美國家庭壽險 (AFL) 2008 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen only mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Ken Janke.

Good morning and thank you, everybody, for joining us on our first quarter call. With me this morning is Dan Amos, Chairman and CEO of AFLAC Incorporated, Kriss Cloninger, President and CFO of AFLAC Incorporated, Paul Amos, President of AFLAC and Chief Operating Officer of our U.S. operations, Jerry Jeffery, Senior Vice President and Chief Investment Officer and Toru Tonoike is President and COO of AFLAC Japan and he joins us this morning from Tokyo.

Before we begin, let me mention the Safe Harbor. I'd like to point out that some of the statements in this conference call are forward-looking within the meaning of Federal Securities laws. Although we believe these statements are reasonable, we can give you no assurance they will prove to be accurate because they are prospective in nature. The actual results in the future could differ materially from those that we discuss today, so I would encourage you to please look at our press release from last night for some of the various risk factors that could materially impact our future results.

Now I would like to turn the program over to Dan who will talk about the quarter and some comments on our businesses in the U.S. and Japan. Dan?

Good morning and thank you for joining us today. Overall, I'm pleased with the way we started 2008. Although we just have one quarter under our belt, I believe we are well-positioned to achieve our objective of operating earnings per share growth this year.

Let me give you more detail about the quarter beginning with AFLAC Japan. As a leading contributor to our consolidated financial statements, we were very satisfied with AFLAC Japan's operating and financial results in the first quarter of 2008. In addition, our top line was consistent with our budget for the year and the benefit ratio continued to improve as we expected.

As a result, we again produced solid pretax earnings growth. I was especially pleased with AFLAC Japan's continued sales improvement. I hope you remember that when we released the fourth quarter earnings, we said that AFLAC Japan sales would start slow in 2008. Personally I thought the first quarter sales could be flat. That was largely because we knew it would take time to build momentum in the bank channels. In fact, only 1% of sales came from the banks in the quarter.

Yet despite our caution, we began the year with a very good quarter. Total new annualized sales rose 5% to JPY 27.6 billion. That result is much better than we had anticipated and in line with our annual sales objective. With bank sales still in their infancy, we believe our solid first quarter sales benefited instead from recent product introductions.

Medical sales improved sharply in the quarter, rising 17.6% over a year ago. Medical sales were helped by Gentle EVER, our non-standard medical product that targets consumers age 40 and over who typically would not qualify for our standard EVER product. During the quarter, we sold 12,400 Gentle EVER policies. Gentle EVER sales of JPY 1.4 billion accounted for approximately 15% of the medical sales in the quarter.

Since we began marketing Gentle EVER last August, it became the number one selling non-standard product in Japan. We were also pleased with cancer insurance sales, up 2.8%. We expected to see solid cancer sales this year in part because of the favorable reception of our new Cancer Forte product. This product is a first major revision to our cancer policy in more than six years. Cancer Forte increases daily out-patient benefits, adds an annuity for newly diagnosed patients and offers a cancelling and doctor referral benefit. On March 24th, Dai-ichi Mutual Life joined AFLAC Japan in selling Cancer Forte. Earlier in the year, we introduced a special cancer policy that allows existing policy holders to upgrade their coverage to that of the Cancer Forte.

In the first quarter, we sold approximately 54,500 of these upgrade policies. We believe this will be an effective means for enhancing customers' coverage while also leveraging our policy holder base to increase sales. We also believe sales of cancer medical insurance will benefit from the addition of our new sales channels.

As we discussed, we expect to leverage our longstanding and extensive relationships in the banking sector to secure a significant number of selling agreements once the banks could finally offer their products over the counter. That is exactly what has happened. At the end of March, we had agreements with 55 banks to sell our products.

That number rose to 90 on April 1st, and by mid year, we expect that number of agreements to be about 150 bank distributors. One reason we expect the numbers to increase is endorsement of AFLAC's products by the National Association of Shinkin Banks.

This association of about 280 Shinkin banks chose AFLAC as one of only four companies to provide third sector products. Not only was AFLAC the only foreign company chosen, but AFLAC was the only company selected to sell both cancer and medical insurance. Even though we don't know with certainty how much business the bank channels will generate, we believe this new channel will gain momentum as the year progresses.

We look for significantly better bank channel sales in the second quarter and this new channel should give us greater confidence in achieving our sales objective for the year. We are also very excited about the opportunity to sell Cancer Forte through an agreement with Japan Post network. As I'm sure you're aware, Japan Post chose AFLAC as the cancer insurance provider through their network company. Initially, we expect to sell through about 300 Postal outlets beginning on October 1st of this year. Needless to say, we believe this is a great opportunity for both Japan Post and AFLAC.

