美國家庭壽險 (AFL) 2007 Q4 法說會逐字稿

Good evening, everybody. If I could get your attention, please? The clock says 6:40, so for the interest and the benefit of those on the Webcast, we want to try and start on time.

So first let me welcome you and thank you for joining us for our year-end presentations for 2007. Let me start with an introduction of those joining me today from Aflac Incorporated, beginning with Dan Amos who is Chairman and CEO. Kriss Cloninger, President and CFO; Paul Amos who is President of Aflac and COO of Aflac U.S.; Robin Mullins, Vice President of Investor Relations, and I'm Ken Janke, Senior Vice President of Investor Relations. And again thanks for joining us.

Let me remind you that some of the things we'll be discussing today are considered forward-looking statements within the guidelines of Federal Securities laws. Although we believe these statements are reasonable, we can give you no assurance that they will prove to be accurate. Obviously the actual results that we discuss could differ materially from those that we talk about today.

I'd encourage you to look at our quarterly Press Release from last night to see some of the various factors that could materially impact our results in the future. Again, I want to remind you that the meeting is being Webcast. If you have anything electronic that will beep, buzz or shake, if you could make it as silent as possible, we would appreciate it. First I'm going to ask Dan to come up and give us some thoughts on the outlook, based on our conclusion of 2007. I'll follow-up very briefly with some numbers and then we would be happy to take the questions you have.

Dan?

Thank you, Ken. Good evening, everyone and thank you for joining us. I think you'll agree that the final quarter of 2007 concluded another great year for Aflac.

In 2007, we achieved our sales objectives in Japan and in the United States, and more importantly, we met our financial targets last year and produced record financial results. I was especially pleased that for the 18th consecutive year, we increased operating earnings per diluted share by at least 15%, excluding the impact of the currency.

Now, let me talk a little bit in more detail about the accomplishments last year and the outlook beginning with Aflac Japan. As the leading contributor to consolidated financial statements, we were very satisfied with Aflac Japan's operating and financial results in each of the quarters of 2007. Our persistency remains strong at 94.7% and our top line was consistent with our budget for the year, and the benefit ratio continued to improve as we had expected. As a result, pre-tax earnings growth was again strong.

We were also encouraged with the progress in the sales area. Following the disappointing sales in 2006, our primary task was to turn around our sales in 2007. However, we entered 2007 facing a weak and challenging marketplace. Like 2006, the market was cluttered with competing medical products and consumer confidence was depressed, due to the extensive claims payment issues in the industry.

As we repeatedly discussed last year, we expected sales to decline in the first half of 2007 and be flat to up 4% in the second half of the year. Consistent with our expectations, we were pleased to see that our sales results improved early in the year and increased to 2.5% in the second six months of 2007.

Sales in the fourth quarter were up 2.7% to 30.3 billion Yen, and I think there are a few reasons for the sales improvement that took place in the second half. Clearly, the comparisons were easier than the first six months of the year, and we also continued our efforts to enhance our traditional distribution system.

In particular, we remain committed to improving the effectiveness of our salesforce and to make sure we had better training. By the end of 2007, approximately 3,300 newly recruited sales associates have been trained through our new training program. Although the new sales basic training program has only been in place for about a year, we have seen better production from new agencies than we had prior to implementing the program.

Recruiting has been more challenging, due to the tighter labor market in Japan, but we're still focused on increasing the size of the traditional distribution channels. And remember that we are adding a significant number of licensed agents this year through the bank channel, which will help mitigate the impact of weaker recruiting.

I believe Aflac Japan's new products will also play a significant role in improving sales. Medical sales were strong in the fourth quarter, rising 16.8% over 2006. Stand-alone Medical up $10.7 billion for the quarter was the best we've produced in the last two years. Clearly, the fourth quarter improvement in medical sales reflect the success of our Gentle EVER product, our new non-standard medical products.

During the quarter, we sold 15,600 Gentle EVER policies and related annualized premium of 1.8 billion Yen and it accounted for approximately 17% of our medical sales in the quarter. In fact, since we began marketing this product last August, Gentle EVER has become the number one selling non-standard medical product in the marketplace today.

Following the rate increase that took effect on September 2, we were not surprised that cancer insurance sales were down in the fourth quarter, however, they declined only 1.7% for the quarter, and cancer insurance sales were up 12.9% for the full year. Due to the renewed focus on the product, cancer insurance was our top selling product category for this year. We expect cancer insurance sales to remain strong in part because of the successful introduction of Cancer Forte, which is the first medical revision that we made to a cancer product in six years.

With Cancer Forte, we increased outpatient benefits to offer the highest level of outpatient coverage in the industry today. In addition, at our traditional first occurrence benefit, this product also pays an annuity to the newly diagnosed patient from the second through the fifth year that they are first diagnosed. It also assists policyholders with counseling and doctor referral services, through a third party diagnosis of the disease.

Last year also brought the U.S. positive news in distribution area, that benefited Aflac Japan in the long run. The first development was the approval of the over-the-counter insurance sales through the bank channel that took effect on December 22. As we discussed, Aflac has extensive longstanding relationships with a majority of Japan's 400 or so banks.

