美國家庭壽險 (AFL) 2006 Q2 法說會逐字稿

Good morning and welcome to the Aflac second quarter conference call. [OPERATOR INSTRUCTIONS]

At this time I would like to turn the conference over to Mr. Ken Janke. Sir, you may begin.

Good morning and thank you, and welcome to our second quarter call. Joining me this morning is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Akitoshi Kan, who is President and Chief Operating Officer of Aflac Japan, Paul Amos, Executive Vice President and Chief Operating Officer of Aflac U.S., Joe Smith, Senior Vice President and Chief Investment Officer, and Jerry Jeffrey, Senior Vice President and Deputy Chief Investment Officer. Before we begin this morning, let me remind you that some of the statements in this conference call are forward-looking within the meaning of Federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they'll prove to be accurate because they are perspective in nature. Obviously the actual results could differ materially from those we discuss today, and we'd encourage you to look at our press release and most recent SEC filings for the risk factors that could affect our future results. I'd also like to point out that, beginning this quarter, we've added a bit more detail to our statistical supplement to the financially analyst briefing. It includes more detail on the consolidated balance sheet and P&L, some segment persistency data and breakout of investment income by source for Aflac Japan. We hope you'll find that helpful.

And now I'd like to turn the program over to Dan, who will talk about the quarter, the outlook for the year, and then I will follow-up with a few financial highlights, then we'll take your questions. Dan?

Thank you, Ken, and good morning, everyone. Let me first say that, from an overall financial perspective, I'm pleased with our second quarter results. Based on continued strong financial performance of Aflac Japan and Aflac U.S., I am more confident than ever that we are positioned to achieve our 2006 earnings target of a 15% increase in operating earnings per share before the effect of the Yen. I was certainly pleased with Aflac Japan's strong financial performance for the quarter, which significantly exceeded our expectations. However, I am disappointed with our sales results in Japan, as many of you are.

In the second quarter, total new analyzed premium sales were 31.2 billion Yen, which was down 4.2% from a year ago. For the first half of the year, total new sales were 2.8% lower than the first six months of 2005. And as you may recall from our analyst meeting in May, I told that you that I was disappointed with Aflac Japan's April sales. I also said that I wasn't sure of its cause and did not want to speculate until I had more time to analyze the data. In looking back at April, it is likely that will one of the reasons our sales were weak was because of the lingering effect of the payroll-to-direct-billing conversion program. Although our agents helped us complete the program in March, we believe they did not have enough time to adequately prepare for the sales activity in April.

We were pleased to see sales recover nicely in May, and through the first three weeks of June, sales were also up. However, the last few days of the month, especially the last day, sales were very weak. It's important for you to understand that, because of the way we process paper applications in Japan, an enormous amount of our business comes in the end of our month. In fact, the last four days accounted for approximately 32% of June sales and the final day represented 17% of sales for the month. That confirms what I've told you many times before: With so much of the sales coming at the very end of the month in the quarter, we often don't know whether we'll meet our sales target until the end of the quarter is actually complete. From a product standpoint, the decline in the quarter resulted from the medical category. We were not surprised to see the continued weakness in the Rider MAX category, which is something we've discussed for many quarters. Standalone medical was still our best product category and accounted for 33% of the second quarter sales.

Please note that we are still the number one seller of standalone medical insurance in Japan. However, we did not expect the sharp fall-off we saw in standalone medical sales, which we believe was attributable to several factors. First, as I mentioned at the analyst meeting in May, the market for medical insurances has become very crowded. Although we still believe that medical sales through the first part of the year were hurt by the billing conversion program, it's also likely the crowded market conditions contributed somewhat to lower medical sales. Even though we are certain that our medical product has the best benefits at the best price recent introductions of competing whole life medical products have made it more difficult for to us attract customers who are policyholders of other companies.

Second, as we showed at the analyst meeting, the market for medical insurance did not grow from March of 2004 to March of 2005. And although FSA data is not yet available for March for 2006, our preliminary research suggests that industry-wide medical sales were down for the quarter and the first half of this year. Third, it's also possible that the sales at the end of June were significantly affected by the highly-profiled sanctions imposed by the FSA to two insurance companies. Both Sompo Japan and Mitsui Sumitomo Marine were ordered to stop selling their medical products for a period of time. Even though we believe Aflac has a very good reputation in the marketplace, we're a bit concerned that consumers might be reluctant to take out an insurance policy from a Company that they have never done business with. We hope that this will be a short term issue. However, there is a possibility that other companies may be sanctioned in the future, which could further fuel distrust and cause payroll accounts and consumers to postpone purchase decisions.

Finally some of the weakness in medical sales was caused by the success of WAYS, which did not surprise us. WAYS allows the policyholders the opportunity to keep the traditional death benefit or they can change it to medical, nursing care or fixed annuity benefit at age 60 or 65. We designed this product as a different way to tap into the need for medical benefits, and we believe that's how a lot of our agents are selling it. Although WAYS has taken away from the sale of EVER product line, we are pleased with its early success. WAYS sold very well in the second quarter and accounted for almost 10% of the second quarter sales. In addition, the sale of WAYS were up 21% over the first quarter. We were also pleased with the sale of cancer life in the quarter. Although sales through Dai-ichi Mutual Life were down 3.2% in the quarter, total new cancer life sales still rose 14.2%, benefiting from a sales campaign to promote a rider that enhances the benefit of our basic cancer life policy.

I know that most of you want to know about the outlook for the remainder of the year. As we mentioned in last night’s press release, we think it's likely that Japan sales will be flat to down single-digit for the rest of 2006. Although Japan is a great market for our products, it's become a more challenging market. However, as we discussed at our analyst meeting in May, we remain active in identifying areas where we can increase our effectiveness and improve our sales. This is especially true on the distribution side. You may recall from our first quarter conference call that I had been very frustrated with the sales results of our corporate channel. The large worksite environment to affiliated corporate agencies is not conducive to making face-to-face sales presentations. Yet with more medical products in the market, it's important for our agencies to use push sales techniques, like face-to-face, and not just pull tactics like direct mail. As a result, we are encouraging some affiliated corporate agencies to form alliances with individual agents who traditionally use face-to-face sales presentations.

