美國家庭壽險 (AFL) 2006 Q1 法說會逐字稿

Hello and welcome to the Aflac first quarter conference call. [OPERATOR INSTRUCTIONS] At this time I will turn the conference over to Mr. Ken Janke. Sir, you may begin.

Thank you very much. Good morning and welcome everybody to our first quarter call. Joining me this morning is Dan Amos Chairman and CEO, Kriss Cloninger, President and CFO, Paul Amos, Executive Vice President and Chief Operating Officer of Aflac U.S., Bill Smith, Senior Vice President and Chief Investment Officer, and Aki Kan, President and Chief Operating Officer of Aflac Japan joins us from Tokyo.

Now, before we begin let we comment on the Safe Harbor language. As you know, some statements in this telephone conference will be forward-looking within the meaning of federal securities laws. And although we believe these statements are reasonable, we can give no assurance that they'll prove to be accurate because they are in fact prospective in nature. The actual results in the future could differ from those materially that we discuss today, so I would encourage you to look at our recent press release or other filings for the various risk factors that could impact our future results.

Now, I would like to turn the program over to Dan, who will talk about our operations in Japan and the United States in the first quarter. I'll follow up with some financials and then we'd be happy to take your questions.

Thank you, Ken. Our first quarter results give Aflac a very good start for the year. Financial results for both Aflac U.S. and Aflac Japan were right in line with our expectations. Our marketing and sales results for both markets also met our expectations for the quarter. I believe our quarterly position us to achieve our objectives for the year.

Let me give you some detail about the quarter starting with Aflac Japan. From a sales perspective, we expected Aflac Japan sales would be somewhat weak, with flat to down sales in the quarter. So, we weren't at all surprised to see total and new annualized premium sales down 1.3%. As you will recall, we had a fairly large block of business that we began converting last year from payroll to direct billing rates. During the quarter, the change in the rates increased conversion premium by 700 million yen.

It took a lot of agencies' times, particularly affiliated corporate agencies, to explain why we had to make these rate changes. Unfortunately, the time it took to explain the rate changes detracted from our new sales activities. But remember, these conversions do enhance the profitability of our business. The conversion program has been completed, so our agencies and sales associates can now concentrate exclusively on generating new business.

From a product standpoint, we believe the conversion program probably impacted medical sales somewhat. Sales of our medical products climbed 15.6%, up from the first quarter of 2005. Although medical sales was still our best selling product category, accounting for 34% of the first quarter sales. Just as important, we retained our position as the number one seller of stand-alone medical insurance in Japan. And we still believe our medical product represents the best value in the marketplace.

In addition, it's likely that medical product sales were impacted by the successful introduction of our new and unique life product called WAYS, as agents spend more time selling the new product. You may recall that WAYS is essentially a first sector life product that allows policyholders to determine how they would like their benefits to be received in later years. Policyholders have the opportunity to keep the traditional death benefit, or they may change it to medical, nursing care or fixed annuity benefits at age 60 or 65. This flexibility is particularly important for retirees who face income restraints and the possible of rising health care costs.

I should point out that WAYS cannot be sold through affiliated corporate agency channels, due to regulatory restraints. Nor can it be sold by Dai-ichi Life. Instead it has be sold by our independent corporate or individual agencies. Despite the sales channel limitations, WAYS sold extremely well in the quarter. During the quarter WAYS generated 2.6 billion yen in new sales, greatly surpassing our expectations. We sold 21,300 policies at an average premium of 123,400 yen per policy.

Actually, first quarter sales of WAYS accounted for 40% of our initial sales target for the full year. The benefit ratio and profitability of WAYS are in line with our other products. We expect it to be less profitable than our medical products, yet more profitable than our ordinary life product. However, the profitability could prove to be higher, depending on which benefits the policyholder selects. I think WAYS is another example of our commitment to creating innovative products that address consumers' needs.

Just like ever, WAYS was very well received from the start and we believe it will continue to grow our business. Cancer life sales also continued to be strong, rising 18.4% in the first quarter. There were several reasons for the strength of this product category. First, cancer life sales benefited from the billing rate conversion. However, even excluding the conversion, cancer sales were up 7.6%.

Second, cancer sales benefited from the success of the new cancer life product we released last June called Medical Check Plus, which includes an increased daily outpatient benefit and a wellness benefit. And third, cancer sales benefited from Dai-ichi Mutual Life's solid contribution to sales. Dai-ichi posted an increase of 5.1% for this quarter.

