美國家庭壽險 (AFL) 2007 Q3 法說會逐字稿

Welcome and thank you for joining the third quarter earning release conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may wish to disconnect at this time. Now I will turn the meeting over to Mr. Ken Janke, Senior Vice President, Investor Relations. Sir, you may begin.

Thank you, Susan. Good morning everybody, and thanks for joining us for our third quarter call.

Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Toru Tonoike, President and COO of Aflac Japan; Paul Amos, President of AFLAC and COO of Aflac U.S.; and Jerry Jeffery, Senior Vice President and Chief Investment Officer.

Before we begin today, let me remind you that some of the statements we'll make in this conference call are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective 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 most recent press release from last night for some of the various risk factors that could materially impact those future results.

As usual now, I'd like to turn the program over to Dan, who will give us an update on our operations in the U.S. and Japan and talk about the quarter and our outlook. I'll follow up very briefly with some financial highlights, and then we'd be happy to take your questions. Dan?

Good morning, and thank you for joining us. Let me first say that I'm very pleased with our performance in the third quarter and for the nine months of this year. Based on the results, I remain confident in our ability to achieve our objective for 2007. As the leading contributor to our consolidated financial statements, we continue to be very satisfied with Aflac Japan's operating and financial results. Our persistency rate remains strong at 94.8%. We're on track for total revenues to increase in line with expectations of a 4.5% to 5% increase for the full year.

Pre-tax earnings were also strong and consistent with our annual target, and we remain encouraged with our progress in the sales area. Aflac Japan's total new sales in yen were up 2.2% in the third quarter, which was consistent with our objective for the second half of 2007. As you will recall, Aflac Japan's first half results exceeded the management bonus target. However, even though we achieved our goal in the first half of the year, receiving that bonus is not automatic. It is also contingent upon sales coming in, flat to up 4% for the second half of the year.

I'm sure you'll remember my comments on the second quarter conference call about my belief that Aflac Japan sales would be up in the second half of the year. Now that the third quarter results are in, I believe we're on track to achieve our sales target. However, I don't want to leave you with the impression that it's easy. I'm convinced we made the turn, but we still have a ways to go before I can say I'm satisfied with our sales growth in Japan.

Like the first two quarters, our third quarter cancer product sales were very strong with cancer life sales up 21.8%. In addition to advertising and promotions that supported our cancer life product, we believe sales in July and August were also enhanced by our agents' focus on selling cancer life in advance of the scheduled rate increase on new business which occurred on September 2. This increase reflected the adoption of the new mortality table.

Not surprising, cancer life sales declined in September, and we expect cancer insurance sales to remain somewhat weak for the balance of the year. However, we still believe there is a very large underpenetrated market for cancer insurance in Japan, and we are intent on maintaining our leadership position for that product. To that end, we introduced a new cancer product called Cancer Forte on September 2. This is the first major revision we've made to the cancer product since we introduced 21st Century Cancer in 2001.

Cancer Forte pays outpatient benefits for 60 days compared with 30 days of our old product. This means Cancer Forte offers the highest level of outpatient coverage in the industry. It also offers two new features that consumers should find attractive. First, if the policyholder is diagnosed with cancer for the first time, we pay the policyholder an annuity from the second year through the fifth year after diagnosis. This is in addition to the traditional up front first occurrence benefit.

The second new benefit is called Premium Support, Premier Support, where we arrange for a third party to provide policyholders with counseling and doctor referral services when diagnosed with cancer.

We were also encouraged by the improvement in medical sales during the third quarter. For the quarter, medical sales were basically flat which was significantly better than the declines we've experienced during the last several quarters. In fact, medical sales were 9.6 billion yen in the third quarter were the best we produced in a year.

We believe one of the reasons for the improvement was due to the newest medical product called Gentle EVER. You'll recall that on August the 1, we launched Gentle EVER, a non-standard medical product. However, we believe the product really did not start gaining traction until September due to the emphasis on selling cancer life before the pending rate increase. During the third quarter, we sold approximately 9,500 Gentle EVER policies at an average annual premium of 118,600 yen.

I consider this product launch to be in line with our expectations, and I remain optimistic about the outlook for Gentle EVER based on initial sales, as well as the response to our television commercials. When we compare the initial post-advertising response for Gentle EVER to EVER and EVER Half, we found that Gentle EVER generates substantially more inquiries than the other products post-advertising.

Having declined medical sales coverage to approximately 800,000 consumers since 1998 due to various health conditions, we know there's an attractive market for this type of medical product in Japan. I believe Gentle EVER will be an effective means for us to extend our reach to new consumers and further segments of the medical market.

As you may know, the insurance industry updated its data for underpaid claims on October 5. For the most part, Japan's media characterized the update as a significant increase in both the number of cases and the yen amount per underpaid since the data was first reported on April 13. However, in looking at the current data for the industry, much of the difference was related to the so-called failure to notify type of underpayment.

