美國家庭壽險 (AFL) 2008 Q2 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'll turn the meeting over to Mr. Ken Janke, Senior Vice President of Investor Relations.

Thank you, Kristine. Good morning, everybody. And welcome to our second quarter call. Joining me this morning is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Paul Amos, President of AFLAC and COO of our US operations, Jerry Jeffery, Senior Vice President and Chief Investment Officer. Also from Japan we're joined by Tohru Tonoike, who is President and COO of Aflac Japan. And with him is Takaaki Matsumoto and Hisayuki Shinkai. You know that Matsumoto-san's in charge of sales Shinkai-san's in charge of banks, and Charles Lake, the Chairman of AFLAC Japan is also with him.

Before we start, let me refer to the Safe Harbor language. I'd like to point out some of the statements in this conference call this morning are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give you no assurance they'll prove to be accurate because they're perspective in nature. Actual results could differ materially from those we discuss today. I'd encourage you to look at our quarterly press release for some of the various risk factors that could material impact our future results. Now I'll turn it over to Dan, who will talk about our quarter and the outlook for the balance of the year in the United States and Japan. I'll follow up with some financial highlights and we'd be happy to take your questions. Dan.

Thanks, Ken. Good morning and thank you for joining us today. Let me start out by saying I remain pleased with AFLAC's financial performance. Our financial results for the second quarter in the first half of 2008 exceeded our expectations in both the United States and Japan. However, from a sales perspective, I had expected Japan's -- AFLAC Japan's sales to produce better in the quarter. But I still believe we can achieve our sales objective for the year. Most important, I continue to believe we're well-positioned to achieve our objective for operating earnings per share for this year and 2009.

Let me share some more thoughts about the quarter beginning with AFLAC Japan. As the leading contributor to our consolidated financial statement, we were very satisfied with AFLAC Japan's operating results in the second quarter of 2008. Our top line was consistent with our budget for the year. And the benefit ratio continued to improve as we expected. The persistency of our business was strong. And we again produced solid, pre-tax earnings growth. You may remember from the first quarter comments that we anticipated slower sales growth in the second quarter compared with AFLAC Japan's 5% increase in the first quarter. In part, that was because I knew how aggressively AFLAC Japan pushed at the end of March. I felt they had written some business in the first quarter that would have otherwise occurred in the second quarter. Even though I believe second quarter sales results would be slower than the first quarter, I did not think we would have positive sales results. Instead, total and new annualized premium sales declined 4.9% to JPY28.7 billion in the quarter. For the first six months new sales were JPY56.3 billion or .3% below the first half of 2007.

One of the reasons for the sales decline was weaker cancer insurance sales that we anticipated. Cancer insurance sales in the second quarter of 2007 exceeded JPY10.8 billion and was the strongest we'd seen in a long time. You may recall that cancer insurance sales a year ago benefited from a rush to purchase the product before the premium rate increase took effect. So we knew we were going to be up against tough comparisons. In addition, our agents have been aggressively focused on selling a lower premium cancer upgrade product since March of this year. This separate policy bridged the coverage from the old product and our new cancer forte product with daily outpatient benefits and annuity for newly diagnosed patients and counseling and doctor referral benefits.

This cancer upgrade policy has allowed us to leverage our policy holder base to increase sales. In the second quarter we sold 94,500 of these upgrade policies. However, the average premium was much lower at JPY27,000 compared with the cancer forte average premium of about JPY50,500 per policy. The we now realize we must go back and concentrate on selling cancer forte rather than upgrade policies, which we will do.

The good news is that medical sales were up 8.7% for the second quarter and 13% for the first six months. Medical sales had benefited from Gentle EVER, our nonstandard medical product that we began selling in August of 2007. Gentle EVER contributed JPY1.2 billion in sales or approximately 13% of the medical sales in the quarter. While we know this product appeals to a relatively narrow segment of the population, we've been pleased with the opportunity to extend our reach to new consumers and further segment the market for medical insurance. It's certainly been one component in our medical sales recovery.

We continue to believe that sales of cancer and medical insurance will benefit from the new distribution channel. And we remain encouraged about the opportunities to sell through a significant number of banks in Japan. By the end of June, AFLAC had already secured agreements with 154 banks to sell our products out of a total of 402 banks. That's a much greater number of selling agreements than our competitor. And it's more than we initially expected.