We continue to expand our distribution in Japan. For the quarter we recruited about 780 agents. Although that's lower than a year ago, this marks a shift in a focus from recruiting agencies, to increasing the total number of licensed associates, including those at established corporate agencies. The number of licensed sales associates increased 14.1% to more than 83,400 at the end of March. We are hopeful that encouraging our existing corporate agencies to increase their number of sales associates will enhance their ability to gain more face-to-face contact with our customers. That is one of the methods we are employing to try to improve the sales results through the corporate agency channels.

I also want to say -- I also want to talk for a moment about our sales management team in Japan. Many of you have met Hisayuki Shinkai at our analyst meeting here in Tokyo. You may recall, Shinkai was promoted in July of last year and was given the responsibility to further developing our banking relations. Through his actions, I believe we are positioning Aflac to successfully third sector products through banks when the channel liberalizes at the end of 2007. Shinkai is also working to enhance our affiliated corporate agency channel.

In addition I believe the management team has benefited from the promotion of Takaaki Matsumoto, who was named marketing director in February. Matsumoto has years of experience with Aflac and he leads our product development and marketing strategy area. While I won't place unrealistic expectations on Matsumoto or Shinkai to produce dramatic change in the short run, I do expect them to have production increases in our guidance range going forward. For the second quarter I believe we'll see better growth due in part to the continued momentum from WAYS, as well as stronger medical sales. And we believe we will increase sales by 5% to 8% for the full year.

Now, let me turn to Aflac U.S. Like Aflac Japan our finance performance and sales results at Aflac U.S. were in line with our expectations for the quarter. Total new annualized premium was up 11.4% to 318 million. We contested a sales contest in the first quarter. Although we achieved our sales target for the year, I had hoped we would do a little better than 11.4% increase. You may remember that sales in the first quarter of 2005 declined 2.1%, primarily because that quarter had fewer production days than the first quarter of 2004.

And looking at production days in the first quarter of 2006, we had one extra day because Good Friday fell in the second quarter of this year. Excluding sales from that one day, first quarter sales would be up a little more than 10%. From a product standpoint, sales for Aflac U.S. continue to be led by accident and disability. And of the top contributors, hospital indemnity plan or HIP was our faster growing product category, with sales up 27.3%. HIP now accounts for 12% of our sales.

Vision Now was, again, about 2% of our sales. Vision Now, which is our lowest premium product, showed pretty good momentum until we rolled out the new version of the hospital indemnity plan toward the end of 2005. We believe that releasing a much higher premium product like HIP shifted some of the sales associates' focus in Vision Now. We have also developed revised specific health care event and intensive care plans, which we anticipate launching in the third quarter of this year.

As you know we have been spending most of our energy on people side of our business. Although we have not set specific recruiting targets this year, we want to continue to increase recruiting as a means of growing our producer base. During the first quarter, recruiting was up 4.2% to more than 6,700 new sales associates. As we have discussed however, our primary focus is to increase producing associates.

We still believe the best way to do that is through more effective and standardized training for our sales associates and our sales management, which can take some of the pressure off recruiting by reducing turnover and developing the people we have. We were pleased to see producer growth in the first quarter. On a monthly average basis, producers were up 2.7% to 17,900. We have always felt that the number of average monthly producers was a conservative measure of the size of our sales force.

However, we are only used monthly producers as a reporting measure. It has never been a metric as a sales coordinators could use effectively managing the sales force. As we told you at the end of the first quarter, tracking average weekly producers is the measure that more of our successful leaders in the field used for years. Monitoring and managing average weekly producer allows the sales coordinator to not only report on the progress but to actually manage their business and their people within the span of a week.

When the numbers come in on a weekly basis state, regional, and district sales coordinators, have more of a real time opportunity to step in and offer assistance, training or motivation to someone who may be struggling. As we move forward this year, you'll see our focus shift to average weekly producers because that's how we're managing our business.

For the first quarter, average weekly producers increased 4.9% to more than 10,100. We are emphasizing the importance of average weekly producer growth to sales and territory directors by including it as a component in their incentive compensation. For those of you who wonder if these bonus provisions had any effect, I only have to remind you that last year we included a recruiting component in their bonus for the first time. And I don't think it was a coincidence that we achieved our recruiting objective for 2005.

From a training perspective, we have several initiatives underway. We have continuing our progress with the LEASE training and are emerging it with our new associates' training cycle. We are pleased with the initial results of the coordinator in training or CIT program. The goal of the CIT is to build a pool of well-trained sales managers. At the end of the year, 64 of the 95 state operations had adopted the CIT. And by the end of the first quarter, 77 of the 96 state operations.

