美國家庭壽險 (AFL) 2006 Q3 法說會逐字稿

Good morning, and welcome to the Aflac third quarter conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to Mr. Ken Janke. Sir, you may begin.

Thank you, Julianne. Good morning everyone, and thank you for joining us this morning on our third quarter call. With me today in Columbus are Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, Executive Vice President and Chief Operating Officer of Aflac U.S; Joe Smith, Senior Vice President, Chief Investment Officer, and Jerry Jeffery, Senior Vice President and Deputy CIO. In Japan, we're joined by Aki Kan, President and Chief Operating Officer of Aflac Japan; Takaaki Matsumoto, who is Director of Marketing, and Hisayuki Shinkai, who is Director of Sales.

Before we begin let me remind you of the safe harbor language. I would like to point out some of the statements in this teleconference are forward looking within the meaning of federal securities laws. Although we believe these statements are reasonable we can give no assurance that they will prove to be accurate because they are prospective in nature. Actual results could differ from those that we discuss today and I would encourage you to look at our quarterly press release that we released last night for some of the various risk factors that could materially impact our results. Now, I would like to turn the program over to Dan who will talk about the quarter and the outlook for the rest of the year and then I'll follow up as usual with a few financial highlights. Then we'll be happy to take your questions. Dan?

Good morning, and thank you for joining us today. Let me open today's discussion by saying that from an overall financial perspective I'm very pleased with the third quarter results. Based on continued strong financial performance of Aflac Japan and Aflac U.S., my confidence in achieving our 2006 and 2007 earnings objective has grown. As was the case with the second quarter, I'm very encouraged by Aflac Japan's financial performance both for the quarter and year-to-date. Aflac Japan also continued to execute very well from an operational perspective. It is worth mentioning that the persistency rate of Aflac Japan's business continues to be outstanding. Our persistency improved from 94.8% a year ago to 94.9% this year. Due to our strong persistency and higher investment income revenues are in line with our budget this year while pretax earnings are ahead of our expectations.

However, we have yet to see any improvements in sales. In the third quarter, total new annualized premium sales were JPY 27.3 billion which was down 11.9% from a year ago. For the first nine months, total new sales were JPY 87.9 billion or 5.8% lower than the first nine months of 2005. First let me say that we have not identified any significant changes in the market over the last few months. As we have explained repeatedly, Japan's medical insurance market remains crowded and therefore challenging, and like the second quarter overall medical sales in Japan appear to have been weak for the industry. In addition, the nonpayment of claims remains a cloud over the industry and it is likely impacting consumers' behavior.

Despite the challenging environment, we are working diligently on initiatives, especially on the distribution side, that we hope will help us better penetrate the market. For instance, our staff at the Aflac contact center in Japan, began making what we term "hot calls" to existing policyholders earlier this year. The call is both a service call and a sales contact. Our staff was trained to get a sense of whether the policyholder is considering additional coverage. Based on how the call goes, we can quickly respond by sending brochures and sharing consumer information with sales agencies to initiate follow up while the insurance is still, as we call it, "hot" on their mind.

We began with our cancer life consumer customer base because we have significant number of policyholders who only have one policy with us. However, we are planning to expand the program to reach all policyholders in the future. As such, we have increased our staff at the Aflac contact center . In addition, we recently acquired a small call center that had been selling our products, which should also increase our capacity to make outbound calls. We are still working to improve the effectiveness of our corporate channel. We are continuing to facilitate alliances with affiliated corporate agencies and individual agents who traditionally use face-to-face sales presentations. This is not a quick fix solution. Forming these alliances is a process, not an event. It takes time for the two different channels that operate quite differently to agree to pursue a working relationship, but we believe these alliances have the potential to increase sales in the affiliated corporate agency channel.