We have just begun this program early this year, but we've already seen some early successes. For example, the production of one agency in Hokkaido more than tripled its sales for the first half of the year after forming an alliance. It takes a lot of time to form these alliances. However, we believe that they can be very effective in helping us improve sales results from affiliated corporate agency channels. To better teach push sales tactics to our agencies, we have reorganized the training department and hired 20 people from our sales force in other companies who have expertise in face-to-face sales. Our newly-developed training program, called Associates Basic Training, focuses on teaching perspective and basic consulting skills. We plan to complete training of 620 coordinators who work at the regional sales offices by December, and we will begin training newly-licensed associates using this program beginning in the fourth quarter. We do believe these consultant tactics will help our sales.

In looking at the eight territories, the Shutoken area of Tokyo produced a 6.3% increase in sales in the second quarter. According to our marketing director, Mr. Matsumoto, the Shutoken area is largely a retail market that effectively uses consulting sales. In addition, we are expanding our relationship with Hojinkai, a national taxpayers association, that has more than 1.1 million members in its firms. For many years, Hojinkai has endorsed our third-sector products to its members firm. In June, Hojinkai endorsed the sale of our first-sector products, including WAYS, to employees of Hojinkai members firm, which should help us better tap to the potential consumer base. The expansion of the Hojinkai endorsement, together with the new training program, should improve and provide a great market for our sales force later this year.

We are also active in other areas, including product development, promotions and administration. As I mentioned at the May analyst meeting, I believe the opening of the bank channel in 2008 could have the greatest impact on our sales since the formation of the alliance with Dai-ichi Mutual Life. Hisayuki Shinkai deserves a lot of credit for preparing Aflac Japan for the opportunity to sell through these banks. Although the competitors will also be vying for this business, we believe Aflac Japan should be well positioned and we are very excited about this opportunity in 2008.

Now let me turn to Aflac U.S. which produced a solid quarter all around. Our financial performance and sales results of Aflac U.S. were consistent with our expectations for the quarter. As I told you in our first quarter press release, we expected second quarter sales in the United States to increase in the mid to upper-single digits. Total new analyzed premium sales were up 6.3% to $327 million. For the six months, total new analyzed premium sales increased 8.8% to $645 million. From a product standpoint, Aflac U.S. sales continue to lead with accident and disability insurance. Of our top contributors, we again experienced solid growth in hospital indemnity products, which was the fastest growing product category. This reflects the popularity of our revised hospital indemnity product we introduced at the end of 2005. Hospital indemnity sales were up 20.8% in the second quarter, accounting for approximately 13% of our sales.

We began launching a revised specific health event and intensive care plan in the third quarter. As we have discussed repeatedly, we have been spending most of our energy on the people side of the market. Although we did not see a set of specific recruiting targets for this year, we are continuing to emphasize recruiting as a means for growing our producer base. During the second quarter, recruiting was up 0.8% to 6,800 new sales associates compared with the second quarter of 2005. The total number of licensed associates was up 5.8% over a year ago. However, our primary focus is to increase the number of producing associates. To that end, we are pleased to see producer growth again in the second quarter. The number of average monthly producing associates rose 1% in the quarter to more than 17,500. But more importantly, on an average weekly basis the number of producing associates was up 2.7% to more than 9,900. You'll recall that we are moving the weekly producers as both the reporting and management matrix for the first time as a component of our marketing and territory director’s bonus. Monitoring and managing the average weekly producer allows sales coordinators to effectively manage their business and their people within the span of a week.

We still believe the best way to improve producer growth is through more effective and standardized training of our sales associates and sales management. During the quarter we began our newest coordinator and training program, or RCAP, which stands for Regional Coordinator Accreditation Program. This workshop -- excuse me -- provides intense and interactive training for regional sales coordinators, or RSCs. They are invited to Aflac's headquarters for a seminar that refleshes -- refreshes the skills of the current RSCs and provides baseline training for the newly-promoted RSC. The curriculum covers leadership, recruiting, management, Aflac's processes and account service strategies. During our first training session this quarter, we brought in 59 RSCs, or about 10% of the total RSCs, to the headquarters. Our second group will focus next month. The feedback we received from the first training group has been extremely positive. For the third quarter, I believe U.S. sales will likely increase at the mid to upper-single digits, as they did in the second quarter. However, we expect stronger fourth quarter sales, which we believe will put us in a good position to achieve our sales target for the year of an 8% to 12% increase.

As I've been reporting, we've not identified any significant change in the competitive environment, and I believe that we're still doing all the right things to strengthen our development of the distribution system. We are strategically positioning our brand, our products are well suited to the U.S. market, the need for our products is growing, and we are using technology to leverage our resources and respond to our agents and consumers’ needs. As you think about Aflac's outlook and our ability to achieve our earnings target, I want you to -- I want to again remind you that there are a lot of factors that impact our income statement. There's no denying that sales are important, and as you probably know, it's part of our officers' incentive bonus. And I can tell you that there are a lot of people, including me and others on this call, whose bonuses in 2006 will be penalized by lower sales in Japan. But at the same time, our top-line growth is influenced by persistency, which continues to be strong, and also investment income.

For those of you that have followed us and owned our shares for a long time, you know that I've repeatedly said that the greatest challenge has been to invest huge cash flows in Japan in this low interest rate environment. It looks like we're finally getting some relief from the historically low interest rates in Japan. Actually, Aflac Japan's investment income for the first half of the year is ahead of budget by 600 million Yen, and we estimate that investment income will be ahead of the plan by 1.7 billion Yen for the full year. In addition, our ability to sustain strong earnings growth also depends on claims trends and operating expenses. In those critical areas, our business in Japan and the United States continues to perform as expected.