We're also developing new standardized training curriculum for our coordinator base. Effective training is an ongoing process that requires long-term commitment. We are making that commitment and we believe we are pursuing the correct course of action to help us grow our producer base. As we look ahead we will face a tough comparison in the second quarter. We had a 17% increase last April, which was the biggest monthly increase in new sales for the year.

However, I still expect second quarter sales to be up in the range of mid to upper single digits, which would keep us on track for our sales goal for the year. Although our sales objective for 2006 is to increase total new sales 8% to 12%, we're clearly working to get back to double digit growth. I still very much believe that the market can support that rate of growth.

We have not identified any significant change in the competitive environment. And I am convinced that we are doing all of the right things to strengthen and develop our distribution system. That is why we are properly positioning our brand. That our products are well suited to the market. And that we are using technology to leverage our resources and respond to agent and consumer needs.

From a financial perspective, I believe Aflac is very strong. Our investment portfolio is in excellent shape. We maintain high capital ratios in support of our ratings. And overall, we are very comfortable with our capital position. We are also generating strong cash flows that we can use to benefit our shareholders. We remain committed to purchasing our shares on a consistent basis. And we have done so in every quarter since initiating our share repurchase program in 1994. During the first quarter, we purchased 2.1 million shares of Aflac's common stock. Bringing the total number of shares purchased to 190 million since the program's inception.

This year we anticipate buying another 10 to 12 million shares. Over many years, Aflac has earned a reputation as a consistent performer from a financial standpoint. I believe that reflects the steady renewal nature of our revenues, our stable operating expenses, our relatively low risk profile to our claims exposure and our conservative approach to investing. Aflac is fundamentally very strong and we believe we are well positioned in the two largest markets in the world.

Our goal for 2006 is to increase operating earnings per share on a diluted basis by 15%, excluding foreign currency. For 2007, our goal is to produce 15% to 16% growth in operating earnings per diluted share, excluding the impact of the yen. Although we only have one quarter of this year under our belt, we are optimistic about achieving our objective for the year. Ken?

Thanks, Dan. Let me briefly take you through some of the first quarter numbers beginning with Aflac Japan.

Starting at the top line in yen terms, revenues were up 6.9% for the quarter. Our persistency rate, which is annualized for the first quarter excluding annuities, was unchanged at 94.7% compared with last year. In terms of the quarterly operating ratios, as we expected the benefit ratio continued to improve over last year. It declined from 66.9% in the first quarter of '05, to 65% this year. However, I should note that last year's first quarter was the highest benefit ratio we had for the year. And the year actually averaged 66.2.

In addition this year's benefit ratio was influenced by the weaker yen's impact on investment income. Excluding that impact, the benefit ratio would have been 65.4%, which is 80 basis points below the full year of 2005. And that's consistent with the guidance and modeling assumptions we had communicated last year. The expense ratio in the quarter was 18.3%, compared with 18.2% a year ago. As a result the pre-tax profit margin showed further improvement rising from 14.9 to 16.7%.

Pre-tax earnings were up 19.2% for the quarter in yen. And excluding the impact from the weaker yen on investment income, pre-tax earnings were up 15.3%. Many of you have asked about the interest rate environment in Japan. And we have seen some movement in rates there, although during the first quarter it was really not in the long end of the curve where we tend to invest. For instance, the 20 year Japanese Government bond yield averaged 2.02% in the first quarter, which compared with 2.07% in the fourth quarter. However, the composite yield for 20 year JGB's is now a little less than 2.3%.

During the first quarter, we invested our cash flow in yen securities at 2.72%, including dollars, the blended rate was 3.04. Now, the portfolio yield at the end of March was 4.2%, which was 2 basis points lower than year end and 10 basis points below a year ago. Through last Friday, we had invested or committed to invest about 39% of our estimated '06 cash flow at an average yield of 3.23%. The overall credit quality of the portfolio remains high. On a consolidated basis, securities that were rated BB or lower were only 2.3% of total investments at the end of March, which was unchanged from year end.

Now, let me turn to Aflac U.S. The revenues rose 10% for the quarter, premium income was up 10.1 and investment income rose 8.3%. The annualized persistency rate of the business in the first quarter was 72.5%, compared with 73.2% a year ago. That was influenced a bit by the Winn Dixie account rolling over. And on a rolling 12-month basis, the persistency basis actually improved over a year ago.

The operating ratios in the quarter improved. The benefit ratio declined from 53.9% to 53.4%, due to revived actuarial assumptions that reflect better experience for some of our recently revised products. The expense ratio was 31.6% compared with 31.2% a year ago. As a result, profit margin improved slightly to 15% compared with 14.9% a year ago. Pre-tax earnings were up 10.4% for the quarter.

