美國家庭壽險 (AFL) 2006 Q4 法說會逐字稿

Let me be the first to thank you, for joining us this evening for our 2006 year end presentation, our kick off meeting in New York. I'd like to begin with an introduction of the people that are joining me today with Aflac. Beginning with, Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO of Aflac Incorporated, Paul Amos, President of Aflac and Chief Operating Officer of Aflac U.S, Robin Mullins, Vice President of Investor Relations. My name is Ken Janke, and I'm Senior Vice President of Investor Relations.

And Aki Kan, who I know a lot of you have seen here for many occasions at this meeting, didn't join us this year. Some of you probably saw earlier in the year we announced that a man named Tohru Tonoike has joined us as, Deputy President of Aflac Japan, and his actual start date is tomorrow. So Aki felt his time was best served working with Tonoike-san in Japan and he sends his regards to everyone here, including us.

Let me point out that first this meeting is being webcast. I'd also like to remind you that some of the statements you'll hear tonight are forward looking within the meaning of Federal Securities laws. And although we believe these statements are reasonable, we can give you no assurance that they'll prove to be accurate, because they are in fact perspective in nature. The actual results that we discuss could differ from those we present tonight and I'd encourage you to look at our most recent press release, one we issued last night that identifies some of the various risk factors that could materially impact our results.

And now I'd like to turn the program over to Dan. He will begin with an overview and some comments about our operations in the U.S. and Japan, and our outlook for '07. And I'll follow up with a brief run through of the financials and then we'd be happy to take your questions. Dan?

Thank you, Ken and good evening, everyone. We're glad you're able to join us. Let me start by saying that the financial-- that the-- this quarter, 2006 and also for the entire year wrapped up another record year for Aflac. From an overall financial perspective, I am very pleased with our fourth quarter and our year end results. Most importantly, we were able to achieve the target for earnings per share growth for the 17th consecutive year.

Let me give you a bit more detail on 2006 and our outlook for 2007 starting with Aflac Japan. Aflac Japan produced strong financial results in each quarter for 2006 and performed very well from an operational perspective throughout the year. Our persistency remained very strong at 94.7%. Due to that strong persistency and higher investment income, both revenues and pre-tax earnings were ahead of our budget for 2006 on a currency neutral basis. As we communicated in the third quarter release, we expected total new annualized premium sales to decline in the fourth quarter. Aflac Japan's total new sales were JPY29.5 billion in the quarter down 16.6% from the fourth quarter 2005. For the year, total new sales was JPY117.5 billion or 8.8% lower than 2005.

Although we were not surprised with these results as the year went on, we were very disappointed with our sales last year. I would remind you, however, that our sales greatly exceeded our lapsed premium and as a result, annualized premium in force were up 5.4% at the end of the year. For the full year, sales of the cancer line product was up slightly over 2005. We were very pleased to see strong sales of our ordinary life which was up 16.9% for the full year.

The success of this product category was directly attributable to our WAYS product which is a ground breaking new life insurance product. WAYS helped consumers who recognized early on that financial and medical situations tend to change over time. This innovative product allows policy holders to redistribute a portion of their life insurance to medical, nursing care, or fixed annuity when they reach the retirement age. Since its introduction in January of 2006, WAYS has been very well received by japanese consumers who appreciate the flexibility of the product.

Like previous quarters, our sales growth was held down by medical product category, primarily due to the sales of our stand alone EVER product. Medical sales were down 24.5% in the fourth quarter and 18.8% for the year. Rider MAX also continued to be weak. However as we talked about repeatedly the campaign to convert our older Rider MAX policies to new Rider MAX policies which began in 2002 has pretty much run its course. We believe EVER sales on the other hand continues to be impacted by the overall weak market conditions. There is no doubt that the market has become more crowded with competing products over the last few years, as other companies have reacted to the success in the medical business. However, we have seen-- we have not seen any significant changes to the competitive market in the last few months, and we still maintain our number one market position for stand alone medical insurance in Japan.

In addition, the regulatory scrutiny of claims paying practices has also hurt the market for medical insurance, for the industry and Aflac. We believe that it's having a fairly significant impact on consumers decision making and purchasing behavior. At our Tokyo analyst meeting in September, we referred to some research that we conducted on the impact of the claims issued. The results reveal that 32% of the respondents were not interested in purchasing insurance due to their concern over the claims paying issues facing the industry. In December, we conducted the same research and the number had climbed to 37% from 32%. This suggests that the issue still has legs and that it's not clear when the concerns will be behind us.

As I mentioned on the third quarter conference call, Aflac along with the entire life insurance industry is reviewing the last five year of claims paid to determine if those claims were paid fully and accurately. In an interview on NHK, a nationally televised program that reaches 10 million viewers, one of the questions that I was asked about was the claims review. My comment was is that we are in the business of paying claims, not denying them, and as I said, if we make any mistakes, we will fix them and we'll apologize to the policy holders. We expect to complete our claims review and report the findings to the FSA at the end of March. As a result, I can not specifically comment on the numbers. However, I can tell you what I told the FSA.