In looking at the balance sheet, Aflac is very strong. Our investment portfolio is in excellent shape and we maintain high capital adequacy ratios to support our ratings, and overall we are very comfortable with our capital position. We are also generating strong cash flows that we 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 programs in 1994. During the second quarter we purchased 2.1 million shares. For the full year we anticipate buying somewhere between 10 and 12 million shares. As you know our goal for 2006 is to increase operating earnings per diluted share 15%, excluding the foreign currency translation. For 2007 our goal is [inaudible] growth in operating earnings per diluted share excluding the impact of the Yen. I am confident that we will achieve our earnings target for 2006 and 2007. And I am increasingly optimistic that we will achieve my personal goal of growing operating earnings per share, before the impact of the Yen, by 15% for 20 years.

Ken, I'll turn it over to you.

Thank you, Dan. Let me briefly take you through some of our second quarter financial highlights, beginning with Aflac Japan. Starting with the top line, in Yen terms revenues were up 6.5% for the quarter. As Dan mentioned, our persistency was little changed and strong at 94.6%, which excludes annuities, and that compares with 94.7% a year ago. In terms of the quarterly operating ratios, as we expected the benefit ratio continued to improve over last year [inaudible]. It was 64.9% in the quarter compared with 65.8% a year ago. Excluding the impact of the weaker Yen on dollar-denominated investment income, the benefit ratio was 65.2%. The expense ratio for the quarter was 18.8 compared with 19.5 a year ago.

You'll recall that last year's expense ratio reflected a write-off of approximately 2 billion Yen of software development costs. Reflecting lower benefit and expense ratios, the margin improved from 14.7% to 16.3% in the quarter. And with the expansion of the margin, pretax earnings rose 18.5% for the quarter in Yen. Again excluding the impact of the stronger Yen on our dollar-denominated investment income, pretax earnings were up [inaudible-background noise]. On the investment [inaudible-background noise] Japanese government bond, yields averaged 2.25% in the second quarter compared with 2.02% in the first. For the quarter we invested our cash flow in Yen-denominated securities at 3.21%, and then including dollars, the blended rate was 3.36%. The portfolio yield at the end of June was 4.17%, which was down three basis points from the end of March and 11 basis points below a year ago. Through July 21st of this year, we had invested or committed to invest about 69% of estimated 2006 cash flow at an average yield of 3.31%, which is ahead of our budget for the year. The overall credit quality remains very high. On a consolidated basis, securities rated double B or lower. We are only 2.1% of portfolio at the end of June. That's down from 2.3% at the end of March.

Let me comment briefly on Aflac U.S., where total revenues were up 9.2% for the quarter, with analyzed persistency rates for the six months declined from 74.1% to 73.4%. And the benefit ratio improved and was 53% compared with 54.2% a year ago. The expense ratio rose slightly from 31.5 to 31.9 due, in part, to higher DAC amortization. The profit margin for the quarter, however, was 15.1%, up from 14.3% a year ago, and as a result pretax operating earnings rose 15.1% for the quarter. In terms of U.S. investment, new money yield for the quarter was 6.54%, up from 6.06%, and the yield on the portfolio at the end of June was 7.19, down two basis points from the first quarter and 11 basis points lower than a year ago.

Turning to some other items for the quarter, as Dan mentioned, we purchased 2.1 million shares at an average price of $47.74. That brings the total number of shares purchased for the first half of the year to 4.1 million shares. The debt-to-total capital ratio was 14% at the end of June, which is down significantly from 19.9% a year ago. The sharp drop in that ratio reflected our repayment of 40 billion Yen, or approximately $355 million of Samari notes that were due in July. It is our intent to refinance that debt later this year, so you can expect to see the total -- debt-to-total capital ratio increase. Noninsurance interest expense in the quarter was $4 million, compared with $5 million a year ago. And parent company and other expenses were $5 million in the second quarter, down from $11 million in the second quarter of 2005. The improvement in the corporate and other line in part reflected higher investment income at the parent company level over last year, as well as lower general operating expenses.

The operating margins improved for the quarter. Pretax margin rose from 14.1% to 15.7% and the after tax margin increased from 9.2% to 10.3%. On an operating basis, the tax rate was 34.5% compared with 35% for 2005. As we reported, operating earnings per diluted share rose 17.2% to $0.75, which was ahead of consensus. The weaker Yen decreased operating earnings by $0.02 a share in the quarter, and excluding the Yen’s impact, operating earnings per share were up 20.3% for the quarter and 17.7% for the first six months.

Now, finally, let me comment on the outlook on EPS for the rest of the year. As you've heard from Dan, our objective for 2006 is a 15% increase in operating earnings per diluted share, excluding the impact of the Yen. On a constant currency basis that translates into a target of $2.92 for the full year of 2006. However, the Yen is significantly weaker than it was a year ago. And even though we are running ahead of our annual target for earnings this year, we still expect to see higher expenses in the second half of the year. As a result, operating earnings per share growth, excluding the Yen, will likely be below 15% for the remaining six months of 2006, just as it was last year. If the Yen remains 115 to 120 for the balance of 2006, we would expect to report in the area of $2.82 to $2.85 for the full year. Under that scenario, third quarter operating earnings per share would likely be $0.71 to $0.73 per diluted share, and the current first call estimate was around $0.73. As you've heard for 2007, our objective remains a 15% to 16% increase in operating earnings per diluted share, before the effect of currency.

It's now close to 9:30. We'd like to make sure that everyone has the opportunity to ask a question, so I'd like you to please limit your question to one per person so that we can be fair to everybody. Now, Valerie, we'd be happy to take the questions that are in the queue.

Thank you. [OPERATOR INSTRUCTIONS] Mr. David Lewis from Suntrust Robinson Humphrey, you may ask your question.