You may remember that most companies could only provide very rough estimates for this type of underpaid claims. By contrast, our numbers in April were pretty firm and also very low. Although we recently reported 26,700 cases of delayed interest payments on cash surrender value at 75 yen or $0.66 per case, the amount is immaterial.

In total, we reported 1.9 billion yen of underpaid claims in April. Earlier this month, we revised the number to 2.1 billion yen, all of which has been reflected in our financial statements. By substantially completing the claims review earlier in the year, we've been able to devote resources in other areas, such as further preparing for sales through our bank channels.

I know that many of you have read Japan's press and have asked about whether the opening of the bank channel could be delayed. For the last month, the FSA, in consultation with political leaders in the Diet has been deliberating on this issue. Two days ago the LDP approved the FSA's plan to open the bank channel in December. In turn, the FSA plans to review the market conduct rules that apply to banks selling insurance.

The FSA will draft the final of the proposed changes to the existing rules and ask for public comment in time to meet the December 22 deadline for opening. Obviously, we are pleased that the bank channel will be open as scheduled, but I want to remind you that we do not expect all banks to immediately begin selling third-sector products. Instead, it will take some time for the momentum to build in that channel.

That said, we belief Aflac is ready and perhaps better prepared than many other insurers in Japan. We also have a very strong brand and remain the leading seller of cancer insurance and medical products in Japan. At the same time, Aflac Japan has extensive long standing relationships with more than 60% of Japan's banks. Although it's difficult, the size of the opportunity, we're convinced that bank distribution will add to our sales growth, and I believe we're in a great position to sell through the new channel.

We are also focused on increasing the size of the traditional sales force. In the third quarter, we've accrued 774 new agencies which was a full 4.6% lower than a year ago. We know that recruiting has become more challenging due to the tighter labor market in Japan, but I still think we can do a better job in that area. To improve recruiting, we've increased the referral incentive amount to encourage agencies to refer sales people to Aflac. We are also allocating more resources for recruiting events at the sales offices around the country.

At the same time, we're implementing an incentive bonus for the territory sales that reach certain levels of recruiting. In short, we're focusing a great deal of effort and resources on getting in front of candidates to present Aflac sales opportunities.

I continue to believe that we've turned the corner in sales. As I mentioned, our objective is for sales to be flat to up 4% in the second half of the year. I still think it's a realistic expectation for this year. When we release fourth quarter results in January, we will tell you about our specific sales objective for 2008. But I can tell you that I expect to see further improvement.

There is still a very strong need for our product in Japan, and I believe our future sales growth will benefit from the expansion and improvement of our existing distribution sales, as well as the bank channel. In addition, I believe we've positioned with the best product in the marketplace in Japan.

Now let me turn to Aflac U.S., which has been performing very well all year in virtually every area of the operations. Our top line and bottom line results for the third quarter were consistent with our expectations for the full year. The persistency of the U.S. business has remained stable through the nine months of the year compared with the same period last year, and we again experienced strong increases in total new annualized premium sales.

In the third quarter sales rose 11% to $368 million. For the nine months, new sales were up 11.1% to $1.1 billion, once again a significant number of our state operations generated strong sales results. During the third quarter, 50 of the 95 Aflac state operations produced double-digit growth during the quarter, and another 34 states had sales results that were flat to up 10%.

The extensive changes we've made throughout our organization in previous years, especially on the distribution side, has been the driving force behind our improved sales momentum. We remain committed to providing better training to our sales associates and all levels of sales coordinators, and we've been following through on this commitment. We still believe these training efforts are producing the intended results.

As we have stated repeatedly, we remain intensely focused on building the number of average weekly producing associates rather than just recruiting new agents. In keeping with this approach, we did not establish an official recruiting target this year. Accordingly, we're not surprised that recruiting has been running behind 2006. However, the third quarter we recruited approximately 6,200 agents, and we will likely recruit more than 24,000 new associates for the full year.

That is a significant number from which we can grow our producer base. In terms of producers, the average weekly producer growth grew 5% to approximately 10,700 in the third quarter, and for the first nine months average weekly producers rose 6.1% over last year. As you've heard us discuss before, our sales objective this year is a 6% to 10% increase. Although we've been running ahead of that range all year long, I want to remind you that once again we face very tough comparisons in the fourth quarter. But with the nine months under our belt, I do expect to achieve our sales target for the year.

We remain convinced that the U.S. is a vast underpenetrated market for our products. Just about every day I pick up a newspaper or see a news segment on TV that reminds me of the need of Aflac's insurance. At the same time, I believe employers and workers alike are gaining a better understanding of how our products can help fill the need. Further, I believe that we have put in place the right combination of products, distribution and brand recognition to tap into the opportunities in the U.S. market.

Overall, we remain pleased with Aflac's financial condition. Our balance sheet is very strong, reflecting a high quality of investment portfolios. The credit rating of our holdings are high, with only 1.9% in below-investment grade category . In addition, we do not have investment exposure to subprime lending markets.