We are finding some claims errors as I expect all companies will and we are correcting them. In addition, we are identifying process changes that will help insure that the claims errors such as these are not repeated. I should also point out that we provided for an estimate of the unpaid portion of those claims in 2006, which is immaterial to the financial statements. I recently met with the FSA on this topic and I reiterated that Aflac is in the business of paying claims, not denying them. And paying claims properly and fairly has always been and continues to be the fundamental elements of our business.

As we think about our sales outlook for 2007, we continue to believe it's going to be a challenging year, and I think most of you who follow us have come to the same conclusion. Considering the difficult market environment and the tough comparison to the first six months of 2007, we believe that will be the most challenging time for us. As you know, comparisons in the second half are much easier. We expect sales growth to be down for the first half of the year followed by sales increase in the second half of the year. Just as I said last year, we are doing what we can to generate sales increase for the year while positioning Aflac Japan for better growth in 2008 when the bank channel opens.

Our main effort continues to be the concentration on the distribution side of our business. We are particularly focused on enhancing the infrastructure that supports individual agencies in Japan. The new Associate Basic Training program we have previously discussed is one of the initiatives that we believe will help improve our face-to-face sales skills of our new agents. There are other initiatives that we will discuss in more detail in our May analyst meeting. In addition, we remain committed to the corporate agency side of our distribution channel. We are still pursuing alliances between affiliated agencies and individuals, or independent agencies along with the use of the hot call program for improving sales among our existing policyholders.

In terms of product development in 2007, we've had a busy year for a couple of reasons. First, the industry will adapt new mortality tables this year which basically impacts the pricing of our entire product line. This change will generally decrease premium rates of the first sector or life insurance, and will increase rates for the third sector or predominantly medical insurance. We plan on implementing the new tables on April the 2nd, for life, and on September the 2nd, for the third sector products.

Second, we will continue to work on products for the banking channels. We have been spending a great deal of time this year on the final preparations to enter the banking channel. I have met personally with the largest banks in Japan and I remain very optimistic about the opportunities of this channel. Although our competitors will also be competing for shelf space, we are confident that in the long term relationships that we have built will ultimately help us in terms of new sales. We believe our business will also benefit from the strong team that we have assembled in Japan.

We recently announced, as was mentioned, that Tohru Tonoike is joining the Executive Management team in Japan. In fact his official start date as they said is tomorrow. We could not work it out where he could start January 1 because of some responsibilities he had so we had to move it to tomorrow. The fact that he comes from the banking background is a bonus and we believe he'll infuse Aflac Japan with additional insight in that regard, however, that is not the reason that we hired him. Aki's primary mission when he returned to Japan in 2005 was to find Aflac Japan's next leader, so as you can see, we've been considering this for some time now. Tonoike-san knows our business well and has been a member of Aflac's Board of Directors for over two years now. We look forward to the contributions that he'll make to our operation.

We're also encouraged about the changes that our Director of Marketing and Sales, Matsumoto-san recently made to his management and his sales team. We believe we have the right people in place to grow our business. We remain convinced that we along with the insurance industry as a whole are experiencing temporary disruption in the demand, not the lessening of the needs for our products. We believe overall, the healthcare cost will continue to rise, with the financially stressed national healthcare system, the aging population, that means consumers out of pocket expenses for healthcare will continue to increase.

Now, let me turn to Aflac U.S, which is operating at a level that is consistent or better than the objectives that we said. Aflac U.S. fourth quarter results marked a continuation of the strong third quarter and even reflected an acceleration in our sales growth. Total new annualized premium sales were very strong in the fourth quarter, rising 21.2% to $447 million. For the year, total new annualized premium sales increased 13.1% to $1.4 billion which exceeded our 2006 sales objectives of an 8% to 12% increase. Our fourth quarter sales benefited from the reenrollment of a large payroll account that allowed us to add an additional product.

I bring this to your attention for two reasons. First, it helps explain our fourth quarter, the tremendous increase we had. However I want to emphasize that even without the premium from that account, sales would have been strong in the double-digit area for the fourth quarter. But the second reason I mention is that it's never too early to remind you that we will be going against those numbers next year at this time, which will make the comparisons very difficult and we ask that you take that into consideration as you look at your modeling going forward.

We absolutely believe that our strong sales are linked to our efforts on the distribution side of our business. Agent recruitment was strong for the quarter and for the year. The total number of licensed sales associates at the end of December was up 8.6% over a year ago, more than 68,300. The increase in licensed associates benefited from the solid new agent recruitment in the year, including a very strong fourth quarter that produced a 15% increase. What we find most encouraging and telling is the fact that the number of producers continues to grow. On average, weekly producers and that's the number we tell you to watch, the number of producing associates was up 10.4% to approximately 11,000 in the fourth quarter.