We also believe we are benefiting from the training initiative. New agents who have gone through the new associate basic training program have generated better production than those who started before the training program was implemented. Although recruiting has been more challenging due to a tighter labor market in Japan, we are still focused on expanding our traditional distribution channel. In that regard, we recruited 771 new associates, or agencies, in the first quarter, which was 14.9% higher than a year ago.

Remember that we are also adding a significant number of licensed agents this year through the bank channel. I firmly believe there's a strong need for our products in Japan and I think we are well-positioned to achieve our sales objective of a 3% to 7% increase for the year. We believe it's a reasonable target and we expect to produce strong financial results that are consistent with our budget for 2008. Now let me turn to the business in the United States.

We are pleased with AFLAC U.S. financial performance in the first quarter. Our top line was consistent with our expectations and our pretax earnings were better than our target. Total new annualized premium sales were up 0.4% to $353 million. We were not surprised that sales were sluggish. However, we did think that sales would be up about 3%. You'll recall that in the fourth quarter press release, we expected first quarter sales to be weak. There were a couple of reasons behind our thinking.

First, we pointed out that we had transferred $8 million of sales for the first quarter of this year to the fourth quarter of last year due to administrative changes that we had in processing conversions. Second, we also new that our agents, particularly our veteran agents, pushed very hard at the end of 2007, and as a result sales were sharply down in January. In addition, we had one less production day in the first quarter compared with a year ago. I'd like to point out that sales improved after the weak start of the year.

From the beginning of February through the end of last week our sales were up 6.5%. The number of average weekly producers roses 0.2% in the first quarter. However, the number of new average weekly producers are those who in their first year increased 2.7% in the quarter. Production of new associates rose 4.2% over last year, and in addition we were pleased with the growth of our new payroll deduction accounts which was up 8.5% over last year. That leads us to believe that the fundamental approach to building an effective distribution is still working and we continue to focus on that. As we've said previously we've been in weak economies.

We have found it easier to recruit because rising unemployment means salary jobs are more difficult to come by. We think the weaker U.S. economy resulted in good recruiting increase for the quarter. Recruiting was up 8.6% in the first quarter to almost 6,500 new associates. I know many of you have asked whether the U. S. economy is affecting other aspects of our business. As we've said before, we really have not experienced any material impact on claims or sales in past economic down turns. The last recession occurred in 2001 when our sales were up 29%.

That incredible sales growth was attributable to the success of the new AFLAC duck advertising campaign which could have simply mitigated any impact of the recession. Of course we recognize that the current economy is impacting consumers and we have seen lower penetration rates in accounts compared to last year. However, we are sure of one thing - the need for our products we sell have not changed. The incidence of cancer, accident and other serious health events does not fluctuate during economic cycles. In fact, I believe the need for our products is actually more compelling when the economy weakens because of the financial risk to the household becomes more pronounced.

With the price of food and gas climbing so rapidly, coping with those rising costs is even more burdensome if the health event occurs. That's precisely why our products provide distinct value to the average American household. We are taking steps to amplify that message to our sales force. This past Monday, we held a national training day that was offered to the entire sales force.

One of the main objectives of this training day was to convey to the sales force how a weak economy enhances the need for our products, and to train them how to better sell in this economic environment. Rest assured we continue to take every opportunity we can to provide our sales force with the tools and skill set they need to be more successful. At the same time, there are other initiatives that we are working on that we believe will help us tap into this vast U.S. market.

At our analyst meeting next month, we will talk about our new business-to-business marketing. This is the first time we have directly approached business owners and we are excited about its potential. We have created business-to-business television commercials which expect to begin running in May.

These initial testings of these commercials was very high and we believe they will help us communicate our brand message to employers. We are also going to continue to segment the market to more effectively meet the needs of the specific consumers, such as the Hispanic market.

We will continue to enhance our distribution by looking more closely at the non-traditional channels such as national insurance brokers. I am pleased with the direction of our operation and enthusiastic about the opportunities we see in the marketplace. Our objective is still an 8% to 12% increase in sales for the full year and I expect our sales growth to improve as I still believe our sales target is achievable, although it's obviously tougher than it was, than we had originally thought.

I'm counting on the marketing and sales officers as well as the field force to do what they can to help drive sales. I believe employers and workers alike are gaining a better understanding of our products and our services and I'm certain we have an effective combination of product, distribution, customer service and brand to meet the customers' needs.

On a consolidated basis, I'm pleased with the financial position. Our balance sheet is still marked by a conservative investment posture and very favorable risk profile. The credit ratings of our holdings remain high, as you know and we do not have any direct investment exposure to the sub-prime lending market. We have limited investment exposure to CMOs, asset backed securities or CDOs, and all those investments in those areas are highly rated.