In terms of U.S. investment, the new money yield for the quarter was 6.21% versus 6.04% in the first quarter of '05. And the yield on the portfolio was 7.21% at the end of March, which was down 3 basis points from year end basis points below a year ago.

Turning to some other items for the quarter. As you heard, we purchased 2.1 million shares in the quarter, at an average price of $47.11. Excluding FAS 115, the ratio of debt-to-total capital was 18.2% at the end March, below [18.8%] from a year ago. Insurance interest expense was 4 million for the quarter, compared with 5 million a year. And parent Company and other unallocated expenses were at $10 million, down slightly from 11 million in the first quarter of '05.

Due to the improvement in margins, especially at Aflac Japan, the total Company margins improved. The pre-tax margin rose from 14.4% to 15.8. And the after-tax margin increased from 9.4% to 10.3%. On an operating basis, the tax rate was 34.7%, compared with 35% a year ago. As we reported, operating earnings per dilutes share were up 9.1% to $0.72 a share. The weaker yen reduced operating earnings by $0.04 a share in the quarter. However, excluding the yen's impact, operating earnings were up 15.2% per share, which is in line with our annual target.

Now lastly, let me comment on the outlook for the year. As you heard from Dan, our objective is 15% growth this year in operating earnings per diluted share, excluding the impact of the currency translation. As we stated at our year-end meeting and in our annual report, that translates to a target of $2.92 in operating earnings. Assuming the same average exchange rate as 2005.

However, the yen is obviously much weaker than it was a year ago. So, if we achieve our objective, and the yen averages 1.15 to 1.20 for the balance of 2006, we would expect that to translate to reported earnings per share of about $2.81 to $2.85 for the full year. Under that scenario, that would place second quarter operating earnings around $0.69 to $0.70 per diluted share. And again, as you heard, our target for '07 is a 15% to 16% increase, assuming no change in currency translation versus '06.

We do want to make sure that everyone has the opportunity to ask a question, so if you would please limit yourself to one question, so everyone has a chance. Now, we'd be happy to take questions.

We will now begin the Q&A session. [OPERATOR INSTRUCTIONS] Our first question comes from Jimmy Bhullar with J.P. Morgan.

Hi, thank you. I just had a question for Aki. If you could comment on the competition in Japan and whether you have seen companies come out with new products? I think Sompo came out with something a short while ago. And then also, what sort of opportunity do you see long term in the bank channels? Dan mentioned that banks are opening in late '07. I just wanted to see what sort of potential you have there.

The -- first of all the competition issue-- well, this is Aki from Tokyo. I have not still seen any critical type of competition from our traditional life companies, as well as the P&C companies like Sompo Japan. Sompo Japan recently had counted a pretty big number of medical policies. But what I heard, is a lot of those new policies were actually the renewals of the term policies. So, I have not really seen anything serious competition from that side. And also, from the traditional life side, like Nippon Life and even Dai-ichi Life.

Dai-ichi Life have announced very recently, I think it was last-- beginning of fourth quarter or third quarter, they introduced a totally new medical policies, especially for women. And -- both for Dai-ichi and Nippon Life. And they sold pretty good for the first one or two quarters and after that they slowed down once again. And moreover, the average size of the premium is at least double or a little bit over two times Aflac products. So if they really want to compete with Aflac, their premium size has to come down, so that we can really see the apples-to-apples comparison. But at this point, I think they are very afraid of slowing down their first sector product sales. And they certainly want to have some market in the first sector products, but that would not be a strong enough to compete with Aflac at this point.

And turning to the bank sales, the beginning of last year, 2005, we had the contract with banks, about 30 regional bankers last year's spring. And we have about 80 at this point and a lot of them are coming from the effort that Shinkai, Dan mentioned, worked on last one year. And most of the banks are expecting that Aflac would come up with a very innovative third sector products at the time that they are liberalized to announce the third sector product starting from 2008. So, we really have for no threat at this point in the bank channel sales. And we expect that we're going to have a pretty good opportunity, starting from the end of 2007 for bank channel sales.

And the bank channel, is that going to open a new market for you guys or are you still going after the same consumer but just targeting them through a different channel?

Well, it certainly creates a new market, that's for sure.

Next question?

Thank you. Our next question comes from David Lewis with SunTrust Robinson Humphrey.

