美國家庭壽險 (AFL) 2007 Q1 法說會逐字稿

Hello, and welcome to the Aflac first quarter earnings conference call. All lines remain in a listen-only mode to the Q&A session. (OPERATOR INSTRUCTIONS) Today's conference call is being recorded for instant replay purposes.

I would now turn the conference over to your host Mr. Ken Janke. Sir, you may begin.

Thank you, Kimberly. And good morning, everybody, and welcome to our first quarter conference call.

Joining me this morning is Dan Amos, Chairman and Chief Executive Officer, Kriss Cloninger, President and CFO, Paul Amos, President of Aflac and COO of Aflac US, Jerry Jeffery, Senior Vice President and Chief Investment Officer and Aki Kan, President and Chief Operating Officer of Aflac Japan joins us from Tokyo.

Before we begin, let me remind you of the Safe Harbor language. Some of the comments that we will make in today's teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give you no assurance they will prove to be accurate because they are prospective in nature.

The actual results in the future could differ materially from those that we discuss today, and I would encourage you to look at our quarterly press release or most recent SEC filing to see the various risk factors that could materially impact our future results.

I now will turn the program over to Dan who will talk about the quarter and our outlook for the year. I will follow up with a few financials, and then we will take your questions. Dan?

Good morning, and thank you for joining us.

Overall, I'm pleased with the first quarter results. I believe we are on track for achieving our objectives this year. Let me give you more details on the quarter, starting with Aflac Japan.

Aflac Japan's persistency rate remains strong at 98.4%. Our revenue growth was in line with our expectations of a full-year increase of 4% to 5%. And excluding the JPY930 million of additional incurred benefits following our claims review, pre-tax earnings were ahead of budget during the quarter.

We were not surprised to see that Aflac Japan sales were down 10.6% for the first quarter, compared with the year ago. In fact, I was a little bit nervous about the possibility of seeing a sales drop similar to the fourth quarter, when sales were down 16.6%.

Importantly, our first quarter sales results are consistent with achieving our unique two-part bonus structure we created for Aflac Japan's management team this year. Our cancer product sales were strong, rising 10.5% for the quarter, which we believe benefited from our advertising and promotions of that product.

However, like previous quarters, medical sales for Aflac in the industry continued to be weak. In addition, ordinary life sales were also lower than a year ago. Lower life sales growth reflected tough comparisons to last year. In addition, you may recall that the new mortality tables we adopted for life products on April 2 and the effect of the new tables was to lower pricing for the first sector of our life insurance products.

We had anticipated the demand for life products would be weak prior to the lower prices taking effect. It appears that is exactly what happened. As we have discussed, the market has become crowded with competing products as other companies have introduced medical products, but we haven't seen market conditions change from a competitive position over the last several months.

Aflac Japan is still the number one seller of stand-alone medical. There have been no major entrants to the market, as virtually all life companies and non-life companies already offer a medical product. And no new products of significance have been introduced.

We still believe there is still some market overhang from the claims payment issues that resulted in a temporary detachment of product need and product demand. I say temporary, because with financially stressed national health care system, an aging population, we strongly believe that rising out-of-pocket expenses for the consumers healthcare will continue to drive the need for our products.

As you know, Aflac along with the rest of the life insurance industry submitted a report to Japan's financial services agency on April the 13th with the results of our review of claims over the last five years. This FSA mandated self review required the industry to identify the extent to which claims were under paid. We are confident that we have conducted a very thorough review of the benefits we owe, which gave us a good understanding of where we need to improve.

Even though our error rate of more than 4.2 million benefits paid was less than one-half of one percent, we are implementing several measures that we believe will reduce the error rate even further. As I have said repeatedly, Aflac is in the business of paying claims, not denying them. Paying claims promptly and fairly has always been and continues to be the cornerstone of our business.

Our findings and submission of our claims report to the FSA has not changed our view on the year from a sales perspective, nor have any market changes or issues within Japan given us cause to modify our outlook. For the second quarter, we again expect a sales decline. However, we do believe sales can increase in the second half of the year.

I realize that many of you want to know why we believe the sales increase will occur or is reasonable in the second half. I think there are several answers to that question. Obviously, we face easy comparisons in the third and fourth quarter. But in addition, we have undertaken several initiatives to improve business in Japan, particularly on the distribution side.

You will recall that we made changes to our sales management team in Japan late last year. We have a new sales director and 7 of the 10 territory directors were new to their positions at the start of 2007. We expect their performance to improve as they gain more experience in their new roles. We also began a new training program last November that we believe will help improve face-to-face sales skills of new ages.

Through the new training program we believe we will see productivity improvements among new agents and also increase the percentage of those to succeed. In addition to the individual side of the sales agencies, we are working to improve sales results at the corporate side of the distribution system.