We also have a very strong risk-based capital. Our RBC ratio for 2007 was 574. Although it declined somewhat from 2006, keep in mind that we transferred $1.4 billion to the parent company in 2007. That capital transfer allowed us to repurchase 12.5 million shares in February of 2008. In other words, the impact of the funding of our 2008 share repurchase was reflected in 2007's RBC ratio.

As I mentioned in our press release, we have narrowed our outlook for this year from a 13% to 15% increase in operating earnings on a diluted basis before the impact of currency, to 14% to 15% increase. I have a high degree of confidence that we will achieve that target and we hope to grow at the high end of that range this year. We are very pleased with our U.S. financial results which were in line or better than expectations.

At the same time, I'm extremely pleased with AFLAC Japan's continued recovery of new sales. AFLAC Japan sales results exceeded our expectations for the quarter and as a contributor to more than 70% of the consolidated earnings, AFLAC Japan's financial results were solid and consistent with our target. I'm still focused on increasing operating EPS by at least 15% annually, excluding the impact of the Yen from my first 20 years as CEO.

If you attend our analyst meeting next month, you will hear about our 2009 earnings target. Beyond my first 20 years as CEO, I still think we can produce another ten years of double-digit earnings growth. As we look ahead, we believe our strong earnings growth will reflect the underlying earnings power of our insurance operations in Japan and the United States. It will also reflect our prudent approach to deploying excess capital in a way that benefits shareholders. Ken?

Thanks, Dan. Let me briefly run through some of the first quarter numbers beginning with AFLAC Japan.

Starting at the top line in Yen terms, revenues were up 2.7% for the quarter. Investment income growth of 0.2% was held back by the impact of the stronger Yen on AFLAC Japan's dollar denominated investment income. And excluding the effect of the stronger Yen, investment income was up 5.1%.

The annualized persistency rate for the quarter excluding annuities was 94.4% compared with 94.8% in the first quarter of 2007. We believe the persistency was impacted by a higher proportion of the population as well as our customer base reaching retirement age. We expect that this will not only influence persistency this year but in 2009 as well.

In looking at the operating ratios for the quarter, as we expected, the benefit ratio continued to improve over last year. It declined from 63.9% to 62.4% in the first quarter of '08. The expense ratio was 19.6%, up from 18.5% a year ago. The increase in the expense ratio was budgeted and in part attributable to greater spending on bank channel preparations.

The pretax profit margins showed further improvement rising from 17.6% to 18.0%. Pretax earnings rose 4.8% for the quarter in Yen and again excluding the impact from the stronger Yen on net investment income, pretax earnings were up 10.6%. Investment yields declined slightly in the quarter in looking at government bonds. For instance, an average yield on an index of twenty-year JGBs was 2.08% in the first quarter compared with 2.13% in the fourth quarter. That composite yield right now is a little less than 2%.

However for the quarter, we invested our cash flow in Yen securities at 3.41% and including dollars, the blended rate was 3.85%. Portfolio yield at the end of March was 399. That was 3 basis points lower than year end and 13 basis points lower than a year ago. Overall, as Dan mentioned, the credit quality of the portfolio remains very high. On a consolidated basis, securities rated BB or lower represented only 1.9% of investments at the end of March. That was unchanged from year end.

In looking at AFLAC U.S., revenues were up 8.4% in the quarter. Earned premium increased 9.3%. Investment income was up 1.3%. As expected, investment income growth was muted by higher dividends that we had paid to the parent company in 2007. The annualized persistency rate of our U.S. business was 71.9% in the quarter compared with 73% a year ago. I'd note however that on a rolling twelve-months basis, there was only a 40 basis point change from the prior year.

Looking at the operating ratios for the quarter, the benefit ratio was 52.4% compared with 52.7% in the first quarter of '07. The improvement in the benefit ratio largely reflected a change in accounting for internal replacements which we adopted at the end of last year. The expense ratio was 31.4% compared with 31.7%, and as a result, the margin was 16.2%, up from 15.6% a year ago. Pretax earnings were up 12.6% for the quarter.

In terms of U.S. investments, the new money yield for the quarter was 7.03% versus 6.27% a year ago, although again we did not have significant cash flows going to investments this year. The yield on the portfolio was 7.01% at the end of March, up 1 basis point from year end but 6 basis points lower than a year ago.

Turning to some other items for the quarter, we did purchase 12.5 million shares. This purchase was executed through an accelerated share repurchase program that we had announced in January.

Excluding FAS 115, the ratio debt to total capital was 16.9% at the end of March compared with 16.8% a year ago. Non insurance interest expense was $7 million for the quarter, compared with $5 million a year ago, and parent company and other expenses were $10 million, up from $6 million in the first quarter of 2007. That largely reflected the timing issue between corporate expenses in the first and second quarter. Total company operating margins rose reflecting the improved profitability of AFLAC Japan and AFLAC U.S. Pretax margin improved from 16.7% to 17%, and the after tax margin rose from 10.9% to 11.1%. On an operating basis, the tax rate was little changed. It was 34.7% versus 34.6%.