In the second quarter we sold JPY680 million in new business through the bank channel which is 146.4% increase over the first quarter. In fact, June sales through the bank channel were greater than the entire first quarter. Although that's a tremendous increase over the first quarter bank sales, we had expected sales from the bank channel to do even better. We believe slower than expected growth through this new channel primarily reflects the ongoing conservatism of some banks due to the regulatory environment. We're still very excited about the prospects of bank sales because banks that have been introduced to our products are doing very well.

In addition, we will begin selling a new product through the bank channel in October. Also in response to the needs of the banks, we developed a single premium product called [sintuso] which has been approved for the sale by the FSA. This product provides lump sum payments upon the diagnosis of cancer, heart attack or stroke. It also has death benefits. In addition, we're very pleased that the National Association of Shinkin Banks has endorsed our Gentle EVER and [ways] products to the membership of the 280 Shinkin Bank banks. I believe bank sales in the fourth quarter should be 10 times the amount we wrote in the first quarter. I still believe that's the case, and I expect the momentum in the bank channels to build in 2009 as well. Overall, we're confident in this channel and fully expect it to meet our long-term expectations.

We're also looking forward to the opportunity to sell cancer forte products through our 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 expected to sell through about 300 postal outlets also beginning on October the 1st of this year. Next month we'll begin training 5,000 Japan Post workers. Needless to say, we continue to believe this is a great opportunity for both Japan Post and AFLAC. I'm sure most of you are aware that the FSA's recent issue of the business improvement order to the top 10 Japanese life insurance companies. We were very surprised and disappointed to receive an order even though they're common. The order requires a company to enhance a process and then to report on the progress to the FSA.

We took exception to the business improvement order because we believed it was unfair and unjust. We feel this for several reasons. First, AFLAC Japan was one of few companies able to complete the five-year claims review process by the date -- deadline required by the FSA. Second, our error rate was low compared with others in the industry. During the five-year review period we assessed more than [JPY4.2 million] benefit payments and determined that our error rate was .47%, which means 99.53% of the benefits were paid properly. Since then we have lowered the error rate by half and we expected it to get even lower.

Third, we're in close contact with the FSA throughout the process and completed all promised measures on schedule to correct the problem and to prevent reoccurrence. In our opinion, it appears that in issuing the business improvement order the FSA focused on the absolute number of cases and the overall yen amount associated with those cases rather than considering the company's real error rate. On a positive side, there was limited media coverage of the business improvement order, and we do not expect any material impact on the business. Perhaps, and most importantly, this should now put the claims issue behind the industry. Our marketing team in Japan has plans in place and all of Japan's officers or all or part of their bonus is tied to achieving a 3% to 7% sales increase for the year. Although our sales objective is going to be more challenging than we initially thought, I believe we will achieve it.

Now, let me turn to our business in the United States. The top line of AFLAC US was consistent with the expectations and pre-tax earnings were better than our target. We were also pleased to see an improvement in persistency over the first quarter. Total new annualized premium sales were up 4.9% to $383 million. Although sales were below our annual target rate of 8% to 12% for the second quarter, I was encouraged to see a significant improvement following a very weak first quarter. For the first six months total new annualized premium sales increased 2.6% to $736 million. We continue to be pleased with the expansion of our sales force. New agent recruitment has been solid this year. And the second quarter we recruited more than 6,700 new associates, an increase of 4.2%. For the six months recruits were up 6.3%.

The average number of weekly producing sales associates also increased 6.3% in the second quarter after being up only .02% in the first quarter. We believe our success at increasing the number of producing sales associates has resulted from an enhanced training program and we've been implementing over the last few years. In addition to growth of our sales force, the key indicators we used to measure our sales force activities continues to be very positive. For example, the number of new payroll accounts rose 10.1% in the second quarter following an 8.5% increase in the first quarter. The growth of payroll accounts opened by new agents rose a very strong 20.3% in the second quarter. Production from new associates was also very positive, rising 12% in the second quarter. That leads us to believe that the fundamental approach to building and training an effective distribution team is still working and we continue to be our main focus.