We are also continuing to expand our sales force. During the third quarter we recruited more than 800 new sales agents, bringing the total number of agencies to 18,700 at the end of September. We now have more than 88,400 licensed associates. More importantly we're focusing on enhancing agent training. Our newly reorganized training department consists of employees from our sales force and other companies who have experience and expertise in face-to-face sales. They're charged with teaching basic consulting skills and processing through a two phase program called Associate Basic Training. Phase I is train the trainer segment, where our core training team educates field training specialists who are actually Aflac Japan employees located at various sale offices. By the end of this month, we anticipate that we will have trained 720 training specialists and sales territory directors. Once training specialists are fully trained they'll deliver Phase II training to the end user, our agents. Phase II is scheduled to begin in November. Our goal for 2007 is to train 3,000 licensed salespeople. However, just as we discussed with Aflac U.S. training initiatives I want to remind you that training is a long-term process and commitment.

From an operational standpoint our business at Aflac Japan remains very strong. As always, we remain active in identifying areas where we can enhance our operational efficiency and effectiveness. To that end, we have been working on a $55 million mainframe consolidation project and it is on track for an early November cutover to the system. This project will greatly enhance our IT capacities. First, it consolidates two older mainframes into one state-of-the-art IBM mainframe. This will both simplify our operating environment and greatly speed up our ability to process business. By simplifying our technological environment and gaining access to more a powerful mainframe, we will be able to develop products faster and provide higher quality of faster customer service. Additionally, the new system will enhance our disaster recovery and security capacities. And finally, we're positioning ourselves to take advantage of the advanced database and modern Internet service-oriented architecture for our business application. We're excited about how this project will enhance our operation.

I am confident in Aflac Japan's ability to generate earnings growth, although sales will be down again in the fourth quarter. Given the market environment, we anticipate that 2007 will also be a challenging year from a sales perspective, however, we're working hard to fine tune our strategies and improve our tactics to work towards generating sales growth next year. At the same time we remain encouraged by the prospects of expanding our business when the new bank deregulation channels open at the end of December of 2007. Although our competitors will be vying for this business, we believe Aflac Japan will be well positioned to reach new consumers through this new sales channel. With long term relations with the bank we are excited about the opportunities to grow our business in 2008.

Now let me turn to Aflac U.S., which is operating at the level that is consistent with or better than our objectives. Total new annualized premium sales are ahead of our expectations for the quarter. Total new sales rose 11.7% to $332 million, For the nine months, total new sales increased 9.7% to $976 million. Although it's early, indications suggest that the fourth quarter will be strong from a sales perspective and I have great confidence that we will achieve our sales target of an 8 to 12% increase for the full year. I believe our sales results suggest that the actions that we've taken to enhance our distribution have been effective.

We also achieved our financial target for both the third quarter and for the nine months of the year. In addition, the matrix that we have focused on since the start of the year also shows significant improvement. Agent recruitment was strong, however, even more meaningful and encouraging is the fact that the number of producers continues to grow. The number of average monthly producers increased 5.2% and the number of average weekly producers increased 7.6%. For the nine months of the year, average weekly producers increased 5%. We believe this suggests that our inertia is building and we will carry on into the fourth quarter. The persistence in Aflac U.S. business has been fairly stable and our administrative area remains strong. Overall, I am very pleased with our U.S. operation. We have not identified any significant changes in the competitive environment and I am convinced that we've been doing all of the right things to strengthen and increase the size of our distribution system. We've properly positioned our brand, our products are well suited to the market and we are using technology to leverage our resources to respond to our agents' and consumers' needs.

All of the strong financial results aren't possible without a strong team of dedicated people. I hope you saw our announcement earlier in the month that Jeff Herbert joined Aflac in the newly created position of Senior Vice President, Chief Marketing Officer. He has 20 years of marketing and branding experience having successfully helped executive positions at Coca-Cola, Campbell soup and Kraft General Foods. Jeff is responsible for the U.S. strategic marketing effort including national advertising, product development, product market development, consumer research and sponsorships. Our Senior Vice President, Director of Sales, Ron Kirkland, who is doing an outstanding job, remains in his responsibilities. His focus is still managing the activities of the U.S. sales force. I believe it is critical that the U.S. sales force report to someone like Ron who has made a living on sales commission and has a reputation with the field force in terms of success. Both Ron and Jeff report directly to Paul Amos, our Chief Operating Officer of Aflac U.S. I think we have a winning sales and marketing combination that will help us maintain our current momentum in the United States.