As reported, operating earnings per diluted share rose 19.5% to $0.98. The stronger Yen increased operating earnings by $0.05 per share for the quarter and excluding the Yen's impact, operating earnings rose 13.4%.

Finally, in looking at the outlook for the balance of the year, as you heard from Dan, our objective for 2008 is a 14% to 15% increase in operating EPS excluding the impact of the Yen. That would suggest $3.73 to $3.76 assuming an identical exchange rate that we had in 2007. However, as you know, the Yen is significantly stronger than it was a year ago. So if we achieve our objective and the Yen averages 100 to 105 for the full year, we would expect that would translate to reported EPS of $3.95 to $4.09 for the year.

And under that same currency scenario, second quarter operating EPS would likely be $1.00 to $1.02. The current first call estimate is $1.00 for the second quarter and $3.97 for the full year. We would now been happy to take your questions. We'd like to make sure that everyone has an opportunity to ask a question, so please limit your questions to one and then hopefully if you have more, we can come back to you.

Judy, now, I will turn the call back over to you for polling.

(OPERATOR INSTRUCTIONS). Your first question comes from Nigel Dally with Morgan Stanley.

Thank you, good morning. My question is on Japan Post. You mentioned that you will start with 300 channels. Are they focused in one particular region and would it be correct to assume that they are the largest channel? More generally, how should we be thinking about the impact on sales? Given the roll-out in October, should it be a driver of sales for 2008 or similar to what we are seeing in the banks? Will it take time for this channel to really gain momentum?

Thank you, Nigel. I am going to let Toru talk about the details but I will tell you that I wouldn't expect Japan Post to play any significant role in sales this year.

If we are going to roll it out and test it in October, it can't be very significant. Now, in my opinion, that's actually good news for us because it has allowed us to concentrate on banks and then next year, we can concentrate on Post. I've been worried all along that we would have both of them at the same time and create some problems for us.

It also allows us to talk to the banks about pushing hard now because the Postals will be in the business later on so I think that's encouraging for us. Toru, would you touch on, if you know the details of how these 300 banks, where they might come from or any of the details or any other comments you might have about Postal?

Yes, first of all, those 300 offices are pretty much spread out all over Japan, not concentrated in a certain area. So it's supposed to be representative of the whole Japan. And that mentioned, they are going to start operations in October and start rolling out.

We did not expect any meaningful effect by the end of the year, so we expect that Japan Post is mostly a next year event. And as to the question to rolling out the banks, the banks as we expected started rather slow because of their concern over the compliance and their concern over the level of the preparations they are making. And now most of the banks are -- the financial year for most of the banks start in April.

So now that we are in April, a number of the banks have set the sales target for the insurance products. So we are hoping that more banks are beginning to sell the insurance on the larger scale. But so far we don't see the big numbers yet. They are rising but still on the way.

Let me make one other comment about what Toru has said which is important. When you hear that Japan's sales from the banks are rising, your immediate conclusion might be then sales are totally rising and they should be in terms of the banks.

But I want to point out what happened in the fourth quarter in the U.S. also happened in the first quarter in Japan. There was a real surge in production in December and if you really want me to equate what I thought the first quarter would be, I think we probably picked up another 2% in March that may have been, with people pushing, that may take away a little bit in April. So I would say that if I kind of looked at our sales numbers, I would say that Japan for the first quarter was probably up closer to 3% even though we showed 5% which is still better than the flat number we thought because of the new product introductions and what they've done with it.

But I think you're going to see the fourth quarter, I mean the second quarter, a little softer than what we originally thought. Still positive but still all in all we'll still make all of our numbers. But I just want to make sure everyone notes that March was very, very strong. And frankly I was pushing them. I wanted a strong first quarter and so that's part of the reason for that. Nigel, does that answer your question?

Yes, that was very helpful. Thank you.

The next question comes from Suneet Kamath of Sanford Bernstein.

Thanks, I just wanted to go back to some of the comments in the prepared remarks about the U. S. I think you said that the penetration rates in the U.S. were low and as you were talking about the impact of the economy, I just want to understand what that means. Are you talking about the new business that you're writing, you are just selling less in each peril account? And as you think about it being low, is that compared to what? Just first quarter this year or first quarter last year, or is this something that has been going on for sometime?

Okay. Paul is going to try to take this question.

It is not a long-term trend. It is something that we have seen only beginning in this first quarter. What I can tell you is that, yes, we are seeing less people purchasing in any given account, be it a new account or an existing account. However, those people who are purchasing are purchasing at the same level with which they were purchasing before. Is the economy affecting us? We have traditionally said that it is not.