We are still pursuing alliances between affiliated agencies and individual or independent agencies along with the use of the Hot Call program for improving sales among the existing policy holders. But these type of alliances are becoming more diversified, and you will hear more about it at the analyst meeting next month. We also believe that offering agents advanced commissions will help us better recruit and retain sales associates, which in turn should benefit sales.

In the U.S., we process and pay commissions each and every business day. When a policy application is submitted, Aflac U.S. advances two-thirds of its first year commission to the agents. By contrast, we only paid commissions monthly in Japan, and that occurred only after the premium is collected, which oftentimes is three or four months after the sale is made.

Although that's great for Aflac Japan from a cash flow perspective, the delay in the payment makes it more challenging to recruit and get new agents off to a quick start. As a result, we modified our commission payment practices in Japan last October to advance 80% of the first-year commissions for newer agents.

And later this year, we will implement a new system that will allow us to pay commissions more frequently. We are also spending time in the product development area. We have allocated a lot of actuarial and IT resources to accommodate the new morbidity tables. As I mentioned, the price decreases took effect April the 2nd.

For the third sector products, we will implement the new price effective September the 2nd. Overall, we do not expect any significant price increases on these products. In fact, prices for some of the products at certain ages will actually be lower.

In addition to pricing changes, we are working on new products that we hope to have ready for the market in the third quarter. Because we have not yet had a formal discussions with the FSA about the new products, I can't give you any of the details.

I can tell you that it is the type of products that is in the marketplace and is consistent with the current product portfolio. We believe it will benefit sales later in the year.

In addition to improving sales, we want to establish some momentum as we get closer to bank channel liberalization. At our analyst meeting next month, you will hear about our preparation for bank deregulation, which will enable banks to sell third sector products to their customers for the first time. We remain very encouraged about the prospects of this new channel.

We believe Aflac Japan is in a very good position to take advantage of the bank channel. Aflac already has relationships with 63% of the 408 banks in Japan where we've been selling our products to the bank employees primarily through the corporate agencies.

Some of these relationships go back for more than 30 years. Although we fully expect this new channel to be very competitive, we believe the strength of our brand, the quality and value of our products, the competitiveness of our commission, and the strong and long-standing bank relationships will help us stand out as we attract both banks and customers to our business.

Now, let me turn to Aflac U.S., which is performing very well. We remain very pleased with the direction of Aflac U.S. in virtually all areas of operations. We continue to see good momentum in new annualized premium sales, which rose 10.6% in the quarter to 352 million.

We experienced solid increases across the entire country, with significant number of state sales operations producing double-digit sales growth. For the the quarter, 54 of our 98 Aflac state organizations produced double-digit growth, and another 23 of Aflac states produced results that were flat to up 10% in 2006.

We believe our renewed momentum and sales growth is a reflection of the changes we made throughout our organization in prior years, including some of the training initiatives that we discussed in the past. We commented following our year-end release that we wouldn't be surprised if recruiting was down this year. We elected not to establish a hard, fast recruiting target this year. And it is not included in the bonus component this year.

Instead, we're focusing on fuel-force management to increase the average weekly producers as both reporting management matrix. Tracking weekly producers allows our sales coordinators to effectively manage their business and their people within the span of one of week. As we've developed our training programs to build tenured producers, we are encouraged that the number of weekly producers continues to grow, rising 6.8% to approximately 10,800 for the first quarter.

Financially, Aflac U.S. is doing very well. We're also encouraged with the persistency of Aflac U.S. business, which remains fairly stable in the first quarter of 2007. With respect to financial targets for Aflac U.S., we are targeting double-digit premium growth this year, as well as double-digit earnings growth.

Our first quarter results were consistent with achieving these targets. We have not seen any significant changes in the competitive landscape in the United States. We believe the need for our type of products we offer will continue to rise. The morale of our sales force is high. And we are exciting about the new renewed momentum in the U.S. business.

With each year that passes, we gain a much better understanding of the U.S. market, and I'm convinced that we will be focusing on the right aspects of our business to tap into the market opportunities. We have been expanding the size of our distribution system with particular focus on producing sales associates.

We are properly positioned on our brand, our products are well suited to the market, and we are using technology to better respond to the agents and consumers' needs. We believe we will have another strong year, and we're well positioned to increase total and new annualized premium sales 6% to 10% in 2007.

From a financial perspective, Aflac remains very strong. Our investment portfolio is in excellent shape. Aflac's favorable capital adequacy ratios reflect a strong balance sheet and our support of our ratings. Our risk-based capital ratio is 601 at the end of 2006, which is quite high. And our solvency margin in Japan is also high.

We have discussed previously that we want to maintain a level of conservatism in those ratios in case of dramatic movement in exchange rates or interest rates, both of which can negatively impact our ratios. That being said, we recognize that we have excess capital in the Company, and we are looking for the best way to deploy that capital.

