美國家庭壽險 (AFL) 2007 Q2 法說會逐字稿

Hello and welcome to today's conference call. All lines are currently in a listen-only mode. Following today's presentation there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) today's conference is being recorded. If you have any objections you may disconnect at this time.

I'd now like to turn the call over to today's first presenter, Mr. Ken Janke. Sir you may begin.

Thank you and good morning everybody and welcome to our second quarter conference call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Toru Tonoike, who is President and COO of Aflac Japan, joins us from Tokyo; Paul Amos is here, President of Aflac and COO of Aflac U.S. Operations; and then we're also joined by Jerry Jeffery, Senior Vice President and Chief Investment Officer. Before we begin this morning, let me mention that some of the statements we will make in this teleconference are forward-looking within the meaning of federal securities laws. And although we believe these statements are reasonable, but we can give you no assurance that they will prove to be accurate because they are perspective in nature. The actual results in the future could differ materially from those we discuss today. And I'd encourage you to look at our quarterly press release and most recent SEC documents for some of the various risk factors that could materially impact our future results. This morning I will now turn it to Dan who will begin with some comments about Japan, United States, and the outlook for the balance of the year. And then I'll follow-up with a few financial highlights and we'd be happy to take your questions. Dan.

Good morning and thank you for joining us. Let me begin by saying that I'm very pleased with the second quarter results and the first half of this year. Based on the six months results, I'm confident that we are well positioned to achieve our marketing and financial initiatives for 2007. We continue to be very satisfied with Aflac Japan's operating and financial results. Our persistency rate remains strong at 94.7%. Our revenue growth was in line with our expectation of a full year increase of 4.5% to 5%. Pretax earnings were also on track with our annual target. And we again, are pleased with our sales performance at Aflac Japan. Aflac Japan's total new sales were down 3.5% in the second quarter, which was what -- much better than we had expected. For the first six months, sales were down 6.9%. Those results greatly exceeded the bonus target that we'd set for the first half of the year. However, you'll recall that in order for management to receive the first half bonus, which represents 25% of the annual amount, we also need to see flat to 4% increase in the second half of the year. I'm sure you'll remember my comments at the analyst meeting in May when I said that I was more confident that our sales would increase in the second half of the year. Our second quarter results confirm that comment.

Like the first quarter, our second quarter cancer product sales were strong. Cancer life sales were up 22.7% in the second quarter which we believe benefited from our advertising and promotions from that product. We believe the cancer product sales were also helped by purchases made in advance of the September the first, premium rate increase due to adoption of the new mortality tables. Medical sales were again down in the quarter and we believe they were also weak for the life insurance industry compared with the second quarter of last year. Even though ordinary life sales were down from a year ago, they improved over the first quarter. We've not seen any significant changes in the market conditions. There have been no major entrants to the market as virtually all major life and non-life companies already offer a medical product. As we have frequently discussed, the market is crowded with competing products, and we believe this has created confusion in the consumer's mind. Even so, Aflac Japan still holds the number one position for sales of stand alone medical. And we don't believe any particular product from any company threatens our leading position.

We believe it is likely there will be some market overhang from the medical claims payment issues. We continue to see periodic articles in Japan newspapers about the status of claims reviews from the industry. It appears that this issue at many companies is unlikely to be completely resolved until November of this year. In terms of Aflac's claims review, we're awaiting documentation from less than 10 policy holders to make a final determination of how much, if any additional claims payments we must make. And we continue to keep the (FSA) apprised of the status of the few claims remaining. Even with the ongoing challenges in the marketplace, I believe we are still positioned to see a modest sales increase in the second half. As you know, we face easier comparisons in the second half of the year. In addition, we believe we have a new product that will also benefit our second half sales as I mentioned at the analyst meeting.

We receive -- recently received regulatory approval for the sale of the new medical product called Gentle Ever. The primary difference between Gentle Ever and our stand alone medical product is it's this new medical product requires less underwriting. Obviously this means the product carries a higher risk than the other version of Ever. However, I want to emphasize, that we are comfortable with the level of risk form the pricing and claims perspective for the two important reasons. First, premium rates are quite a bit higher for Gentle Ever, compared with a standard Ever product. For instance the monthly premium for a 50-year-old male is 5,730 yen for Gentle Ever compared to 2,945 for the basic Ever product. However the premium is still very attractive from a competitive standpoint. Second, the products' benefits are paid at only 50% of the claims filed within the first year of coverage. We believe this will help mitigate adverse selection and we expect the profit margins of Gentle Ever to be consistent with our other Ever products. We also believe there's an attractive market for this type of medical products in Japan. Since the launch of Rider Max in 1998 and Ever in 2002, we have declined coverage to approximately 800,000 customers due to underwriting reasons. As a result, we can market to a group of consumers that we know already have interest in the products. We know that other companies have sold similar products to Gentle Ever with success. We believe that our product will compare favorably to the other products in the marketplace and will benefit from Aflac's strong brand in the medical area. In addition, due to the simplicity of the product, we believe Gentle Ever will be well received by the corporate agencies.