I have to say that from what I'm seeing out there there is a still a huge demand for our products and there is still an equal demand for the amount of product they were purchasing or more than they were purchasing in the past. I firmly believe that our products are positioned well and this national training day was focused around what our agents need to be doing to sell our products in a difficult economic environment.

You know, it is not about the economy affecting us. It's about there being questions and people and ideas around what's going on with the economy and making sure that our agents are well prepared to deal with those objections. I think it's probably been the single biggest thing we've done in the last three years on a single event basis to get our sales forces in line, and as Dan said the agents moving slow at the beginning of the year the meeting was to inject our Veterans into doing a better job and I believe it has.

To answer your question I believe in the end that, yes, we are seeing some lower account penetration but my hope is that this national training day combined with getting things, things are already showing a much better trend in February, and beyond that we are moving it right back in the direction that it needs to be.

And also remember again the number of new accounts was up 8.5% in the first quarter. So the number of accounts and the need for the products according to the employers about putting it on payroll has grown significantly. Okay.

Okay. Thank you.

Tom Gallagher with Credit Suisse.

Hi, just a question on persistency in the U.S. It declined about 200 basis points this quarter. Just wondering what was driving that?

This is Kriss. Well, we did experience some, I'd say it's probably more a seasonal thing in large part because we have big production in the fourth quarter. We do tend to have somewhat higher lapses in the sequential first quarter. That is as lapses get processed from the prior year, the big fourth quarter production.

That's a trend that gets annualized in our computation and I'm not always satisfied about the first quarter number. I think it's somewhat overstated. But quite frankly I didn't put a great deal of importance on it.

Okay. So, Kriss --

Remember, too, that we've also been making an effort to sell to micro accounts. We started the initiative a while ago on the AFLAC SB or small business.

Although we don't have any empirical data to really support the notion, it wouldn't be surprising that if businesses are folding in this environment, it's the small businesses that would go first and that could be impacting some of the accounts that we have.

Tom, just to add to my comment, I looked back on my seasonality thing and the first quarter persistency, the last three or four years has been around 1% worse than it turned out for the year and that's to my seasonality comment.

With that, Kriss, would it be fair to say that the 200 basis point decline may be half of that seasonality, the rest is the point that Ken made?

I would think that's correct.

Again, my comment on the call, Tom, that if you looked at it on kind of a rolling twelve-month basis as opposed to annualizing the quarter, you still get a decline but it's a 40 basis point decline.

Okay. And then as we think about rolling that up into earned premium growth, how should we expect that level to come through in 2008? It was a little bit above 9%, is that a reasonable run rate for this year?

Yes, our plan is pretty consistent with what we experienced in the first quarter at about 9.3% or so.

Okay. Thanks --

In the range. I mean I have to quote ranges, say 9%, 9.5%, 9.3% is in the middle.

Jeff Schuman with Keefe, Bruyette & Woods.

Good morning. I was hoping to ask Paul a little bit more about the U.S. recruiting. It went up a lot this quarter. It sounds like based on the economy that may continue. I guess as we've seen in the past that a certain level of recruiting is good, but at times when the system wasn't necessarily ready to absorb it, it was a bit of a challenge.

How do you feel, your position at this point, Paul with the district sales coordinators to handle a higher level of recruiting, do you have the right number, is the system ready to absorb this and embrace this and can you move these people to productivity pretty quickly?

Absolutely. I appreciate you asking that. The fact of the matter is I believe because of our training systems, because of the level of our state training coordinators and how our district sales coordinators have bought into that training, that we are more prepared than any time in our history to take a high volume of recruits and make them successful.

I believe the national training day just re-emphasizes exactly what we're doing and while we don't necessarily see our recruiting uptick affect sales in the following 13 weeks, we do expect during the 2008 year for these recruits to have an effect on our sales , as well as on our new accounts, which you've already seen an uptick in, because we know new associates generate a good portion of our new accounts.

So I feel very confident that this 8.6% increase in recruiting will have a very good effect on what we are trying to do for the remainder of 2008 and

Great. Thanks a lot.

One moment -- Mark Finkelstein with Fox-Pitt, Kelton Cochran Caronia Waller .

Good morning. I wanted to just talk about medical sales in Japan, specifically Gentle EVER. It accounted for about 5% of total sales and I just wanted to get your current thinking on those.

Are they mainly previously declined applicants or are you seeing more new applicants? And is the current level of sales sustainable or do you continue to think that it's going to kind of peak and then start to subside materially, as you get passed that previously denied applicant base?

Toru, I can say some, but do you have any comments you want to make on it?