As you know, our primary use of excess capital has been purchasing our shares and increasing the cash dividend. Last year we announced that we are accelerating our share repurchase activities beginning in 2007. We indicated our intent to purchase back 12 million shares this year, which is a 20% increase over our purchases in the last few years. You will note that we have been aggressively purchasing our shares this year, and we have already bought 5.1 million shares.

We have also significantly increased the cash dividend. Last year we raised the dividend twice, which resulted in a 25% increase in the cash dividend in 2006, compared with 2005. We increased the cash dividend again in the first quarter of this year, and last night we announced another increase effective in the second quarter payment.

The second quarter dividend of $0.205 per share is a 57.7% higher than the dividend of a year ago. At that indicated rate for the full-year dividend will be up 45.5% higher than those in 2006. This year is the 25th consecutive year in which we have increased the dividend. It is likely that we will continue to have dividend increases at a faster rate than the earnings growth going forward.

We are also keenly focused on producing attractive earnings growth which benefits our shareholders in the form of price appreciation. To that end, we retain our goal of producing 15% to 16% growth in operating earnings per share, on a diluted basis in 2007, excluding the impact of the yen.

You've heard me say that my personal goal is to increase operating earnings per diluted share by at least 15% annually during my first 20 years as CEO. Aflac has generated the -- has generated that rate of growth for 17 years now, and I'm confident that we will extend that record 18 years once 2007 is complete.

Because of the substantial growth in our business over the last 17 years, it is obviously more challenging to continue those same growth rates. In addition, I think most of you know that it would be out of character for me to do something in the short term to achieve my personal goal that would jeopardize our growth rates in the following years. I do believe we have a bright future ahead of us.

I hope you will join us and listen to the webcast on the opening night of the analyst meeting next month when I will discuss the earnings outlook for 2008 and my thoughts on long-term growth for the Company. Ken?

Thank you, Dan.

Let me take you through some of the numbers for the first quarter beginning with Aflac Japan. Starting at the top line, in yen terms, revenues were up 5.7%, for the quarter, benefiting from a 9.2% increase in net investment income. Our persistency rate excluding annuities was 94.8%, which compared with 94.7% in the first quarter of 2006.

In terms of quarterly operating ratios, as we expected, the benefit ratio continued to improve over last year. It declined from 65.0% a year ago to 63.9% this year. The expense ratio was 18.5% in 2007, compared with 18.3% a year ago, and as a result, the pre-tax profit margins showed further improvement rising from 16.7%, to 17.6%.

Pre-tax earnings rose 11.8% for the quarter in yen, and excluding the impact from the weaker yen on the investment income of Aflac Japan, pre-tax earnings were up 11.0% in the quarter. We have not seen too much movement in interest rates or investment yields in Japan.

For instance, in the first quarter, the 20-year bond yield on an index was 2.11%, compared with 2.15% in the fourth quarter. That yield today stands at about 2.13%. However, for the quarter, we invested our cash flow in yen securities at 316, and including dollars, the blended rate was 3.36%.

The portfolio yield at the end of March was 412, which was two basis points lower than year end and eight basis points lower than a year ago. Through last Friday, we had invested or committed to invest about 36% of estimated 2007 cash flow, at an average yield of 3.39%.

On an overall basis, the credit quality of the portfolio remains very high. On, again, a consolidated basis, securities rated BB or lower were only 2.5% at the end of March, which was a slight improvement over year-end.

Now, let me turn to Aflac U.S. where revenues were up 10.7% for the quarter, earned premium income increased 10.9%, and investment income was up 10.3%. The annualized persistency rate of the U.S. business was 73.0%, which compares with 72.5% a year ago. The U.S. benefit ratio was 52.7%, down from 53.4% in the first quarter of '06, and the expense ratio was 31.7, compared with 31.6.

Reflecting the improvement in the benefit ratio, the profit margin increased to 15.6% in the quarter, up from 15 a year ago. And pre-tax earnings were up 15.4%. In terms of U.S. investments, the new money yield on the quarter was 627 versus 621 a year ago. And the yield on the portfolio was 7.07%, down 8 basis points from year end and 14 basis points lower than a year ago.

In looking at some other items for the quarter, as you heard, we purchased 5.1 million shares, the average price was $47.54, excluding FAS 115, the ratio of debt to total capital was 16.8% at the end of March, which compared with 17.9% a year ago. Non-insurance interest expense was 5 million for the quarter, compared with 4 million a year ago, and parent company and other unallocated expenses were $6 million, down from $10 million in the first quarter of '06.

Total Company operating margins improved, reflecting better profitability of Aflac Japan and Aflac U.S. The pre-tax margin rose from 15.8% to 16.7%, and the after-tax margin increased from 10.3% to 10.9%. On an operating basis, the tax rate was 34.6%, a little change from 34.7% a year ago. And as reported, operating earnings per diluted share rose 13.9% to $0.82.