Sales of this new medical product will begin August the first. We also believe sales in the second half of this year and beyond will benefit from our distribution initiatives. For instance, one of the major telemarketing agencies increased it's outbound call capacity. We also remain focused on increasing the size of the sales force due to recruiting new sales associates. At the end of June, we were represented by 95,800 licensed sales associates, which was 11.8% higher than a year ago. We believe advancing a portion of the first year commission to the newer associates will make it easier to recruit in the future. We also expect that the new training program we rolled out last November will help improve face-to-face sales skills of the new sales associates. By focusing on improving training and rewarding associates with quicker commission payments we hope to improve productivity among new agents. We also expect to see an increase in the percentage of recruits who succeeded as Aflac sales associates .

As I hope you're aware, we announced that some of the changes of Aflac Japan's executive management during the second quarter. Hide Matsui who was on the team that helped us acquire a license in the early '70s, retired as Chairman of Aflac Japan. And (Akitoshi) Kan was promoted from President of Aflac to Chairman. And Tohru Tonoike promoted to President and Chief Operating Officer of Aflac Japan. After having served on the Board of Directors for approximately two years, Tohru joined Aflac Japan in February of this year as Deputy President. I think many of you realize that we often use the deputy title as a transition position. Which is provided for a smooth succession of management. So I doubt anyone was surprised by these changes. In addition, Aki's primary role when he moved to Tokyo in 2005 was to find the next leader of Aflac Japan. I absolutely believe that we found the right person in Tohru, and I look forward to his contribution to the Company. At the same time, I am grateful for the dedication of Hidai and Aki for their many years of service at Aflac Japan.

As I said, I am pleased with the progress at Aflac Japan. But I won't be satisfied until we see further improvements that result in sales increases in the second half of the year. As we look beyond 2007, we believe our sales will continue to improve, and we remain excited about the opportunities to sell our products through the bank channels. As we conveyed at the analyst meeting in May, Aflac Japan has extensive long standing relationships with banks in Japan, and we think we're in a great position to take advantage of this new distribution outlet.

Now let me turn to Aflac U.S. which is performing very well this year. Our top line and bottom line results were again consistent with the expectations with both revenues and earnings growth at the double digit rates. The persistency of our U.S. business has remained stable through the first half of this year compared with last year. And we again experienced strong increases in total and new annualized premium sales. In the second quarter, new sales rose 11.8% to $365 million and for the first six months, new sales were up 11.2% to $770 million (sic - see Press Release). Like the first quarter, a significant number of our state operations produced double digit sales growth during the second quarter. 56 of the 95 Aflac state organizations produced double digit growth during the quarter and another 20 of Aflac states produced results that were flat to up 10%. We attribute our improved sales momentum to the extensive change we made throughout our organization in previous years, especially on the distribution side. As we have discussed for the past two years, we are committed to providing better training to our sales associate and all levels of sales coordinators and we believe training efforts are producing desired results.

You recall that we did not establish an official recruiting target this year and we expected that recruiting would be lower in 2007 than last year. As a result, we were not surprised or concerned that recruiting was down 3.8% in the quarter. As we've discussed our distribution focus remains on building the number of average weekly producing associates rather than just recruiting. To that end, we continue to be pleased with producer growth. The number of average weekly producers rose 6.7% to approximately 10,600 in the second quarter. We remain very excited about the outlook for Aflac Japan in 2007 and beyond. And I'm sure I didn't have to remind you that we face tough comparisons in the fourth quarter, but I'm going to take this opportunity to remind you again. However, we do expect our sales momentum to continue in the third quarter and we also expect to achieve our sales target of 6% to 10% increase in 2007. We remain convinced that the U.S. is a tremendous market for our products. We expect the need for our insurance coverage to grow and consumer understanding of the need to also increase. We believe we have the right combination of products, distribution and brand recognition to tap into the U.S. opportunities.

Overall, we remain pleased with Aflac's financial condition and performance. Our investment portfolio is in excellent shape. The credit rating of our holdings are high and we don't have exposure to sub prime lending market. Aflac's favorable capital adequacy ratios reflect a strong balance sheet and support our rate. As we discussed at the analyst meeting, we recognize that we have excess capital in our Company and we are looking at the best ways to deploy that capital. We continue to due our purchasing of shares and increasing cash dividends as a primary use of excess capital as opposed to making an acquisition. We bought two million shares in the second quarter. Through the first six months of this year we purchased 7.1 million shares. It is still our intent to purchase about 12 million shares for the full year which represents a 20% increase over last year and our cash dividend paid in 2007 will also be significantly greater than a year ago. At the indicated quarterly rate of $0.205 per share, full year dividends will be 45.5% higher than in 2006.