Morning. Kriss, I don't know if you've had time to update your '07 budget but given the slowdown of Japan sales, and I know originally your model assumed a 3% to 7% growth rate in '06 and '07, given some of the changes, probably a little bit better benefit ratios and higher investment income, what do you think you would need in '06 and '07 Japan sales to achieve 15% growth in '07? Maybe just some rough guidance.

Well, we do have the relatively positive things Dan mentioned in terms of investment yields being -- tending to go up in Japan some. This year we're likely to beat our original new money target of 3% by 30 or so basis points. That'll carry over in 2007. You know, the year you make the investments you only get half year of effect. The next year you get a whole year of effect, so that's a positive thing. Keep in mind, David, the new sales in Japan only create about 10% of our Japan premium income. 90% of our premium income is from business already in force, so to me the slow down that we've experienced in 2006 sales in Japan won't hurt us that much in 2007. Another source of profit that we are going to have -- you know, we had the direct to -- or the payroll-to-direct conversion program latter part of last year and the first quarter of this year. The profits associated with those increase in premiums are going to hit latter part of 2006 and in 2007.

And I think we said at the analyst meeting that the anticipated extra profit associated with those conversions is going to have about the same effect as producing 125,000 policies, which is a significant part of new sales. I mean, I don't remember if it's 10% or what, but we've got a lot of good things going on in Japan. Persistency remains strong. The profit margins on our new products exceed the aggregate margin of what we are currently selling. The U.S. is strong. Share repurchase continues to benefit us. And all those things in the aggregate -- there are a lot of moving parts, you know. I mean, this quarter Dan said to me when I told him we were over earning, he said, "well, how'd you miss the number," and I said, "well, you know everything went right except for the weakness in Japan sales." So that's kind of a story I'm leaving you with to go into 2007.

That's very helpful. Thank you.

Nigel Dally from Morgan Stanley. You may ask your question.

Great. Thank you and good morning. You went through a number of different distribution initiatives to improve the sales in Japan. I know it's not going to improve sales immediately, but do you have a time frame in mind for when we should expect to see some of the benefit of those initiatives? Are we still looking at a tough sales environment continuing to 2007, or do you expect those initiatives to kick in and return you to growth?

This is Aki. I think there are two different issues over here. One thing is a kind of a one thing that we can control. The other, absolutely there's no control from our perspective. So let me just focus on what we can control in our own discretion. What we are doing right now is basically strengthening our regional sales office and also, at the same time, our field force by strengthening our training organization. As Dan mentioned, we've been preparing this thing not just right now, but last one year we've been preparing this -- the new program of the training and also the personnel in that organization. And also at the same time, we've been initiating last programs starting from this January. That is combining our -- the corporate agents -- corporate affiliated agents' expertise with the individual agency’s expertise. It's not just the expertise base but also -- sorry, the expertise means the consulting and face-to-face selling skills, but also at the same time we are trying to combine the market that a corporate-affiliated agency has with the individual agency.

Also at the same time, probably you have heard many times about our expansion of the Aflac service shops. We have right now just about 500 service shops across the country, and a lot of other life companies are trying to copy or follow us right now. But what we are trying to do is use -- to use this 500, over 500 service shops aligned with the individual agencies and corporate agencies, more deeply cultivating our corporate affiliated market. So all of this is right now going on in a parallel basis. And in terms of the training, we will finish all the training for our own regional sales office by the end of December, and at the same time, we will start the educating and giving training for our field forces starting from October. And this training program for actual field force will last somewhere around five or six months. This is not a short course. That will give us a little bit of a time constraint, but we are sure that all these initiatives that we are implementing right now will give us a positive impact during -- I mean, over the year end and next year.

That's helpful. Thank you.

Mark Lane from William Blair, you may ask your question.

Good morning. I just have a question on the overall medical market in Japan. There were flat sales from '04 to '05 and you mention that you think that sales were down in the first half. I guess, if the demographics are so powerful and people are so concerned about out-of-pocket expenses and the pressure on the government, et cetera, et cetera, what's the plausible explanation why sales are so flat? I mean, if competition's increasing and there's a lot of product out in the market and people are confused, shouldn't that kind of work itself out overtime, if there's a demand for the product? Can you offer any other insight?

Right now the overall, as we've said, the overall market has not really grown last -- at least the six months. And there are many potential reasons for that. I just cannot speculate all the reasons that we may say, but at this point the medical insurance needs, we believe, will not be changing at all. The revenue situation of the government is still getting poorer, and the cost for the medical treatment is going up. But the only thing that we can see as a negative impact as the sanctions that we have seen last almost eight months, including the Meiji Yasuda deal last year, October. And the important point over here is the sanctions were pretty much done for the medical insurance, not any other things. The focal point over here is medical insurance and what FSA, the regulatory agency has been trying to focus on is the nonpayment of claims of the medical insurance. So the overall industry for the medical insurance is being hit, and the magnitude of it being hit would be bigger for Aflac, because Aflac is the number one player. So that's the only thing that I can say right now. But starting from October this year, the senior people's co-pay will go increase, and we are hoping that the sanction issues would go away during this summer. So sometime around fall, we might see a little bit different movement in the market.

Okay. Thanks.

[inaudible-background noise] of JPMorgan, you may ask your question.

Hi, I have a question on your U.S. sales outlook. I think you'd mentioned at the end of this first quarter call that you expected sales to be modest in the third quarter, and then -- or second quarter and expect it to pick up in the third quarter. Your current guidance, I think, assumes roughly flat sales -- or sales as relative to second quarter level in the third quarter, and then you are expecting a pick-up in the fourth quarter. So my question is what's changed in the past three months that's making you a little less positive, and what's going to allow you to improve sales growth in the fourth quarter from the third quarter level?