By the end of January, we had agreements with 41 to market our products through more than 3,300 branches nationwide. Of these banks, 12 of them are selling only our products at the present time. We believe that we have established more sales agreements with banks than any other Insurance Company operating in Japan today, and we expect those numbers to continue to grow.

However, I'd caution you that some banks are being very conservative in their sales approach because of the compliance issues with selling insurance to the customers. In addition, many banks won't start selling until April 1, which marks the start of the fiscal year in Japan. Yet, I continue to believe we are in great position to sell our products through the new channel.

We are also excited that we've been chosen by Japan Post to be the cancer insurance provider through a network which operates 24,000 post offices. We believe Japan's Post selection of Aflac reflects the quality of the products and the overall strength of the Aflac brand, a reputation for quality, customer service and strong support we provide to the salesforce.

I'm not able to discuss exactly when sales will commence or how many postal outlets will initially offer our products, but I do hope to have more details by the time we release the first quarter results in April. Needless to say, we believe this is a great opportunity for both Japan Post and Aflac.

I believe there's still a strong need for our products in Japan, and I think we're positioned to have a better year in 2008 than we did last year from a sales perspective. Our objective is to increase sales 3 to 7% this year, which we believe is a reasonable expectation. Because it will take some time for the bank channels to have an impact on our business, our sales might start off a little slow this year. However, I expect Aflac Japan to achieve its sales objective for 2008 while also producing financial results that are consistent with our budget.

Now let me turn to the U.S. Operation, which had a great 2007, achieving both its marketing and its financial objectives. You heard me say repeatedly last year that we faced a tough sales comparison in the fourth quarter due to a re-enrollment of a very large account in 2006. Despite the tough comparisons, sales were up 5.9% to $473 million in the fourth quarter, which was a record quarter for the Company.

For the year, total new annualized premium sales increased 9.5% to $1.6 billion, another record. That compares with an objective of 6 to 10% increase in sales in 2007.

As we mentioned in our Earnings Release, a change in processing of conversions helped the fourth quarter sales. In the past, we counted production for conversions based on the effective date of the conversions. Beginning in 2007, we will include conversions in the production based on the application date, just as we do with our new sales.

Excluding the $8 million impact from this change, sales were up 4% for the fourth quarter and 8.9% for the year, which is still consistent with our sales objective that we wanted to achieve. And considering the great year we had in 2006, we are very pleased with our results in 2007. I am convinced that the renewed sales momentum in the United States is directly linked to our efforts of our distribution side of our business.

In the last few years we have strengthened our sales management infrastructure through a sales coordinator growth. We have supported that infrastructure through new and extensive training programs at every level from our new associates to our veteran sales coordinators. We have also committed to growing the size of our salesforce, although as we discussed, the approach has changed a bit.

As you know, we did not establish a recruiting target for 2007 and we expect that recruiting would be lower than it was in 2006; however, we still recruited 5,500 new sales associates in the fourth quarter and more than 24,200 for the full year. That is a significant base from which we can grow our producers, which is the highest distribution priority we have. In that regard, we are very pleased that the number of average weekly producers rose 5.4% to approximately 11,600 producers and 6% to 10,900 for the full year.

We also believe our commercials and our branding message have benefited our results. Our commercials are more, are just 30 seconds in terms of entertainment value but they also show that Aflac's products help people following a serious medical event. We're expanding our advertising medium to print, radio, and online advertising.

Tonight, I'd like to show our newest commercial, which we [appropriately] call orangutan. This commercial helps us not only maintain strong brand awareness but also brand definition. And I'm going to show it two times because sometimes you miss a little bit of it, so if you'll run the commercial, we'll let you see it.

[Video Presentation]

As you can see, the commercial begs the question, we're going to do it once more--

[Video Presentation] You know, this commercial has tested very well for us in all of the statistics that we saw on it and what I can tell you is that it begs the question: What does Aflac duck have in common with the Orangutan? And the answer is not much and that's the whole point of the commercial, that there's only one Aflac and all of the research says that it's working very well, a lot like the goat commercial that you saw that we ran last year.

Overall, I'm very pleased with the results and the direction of our U.S. operations. All signs point to a growing need for the types of products that we offer, and at the same time, I believe the employers and workers alike are gaining a better understanding of how our products will help fill their needs. With the effective combination of products, distribution, customer service and brand, I believe we're poised to continue to have strong sales growth.

Our sales objective for 2008 is to have an 8 to 12% increase and we expect to achieve that. However, as I mentioned in the year-end release, first quarter sales would be weak in part because of the shift in the conversion premium in the first quarter of 2008, from the fourth quarter of last year.

In addition, we got off to a little bit slower start this year, following a very strong push by our salesforce at the end of the year. Yet, I remain encouraged about the opportunities in the U.S. market for the year and beyond. We estimate that we have only penetrated about 7% or 5.9 million businesses in the U.S. with fewer than 500 workers. That suggests that there's a vast market of potential payroll accounts and customers for Aflac to reach in years ahead.