I'm sure most of you are also aware that our Chief Investment Officer, Joe Smith, will be retiring at the end of this year. Joe has been with Aflac for 21 years. His innovative investment approach has resulted in Aflac becoming the premier provider of long-term Yen financing, and that has significantly contributed to our ability to achieve our earnings objectives. Upon Joe's retirement, Jerry Jeffery will become Chief Investment Officer. Jerry joined Aflac in 2005 as Deputy Chief Investment Officer but he is not new to Aflac. While Jerry was at Morgan Stanley in New York he worked closely with Joe for more than a decade helping to identify investment opportunities that met our unique requirements when investing huge Yen-denominated cash flows. We congratulate Joe on his lengthy and very successful career with Aflac and we look forward to Jerry's continued contribution to our business.

As you evaluate our financial position and prospects for growth, I will urge you to maintain some kind of perspective on Aflac Japan's sales. When you look at income statement, remember that the vast majority of our earned premium comes from renewals. For example, less than 10% of Aflac Japan's total revenues is derived from premium income from these sales. In addition, we will sell significantly more business in Japan this year then we will lapse. More importantly, the business that we continue to add to premium in force is more profitable than the aggregate block of business for Aflac Japan which improves our profitability of overall business. Furthermore, keep in mind that we are generating additional investment income due to higher interest rates in both the United States and Japan. Combined investment income should be ahead of budget by 28 million this year. In addition we have budgeted a U.S. sales increase by 8% for 2006 and we will very likely surpass that number for the year.

In looking at our balance sheet, Aflac remains very strong. Our investment portfolio is in excellent shape. We maintained high capital adequacy ratios to support our ratings and overall we're very comfortable with our capital position. We're also generating strong cash flows that we can use to benefit our shareholders. As you saw in yesterday's press release, we increased the cash dividend for the second time this year. The fourth quarter payment will be 23.1% higher than the third quarter cash dividend and we also declared another increase effective in the first quarter of 2007. As a result, the first quarter dividend will be 15.6% higher than the fourth quarter payment. Combined, that represents 42.3% increase over the third quarter dividend.

In addition, we remain committed to purchasing our shares on a consistent basis. While we're on track to purchase about 10 million shares this year, we have raised our target for next year. We now anticipate purchasing 12 million shares in 2007. I believe these two steps reflect our confidence in the future and our commitment to increasing shareholder value.

Of course, our approach for enhancing shareholder value has always centered on on increasing operating earnings per share at an attractive rate. To that end, our goal for 2006 remains unchanged and is increasing operating earnings per diluted share of 15% excluding foreign currency translation. For 2007, our goal is to produce 15 to 16% growth in operating earnings per diluted share excluding the impact of the Yen. As I said at the analyst meeting in May, my personal objective is to increase earnings per share 15% for 20 years and I remain confident about reaching that goal. Thank you for joining us this morning. Ken?

Thank you, Dan. Let me briefly go through some of the third quarter financial highlights beginning with Aflac Japan. Starting at the top line revenues were up 6.4% for the quarter in Yen terms. In looking at the quarterly operating ratios as we expected, the benefit ratio continued to improve over last year. It was 66.1% in the third quarter compared with 66.6 a year ago. Excluding the impact from the weaker Yen on investment income, the benefit ratio was 66.2%. The operating expense ratio for the quarter was 18.5%. As we expected, it was higher than a year ago, which was 18.3%. As a result, the pretax margin improved from 15.1 to 15.4% in the third quarter, and with the expansion of the margin pretax earnings increased 8.4% in Yen. Excluding the impact of the weaker Yen on Aflac Japan's dollar-denominated investment income, pretax earnings were up 6.7% for the quarter.

