美國家庭壽險 (AFL) 2005 Q3 法說會逐字稿

Good afternoon, and welcome to today's third quarter earnings release 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, and good afternoon everybody and thanks for joining us on today's third quarter call. Joining me today 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 Aki Kan, President of Aflac Japan is joining us from Tokyo.

Before we begin today's call, let me mention the safe harbor language. I'd like to point out that some of the statements in this teleconference 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, in fact, prospective in nature. Actual results could differ materially from those we discuss today. So I'd encourage you to look at the quarterly report for some of the various risk factors that could materially impact our future results.

Now I'd like to turn the program over to Dan, who will begin with some comments about the quarter and our operations in Japan and the United States. I'll follow up briefly with some financial highlights, then we will take your questions. Dan?

Okay. Thank you, Ken. Good afternoon, and thank you for joining us.

Our conference call is being conducted off site today because of the timing of our annual sales convention. It's always a great celebration. We acknowledge our top U.S. producing sales associates, and that year's convention is especially meaningful because it commemorates our 50th anniversary of operations. It's been a rewarding 50 years and our third quarter was a continuation of our record of success. Our marketing and sales results were in line with our expectation and our financial results were once again strong.

Let me start today with a discussion of our U.S. business. Overall, Aflac U.S. had a very good quarter. I was especially pleased to see our second quarter sales momentum extend into the third quarter. Total and new annualized premium sales increased 10% to $297 million in this quarter. For the nine months, sales were up 5.6% to 890 million. These results were consistent with both our sales expectations for the second quarter of 2005 and our objective for the full-year sales growth.

As I stated three months ago, I believe our U.S. sales force has been reinvigorated. Like the second quarter, we saw a broad improvement in sales in terms of geography and product. All of our eight sales territories produced increases over the third quarter of 2004, with the Northeast and South both posting 14.1% increases, and 74 of the 95 state operations posted sales increases in the quarter, which was a slight improvement over the second quarter. We were especially pleased with the market initiative reception of Vision Now, the new vision product we began rolling out at the start of the third quarter. By the end of September, we were selling this unique vision plan in 44 states. Vision Now contributed more than $8 million or about 3% of the total new sales in the quarter. Although its premium is lower than the average of most of our other policies, we expect it to be a very good complement to our product line.

I know many of you want to know about the impact of the hurricanes on our business. Let me first say that our primary concern has been and continues to be the well-being of people in devastated areas, especially our customers and sales associates. In addition to our $1 million donation to the relief effort, we announced in early September that we are giving our customers a 90-day grace period for premium payment. The state of Louisiana has extended a mandatory grace period through the end of the year for seven parishes. We are also providing assistance to our sales associates. In addition to financial help, we are offering opportunities for established sales associates to relocate permanently or temporarily until they decide to return to their home market. Of course, it's difficult to estimate the lost sales from an event like a hurricane. However, we concluded that the hurricane probably reduced our sales growth by about 1% in the third quarter. Keep in mind that's just the impact from September sales. We expect sales growth in Mississippi, Louisiana, and part of Texas to be held back in the fourth quarter as well. However, we still expect to meet our numbers for the second half of the year.

We've been pleased that Mississippi sales have already recovered to a degree, and although they still lag behind the Company's average growth, clearly it will take a long time for our business in Louisiana to return to normal. Sales in Texas were also impacted by Hurricane Rita. However, for the most part, the affected area in Texas, we believe the primary impact on sales was a delay in enrollment. The overall financial effect from the hurricanes in the third quarter was not material. Due to the grace periods, we don't see any impact on persistency until the fourth quarter. At that time, we could see increased lapses. But keep in mind that a large portion of our business in the affected areas was older cancer business. As a result, the reserve release would exceed the DAC write-off, and, therefore, we would actually benefit the bottom line.

As we've discussed before we're focusing a lot of attention on the distribution side of our business model. At the end of September, we had 95 state organizations, and we've produced measured growth in a number of both regional and district sales coordinators in the quarter compared with a year ago. We also recruited about 5700 new agents in the quarter, which was 2.5% higher than the third quarter of 2004. For the first nine months of the year, recruiting was up 8.2%. I'm not at all surprised or disappointed with the third quarter recruiting. In fact, it's consistent with what I expected. You need to remember that we recruited very heavily in the first half of the year. In addition, we spent a lot of time on the rollouts of our new vision and hospital indemnity products, as well as coordinator and training programs during the third quarter. Those activities took away from the recruiting in the quarter. However, for the full year I expect to see recruiting up 5 to 10%.