We also believe our commercials and our branding message have benefited our results. And research tells us that as long as the Aflac duck finds himself new adventures or misadventures, people will continue to enjoy his antics. In addition to entertaining, our most recent ads show that Aflac's products actually help people following a medical crisis. Tonight, I'd like to show you two new commercials. One of them, the hero duck, that you may have already seen. This commercial conveys the need for Aflac's products by showing how their-- the power to rescue consumers from their financial peril.

But the second commercial that we haven't released yet is the one I'm the most excited about. In fact, the most excited of any commercial that we've had since the original one, because it is the highest rated commercial we have ever made. The commercial is interesting because you never see the Aflac duck, but I hope you'll enjoy it because it conveys a message that there is only one Aflac. So let's run them. [Audio Media Commercial] I think that one's going to do very well for us and get our point across.

We're very excited about the renewed momentum in our U.S. business. For 2007 our sales objective is to increase the sales between 6% and 10% for the year. As I mentioned, we face tough comparisons at the fourth quarter of this year, and we're setting a range of 6% to 10% acknowledging the fact that the opportunities that are out there are strong but at the same time, we have to take into account that large account. Ultimately, the overriding goal is to still produce sustainable double-digit sales growth in the United States. The persistency of the U.S. business has remained fairly stable through 2006 and in the fourth quarter.

Our administrative areas continue to be strong and overall I'm very pleased with the U.S. operation. I'm convinced that we've been focusing on the right aspects of our business. We have been increasing the size of our distribution channel of producing sales associates, and we are properly positioning our brand. Our products are well suited to the market and we are using technology to leverage our resources to respond to the agents and to the consumers needs. We have now identified any significant changes in the competitive market. If anything, all signs point to the rising need for the types of products we offer in a vast, untapped market.

In looking at the balance sheet, Aflac remains very strong. Our investment portfolio is in outstanding shape. We've maintained high capital adequacy ratios to support our ratings and overall we are very comfortable with our capital position. We're also generating strong cash flows that we can use to benefit our shareholders. As we announced in October of 2006, the Board of Directors approved an increase in the quarterly cash dividend effective the first quarter of 2007. The first quarter cash dividend payment of $0.185 per share is 42.3% higher than the first quarter of 2006 payment of just $0.13 per share, making it the 24th consecutive year in which the dividend has been increased.

In addition, we remain committed to purchasing our shares on a consistent basis. We've purchased 10.3 million shares in 2006 and we anticipate purchasing closer to 12 million shares in 2007. Our dividend and our share repurchase both reflect our committment to increasing shareholder value. Of course, our primary means of enhancing shareholder value has centered on increasing operating earnings per share at an attractive rate. In that regard, our approach has not changed. For 2007, our goal is to produce a 15% to 16% growth in operating earnings per share per diluted, excluding the impact of the Yen. As you know, we'll be conducting our analyst meeting in New York in May, at which time we'll present our goals for 2008 from an earnings perspective.

Rest assured, we maintain committed to growing our business in a way that generates strong earnings growth which we believe will translate into increased shareholder value. You've heard me say before that I'd love to be able to generate a minimum of a 15% operating earnings per share during my first 20 years as CEO. Well, I'm pleased that we just concluded the 17th year as CEO, and that we have achieved a 15% or better target. Now, we move on to our 18th year where I fully expect to achieve the target of a 15% increase in operating earnings per share before currency. Now I'll turn the program over to Ken. Ken?

Thank you, Dan. As you can see, we did bring our hero duck with us so make sure you stay long enough to get one of those. And I hope you saw there are copies of these notes in the kit we've put at your desk or your seat if you'd care to follow along and make some notes and again we'll have plenty of time for questions afterwards.

Let me just briefly take you through, oops, he's on a mission. Let me take you through the segment contributions to Aflac's results for 2006, beginning with Aflac Japan which was responsible for again about 74% of the pre-tax insurance earnings in dollar terms. Clearly, our growth rates for the year were influenced by the 5.5% weakening of the Yen, so it probably makes more sense to look at it in functional currency terms. And in local currency, you can see revenues were up 6.3% that came on a 5.9% increase in premium income and investment income was up 9%. Our persistency rate which had been improving remained very strong and stable at 94.7% and again, revenues reached JPY1.2 trillion for the year.

The operating trends for Aflac Japan have been consistent with our expectations. The benefit ratio continued to decline throughout 2006. For the full year, it decreased by 80 basis points. You may recall from our analyst meeting last year that we had said we'd expected it to decrease from 50 to100 basis points for the year, so that fell right in line with that. We did have some adjustments to the benefit mix in the fourth quarter of last year. There was a release of claims reserves on the life line that was slightly more than offset by an increase in reserves for an older product that we call dementia care, which resulted in a slight negative charge to earnings in the fourth quarter although it was fairly modest. The expense ratio improved a bit over last year as we expected it would, although expenses were up a little bit in the fourth quarter, and the margin expanded as we had expected, and we would expect the margins to improve again on a lower benefit ratio in 2007.