The weaker yen did lower operating earnings by $0.01 per share in the quarter. And excluding that negative impact from the yen, operating earnings per share increased 15.3%, which was in line with our annual target.

Finally, let me comment on the outlook for the year. As you heard from Dan, our objective for 2007 remains a 15% to 16% increase in operating earnings per diluted share, excluding the impact of the yen.

As we have stated at our year-end meetings and in our annual report, that represents a target of $3.28 to $3.31, in operating EPS assuming the same average exchange rate as last year. So if we achieve our objective and if the yen averages 115 to 120 for the balance of the year, we would expect that to translate into reported earnings per share of $3.26 to $3.31, and under that scenario, second quarter operating earnings per share would likely be $0.81 to $0.83 per diluted share. The current first-call estimate is $0.81 for the second quarter and $3.26 for the year.

That concludes my comments. We do want to make sure that everyone has the opportunity to ask a question, so please limit yourself to one question so we can be fair to everyone.

Kimberly, I will turn it back over to you, and we would be happy to take questions.

Thank you. We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS)

Our first question comes from David Lewis with SunTrust Robinson Humphrey.

Good morning, and thank you.

Dan or Aki, can you give us an update on the expected tone and timing of any FSA commentary and how the press is portraying Aflac relative to industry peers following that review?

And just final question, can you give us a sense of whether you feel the momentum is strong enough to see sequential improvement in the second quarter versus the first quarter in Japan? Thank you.

This is Aki. Let me just answer about the FSA-related issue. FSA is still in the process of making sure that every report from every company are in level field.

It looks like it takes at least two or three weeks for them to digest all those data and the contents of the report that they received from the insurance companies. So from that perspective, it's a little bit premature to say anything at this point.

Probably the first -- during the first two weeks, after the press conference, the FSA has been trying to make a hearing with every insurance company, every life insurance company in Japan, and that's why it takes some time. Because there are at least over 35 companies that they have to take a hearing.

So that is what is going on right now. And the newspapers at this point, they are also pretty much confused about all of the reports that were published by the insurance companies, because all of the contents were not in a sense a complete level field.

So that's where we are now. And we just have to wait and see what FSA would respond back to us.

David, my only comment is that I don't believe we could have done a better job than what we did. We took it-- we were very serious about how we approached it. I talked to the FSA three times over there, I personally talked with them since November. From the minute they came out with it, I think if you look back, you will see that some of them were not prepared like we were, and I know I am prejudice, but I think you will find that we did as good a job as could be done.

Granted, we -- because we had 4.2 million claims to review, there were -- the number was several thousand, but at the same time, I think when you look at the outpatient, and we had just 600 and some of them had hundreds of thousands, I think we're going to look good when we're finished. But that is just my personal opinion. And we will have to wait and see.

It was also some little news article that ran in a trade publication that said that Aflac had done better than anyone else. And a very smart group of people, whoever said that. So that's -- and was there any other part of that you asked?

Oh, sequential sales. I am cautiously optimistic that we will see sequential sales improvement. But I won't go on the record to saying absolutely at this point.

Terms of the rate of growth.

Right, in terms of the rate of growth.

Great. Thank you.

Thank you. Our next question comes from Jimmy Bhullar with JPMorgan.

Hi, thank you.

I just have a question for Kriss on the benefits issue for Japan. If you look at your business mix, it seems like the benefits issue could improve to the high 50s, and I think it was slightly below 64% in the first quarter.

Could you comment on how you much you think the benefits ratio could improve from the current level over time in Japan?

This year, I've said -- we initially said 50 to 100 basis points for this year. We're going to update you on that estimate at the analyst meeting. I will say that last year we were close to 100 basis point improvement even though we did some reserve strengthening relative to interest rates on a closed block of business that we had sold years ago. And we still got almost 100 basis points improvement.

We don't anticipate we're going to have that kind of reserve strengthening this year, so you may -- we may indicate we expect a little more improvement. We were up -- down 110 basis points on the benefit ratio in the first quarter '07 compared to '06. And I don't think that is unreasonable compared to what we would expect for this year.

I think if you look at the charts we've shown on benefit ratios of new business, you do see quite a few of those ratios in the 50s. So we're on a glide path down because of mix of business and also favorable experience, but I'm not prepared to say what it is going to be five years from now at this point.

I will just say we're headed in that direction.

And then also on Japan, you mentioned life sales were (Inaudible) because of new mortality tables. Have you seen a pickup since the new tables were introduced earlier this month?

Well, we don't give the quarterly sales information until the quarter is over. But --

But just in terms --

We're effectively just priced, you know, April 2nd, so we're not two weeks into it yet, and we don't have enough information to be able to give you any color on that yet.

Okay. Thank you.

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

Great. Thank you, and good morning.