We also reported that the average number of monthly producers -- associates rose slightly to 16,900 in the quarter. Our new training initiatives are still in the early stages. However, as our training programs take hold, we expect the growth of the producer base to improve. As you'll recall, the coordinator in training, or CIT program, is a leadership development program that was rolled out on a national basis in July. The CIT program lets our associates work as an acting sales manager for a period of time before actually being promoted to a district sales coordinator. By providing a trial period 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. Even though we just rolled out the program in the third quarter, more than 800 sales associates have already attended our CIT training classes.

In addition to training, we're also on track with the product initiatives that we have previously discussed. We began introducing a revised hospital indemnity plan in the third quarter that has three levels of coverage. One of the levels was specifically designed to fit within the given parameters of the health savings accounts, or HSAs. This particular plan provides daily hospital benefits and pays claims on the front end of the health event. This increases the chance that a claimant will have an adequate amount of funds to pay the high deductibles on the health plan associated with the HSA. By the end of September, we had introduced the new hospital indemnity plan in 20 states, and as it was approved in an additional 13 states. We are very pleased with its initial reception.

For several years, you've heard us discuss the tremendous size of the U.S. market. The Small Business Administration estimates that there are 5.6 million businesses with fewer than 500 workers. And despite our leading position our penetration of that market is still only about 6%, which suggests a huge potential. And it seems that I hear evidence almost every day as to why those workers need our product. You've heard me say or mention the Harvard study that linked personal bankruptcies to the cost of healthcare treatment, in addition to a recent U.S.A. today Kaiser Family Foundation/Harvard School of Public Health poll indicates that 28% of Americans had trouble paying a medical bill in the past. Of those, 62% already had insurance. And a New York Times article just last month noted that many employers are using a tactic called cost shifting, which demands employees to pay higher deductibles, premiums, and copayment fees. There is obviously a significant need for protection we provide, and we believe we're well-positioned to tap into that opportunity. Our sales force has demonstrated resilience and passion, which they've translate into sales growth. I believe we will see a fourth quarter sales increase of 5 to 10%, and I'm confident that we will achieve our goal of a 3 to 8% increase in sales for this year. I also expect to see better growth in 2006.

Let me turn to Aflac Japan, which also delivered on a solid quarter. Total annualized new sales increased 8.2% to 31 billion yen, or $278 million in the third quarter. I'm certainly pleased that our growth rate in the quarter was significantly better than the second quarter. As you'll recall, we expected weaker second quarter sales results followed by a stronger third quarter which is exactly what happened. And I believe our third quarter result keeps us on track to achieving our goal this year of a 5 to 10% increase in sales.

We were especially happy with sales of our medical product, which has sustained steady and consistent sales growth this year. Medical sales rose 31.7% over last year and accounted for about 38% of the total new sales in the quarter. EVER and EVER HALF together accounted for 96% of the stand-alone medical sales on the premium basis in the quarter. In a health cost conscious market like Japan, we expect the demand for medical products will continue to rise in the future, and we remain encouraged about the outlook for medical insurance market. Although the market is very competitive, Aflac Japan retains the distinction of being the number one seller of stand-alone medical insurance in Japan, and we believe our number one status is a distinct advantage in the marketplace. As you will recall, we introduced a new cancer insurance product June, which is an extension of our existing cancer life product category. The new product, called Twenty-First Century Cancer Life Medical Checkup Plan incorporates a wellness benefit while also increasing the daily outpatient benefit to the same level as the hospitalization benefit. We believe it represents the best relative value in the market. The market -- the reception to this new product has been very positive and we believe it's one reason for our strong sales through Dai-ichi Mutual Life which were up 19% for the quarter.

As we've discussed before, our greatest challenge into sales this year has been overcoming declining Rider MAX production. As expected, we did not see any improvement in Rider MAX conversions to the whole life version of Rider MAX. More than 55% of Rider MAX customer base has already converted to the new Rider MAX product, and as a result, we expect to see a decline in Rider MAX conversions to continue. However, we've identified an older block of cancer life business that we are converting from payroll billing to a direct billing. We had some of these conversions in the third quarter, but we expect the majority of them to occur in the next two quarters. As a result, we expect to see a sharp increase in fourth quarter conversions compared with the third quarter of this year.