Well, I will comment on it, let me just say that I believe that the Gentle EVER has been a nice addition. It has allowed us to go back. We believe that there were a certain amount of people that were out there that we had not had an opportunity to add a product to that we went back to, but it's also brought on a lot of new customers in the process. In regard to our abilities to sustain, I'm sure there's somewhat of a spike in it. I think we actually started in August so I would expect it to stay strong through August and then for it to level out at some point. Normally, 80% of what we did the year before is normally a number that's reasonable the next year. But, it being new, I'm not sure.

I do think it's worth noting that every new product we've ever introduced, even if we basically found that somebody else had really started selling it first, how we captured the market and taken it away from them. I mean medical insurance we got into late and we are the number one seller within a short time.

This Gentle EVER, taking away the substandard and now we are number one. The message gets out that we offer the best product at the best price. From that standpoint, our sustainability with these new products works much better and allows us to stay at a much higher level of consistently producing that amount, than say one of our competitors that only goes in and offers it to their existing customers. It gets out throughout all the consumers in Japan that we truly are the best and so I think we can hold a higher number because of that.

Let me add one thing to that comment. As far as the mix between previously declined applicants and current applicants, it may not meet the standard underwriting for EVER and therefore take Gentle EVER. It's a mix of those people and people that had not been previously declined. And some that have.

But because of privacy laws, we are not able to directly approach people that have previously been declined. We have to approach them only in a, say a mailing process that's designed to expose the product to a broader class of people. We are not allowed to go in and specifically target people that have been previously declined. So the sales methodology isn't that targeted.

I didn't know if we had covered that before or not.

Okay. Great. Thank you.

Darin Arita with Deutsche Bank.

Thank you. Just a question on the Japan bank channel sales. I realize it's early days in the first quarter but can you give us a sense of the mix of business that had been sold through the channels? Cancer versus medical and also to what degree have consumers chosen the single premium payment option?

I'm not sure --

I don't think we've seen -- we haven't seen hardly any of the single premium so far.

Toru, are you there or did we lose you?

Yes, let me add that almost all of the bank sales are not the single payment. Just a very small portion is paid up. But mostly there are the level payments, and the income of the type of product they have sold are the similar amount of cancer and medical, cancer a little bit more than medical.

All right. Thank you.

Steven Schwartz with Raymond James and Associates.

Hey, good morning, everybody. I'm going to be a bit of a pig here because I wanted a follow up first on the question of penetration, Paul. I don't quite understand what you're getting at. Why is, given a continuing count, why would penetration be less? Do you have -- are there continued employees that are dropping your policies? I'm not quite getting the math here, the numerator and the denominator.

I'm sorry, maybe I misspoke. It's not the penetration of an existing account is going down, it's the average increase in an existing account that we would normally have penetration-wise is less. So if our account penetration was 25% and the second year we would expect, and these are not real numbers, we expect it to go to 40%, it's going to 35%.

Okay. That's great. I did not understand that. I didn't get that part at all.

The number is rising, it's just not rising at the same incremental amount that we would have expected in previous years on our existing account.

Got it. Then if I can ask a question of my own, just re-visiting the banks. I think you had 40 banks at the end of the year, 3300 branches, do you know how many branches you have with the 90 that you cited on the news release and what the 150 with the Shinkin banks might give you, what kind of branch numbers you may have?

Toru, are you on?

Yes, I am but I'm sorry I don't have that number at hand.

Can you get back to me?

Sure, we will.

I would be happy to.

Thanks.

But let me just point out and this is a gut call that I made last year, the end of the year, but I said I thought we did more than ten times in the fourth quarter than what we did from the first quarter from banks. So we expect it to continue to grow.

Your next question is from Randy Binner with Friedman, Billings, Ramsey Group, Inc.

Hi, thanks. Quick question on the balance sheet. I saw that CDO allocation increased fairly significantly in the first quarter to around $661 million from $495 million. We are not seeing that allocation in investments grow a lot of places. Are you seeing opportunities there? Can we get some color on that? Thanks.

Hi, it's Jerry Jeffery. We are seeing tremendous opportunities and I guess on a percentage basis, that appears large but on an actual basis, $165 million is relatively small. But just to give you an idea of what we've been able to achieve there. We are getting much higher yields than we had previously been able to get and not to get too technical but our purchases are all AAA rated currently, the ones we've been making in the first quarter.

But not only are they AAA rated but previously we've been getting 30 or 40 basis points of what we call ratings cushion in the purchases we made. The ratings cushion that we received in the first quarter ranged between 200 and 400 basis points. So the amount of credit protection that we are getting on our new purchases and the yields we are achieving are much better than we've been able to in the past. So we continue to think that this is a very attractive space and it's not a core strategy but at the margin, we think it is hugely beneficial to us.

That's interesting, thanks, and what's the underlying collateral on the new stuff?

Well, the underlying reference entities are all corporate credits and they are all investment grade.