I actually feel very confident in sales both in the third quarter and the fourth quarter. The real issue we're encountering in the third quarter is something that's not comparable. We had our 50th anniversary national convention last year, which was a seven-day cruise. That contest period ended in August and created a very large comparable for us during that time period. That's just something that we will not have as a comparison for this year. The reason for the outlook being mid to high-single digits is the fear over that comparison. However, I still feel very confident about what we are doing. I'm seeing tremendous a growth in the things that we are tracking and trying to do, and I feel very confident. In terms of the latter half of the year, I consider our reenrollment, as well as new accounts that we're bringing on, to be good indicators of what's going to happen, and I feel very strong about what's going to happen in the fourth quarter.

Can you give us any -- do you have any new products planned, or how do you have visibility that your sales growth will accelerate in the fourth quarter, other than just the typical comps in the third quarter?

Well, actually, yes, we have rolled out a brand new -- well, two product revisions, both our hospital intensive care, as well as our specified health events. And the combination of those two were rolled out beginning this month. We've announced that for several quarters coming, so that's picking up. I think we've rolled it out as of the end of last week in ten states, and we will role it out in 30 or 40 states by the end of this quarter. So it'll really be picking up momentum going into fourth quarter enrollments. But, again, a lot of our major reenrollments happen in the fourth quarter, and just like we're seen with our hospital indemnity and other product revisions that have been in the past, it's now going to give them an opportunity to be a part of our portfolio, going into this quarter -- this year’s reenrollments. And I feel confident about the numbers that we're going to be able to produce going into the fourth quarter.

Okay, thank you.

Colin Devine from Citigroup, you may ask your question.

Thank you very much. Okay, sorry. Dan, I was wondering if we could talk a little bit more about the corporate agencies, because it would seem to me that if we're looking at the sales production from them, look back the last four years of the second quarter, which is as far back as you provide data, this is the weakest quarter we've seen. So this trend seems to have been building and it may, in fact, be the weakest second quarter you've had in sometime, perhaps you can expand on that? And then the other one, just a quick one, I notice in the U.S. that the weekly average producers is up year over year, but I think it was down about 2.6%, sequentially, and perhaps Paul could comment on that.

Okay. I agree with you that the corporate agencies has been our weakest link and, as you know, I talked about it a little bit in the conference call in the first quarter. The corporate agencies from a profit standpoint are also highly affected by the conversion program. The older the account, the more these existing policyholders that were on a payroll rate had to move to direct and, therefore, it caused our agencies taking a lot more time away from them than was the norm. The other thing is these sanctions that were imposed -- let me be clear on these sanctions, too. when -- and Aki can talk a bit more about it -- but on these sanctions, when you heard, for example, if there was a major group, just -- I'm going to use company X, because I don't want to call any names out, was affected, this enormous agency and said that they could no longer enroll, most of the time those agencies stopped everything. Not just Sompo Japan, for example, they just said until we get all of this cleared up, we are not going to allow any enrollment in anything whatsoever until all this passes. And so that affected. So the two areas that have been most affected -- or the two points, I would say, are both of those and they affected corporate agencies. Now corporate agencies was the smallest percent of our overall business that we've ever had. Wasn't it, Ken, like 31% --

First quarter.

-- in the first quarter?

34.5.

And 34.5 in the second. So it continues to be smaller overall year to date, but as we've said, we are working on this – I have said all along our greatest asset in terms of sales increase is now our greatest liability. And I am working on this. We are going to do whatever it takes to get the job done. We're going to continue to add pressure. We're trying to find financial -- we are very fortunate that we've got a problem, but we've got money that's surplus funds that, if it's spent in the proper manner, could ultimately enhance our top-line growth. And so we're looking at spending additional funds at those corporate agency levels in terms of the training and other aspects to reinvest that money in doing those things, and that's what we plan on doing.

And the selling by the individual agencies to the corporate agencies, I mentioned is a very slow process. But as you can imagine, if it is your account and you have protected it for all these years, to let an outsider come in and get into that account takes a lot of salesmanship on our part to convince them that they are not going to undermine the existing structure they have, or in any way begin to, say, write business on the side or anything else. It becomes an issue of trust. And as I said, it's a very slow process, but I think we have 57 accounts -- and when I name an account, it's not like the U.S. Like the example I gave you of Hojinkai, there are 13,000 employees in that account, so we are not talking.

Hokkaido

Hokkaido, I'm sorry. In Hokkaido area is 13,000 people. So we have got these 57 accounts. So they are not small accounts with corporate agency; they're large account that we're working on to do this. Aki, you want to make any comment?

Yes, that 57 accounts have about 200,000 people within the groups. And the penetration rate right now is pretty below the average penetration rate that we have across the Company, so we are expecting that we have a much better result than what they have right now. And 57 group is actually the groups that we are actually selling right now, but also another almost a 500 groups that the alliance deal of being discussed. These 500 groups have about 2.3 million employees inside, and we feel that we can have good amount of opportunities in these 500 groups also. Probably we can give you a little bit more insight when we have an FAB meeting in Tokyo.

Okay, just to recap if I'm clear then, gentlemen, you're saying the two primary issues in Japan around sales are, one, we are watching this deterioration in the corporate agencies, which are what, down 7% in the first, 10 here in the second. That's issue one. Issue two is just increased competition or saturation of the medical product and that the way you are trying to overcome this is to both to develop the individual corporate agency relationships and cross-selling and, secondly, to build out these alliance distributions. Have I got that correct?

You got it.

Thank you. And now if we can briefly talk on the U.S. as to why weekly producers were down sequentially by 2.5%?