With the higher pre-tax margin, earnings were up 15.4% in Yen terms. You may remember that about 37% of Aflac Japan's investment income is actually dollar denominated and if you unwind the currency effect on that, because it did benefit from the weaker Yen throughout 2006, pre-tax earnings on purely a currency neutral basis were up 13.3%. Aflac Japan had a very good year in terms of investments and looking at the new money yields in particular, in both Yen terms and then in a blended rate, we were expecting new money yields of about 3%. You can see on a blended basis we actually did much better at 3.33% which kept us ahead of budget.

Our budget for '07 is 3.1%. And although rates improved a bit during the year, understand they did decline toward the end of the year, just like U.S. rates and they actually ended up somewhere in the area where they began 2006. We maintained a very high quality investment portfolio on a consolidated basis of below investment grade securities were 2.6% of investments, up slightly from 2.3% a year ago.

In looking at the U.S. segment contribution, which as you heard had a very strong year, earnings were $585 million. Revenues were up 9.5% as was premium income, investment income grew a bit faster at 10.4%. Our persistency was 73.9% down slightly from 74.4% in 2005. In looking at the operating trends for Aflac U.S, we did expect that the benefit ratio would improve a little bit in 2006 and it did. We noted in our press release that we did increase claims reserves in the fourth quarter for Aflac U.S. That was in addition to some reclassifications between claims reserves and net benefit reserves.

But the $28.3 million that we pointed out in the press release was an increase of claim reserves primarily related to a lengthening of some treatments for cancer. And of that $28.3 million, I should point out that only $8.9 million was attributable to 2006 incurred claims, which represents less than 1% of total incurreds for the year, so it's a relatively small number. The expense ratio was a little changed from 2005 as a result we did have a higher margin than a year ago, and again with that margin improvement, we saw earnings grow a little faster than revenues and they came in at $585 million.

The U.S. also did well in terms of investments and did a bit better than we had expected. We were able to put cash flow to work a bit earlier in the year and it happened to come at a time when rates improved and that helped the new money yield for the full year which was 6.44%. You can see the yield at the end of the period was about 9 basis points lower than it was at the end of 2005.

In looking at some other items, interest expense was down a bit, $17 million compared with $20 million. That $17 million you may recall is related to $1.4 billion of parent Company debt that is denominated in Yen, so it's very low rate of interest and our debt to total capital ratio at the end of the year excluding unrealized gains in the bond portfolio was 17.1% which was down from 18.8% a year ago. The parent Company and other segment line also improved. We did see a bit of improvement in some of the very small segments in the business that we don't break out separately, but in addition, we had more investment income at the parent Company level that got netted against the expenses of the parent Company, and that was primarily the reason that that line improved year-over-year.

Consolidated pre-tax earnings were up 10.4% on an operating basis. The tax rate was little changed to 34.5% compared with 34.7% and we'd expect that to be fairly stable in '07 as well. As a result, operating earnings were up 10.8% or 13.9% on an adjusted currency neutral basis. In looking at the items that would help us reconcile operating to net earnings, there weren't-- we didn't have as many as we've had in prior periods.

We had $51 million of realized investment gains. We had commented during the year that we had began a bond swap program that was primarily tax driven and that was started in the third quarter of '05. It was completed in the second quarter of 2006 which is why we had lower gains this year than we did the year before. You can see FAS 133 had no impact on earnings this year, and those other items did not occur again as well. As a result, net earnings were actually exactly what they were in 2005, although they were up 1% on a diluted per share basis to $2.95.

As Dan commented, we did slightly better than our expectation for 2006 in terms of operating earnings per share, we reported $2.85. This was right in line with what we had commented on in our third quarter release and conference call where we said we expected if the Yen averaged JPY1.15 to JPY1.20 for the balance of the year, we expected to report $2.84 to $2.85 so our results were consistent with that. The Yen did hurt earnings by $0.08 a share for the full year, all of which occurred in the first nine months of the year, and as a result, earnings excluding the Yen were up 15.4%.

As Dan mentioned, our target was retained and that's to increase operating earnings per share of 15% to 16%, excluding the impact of the Yen in 2007, and this next slide will give you an idea of how that might play out at various Yen scenarios. You can see the Yen average JPY116.31 in 2006 and that's right now hovering between the JPY121 and JPY122 area. When you look at the scenarios related to a weakening Yen versus last year, the sensitivity is roughly $0.12 per share for every 1 Yen move on the annual average exchange rate. It's a little closer to $0.015 per share when you look at the strengthening Yen scenarios if you go to 110 and then 105 for the full year. So we hope you'll take this into consideration when you're reviewing your own models whether your on the [cell] side or [box] side, in building your expectations for this year.