As we previously discussed, we recognize that we have excess capital in our Company, and we want to deploy that capital in a manner that is in the best interests of our shareholders over the long term. We continue to view purchasing our shares and increasing the cash dividend as an effective use of excess capital.

We bought 2 million shares in the third quarter. Through the nine months of this year, we purchased 9.1 million shares. We anticipate purchasing a total of 12 million shares for the full year, which represents a 20% increase over last year, and our cash dividend paid in 2007 will be significantly greater than a year ago.

This year's cash dividend will be 45.5% higher than in 2006. Going forward, we expect to grow the cash dividend faster than earnings. Increasing shareholder value has always been and will remain a top priority. Our principal means of accomplishing this is through the opportunities we've identified in the two markets which contribute to consistent and attractive earnings per share growth.

For 2007, our goal remains to produce a 15% to 16% increase in operating earnings 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 want to remind you that I have my sights set 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 2007, I still believe there is a reasonable and achievable objective that we can meet. And beyond 2009, I think we can see many years of double-digit earnings

Thanks, Dan. Let me briefly follow up with some of the third quarter financial highlights, beginning with Aflac Japan. Starting in the top line in yen terms, revenues were up 4.3% for the quarter. The operating ratios pretty much fell in line with expectations. The benefit ratio continued to improve over last year. It was 63.7% in the quarter, down from 66.1% a year ago.

The yen did not weaken too much to the dollar versus the prior year. As a result, there was not much impact on yen investment income from dollar sources. The expense ratio for the quarter was 19.1% compared with 18.5% in 2006. As a result, the pre-tax margin rose from 15.4% a year ago to 17.2% in the third quarter of '07.

With the expansion of the margin, pre-tax earnings increased 16.7% for the quarter, excluding the impact of the weaker yen on Aflac Japan's dollar denominated investment income, pre-tax earnings were up 16% in the quarter. On the investment side, yields in Japan were little changed from second quarter levels as measured by an index of the 20-year JGB. Yields averaged 2.19% in the third quarter compared with 2.17% in the second quarter.

For the third quarter, we invested our cash flow in yen securities at 3.23%, including dollars the blended rate was 3.89%. The portfolio yield at the end of the quarter was 4.06%. That was down 3 basis points from the end of June, and 12 basis points lower than a year ago.

In looking at Aflac U.S., total revenues were up 10% for the quarter. The operating ratios for this segment also were in line with our expectations. The benefit ratio improved slightly and was 53.1% compared with 53.4% a year ago. The expense ratio was 30.6%, basically unchanged with a 30.7% in '06. The profit margin, because of the lower benefit ratio, rose to 16.3% compared with 15.9% a year ago. Pre-tax earnings were up 12.3% in the quarter.

In looking at U.S. investment activities the new money yield for the quarter was 7.01%. That compares with 6.61% a year ago. And the yield on the portfolio at the end of September was unchanged from the second quarter and 16 basis points lower than a year ago.

In looking at some other line items for the quarter, as Dan mentioned, we purchased 2 million shares in the quarter. The average price was $53.43, and that brings the total number of shares purchased for the first nine months to 9.1 million shares. The debt to total capitalization ratio at the end of the period was 15.9% compared with 17.3% a year ago. Non-insurance interest expense in the quarter was $6 million compared with $3 million a year ago, and parent company and other unallocated expenses were $6 million in the quarter. That compares with $15 million a year ago.

The expenses were somewhat higher in 2006 due to a write-down of some parent company investment assets and in addition we had higher investment income at the parent company this year than we did in the third quarter of '06. The operating profit margins improved for the quarter on a consolidated basis and the pre-tax margin rose from 15% to 16.5%. The after tax margin also improved and was 10.8%, up from 9.9%. On an operating basis, the tax rate was 34.6% versus 34.1% in 2006.

As reported, operating earnings per diluted share rose 18.1% to $0.85, which was a bit ahead of consensus. Although the yen was slightly weaker than a year ago, there was no impact -- not a material impact on operating earnings per diluted share for the quarter. However, for the nine months, the weaker yen has reduced operating earnings per share by $0.03. Excluding the effect of the yen, operating earnings per diluted share were up 15.1% for the first nine months, which is right in line with our objective.

Finally, let me comment on the earnings outlook for the 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 into a target of $3.28 to $3.31 in operating earnings per share, assuming the exact same exchange rate that we experienced in 2006.

However, as I mentioned, year-to-date the average yen/dollar exchange rate is weaker than it was a year ago. If the yen remains, or averages, 115 to 120 for the balance of 2007, we would expect reported earnings per share to be in the area of $3.24 to $3.28 for the full year. Under that scenario, fourth quarter operating earnings per share would likely be $0.75 to $0.79 per share . The current first call estimate for the fourth quarter was $0.82.