We also experienced continued declines in the sale of Rider MAX to both existing and new cancer policyholders. Currently 30% of the existing cancer life policyholders also have Rider MAX. That adoption rate is consistent with the 30 to 35% rate we expected when we introduced Rider MAX seven years ago. And while our new sales of Rider MAX and a combination with the cancer life have also declined, consumers are choosing to bundle the cancer life and EVER product. As we discussed last quarter, we believe this may reflect consumers' preference for two stand-alone products over a product and a rider. We also believe it speaks to the visibility and popularity of EVER as Japan's number one medical product.

We continue to view Japan as a market that is perfectly suited to our products we sell. With Japan's aging population, it's likely their national healthcare system will continue to experience financial stress. As a result, consumers will face the prospect of higher out-of-pocket expenses. We believe our products will continue to be a valuable component of consumers' health care coverage as they look to Aflac Japan as a solution to reduce financial risk of illness and accident.

In addition to our sales and marketing results, I'm also pleased with our overall financial condition of Aflac. I believe our balance sheet is stronger than it's ever been in its history, and I also believe our business model puts us in a good position to achieve our future financial target. We have been able to meet or exceed our earnings objectives throughout 2005 while still allowing the management of our insurance operations the flexibility of spending more money on promotional activities. That's still true today. Yet based on our nine-month results, I believe we will meet or exceed this year's target of a 15% increase in operating earnings per share, excluding the impact of currency translation. I want to emphasize that I don't expect this year's very strong financial performance to affect our ability to achieve our stated objectives for the next two years. In fact, we are maintaining our goal for 2006 of increasing operating earnings per diluted share by 15%, excluding the impact of the yen. We've also retained our objective for 2007 of a 13 to 16% increase in operating earnings per diluted share before the effect of currency. I believe those objectives are a reasonable indication of the opportunities we see in the U.S. and in Japan, and more important, I believe they are achievable.

Ken?

Thank you, Dan.

Let me briefly take you through some of the third quarter numbers, beginning with Aflac Japan. Starting at the top line in yen terms, earned premium rose 6.1% in the quarter and total revenues were up 6.2%. Our persistency rate continued to improve a bit and was 94.7% excluding annuities on an annualized basis for the nine months compared with 94.5% a year ago. In looking at the quarterly operating ratios, as we expected, the benefit ratio continued to improve over last year. It was 66.6% in the third quarter compared with 67.4% a year ago. The expense ratio for the third quarter was 18.3% down from 18.6 in 2004. As a result, the pretax margin rose from 14% to 15.1 in the quarter. With the expansion of the margin, pretax earnings increased 14.5% for the quarter in yen terms, and excluding the impact of the weaker yen on Aflac Japan's dollar-denominated investment income, pretax earnings were up 14.1% in the quarter.

On the investment side, yields in Japan were a bit higher than they were during the second quarter. For instance, as measured by an index of the 20-year JGB, yields averaged 2.02% compared with 1.93 in the second quarter. For the third quarter, we invested our cash flow in yen-denominated securities at 3.15%, and including dollars, the blended rate was 3.43%. Portfolio yield at the end September was 4.26, which is down 2 basis points from June and 16 basis points lower than a year ago. And through yesterday, we had invested or committed to invest approximately 98% of Aflac Japan's estimated cash flow for 2005 at an average yield of 3.17%, which is ahead of the target we had set for this year of 3%.

The overall credit quality for the Company remained high. On a consolidated basis, securities rated BB or lower were only 2% at the end of September. That's up slightly from 1.8% at the end of June. The only addition to the below investment grade securities in the quarter was Ford Motor Company. The total unrealized losses on our below investment grade holdings were $114 million at the end of the quarter.

Let me turn to Aflac U.S. where earned premium rose 10.1% in the quarter. Investment income was up 7.4%, and total revenues climbed 9.7%. The annualized persistency rate for the nine months improved from 73.8% to 74.8%, but keep in mind due to the grace period that we extended to the hurricane victims, there was clearly some business that otherwise would have left that did not, which probably pulled up the persistency rate a bit. In looking at the operating ratios for the quarter, the benefit ratio is 54.7 compared with 54.2% a year ago. The expense ratio was little changed from 2004 at 30.9% compared with 30.8%. And the profit margin for the quarter was 14.4 compared with 15% a year ago. Pretax operating earnings rose 5.1% for the quarter, and at Aflac U.S. in terms of investments, the new money yield for the quarter was 622 versus 633 a year ago. The yield in the portfolio at the end of June was 725, down 5 basis points from the second quarter and 20 basis points lower than a year ago.