Now, turning to Aflac Incorporated, I believe we're well positioned to grow our Company in 2008 in a way that will continue to benefit the shareholders. We have retained our 2008 objective of increasing operating earnings on a per diluted share by 13 to 15% before the impact of the currency. And as I've suggested in the press release on Tuesday, we are more optimistic that we will grow at the high end of the range this year.

It is our intent to accelerate our full share repurchase of the 12 million shares into the first quarter of this year. This accelerated purchase will be funded through internal capital. In addition, we anticipate increasing our share repurchase from 12 million shares to a range of 12 to 18 million shares this year. I mentioned at the analyst meeting last May that I would not do anything in the short run that would jeopardize our growth rates in the long term. Accelerating our buyback and increasing our share repurchase in 2008 is consistent with that view.

Not only will these actions benefit our results in 2008, they better position us to maintain our strong record of growth in 2009 as well. We will still maintain very high capital ratios to support our ratings. Although we have not yet finished our statutory financial statements for 2007, we believe that our RBC ratio will remain strong.

Our balance sheet is still marked by strength and conservative investments. The credit ratings of our holdings are high with only 1.9% rated below investment grade, and we do not have any direct investment exposure to subprime lending markets.

In addition to repurchasing our shares, we're also committed to increasing the dividend. In 2007, we raised the dividend twice. As a result, the cash dividend per share in 2007 was 45.5% higher than in 2006. And just last week, the Board of Directors increased the quarterly cash dividend by 17.1% to $0.24 per share. At that indicated rate, the cash dividend in 2008 will be 20% higher than in 2007. We expect to increase the cash dividend at a faster rate than earnings growth going forward.

I'm still focused on increasing operating earnings per share by a minimum of 15%, excluding the impact of the Yen for my first 20 years as CEO. I actually feel more confident about achieving it today than I did at the analyst meeting back in May. We're in a great business that generates consistent and predictable top line results and our margins have expanded over the last 10 years and we believe the margin improvement will continue.

Beyond my first 20 years as CEO, I still think we can achieve another 10 years of double digit earnings per share growth. Both Chris and I believe that is reasonable expectations in the long run. I want to reiterate that we don't expect our earnings growth to abruptly slow. Instead, we believe that the growth rates will grade down incrementally over time. And as we look ahead, we believe that strong earnings growth will reflect the underlying earnings power of the insurance operations in the U.S. and in Japan. It also reflects our prudent approach to deploying excess capital in a way that benefits our shareholders.

Now I'll turn the program over to Ken. Ken?

Thank you, Dan. I'm just going to briefly run through some of the financial highlights, kind of by walking through the segment details in the P&L. If you look in your kits you will see a copy of these slides if you care to follow along and make some notes.

Let me begin with Aflac Japan, which is clearly still the largest driver and contributor to earnings that accounted for about 72% of pre-tax insurance earnings last year. Our results in dollar terms were just modestly impacted by the weaker Yen for 2007 versus 2006. The average exchange rate was about 1.4% weaker last year than it was for the prior year.

In functional or local currency terms, our targets -- our results were consistent with our targets. Premium income was up 4.3%. We had a 4.8% increase in net investment income in Japan in Yen. As you heard our persistency remains stable at 94.7% and as a result, total revenues were up 4.9% for the year to 1.3 trillion Yen.

In terms of operating ratios, it was pretty much what we expected throughout the year. We had communicated that our benefit ratio would continue to decline and it did and actually improved by 160 basis points for the year compared with 2006. You note from the release last night, we did add to reserves for a closed block of business in the fourth quarter of last year, and that added about 2 billion Yen to benefit reserves for an old dementia care business that we sold about 20 years ago.

Also, as you saw, we had adopted SOP 05-1, which relates to accounting for internal replacements or conversions. And as a result of that adoption we also saw movement in the benefit reserves of about a billion Yen release, which was offset by DAC. But as a result, the benefit ratio did improve and we would expect to see it continue to improve in 2008, right in line with the guidance we had given at our analyst meeting last May.

The expense ratio moved up a little bit. In our third quarter call we had commented that we'd expected expenses to skew toward the latter part of the year and they did. In addition, with the adoption of that accounting standard, we did again release some benefit reserves and it was offset by charging off some DAC related to that business, which basically offset but the margins still improved from 15.8 to 16.8% for the year.

As a result, we had very good earnings growth. Pre-tax earnings in Yen were up 11.8%. You'll remember that a pretty sizeable portion of our investment income in Japan is actually denominated in dollars through straight dollar investments or reverse dual currency securities. So when you kind of unwind the effect of the currency translation on the dollar income of Aflac Japan, you'd see the pre-tax earnings were actually up 11.3%, which is kind of the real functional currency look at Japan's earnings growth.

Although we saw a little movement in interest rates, it really didn't do much. We saw a little bit of a rise in rates and then a decline in rates, and the decline was somewhat offset by higher spreads than we had seen in the early part of the year. We did invest generally right in line with what we expected to for the year. Our new money rate in Yen was 3.05 and including dollars, the blended rate was 3.38%.