Thank you. Good morning. I got a question for Kriss. Can you one, talk about the U.S. actuarial changes that Ken mentioned? And two, Kriss in the past you've talked about the declining hospital stays. And you thought that, particularly on the cancer side, that you would have a greater number of stays, a smaller stay period. Do you see that trend? And is there a chance that you might actually be overreserved on the cancer side?

Well, regarding the changes in actuarial assumptions in the U.S., the changes we made were principally on the newer product versions, the dental product and specified health event. Where we have been writing the new business there for three or four years. And we have gotten a fair amount of claims experience under our built. And we have built in some conservatism when we initially started reserving those products that we no longer feel is required at that level of conservatism.

Our new assumption still maintains some level of conservatism but not as much as we originally had based on the experience that has emerged. So that accounted for a portion of the benefit decrease in the U.S. And we'll update you a little more on that at the analyst's meeting in May.

Regarding the trend in average number of days in the hospital in Japan and -- we still see the same trend. The declining number of days but an increasing average number of hospitalizations. Such that the overall number of days required to treat a specific illness is reducing marginally but not really as dramatically as the average days per hospitalization would suggest. Which tells me that we did the right thing, shifting reserves from current claim reserves or IB&R to future policy benefits. But I'm still comfortable that we're in the appropriate zone there.

Thank you.

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

Great. Thank you. Good morning. My question is on medical sales. I appreciate the Company's specific reasons why your sales are under pressure this. But I also wondering whether is any industry-wide at play? I don't know whether you have this information, but do you have any sense as to whether the industry-wide medical sales also slowed and whether that also explains some of the weakness this quarter?

I assume this is about Japan. For the first quarter, I think it's a little bit premature for us to be able to look at the entire industry trend at this point. But as- far as the-- those information is available at officially or unofficial basis at this point, I have not seen any difference from last quarter, which means people have a pretty stable trend at this point.

I do want to make a comment about medical sales. And that is that to some degree and -- it's hard for us to put a number on it yet, but WAYS is really a medical product. Think of it this way, if people wanted to buy life insurance, they would just buy the life insurance. They are buying WAYS from us, which starts as a life insurance product but can been converted at 60 or age 65 to a medical product or a pension. And we are not -- we had to take a guess on what -- how we think it will break out. But I think it's reasonable to think that if they were going to keep it as life insurance all along, they would just buy a straight out life. So to some degree, it's misleading when you see medical sales off by whatever number it is and just say that's the flat number. Because to some degree, WAYS is medical. And we'll try as we move forward to get a better handle on that. But I just want you to keep that in the back of your mind as you are trying to come up with a number.

That's helpful, thanks, Dan.

Thank you our next question comes from Steven Schwartz with Raymond James and Associates.

Hi, good morning, everyone. Two quick questions. First the loss rare you in the U.S. Kriss, it sounds to me maybe because of the size of the products that the actuarial changes were made. We are not going to see a continued step down in the loss ratio as we did when the changes were made in Japan a few years back; is that correct?

Well, I expect the loss ratio to remain roughly in the same level through 2006 as it was in the first quarter.

Okay.

It is possible that we'll see some additional step-downs in future years, depending on the way the claims experience continues to emerge. But I do not anticipate that it will be of the some magnitude that it has been in Japan.

He was asking about cancer.

No, I was talking about -- no, Kriss got the right. Thanks.

Okay.

And then looking at -- just so I understand what was going on in the Japanese loss ratio, should that stay at that level and then step down more, as we would have expected anyway, assuming that the yen stays relatively where it is? Or if the yen stays relatively where it is, should the loss ratio pop back up for the remainder of the year?

No it should stay roughly where it is if the yen exchange rate stays about the same. It doesn't have much effect on the revenue base we use to compute the ratio. The reason for that is, Steven, is that once a year we take a real hard look at our claims experience. And in consultation with our auditors we sort of set the base that we're going to use to go forward for the next 12 months. And we typically, do that as -- after the year end audit is concluded and as we're posturing ourselves for financial reporting during 2006. So typically, we make adjustments after the end of the year and we go forward on that basis for the next 12 months. And we take another look at the end of the year and we'll expect some adjustment at that time.

Okay. Great thank you.

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

Great. Thanks. I just wanted to explore this WAYS very medical issue one more time. And Dan I hear your point about WAYS sort of being a hybrid product. But I think in your prepared comments, you also said that the profitability is lower on WAYS because of a higher benefit ratio. And the other thing I'm thinking is that you can sell WAYS in only 60% of your distribution. Whereas, I think you can sell medical in probably in 90%, just excluding Dai-ichi. So, I just want to understand how you're thinking about the two products. Are you going for the higher premium associated with WAYS to get better sales growth and that's offsetting the lower -- the margins? Or kind of how do you think about that tradeoff?