On the investment side, yields in Japan were actually a bit lower than second quarter levels. As measured by an index of the 20-year Japanese government bonds, yields averaged 2.22% in the third compared with 2.24 in the second quarter. However, for the quarter, we invested our cash flow at attractive yields and for Yen only we invested at 3.66% and including dollars the blended rate was 4.2%. The portfolio yield was 418 at the end of September which was up one basis point from the end of June but eight basis points lower than a year ago. Though this Monday, October 23rd, we had committed to invest about 78% of estimated cash flow at an average yield of 3.38%. The overall credit quality remains high, although we did have one addition to our below investment grade holdings in the quarter, which was CSAV a South American shipping company, yet on a consolidated basis securities rated double B or lower were still only 2.5% at the end of September compared with 2.1% at the end of June.

Now turning to Aflac U.S., total revenues rose 9.8% for the quarter, in looking at the operating ratios as expected, the benefit ratio improved over last year and was 53.4% compared with 54.7% a year ago. The expense ratio declined from 30.9% to 30.7, and the profit margin for the quarter was 15.9% up from 14.4 a year ago. As a result, pretax operating earnings were up 21.7% in the third quarter. In terms of U.S. investments, the new money yield for the quarter was 6.61% up from 6.22% a year ago and the yield on the portfolio at the end of the September was 7.17 which was down two basis points from June and eight basis points lower than a year ago.

In looking at other some items for the quarter as you heard we purchased 3 million shares during the third quarter, that was at an average price of 43.52 per share. That brings the total number of shares purchased for first nine months to 7.1 million shares and keeps us on track to buy 10 million for the full year. The debt to total capital ratio was 17.6% at the end of September compared with 22.6% a year ago. Notes payable of $1.4 billion the the end of the quarter reflects our issuance of JPY 45 billion or approximately $382 million of euro/Yen bonds in September. Noninsurance interest expense in the quarter was 3 million compared with 5 million a year ago, and parent company and other unallocated expenses were 15 million in the third quarter compared with 12 million a year ago. The operating margins improved for the quarter. The pre-tax margin rose from 14.4 to 15% and the after tax margin increased from 9.4 to 9.9%.

On an operating basis, the tax rate was 34.1 compared with 34.4% a year ago. And as we reported, operating earnings per diluted share rose 9.1% to $0.72 per share which was in line with the consensus as well as our expectations. The weaker Yen in the quarter decreased operating earnings by $0.02 a share and excluding the Yen's impact operating earnings per share were up 12.1% for the quarter and 15.8% for the first nine months.

Finally let me comment on the outlook for the fourth quarter earnings. As we mentioned in yesterday's press release and as Dan said again this morning, our objective for 2006 is a 15% increase in operating earnings per diluted share excluding the impact of the Yen. That would translate into $2.92 on a currency neutral basis compared with last year. Achieving our target for the year implies fourth quarter earnings of $0.65 per diluted share on a constant currency basis compared with a year ago. Even though we're running ahead of our annual target for earnings so far we still expect higher expenses in the fourth quarter as we communicated to you on our second quarter conference call. And if the Yen average is 1.15 to 1.20 for the balance of the year we would expect to report fourth quarter earnings of $0.65 to $0.66 per diluted share on an operating basis. That would mean that full year operating earnings would be in the area of $2.84 to $2.85 for the year. For 2007, our objective remains a 15 to 16% increase in the impact of -- or excluding the impact of the Yen on an operating earnings basis, and now we would be happy to take questions. We do want to make sure that everyone has a chance for questions so please limit your questions to one. Thank you and Julianne, we'll go ahead and take questions now.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Nigel Dally from Morgan Stanley.