Now turning to some other items of interest for the quarter, we did complete our annual profit repatriation in the quarter with the transfer of 41.2 billion yen, or $374 million to Aflac U.S. We also purchased 2 million shares in the quarter at an average price of 43.99 per share. That brings the total number of shares purchased for the first nine months of the year to 7.6 million shares, which is consistent with our annual expectation of buying 10 to 12 million shares. The debt to total capital ratio was 22.6% at the end of September compared with 21.9% a year ago. The higher debt to total capital ratio reflects the issuance of 40 billion yen of Samurai bonds in July. We're using 30 billion yen of those proceeds to pay down debt this month, and as a result, the debt to total capital ratio will be lower at the end of the year than it was at the end of September. Non insurance interest expense in the quarter was unchanged at $5 million. And parent company and other expenses were $12 million in the third quarter, down from 14 million a year ago.

The operating margins improved for the quarter with the pretax margin rising from 13.7 to 14.5% and the after tax margin expanded from 8.8 to 9.4%. On an operating basis, the tax rate was 34.4% in the quarter compared with 35.7% in 2004. As reported, operating earnings per diluted share rose 15.8% to $0.66, which was a bit ahead of consensus. The yen-dollar exchange rate was slightly weaker than a year ago, but did it not impact operating earnings on a per share basis in the quarter.

There were a couple of note worthy items that benefited net earnings in the quarter. First of all we reported $89 million, or $0.18 per share of realized investment gains that were generated from bond swaps in the third quarter. Those swaps took advantage of tax -- tax loss carry-forwards that resulted from our sale of Parmalat two years ago. The swaps will also benefit investment income in future periods. Joe Smith, as you know, is with us today so he can discuss that in more detail if you have questions. Net earnings also benefited by $34 million, or $0.07 per share from the release of a valuation allowance for deferred tax assets. The valuation allowance release reflects our determination that we will be able to use all of our noninsurance losses against noninsurance income in the future.

Lastly, let me comment on the EPS outlook for the balance of the year. As you heard from Dan, we expect to meet or exceed our objective for 2005 of a 15% increase in operating earnings per diluted share excluding the impact of the yen. That would likely equate to operating earnings of $2.57, or $2.58 this year, excluding the effect of the yen. If the yen remains at its current level, which is around 115 to the dollar for the balance of 2005, fourth quarter operating earnings will likely be reduced by $0.03 a share due to the weakening yen compared with a year ago. Please note that last year's average yen rate in the fourth quarter was about 106 yen to the dollar. Under that scenario, fourth quarter operating earnings per share would likely be $0.63 or $0.64 before the effect of currency, or $0.60 to $0.61 after the effect of a weaker yen. The First Call estimate for the fourth quarter as of yesterday was $0.65 per share. And you heard from Dan, our target for 2006 is also a 15% increase in operating earnings per diluted share before the impact of the yen, and we've retained our goal to produce 13 to 16% EPS growth before currency changes in 2007.

We'd like to make sure that everyone has the opportunity to ask a question today so please limit your questions to one to be fair to everybody. And now, Perry, if you can open up the queue, we'd be happy to take questions.

[OPERATOR INSTRUCTIONS]. Nigel Dally, Morgan Stanley.

Great. Thank you. My question is on the outlook for sales. For the U.S. you said you expect better sales growth in 2006. Is it possible to put any -- some dimensions around your expectations? And then for Japan, sales through the Dai-ichi relationship were particularly strong. Can you comment on whether you expect the current pace of sales are sustainable, or whether that could emerge as a potential head wind? Thanks.

I'll start with Japan. Remember, we had no direct control over Dai-ichi Life. I think what you should get from the Dai-ichi Life sales is where as it was a declining new sales position that we have seen over the five years we've been doing it, we've seen sales come back and -- and be much stronger. It's too early for us to tell, but I certainly would hope that next year our sales would at least be flat or up, and we'll have to get with them to see at this point, but they like the new cancer product we're selling. It's doing very well. They're continuing to offer it and broaden the approach, so I can't give you whether or not it will be head winds, as you said, at this point or not. In regard to the U.S., I would like to have the fourth quarter first, but I've said all along that I felt needed to get back to double-digit sales growth, so right now I would say our approach would be that, and the range probably around 10 to 12%.

That's very helpful. Thanks, Dan.

Thomas Gallagher, CS First Boston.