As you heard Dan say, the investment portfolio is still very conservatively postured. Aflac Japan had 1.9% of its securities below investment grade and on a consolidated basis, that was down from 2.6% for the prior year.

In looking at Aflac U.S., as you heard, it had a very strong -- this segment had a very strong year in 2007, and a very good earnings contributor last year. The top line, like Japan was right in line with what we'd expected. We had a 10.8% increase in premium income, investment income was up 7.5%. Our persistency rate, like Japan, was unchanged for the year, and in the U.S. case, it's 73.9% and as a result, the total revenue line grew by 10.4% for the year.

Looking at our U.S. operating trends, they were also consistent with our expectations. We had communicated that we expected to see a bit of improvement in the benefit ratio for the year for Aflac U.S., due to better experience on some newer lines of business. We basically saw that throughout the entire year.

We did have some movement in these ratios again because of the adoption of that accounting standard for internal replacements, which released about $14 million of benefit reserves but we wrote off about 5 million of DAC, so that influenced both the benefit ratio as well as the expense ratio. We also did, as we commented on the release last night, made a small addition to benefit reserves, also for an old closed block of business in the U.S. But we did see nice margin improvement last year. For 2008, we would expect to see relative stability in the operating trends from a benefit expense and margin perspective.

But we did have a very strong year as you can see, earnings were up 18.3% to $692 million. Like Japan, the U.S. was not a fun place to invest for a fixed maturity investor this year. We're fortunate our new money rate was the same as it was last year at 644. The overall yield though did continue to decline, reflecting lower market rates, and in the U.S, 1.6% of our investments were below investment grade. So like Japan, it had a very clean portfolio.

Just looking at some of the other items that make up the rest of the income statement contributions. Interest expense rose a bit to $21 million. This is on the $1.5 billion of debt that we have, which is Yen denominated and has primarily related to our share repurchase activities in the past. At the end of the year our debt to total capital ratio was 15.6%, which was down from 17.1 in 2006.

Our corporate expenses improved for the year by $10 million. We did have more investment income at the parent Company level because we had dividended some capital to the parent to position us for a share repurchase that generated investment income that offset parent Company operating expenses. And that's why we saw a bit of improvement there and we should see stability to improvement in 2008.

Our pre tax operating earnings were up 12.9%. We basically had a stable tax rate at 34.6 versus 34.5% in 2006. And on an operating basis our operating earnings after-tax were up 12.7% or 13.4%, excluding the effect of the currency.

There were a couple reconciling items you can see. We had lower investment gains in '07 than we did in '06. I should point out in '07, we did write down one of our assets, one of our investments, which was ISTC or International Securities Trading Corp. We had a very small position of $20 million and it got caught in the liquidity squeeze and we wrote down the value of that investment to zero in the fourth quarter. It was offset by a bit of gains so you didn't see a lot of movement in the quarter but we did have lower total realized gains in '07 than '06. And as you can see the effect of FAS 133 was basically immaterial in both periods.

Net earnings were up 10.2% for the year, or a little over 12% to $3.31 on a per share, per diluted share basis. And this chart, which you've seen I think now for many years, shows our operating earnings for the last few years with and without the effect of currency. The fourth quarter we picked up a penny from the strengthening Yen and that reduced the overall negative impact for the year from $.03 to $.02, so we're up 14.7 as reported, on an operating basis we're up 15.4%, excluding the effect of currency translation.

As we discussed in the release last night, there were a couple items that impacted fourth quarter earnings. They weren't really as material on a full year basis but that accounting change of internal replacements added about $0.01 to per share earnings in the quarter and for the year, and then the increase in benefit reserves for the two closed blocks in Japan and the U.S. reduced earnings by $0.03 per share.

As you heard Dan say, we've retained our objective of 13 to 15% earnings growth excluding the effective currency. This is the objective that we first discussed in our Analyst meeting in May of '07, and I'd like to give you some sense of how the year might play out at varying Yen scenarios, as we do every year. And there's quite a broad range here because we averaged last year 117.93 and that forms the basis of our guidance, but right now, the Yen is significantly stronger than that. The spot rate is about 106.5 to 107.

Last year, we had mentioned to you that we estimated a one Yen move on the average exchange rate for the year, equated to 1.3 cents in operating earnings per diluted share. We're going to get a bit more earnings from Japan this year than last year so that sensitivity is about 1.7 cents, so we're a little bit more sensitive to currency especially in the strengthening Yen scenarios from 105 to 115. But you can use this as a pretty good guide to help you with your -- check your modeling and to look at the guidance that we give and what your expectations are for the year. But as it stands right now, the Yen has averaged about 108 through the first month of the year. So we could very well be positioned to benefit from the currency this year for the full year.

Well, that concludes the brief comments that I have on our financials and I'd like Dan, Kriss, and Paul to join me. Again as a reminder we are Webcasting this presentation and for the benefit of those on the Webcast if you would please wait for the microphone. Heidi will have a microphone for us and let us know who you are, the firm you're with. And please try and limit your question to just one the first time around so we make sure everyone has a chance to ask a question.