Dan, you mentioned your personal goal is to grow EPS of 15% for 20 years and you wouldn't take short-term actions that would damage the long-term growth to hit your personal goal, does that mean your personal goal is no longer 20 years? Perhaps a little clarity as to what you meant by that comment.

No. My personal goal is still 20 years and I will give you -- I will go into more details at the analyst meeting. I have said all along that I don't think it is anything new in that I just want to be very cautious in how we approach this.

But I still want to try to make 15% for 20 years.

Okay. And perhaps if I can just follow up with a quick question, do you have a sense as to how much industry-wide sales in medical policies in Japan declined in the quarter and whether you gained or lost market share?

Nigel, this is Ken. We just got some data this morning. The rate of growth, or the rate of change, I should say, for the 13 insurers, which includes us and represents the vast, vast majority of the industry, were down to the similar rate to ours, so we don't think there is any material margin or share deterioration there.

Although I should point out that the industry data also reflects the fact that Matsui Marine did not sell in the first quarter or in the fourth quarter of last year because they were under a punitive sanction by the FSA. So they were, in effect, out of the market. And if you exclude them, the numbers will be a little bit different.

But generally it looks like it continued to be a very tough quarter for the entire industry for the sale of stand-alone medical insurance.

That's very helpful. Thanks.

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

Thanks. Just a question on Japan.

Is there any risk, given the scrutiny over third sector sales that the entry of banks into third sector distribution will be pushed back until sort of the current uncertainty is cleared up? And is it the FSA that has oversight in terms of that structural change?

There is always a risk, but when I was at the FSA meeting back about a month ago, it was still on. So anything can change with the Japanese, we will just have to wait and see.

Suneet, just a follow-up on that, and Charles, I think, mentioned this in his comments last year, there were market conduct rules put into place for the sale of bank -- products at banks to make sure that banks would not be using their relationships to unduly influence customers into buying products.

And so the FSA has said all along what they're going to do is monitor the conduct of the sales to make sure that they're being appropriately sold. And that would influence perhaps their decision if it opens up on time or at a later date.

And has there been any view of, say the VA sales in the bank channel, have there been any sales practice issues?

I haven't heard anything either positive or negative in that regard.

Okay. Thanks.

Thank you. Our next question comes from Joan Zeif with Goldman Sachs.

Thank you. Good morning.

I just wanted to ask about the U.S. for a few minutes. Premium growth, your goal of premium growth is up double digit, and I just wanted to know, what sort of sales growth do you need to sustain in order to feel confident that the premium growth can exceed 10%, particularly because of the persistency issues?

And then, can you just talk about the loss trends in the U.S.? And again, the shift, we're seeing in the benefit ratio, the shift between benefits and then increase in reserves. Are we going forward, should -- going forward, should we expect that shift to continue?

All right. Joan, this is Kriss. I will comment on that.

As far as the rate of sales growth that we need to sustain double-digit increases in premium income, we forecasted 8% to 12% last year at the analyst meeting. The fact that we're talking 6 to 10 this year is reflective of the fact that we beat the 8 to 12 last year, with enrollment of a very big block of business in December.

So it influences the growth rate this year, but it benefited us as far as growing premium income over the longer term. As far as the mix of business and -- the benefit ratio, in the U.S., I had said the benefit ratio is expected to be down slightly this year.

We are -- cancer, which has our highest incurred benefit ratio, is trending downward slightly, though it is still a substantial block. It is slightly under 20% of total premium produced.

But accident insurance and hospital income -- or hospital indemnity that have lower loss ratios, are a bigger part of new sales than cancer. So we're trending downwards a little bit.

So I guess -- but my question is, really, when you see the benefit ratio in its parts, what is the increase in reserves and what's I guess the incurred? I guess that seems to have shifted in the U.S.

And I just wanted to make sure that you have very big increases in reserves and a decline in the pure benefit payments, and so is that -- is the mix -- has the mix of business shifted so that is now sort of the new relationship. It sort of started in the fourth quarter.

There were some reserve reallocations in the fourth quarter between claim reserves and policy reserves that affected that ratio in the fourth quarter. The first quarter this year, the incurred claims was 37.2, which was about 5 points lower than last year, which was about 42.5.

To tell you the truth, right off the top of my head, I'm not remembering exactly whether there was anything unusual in the first quarter this year. I don't think there was in particular. But the important thing is the total benefit ratio.

The payout patterns of our major products haven't changed at all. They will fluctuate from time to time, but no, accident is paying out, the same pattern it always has, and so is hospital indemnity and cancer. So let me think about that, and I will give you an update at the analyst meeting if we find anything differently.

Thank you.

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

Hi, good morning.

Just a quick question on capital, is there room to up the buyback guidance given that you bought back 5 million of the 12 million already in the first quarter?

We said our target was 12 million shares to repurchase this year. In the prior years, we had set a range of 10 to 12 million, and then we increased the dividend payout and the share repurchase to 20% and 25%, but when we said the 12 million target for this year, we had just used the 10 million we had been buying each of the three previous years and increased that 20%.