I'm going to let Aki talk but I want to make one comment. I don't think for a minute that it's totally going to offset the medical. I just wanted to make the comment that the medical being down is not as much as you would think because WAYS is a certain amount of medical insurance. But there's no doubt being out of a third of the distribution channel, which we are because of WAYS, does make a difference. But I will tell you this, my sense in being over in Japan, I have been there twice this year, is that the life companies are scared to death of this product because they noticed that it has a lot of bells and whistles on it, is what I always call them on the sales side, to it. To where it's very attractive to people. So, Aki go ahead.

Yes. It's been very successful to rollout this WAYS product, which is much better than our original expectation. But again, our mainstream product in our whole -- the product portfolio is still the first sector products. So far last two months plus, we kind of experienced that our campaign was very successful and the production amount has been increasing very steadily. But this increasing acceleration speed would not really go forever. Because starting from the second quarter, we kind of refocus on the first sector by doing a lot of campaigns, so that we can have -- we can guarantee certain part -- certain portion of the first sector product sales as we originally budgeted.

So from that perspective, we're going to have balanced sales result this year. And also at the same time although this WAYS product may have a little bit lower profitability than our medical products, but it's much higher profitability than our old -- the original ordinary products. So, I hope this would give you some perspective on this issue.

That's helpful. Just one point of clarification. Aki, earlier you mentioned I think you have contracts with 80 banks in Japan I just want to understand what that means? Does that mean that they're --?

Oh, the contract. Okay. Contract means -- in Aflac's history for last almost 25 to 28 years, we have had contracts with affiliated agency for bankers by about 260 contracts. They are all our Aflac's agencies that are affiliated with those bankers. But now at the liberalization of the bank channel, banks themselves are not trying to be our agent, not their affiliated companies. So, the numbers that I picked up 30, at the time of last year's spring, and 80 right now, it means the 80 banks themselves are trying to sell our product product. Does that clear?

Yes I got it thanks.

Our next question comes from Joan Zief with Goldman Sachs.

Thank you, good morning. I just -- before I just ask my question I just want to make sure, Kriss, I understood what you meant about the benefit ratio. Okay. So what you are saying is that when I look at -- when I think about the U.S. benefit ratio for this year, the first quarter's results set the tone and set the level. And you are saying that that's true as well with the Japan benefit ratio, that the first quarter benefit ratio sort of sets the level for the year, what we should expect for the year.

Right. We tend to make any assumption changes effective with the first quarter. So, that stays in effect throughout the year and we look at it --

So my question relates to excess capital. Could you talk a little bit about your excess capital position? What sort of capital management you might be thinking about this year, sort of repatriation, buybacks, so your philosophy of dividends, marketing, which is I guess is you are reinvesting in the business?

Well, our share repurchase target remains in effect at 10 to 12 million shares a year. We expect the dividend to go up as earnings go up. In fact we expect the share price to go up as earnings go up. And therefore, we're going to be spending more money on share repurchase even if we buy back the same number of shares. Our risk-based capital ratio in the U.S. came in at a very strong level at the end of 2005, roughly 575%, which is above the target we had established for our ourselves somewhere in the 375 to 425 range. But I'm going to show at you at the analyst's meeting how sensitive that is to changes in the foreign exchange rate.

When the yen is weak, it really causes a fairly significant increase in our RBC ratio. And I'm going to show you how; say 110 that ratio is down much closer to our target range. So yes, I'll admit we've got some excess capital and you can speculate as to how much it is. And I'm going to try to give you more information in May to be there. But I'll admit to $500 million or so. But yes, we still maintain the highest return on equity we've got.

I'm also going to show you something about the double leverage loss ratios or talk little bit about that, that the rating agencies look at. Because you need to keep in mind that all of our debt is at the holding Company level. All of the same of our debt supporting share repurchase to some extent and none of that is at the life Company level. If you transferred that debt down and measured it against the statutory equity, you would end up with a more reasonable looking RBC ratio. So, we feel like we are managing capital appropriately and within reason, albeit somewhat conservatively. And we don't have any plans to change our approach during the coming year.

And anything on the repatriation, any change that we should expect there?

The only change is that we generated some significant capital gains in the Japanese investment portfolio and we'll leave those gains in Japan. We're just -- we don't view those as part of our operating profits from Japan. And it's likely that our repatriation will be with a view toward operating profits rather than total profits, including those realized gains. They kind of replace the realized loss on [Permaline] we had a few years ago. And so we're not going to take those gains out.