Good afternoon. Just wanted to -- I guess, probe a little further into what's happening in Japan. Can you talk about sales by distribution channel in particular? When I look at the quarter, it looks like most of your growth -- at least the up side growth, is coming from Dai-ichi, and the affiliated corporate agencies. When I look at your fastest growing channel -- in fact, when you look back at the individual independent for the last four years or so that's been your fastest growing channel, the growth was a bit slower there. Can you just talk about sort of what's happening within the channels and in particular do you think there's up side on the individual side?

Okay. This is Aki. I just want to mention a couple of things on that. I've been with the Japan operation the last nine months, and what I have seen here is that we put -- we have put too much attention or too much resources or too much efforts on developing this individual market, which means we have not really tried to make a right balance between our -- between the two markets, which is the individual market and the corporate affiliated market. And especially the corporate affiliated market, we really have the -- we are the only one company who has the extreme expertise in this market in the entire Japanese insurance industry. So we believe that we have to take a right balance between these two major markets, and we actually have put a lot effort to revitalize our corporate market. And this momentum will continue throughout next year and beyond.

So, Aki, under that scenario, is it fair to say that you're going to see greater growth from affiliated corporate or do you think it's just going to be close to equivalent?

Well, first of all -- first of all, we have to see that the -- the sales from the corporate affiliated should level off first, and then it grows to the different -- in different degree. But we should not -- we should not experience any kind of deterioration in the future, and that's where we are trying to put some effort for the future.

Got it. Thank you.

Let me say one other thing about that, too. Is that as you said, the corporate agencies have slowed down our growth to some degree, and we're making some changes in our contest that's going to make it where we expect increases in sales to people that qualify, and I believe that's going to have a big impact, because people that have made conventions forever, because prior it was always based just on production. Now their going to have to be up is, I believe, going to be very positive for us, although some of our people won't like it in the corporate agency area, it's the right thing to do, and I think that will help.

And, Dan, if you had to qualify where you're at in terms of implementing that, is that fully implemented, or is that still being rolled out?

No, it's -- what I'm talking about it's the contest that will start next year. We haven't done anything for this year. But starting January we're giving people notice that these will be the new rules January the 1st.

Got it. Thanks.

Jimmy Bhullar, J.P. Morgan.

Thank you. I just have a question for Aki. The market in Japan is getting crowded over time with additional products. If you could just compare Aflac's product designer pricing versus some of the newer products that are coming in the market? That's it.

Well, it -- it is very interesting market. It is -- I mean, it is the market where the number for products are really increasing rapidly. Compared this year with five years ago, the number of products increased almost five times. And in this kind of circumstances, people are just trying to introduce a lot of -- a lot of products which really makes the -- our consumers kind of opposed not buy the insurance policy until they are really aware of what the policies are, what kind of benefit they would get. So it caused some -- some -- a interesting issue in the Japanese market. But in terms of the pricing, everybody -- I mean, all the players in the insurance market have not really tried to change their cost structure or cost model, so that the pricing has not really come down that much compared to Aflac's. For instance, the Nippon Life just introduced their new medical product, which is about 50% higher than our product, and Mitsui Life, just about a few -- one or two weeks ago introduced new product in medical side which is again about the 30 to 40% higher than our product pricing. So in terms of that pricing and the benefit level, we are absolutely comfortable in terms of the competition.

Jimmy, this is Dan again. I want to say one other thing. Is I think what you're seeing is is our number one campaign in medical insurance is -- is really showing you, and with sales being up 31% with medical, it's really showing you that it's kind of emerging as the premier product in everything that we do, but also in all the third sector. I mean, you can see it's even affected our Rider MAX sales. So it's standing out, and I think that's what's keeping us above the fray, and people are realizing that it is the best product at the best price, and that is going to continue to be the thing that we drive home in our advertising, is both the cancer insurance we've got the best product, and in terms of medical insurance, the EVER product is the best product.

And have you -- just -- go on, actually.

Oh, and to endorse that, just about a week ago, Toyo Keizai, the monthly -- I mean weekly journal, just produced the new life insurance company's ranking of Japan, and it revalidates our number one ranking. They basically announced that Aflac is the number one in comprehensive ranking in the insurance industry.

And have you seen a trend from other companies to try to introduce low-priced products even if they're stripped down in terms of the benefits, to be closer in size to you?

No, not -- not really any -- any new movement at this point. No.

Okay. Thank you.

Jeff Hopson, A.G. Edwards.

Hi. In regard to the Vision Now product, can you give us a sense of how your associates are using that? Is that -- are they going back to existing clients, or are they going new clients and trying to use that as a door opener, I guess?