Great, thank you, good morning. It seems the question on everyone's mind is how long will it take for Japan's sales to stabilize and return to growth? I know you can't control the market but how long do you expect it will take for your distribution initiatives to kick in? Also, I don't know whether you said this yet but what level of sales growth does your Japanese management team need to hit in 2007 to receive a bonus? Thanks.

This is Aki. About the first question, how long it's going to take for our sales trend to change in 2007? Let me give you a background about our new ABT training program. This program is consisting of a six month period that is combining the learning process on the desk and also the actual selling initiatives in the market, so I would assume after six months from November this year, we will see some kind of result. I hope this would help your understanding.

And the answer about the bonus is -- I haven't said it but there will be no bonus for a decrease. How we're going to set it and what -- I want to look a little bit more into the fourth quarter and see how it unfolds, and how the training is going, and the recruiting, but I can tell you that for sure. So, I'll let you know more about the other as we get a little closer in the year.

I got it. That's helpful, thanks.

Our next question comes from David Lewis from SunTrust Robinson Humphrey.

Thank you and good morning. Dan and Aki, I know we have talked about the issues in Japan being the competitive marketplace, the potential sanctions by some of the regulatory bodies, I mean is there any concern there's a penetration or saturation issue and do you think that the overall industry is actual seeing near double-digit declines in overall sales in the third sector?

This is Aki again, let me take the second question first. For the major 13 companies that are dealing with the medical policies, in terms of the medical policies, number of medical policies, the increase for those major 13 companies for the third quarter was negative 11%. So, we are a little bit lower than that, but the difference is coming from the magnitude that we are depending on the third sector. That's the number one question.

And number two question, or number one question you had was about the sanction. Today, in the Nikkei daily journal, there was a reporting about the non life companies, the new report to FSA they made just about a week ago, and it said that they found additional 130,000 claims errors on top of the 180,000 claims errors they reported last year, November. So it is creating some additional cloud right now and also at the same time by the end of this month, the non-life companies are supposed to submit new report to FSA about their claims errors on the medical policies this time. So that's kind of coming along towards the end of the year. So we are expecting that these things would linger for the end of the year and next year.

David, I think one other point is that our medical sales, it was calculated, but are actually hurt by the sale of WAYS. So if we had not been selling WAYS, our medical insurance, I assume would have been up more than it was, but overall we may not have brought in as much business. So we think WAYS ultimately benefits us but at the same time when you break it out just into the third sector because of the way we sell WAYS it can have an impact.

That's a good point, thank you.

Mr. Matsumoto would you agree with that?

Yes.

Our next question comes from Ed Spehar from Merrill Lynch.

Good morning. I had a question on the benefit ratio in Japan in the third quarter. If you look at the 3Q this year and last year, there's a pretty nice sequential increase versus the second quarter. And I'm wondering if you could explain is there something seasonal? Is there something else that happened this quarter that was perhaps unusual that -- with reserving, anything on that would be helpful, thanks?

We have a block of business, Ed, an old closed block of dementia businesses that it's or practice in agreement with our auditors that we review from a gross premium valuation perspective for reserve adequacy and we do that in the third quarter, and last year we made a roughly JPY 3.5 billion adjustment to the benefits' increase and we did about 3 billion this year. So it's fairly consistent year after year, but that causes the fluctuation between the third quarter and second quarter. It's just an agreement between the auditing firm to be consistent by quarter. There's nothing else particularly seasonal about the benefit ratios in the quarters.

And given the adjustments that you've made and the assumption would be, I guess, that if things play out as expected that there are no further adjustments for that in the third [inaudible -- voices overlapping]?

We'll take a look at it again in 2007. What's going on with that particular block is that we've had persistency that's better than expected on that block and to the expect that persistency's better we tend to pay more claims. Now, it's just really on margin, the persistencies like 2.3% -- I mean the lapses are like 2.3%, instead of 2.5. So it's really a tiny thing but that's factored into the overall projection of decline in benefit ratio year to year that underlines our earnings estimates. So, it's just kind a quarterly blip that's in the numbers projected for the year.