In our financial modeling we had assumed or at least stress tested 12 million. So it is possible that we would buy back more than 12 this year. We try to be somewhat opportunistic relative to share repurchase, and quite frankly, we had planned on buying 3 million in the first quarter, and then late in the quarter, we were offered a position that would settle an estate, and we got that at what we considered an attractive price.

So I think the 5 million was a little bit higher than the current intended run rate, but there is some upside on that, given that we are seeking ways to deploy what we perceive to be an excess capital position.

Can you remind us, Kriss, what your estimated excess capital position is currently?

Well, we've talked about that with a number of people. Arguably, it is -- I would say it is reasonable to say it is probably in the $500 million to a $1 billion range before the effect of the dividend increases that we've recently implemented. That being said, we're going to pay out an extra 100 million of dividends in '07 relative to what we intended or what we would have expected this time last year.

We are probably going to repurchase some more shares. But we did institute some new operational things like advancing commissions in Japan that allows us to redeploy the capital inside the business. And we're looking at other ways to make our business maybe more efficient and to be sure that we haven't overlooked ways to internally utilize some of that capital.

I will say that at 601% risk-based capital ratio at year end, some people think that's way high. The rating agencies tell us that they think for a company in our situation with dual currencies, Japan, U.S., impacting us probably somewhere in the 450% neighborhood, is what they're comfortable with. So you can kind of do the math.

Other people have said, well, you could leverage up the balance sheet more and do hybrid securities and all kind of things, but we're a gradualist type of company as it comes to capital changes, and I don't really believe in borrowing money you don't need. So that is kind of where we are.

Great. Thanks a lot.

Thank you. Our next question comes from Darin Arita with Deutsche bank.

Hi, good morning. In the U.S., Aflac has done a nice job reviving sales growth. Some state operations, however, still have a sales decline.

Can you talk about what is going on there, and how quickly can those state operations return to sales growth?

Sure, Darin, if you look at the first quarter '06, versus first quarter '07, in terms of the number of state operations with a decline, it is almost similar in the three categories that we've been providing for you. The fact of the matter is, we're never going to have, as a company, a situation where everyone is doing a perfect job.

And in fact, I think the fact that we were up 10.6%, with that many operations being in a negative, only points to the strength of our team, and the strength of our organization. Do keep in mind that the vast majority of changes that occur in the state operation in terms of leadership occur in the end of the year.

Therefore, there is sometimes a hiccup in sales that occurs in the first quarter, as new leadership ideas and mentalities are put into place. But I am not worried at all about those operations being down in terms of sales. I believe that it only again shows the upside potential that we have for growth in the long term.

In terms of the composition though of the states in the first quarter of '06 versus the first quarter of '07 in the three categories, are they roughly similar or is there quite a movement each year?

They're almost exactly similar. We just have a few more states in first quarter '07 than '06 and that accounts for a couple more with a decrease but the numbers are almost exactly the same.

Okay. Thank you.

Thank you. Our next question comes from Andrew Klingerman with UBS.

Good morning.

Question, just for some clarity, pricing, I guess I heard Dan say that you would implement your new products on September 2nd, which is earlier than I had thought, I thought it was going to be October 1st. Could you just clarify what exactly is going to happen on September 2nd? Are you going to refresh all of your products just in terms of --

No, no, we're not going to -- we hope to have one new product on the September 2nd. And we're debating how -- whether or not we want to refresh one other products and what the date that will be, but we certainly plan on having it in the second half, the other one. And much more than, that I got trouble one time with the FSA not wanting us to discuss anything.

But I think it will help sales. It pretty much falls in line with products like we sold before, but it is more of a niche, looking for an area that we haven't really focused in on in terms of a group of people, and that is about all I can say at this point.

Okay.

Let me amplify that just a bit. Dan is talking about new products. And the fact of the matter is, that all the existing products we are selling that are in our portfolio now had to have new premium rates recomputed with the new mortality tables, the FSA promulgated. So all of our current offerings will have to be repriced or will be repriced.

September 2nd is kind of a funny date, sounding funny date but the way they do things in Japan, most of the policies become effective on the first of the month. So all applications taken between September 2nd and September 30th are for policy dates effective October the 1st. That is why it wasn't September the 1st.

Okay. Got it.

And so the medical products that will have the rate changes September 2nd, those are pluses and minuses, and in the aggregate, there is no material change.

And Kriss, will you --

Some are lower.

Will you be freshening or revising somewhat any of the riders or terms and conditions around those products with the rate increases on those existing products?

Well, those fall more into the category of new or refreshed product terms, Andrew. I don't think that we've made any changes to benefits on many of our -- or I will say any of our existing products. We just have to -- we just have to reprice them and give them the same benefits.

Got it.