Our principle means of increasing shareholder value continues to be identifying opportunities in our two markets that will help drive consistent and attractable earnings growth. For 2007, we have retained our goal of producing a 15% to 16% growth in operating per diluted share excluding the impact of the yen. As we announced at our May analyst meeting, our objective for 2008 is to increase operating earnings per diluted share 13% to 15% before the impact of the yen. I'm also still focused on achieving my personal goal of increasing operating earnings per share by a minimum of 15% excluding the impact of the yen for my first 20 years as CEO which is through 2009. From where we are in mid-2007, I still believe that is a remarkable and achievable objective. But as I acknowledged several times over the last few years, growing at 15% annually is not as easy as it used to be. Still, I want to remind you that when 2007 is complete, I'm confident that we will have produced a remarkable record of 18 years of at least 15% before the currency impact. And I believe we're in a good position to continue achieving our objective in the future.

Thank you, Dan. Again, let me just briefly go through some of the quarter financial highlights beginning with Aflac Japan and starting at the top line in yen terms revenues were up 5.5% for the quarter. As Dan mentioned our persistency rate was little changed and was 94.7% excluding annuities for the first six months of this year compared with 94.6% a year ago. In terms of the quarterly operating ratios, the benefit ratio again improved over last year. It was 63.7% in the quarter compared with 64.9% a year ago. Excluding the impact from the weaker yen on investment income, the benefit ratio was 63.9% in the quarter. The expense ratio for the quarter was 18.9% which compares with 18.8% in 2006 and reflecting the lower benefit ratio, the pretax margin rose from 16.3% to 17.4% in the quarter. With the expansion of the profit margin, pretax earnings increased 12.6% for the quarter in yen, however, excluding the impact of the weaker yen on dollar investment income, pretax earnings were up 10.6% for the quarter.

On the investment side, yields in Japan were a bit higher than they were in the first quarter. For instance, as measured by an index of 20 year JGBs, yields averaged 2.17% compared to 2.11% in the first quarter. The composite yield for a 20 year JGB is now about 2.3%. For the quarter, we invested cash flow in Yen Securities at 3.2%, and including dollars, the blended rate was 3.5%. Through July 20th, we had invested or committed to invest about 64% of estimated cash flow at an average blended yield at 3.48%. At the end of June the portfolio yield was 4.09%, down three basis points from the end of March and eight basis points lower than a year ago. For the overall credit quality, as Dan mentioned, remains very high and on a consolidated basis, securities rate a double B or lower, were only 1.9% compared with 2.5% at the end of the March.

Turning to Aflac U.S., total revenues were up 10.6% for the quarter. The annualized persistency rate for the six months was 73.4%, which was unchanged from a year ago. The benefit ratio was 53.1% compared with 53% a year ago. And the expense ratio improved from 31.9% to 31.3%. As a result, the profit margin for the quarter was 15.6% compared with 15.1% a year ago. And pretax earnings rose 14.1% for the quarter. In looking at the investment activities of Aflac U.S., the new money yield for the quarter was 6.51% versus 6.54% a year ago. And the yield on the portfolio at the end of June was 7.01%, which was six basis points lower than the first quarter and 18 basis points below a year ago.

Turning to some other segment items for the quarter, as you heard, we purchased two million shares in the quarter. The average purchase price was $52.35. And that does bring the total of shares purchased to the first half at $7.1 million. The ratio of debt to total capital was 16% at the end of June which compares with 13.7% a year ago. The ratio was unusually low last year because we had just paid off some debt which we subsequently refinanced. Non-insurance interest expense in the quarter was $5 million, down from $4 million a year ago. And parent company and other unallocated expenses were $5 million in the second quarter, which was unchanged from a year ago. The pretax operating profit margin on a consolidated basis improved from 15.7% to 16.6%. And the after tax margin increased from 10.3% to 10.9%. On an operating basis, the tax rate was virtually unchanged, 34.6% compared with 34.5% a year ago. As reported, operating earnings per diluted share rose 9.3% to $0.82 per share. That was consistent with the guidance we gave on the first quarter conference call. The weaker yen did decrease operating earnings by $0.02 per share for the quarter and $0.03 for the first half of the year. Excluding the yen's impact, operating earnings per share increased 12% for the quarter and 13.6% for the first six months.

Lastly, let me comment on the EPS outlook for the third quarter and balance of the year. As you heard from Dan, our objective for 2007 remains a 15% to 16% increase in operating earnings per diluted share before the impact of the yen. That translates to a target of $3.28 to $3.31 in operating earnings per share for 2007 assuming the exchange rate is unchanged from the level it was in 2006. However, the yen does remain weaker than it was last year, and as a result if the yen average is 120 to 125 for the balance of 2007, we would expect reported operating earnings per share to be roughly $3.21 to $3.24 for the full year. Under that scenario of a weaker yen, third quarter operating earnings per diluted share would likely be $0.80 to $0.82. And note the current first call estimate for the third quarter is $0.82 per share. For 2008, our objective remains a 13% to 15% increase in operating earns per diluted share before the impact of the yen. We now have ample time f or questions, however we do want to make sure everyone has an opportunity to ask a question so please limit yourself to one question and if you have others hopefully we can get back with you.

