early read on how things might trend there on the Vision product?

We really need to wait till the end of the third quarter to give us a good estimate on what's going to happen.

Thanks.

Our next question comes from Randy Simpson of Goldman Sachs.

Good morning. In the past, you guys have talked about long-term sales assumption in the double-digit range, and the '05 target was set down at 3 to 8% following the agent growth fall-off in '04. So the question is, with three quarters of agent growth for the last two quarters being double-digit agent growth, is the long-term sales growth double-digit range, is that quote, unquote long-term still, or can you actually leverage the agent growth momentum to drive 10+% sales growth near-term as in '06 and '07? And I guess the follow up is, if not, what will it take to get back to double-digit sales growth in the U.S.? Thanks.

Yes, I'll say that our -- I will be unhappy if long-term we don't move back to 10% sales growth in the U.S. The -- what we really have got to look at is all this new training and the impact that it's going to have. And new agents and new training takes time, and so I want to build on this. I want to be in the 5 to 10% range, and then I want to see us gradually move back into the 10% area and stay above there. So I -- we'll just have to monitor it as we go along, but as I said, I am cautiously optimistic that we've headed that way.

Thank you.

Our next question comes from Eric Berg of Lehman Brothers.

Thanks very much. My one question relates to training as well. Why will the rollout of the -- help me understand the relationship between the rollout of the Coordinator in Training program, if there is a connection between it on the one hand, and your efforts to boost the number of monthly producers. And relatedly, since you've had LEASE in the marketplace for, what, a year and a half, what are you doing differently, or what will you be doing differently with LEASE in the future to make it more effective than it has been, or maybe you feel it has been effective. Thank you.

Eric, I'll start first with your question about the CIT program. The transition from an associate and the full-time responsibility of soliciting or marketing the sale of Aflac business and servicing that business, to going to recruiting and training people, as well as personally producing is a huge transition and jump. Up to this point, there has been no educational process or formal training for that individual about the new career they were going to take on. The CIT program is a formal way for us to go in and train those people and we believe that it will create a significantly higher success rate for our new district sales coordinators as a result of the education they'll receive, the timing they receive and the mentoring they'll receive. Can we quantify that percentage at this point? Absolutely not. It's difficult to say how it will be handled in each different area, but I do expect it to move those numbers in a positive direction.

As to your question about LEASE. First of all, LEASE was a totally voluntary rollout a year and a half ago. It has only become something that we pushed on a national basis in the beginning of 2005 and we're only now still finally putting it in all of our state operations. What I can tell you is, yes, we've added components of LEASE that are much more on the back end accountability basis.

We still believe that the fundamentals of LEASE, the idea of going after smaller employers and the idea of using specified scripts for our new people is a strong program. However, we need to make sure that we are doing a successful job of getting those people trained and making sure that our coordinators understand the value of this program.

Again, I'll reverberate the comment that Dan made earlier, 47,580 new accounts, absolutely is a testament to the fact that I think LEASE is working for us and that we're helping many people in the marketplace.

Thank you, Paul.

Our next question comes from Mark Lane of William Blair & Co.

Good morning. My question is regarding medical sales in Japan and EVER. I think medical's premiums were up 29% in both the first and second quarter, but unit growth was 4 to 5%. Can you give us some idea of the breakdown of sales between the different versions of EVER in the quarter so we can get some sort of sense of how the higher average selling price is going to effect growth?

Mark, I'm going to let Aki -- or Ken's going take that, but just remember, it's basically two products for EVER. The big one counted for less than 5%, so it's basically EVER Half and EVER is what's driving everything.

Mark, I've got the production report right in front of me, so let me just briefly go through some of those numbers. On a policy basis, the original EVER product accounted for about 47% of policy sales in the quarter. EVER Half was 48%, and the balance was EVER Bonus. On a premium basis, the original EVER product was 52% of sales. The EVER Half was 43% and then the balance of premiums was from EVER Bonus.

And, remember, as we discussed in the first quarter, that the higher premium per policy was coming from the increased sales of EVER Half, which has a higher premium, although the premium rate differential is smaller at younger issue ages than at older issue ages, but that the original EVER product was being bought by older people, which leads to a higher premium. And also we've emphasized the, kind of a 10,000 yen campaign where basically what we're promoting is the purchase of 10,000 yen per daily hospitalization benefit rather than 5,000 yen, which was the original EVER product. So those those are some of the things that are moving the premium rate at a faster rate than the --

Do you have any insight on the movement towards the -- or the success of the 10,000 versus the 5000 as you move to that?

Let me ask Aki if he can follow up on that.