For 2008, our objective is a 13% to 15% increase in operating earnings per diluted share before the effect of the yen. We're now ready to take questions and we do want to make sure that everyone has the opportunity to ask a question, so please limit your questions to one and then there might be a chance for you to follow up if there are additional questions later. Susan, now we'll turn it back to you for

Thank you, sir. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Jimmy Bhullar from JPMorgan. Your line is open.

Hi. Thank you. I have a question for Kriss on the U.S. business. Your margins this quarter were 16.6%, that's the highest, I think, since the fourth quarter of '02 and prior to 2006 margins had actually declined for three, four straight years. Now the last couple of years seems like they're expanding. If you could just talk about, one, if there was an aberration this quarter that caused the benefits ratio to be unusually low, and also secondly, on what your expectations are for margins for the U.S. business in the U.S. longer term? Is this a market that could actually see expanding margins similar to what you've seen in Japan or not?

Okay. The benefit ratio did improve this year compared to the last year, but it was consistent with what it had been in the first two quarters of this year. We were, in the U.S., 53.1 to total revenues -- benefits to total revenues, which is the same as the second quarter, first quarter was actually 52.7. Prior year was 53.4.

We mentioned during our analyst meeting that in 2007 we expected the U.S. benefit ratio to be a bit lower in 2007 than 2006. We are attributing that to two things. One is somewhat lower benefit ratios on some of our newer products, specifically dental, vision and specified health event all are showing somewhat lower loss ratios today than we original anticipated when we priced them.

I think I've said it a number of times, but when we price something, we tend to be a little conservative early in the policy life, and once we get enough experience to see where claims are actually going to come out, we start recognizing that, giving it greater weight in the financial statements, and that's what's going on there. Relative to the longer term, though, we don't expect to see the statement kind of margin improvement in the U.S. that we have been seeing in Japan.

We've got more stable loss ratios in the U.S. in terms of not as much improvement in medical utilization as there is going on in Japan. In Japan, the average days in the hospital continued to decline as the government puts more pressure on the health care providers. That's not going on in the U.S. It's already been achieved in the U.S. So really, we're seeing more an effect of the lower benefit ratios on newer products, but our core products, cancer and accident, are going to be about the same.

Okay. Thank you.

Our next question comes from Darin Arita, Deutsche Bank. You may ask your question.

Hi, good morning. Thank you. I guess, with respect to Japan, can you talk a little bit about what Aflac is seeing in terms of the banks and how they're preparing to sell additional insurance products through their -- through the bank channel?

Well, it's still a little bit early to talk in great detail about it, because, in fact, when I was to give this speech this morning, I had it written three ways. I had it written that they would approve it, they would delay it, or they would not approve it, and that's how -- how little time we've had to really study and know exactly what will happen.

In terms of saying bank deregulation, I can tell you that we assumed from day one, it would be approved on December 22 and have not wavered from that in any way, and figured that if it was backed off on, that would be up to them. But it wouldn't be us caught off guard by not being prepared. So we have had contact with all the mega banks and many of the regional banks and have had discussions with them.

Saying that, it's now in review with the FSA in terms of any changes they're going to make as they take dialogue from everyone to find out what the final out come will be. I guess the main point I can make to you, though, is that we are prepared as well as we can be prepared, and we're ready to go with training and following through in every aspect of it in terms of that December the 22 date.

Does it seem, though, that the banks are preparing now for anticipation of that, or are they waiting until December 22?

Well, some of them are preparing now. Some of them aren't. It's not -- it's one of those things where you've got so many banks. Toru, do you want to make any comment?

Yes. I think Dan is right and it seems that we -- it looks like December 29 declaration is more likely than before. More banks are making efforts to make the December 29. So yes, we are making progress and so are the banks.

But I think that the answer you're looking for is, some of them, as it is in all industries, when they're innovative and up front and will be ready to go, others will be slow and others will be very slow. But -- so we think it will be phased in over next year. Do we think that on the day it deregulates that everyone will be in a three-point position ready to go? No.

Do we think a couple will? Yes. Are we trying to make everybody ready to go? Of course, but it's just not going to happen. But we are working toward that.

But I would say the first quarter you would see very little impact from the banks, and the second quarter it might grow some, and then the third quarter more so, and (inaudible) going forward. It's like new products as well where when you introduce a new product, at first it's slow catching on, and then it builds with time. I think bank deregulation sales will build over the next year or two, and then level back off.

All right. Thank you.

The next question comes from Eric Berg, Lehman Brothers. You may ask your question.

Thanks again. Good morning, Dan, and to your team. So you've gone from having sharply negative sales growth, declining sales, to less negative to less negative and now positive.

How do we know, how do you know, that's what I'm really asking, how do you know -- what do you see in the numbers, maybe numbers that we can't see but you see that leads you to believe that this is not just a bottoming out? But I think you said we've turned the corner and we're sort of getting better from here.

How do we know we're not at the bottom of -- we're not at the bottom of the U and we're going to stay there as opposed to what you're saying, which is that we're actually getting better, we've sort of turned the corner and on the way up? What can we see in the numbers that speaks to that?