And then just real quickly, recruiting, down about 11% in the U.S., down 13% in Japan, in both countries, are you just -- over the next few years, can we expect that recruiting will be off and productivity will be up? I mean is that the mantra at Aflac? And can it work for a long period of time?

It can work for a long period of time. I think it is something that we need to be focused on.

You will remember, 18 months ago, I think it was exactly 18 months ago, Dan made the speech when we were in our conference call out of Jamaica, and he said that we would be putting in the training initiatives that would long term allow our agents to be more productive as well as our recruiting ratios of bringing people in and being more productive.

I am -- not only did we see a 6.8% increase in week -- average weekly producers, we saw a 9.1% increase in total licensed associates. It is not like we're losing people with the lower number of recruits that we're bringing on. In fact, we're retaining quite a few of those people and seeing them be more successful.

I'm very comfortable with what is going on. I feel that our programs and systems have taken a time to implement, but we are seeing a strong effect from them. Did I get everything you wanted?

That gets where I need to be.

I think, in Japan, recruiting, obviously, sort of the same answer, we cannot go for a long time without improving our recruiting. I will say in Japan, the current emphasis is implementing the kinds of training programs that we implemented in the U.S. that worked fairly well, and we're trying to emphasize improving productivity among our existing agents, but we will turn to new efforts to recruit in Japan in the near future.

I feel confident.

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

Hi. Good morning. Just a quick question.

Should we be drawing anything from -- any insight from the non-life's bans that were given out earlier this year? I mean it seems like the FSA took some time to review the claims, three months or whatever. And then out came bans. Even though the claims numbers were not that high.

So it seems like -- I'm not sure if you're worried at all that Aflac could be banned even the size of your erroneous claims was very, very small.

Tamara, this is Ken. Let me make a quick comment and then ask AKI if he wants to add something on that.

My first comment would be that I would caution anyone listening today to not compare what the non-life industry went through to what the life insurance industry went through. The non-life industry last October completed a review of denied claims. That was a review that Aflac and the entire life industry went through in 2005. And that issue had been resolved.

The issue that we just went through was looking at underpayments on paid claims over a five-year period. So you cannot really compare one review directly to the other review. In addition, what we've gathered out of the press that we've read in Japan, that Aflac Japan has sent to us, is that if this is -- if this was accurately reported, that the troublesome issue to the FSA is the case where policy holders had filed claims and did not request all of the benefits they might have been entitled to receive.

The so-called non-filed claims. And as we reported, we had 621 of those instances that we need to resolve and should have those resolved fairly soon. The entire industry, based on the most recent report from last Friday, suggested that in the Nikeii press that there were 1.7 million of those cases industry-wide. Meaning our 621 cases is just 0.04%.

So if those -- if that data is correct, and if the message that we kind of picked up in the press is correct, that is kind of the troublesome spot with this review, then I think that we look very, very good relatively speaking. Aki, is there anything you want to add?

I think Ken is right. It is not really reasonable for us to try to compare the non-life report and our report. Non-life's report, they just made for the underpayment issue, those reports were not complete, either. So we really don't know how long it is going to take further for this non-life companies to settle this underpayment issue.

Some papers say it will take even -- it will be delayed even into next year, and about the 621 cases that Ken just mentioned, when I had the press conference April the 13th, the most questions I received from the media people is why Aflac could finish this whole thing in such a faster manner than all other companies, and why our numbers are so small.

So from that perspective, we are just, in a sense, very standing out. Am I answering the question?

Yes. Thank you so much.

Thank you. Our next question comes from Steven Schwartz with Raymond James.

Good morning, everybody. Are you there?

Yes, we're here.

Great. Okay.

Hey, Aki, could you touch on -- it was kind of a throw away line and maybe I missed it in previous conference calls, but could you touch on the two-part bonus structure that you -- that Dan touched upon earlier in his presentation vis-a-vis Japan?

And then just wanted to nail down the discussion with Andrew, given the fact that you've got rates rising and falling in the medical products, come September 2nd, do you think we might see -- it sounds to me like you would not see a repeat of the sales drop-off prior to April, come the third quarter. Would that be correct?

Yes. I will do the bonus structure. We said a number in the first half of the year that said that the sales would be negative.

Right.

And we made that 25% of the overall bonus. If the bonus was, whatever it was, 25% of it. 75% is the in the second half. And you can't get the first half unless you achieve the second half.

And the second half I will tell you, the number is zero to up 4% in the second half. And I think it is attainable. And so, for example, if sales ended up being very good in the first half and the second half we were down 1%, they get nothing. So they've got to be flat to up 4%.

And on the sales question about medical products, for the September rate change, I would be surprised, Steven, if we had any significant drop-off associated with the premium rate changes on the medical products.

Okay. Great. Thanks.

And one other point I think is important. A lot of you may ask, why was it set up that way? The reasons that it was set into two parts is that I didn't want them holding business and having a terrible second quarter to try to carry it all over to the third and fourth quarter.