Hi, Nigel Dally from Morgan Stanley. With the sales outlook for Japan, is it possible to break down how much is expected to come through the bank versus the traditional channels and whether your sales outlook includes anything for Japan Post.

Well, what I would say is that we started or we had the second half, we did a 2.5% increase, and so saying we were going to be up 3 to 7, certainly within that range I think it takes into account everything.

Now, we do not know what Japan Post or what the banks will do. It's just a guess on our part, but we think that totally incorporates it and we expect to have a better year than we had last year, and we do not think that it will peak next year necessarily. It may be even better year in '09. So at this point, I can't break it out.

There's certain things we can track. You know, I can tell you if we do a revised product what we would project but when we do something like the Gentle EVER, where it's totally different, we've never done it before, or go into a totally new market like Dai-Ichi Life like we did. It's very difficult for us to tell because we don't have the controls in place in terms of cutting on or cutting off the sales based on, because their distribution channels that are controlled by outside forces. So we just have to kind of wait and see.

I can tell you that I called on seven of the banks back a couple of weeks ago, and I can tell you as I said in my speech, that they are being very cautious and approaching how to get into the market because they do not want to have the regulators say they aren't selling properly or have done something. So they're spending a lot of time training, but I look for the momentum to grow at a very fast rate as we move forward.

And just as an aside by the way, as these channels start to take on greater importance, we will disclose the contribution in our statistical supplements so you'll be able to see what their contribution is.

Thanks. Suneet Kamath from Sanford Bernstein. Just to follow-up on the banks and the Post.

Is there anything different about the products that you plan on selling into either of those two channels, with respect to either the commissions or the premiums or the benefit ratio, and then how should we think about potential training expenses that you may incur as you start to get ramped up into those channels? Is that something we need to factor into our expense estimates?

Well the Post, the easiest one to start with because we haven't decided or they haven't told us exactly what they want but in an effort to try to make sure we adhere to their request, we're going to try to work out whatever type policy that they would want, but obviously we have had some talk to know that we believe we can get what they want.

As far as the banks, they have gotten more front end money. Not more in terms of cost from our perspective but more in terms of, they want advanced commissions more so than, say some of the individual agents. And so from that standpoint, it will be a little bit different but Kriss, the cost is--.

Profit margins are expected to be very similar.

Profit margins will be similar since we're picking up on the Internet.

Sure.

Does the difference and timing of commissions going to get taken care of with the DAC or how are we going to see that in your income statement?

Yes, to the extent --

Why don't you repeat the question?

Okay, the question was -- does the timing of any payment of commission get reflected in the deferred cost and the like? Yes, it does to the extent that the banks mostly want to accelerate the premiums. We have some limited pay products already in our portfolio.

The banks like the limited pay products and you normally get commissions earlier on limited pay products and some premiums are paid earlier. So some of that in terms of premium income recognition will be earlier and the deferred cost, the commission payout and deferred cost capitalization will be somewhat earlier, but we're required to recognize profits over the life of the contract, as opposed to the premium period. So the profit recognition should be similar to our standard products.

Tom Gallagher, Credit Suisse. Dan, it seems like your momentum in Japan has been gradually building, so I guess I'm a little surprised to hear you say the year is going to start off slow. Can you just give a little color on what's behind that? Is that because you're doing more preparation work for the new distribution outlets and can you frame that a little bit? Are we talking about sales potentially going negative from a year to year standpoint to start the year?

You know, I don't think sales will be negative. I don't know what they will be, but I don't think they will be. But I don't look for a big increase. I can't tell at this particular time, but I'm cautiously optimistic that it's going to be building.

What is happening right now is that a lot of our people are training the banks, therefore nothing is in production from the standpoint of our employees that help a lot. A lot of the internal staff that would help with all kind of things at the corporate level or whatever, we put this rush on but it was planned. We did other things in the fourth quarter, so no one's shocked that this is the way we did it. But we've got -- we're putting all of our resources into getting them trained as fast as we can. And so it's that training process of them kind of being in the starting block ready to go and we have to push them out the door and get them going, so that's why I say that.

Now, I will say from a training perspective, we have some things going on in Japan, and Paul will still be responsible for the U.S. but I'm also putting part of his bonus based on training and helping us in Japan because it worked so well in the U.S. I've got to make sure it carries over in Japan so I might get him to talk a minute about training and how we're transferring it over and what we're doing.

Obviously, we saw a lot of success with training in the U.S, beginning in 2005 coming in and putting a training department really centralizing that we saw that it had a big effect. That's taking what we believe was back to the fundamentals. That was going and saying these were things that the U.S. people already did, teaching sales techniques and standardizing those techniques in an area. It took us about 27 months really to get things up to speed. We came in beginning of 2005. Third quarter call of '05, Dan said it would take 18 more months. So you really saw that cycle happen.

In Japan it's different. You're talking about teaching techniques to people that are very different from the culture and (inaudible) that you see there. So how long is the time frame going to take? I really don't know but I can tell you that the ABT system that they've built, the standardization that's been done by [Sumi Kauwa's] team in Japan, I think is excellent. I think it very much parallels what we're doing, allowing for cultural adaptation. We continue to work with them on the individual side and what they're doing.