Well that concludes my comments. We have some time for hopefully plenty of questions. Again, I'd like to remind you this is being webcast so we'd ask you to first wait until you get the microphone to ask your question. If you'd be so kind as to give us your name and firm we would appreciate it. And also, if you can, please limit your questions to one per person so that everyone has a chance and if you have additional questions, we can come back to you. So I'd like to ask Dan, Kriss, Paul to come up and join me and again, we'd be happy to take your questions.

Judy? Start right there.

Thanks. Wanted to start on the claims examination going on in Japan right now.

Okay.

Can you just comment on how broad-based the types of policies that are being reviewed are? Is it just medical? Or is it all first and third sector products? And if it is all types of products, do you think all sales are being affected right now? And then I guess a related question, is it fair to say if this review is completed at the end of March that we may see the impact substantially diminish by the second half of the year?

The answer is is that it is the entire third sector which is predominantly our entire policyholder base, the majority of our business, of course, is in the third sector. We will announce it to the FSA on March 31st. I would hope that the issue will then be behind it by the second half of the year. I can say very little about it other than we report to them and as soon as they let it out other than the actual statement I made. Did that pretty much-- is there anything else you want to ask about that? Did I pretty well answer those?

No, that was fine. I guess I'm just trying to get a sense for, I guess what I'm confused by is it doesn't seem like there's, or it seems to be like there's this uncertainty with how long the drag on sales related to the claims examination would go on. But it seems like we have a finite date here. I would expect the drag to end pretty soon.

Well, to be perfectly honest with you, I'm surprised that it's drug on as long as it has. And I have no idea but my sense is is the second of anything is never as big as the first. So no matter when they make the announcement, the first one may have brought everything to the forefront which was a bigger issue at the time. And I can tell you that the FSA and Aflac has one thing in common. We want to get it done and get it over with. The FSA, I can't speak for them, but my gut is that they had seen enough of this. They want it corrected, handled, and never to happen again. That's what we want at Aflac and so we're in agreement and that's what we plan on doing. So the faster we can get it out of the way the better it'll be and I think they'll feel the same way.

You're going to kill me if I ask two questions because I've got to run, but just quickly, I want to understand with respect to the lengthening of cancer treatment periods for claims incurred and why you're comfortable with that 2006 number of 8.9? Is that a run rate and why are you comfortable that it won't snowball?

And then just very quickly, with regard to the bank channel, Dan , that you touched on a little earlier, there are a lot of skeptics that are saying they think the competition is going to come in and that your sales are going to get cannibalized. Why are you so excited about the bank channel and not worried that it could have a negative impact?

I'll take the question on cancer claims first. Let me say that this is not a snowball thing. It's a cumulative effect of changes in treatment patterns and survivorship rates in cancer victims in the United States, and gradually, these things have been happening over time. The medical treatments are shifting more to outpatient treatments, primarily associated with chemotherapy and radiation and the like. And what we've seen is an increase in survival rates for cancer victims and there for an increasing period of time, people have to be treated. And we've also seen an extension of the treatment patterns, primarily of certain chemotherapy regimens. And as that relates to our cancer business, we've seen these trends developing over time. We've seen them developing over time and we've started reflecting them more in the claim reserves.

But the reason it was a big number this year and I could go into a lot more detail, and somebody may ask a follow-up, but we had an opportunity or a challenge from the SEC to clean up all our balance sheet accounts. They issued what was called staff accounting bulletin 108, that basically said we know that some companies have had missed statements accumulate in certain balance sheet accounts over the years, amounts that would have been immaterial to PP&L in any one year, but on a cumulative basis, we're going to give you an opportunity to have a fresh start on stating the value of these balance sheet accounts, and do it all in 2006 and get it over with. And then basically we can tell the public we don't have any accumulated misstatements. So we took advantage of doing that and we did it in all our accounts on our balance sheet.

And in the cancer claim reserves in the U.S, that was the only area where we really felt like we had an understatement of a liability. And we in the past had said we had recognized that that was understated but as I've told you before, we tend to be conservative in the way we state our claim reserves, and we've got margins in them or we had margins in them. Well, we removed a lot of the margins and the claim reserves from our other lines of business, and essentially transferred them to future policy benefits to the extent we could justify them which was substantially 100%. And so this cancer claim reserve was the only one that was I said left naked so to speak. I didn't have any sufficiencies left to cover the deficiency in that block, so I went ahead and strengthened the claim reserve on that block for these longer treatment periods.

And that was about $28 million for the whole block of business, about $8 million associated with 2006 incurred claims and about $20 million associated with claims incurred in prior years, so we think the things fixed now. Basically the $8 million in incurred claims for 2006 [incurrals] is factored into the target loss ratios we used to prepare the plan and so it's not something that's going to affect our 2007 projections for Aflac U.S.

Now your question about bank channels is why do I think it'll go well, basically?