I believe our strong payroll account growth suggests that employers are better understanding the benefits AFLAC brings to the table. They're seeing how AFLAC's products help to provide health care options to their workers at an affordable price. We believe the proved acceptance of employers has benefited from the advertising message and also the new business-to-business initiative we discussed at the analyst meeting in May. In looking at new consumers' buying pattern, the average annualized premium per new customer is up for the first half of this year compared with a year ago. However, during the same period fewer employees took out coverage when we enrolled a new payroll account, which is a problem, and we're addressing it through better training.

The obvious question is whether our new sales have been impacted by the slower economy. I think it's very safe to assume that some of our policy holders, potential customers and sales associates are feeling the pain of the current environment. Obviously we've operated in the challenging economies before, but it's been a long time since consumers have had to deal with such sharp increases in gasoline and food prices. However, we don't believe this means that our fortunes are exclusively tied to the business cycle. As you've heard me say before, I believe the need for our products is actually more compelling when the economy weakens because the financial risk to the household becomes more pronounced. The risk of serious illness or accidents don't change with the business cycle. But coping with rising household expenses, even more of a drain on the family's finances when a health care event occurs. That's exactly where our products can provide value to the average American household.

In this environment it's up to us to understand the circumstances that existing and potential customers are facing, and make sure that our message is appropriate and our products are affordable. We know that people don't wake up in the morning and suddenly come to the realization that they need an extra layer of protection, especially in this challenging economy. It's our job to identify potential customers, inform them of the possible risks, and then help mitigate those risks through the sale of our products. You'll recall that we held a national training day for our field force in the first quarter to intensify and coordinate our message in this current economy. One of the objectives of that day was to train our sales force on how to sell our products in a weak economy. We've incorporated that message into our ongoing field training.

Earlier this month we released a commercial that speaks directly to the challenges consumers face and why AFLAC's products are important in this type of economy. We're doing what we believe is appropriate to support our sales force and customizing our training and tools to suit the current needs. While the weak economy we've made it more challenging to sell, it's actually made it easier to recruit. The reason is that when unemployment people cannot find salaried jobs, they're willing to try commissions that they normally would have not done.

As I mentioned in the press release, it will clearly be difficult to achieve a minimum of 8% for this year when we need 12.5% for the second half. However, I can assure you that our sales director and eight territory directors are all pushing hard to improve the sales results so they can make a bonus. Importantly, we continue to believe that the US market is perfectly suited to our business. There are literally millions of potential payroll accounts and tens of millions of potential customers that can benefit from our products.

On a consolidated basis I'm pleased with our overall financial position. Clearly, there's been a lot of investor focus on the balance sheet of financial companies recently, which is certainly something that we understand. I'm proud of AFLAC's balance sheet was marked by highly rated investments. Despite the turmoil of capital markets, we're confident our time-tested investment approach remains prudent and effective in the current environment. Even though we've seen a sharp rise on unrealized losses on the fixed income investments, they've resulted from the widening of credit spreads. Remember that a widening of spreads benefits our income statement as we invest huge cash flows in Japan at a more attractive investment yields. Our outlook for this year remains 14% to 15% increase in operating per diluted share before the effect of foreign currency. I have a high degree of confidence we can achieve that target. And we hope to grow at the high end of the range this year.

As I mentioned at our analyst meeting in May, our modeling suggests that 13% to 15% increase in operating earnings per diluted share excluding the currency is a reasonable goal for 2009. I'm still focused on increasing operating earnings per share by at least 15% excluding the impact of the yen for my first 20 years as CEO. Beyond those 20 years I still think we can produce another 10 years of double-digit earnings growth. As we look to the future, we believe our strong earnings growth will continue to exemplify our underlying earnings power of our insurance operations in the United States and Japan. It will also reflect our prudent approach to deploying excess capital in a way that benefits our shareholders. Ken.

Thank you, Dan. Let me just briefly go through some of the second quarter numbers beginning with AFLAC Japan. Starting at the top line in yen terms, revenues were up 2.9% for the quarter. Investment was down 0.7% due primarily to the impact of the stronger yen on AFLAC Japan's dollar denominated investment income. If you exclude the effect of the stronger yen, investment income was actually up 5% on a currency mutual basis. The annualized persistency rate excluding annuities was 94.5% compared with 94.7% in the first half of 2007. That was consistent with our expectations.