Well, I guess my first comment is I've got a lot more confidence talking today than I did back in January. In January, when I thought we had turned the corner in the second half, it was anticipation of what I saw that we were planning on doing. I'm actually seeing now many of the things that we've put in place working out.

I told you, first of all, that the best thing that would help us, which is, I hate it that way, but it's due to low numbers in the third quarter, the fourth quarter and even the first quarter in terms of we had negative sales, and just easy comparisons is the first thing.

The second thing is Gentle EVER. We're always in the business of product development, trying to find ways to expand the products, and so Gentle EVER is something we believe will pick back up, or will continue to grow. Cancer Forte -- just to give you an idea, cancer insurance for July and August were up, like, dramatically, like 50%, and then down in September, which brought it to 21% for the quarter.

But that generally will level out, and then Cancer Forte, or the new product, we think will start climbing back probably next year, maybe even -- you know, it will do better in the fourth quarter than it did in September, and then it will just -- it's kind of like -- think of cars, when all of the sudden cars come out with new rate increases. No one want to buy the first month, because they remember last month. But then they get used to the rate increase, and they go on.

In our case, there is a rate increase; but in addition to it, there's benefit increases, so we think that will catch on. And then, in addition to that next year, we think that the banks will help us to some degree.

I had made the statement that I'd like to see $50 million in new sales from banks the first full year, and then I think it will grow a little more the next year and then may level off. And that's a very conservative number.

So I think those three things, in addition to that, which is more subjective than objective, would be the recruiting and the training especially. We're trying to train our people better. We certainly have seen the results of that in the U.S.

It's a little slower to prove it in Japan, but that would be the combination of things that I think will make the difference going forward. And Kriss wants to say something.

Eric, just to address the notion of the bottom of the U, so to speak, Dan has talked about what we're doing to address that, but I think it's important that there are two other things just macro going on in the market. One is you still have the consumer need. The consumer need is out there, it continues to increase. The health care expenditures in Japan continue to rise despite the flat population.

People are going to insure their exposure, they're going to turn to Aflac for their supplemental insurance needs, and the second thing is I don't think in the consumer mind the negative sentiment associated with the claims problem is behind us just yet. We updated a survey that we had previously done and 30% of the people we surveyed said they didn't want to buy insurance from anybody back in April, and that's still at a 27% number in August. So consumer sentiment hadn't really improved, and I think that's going to turn the U, too.

I have a follow-up question and I will requeue to ask it.

Okay. Thank you, Eric.

The next question comes from Steven Schwartz, Raymond, James and Associates. Your line is open.

Hey, good morning, everybody. A question maybe for Toru. Do you have any sense on the Gentle EVER sales what you've seen so far? Admittedly, it's not a whole lot of history. Are these new -- the sales that you made, are these new, new clients to Aflac Japan, or are we mining people who've come to Aflac Japan who were denied coverage for whatever reason and the agents are going to them? Who are the agents hitting, first and foremost, I guess is the question?

We have been trying to approach both types of potential clients, the ones who have been denied before and the ones who have never been approached by us.

Okay. Toru, do you have a sense of -- you're approaching both, but where the sales came from, which part of that market most of the sales came from?

I don't have the exact numbers yet, but the things I have been hearing from the field force is that we have been receiving a pretty good acceptance by both groups.

Okay. Great. Thank you.

Next question comes from Mark Lane, William Blair & Company. Your line is open.

Good morning. Another question on Gentle EVER. Dan, at the analyst meeting we discussed the idea of cannibalization and the fact that because this was a new market segment, that there wasn't much risk regarding cannibalization of existing products. But it seems like the sales people in Japan, that there's the potential for just cannibalization of time, that they only have time to sell one product.

You mentioned that everyone was focused on cancer sales, and therefore there wasn't a focus on it in August. So can this really be additive to sales growth and productivity, or are the sales people just going to start selling this and not selling the cancer product or selling whatever else they're trying to sell?

Well, Mark, the 30 years I've been in the business, and from that standpoint, any sales area, what the salesman has is time, and how he spends that time can vary. I think, though, the ultimate question is, of that time that they're spending, can they spend it in a more efficient manner because of easier sales because of the consumer's interest in the product.

So whereas you may have a product you've been selling that's become a little stale and a little more difficult to sell, if you give them something new, it can energize them, and they can go back and add and sell more simply because the consumers have more interest in it. So from that standpoint, that's how you get surge in production.

Also it just comes from having more people selling for you. Bank deregulation will put more people selling for us than ever before. So that's going to be another positive. But there is -- when I think of cannibalization, I normally use the term to mean that they actually sell a product, and then they turn around and they latch that product and resell them another one. But in terms of the way you're saying it is they're selling a product and they're cannibalizing their time by going another direction.