Thank you. (OPERATOR INSTRUCTIONS)

Steven Schwartz, Raymond James. Good morning guys. Hey, quick question for -- for Paul. Weekly producers up 6.7%, and I understand that that's in line with the goal for the year, but the goal for the year is kind of artificially affected by the -- by the fourth quarter and the Wal-Mart re-enrollment. I guess my question is, how long can you go with weekly producers below, the targeted kind of 8% to 12% run rate?

And a continue to achieve double digit sales growth is what you're asking?

Yes, that's exactly right.

Almost perpetually, and the reason for that is that there's no sign that the American economy and healthcare situation is going to change. Therefore, there's going to be continually more placed on the American consumer in terms of money that they're going to have to spend in out-of-pocket expenses and non-medical related costs. So as our premium, average premium of our policies continues to rise because we revise our policies to reflect what the American consumer is having to pay, it is the combination of that and the combination of the average weekly producers, the yields, the growth for us. So by no means do I expect the average weekly producer growth to equal the total sales growth within the U.S. In fact, the comparisons that we had in Q1 and Q2 of this year for average weekly producers were weaker and their going to get more difficult in Q3 and Q4 this year. And so I expect those producer numbers to decline, or excuse me, the increases to slow down slightly. Not a negative, but just a slower rate of increase. At the same time it's still all very much in line with our target and our plan for 2007. And I still very feel very comfortable with our six to ten sales target for 2007.

Okay, so Paul, just to nail this down, what we're looking at here is -- is growth and weekly producers, plus growth in price, plus maybe growth in quantity per sale because gaps get bigger?

I guess quantity per sale, but what we're really looking at is just a total premium. Yes, that is correct.

Okay great, thanks.

Joan Zief, Goldman Sachs. Thank you, good morning. My question, just also relates to , the U.S. And what I wanted to know is how much do you have to grow your sales by on an annual basis for you to feel comfortable that you can keep premium income growing now at double digit rates on a more consistent basis? And , tied into that is, if it -- do you still believe that you need double digit rates in premium growth in order to drive the U.S. segment earnings up double digit or have you now looked and seen that there may be as more ongoing margin improvement that's available in the U.S.

This is Kriss, I'll take that. The growth rate in premium income and the growth rate in new sales in the U.S. are fairly highly correlated. That, you know, is a complex way of saying that -- that we need close to double digit growth in sales to get double digit growth in earned premium. Our persistency in the U.S. is not as strong as it is in Japan. Roughly 70% of our premium income in the U.S. comes from our base in renewal premiums that was in force at the beginning of the year. But that means that 30% of our premium relates to current period sales, our sales for the last 12 months. So that -- that means it's fairly highly correlated.

That being said, our sales when they were down in the 5% to 6% range, we were still getting close to double digit increased in earned premium because there's a lag, and if you have a weak quarter or a weak year, it doesn't necessarily mean that you're dragged down forever, it's just the numbers are going start heading in that direction. Regarding margins and profits,, we've been operating under a business model in the U.S. for stable margins. I'll say that in the last year or so we've -- and included in my analyst speech, the assumptions under which our earnings forecasts are based, we do expect some modest improvement in U.S. margins primarily related to modest declines in the benefit ratios associated with some of our newer product lines. So that being said, we expect a little bit of margin expansion in the U.S. to bolster growth in profits even slightly more than our growth in earned premium.

But is that trend on the benefit ratio more than, than a one-year event? Are you adding new products with different benefit ratios similar to Japan so we should expect an ongoing improvement in the benefit ratio and margins, say for several years to come?

It's not nearly as dramatic as it is in Japan, Joan. In the U.S., our pricing targets remain pretty -- pretty similar to -- to what they are on our current product line. We don't have anything in the pipeline in the U.S. product development scheme of things. that has dramatically lower loss ratios than our existing products. And we try to maintain the best value to the consumer in the U.S. market.

Yes, the one thing I would comment on is, is that in Japan of course, you have to remember, that, that what drove our profit margins up was primarily due to when we filed the policy, they rejected it and told us we couldn't sell it that cheap. And in the U.S., of course, we want to stay extremely competitive and we don't want anyone to undercut us. Well we know it can't happen in Japan, we want to make sure it never happens here. So we want to be careful about the profit margin.

Thank you

Tamara Kravec, Banc of America Securities. Hi. Good morning. Just looking at the performance year-to-date in sales, both in Japan and in the U.S., you're running at about 11.3% increase through the first half in U.S. and Japan, you're running ahead of -- of I think what you were expecting, so you haven't changed your sales guidance, do you feel like it's looking a little too conservative? Or what are your concerns or thoughts around your guidance there?