In terms of quarterly operating ratios, the benefit ratio continued to improve over last year. It was 61.9% in the quarter compared with 63.7% a year ago. And excluding the impacts on the weaker -- excuse me, the stronger yen on investment income, the benefit ratio was 61.5%. The expense ratio for the quarter was 19.9% up from 18.9% in 2007. The higher expense ratio was budgeted and therefore expected and the increase primarily reflected additional marketing expenses, especially for ongoing preparation in the bank channel and increased IT expenses. Reflecting the lower ratio in the higher expense ratio, the margin rose from 17.4% to 18.2% in the quarter. With the expansion of the margin, pre-tax earnings were up 7.5% for the quarter in yen, and again excluding the impact of the stronger yen on dollar denominated investment income, pre-tax earnings were up 11.1% in the quarter.

On the investment side yields in Japan were a bit higher than they were in the first quarter. For instance, looking at the index of 20 or JGBs yields 2.24% up from 2.08% in the first quarter. The composite yield for a 20-year JGB right now is about 2.26%. For the quarter we invested our cash flow in yen securities at an average rate of 3.27%, including dollars, the blended rate was 3.46%. The portfolio yield at the end of June was [398]. That's down one basis point from the end of March and 11 basis points from a year ago. The overall credit quality of the portfolio remains very high. On a consolidated basis securities rated double-B or lower were only 1.9% at the end of June which was unchanged since the end of March. We did have one small addition to our below investment grade holdings in the quarter, that was Sprint Capital Corp., that was downgraded and had an amortized cost of $24 million.

Turning to AFLAC US, total revenues were up 8.4% in the quarter. The annualized persistency rate for the six months was 73.1%, which was up significantly from the first quarter and only down slightly from a year ago. Looking at the operating ratios for AFLAC US, the benefit ratio was 52.8% in the quarter compared with 53.1% a year ago. The expense ratio was unchanged at 31.3%. Therefore, the profit margin increased to 15.9% compared with 15.6% a year ago. As a result pre-tax operating earnings for AFLAC US were up 11.1% in the quarter. In terms of US investments, the new money yield for the quarter was 729 up from 651 a year ago. The yield on the portfolio at the end of June was 7.04% up three basis points from the first quarter and a year ago.

In looking at some other line items for the quarter, excluding FAS 115, the ratio of debt-to-total capital was 15.9% at the end of June, a little change from the 16.0% of a year ago. Noninsurance interest expense in the quarter was $6 million compared with $5 million a year ago. Parent company and other unallocated expenses were $11 million in the quarter up from $5 million a year ago. That increase primarily reflected a reduction in retirements expense in 2007 and then lower investment income in 2008 at the parent company level.

On a consolidated basis, the pre-tax operating profit margin rose from 16.6% to 17.2%. The after tax margin also increased rising from 10.9% to 11.2%. The tax rate, as we expected, was little changed and was 34.7% versus 34.6% a year ago. As reported operating earnings rose 23.2% to $1.01. That was consistent with the guidance we had given on our first quarter call. The stronger yen increased operating earnings by $0.08 per share on the quarter and $0.13 for the first six months of the year. So excluding the yen and the yen's impact, operating earnings per share were up 13.4% for the quarter and the first six months.

Lastly, let me comment on the outlook for the year. As Dan mentioned, we've reaffirmed our target of a 14% to 15% increase in operating earnings before diluted share before the impact of the yen for 2008. That would translate to a target of $3.73 to $3.76 assuming the exact same average exchange rate as we experienced in 2007. However, as you know the yen is clearly much stronger than it was a year ago. And if the yen averages [$105 to $110] for the full year, we would expect reported earnings to be $3.86 to $3.98 on a diluted basis for 2008. Under that same yen scenario, third quarter operating earnings per share would likely be $0.98 to $1.01 per diluted share. The first call estimate this morning was $1.01. For 2009 our objective is a 13% to 15% increase in operating earnings before the impact of the yen.

We'd like to make sure everyone has a chance to ask a question this morning. So please limit yourself to one question so we can be fair to everyone and we'll try to get back with you if you have additional questions. Kristine, we'd now be happy to open it up and take some questions.

Thank you. We'll now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Nigel Dally from Morgan Stanley.

Great. Thank you. Good morning. In the US you write the issue the economic weakness driving the sales below your original forecast.. Are you seeing the sales particularly weak in the states more economically prone? And if it is the weakness in the economy causing sales to come under pressure, shouldn't we also be concerned the persistency in the US could also come under pressure in the coming quarters? Thanks.