Obviously as Dan said there is some shift in focus within training to make sure that the tellers and different people in the banks are up to speed, but we believe from an individual standpoint, the things and changes they're making on training, should long term begin to yield better results, and of course, with the cultural changes it's a matter of time and we have to look to see where it goes from here.

Eric?

Thanks. Eric Berg from Lehman. Dan, I'm sure that you and your colleagues have done just a tremendous amount of thinking about the slowdown that has taken place in Japan. Really, over many years.

I mean, if you, getting away for a minute from whether it's going to be 3% or 5% or 7% up. If you look at the level of production at present, it's really not all that different from what it was just a few years ago. And so my question is, why do you think that is? And in particular, my question is do you think you've just had, you and lots of other companies, have had just sort of a string of bad luck, whether it was the issue with claims payments or the new disclosure law? Or is there something more sort of fundamental going on, which would be kind of surprising given how rapid inflation is in Japan, medical inflation and the rising co-payment, it's just surprising we've had this slowdown for so long. What do you think is really going on?

Well, there's definitely more competition out there. We've talked about that. We see that. We still are not allowed under the law to do a fair comparison. We cannot, they will not allow us to do that. We still have the best product at the best price, yet we have to be very careful of the way we approach saying any of that, and so that hurts us to some degree. So when there's so many new products and there's confusion in the marketplace, and you can't say, here is product A and here is product B, compare them, it's more difficult. But at the same time, if you want to reflect back three years and you realize that our profits are up 50% during that period of time, something is going right, and it reflects also in our ability to sell products with higher profit margins.

And so overall, although the sales may have slowed, the profits are there because of the higher profits and I think it's all about profits, and as long as we're not worried about getting too high a profit margins that we'll be undercut by our competitors with better products, then we're in good shape and we're constantly watching that. And I think that stems from the operating expense ratio and our ability to do that.

Now, going forward I think the opportunity is better going forward than it was three years ago because the channels broaden. There's more, you've got, now you've got Dai-ichi Life, you have of course our main traditional channel, which is the corporate agency structure that we've had since inception. We've created our own direct channel and we think it will grow. We now have Dai-ichi Life, we're now going to have banks, we're going to have postal and within that some will be up and some will be down but overall, I think we'll see continued growth in our sales.

Will it be the old days of, you know, 15% growth? No. But will it be substantial? Yes. Do I think we can grow to 15% the corporate level through 2009? Personally, I think we can although the Company isn't totally committed to it at this point. Do I think that we can grow for 10 years beyond that? Yes, based on these assumptions of these sales numbers at these levels.

So, I still think that it's a great market for us in Japan and I think it will continue to grow because I also am very encouraged about our new Gentle EVER product. If you go back and we're picking up niches that are making a difference, if you go back, take me for example.

If I bought this policy at 40 years old and now I'm 56, and I had something go wrong with me, I could not buy anymore insurance. Let's assume I became a diabetic, which I'm not, but let's just assume that I was. I could not buy the product. Well, under Gentle EVER, I would be able to buy it, therefore, we are broadening our market through products and new ideas or old products and a little bit more underwriting and much higher premiums to cover it, but we're doing different things to grow the business, and I really believe the U.S. and Japan both have enormous market potential long term for us to make those corporate objectives of earnings per share going forward.

Up here?

Thanks, Tamara Kravec, Banc of America Securities. In terms of your share buyback, you had mentioned it's funded with internal capital. Should we take that to mean that you're very comfortable with your capital position or is that capital that would have otherwise been deployed in other avenues, and in light of a potential recession in the U.S, how are you feeling about your capital position?

Well, we feel very strong and confident regarding our statutory risk-based capital ratios. Last year, we were at 600%. We moved a significant amount of capital, probably $600 to $700 million out of the Life Company into the Holding Company. And we still expect, even though our results aren't final yet, that our statutory RBC ratios will be higher at the end of 2007 than they were in 2006.

So we've talked about excess capital for years. The investment community has questioned me about it for years and we move slowly sometimes but we've finally become convinced that yes, in our statutory earning ability exceeds the rate at which we've deployed that capital. So in 2008, we expect to deploy some more of it. And this accelerated share repurchase, we entered into is basically funded by money we've already moved out of the Life Company into the parent Company, and it's like Step 1 of our Capital Management program in 2008.

Andrew Kligerman, UBS. Maybe Dan, you could give us a bit of the competitive landscape or just the landscape in Japan now as you see it, has the competition intensified or slowed down a bit and a little color on that. What's the regulatory situation? We haven't heard much from the FSA. And then lastly, you came out with the Gentle EVER product. Is there anything in the hopper right now that you might be working on?

There is, I'll try, there were several questions, I'll try to remember them. First is if there's a new product. We're always looking for new products but there's nothing we can talk about at this time that we've gotten approved, but we're constantly reviewing and looking at them. I will say I think that the Gentle EVER product will take us through this year, but we are looking at that.