Great. Thank you.

Eric Berg with Lehman Brothers.

Thanks very much and good morning to everyone. I just want to follow up on Steve Schwartz question regarding the general picture in the U.S. On the one hand you are saying that the increase in the penetration is, has slowed somewhat. I think Ken was saying that on an adjusted sort of normalized basis there's been a modest deterioration; I think I heard Ken saying in persistency.

But at the same token you are saying you have your national training day and things have gotten better in February and March. So when all is said and done where does that leave us? Is business in the U.S. slowing?

I was just going to say the one thing I think you left out, Eric, is the number of new accounts is accelerating at 8.5%. So within the accounts, it's a smaller increase in terms of penetration but the number of new accounts that are coming on realizing they need additional coverage right now is going up. Those two things together are somewhat of an offset and that's why I think we are running 6.5% right now instead of flat is, is that the new recruits are up because of the economy, the new accounts are up and it's a little softer than we'd like right now but the national training program is going to help hopefully offset that to a degree and we are hoping we will get right back on track.

Another thing is, Eric, I'm thrilled with the recruiting. Remember in the past, we never have had such a turnaround in recruiting with four quarters of decreases going to such a strong increase in the first quarter. So traditionally in the past, you had strong recruiting lead to strong recruiting and so those producers would continue to come on. With things changing and with us seeing this strong recruiting at the end of the first quarter, I believe it will take a little time to really see the effect of that.

I don't however see it going anywhere where but in a positive direction for us. I'm very excited about what's going to happen going forward. Can I quantify that directly? I don't believe I can. What I can tell you is I don't believe there's anything broken with the U.S. business. I believe the demand for our products is greater than ever.

I believe at a time when people are discussing the economy, it shows the need for our products to help them from a disposable income standpoint more than ever. If nothing else, getting these additional accounts buys us access to those in the future. So whether we have as high a penetration or a higher penetration than we have had in the past, in the future, we will be able to go back and write even more business in those businesses. The economy, it makes it tougher but we are doing everything we can do to grow our business and I'm excited about where we are headed.

Thank you, very helpful, thank you.

Tom Gallagher with Credit Suisse.

Hi, just a quick follow up. Can you just comment on the environment as it relates to the whole regulatory issue in Japan? Do you think that's pretty much behind us now or just an update there? Thanks.

I do think it's better. I was over there in January. Unfortunately, I was supposed to be there a few weeks ago and my dad had to have open heart surgery and I didn't get a chance to go, but I will be going after the shareholders meeting again. So I have not followed up since my January trip.

But I believe that -- it's one of those things, no news is good news. And we've heard nothing in any way that makes us think they have any problems other than they've been totally happy with AFLAC and what's going on, and there have been no rumblings in the newspapers about other companies. So we think we are in good shape.

Okay. Thanks.

-- and by the way, someone said, my dad is doing well. I've had a lot of people ask. He's home now. We are hoping we can get him to the shareholders meeting.

Glad to hear it. Thanks.

Andrew Kligerman with UBS.

Good morning. A couple of questions. First, maybe you can give a little color around the economy in Japan and how that might be affecting your sales outlook and also with respect to where you are in the bank channel right now, what's the process, how far along is the typical -- I see in the release you mentioned 90 banks are signed up, how far along is the typical bank in terms of the training and when might they be in a position to have some material impact on sales?

Well, I'm going to let Toru talk a little bit more than I will but I can tell you that from the bank's perspective, each one is totally different. Some of the banks jumped right on it, one in particular, and is doing great. Others are very bureaucratic and slow in their process of rolling it out, which I think is a bad decision but that's theirs. So it varies up and down the scale in terms of what's happening.

But all in all, I would say to get them to full speed, if you took the average one, it's a quarter before they start picking it up. Training, everything along those lines, we had some that came out of the chute doing it. Others will be six months or longer. But I think on average it takes at least a good quarter for them to get started. Toru, you want to comment?

Yes, I think that was absolutely right. Of course the bank's vary in terms of the size. Mega banks have several hundred branches and tens of thousands of employees. So it takes them to be fully prepared sometimes close to a year. Some of the mega banks have been working in preparation almost a year. And they're now starting to work.

But smaller banks can get up to speed much quicker, so on average, I don't know a quarter to six months I think is a good estimate. And also I think you asked if the economy in Japan is affecting our sales, and I understand that Japan's economy is slowing a little bit. But we have no symptoms of slowing down on our business yet so we hope it doesn't affect us.

Maybe talk a little bit about what kind of involvement your agents will have in this bank distribution and how they feel about it in general.

In most cases, some of the banks have their affiliates, which have been our agents. For those banks, some banks use them to support them in the administration or other ways. But some banks are operating pretty much independently from their affiliates. It varies. But overall, the involvement of our existing agents is very limited in the bank's channel business.