And that is always the case in any salesman's life is what is the most efficient way to spend their time. And I think new products makes their life easier and more efficient, and ultimately increases our sales. And I am encouraged about Gentle EVER. I will say this. In my little talk that I gave, I made the comment that we had more inquiries about Gentle EVER than any other product.

That is not surprising to me, because in that list of the people, you've got people that can't buy insurance that are going to try to come to us that we've got to cut through and say, "No, this particular group can't buy it." And we know that we have 800,000 people that we've turned down that we can go to, and of those, I don't know what percentage, but half probably can't get it no matter what.

So we're going through underwriting issues in terms of growing pains of being very conservative and protecting our base, and it's slowed down our Gentle EVER sales, to some degree, of what I think will grow as we become more efficient, because we're only going to underwrite in the most conservative manner and then loosen as we become more comfortable with it.

And here's the scenario I see over the next several years. We would first come to a person and offer them an EVER product. We can either reject the app or decline it. If we decline it, we would then move them to Gentle EVER. When we move them to Gentle EVER, we would either accept them or decline them. When they go to Gentle EVER, they will pay about double the premium. If we decline them again, then they can't buy insurance under any conditions.

So that's the process we'll be going through. Whereas before we would write them EVER. If we would decline them, that was it, and it was over. So this step 2 is going to allow us to pick up a lot of people with some additional risk, but plenty of premium to cover it.

Okay. Appreciate the thoughts.

Sure. Sorry, long answer.

That's okay.

Our next question comes from Colin Devine, Citigroup. You may ask your question.

Good morning. Two clarifications, and then just to get into the question. First, Ken, with respect to where our first call is now and your suggestion on earnings for the fourth quarter were you were basically guiding down first call?

Second, for Kriss with respect to Jimmy's question at the beginning, I'm not really sure what you said about where margins are going in the U.S. Historically, they run in the 15% range. This quarter, I believe, was an all-time record for Aflac U.S. Is it more now at a 16% level going up, or are you really saying, "No. We're going to be where we were historically." So if I could get that clarified?

And then for the question -- let's turn to Aflac Japan. I was wondering if we could drill in a little bit deeper into the actual distribution channels? All right. And also, if you could give us some sense of how much cancer rates were up on September 2.

And if I'm looking at the distribution channels, Dan, if I recall, you referred to, what, a couple quarters ago that a lot of the corporate agencies -- I believe your term was "fat and happy." Now we're looking at nine-month sales up 4%.

But at the independent channel, which has been your growth channel -- you know, corporate agency sales were down about 14 -- were down significantly, have been flat for many years. If we focus on the independent channel, you're down about 8.7% for the nine months.

What's going on there? Because it seems you're getting the impact of the cancer rush has come through in the corporate agencies. Why aren't we seeing the sales increase in the independent?

Okay. That's a lot of questions.

Well, it's just if we really focus on the independent and the distribution channels and then the two clarifications. I just want to make sure I --

Okay. Colin, this is Ken. Let me quickly take the first clarification. The guidance that we gave in the press release and reiterated this morning at $0.75 to $0.79 assumes that we achieve, but do not exceed, the 15% to 16% target for the full year excluding the currency, and it also assumes that the yen averages 115 to 120 for the balance of the year.

The reason for the first assumption that we don't exceed the target is because we would expect higher expense ratios in the fourth quarter for both the U.S. and Japanese segment, just as we had last year, due in part to the just timing of budgeted expenses, as well as the allocation of some additional advertising, resources for Aflac Japan.

So you're going to see much higher expense ratios, again, in the fourth quarter than we've been running both quarter and year-to-date so far in both segments.

Thank you.

Okay. And I'll go ahead and cover the U.S. margin thing. Let me say that I expect that our expense ratio will be fairly consistent going forward at about 31.5% of revenues.

I think we're sort of in a [3] zone for benefits, and I don't expect that to improve much anymore. So I think we're in the 15.5% range on the margin, subject to what goes on with investment income in Aflac U.S. We have been moving more cash out of Aflac U.S. into Inc. to support accelerated, or share repurchase, higher share repurchase in 2007 than in 2006, and also a higher corporate dividend.

So there could be a little bit of effect on investment income going forward. But all in all, I'd say I'd expect the '08 margin to be about flat with the '07 margin for Aflac U.S.

Thanks, Kriss.

And then one of the questions you asked me was the rate increase on cancer is about 12% to 13% on average. The one thing I would tell you is with the corporate agencies, they have the largest block of customers as well as potential customers that they can go back to and offer the products.

Again, I still would characterize most of our corporate agencies as being "fat and happy." That's just a fact. It's always been one. And trying to change them is another challenge that we have, and we continue to work toward that.

We did see improvement this year. We saw improvement, but not to the extent of the way I want to see it improved. They still were able to go back and do mail-outs again to existing customers to say, "Here's the existing cancer product, and we were advertising on TV about it and you can get in under the rate increase," and they had a surge in business for that.