Absolutely. Colin, just to say one thing, I think that the average weekly producers being up to over 2.5% in this quarter was a great accomplishment. We are looking and internally tracking. Yes, it was up 4.9% in the first quarter and then it was down compared to that sequentially; however, our target goal is to continue to have increases. If you look at both 2005 and 2004 numbers, we saw anywhere from decreases to flat to moderate increase. These comparatives to those numbers are significant increases and we think, based on the internal numbers we're tracking, we're showing very strong results on the training systems that we're putting in place. Such strong results, actually, that we are expanding that training program, as Dan mentioned, with the RCAP program and other things that we now have on the drawing board that we'll be rolling out in the latter half of year and the beginning of next year and we'll be discussing with you upcoming. But, we feel very excited about the number, and so I would not -- I'm not at all concerned about what you consider to be a downward trend, sequentially. Again, both of them are strong increases over last year and are right in line with what we think we need in order to achieve our targets and to continue our growth into 2007.

But there's no real reason as to why they just happened to go down sequentially? It doesn't appear to be seasonal, based on past years. In fact, typically in the second quarter it's gone up.

Well, part of it's based on that fact that, in the first quarter of last year we had a very easy comparison because we had a bad quarter, and second quarter of last year, we had a very high number, a very tough comparison. When you have better production you're going to have more average weekly producers. It's just a direct result of -- there's only two things you can move, either productivity or number of average weekly producers. And by having a tough comparison, we had more average weekly producers in the second quarter of last year from some of the momentum that we were able to create and, therefore, it made it a tougher comparison. So, the 2.6% increase this quarter was actually, in my opinion, a very good increase overcoming what we had to do last year in the second quarter, versus the 4.9% in the first quarter of this year, which was overcoming an easier comparable in the first quarter.

Thanks very much.

Chris Ferrara from Merrill Lynch, you may ask your question.

Thank you. Focusing on Japan, given that the market conditions are out of your control, and it sounds like the new training initiatives will be going into '07, at least with the field organization, I guess, and I'm assuming that there's potentially short-term negative impact on sales, as an agent is spending time getting trained versus selling. Considering all of that, do we have to wait for the bank channel opening at the beginning of '08 before the sales are up again, or what's the chance that that's the case? Thanks.

Absolutely not. We are focusing on finding a way right now to address every issue out there and to get production back on track. We have given ourselves some leeway in the second half of the year because, frankly, our sales force has been -- and our management team has been under so much pressure with calls from us every hour on the hour almost, asking where they are in regard to production that they don't have time to stop and do the fundamental things they need to do. This gives us a little bit of time to stop, get done what we need to do, which are some fundamentals which takes awhile to show in terms of production. We don't know next year what we'll do at this point, because we don't know what we are going to do the second half. But as we get closer in the year, we'll give you more guidance as we feel more comfortable with what we can do. But would we be -- are we giving up on 2007? Absolutely not. I'm going to do everything in my power, go over there as much as I need to go over there, work with Aki, and we are -- we know that '08 is going to be a very big year for us. One thing is, it's going to be hard to tell how effective a lot of things we've put in because '08 is going to look good because of the bank channel. And so we've got to figure out how to monitor and how to gauge what's taking place and the success of what all we're going to be doing. But I think we can monitor it like we did in the U.S. in terms of training, and we're just working through that process right now.

And, Dan, just to clarify, the response to a prior question. I think there was the question about, you know, sort of the assumption that the medical market was saturated, and it sounded like you agreed with that. Do you agree with that or is this -- or did I --

This is Aki. I don't think it's saturated at all. The -- this data is about seven, eight years ago but, basically, when we look at the whole entire -- the demographics of Japan, about 6% or 7% of the people were covered by whole life medical policies. And about 10% -- I'm sorry, about 30% of the people at that time were not covered by medical insurance at all. And all other people were covered by either the term medical individual policies or term medical group policies. So, a lot of people are thinking that Aflac has had a big market for this medical insurance for many, many years, but actually not. Aflac just grabbed the total new market in 2002, 2003. That was the first time. And all those policy-holders at that time -- we acquired at that time were basically coming from somebody else's policyholders. That means those people were covered by the term medical individual policies or group term medical policies, and we basically appealed to the Japanese public that for the future, whole life medical policies should be held by everyone in Japan. And we were bought at that time for that concept. So from that point beyond, we've been grabbing more and more market share. And that means there are almost still 80%, 90% of the people in Japan will have an opportunity to either change to the whole life medical or buy the new whole life medical. So I don't think there's any saturation at all.

Thank you.

Am I answering your question?

Yes, thank you very much.

Also, remember that we are not counting on this, but I believe you're going to continue to see the co-pays and the deductibles go up. And that's not in our plans or forecast, but there's nothing out there that indicates that they've got any control over the cost. And they've got -- the government -- and they've got to continue to push those costs on to the consumers. So the market will grow by that, as well. So, no, I don't think it's saturated either.

Thank you.

Jason Zucker from Fox-Pitt Kelton, you can ask your question.

Great. Good morning, thanks. A couple of questions. First, is there any chance that you guys could be sanctioned by the FSA similarly as to the other companies you had mentioned? And then, the second question. A little bit bigger picture, just thinking about the market in Japan and your model in Japan, and if I go back a couple of years, I know that you guys have always aspired to be able to grow sales at around 10% a year. That really hasn't held up now in the last couple of years and I'm wondering, looking out, where you think a more realistic sales growth rate should end up?

Well, I think an -- we've had no dialogue with the FSA in anything negative that would indicate that we have any problems whatsoever. Can you ever be sanctioned? I guess you can, but there's nothing going on that we know of in any way that's nothing but positive with the FSA and us.

Well, we just concluded an exam last year. I mean --

Last summer

-- last summer, so we have been examined recently and there weren't any resolved issues.

So, it's not us.

Okay.

And what was -- Long-term it's 10%. Long-term we've been 10% seeking there is that --

Well, for that long-term, double-digit increase, that's why we have been working very hard every day, every hour.