Well , I think the -- I will take the flat, the 4% increase in the second half in Japan and be thrilled. I am pushing them to be at the top end of the range, what I have told everyone publicly is, as is anything within the flat to up 4% will be acceptable, but for them -- Aflac Japan has not seen its marketing area paid a bonus in two -- almost two and a half years. So I want them to have a chance to make a big bonus. So I'm pushing them more now to just make a big bonus, but certainly that range is acceptable. As far as the U.S. goes, we are going up against an enormous fourth quarter. That's why we believe that our range is correct. We -- we're really not, I think we were up about 21% or 22% last year in the fourth quarter due to enrollment in one big account which we won't have this year to offset it. So that's the reason our conservatism. Compound will still be growing at right at 10% we think over the last two years but that's why we said this year we'll be closer to 6% to 10% because last year was up how much? About 12.5% or 13% something like that last

13.%.

13.1%, so that's why we said what we did. So no, I think -- I think it's exactly right on target.

Okay, great thank you.

Edward Spehar, Merrill Lynch. Thank you, good morning. I was wondering if you could give any sense, Dan, what percentage of that 800,000 of applicants that were denied coverage, do you think you have a chance of getting with the new product?

That's a tough number, but you know, remember of those 800,000, there's a large number of them we couldn't write under any circumstances. So if you cut it in half and say okay, 500,000, I mean, 400,000, then you -- then you've cut out 400. And of the 400 -- let's just put it this way, I just was talking to Ken before we walked in here, and I said, if 10% of them were available, that's -- that's roughly 80,000 and the premiums about double what the regular Ever is, so that would be equivalent to 116,000 -- 160,000 policies of normal Ever. If we wrote 80,000 of Gentle Ever. So it has some very strong potential for us. But we just have to -- we just have to wait and see. I'll give you an idea at the end of the third quarter, but remember, we haven't even started selling it yet. We don't even start until August the first.

Just remind us again, what is the average premium?

Well I gave you an example of a 50-year-old. And I believe it was like 5800 yen compared to 2900 yen, or something.

It's almost double.

It's almost double.

And that's -- that's per month, 5800 per month?

Yes, correct.

Thank you.

By the way, Ed, and it's extremely competitive even at a double rate. I want to make sure you understand that.

Suneet Kamath, Sanford C. Bernstein. Thanks, good morning. I had also a question on the new product. Frankly I was a little surprised to see the approval for August first sale given all the investigations that the FSA is conducting. So, my question is, is the insurance industry in general in Japan getting products approved with the normal frequency that we would have had without these investigations or should we be thinking about your approval as something that's rare in the current environment?

I really can't answer that, I can just tell you that we are getting approvals for what we need. I think the FSA , has been very pleased with our response to any inquiries they've had on any issues. And , and so I take getting these approvals as being a very positive sign on, from the FF -- from the FSA's perspective of how they view us. Now that's something I've surmised. They have not said that, but they have told us that they are pleased how quickly we have responded to any inquiries or requests that they've had concerning anything. And as I mentioned, we basically are finished. We're trying to reach, I think we're down to four policy holders we're trying to reach, and it's hard to believe when you're talking about as many policy holders out there, we have it down to four. Most companies will not be ready til November. But we've been down to ten for two months now. So we're just kind of waiting to see when they want us to submit it, and we'll submit accordingly. But we're about as close as we're going

Thanks. Maybe one quick follow-up for Kriss, can you give the expected benefit ratio on this new Gentle Ever product?

It's in the 55 to 60 range that standard Ever is. We have about the same expected benefit ratio, it'll probable be close to 55.

Colin Devine, Citgroup. Good morning. Dan I was wondering if you could drill in a little bit more to what happened with sales in Japan. Because as you highlighted certainly, the cancer sales are up dramatically, Rider Max, medical, life, other are all down significantly, but within that, what I want to understand is the gain really came from the affiliated agencies where you certainly expressed your level of frustration within the past as the independent agency sales actually were down about 10%. You made a comment about advertising and how that boosted sales. I'm trying to understand, I could have understood how that -- why that might have helped independent agents, but what drove the increase out of the affiliate corporates? Was -- was there some sort of sales promotion in and above everything else? What was going on there that drove them surprisingly boosting cancer sales for the first time in a while?

I think it's the rate increase that's going to take effect in September. Everyone knows it'll jump and get in before the rate increase and the agencies certainly understand that has been the predominant reason. Also, I think the campaign we've had in terms of Rider Pac and pushing it which is part of cancer insurance as well. So the agencies certainly understand rate increases and they understand that you have to fall in under a certain date. And so I think that's what's driven it. And frankly, we just haven't pushed cancer in a long time. Medical has -- we -- it's been hitting the airways, not only us, but other companies over and over again, and it's kind of refreshing to have something new. And although we've been in the cancer and business for a long, long time, we haven't -- we haven't brought it to the forefront like we have this year and so we think that's the other thing.