So that is a short-term fix for what is a long-term problem of trying to get more one-on-one sales or more Intranet sales, but finding ways to have more interactions. We are having some luck with some corporations where we're doing it through telephone operators where they have set it up. We've done it through service shops.

So it's not to say it's been a total failure, but some of them, just frankly, have made a lot of money, and it's very difficult to get them to change. But that is the difference between why the independent agents have been slower during this period of time versus the corporate agencies.

Are you satisfied with the independent, or is that a disappointment to you?

I'm not satisfied with anything when overall sales for this year are down. So I want to see our sales do better overall with everyone. I'll never say I'm satisfied with anybody down. So I am dissatisfied.

But I feel like what we have done to change from what -- when you were first following us, Colin, was nothing but a corporate agency company in Japan, to today a Dai-ichi Life, a distribution system with direct sales, and now a new distribution system with bank channels. I'm pleased with the way that's going, but we have to work on our independent agents. We need to hire more people. That's going to be the challenge, and we have to train them better.

But, you know, there is some cannibalization with agents and production. When the bank channels opens up, to some small degree you'll see an impact with it hurting independent sales because there will be so many bank channel out there selling that can have some impact. And our agents, of course, worry about that.

But just as they worried about Dai-ichi Life, it is better for them to sell for us than it is to sell for competitors. So from that perspective, they'd much rather have it this way.

Dan, thank you for your candor.

Sure.

Our next question comes from Andrew Kligerman, UBS. You may ask your question.

Great. Good morning, everyone. I just have three clarifications, and I won't ask any questions at all, because I don't want to be selfish and take up the other analysts' times. So just three clarifications.

One, the inquiries, Gentle EVER, Dan you mentioned earlier that there was a big pickup in inquiries. I'd like a little more color on that. Dan, you also mentioned that there were recruiting bonuses, and I want to get a sense of what that is, how that might influence recruiting, and then lastly, on the regulatory environment, Kriss was talking about how sentiment is still negative, and I want to get a sense of when that environment might calm down? Is November when it all kind of calms down and then we see a big pickup?

Okay. Let's say the recruiting bonus is for the territory directors, and it's a small bonus, but we've never done that before, and it's just a way of trying to get our top people focused on recruiting. What we've said to our territory directors is, if you make your sales objective, then you have a recruiting bonus. If you make this recruiting number, you make an additional 10% on top of that. And there's several that right now are going to achieve that, several obviously won't.

But whereas this time last year, they were only worried about sales and everything else, it's a little more balanced, and I think they're looking at the recruiting from that perspective. I guess, going back to your first question about Gentle EVER, the reason the inquiries, in my opinion, have picked up is because there are people that were turned down by a lot of companies, not just us, that all of a sudden see that we've come out with this new product and want to buy it.

There are also people that we won't sell. I always use the example of burning houses. People come out with new homeowners insurance and a lot of people with burning houses want to buy it, and those we can't sell.

And so there are a group of people that are calling us that are uninsured because of bad health risk that we won't be able to pick up that we're also having additional calls about. But if you cut through the clutter of that group of people, it's still really a new market for us.

These are people that we just weren't writing in the history of Aflac or specifically since the history of medical insurance, and it's going to be a good market for us. I think it will be a spike to some degree over the next year because we'll go back and visit these people that we've never offered to before, and then you'll just move forward through that process that I talked about earlier where you'll be offered medical insurance when you become of age.

Then, if you can't be insured, then you would go to the Gentle EVER product, and then if you couldn't buy it, you couldn't buy anything. So it will grow over time. But initially, we've got this whole new group of people that we weren't going to be able to cover. And, Kriss, you want to --

Yes. On the last thing, the claim sentiment and the like. I think the air is going to start to clear, Andrew. In the second quarter it hadn't cleared yet.

October 5, companies were required to report to the FSA current status of claim investigation. We reported, most of the other large companies reported. We're substantially done. It's basically behind us. Some of the other companies are not yet complete. They still have more work to do.

But as that works through the system and the other companies start finally reporting, we got virtually no negative press out of the October 5 report. And we think it's going to be behind us, and I think gradually the media will start comparing the different companies' reports, and we ought to look pretty good relative to the industry, in my personal opinion.

That's not really a Company position, per se, but I think the air is going to start to clear as the media gets all this behind them.

Excellent. Thank you.

Our next question comes from Ed Spehar, Merrill Lynch. You may ask your question.

Thank you. You can call it a clarification or a question, but I have one. (laughter) Could you talk about the degree of competition in the non-standard market versus the standard market, and specifically are the domestic players in this segment?

The question is, is there competitors in the market? There's one -- only one -- there's two now. There's two. Go ahead and answer it, Toru.

Yes. There was one company before we sold the substandard medical. But then we started to sell, and then other companies followed us. Now there are two other companies other than Aflac selling a similar type of product.

One domestic, one foreign.

Thank you.

But our product's the best. Let's be clear on that. (laughter)

Our next question comes from Jeff Schuman, KBW. You may ask your question.