The other question was the FSA. I met with the head of the FSA in January. I go and I meet with the insurance commissioner at least usually three times a year and I meet with the head of the FSA at least once a year. And specifically, I asked the question about, are you satisfied with all the things that we're doing in terms of addressing these issues, and he's much more of a politician at that level versus a bureaucrat at the insurance commissioner level. But I can tell you that I think he realizes that everyone, meaning the entire industry, is correcting the issues. They're serious about it and my gut is that it's kind of past us and everything is fine.

Saying that, no one but no one wants to make another mistake. The old shame on you, second time shame on me. We don't want to make anymore mistakes so, everyone is doing that. But I think we came out, when you look at all of it, I think we came out as a Company that was doing about as well as you could do under the circumstances, and I think we walked away. And I'm very pleased with our results and hopefully, we'll never have any other issues. But the size of the Company and the number of policies you got in force, it can happen again but I promise you one thing, it won't be from our lack of trying to follow every possible guideline that we can.

And the competitive environment, when I think of competition, I think of confusion more than better products. No one comes to mind. At every level, you know, think about this. We are in cancer insurance, we got the number one product; we're the number one seller. We get into medical insurance and as soon as we get into it we become the number one seller of medical insurance and then all of a sudden, we get into this new Gentle EVER or the substandard products that we offer. Now, we're the number one seller of it.

So we dominate the market as soon as we get into it. We're a little cautious. We weren't the first out of the block. We weren't the innovator in selling a higher premium medical product. We're very cautious in watching loss ratios and making sure we make the decisions, but once we know we got it, watch out. We're coming, and that's what's happened with us, so I still think we dominate that market, and there's no one out there that worries us.

If anything, the FSA's requirements and review of all the policies and procedures has scared all of the competitors more than anything else, and that everybody else, it's like a second tier product, and in our business, it's all we do, and so we watch it better. So they don't want to take a chance and make a mistake, so they're very cautious right now, so I don't worry about that.

And let me add one thing back on the product issue. Remember that Cancer Forte, it's the first major revision to our product, our cancer products since '01. It just got started in September. We'll be phasing out the older product, 21st Century Cancer Life this year. And if you toss too much product at one-time, you'll confuse them, doesn't matter whether it's U.S. or Japan. So we've seen a nice resurgence in the cancer expense business, and that should continue.

Do you feel like when the time comes you'll have something potent like Forte?

Oh, yes, that's the name of the game. You always got to have something new periodically to keep or to have a reason to go back. If you sell, remember if you're selling indemnity products, then any type of inflation at all you got to go back and add better products to cover that increase in the inflation, and that's part of the game we have, because we never rate increase based on the need for better product. You have a choice to buy it or not, so we have to do that. That's the way the system works with our Company.

Last point, the competition issue, so you're not seeing any major change? There's still a not of noise? No major shift in more or less?

No, and we track it monthly. And we'll give you more detail at the Analyst meeting in May, as usual.

Patrick Lemons, AVM Asset Management. So if you talk about 3 to 7% growth expected in Japan, that translates into 4 to 10, if you start in April basically annualized. So, I mean, I wonder how much of it is, for example, coming from cancer insurance to the post offices? Do you have a real expectation that that will be a successful product? How can you know? I mean it's a new product I would say through a new channel. How do you know whether it will be a success beforehand?

And then one other question, I've just spent a week here, lots of panic, although you don't look, if you look at the market actually there's no panic, but commercial Real Estate is the biggest problem right now it seems. Is there something which you could perhaps make use of? I don't know whether you invest in it a lot right now, but perhaps one panics is at the highest area of opportunities?

Well, first of all, in terms of investing in Real Estate, the only Real Estate we own is where we use it for operational purposes. Our investment income and our pre-tax earnings have such a high correlation that it's that predictability of earnings is what our investors have enjoyed and like, and that's what we've tried to do over the years and we have never gotten off track in the 18 years that I have been there, but back since the inception of the Company. What was the other question?

About Japan Post.

We don't know what it's going to do. We gave you a range of 3 to 7 and at this point, we can't tell. We're not even sure of the date on when we're going to actually have it approved to start selling.

What I said is the end of the first quarter which will be in April, we hope to have an update on more details of it, but at this point, as you can imagine in the numbers, we don't have a whole lot, anything in it but we're very comfortable with it and all I can go back to is last year at this time when I told you we would be up flat to up 4%, we ended up at 2.5.

We get a pretty good analysis and some things we've got to guess at. We don't know if this part will be a little bit less or a little more or this will be a little less or a little more but when you add it all together, we generally can fall within a range and we're very comfortable with that 3 to 7, and in April, maybe we can give you more update on the Post, as soon as we know more, we'll be glad to give you.

Let me add one thing. I mean, it's a new channel for us. It's not a new channel for insurance. I mean, Japan Post through comp is the largest insurance organization in the world, and they want to sell our cancer product, our cancer product has been a market leader since 1974, but we don't know exactly what that combination will do but they do know how to sell insurance and we know how to underwrite cancer insurance.