Jeff, this is Paul. We're seeing that across the gamut. It is both a door opener, and there's being a lot written in existing accounts. We feel very comfortable how it's being written. Obviously we rolled it out this quarter. It really took a process of about six weeks to get the -- get to the 44-state level, so I think the eight -- well, we saw the 8 million in premium. It exceeded our expectation. And I think it's working in multiple avenues for us. We're very excited about what it's -- at what it's being able to do right now.

Okay. Great. Thank you.

Colin Devine, Citigroup.

Good morning -- or good afternoon, sorry about that. I was wondering if you could just expand a little bit more on what's going on in the U.S. in terms of agent recruiting? We're continuing to see the -- some of the numbers trend down there in terms of the monthly average producers. Is it going to be first quarter next year when we really start to turn the corner there, or perhaps you can give us a bit more?

Well, if you'll remember, in agent recruiting, we had said it would be 5 to 10, and I had a lot of people ask at the end of the second quarter, well, gosh, aren't the numbers really strong in the first half? And I said, well, it won't -- we won't hold that number, because we're going to be trying to balance it, and so we'll see softer recruiting in the second half, but we will attain the 5 to 10 for the year. So from that regard, I think -- I think it's pretty much in line with exactly what we've been telling everyone. And what was your other question?

Well, really then let's focus on the monthly average producers as well. When do you really start to turn the corner there?

Yes, I think we're already starting to see just a little bit of movement. The fact of the matter is, that when we look back at our monthly average producers, the month that really killed us is July. I -- because of the way we work on a 4-4-5 cycle, that's four weeks, four weeks and five weeks in each month, September was a huge production number producers' month for us. We had 18,700 producers in the month of September versus only 15,691 in the month of July. So this trending downward in the wrong direction? Absolutely not. I think the other thing that's going on we rolled out our new CIT program, we rolled out our new vision plan. In about -- approximately 20 states we rolled out our new hip plan. With that magnitude of training on just those three items, plus the emphasis we have on our national training program, I think a lot of people have taken a step to really implement those programs and do it successfully, and we will begin to see those things begin to take effect very soon, I hope.

Okay. Thank you.

Edward Spehar, Merrill Lynch.

Thank you. I had a question on the benefit ratio. It's -- in Japan, the benefit ratio -- I know it was down year-over-year, but it was up sequentially by about 80 basis points, and the benefit ratio in the U.S. was also at a higher level than what we've seen in awhile. And I'm wondering, was there anything in usual in either those numbers that you could talk about?

You said up sequentially. We're really down sequentially, Ed, whether you look at it year-to-date year-to-date or quarter-to-quarter.

Yes, I guess, Kriss, I'm looking at the third quarter versus the second quarter.

Oh, third versus second?

Yes.

Okay. There is some seasonality in there, Ed, that just -- we don't smooth all that stuff out, but I usually look at things year-to-date year-to-date. I will say that there's nothing unusual in that Japanese benefit ratio that I've -- there just wasn't anything unusual this quarter. We're continuing to trend down at a rate somewhere around 70 to 80 basis points on a year-on-year basis, based on a continuation of the -- the selling of the products with the lower loss ratios and the like. So that's -- I'd say the only other thing impacting us some is maybe a decline in the amount of the total benefits that are associated with the cash value payouts. Because of the improved persistency, cash -- cash values paid out are not as big a piece of the total benefits as they have been in the past. So future policy benefits is a little higher, incurred claims tends to be a little lower relative to where they have been. U.S. -- the only unusual thing in the U.S. I think in the third quarter may have been a slightly higher total benefit ratio associated with the grace period extensions. We didn't lapse policies at the end of September from the areas that were affected by the hurricanes. We gave -- we extended the grace period for payment of premiums, and we'll just see how that works out in the fourth quarter. But not processing as many lapses in September led to having somewhat higher future policy benefit increases and lower deferred cost amortization than we might have had, but those effects are relatively immaterial. I mean, I almost didn't notice them. But if there was anything unusual in the quarter, that's what they were.

Okay. Thank you.

Mark Lane, William Blair & Co.

Good afternoon. As a follow-up question to the focus on the monthly average producers, when do you think that you'll be able to see some evidence -- some solid evidence in terms of data that you can share with us regarding the benefits from training? It sounds -- it sounds like it's very early days.