I'm sorry, did -- how much was that?

The gains we generated were order of magnitude $350 million in 2005.

Okay.

Pre-tax.

Okay. Thank you.

Okay. Thank you, our next question comes from Jason Zucker with Fox-Pitt.

Good morning, thanks. Just a quick question on the in-force billing, the in-force payroll accounts to the direct billing. Could you tell us why it's more profitable and just whether or not really it's going to be material?

Jason, I'll take that. Basically these are old policies. These were policies sold back in the era of the 1970's through the 1980's. And they are policies that were originally sold under payroll accounts. And we were supposed to change the premium rates to district billed accounts -- or direct bill policies when the people retired from the accounts. And there were a few other reasons but when we increase the premium rate, the claims aren't going to be effected on those policies. Nobody is going to experience higher hospitalization or cancer incidents just because they got a 3% premium increase. So, there's no real additional claims associated with them.

We will have to pay renewal commission on the increased premium but there's additional processing increase. So a lot of that is just -- it's incremental income to the Company. Now I will say, that it doesn't all go to the bottom line necessarily because it did take time away from us selling new business. So to some extent, it diminished sales and therefore the profit on sales we would have otherwise achieved. But it does give us some flexibility to invest in some current marketing initiatives that we might otherwise have had a harder time finding money for in the budget.

So the money incrementally is going to flow to the bottom line but it's going to be offset by a couple of things that we're using the money for.

Great. Thank you.

Thank you. Our next question comes from Saul Martinez with Bear Stearns.

Hi, good morning. If I look at the year-over-year sales decline in Japan, it's obviously concentrated in the affiliated corporate channel. You mentioned that the conversion process disproportionately impacted sales there. Aki can you comment just a little bit on some of the efforts that you've mentioned in the past to try revamp sales in this channel, and how they are going?

Probably I can explain better and more in the FAB meeting in June -- in May. But there are couple of initiatives that are going on right now. Number one is, we have to look into the actual licensed agents within those corporate agencies. Traditionally, we just looked into -- looked at the overall number of corporate agencies. But we really have to take a serious look at what and what kind of quality sales associates we have within those corporate affiliated agencies. That's number one.

And number two is, because of the limitations in the number of sales associates in those corporate affiliated agencies, there were some payroll accounts that have not really been visited by the corporate affiliated agencies lately. So we just listed up those unvisited accounts. And we are strengthening to revisit those untouched markets at this point. And number three, is we are trying to do some good amount of sales campaign in the [hojin kai] corporate market, which is smaller corporate market just like U.S. So everything is underway. And we just have to wait and see what kind of result we're going to get in the second quarter and third quarter.

Let me just say something about those affiliated corporate agencies. I'm not at all happy with what they are doing. And for 16 years I have kept my mouth shut with them. And I had enough of it on this last trip and I told them I didn't think they were doing well. And Aki had to apologize after I left because I just a bold American, saying these things. But I have had enough of it and I'm going to turn the pressure up because they have got to change. The times have changed. And they've got to change.

They are making a lot of money and a lot of them are fat and happy. And that's what we have got to push and we're basically telling them; "if you don't do it we're going to do it for you". And it's working with them of them, some of them are changing. But as you can imagine it's a bureaucracy out there. And it's a slow moving ship that turns in a way that doesn't move the way I'd like for it to do. But I promise you, I'm going to either make them miserable because they have made me miserable for a long time. And I have had enough of it.

Okay. Great. Thanks for the succinct answer.

Our next question comes from Ed Spehar with Merrill Lynch.

Thank you. Good morning. Can you hear me?

Yes.

Yes. Kriss I was curious, you mentioned in the benefit ratio that you still have conservatism in the assumptions related to these products where the actuarial changes occurred. Could you give us some sense, if you took all of the conservatism out, what the impact of the benefit ratio would be?

Well, Ed --

Anything 100 basis points 50? 200?

We're required by the auditing standards to maintain a provision for adverse deviation. And all I'll say is that in consultation with our auditors, we believe what we've got in there is appropriate. I really won't make a guess to quantify that, Ed. Because it just depends on the way claim trends continue to emerge.

The biggest provisions, though, I would say are obviously associated with Aflac Japan. And it kind of depends on the way they continue to manage their health care delivery system down in terms of offering number of days hospitalization. There's a lot of pressure on getting people out of the hospital earlier, and managing down the number of outpatient treatments or surgical procedures. And of course, our policies all pay a fixed amount per per procedure or per day in the hospital.