Okay, thank you very much.

Our next question comes from Tom Gallagher from Credit Suisse.

Hi. Aki, I just wanted to follow up on one of the comments that's happening from a regulatory standpoint. You talked about the non-life companies I guess recently revising upward their claims errors estimate, and you had also referenced the requests by regulators to examine the medical policies and looking back at historically to examine those? Can you just flush that out or flush that out a little bit for us? Have you all also received a request from regulators to examine your past claims and is that a broad industry issue and when do you think that might be resolved?

Yes, all of the non-life companies and also the life companies were asked, requested by FSA, to go back five years of historical claims payment and medical policies and the non life companies' report is due by the end of October and the life companies' -- the final report is due at the end of 2007 in March. So, I guess that would be answer to your question.

Okay. So we may hear more news on the medical claims side from the life companies in May of '07?

Yes, right.

Okay, thanks very much.

Our next question comes from Tamara Kravec from Banc of America Securities.

Yes, hi. Good morning. I guess just this question, you've been saying expenses would be back end loaded in the second half of this year and in the fourth quarter you had of '05 you had higher expenses. Should we expect a similar ramp in 4Q '06 that we saw last year and would you expect the back loading to be case in '07? And just tying into that is it really just increased advertising and technology? What's really going to be driving that? Thanks.

Excuse me. [coughing] Kriss again. We've got certainly some flexibility in terms of marketing expenses we authorize and historically we've authorized additional marketing expenses in the fourth quarter. This year both in the U.S. and Japan, we've got certain categories of expenses other than marketing we're looking at. We're making significant investments in IT in Japan and during 2007 we anticipate doing some things that are in the 2007 plan for expenses that -- some of which would be accelerated to the fourth quarter of 2006 once our mainframe conversion is complete. We have every reason to believe our mainframe conversion is going to be successful here early November and assuming that all comes to pass, which as I said, we have every confidence it will. There are some expenses we can accelerate into the end of '06 that would relieve some of the expense burden in '07 and accelerate -- we're really trying to accelerate the benefits of the mainframe conversion effort. So some of that is going to occur.

We've also got certain types of expenses in the U.S. that are non marketing that we're planning on spending in '07. And to the extent we've got room to achieve our 2006 overall EPS objectives, it's been our practice consistently over the years to try to accelerate expenses into the current year to take advantage of the early implementation of those new improvement products. So right now we're ahead of the year-to-date percentage increase in EPS we have as our official target and I would anticipate that we would accelerate some expenses into the fourth quarter of '06. As long as those expenses are deemed to be effective expenses. I would say on the marketing side, we've identified some expenses that haven't been as effective currently as they have been in the past. For example, some of the direct selling expenses haven't had the payoff in terms of hit ratios this year that they've had in the past. So we've got some variability in our ability to spend money and we try to spend it in the most effective place and our overall primary objective is to hit the 15% annual increase in EPS for the year that we promised you.

Okay, great, thank you.

Our next question comes from Suneet Kamath from Sanford Bernstein.

Thanks. One clarification and then a bigger question. When you say the medical sales are down 11% in the third quarter. Does that include just stand alone medical or does that include riders on life insurance policies?

Just stand alone medical.

Okay, just stand alone medical?

Yes.

Okay. And the bigger question is I'm I-guess I'm just curious what you're hearing from your agents -- your independent agents in Japan in terms of how they're conducting their business? Presumably these guys are all commission based so they have to generate commissions every day. What are they hearing? Are people just not willing to buy the product? Are they spending money on something else, variable annuities? What is the pushback that they are getting because I am assuming they're being as aggressive as at least they have been in the past?

Let me let Matsumoto answer that question. We'll have to translate it for him first so be patient.

[interpreted]This is Matsumoto speaking. I don't think the consumers are moving to buy annuities and pensions. I think the reason why the medical product movement is slow is that as Dan mentioned, the market is still crowded with a lot of medical products and also the sanction issue is still lingering. That's all, thank you.