Yes. In many sales campaigns, we are experiencing that the more and more 10,000-yen policies are sold. And in other competitor companies or other companies trend too, maybe because the Japanese economy is recovering, the richer people are trying get kind of better -- bigger policies these days, so I personally believe that the consumers are wanting to have the bigger policies from now on, but that doesn't mean necessarily the consumers who want to have the absolutely minimum size of policies are still there.

And just a quick follow up to the question from earlier on the standalone medical competition. Then last September at the analyst meeting, Yatsushi [ph] was really focused on moving up market and with the economy improving and this EVER Bonus product, but it doesn't really seem like that's really caught on. Does that mean that that market opportunity was not as great as you thought, or is it just that you're still in the sweet spot of this product cycle and you're trying to exploit that? Is it possible to go after --?

Well, I still believe the market is expanding and is getting bigger and bigger. But the problematic issue in the Japanese market right now is, there are just too many new products coming in, which really are confusing our consumers right now. When we -- if we compare right now and six years ago, six years ago there were only about 20 products in the whole entire market versus today, we have about a little bit less than 100 products playing in the field. So we have -- we are in a totally different environment, which really are confusing our customers. And I don't think this condition would lasted that long, because we've been telling our customers through all kinds of media that we are the number one in terms of the policies in force, in terms of the policy sales in medical and more and more people are buying EVER product these days with the 10,000 yen. So I think the momentum would not really change throughout this year and even bigger next year.

Okay. Thank you.

Our next question comes from Vanessa Wilson of Deutsche Bank.

Thank you, and good morning. Could you talk a little bit about the -- sort of the lifecycle of moving the agents up to the CIT phase and then up to the RSC and DSC levels. Just watching your sales force, your state sales coordinators has expanded nicely. Your recruiting is expanding. You're getting some of that transition to monthly producers, but it appears to me that the DSC's and RSC's has lagged in this process.

I'll be happy to talk about that. The fact of the matter is that when an associate traditionally had gone to the DSC level, they were promoted automatically effective at a time that the regional sales coordinator and state sales coordinator agreed upon that growth. Their success rate depended, in many cases on their own skill set and not upon the training that they received. Program is a 12-module program that we're going to allow people to run throughout a year.

Now, do we expect people to stay in this program a year before they get promoted to be a District Sales Coordinator? Absolutely not. We're going to give state operations the autonomy to make promotions when necessary, but what we are going to ask them to do is to continue that education process, even beyond the time that that person has been promoted to ensure their success within the position. I do believe that some period of time is necessary for them to be in the program so that they can understand the burden of the responsibility that they hold prior to taking on a quota, or an MPI, as we refer to it here.

The question about the growth in our state sales coordinators, you're correct, we grew 11.8% in our state sales coordinators year-over-year and we grew our District Sales Coordinators only 0.5%. That is a focus for us, however, I do believe our District Sales Coordinator turnover has been larger than the 0.5%. We've had to demote some District Sales Coordinators due to lack of the skill set necessary to do well in that position, and we've also promoted slightly more than we've demoted.

So I feel good about the churn there, but long-term I do look to grow both the district and the regional sales coordinator base, but nothing outside -- nothing outside standard growth that will help us. I do not expect there to be any dramatic growth or shifts in our model any time in the future.

So just to say it back to you, it sounds like you've had some definitional changes in those roles, and in a sense you're upgrading quality, so for a period of time that's showing in these numbers?

I do believe we're upgrading quality. I do not believe we had a definitional change in the role, other than we expect higher quality and a stronger trained person in that role. It's still the primary responsibility of the Regional Sales Coordinator to do recruiting and some training, and still, the primary responsibility of the District Sales Coordinator to train with a minor bit of recruiting.

Our next question comes from Jeff Hopson of A.G. Edwards.

Hi, good morning. On the U.S. sales, is there an appropriate measure that looks at how much the sales are coming from the newer generation of agents recruited over the last year, and how much versus more seasoned? And then any early gauge on productivity of this generation of sales agents versus previous generations?

There are -- gauges we look at, new associate premium and the like. We do believe that our associates are doing an effective job of producing and we're growing them. We only saw our total number of producers in the quarter grow by 2.2%, and so from a productivity standpoint, our overall producers, were more productive with a 9.2 increase in sales. But we don't look to productivity gains as something that we're trying to attribute. I believe if we can train our people within the effective manner that we have done in the past and really grow our training to an overall -- to be one of our overall strengths that we will see, the average producer fit in line with what we've existed in the past and that we will see those people be more successful and we'll retain a higher number of those people long-term.