You know, I think the answer, Jason, is that we're being very conservative in the second half and until we've got a better grasp on what's going on, I'm not going to go out and commit something that I'm just not sure of. But what I can tell you is is we still offer the best product at the best price. There's still increasing deductibles, co-pays and everything in Japan, and we still believe it's a big market. There have been some under controllable issues that we have not -- that we cannot directly address, like the sanctions, but they eventually will go away. And there are other issues that are out there, but we can adapt and change and increase and do much better than we are doing right now. And that's what we plan on doing is working and more efficiently find ways to improve our operation and we're going to do that. That's what we are paid to do, and we're going to find ways to do that, and it may take us a little while. But we will update you as we always have done, tried to be as transparent as possible with everything good and everything bad that we know about, to let you know. And as we come into the analyst meeting maybe we'll have more insight to tell you about in September, but certainly as the year goes on we'll keep you updated.

But I'm not willing to go out on a long-term plan at this particular point, when I've just told you I've got disappointing numbers and so I've just got to wait and see. But I will again say that it's mighty nice to be able to see, at a time period when the sales are disappointing, that we have something to balance it and to certainly help offset it by having a higher-interest rate environment. And that has been very positive for us. We don't know how long that'll go, but as I told you all along, our biggest fear was always a low-interest rate environment. And to have it improving at this time could never have been a better time for us. And so that, along with the conversion program, makes us feel very comfortable about making our profits and, frankly, it gives us a little time to work on sales and correct that problem and still be able to stay on track to make those earnings. And that's what it's all about and that's what we plan on doing.

Great. Thank you.

Valerie, I'm showing we're at the top of the hour right now. How many more questions do we have in the queue?

We have eight more, sir.

I don't know that we will get to all eight, but let's at least take a couple more. We'll extend this a little bit beyond the hour time limit, given the circumstances. So if we could take a couple more questions, that'd be great.

Sure. Suneet Kamath from Sanford Bernstein, you may ask your question.

Thanks. And thanks for extending the call. I want to ask a question about the bank channel. As I understand it, I mean if you made it clear, there's a lot of confusion in the market in Japan and people are seeing lots of different products. And you're also talking about the bank channel being this great opportunity. And I guess I'm just trying to reconcile those two things, because at the end of the day, is this situation going to be one where you have another distributor selling a bunch of products that perhaps that distributor doesn't understand, as well as the folks that are selling the products today? And why isn't that going to create even more confusion in the market? Why are you so confident that that's a growth opportunity? Thanks.

Well, when you say about a bank channel, there are many different kinds of banks. Let's talk about three different bankers. Number one, the so-called mega bank, and, number two is regional bankers, and number three is kind of cooperative type of bankers. And the mega banks and regional banks, they would like to sell a bigger face-value policies that our normal distribution channel would not try to sell. For instance, last three years a lot of people were trying to sell the single-premium annuity policy or single-premium variable annuity policies, and that's why they doubled or tripled their premium income. But that kind of product, I don't think we can sell through our existing -- existing distribution channel. And when we talk about the small -- the real regional and cooperative type of bankers, they have have an individual customers in the localized areas. And for that are part there might be some conflict in the market, but we -- in our cases, the -- all those bankers, about half of them for the last 30 years we have already dealt with the corporate -- I mean, bank affiliated agencies already. So that we've been establishing our expertise in dealing with the existing market situation, so that will we are not really that much concerned about the market conflict in terms of that kind of localized bankers and localized individual agencies. Am I asking -- I mean answering your question?

I guess. I guess what I'm worried about is really the --

-- be clear. Just think of it this time. There's still going to be confusion in the market place, but think about taking an additional 5,000 agents that you didn't have last year and you're all the sudden going to have this year. Confusion or not, you're going to sell a lot more insurance, and that's the real issue her, is that all of a sudden there's going to be -- Kind of like Dai-ichi Life. All of a sudden we added the Dai-ichi Life distribution system. No, granted, not everybody at Dai-ichi Life that was a salesperson sold a policy for us, but enough did that it created this surge in business. Well, when we license these banks, they are going to have salespeople at the bank making the sale, and it's just going to be a surge out of shear volume of people making these presentations. And because they'll be more one on one, they -- what we call push versus pull, there's going to be a natural tendency to sell more. So there'll still be convert -- still be confusion in the market place to some degree, but less because of the consumers themselves talking to people at the bank versus the pull technique. And second, there will be some confusion, no question about it. But just the sheer volume of people now selling will increase.

And interestingly enough, when we hear from all the sales forces in Dai-ichi, I've never heard that they have a conflict with Aflac agencies. So there is still remaining a vast market there.

Yes, that's helpful. I guess I wasn't as concerned with conflict with your agencies as opposed to conflict with the other insurers that you are competing with, but I guess we will hear more on this in September, anyway. Thanks.

Jeff Hopson from A.G. Edwards, you may ask your question.

Okay, thanks. I just want to make sure on the spending issue, I know last year you had accelerated spending in the second half. What type of spending acceleration are you thinking about this year to spur sales? And any chance that share repurchase activity could be accelerated under these circumstances?

Well, I'll another press share repurchase and probably most of the spending. Aki may have a comment or two. We've only bought back 4.4 million shares so far in 2006 and we've quoted a range of ten to 12 million. We always hit at least a minimum in that range, so the second half will be more than the first, one way or the other. It could be ten million for an extra 5.6 million acquired, or it could go up to 12, but we'll probably be in that range for 2006. We will look at the price of the stock and gauge our actions accordingly. Regarding spending initiatives, we have some expenses that we had in the budget for the first half of the year that we didn't get around to initiating the projects on. A couple of those are IT-related both in U.S. and Japan, and some of those are going to happen in the second half of the year. We are looking at spending additional money on training in Japan in the second half of the year, and we have some other initiatives. It's not all going to go into advertising. It's going to go into these initiatives that we've addressed so far on the conference call that are primarily focused on increasing the agents ability to do face-to-face selling and address the market head-on, as opposed to the pull techniques of advertising and direct mail.

Okay. Thank you.