Good morning, Ken. I'm wondering if Jerry is on the call, because if he is, I'll ask an investment question?

Yes, he's here.

Okay. I'm just wondering, given all the revaluation in the fixed income market --

(laughter) We do have a U.S. operation.

What's that?

Go ahead.

I was just wondering, given all the revaluations in the fixed income markets over the last several months, I'm wondering what Jerry's thinking is in terms of repositioning the portfolio or redirecting new money investments, and in particular given your pretty conservative exposure to corporate credit risk, are wider spreads an enticement at this point, or is he more cautious going forward?

I guess the way to answer that is, as you pointed out, most of the investments we've made over the past couple of years have tended towards the high quality of the credit spectrum. And what we've seen over the last couple of months is more opportunities in that area at wider spreads.

So we're seeing a lot of really high quality offerings at spreads we never thought we could achieve. So we continue to emphasize that area. I still think that in the lower quality spectrum, there will be much more revaluation in our low-rated and below investment grade credits.

We still haven't had any real significant defaults in that space, and so I think people still have somewhat of an optimistic outlook on their credit viewpoints. So we're still going to maintain a high quality orientation until we see real value in other areas.

Great. Thank you.

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

Thanks. Good morning. I'm going to set a new standard and ask absolutely no questions, because all of my questions have been asked and answered. Thank you.

Thanks Tamara.

Suneet Kamath, Sanford Bernstein. You may ask your question.

Thanks. Just, again, a question on Japan. I apologize.

I guess what I'm trying to figure out is if cancer is going to slow in the fourth quarter, given the pull forward of sales, is Gentle EVER going to be able to offset that? So the question is if I look at the $9.1 billion of cancer sales in the third quarter can you give me a sense of what the contribution was from September so I can compare that to the $1.1 billion of Gentle EVER sales, realizing that there will probably be a bit of a ramp-up with Gentle EVER as the distribution starts to understand the product more?

Suneet, this is Ken. We really don't talk in detail on monthly sales numbers, except with this case, I would say that for the cancer sales they were up huge in July, up huge in August, and down in September. But we really don't -- we're not really going to parse it anymore more than that.

Can I just ask one follow-up? If we look at the year-ago quarter then at $7.5 billion of cancer sales, would it be fair to assume that that was sort of more evenly spread throughout the three months?

You know, it's hard to say, but remember, too, that in both segments, this is especially true in Japan -- you do see a skewing of sales very late in the quarter where we get an abundance of sales that come in at the very last week or two. So I'm not really sure you can look at that and draw any conclusions from it.

The only real conclusion we were trying to draw was the fact that that rate increase made the business surge -- pre-grade increase made it surge and post made it fall off, and what we were just trying to show all of you is that we still know what we're talking about, and that we can tell you when there's going to be peaks and valleys and changes, and we were just giving you some information to know that.

But we don't want to break down the other, because I've said this before and I'll say it again. It's 13 weeks of production. It's still hard for us to be able to set trends based on that alone, and when you go down to four weeks, it's just not fair to give it out, because it can send you the wrong messages that we don't want to send you. And there's so much volatility in the market based on our sales versus the real financial results that we think it gets skewed and is misleading to people.

Okay. That's fine. Thanks.

All right.

Susan, I'm showing right now that we are one minute before our hour mark. We can take one very, very brief simple question so we can give a brief answer, and then we'll have to conclude our call.

Thank you, sir. Tom Gallagher, Credit Suisse. You may ask your question.

I guess the consumer confidence survey in Japan or, I guess, the percent of consumers that wouldn't consider buying a product due to regulatory concerns, and that number was north of 30%. Now, Kriss, I believe you said it was down to 27%?

Right.

Right.

Can you give a little context of to what that number means? Is it realistic to think that if now close to a third of all consumers polled aren't considering buying, when the dust does clear on the regulatory front is there a percent of the respondents that you think just aren't really in the market to buy insurance?

I mean, is that number going to permanently stay at 20, because if that number is potentially going to approach zero, I would think that could be enormous from a sales momentum standpoint. Is there any sense you can give us on that? Thanks.

I don't really know. I don't think we know the answer to that, Tom. But I would assume -- I would infer, from just general speculation, that the number that would probably never buy insurance might be 10%, something like that. But still, if you bring 20% of the population back in the market, it's a hell of a big move.

But I still want to go back to we're holding for a flat to up 4% for the second half of the year, and we plan on making it.

Thanks.

In Japan, and we're going to make our numbers in the U.S., even though you didn't ask about them. We're going to do very well there.

Again, we're showing that we've hit our hour time limit. For those of you who weren't able to ask questions, I apologize. We are at an off-site location today, but [Robin] and I are both accessible for questions if you would like to follow up.

The best thing would be to send me an e-mail and I will get back with you just as soon as I possibly can. Again, thank you for your time. We look forward to talking with you again.

This concludes today's conference. Thank you for joining us. You may disconnect at this time.