Okay, but just to be clear then, are we looking at something that may be more of a one-shot phenomenon with the corporate agencies? I mean this is their best quarter in terms of sort of percentage gains in multiple years. And is that really then tied to the September increases, basically means, come next month, you're going to know, we're really not see the back end loaded sort of quarterly sales pattern that you normally have. So that's sort of run its course and then we're still looking at -- then on the independent side, it still wasn't a great quarter despite the advertising. Is that fair?

No, well, yes, to some degree. But the other thing is Rider Pac is going to all of a sudden jump in for the agencies. They're the one that has the majority of the 800,000 people to call back on -- Gentle Ever, I'm sorry. They're the ones that have the opportunity to go back to their existing customers and also to the ones that were rejected and ask. My sense is that , when the life -- when the cancer business switches over, in terms of a push, they'll be the ones that will be the drivers of the Gentle

Okay and just a quick follow-up on Gentle Ever, if I'm writing the math right, just to make sure I'm understanding this, that if you pick up perhaps the 80,000 extra customers, we're looking at, if it all works out, you bringing in about an extra $4 million U.S. of premium per month. Is that about right?

I haven't run those--

I'm sure Kriss is there, can do that pretty quick.

Yes, I'd have to figure that out, let's see.

Okay, thanks.

Well if you assume a monthly premium of 5,000 yen, you're right around $4 million. If we write all 50-year-old males.

Right.

Andrew Kligerman, UBS. Hi. Wanted to get a little color around the product itself, the Gentle Ever and how it works. First, how does it differ if it -- well actually, Dan, you mentioned it had simplicity, could you describe the product in a little more detail?

Go ahead.

I'll follow-up.

It's basically the Ever product, which is -- which is simple. But people that have certain conditions that -- I don't have the details of the underwriting, that before we just rejected in the masses, we're going back and dividing them up into sub groups and see whether or not we can pick some of those people up, that the risk is worth it. Again, the thing that protects us again is that first year we only paid 50% of the claims if we -- if we see that there are claims filed at all.

I see, Dan, so the underwriting is -- is, the information provided is virtually the same, is that -- is that fair?

The information--

You know it's like when you apply for a policy, is the information requested the same whether it be the standard product or the Gentle Ever?

Well we -- if you're rejected by the Ever, then we give you a longer medical questionnaire that you have to fill out. And then we can tell you whether or not you would be accepted for Gentle Ever.

I see, and so -- and in terms of pricing, do you have a sense of how -- how much the pricing differs versus the competition in general?

I don't have the number in front of me, but it's significant enough that our -- that all of our field force tells us that we will beat everyone in regard to that. So you know, I'm going -- I'm going to say 20% better, but don't hold me to that. But it's not five or our agents would say it's basically the same rate.

And I guess just lastly is there some type of marketing campaign that's going to go with this that's going to be big?

Yes, but it won't be as national as it will be to focus in on the 800,000 people at first because the masses are still going to buy Ever. So it will be select marketing more so.

Have it, thanks a lot.

Sure.

Collin, this is Kriss, your --your number of $4 million a month is right in the ballpark on premium if we write those 80,000 policies.

Mark Lane, William Blair. Good morning. Just another follow-up on the new product. You know, in the past, you haven't had a lot of success, although I think you tried selling up market, you look at Ever bonus versus Ever half, or back in 2004, you talked about the opportunity to move up market and sell more expensive comprehensive products. Is this -- is this product focused on a -- on a different customer profile or is it the exact same market that you're selling to? Do you see any issues with your distribution not -- not having broad enough reach? Because in the past you always said your distribution has had broad enough reach to go up market but you've never really been very successful with that.

Yes. I don't consider this in any way up market. I consider these people that could not buy insurance with any of anyone initially until we started coming out with this substandard or there was one even available with the competitor. I think in terms of going into an account and there were a thousand people and of that there may have been 50 people that we didn't even try to write and of that 50 now, all of a sudden there are 25 people we can go back to and we can write. And in their particular case, they can't buy insurance from anybody so these 25 people now say, well, it's not price that's the issue with me, I'm just trying to get covered. There had been a few competitors that have just started it, and now we're going to be cheaper than them. So I feel like we'll start writing that business.

Let me follow-up with a comment on that. Somewhere we're a magnitude of 70% applicants or working people are considered in standard health and maybe 70% to 80% or this first layer of slightly unhealthy, they may have controlled diabetes or hypertension or something like that. Those are the people that are going to be eligible to buy the Ever product at the increased rate. So it's the same product, it's just a higher premium reflecting the higher risk of people with controlled diseases. And so it's not really up-scale. The other thing is our Ever product tends to be about the cheapest medical product available in the market. Because we don't -- we don't provide a lot of extra benefits over and above hospitalization, out-patient, and things like that. We -- we don't have a lot of cash return features in our medical products. So our rates tend to be lower than most products out there anyway. And Gentle Ever is just a continuation of that product philosophy.