I would say that's accurate. I mean, we're in the process right now of building all different types of metrics and taking a look at how valid those metrics are. I'm obviously not going to be bringing anything to the table until I am confident that we have history with it and that it tracks exactly what I believe it should. But what I can tell you is, yes, the original development stage of the training department as well as the people and programs took a period of time. We're now starting to implement some of the most important programs. Then in January we roll out our new associate training program for the whole country, which will be a uniform training program for all of our new people. We're very excited about the things that we're taking on, but you're right, it will take a period of time for us to be able to find the right metrics and bring you those.

So how long do you think that's going to take? How long do you think it's going to take to actually see some tangible evidence that your new training programs are having some positive impact either in terms of agent retention or productivity?

Year and a half from now. I'll give that you. It won't be in effect. We're still rolling it out. So by the time it's in effect, we've kind of gotten it everywhere it will be January, and then give it a year. So just say a year and a half. To really be able to tell. Any new program like that at first it's just hard to tell. But I think you're seeing the impact of everything in a positive, and the sales are back on target, and we are achieving them. So -- but give it a little while. We don't want the pressure on them to the point to where we push too hard when we've got things rolling like we want right now. I will give you one thing, though, to let you know that there has been some success already. And one of the reasons I continue to remain confident with this program, I think vision's rollout went well for two reasons. Number one was I think the product was demanded and it was something the market wanted. But we also approached the product rollout in a different format than we ever had. By training the people first, rolling it out systematically through a specific number of states in a very short period of time along with marketing that. I believe the training that we did there made our agents across the country more confident in our ability to sell the vision plan, and so I do believe an incremental effect on the sale of that product -- initial sale of that product is the strong training that we were able to do with it. So I'm excited about our product roll out and how they're already affecting the product.

Okay, thank you.

Suneet Kamath, Sanford Bernstein.

Thank you. Just a question on Japan, specifically the entry of banks into third sector distribution. I know we're still a ways away, but is there any way that you can help us sort of dimension what that opportunity might look like? For example, some U.S. insurers are selling a ton of annuity products through the bank channel. I mean, is it going to be anywhere near the size of that market, and what do you think is going to drive success there? Is it going to be pricing, relationships, total product offering? Just any insight you can provide on that would be very helpful.

Well, this is Aki again. Well -- it has a lot of stories about this banking channel thing, and I don't think this is the right opportunity to explain all these things, but let me give you just a few points. The only reason, to me, that the single premium annuity policies were sold that much in last three years was that the -- there were -- there have been great amount of a concern on the healthiness of the banking industry. So people had to hide their money or shift their money from banking industry to somewhere, some of it went to the postal service, some of it went to the insurance companies, some of it went to the mutual -- mutual funds. So it's been three years already, and the rich people have mostly bought those single-premium annuity policies, or dollar-denominated whole life policies and annuity policies. So I think time is kind of riping [ph] for the first sector products in one year or two, so the entire freeing up of first sector products in the banking channel in2008 is a wonderful and exciting time for Aflac, because right now everybody else has been concentrated on this -- the single premium first sector policies, and they have not really tried to come up with any -- the first sector policies.

So instead of us trying to come up with a single premium, or dollar-denominated policies where we don't really have that much expertise in that kind of asset accumulation area, we want to concentrate on the first sector products, and we are developing those products, and from now on, the -- one problem in the banking channel is that they will not act like a -- the agencies of the banking companies, which means they do not want to get involved in the administrative works of the insurance policies' administration. So somehow the insurance companies have to deal with both the product side and also the administration side, where Aflac does really have a good expertise on. So, again, we are excited about the opportunity starting from 2008, but one thing very important is that Aflac still need to have a right bridge between Aflac and the banking companies during this moratorium period. And from that perspective, Aflac is the only one company who has -- over 230 alliance -- I mean, tie-ups with the banking industry in entire Japan. This is a very high number. And although those banking companies do not really sell our third sector policies right now, or annuity policies -- not single premium, though, right now, still about 60 -- over 60 banking -- banks are selling our annuity policies, and we believe we are very comfortable position in maintaining or sustaining our very good relationship with banking industries at this point, and we want to strengthen our alliances with banking companies from now on.

Suneet, this is Dan Amos. I was in Japan a couple of weeks ago, and coming from sales I try to always stay involved to some degree, and I called on four of the five largest banks in Japan. And our relationship with them is very strong. I think we will do very well when the market deregulates. Shinkai Son [ph], who many of you may know, was put in charge of the banking area in the relationship back in January. He is doing a superb job, and in fact, Atsushi, who of course is our director of marketing, in addition to that, we made Shinkai our national sales director, who will also head up this part as well as the other part of our overall sales. And I'm -- I'm very confident that when it finally deregulates, that's going to be a real spurt for us in terms of sales right now in looking at it.