But at this point is it fair to say that the new agents recruited over the last year are having not a huge impact on the 9% sales increase? Is that fair, or --?

I will say this. The recruiting really took off in the -- this year. And those people, we have not had a chance yet to really see the production. It takes six to twelve months before we really see that and, of course, last year recruiting was down. So that's the issue. If you ask me that next quarter, we can give you more detail and we'll have a better idea.

Well, new agents do contribute somewhere between 20 and 25% of our production in any particular period, so new agents are always important to us and continuing to grow the new agents is a critical success factor in growing new sales.

Okay, great. Thank you.

Our next question comes from Colin Devine of Smith Barney.

Good morning, thank you. I was wondering if you could expand a little bit on the extra costs, I guess it was Ken referenced that you expect to incur in the second half here, EPS growth down a little bit. Are they going to be in the U.S., in Japan, and will they carry over in the first, second quarter of next year?

Yes, Colin, Kriss again. We -- as I said at the analyst meeting, one of our risks of achieving the longer-term growth is over-earning in the near term, and we do have a tendency to reinvest earnings in excess of our stated targets and in activities that will help grow the top line. And we intend to do that during the second half of this year. Both perhaps, primarily in Japan, but I'm not ruling out the U.S., if we can find ways to invest and achieve effective increases in growth.

So right now, we're going to emphasize the number one medical program in Japan and our media advertising in the second half of the year, and I've already authorized the specific additional amount over and above our initial budget for that. But we're looking -- I hate -- I don't want to just spend money to spend money. I'm trying to insist that the sales folks demonstrate that they expect to add value and I asked them how much are you going to add in new sales for every additional unit of new budget you get? So that's pretty much the story.

Okay. Then one quick follow-up. On the 10,000 versus the 5,000 yen medical product, have you had much in the way of conversion activity from the initial product to the higher one, or not? Or do you have a program that's in the works to encourage that?

This is Aki. I don't think there's any conversion from 5,000 to 10,000. That's mostly the new policies. And with my very limited experience last six months, most of the policies I saw was complete new policy holders who wanted to buy the 10,000 yen benefit size.

Colin, that's a good point, and that is I believe an opportunity for us to go back to that existing block and add 5,000 more to them and that's what I'm encouraging them.

Our-- if you look at Japan, one of the key things that we did was bring on the individual agents. If you look back at us in the early days, it was the corporate agencies that built the business. Then we switched over and started doing these individual agencies. The -- a lot of those, the business, a large part of the business is controlled by the corporate agencies and we have to work through them to get them to participate in these new thoughts and ideas, and we are encouraging them right now to work toward offering new products, also to upgrade what we've got. So that will be a challenge we've got, but it's certainly, is an opportunity for us.

Okay, Dan. Of the 29% increase in the medical, would conversions be a diminimus amount of that at this point, or can you give us an idea, is it a meaningful percentage?

It would be diminimus, Colin.

Thank you very much.

Perry, it's just a couple minutes or so before 10:00, we've got time for one more question before we hit the 10:00 hour, so if we can take one more and then we'll conclude the call.

Okay, sir. Our last question is from David Lewis of SunTrust Robinson and Humphrey.

Moving to Japan sales, clearly the momentum has to build to achieve your expectations for the full year. Could you give us the timing of some of the corporate agency sales campaigns, third quarter versus fourth quarter? And expectations for third quarter sales? And lastly, if Dai-ichi hits their target, what might be the second half sales growth?

Well, we need to have 7% per quarter to make 5 for the year, or we need 5 and 10. Any combination will do it. So I think it's reasonable to say that the third quarter will definitely need be up over 5. And I would frankly like to see 7 and 7 if I had my choice, but I'll take it any way I can get it. Aki, do you want to make any comment?

Yes, well, David asked about the Dai-ichi Life. Dai-ichi Life at this point is very strong. In terms of the number of policies they have committed is quite big, much bigger than last year and also at the same time, because -- because of the policies, I mean the product that they are selling, just started selling from the month of June has a higher premium size, which is the Medical Check Plus cancer policy. So the increase in premium -- premium size also is going to impact Dai-ichi Life's production. So with the combined result, I'm pretty sure they are going have a pretty good result in 2005.

Aki, how much higher is that premium?

Well, it's about, I think it's about somewhere between 15 to 20%.

Any guidance on sales campaigns?

They -- they are holding a sales campaign in July and November and February.

Thank you.

Okay. We've hit 10:00. We certainly appreciate you all joining us for the call. If you have any other questions, please call us at our toll-free number or send me an e-mail. We look forward to talking with you again. Thank you.

Thank you for participating in today's teleconference and have a nice day.