[inaudible question- microphone inaccessible]

Well, first of all, I met with all the major banks and I think they are going to sell for us. I think that within itself is positive and if you just take anything you're doing and all of a sudden you increase the sales force by a large amount, no matter how little they write, it's going to ultimately increase your sales. Now, the question is what can we get them to do for us? For the last year, we've been working on this. And the banks-- I'm dealing with different ones, different ones are approaching it with different-- there are some that are very enthusiastic about it. There are some that are somewhat cautious about how they want to go into it, and we're trying to design something for each one of them to fit their needs. We, of course, have a way that we think is best. The more they can do one-on-one presentations, the better off they'll be.

We think in talking with Tonoike-san, our new Deputy President , who I've been around a lot recently, he believes that with the bank channels that it's going-- the key person is going to be the teller. And he explained to me that the teller has so many different products and services before them, it's which one do they offer and how do you do it? Well, in his opinion the most important thing is to develop a product that is simple, that they can pick up, grasp, and doesn't have too many bells and whistles on it that they can go right with it. We're looking at developing a product for that. The other thing is is trying to incentivize bank tellers to try, to start telling this to use it. Certainly with him coming from Mizuho, our largest agency and one of the largest banks, if not the largest? It's either one or two , but any way, they will be a great group for us to go to work with start with.

So I am encouraged. I do think it has potential. I do not know how big it will be or what will happen at this point, but we're going to come up with a model that we think they should use and from there, whatever they want is what we're going to end up doing. And we're just going to have to work with it the best way we can , but I see it as a potential [inaudible] life. It's going to be a surge in business for us, hopefully, and it'll be a spike and then it'll level out and then hopefully it'll climb over periods of time, but we'll just have to wait and see. Yes?

Ed Spehar from Merrill. On the bank channel, Dan, could you talk about how you address with product development, the compensation issue? I think the challenge you see in the U.S, for example, would be similar in Japan, which is that annuities pay a lot more up front it would seem, than products you're selling in this sector. So how do you get people to sell this when there's a significant compensation differential?

Well, there's a significant price difference too. But we will try to front load more for them to make it more appealing to the banks, and we're just-- those are the things that the-- Kriss, overseeing from a actual [world] perspective with product development has to be worked through. Our profit margin will remain the same but we will within that scope try to adapt in anyway that they want or like. And in our early discussions with them, we think that we can do that without too much trouble.

Can you do some type of hybrid product that's a sort of savings medical product?

We can do anything. We are very adaptable. But we're asking them what they want, and working around that. Kriss you want to say something about it? You jumped up here--

Well Ed I think that's a good idea long term but I think on the front end we've got to get the bank channel people used to selling an insurance product, period. So we solve simplicity at first. We're trying to give them as much commission we can on the front end so it won't be a slap in the face compared to compensation on say a single premium deferred annuity or variable annuity. But the fact of the matter is, premiums are going to be somewhat lower over time, we might be able to build a hybrid product but initially we're going to have to get them to sell an insurance product and see how that goes, get them used to it. That's why I jumped up here.

Come up here [inaudible].

Yes, just a question on the Japanese consumer. Can we look to I guess 1997 when your sales were down and I think that was due to a large bankruptcy in Japan?

That's right.

Sort of shocking the consumer? I mean can we draw some parallels between what happened then and what's going on now? And what got the consumer back in I guess 1998? Because I think your sales were up strong, and are you going to need something like an increase in co-payments or something like that to get the consumer back buying medical insurance?

It was a new product. It was Rider MAX that got us back on target and new products make a difference. Understand that this year is a complicated year for us from a product development. We were having this discussion at our table that we will have a rate increase. So if we introduce any new product in the medical side before September the 2nd, we would then have to rate it after September the 2nd. So our profit margin therefore would be lower on this product while we're selling it. So we're kind of waiting for that particular date to look at new products and to have them, but that's what slowed us down to a degree was that. We will have constantly looking at new products and have new products and that's part of our success over the years. But we'll just have to take them one at a time and see what we come up with.

Okay, now I'm just going to say one thing. I will answer any question you want and I'll stand up here and ask for Japan all day long, but we just had the best and greatest year in the U.S. And I just hope before we're over, somebody will ask something about the U.S! That's my only comment, okay? Go ahead, Ken. Whatever you want.

I have a question on Japan.

Okay.

Hi, Paul. I do. The question on Japan is, Dan, can you talk about the likelihood or the probability of the postal savings organization selling third sector products in 2007? And if they do start selling those products how you think that affects the competitive environment?

Okay, Ken says he wants to comment.

I can talk a little bit about that because that's a topic that we handle at the disclosure committee meetings quite frequently. The privatization process really begins in October this year for the postal savings system, and you probably recall there's a 10 year time frame over which the postal savings and the postal insurance systems will be privatized. IPO'd to the public and then overtime, including in 2017 the government will shed its ownership of either the bank-- the bank your savings side and the postal insurance side.

If you look at where we are right now, if you ask the insurance side, Compo, what would you like to sell, they'd like to sell everything and anything they could immediately, and they would like to accelerate the timetable for the IPO which is right now scheduled kind of 2011. For Compo to change its product line from what it is offering right now, the law needs to be changed. They are legally restricted as to what they can sell right now and they would need legislation past in order to broaden their product line offering and right now, they aren't a direct competitor of Aflac.