Good enough, thanks.

Darin Arita, Deutsche Bank. Thank you. Most of my questions have been answered. But I guess just to clarify on the comments on the investment portfolio and exposure to sub prime mortgages, can you -- to what extent does Aflac have any exposure to it in either -- I know it's primarily focused on corporate fixed income, but within it's mortgage backed securities and I believe Aflac has started to also invest in CDOs.

Yes, this is Jerry Jaffrey speaking. You're correct, obviously the collateral risk from the sub prime mortgage situation is not completely predictable, but I can comment on our mortgage portfolio. I did comment a lot in the May (Fam) meeting and on the direct mortgage exposure or mortgage portfolio, and that really hasn't changed. In the U.S. we have a relatively small exposure, it's less than 5% of the overall exposure and it's all in AAA. DMOs, most of those are agencies issues, and so therefore they're conforming. Mortgages that underline the agencies do not issue any CMOs that we purchased that have sub prime mortgages in them.

In Japan we have, as I also mentioned in May, invested in a couple of different mortgage products, primarily in , mortgage pass through certificates issued by the Japan government housing loan corporation which are already AAA. And all those mortgages add -- well the mortgage standards in Japan are a little but different from the U.S., but essentially they're high quality underlying residential mortgages.

Let me turn to CDOs because I think there's been a lot of reports in the press that are somewhat misleading about CDOs, in term s of how there's been a lot of erosion in credit ratings of CDOs. I think almost all of those reports referred specificly to CDOs that are backed by sub prime mortgages to which we have zero exposure. But let me describe quickly what our exposure is. We've invested in 12 different CDO issues. All of them static, all of them synthetic. They are the total exposure on amortized cost basis is $290 million. Of the 12 issues, 10 of them were rated AAA at the time of issuance. Nine of them are still rated AAA, one of them is AA plus. The other two were rated AA at the time of issuance, I believe one of them is now rated single A the other one remains rated AA. Our collateral, or our credit requirements at the time of issuance is 100% of the credit exposure underlying the synthetic CDOs has to be investment grade. That remains our requirement. A couple of the underlying exposures have been downgraded to below investment grade. I think the largest exposure in any portfolio, and these portfolios typically run 100 to 125 names is four names that have been downgraded to below investment grade by either rating agency, (S&P) or Moody's. And that, I think, gives you a pretty good outline. Oh, one last thing on the CDOs, if you dig as deep as what the underlying collateral is on funded CDOs, the underlying collateral is all -- was rated AAA at the type of issuance, remains AAA, there are no sub prime mortgages in the collateral, it's all asset backed and there is one AAA rated European bank which provides senior note collateral. That's what you

Yes, thank you that was very helpful.

Okay.

Jeff Schuman, from KBW. Good morning, first of all just a clarification. The 800,000 people that didn't qualify for Ever, is that over the life of Ever? What was the time period of that?

Since 98.

It includes Rider Max.

It includes Rider Max.

Okay and are we at risk of maybe understating the opportunity by just looking at the bucket in the sense that, presumably there are people who maybe would have not expected to qualify for Ever and wouldn't have applied?

Absolutely, but I don't have any idea what the number is. Give me the second -- third quarter in under our belt and I'll give you a much better idea. But I just can't tell. But I do think it's a big market for us.

Okay and just one other one for Kriss, can you give us any second quarter statutory earnings?

We -- we still haven't finished them Jeff, we're -- we're a couple of weeks away, but they'll be -- they'll be inline. I mean the gap's going to indicate how the statutory's going to come out. We didn't have anything unusual in statutories. So it'll be -- it'll be inline with GAAP. I pointed out that those numbers are within 5% of each other pretty -- pretty much and it'll be in that ballpark.

And the strong first quarter stat operating earnings of about 0.5 billion, is there any reason to think that's not kind of reasonably (annualyzable)?

They're pretty consistent quarter-to-quarter. Sometimes realized gains will take them up or down, but I can't think of anything, sometimes taxes. The timing of taxes gets in the way of quarterly earning stability, but I can't think of anything that's going to cause it to be significantly different second quarter than first.

Great, thank you very much.

Eric Berg, Lehman Brothers. Thanks. Good morning. Can you talk about merging claims experience in the june quarter and the outlook? And by that I mean, can you talk about -- can you expand upon some of the issues that Sue Blank discussed in her presentation at your Investor Day with respect to length of hospital stays, the avoiding of false positives and other developments taking place in Japan's medical system that might be driving down your benefit ratio?