Okay. Thanks.

Our next question--

Let me just say in Japan that a large part of Asian compensation comes from renewal business on business previously sold and new business commissions aren't as high a percent of their overall compensation as they are are in the U.S. so we have a little more lethargy relative to new business that we've got in Japan compared with the U.S. But, that's always been true so it may not totally explain what's going on, it's just a fact of life.

Thank you our next question comes from Jeff Schumann from KBW.

Good morning, Kriss. You gave the dividend an extra bump, and the share repurchase an extra bump. Can you talk a little bit about the criteria you look at in making that decision? Was there some threshold in terms of risk-based capital or holding company position? What kind of tipped the scale here?

Well, yes, as we've discussed at analyst meetings in the past, a frequent question I receive is, "How much excess capital do you guys have? Your statutory earnings are strong and how are you going to go about using it?" And we've been in the process of analyzing that over the last year or two and we finally concluded that we're confident enough in the future of our earnings to go ahead and increase the extent to which we return a portion of our free cash flow to shareholders and we did it in a way that maintains the same mix of cash distributed to shareholders in the form of dividends and share repurchase. By increasing both amounts at roughly the same rate, essentially 20 to 25% on the dividends and 20 to 25% on share repurchase, we'll maintain both the projected growth in earnings per share and the cash out to dividends.

The extra dividend increase that will occur in the first quarter will be sort of the -- excuse me -- the normal increase in dividends we provide for each year that's consistent with our overall growth and earnings. We look at payout ratios. You know, we're in the 50 to 60% range on payout ratios. We've looked at various measures of residual equity to revenues, residual equities to assets, compared to our peer groups in the industry, and we're confident we'll be able to maintain those as well as risk-based capital ratios and solvency margins on a regulatory basis in the Japan and U.S. so we felt confident in being able to increase the amount paid out to shareholders.

Kriss, by my reckoning it looks like with your free cash flow you can easily fund even these higher levels of share repurchase and dividend. So I assume you're going to continue to build capital in '07. Are we likely to revisit this issue a year from now?

Well, it's possible. You guys always accuse me of being too conservative and I intend to maintain that posture.

Great, thank you.

Next question comes in Jimmie Bhullar from J.P. Morgan. I am sorry he withdrew his request. The next question comes from Steven Schwartz from Raymond James and Associates.

Good morning. Could I get a little help here? Investment yields in Japan I'm trying to get this straight. The yield for the first time -- the new money yield for the first time in recent memory at least was higher than the effective yield, yet I don't think going into the third quarter that the money that you had precommited, if you will was at that rate and the new money rate that you cited, which I think was 3.38%, for what you've already committed is lower than that rate. So I guess I don't quite understand what happened to get the new money rate that high or in retrospect to drive the new money rate back down.

Hi, Jerry Jeffery [inaudible]. The third quarter was a bit of an anomaly because of the amount we invested in the third quarter was low relative to prior quarters. So, each investment had an outsized impact on the new money rate for the quarter. However, for the year the impact remains somewhat muted and we continue to expect our overall new money yield to be at or slightly above our budgeted level.

Okay, all right, that's what I wanted to know, thank you.

Our next question comes from Joan Zief from Goldman Sachs.

Thank you. Good morning. Could you talk about what plans you have for maybe new product developments in Japan? There's a lot of focus on medical. I know that's where you move towards but do you have any plans of maybe taking some of the products that you have done in the U.S. whether it's dental, whether it's vision, or something like that. Is it possible to move those products to Japan?

Well, let me just say that we have allowed the product development committees to stand autonomous and I would say -- because we tried to research Japanese consumers and see specifically what they want. So I'll let Japan -- we, of course, give them a copy and they go through everything, all of our research in the U.S. and if they like any of the products and they have over the past, they adapted them to the Japanese way. So, Matsumoto would you like to comment on that?