So they've got 25% of their bonus tied to that first and second quarter, or first half, and it just stops people holding business. And that's why I set it up the way I did.

Okay. Thanks.

Thank you. Our next question comes from Colin Devine with Citigroup.

Good morning. Dan, on this call a year ago, I think it is fair to say you expressed a fair amount of frustration with the corporate agencies in Japan. And that the problems there went back, I guess, 16 years per what you mentioned.

Can you give us an update on what has changed? We certainly watched the sales continue to decline. I think the 9 million of sales in the first quarter was their worst since about 2002.

What's really being -- what have you been able to achieve to try to get that beginning to turn around?

Well, that is the problem. The good news is, it accounts for about 30% of our business now compared to 90% of it seven, eight years ago. So it is what we believe that will be the driving force, will still be the individual agents more so. We are having some luck with some of the corporate agencies. But it has been a slow tedious process.

The hot calls and getting them to consider actually using telephone operators versus direct mail is probably the one thing that I would tell you has the most potential for us. We don't think they're going to be able to do one-on-one sales at the majority of the accounts. But we do think they're going to allow us to do more telephoning, which could change the hit rate dramatically.

Because basically, Colin, the hit rate is dried up. There is too much confusion in the marketplace. And one particular piece of literature being sent to them and then sending it back in are over. And so we've got to have interaction between the customer and someone at Aflac, and our best way of doing it is the way we do it in the U.S. with one-on-one presentations and the way we do it in Japan with our individual agents, and our individual agencies.

But if we can't do that, then the next best thing is to try to do it through these telephone operators, and that is what we're counting on going forward.

Okay. Well, just so I'm clear then, because this percentage of your sales has steadily declined and it is not necessarily, obviously, because the individuals grown so much. So when you're talking about a second half turn-around in sales in Japan, is there really -- do you mean you're hoping for a second half turn-around at the individual agencies versus the corporate?

Because it seems to me you're setting yourself up to fall short when nothing is really, as far as I can tell by the numbers, getting better at the affiliated corporate agencies.

Well, I do think that the individual agents will have a bigger increase than the corporate agencies. There is no question about that. I believe the new product that we're talking about introducing will help the corporate agencies more than the individual agencies, one of the products. Because they can go back to the existing block of business they've got and be able to add on.

So from that perspective, I think it will be very beneficial to us. But make no doubt, the corporate agency is the thorn in our side. And how to work on that and change it has been a very difficult task. And one we continue to work on.

So I don't -- I don't have a magic bullet that will do it. But I do feel like that some of the things that we're doing will have a positive impact on us, and we will just have to continue to work on it. And I think this Hot Call and what we're seeing is doing that.

But I do expect improvement over what they had been doing in the first half of the year.

Okay. So in terms of just to fine tune this, should stay about level where it is, you're looking for meaningful improvement from the independents and is it fair to say some improvement from the affiliate corporates?

Hopefully, that's correct.

Okay. Thanks.

Thank you. Our last question comes from Eric Berg with Lehman Brothers.

Thanks, very much. I actually had a follow-up question on the benefit ratio. Maybe for Kriss. And it is this.

With the slowdown in sales in recent years, it has just sort of been the result as a matter, I guess, of just simple math, but the new business relative to your in force has been declining, that's just what you would expect just in terms of the arithmetic, and based on the data that you published in your investor day last spring about claims experience, it looks like claims experience, while significantly better than expected, has been stable.

So I would think that that would lead to -- those two factors together, stable claims experience, and new sales becoming less important than they had been relative to the total, I would think that that would lead to a slowdown in the profit margin improvement.

And yet, it seems like margins are slated to improve as quickly this year as they have in other years. Am I thinking about, sort of, the overall big picture correctly, Kriss? Or what am I missing here?

Well, even though the growth in new sales is lower today than it was two years ago, it is still substantial. We're still putting on a lot more premium than we're lapsing. So you're seeing -- you're continuing to see some positive impact from business mix. It hasn't slowed down quite as much as you might think, Eric.

In addition, the -- we're going to update ya'll at the analyst meeting on our experiences to claim trends and the like, and I would almost ask to let me defer until the analyst meeting, giving you that update. We're putting the final touches on the presentations and the like, and I hate to steal the thunder of the people that are going to be making those presentations.

But I will say that the thing I mentioned earlier, about having done some reserve strengthening last year and not anticipating doing anything this year, will probably lead to greater overall improvement in benefits this year than we had last year.

Very good. I will wait patiently. And I thank you.

Thank you, very much.

Thank you. And thanks for joining us. My clock is showing a little bit past 10:00, so we will adjourn the conference call.

If have you any follow-up questions, please feel free to call Robert or myself at the toll free numbers, and we hope to see you all at the analyst meeting on the 23rd and 24th of next month.

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