Eric, certainly the monthly experience is not something we -- we follow closely, I mean, we have monthly detail, but we don't, we don't think monthly results are indicative of a trend necessarily. That being said, we do measure all our experience on an annual basis. We tend to do a rolling 12 months to eliminate monthly fluctuations. In Sue's presentation, she highlighted the long-term trend toward the decline in hospital days and there's nothing in the healthcare financing environment in Japan that's caused that trend to change. So I'd say we'll stick with everything we told you at the analyst briefing. And no, there's nothing indicative in June that that would be unusual. I will say in the second quarter we went through a normal adjustment to -- we looked at our -- our claims experience -- cash claims experience in determining our incurred, but not reported, claim reserve and determined that -- that those were paying out a little faster than they had been. So we updated the factors, but that's a normal routine adjustment and didn't have any significant impact on our overall second quarter benefit ratio.

Thank you.

Colin Divine. One quick follow-up for the investment portfolio, just to make sure that I have the numbers. Can you give us the -- your holdings of residential mortgage backs, CMBS, and ABS as of the end of the second quarter? And then also, could you quickly review your process for determining , permanent impairments and I guess I'm particularly thinking about the Ford position where it's been underwater for several years

In the U.S.--

Let's go consolidated because I don't think it'll make a difference.

I'll have to get back to you on consolidated exposures for mortgages. We don't have it.

Mortgage backed securities, not --

I understand. We have no direct mortgage exposures, but we do not have any CMBS exposure. Do not have ABS exposure except as it pertains to underlying collateral in CDOs. That's all AAA, credit card exposure on that side.

Was that the $290 million.

No the $290 million is -- well yes, that is because it is the collateral that underlies the CDOs that provides -- these are funded. So that would be $290 million. And it would all be --

Maybe we can get this put in the -- in the Q this quarter. But to just split these out and give us a little more granularity on exactly what you hold so we can compare them to everybody else in the industry, it will be helpful.

It'll be a favorable comparison.

I'm sure it will, but it's always helpful to just have the numbers. And then if we can talk about the impairment decision process?

Well our impairment policy says that if we continue to believe that we will be paid on time and in full, that we will continue to hold our positions in whatever securities we own with -- with no intent to impair. That remains our credit view on Ford and frankly on every other fixed income security we hold at this time. So we have not changed our viewpoint on any of our below investment grade securities.

Okay, thanks for the clarification.

Is there anyone else in the queue?

Our last question comes from Steven Schwartz from Raymond James.

Hi guys, quick follow-up for Jerry. And then I have something different to ask. Jerry, you said that the CDOs that you do own tend to be of a synthetic nature? My understanding is that the credit to fall swap market isn't that huge? Are you comfortable with the diversification within those portfolios?

I'm not sure I understand the question. When you say not that huge?

My understanding is at least when it comes -- maybe it's not true for what you're investing in, but for the sub prime market, you'll tend to see CDOs have the same credit swaps in them. So you might be thinking you're getting diversification by buying a whole lot of different CDOs or going to a CDO squared, but it turns out you have a whole lot of overlap and a whole lot of correlation risk.

I understand your question. Yes, the sub prime, well really the CDOs market in the mortgage space is considerably smaller than the corporate space and a lot less developed. In the corporate space, you're probably looking at 600 names that in the investor grade universe, 400 to 600 names that trade with a reasonable amount of frequency. Do we have a name overlap in our portfolios? Yes we do. How big is each exposure on an overall basis? Well probably some of those names appear up to 4 times in the 12 portfolio -- the 12 CDOs that we've purchased. But when you consider that each -- each CDO has 100 to 125 names in it that still is a miniscule total on an overall basis in our portfolio per name.

Okay.

One last thing, if our CDO portfolio were to grow considerably obviously that would become an issue but this is still a strategy that we use at the margins, not a core strategy.

Okay, and then going onto something else. In June, I think it was, in one of the Japanese newspapers, it was reported that (Resona and Dai-ichi) had -- had tied up. It almost sounded like a (Zibotchi) type of relationship. And that Resona had agreed to sell Dai-ichi's policies. I'm wondering if this is an ongoing trend in Japan and whether that's a risk to -- to the possibility of you doing well in the bank channel market? And then is -- just as another aside, Dai-ichi sales through the banks will -- will they still be selling your cancer policies through the banks?

Tohru, do you want to answer that?

Yes, sure. I don't know what the objective of Dai-ichi to make the investment in the Resona. the reason it has -- is that their sale of Dai-ichi will be -- will not be exclusive in anyway. The reason that we'll continue to sell other products in addition to the Dai-ichi. So I don't think that this is an -- I don't know whether there are similar deals following up these ones, but I don't think this is a major issue -- a major threat to our sales in Japan.

Okay great.

I think the real answer you want to know is we still expect the bank channel to be very big for us.

Okay, and will Dai-ichi be selling your products?

Yes, they will be. Yes, whether or not they sell their product to the others.

Okay great, Thank you.

Folks, we're at the top of the hour so we're going to conclude our call. Again, thanks for joining us this morning and if you have any need foe follow up please feel free to call Robin or myself on the tool free number. Thanks again.

This concludes today's teleconference thank you for attending. You may disconnect you line at his tome and have a good day.