How do they feel about it? Are they nervous? Are they okay with it?

They have been very concerned and I think some of them were nervous but the general feeling I'm listening now is that they are kind of accepting that as a matter of fact and they seem to be prepared to the new environment.

Thank you.

Steven Schwartz with Raymond James and Associates.

Can you hear me?

Yes.

Just a quick follow-up. Looking at the below investment grade holdings, maybe it has to do with currency or maybe it's just a stupid question, but looking at the par values of a number of the holdings that are listed there hold, Ford Motor Credit, CSAV, whatever that is, and Bawa Capital. Just noticing that the par values have risen in the quarter. I'm just wondering is that new money going into those names because they are attractive, is it currency related or something else?

That's currency related. There has been no additions to any of those holdings.

Okay.

In the quarter.

All right. Thank you.

In fact, it's not a -- we are not prohibited to investing in below investment grade but as a policy we just have never done it.

Okay. Thank you.

Tamara Kravec with Banc of America.

Thank you. Good morning. Just wanted to ask a quick question on the margin, the pretax margin in Japan, and just based on how your sales are flowing, how you're feeling about continued margin expansion and what you've expected and how that's playing out.

I'd say it's right in line with plan, Tamara. We expected an improvement in benefit ratio on order of magnitude 150 basis points. This year, we got 140 in the first quarter, 150 compared to the prior year, 140 compared to the -- I mean 140 compared to the year, 150 compared to the quarter. But, you know, margin overall is up about 1.2% and that's in line with our plan and expectation. So we would expect 1.2% or so improvement for the year to play out.

Okay. Can you comment at all about whether you think this is something that can continue over a longer period of time?

Yes, we'll give you some color on that at the fab meeting, the analyst meeting in May, give you more details at that time but we continue to see some improvement in benefit ratio due to mix of business, some improvement relative to continued declining healthcare cost per unit of service in Japan, lower days in the hospital and that sort of thing. So we'll give you some more color on that in May but I'd say, yes, it's continuing to improve.

Okay. If I could just ask one quick one, the business-to-business initiatives that you have, are those built into your 8% to 12% target for sales or none of those initiatives are in there?

They are built into the 8% to 12% target for sales and they are a good reason why I feel very strong about what's going to happen but it is built into the existing eight to twelve.

Okay. Thank you.

Jeff Schuman with Keefe, Bruyette & Woods.

I guess I wanted to follow up a little bit on Andrew's question about kind of the mechanics of how you work with the banks in terms of training and sales support. I mean, take the mega banks, for example, do you just do kind of initial training with the bank staff and then the bank staff goes out and trains people in these hundreds of branches or is this something where you are involved in an ongoing basis in training all these people? And then likewise in sales support, is that something that's handled internally or are you in daily contact supporting all these people in the banks?

I will let Toru -- Toru comes from the banking side so he can give you a real good answer on this one. Toru?

Yes, most of the mega banks are doing the training mostly inhouse. We help them to be prepared for giving training to their employees. So we teach them, we teach their trainers. And also some of the times we can visit the branches and give the training by ourselves. But mostly training within mega banks are handled internally. They have a large number of employees, a couple hundred who are specialized, who have experience in the banking insurance industry and they are dedicated to the insurance business.

They have plenty of resources inhouse. For the smaller regional banks, are very open, and Shinkin banks we are very open, we ask to visit their branches and officers and provide the training to their employees working there.

So going forward on kind of a daily basis, it sounds like you'd be a little closer to sort of development in the smaller banks. Is that the case, than the mega banks, maybe you are a little bit removed from day-to-day operations, is that correct?

Yes, we have about 200 people who are specialized in this kind of business. They are allotted amongst the banks which they are responsible for. We are sure that we can be -- we can be helping them in a sufficient fashion.

The answer to your question is, yes, that's right.

Okay. Great. Thank you.

Judy, I'm showing just a couple of minutes to the top of the hour. We have time for one more short question with an easy answer.

Thank you. Mark Finkelstein with Fox-Pitt Kelton Cochran Caronia Waller.

Okay, I think I can do that. Can you just give an update on which of the mega banks, which ones are selling? I think there was a couple that were going to start selling in April. I wanted to just confirm whether that's the case or if not when you expect them to start selling.

Toru?

Yes. All of the mega banks including (inaudible) bank are selling the insurance products now. It varies. The scale is different but all four are now selling the insurance products beginning of April or before.

Okay. Good. Thank you.

Okay. That will conclude our first quarter call and we greatly appreciate you joining us this morning. If you require any follow up, please feel free to give Robin or myself a call on our toll free number. If we don't talk with you today or shortly, we sure hope we will see you at our analyst meeting on May 14 and 15 in New York. Thank you.