Thanks, Jason Zucker, Viva capital. Paul, my question is for you. Sales have been running very steadily for a long time. Maybe talk a little bit about the potential or what could be the potential for a sales slowing in the U.S. And let me just throw out two things that perhaps you could answer too.

One would be shrinking payrolls because of a recession and two, a few years back, a problem in the U.S. was more structural with respect to Aflac where you had to split territories and maybe talk a little bit about the structural issues there and how much you have to grow, to keep growing into your current structure. And maybe there's a third and I'll let you add that if there's something else you worried about in terms of hitting your targets.

The economy is not well correlated to what we do in the U.S, so it's a result of the fact that when people are out of work and payrolls start shrinking, generally our recruiting is easier and the fact of the matter is when we bring on more agents traditionally, we've been able to yield more producers.

Now again, we've made the shift to average weekly producers and I'm not trying to send a message of massive recruiting but in a down economy it does give us a boost. It, not necessarily insulates us by any means, but certainly gives us a chance to go out and produce more and see something positive happen as a result.

You asked about sales slowing. I can tell you that week 51, we divide all our weeks by number, and 51 was the second to the last week of the year. We had the best week in Company history and as a result, our agents pushed further into the year than I've ever seen them push and we talk a little bit about first quarter potentially being a little bit slow. It's just because they push that hard. They've been pushing hard for three years and they pushed the hardest I've ever seen them into this quarter and these are independent contractors who are going to take vacation when they want to take vacation.

And so the fact of the matter is could we see a slowing in a single 13 week period? Yes. Are we going to see a slowing of the U.S. Business? No. U.S. Business looks great. I am more confident than ever in what we are doing. I believe that the fundamentals that we put in place since 2005 in terms of training, in terms of the consistency across the organization, building the right leaders, hearing the right message across this organization are only better.

Add to that the fact that every day there are more articles about healthcare than perhaps any other issue out there. People are taking notice of what we're doing, before 2000, nobody knew what we did, nobody knew our name and nobody cared. Today, everybody cares, and the fact that we're out there and providing a product that people need, that each year is growing in need because of the amount of money that's being off shipped into an individual directly, I believe absolutely goes right to the reason there's tremendous demand for our products.

Overall, I'm seeing things onward and upward and I believe 8 to 12, we're 6 to 10 last year even though it was a down shift because on one big reenrollment and I think the fact we've shifted it back to 8 to 12 only shows you the strength we feel in the business and what's going to happen again. Again, I feel like this year, we've got some really good potential out there and did I answer it all or do you have another one?

How about structurally where you needed to go back and split territories? You've been growing and recruiting, where are you in that the process where maybe you have to go through some of that reengineering again. What do you see that we don't?

Yes, we slowed down. Well we went through a tremendous amount, through 2003, sales were going so well that we had people who no longer really needed to be in some of those positions. At the end of 2003 when the game was up and sales started to get much tougher we saw a massive turnover at those levels, so through '04 and '05 we really saw us have to regrade, bring up some of the leaders from above and below, and increase a trickle down effect of everybody else moving up to specific levels.

I believe we're much more consistent now. I believe we have a younger, hungrier workforce that's running our operations and I believe the tenure age is lower so it will allow us to be successful for a long time. I believe the infrastructure and the territory level we have in place, the 8 territories, is the right one. For us, we've maintained our State sales coordinator operations within a limited growth range over the last year and I believe we're doing the right things.

I think we've made some changes but there are always some changes. There are always going to be some changes. There are always going to be operations doing very well and there are always going to be operations not doing well. If we ever have a quarter where everybody is doing well I'm scared to death because we'll never overcome it the following year. We always want there to be some good, some bad, but overall, everything moving in the right direction. So Jason, I just feel like structurally we're there. We got the right people, we're still making changes, but I feel very confident about the team.

We've got to go to another venue tonight, so we have got time for one more question and then we have to go, I apologize. Bill?

Hi, nice to see you once again. I've mentioned this before, but isn't it axiomatic that the average return for the Japanese retired person is very poor by our standards and we know what little returns you get from postal savings and why this, I'm not asking to talk about a product, but why isn't that a huge market in terms of providing annuity or a whole life policy that would give them a superior return and compete with the mutual fund industry?

Partly because the yields available in Yen markets for short-term securities are very low. And when you match assets and liabilities, it just hadn't been a market that appeals to us. We've looked at selling asset accumulation products in Japan and there are really two main issues that we've dealt with from a strategic perspective.

One is with the low interest rate environment, are you exposing yourself to the potential for dis-intermediation and if we got a significant increase in interest rates in Japan, over some period of time, I used to be a lot more concerned about that than I am now, having experienced low interest rate environments for so long. But the second thing we've always come back to is do we have a distribution system in place that could really sell asset accumulation products that are fairly marginal in terms of profitability, compared to the products in the third sector, supplemental insurance, that are much more profitable? So from an overall perspective of, how do you most effectively utilize your distribution system to maximize profits? We've stayed with the supplemental insurance, and we feel like that's been a winning combination.

Again, thank you all for joining us tonight. We hope we see you again very soon. If you have any questions, please call Robin or myself at any time.