[interpreted]As to the reference of whether we can use products in the United States as they are. In Japan we plan to have a thorough discussion of that in November and we also plan to see what type of new products we may think of for next fiscal year.

Thank you.

I think she was asking too, are there any specific products that you right now can discuss, are those products still being developed?

This is Aki. We have a couple of products within the work in process right now and I don't think I can really touch on too much detail, but one on medical side. One in bank channel side -- no, two in bank channel side and one other specific disease type of a product next year.

And just so I understand. So we're still in work in progress. So new product development is not likely to play a role in 2007 sales?

Let me comment on that for a second. One thing we've got going on in 2007 is that the FSA has introduced the requirement that all companies adopt a new mortality table promulgated by the FSA and that generally needs to be effective April 1, 2007. So, all the companies in Japan are having to reprice their products consistent with this promulgated new mortality table and generally for life products that's going to decrease premium rates. And generally for medical products all other things being the same it's going to increase premium rates, but in the medical side, we've looked at the effect of other assumptions in our pricing, including morbidity rates and the like. So even though the products sold after April 1, 2007 are going to have very similar benefits to products previously sold there's going to be new premium structures and great deal of our product development activity right now is having to be focused on the administrative details of implementing those changes and that's taking up the fourth quarter of '06 and it's going to be take up a lot of the first quarter of '07. So it's not like there's nothing going on.

In addition, we've got bank channels to prepare for starting January 1, 2008 and we are spending lot of time talking about what is likely to appeal to the bank channel. So there's a lot of product activity going on that's nonstandard, I would say, compared to what's been going on in previous years.

Great, thank you so much.

[OPERATOR INSTRUCTIONS] Our next question comes from [Rica Mendosa] your line--

Hi. It's actually Jimmy Bhullar. I got disconnected earlier. I have a question on U.S. sales for a change. You had very strong growth in the third quarter. I think [inaudible] got easier in the fourth quarter. I think there was a contest you ran for district coordinators in the third quarter. I'm just trying to get an idea of how much of the sales momentum was because of the contest and what's your outlook for sales in the U.S. in the fourth quarter?

Absolutely. First of all, the contest that we ran in the third quarter was not directly correlated to sales. It was indirectly correlated to sales. We contested them based on two things, new accounts and the primary focus was average weekly producers. As we've said all year long, that's our primary focus for growth. Currently , is not a part of the compensation package for district sales coordinators in 2006. So we felt it was essential to run a contest in 2006 to focus our district sales coordinators on average weekly producer growth.

The contest was in line with the budget that we have for annualized contest budget. I feel it was an extremely successful contest I think you'll continue to see incrementally stronger growth in our average weekly producers, this quarter being the best growth we've had in years, so I feel like it was extremely successful. In terms of the outlook for the fourth quarter I feel very strong for the fourth quarter I missed our sales projection in the third quarter. I said 5 to 8% and we end up 11.7 and nobody's upset about it because it was on the top end. On the flip side I'm still predicting we'll be in the range within the fourth quarter and I feel more confident than ever without a catastrophic event that we've made our numbers for the year within the range of 8 to 12.

And the range for the fourth quarter, you were mentioning was 5 to 8?

No, in the fourth quarter I'm saying 8 to 12.

Okay and gust a clarification, I think when Dan gave his prepared comments you had mentioned fourth quarter in Japan was going to be down and '07 you said was challenging, does challenging mean not down or can you clarify that?

Well, as I said, I'm trying to get the numbers, but there's no bonuses below -- without increases. So I can't define -- I want to see how these programs are working and whatever are taking place but I'm certainly striving to have increases in '07, and we're working that way right now.

Okay. Thank you.

I have no further questions at this time.

Thank you.

Okay. Well, thank you all for taking the time to join us this morning if you have questions later in the day please pre to call the toll free number and we would love to talk to you and thanks again.

This concludes today's conference call thanks for joining, you may disconnect at this time.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.