And so to the extent those procedures or days go down our claims automatically go down. And that's going to be a big part of what I call the tail wind on reducing benefit ratios in the future. As opposed to true just provisions for adverse deviation.

And one follow-up on margins in Japan. If you look at the WAYS product and you think -- Dan, you made the comment that you think it's really a medical product. Could you give us some sense of what portion you assume do convert to medical?

Well--

Will the margins then be the same as the stand alone medical sales if that occurs?

Let me just say the WAYS profit margin is higher than the overall profit margin of the Company right now. So, it continues to increase our profit margin based on our assumptions.

And we're counting -- well, right now we're just speculating . We're not really counting on anything. I'd say the way we're pricing and doing financial reporting on WAYS is not really highly dependent upon the results of conversion activity at the retirement age. But we're cognizant that if a significant percent of the people convert to an annuity type payout, which we're calling a pension benefit or long-term care type benefit or medical benefit; that our profits in those payout conditions should be similar to the products that we offer that provide those benefits now. So the medical benefit profitability is higher than the ordinary life. And that would be -- that would come into effect post-retirement. Right now our profit margin, though, that we're reporting on WAYS is not really dependant upon an assumed -- achieving a certain split post-retirement.

Aki why don't you comment on WAYS?

Yes. Well, at -- it's still premature to say anything at this point. But in Japan, there is a wide range of concerns on the the Social Security. And this Social Security concern to the general public really make people want to react in many different ways. Number one, is the medical product. Number two, is the pension annuity product, that kind of things. So right now, what I'm hearing is a lot of people are more concerned of their Social Security at this point. And they are kind of trying to think about what is going to happen in the future. If the medical expenses going up, what is going to happen? And when the Social Security payment is cut down to the lower level, what is going to happen? So from that perspective, people tends to buy this WAYS product from the perspective of a pension annuity, or the medical coverage, additional medical coverage. So -- but right now, it's a little bit premature to say anything definite at this point.

Let me just say that people are buying the flexibility. And we believe that the way we've got the options priced that the retirement age is appropriate and in line with your expectations. But the appeal is that a consumer buys opportunity to make a choice later on in their life.

That's right.

So it gives them some flexibility they don't have under traditional life products.

Thank you very much.

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

Thank you. Good morning. It sounds to me on the Japan side that from a product perspective you have things fairly well in hand. And my question really is on the distribution side. It feels to me that in this U.S. you have really focused much more actively on training and marketing support of your independent distributors. And that you are needing to do that very much in Japan at this point. And you have said that Shinkai san is looking after the banks and now more recently after the corporate agencies. Who is looking after the independent agents? And where are you in terms of timing of really getting your arms around distribution management in Japan?

Well, distribution management is under Shinkai's management. And --

For the independent agents, as well Aki?

Excuse me?

For the independent agents as well?

Yes. Absolutely. Absolutely. The -- we have seven different territory officers. And seven different territory officers are responsible for taking care of those corporate affiliated market, corporate market and individual market. And those market are actually just scattered around the whole country.

So, it's really difficult to say who is responsible for what. But if we characterize our territories to a certain degree; the Tokyo region, which has four divisions in Tokyo and also in Osaka region that has two divisions, they have a pretty big amount of corporate affiliated market. And they are underneath of two territory officers. Number one, is [Yajima] and number two is [Wakasugi] And they are actually doing all of those leg work to do the corporate affiliate market. And at the same time the retail market, which is all around the country, they are under the all other territory officers. But what is different this year, is that I specifically designated one territory officer who is responsible for both retail -- both individual and corporate market in Tokyo, who is Mr. Yajima. Yajima is looking on this -- the corporate market in Tokyo as well as the retail market in Tokyo. So that we have a combined synergy between those two different markets.

Vanessa, one other thing is that the service shops are really -- I went to a service shop a few weeks ago when I was there. And that's a place that they are spending enormous amount of time training and activities are going. And I'm sure, we will cover it at the analyst's meeting in great detail.

Right. And at the analyst's meeting maybe you could talk a little bit about whether or not -- what you have done in the United States? Where you actually had to increase the base of management at the top level? And if you are in the same position in Japan where you need more territory to --? Vanessa, I'm sorry I couldn't hear, the increased what?

In the United States,

the strategy was to increase the number of sales managers at the very top.

Okay.

And I'm just curious if you have a similar need in Japan?

Okay. Got it. Okay.

Vanessa thanks. I enjoyed your last question. That brings us a little past the top of the hour, so we'll stop the calls. If you have any other questions please call us on our toll-free number, we would be happy to talk with you. Thank you.

That concludes today's teleconference. Have a great day. You may disconnect.