Okay. Thanks for the color.

Jim Edelman, Highland Capital.

Good afternoon. A somewhat related question. Aflac has done very well in Japan since 1990 in a somewhat stagnant economy. Can you talk about challenges and opportunities if the next ten years in Japan see significantly better growth than the past ten years have?

Well, again, nothing -- nothing new story, but last ten years, the map of the whole life insurance industry has been changed in such a way that the first sector product, people in Japan have less -- have come to have less interest in first sector products because people do not believe that they have to have -- or they have to sustain the high level of the benefit side for the death. And on the other hand, the -- the first sector, especially the medical side, the medical market has been increasing dramatically because of the demographics of the Japanese society. And I think this aging issue in Japan is going to be fierce in the next coming ten years, and that means the -- in the medical area, the insurance coverage -- more and more insurance coverages would be necessary, and that's the national consensus at this point. So what I believe is that although the economy has not really been that much strong in Japan last five or six years or even ten years, the reason that Aflac has been very successful in those period -- time period is that this -- the whole insurance industry's map change has contributed a lot to Aflac, and this momentum will be -- will be growing even bigger in the future, next -- especially next coming ten years. That's kind of my belief for the Japanese industry right now.

Also, one thing -- this is Joe Smith. The biggest thing that -- I was over in Japan at the same time Dan was, and it seems like business activity is certainly picking up in Japan, and the biggest benefit we're going to have if rates move higher, as economic activity increases in Japan as we get to the rates where we can get up to 4 and 5% on our portfolio with our current portfolio, it'll be all that much better for us.

Let me say one thing. As we reflect back on the economy, I've got to say we -- yes, we try to manage sales annually, not quarterly and look at it, and I think the fourth quarter is going to be a good quarter for us. I feel real comfortable about that. I now worry about next year, and then the next year. That's just part of the -- and in '08, I think it'll be a big year because of the deregulation. And as I look at next year I think that the toughest comparisons will be the first and the fourth quarter with the second and third being the strong increases. You add better economies, that helps us in -- in many ways, and so there are other positive things that we've got going forward, but we don't count any of that. We just look at kind of a worst case scenario and try to develop a model from that standpoint. And so, next year I think sales in Japan will be up in the 5 to 10% range again, so we continue to be optimistic about our future growth in Japan.

Thank you.

Jeff Schuman, KBW.

Good afternoon. I was wondering if we could come back a little bit again to the issue of distribution in Japan, and maybe some of the reallocation of resources. I mean, I thought that the emphasis on recent years on the individual and independent corporate channel was one that was based on some pretty strong fundamentals, which involved pretty good saturation of the large corporate market and the fact that you were -- to some extent a falling employment growth, which was more at the small business or retail end of the market. I mean, one of the things that we've noticed over the last two years, is that it appears that the marginal productivity of the new individual agencies that you've recruited continues to decline. Are you experiencing -- are you feeling sort of tapped out in building out that individual channel or --?

No, not at all. I'm going to give you the short version of this because the conference call is about up, but I want to tell you that the individual agent is going to continue to be a place where we're going to grow, and it's going to grow at a -- at the same pace that we've seen the last few years. Our emphasis, though, is there's this enormous block of business that we've got, plus potential customers within that block that can be added to. And many of those agencies have done so well over the years, they have not, let's say, concentrated as much as we think there is in terms of potential sales growth. And so we're going to emphasize that to some degree. Because the other -- we're trying to balance the two, and I think that's one advantage we have with Aki over there, is he understands the corporate agency side, he worked in it for over 20 years, and he wants to work on that, but at the same time, with Atsushi Yagai and also Shinkai, they can balance and work on both of those as well. So by no means do we expect the individual sales to slow down. We just want to see the corporate agency side pick up what has been a lagging percentage growth for us in the past.

Okay. That's helpful. Thank you.

Perry, I'm --I'm showing that our hour is up, and so we need to conclude the call at this time. I want to thank everyone for joining us today, and let me mention to that Robin and I will be out of the office for the balance of the week and it will probably be difficult to get us by voice, but if you have a question or need some follow-up information, please send us an e-mail, and we'll try to get that back to you as quickly as we can. We'll both be back in the office on Monday. Thanks again for joining us. We appreciate your time. Bye.

Thank you.

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