Tamara Kravec from Banc of America Securities, you may ask your question.

Thank you. I guess most of them have been answered, but if you could just talk a little bit about what's going on at Dai-ichi in terms of sale? Are they [inaudible] flat year over year over year?

I think right now they are trying though sell their own products, putting enormous amount of their effort, because they have had an alliance with Sompo Japan. And Sompo Japan is really in trouble right now, so that they cannot really expect the potential sales, otherwise, coming from Sompo Japan. So also at the same time, they just announced -- I mean, they launched their new product in the market. So right now they are trying to put their -- most of the effort in selling in their own products right now.

So would you expect then given that -- you seem to have three to four quarters of very strong growth there. It seemed to rebound and then this quarter it was flat to down slightly, so would you expect weaker sales coming out of Dai-ichi for the remainder of the year and possibly into '07, then?

Well, I want to go back to when I originally cut that deal with Dai-ichi Life, is that we never expected to see a pattern of growth like we hoped would match up with our existing field force. We knew that they would have push periods and work with us, and then they would have periods when they would push their own products. And that, in fact, compared to our ability to work with our sales force and push them, that Dai-ichi Life could simply say, this is the year that we're pushing a new life product. But the fact is they would still roll in close to 100 million in premium year after year, no matter what. The one thing that I think was important last year was -- and I thought this was possible -- is we could have a decreasing amount of business each year from Dai-ichi Life, but still overall, it was enormous. They're still the number two seller of cancer insurance. In fact, it turned last year. They pushed it. Under Mr. [Sihto], he and I had this program that we put out nationwide for Dai-ichi Life and did this contest ,and the sales picked back up. He told us that this year would be something else. So, Aki, I would think this year,you want to comment on what you think of sales, but I want you to understand the context in which it was written and what we expected going into it. I mean --

Let me add one thing briefly. Last year's second quarter, if I remember correctly, Dai-ichi was up about 19%. They greatly exceeded their sales expectations last year, but they didn't revise their target for this year. So we never expected to have a tremendous increase out of Dai-ichi to begin with.

Also at the same time, we provided new product -- new cancer product last June, just because they really asked us to do that. On behalf of them it was really difficult for us to provide a new product for them in our timing basis, so I'm sure that they are trying to do whatever they can about our -- the mutual promise.

I think the one question you're really asking is are we happy with them and the alliance and what's going on and even production this year. The answer is they are right on target with what we expected, we're very happy with it, and we wish we had five more just like it.

Okay, thank you.

Valerie, let's take one more question and then I'm afraid we'll have to complete the call. If we can have one more, that'd be good.

Andrew Kligerman from UBS, you may ask your question.

Whoo, just made the cut. [LAUGHTER]

Well, if we missed anybody, we'll -- after the call, give us a call. We're not going to cut anybody off and not take your call, so just know that.

I will try to keep this one short. You know, it seems like you're doing so many phenomenal things and it's quite remarkable that we're spending the whole quarter on Japan sales. And it makes me think a lot about -- about Starbucks, of all companies, where you have this phenomenal management that just when you think the coffee market is saturated, they push ice teas or they push pastries or whatever, and it's making me wonder about Aflac and being such an innovative Company. Are you thinking, again, about expanding a new country? That's number one. Number two, what exactly is the potential of your WAYS product? I see life insurance is becoming a bigger proportion of sale. Do you think product expansion might become a much more prominent factor down the road. So, geographic and product is the question.

Well, I've always believed that, going back to the early days of when I was CEO that we were basically a one-product Company and how we've evolved. I think our mission at Aflac is to cover the body and within that, it can be health insurance, life insurance. I don't say us in the property casualty business, but I see us looking for where there are voids in the healthcare system or voids in anything that they might need to cover the body. I think our job is -- I've said all along that we're a marketing Company, and we will look for ways to continue to grow that distribution channel and keep them excited about new potential products and ideas. And, yes, we are always doing that. We're asking consumers. we're asking our agents.

The one thing that's interesting, especially in the U.S. and to some degree even in Japan is that our products aren't bought, they are sold. And we even see that more so in Japan is that, maybe in the early years, they were sold more than they were bought -- I mean bought more than they were sold, excuse me. When today they have to be sold more than they're bought because of the confusion in the market place. Well, that's our area of expertise in the U.S. is understanding how to train people and how to teach them to sell. And what we've got to do is we've both to get Aflac Japan, and specifically the corporate agency side, in more of that position to where they know how to sell people. And that's what we're going to work on and that's what we're going to do in training. And frankly, that's what we're good at and we've just got to concentrate on that. We've done a pretty good job with that with two-thirds of our sales force in Japan, because they pretty well know how to do that. And if we get that other side to pick it up, we'll be in very good shape and that's what we're going to work on, Andrew.

So geographic is not on the plate?

Let me tell you this, we are looking internationally, but we don't want to lose sight of the two biggest markets in the world. Have we looked at China? Yes. But because of health care issues, it -- you know, property casualty you can do in Japan, life insurance, but with health insurance, undeveloped countries just doesn't make sense for us. We've looked at Germany. They only allowed a 1% profit margin. Are we reevaluating and going to look at other markets? The answer is yes. But right now, when you're writing about $2.5 billion in new sales, there's not going to be a start-up that's going to have any direct impact on us. So what we've to do is just get the sales of these two countries to continue to grow. We think we fixed the U.S.; it's back on target. We've now got a problem here. We're going to fix this. That's what we're paid in management to do, is not do the easy things day to day. You get paid the big bucks for fixing the problems, and that's what we are going to do. And we're going to find a way to do it, and we don't know all the answers yet, but we will have more questions and then we'll have more solutions to those questions as we move forward.

Excellent. Thanks.

Again, thank you all for joining us this morning. If we didn't get to your question, I apologize but I hope will you give either Robin Mullins or myself a call and we'd be happy to take that call. Thanks, and we will talk to you soon