And our approach has always been, as you'll recall from many analyst meetings, the first thing we want to look at at Compo, are they friend or are they foe, and first we want to make sure they aren't foe. And to do that we want to make sure that Compo is put on a level playing field with the rest of the industry, and we've told people repeatedly if they play on a level playing field with us we can compete with them. Whether they become friend or not meaning they are eventually a distributer for the industry including Aflac remains to be seen.

You'll probably hear, undoubtedly, if you follow the Japanese press, you're going to see a lot of articles appear between now and October 2007, when this privatization process formally starts. But you'll have to really ask if a lot of it's credible because there'll be floating ideas about what they'd like to do but again keep in mind they need legislative action in order to do something differently than they're doing now. Does that answer it?

I'm sorry to ask another Japanese question, but I have seen Japanese bank branches, and they're not the best place to be. They're not very enjoyable, sort of like U.S. bank branches 20 years ago. And I wonder whether people are really going to line up after waiting for whatever how long, watching their number to be called out, and then to buy an extra product, instead of just getting the stuff done. And [inaudible] you're not going to be the only one coming in.

I mean all these mutual companies, probably now finally see a chance to make some money, perhaps, and they probably aren't offered the smartest products and the best priced products. So are you not afraid that it actually is going to be a lot tougher? And if you look at, for example, just getting through bank branches which are smarter like Tokyo Star, and [inaudible], and [inaudible] where you're seeing at least some restructuring going on in more modern bank branches?

Well, first, we-- I believe we will be in a great number of the banks everywhere, small, medium, and large. Second of all, I want to go back to your point. I'm not suggesting that all of a sudden everyone's going to run to the bank and buy insurance. What I'm telling you is anybody that comes to the bank that has thought about insurance, we're going to be there to offer it to them. So what the number is going to be, I can't tell at this particular point, but I do think it will be a number.

Do I think that-- why do I think our products will be more successful? Well, number one is all the banks already sell our products to their employees. Now it would only make sense to me that if you own our product, what product would you naturally offer to the customer, and I would think it would be our product or the one you already own. Number one, you understand it a little bit and number two is is that it's going to be the best product at the best spot. So, those two things I think will be the driving force. But I want to be clear, I have no idea how big this thing is and I don't want to say that it's too big. What I'm just telling you is we're going to get our share of the pie. I don't know how, I don't know how big the pie is, but I know we're going to walk away with our share of it.

That's what I'm saying, and we'll wait and see. But everyone seems to think it's going to be big in Japan. And I'm with you, it's-- people are not going to walk in and just say gosh, I've been waiting for the banks to get it all my life so I can buy a policy from them. That is not going to happen. But at the same time when they 're in there, they're depositing money, they've got money, they're thinking about what they want to do in terms of putting it away is a perfect opportunity when you're holding money to say, I can help you invest that money by protecting you with a medical policy. And it's much more likely than if you haven't got a dime trying to sell it.

[inaudible]

Tamara Kravec, Banc of America Securities and I have a question on the U.S.

Okay.

Just given that you had the one large reenrollment, even taking that out, you had very strong growth, so I'm looking at your 6% to 10% target and thinking 6% sounds low, even though it seems like a tough comparison. So you're just gaining momentum there over the last couple of quarters, so is it that you're being conservative and you have concerns about reaching double-digits again or, if you could just comment on that?

Sure. The account added two points. So basically what we decided was we'd make a 2 point slide in the scale, so basically if you took the account out the 6% to 10% is 8% to 12%. I feel confident about this year. I mean, we're saying 6% to 10%. I feel good about what we're trying to do as Dan mentioned in his speech. We're looking long term to be a double-digit growth side on the U.S. We've got some great things coming this year, as I was talking to my table. We've got a new product coming out next month with our care assist plan, a new product line that we're opening up, in fact we go in 40 U.S. states live next month.

Again it's a slow growth for us, it's not something that we kickoff and have a huge spike and over time it's something we'll sell in. But this kind of reverse disability product that basically goes out and says if an individual is at work, we're going to pay them if their child or their spouse is sick, to stay home or use that money to cover for somebody else. So I believe we've got a lot of initiatives out there that are really going to strengthen in the U.S. That fourth quarter is a big hurdle. I mean we obviously had a huge number and so I think we are trying to adjust the model to say we're doing the same thing we did last year at 8% to 12%, merely adjusted for that single account.

Is there anything left on the distribution side that needs doing? You're talking about new products but in terms of your field structure and sales reps and all that, is there anything else that you have on plan for '07?

Absolutely. We are-- we have gone in with our new associates with our CIT's and our regional sales coordinators before. This year we're going to roll out training to the rest of the coordinator level with our district sales coordinators, a huge program we'll be doing nationwide with them, also with our SSC's we'll be bringing them in for training so now we'll have uniform training in every single level within the hierarchy. Some execution and consistency is a very important thing that we're going to be doing within the training side of the field force.

Internally, we've just brought in a new Chief Marketing Officer and we're kind of revamping the way we look at our product development, our entire product centric department, I believe that we will also look at doing some things, we're going to be launching our large Hispanic initiative this year. I believe we've got a lot of things, some of them that will be slow growth for the long term, others of which will be bigger for this year. But I believe we're putting initiatives in place. We're always going to be doing something new, but for this year, yes I guess a lot of the underlying theme is consistency and execution.

Thank you.

All right. Tamara, you get two ducks, one for asking the U.S. question. Okay, next.

Steven Labbe, Langen McAlenney. First question, as it regards the new sales that might come from the bank channel, do you think those would be sales from customers who don't have medical products already, or do you think you'll be taking market share? And then my second question is to what extent does the slowdown in medical sales impact your thoughts on the prospective margin improvement in Japan given that I thought the biggest reason margins were expanding was business mix shift?

Okay. I'll let you take the expansion product and what was the first one? I'm sorry, I hate --

That's okay. As far as the new sales that you might get through the bank channel, do you think it's going to be market share gains or do you think it's going to be people who don't have products already?

Well I think there'll be people that do not have products with us. We don't know the demographics yet for where they'll come from. We know that medical insurance is covered a great majority of the Japanese consumers. But just remember that when we've gone from 20% co-pay to 30% co-pay, that's a 50% difference, and the vast majority of the Japanese have not made up that difference if they were trying to be totally covered at 20%, so I think it'll be both. I think it'll be some that don't have it, but I think the majority will be buying it as an additional or supplement to the program they have because ours have basically been low premium dollar amounts or Yen amounts, that's allowed that, so I think it'll skew a little bit more that way than anything else. And Kriss?

On the mix question, I would say that to some extent, the slowdown in the medical product has been due to the introduction of our life product with multiple settlement options so to speak at retirement age, we call it WAYS. The life policy is there at age 65 and then at age 60 or 65 depending on what the individual selects is his retirement age, they get to choose whether they want to continue benefits as medical insurance or an annuity payout or care type assist or cash render or continue life insurance.

Our WAYS product is almost as profitable as stand alone medical, not quite, but it's more profitable than the average products in our portfolio, our in force portfolio. So the benefit ratio is going to continue to decline, perhaps not as fast as it would have if medical had continued to be the original percent of sales it was in say 2003 and 2004, but I don't think there's going to be an appreciable slowing down of the improvement in the benefit ratio in Japan. We'll update you on that in May.

We've got time for one more question. We're at about the hour mark, so let's take one more question there from Darin.

Thank you. Darin Arita from Deutsche Bank. When you think about the success that you've had in the U.S, what are some of the lessons that you've learned and to what extent can these lessons be applied to Japan?

Well, I think the lesson that we learned in Japan is how you have to constantly stick to the fundamentals that made you successful. That if you look at the U.S, the advertising drove our sales in 2000, 2001 and 2002, and we didn't concentrate as much on looking at weekly producer growth or new recruits or training or all of those things. And I think what we have to do with Japan is to continue to work on the fundamentals that made us. If you look at our channel right now, you realize that it's broken down into the corporate agencies and the individual sales. We did not have that individual sales or individual agencies 10 years ago. But we don't have in that individual or sales group an infrastructure that we need, and that's what we've got to work on.

I'll give you a great example. We pay commissions daily in the United States. It's really hard to believe that in Japan, we only, we don't pay it but as earned and so if you come to work for us before you make your first Yen with us, it's almost two months so everyone has to have some savings and a lot of confidence to come to work for us. We are within our infrastructure changing to where we will have advanced commissions that will be available certainly by the second half of this year to where we'll be able to pay twice a week. That is a major change and will help us enormous--in an enormous way in terms of recruiting. So, it's some of the things that we're doing, the training.

The other thing is is that we're working closer together. I have had marketing people come over. We were setting up a new contest for this year. We brought the contest gurus from the U.S. over to Japan and we used them back in December to set the contest because the Japanese are such that they like everybody to win, and in the U.S, we want one big winner and one big loser, and so we compromised and we've got a lot of winners and a lot of losers but it works much better for us in terms of putting peer pressure on people to do better.

We're also doing it in regard to training. Paul is going over to Japan twice in the next three months with a training department to review all the training processes that we do in Japan to see what we can do. They in turn have sent advertising people over where to our operation to look at U.S. to tell us what they're doing. So we work together as a team looking for positive efficiencies that help us on both sides. But I would say right now, Japan wants and is listening to as the market has become deregulated, which has always been the case in the U.S, and so those are the things that we've learned.

Well, thank you all for your attention, your questions, and thanks for coming out and joining us tonight. If you have any other questions, we hope you'll follow up by calling us on the 800 number and again, thanks for your time.