First of all, our persistency improved in the US which I think shows the need for our products even more so this quarter. But I'll let Paul answer that. I agree with Dan. I think from a persistency standpoint, we're going to see some strength. As to your question about where we're seeing the sales, it's just like we've see traditionally across this country there are operations throughout the United States who are doing better than other operations. There is no particular area of the country, northeastern California has been hit particularly hard by the economic situation that are doing any worse than anywhere else. So I believe we're still showing consistency. Again we were up 4.9%. And while that is not within the target of where we want to be, it is not significantly off of where the numbers that we had projected for the year at least on a quarterly basis. So I feel like we've got some refining to do and we'll continue to get better. But the overall sales are consistent throughout the country with some good, some bad and some in between.

Thank you.

Our next question comes from Colin Devine from Citigroup.

Good morning. I got just two quick things. First, on the investment portfolio you talked a lot about quality. But I'm looking at the Ford position, the unrealized losses double year-to-date by your own count is trading at what 62%. At what point are we going to see an impairment of this? How far does it have to go before you finally start to write it down? And then secondly for Dan, I appreciate your comments on Japanese sales, as I'm looking at the numbers today, it seems to me the channel to zero in on once again is the affiliated corporate agencies where their second quarter sales are the lowest in at least six years and may in fact be the lowest ever, because you only give them split back out for the last six years. Are we back to where we were two years ago when you made your comments on the call?

Well, I think the corporate -- this is Dan. I'll start and then let Jerry follow up. The corporate agencies had the biggest increase in the second quarter of '07 that they'd had in a long time. They were the ones that were the most affected by the rate increase that was to take place on the cancer sales. They're the ones that went to all their policy holders and immediately added the additional cancer prior to the rate increase. So from that perspective.

But to your point, I am not satisfied with the corporate agencies. They are actually being hurt as we create new channels because the new channels will actually go in, for example, the banks will actually be selling to customers which in essence is an indirect run at the corporate agencies. And if they're not finding a way to penetrate their market that they have, then in essence either through postal or through banks, we'll be -- they'll be going at their customers another way. So it's actually hurting them that they are not doing that. And what our challenge has been is to convince that bureaucracy that's over there to do that.

So Colin, your point is well taken. But I do believe that they can either do it themselves or through other distribution channels, these customers will have an opportunity to buy a policy one way or another through one of our distribution channels. So by adding these new channels, we're in essence making another way of getting to those potential customers within the corporate agency structure.

Isn't that another way of saying you're channelizing your existing channels. I think the point is the second quarter is traditionally your second best in the year. And putting aside last year's boost, the fact is this is the worst sales that you put up in at least six years and maybe the last 10. You just don't give the numbers back that far. And it seems that we are back where you nailed it two years ago that there's a real problem in this channel. What I'm hearing now is it's not going to get any better. You may pick up the sales somewhere else, but this channel is not turned around.

I agree with you, the sales channel has not turned around. I also agree with you that the numbers have not improved other than last year at this time. And all I can tell you is, is we continue to work on that and find ways to do it. And I am very unhappy. Maybe AFLAC Japan would like to make a comment on this. I have them on the line. And let's -- I've already spoken this issue several times with them in most recent weeks. So maybe they'd like to comment on the corporate agency structure for one second.

Yes. In the interest of time, too, we'll ask Tohru to speak for Mr. Matsumoto, so we don't have to go through a translation.

Yes. I agree with Dan, both corporate agencies have been effected by the factors which Dan mentioned a few minutes ago. I totally agree with everything Dan said. In addition to that, corporate agencies have been effected for years by the social change which is taking place in Japan in which the people are not so strongly attached to the companies as they used to be. Also, the people have other places to buy insurance, other than worksite.

So that has been have reduced the corporate agencies. I also agree with Dan having said that, in saying that they have a huge market and huge customer base. So the point -- the question is to how and when they could find a way to change their business, the way they do the business so that they can be more -- they can speak to the current environment. That's a challenge we have been facing. We have been trying hard, still I think we are not very successful yet.

But, Colin, I will say this I will not quit on this issue. And if necessary, I'm going to take some of these accounts away from some of the corporate agencies in terms of existing policy holders and mail out to them or do something. But long term, I'm not going to let the potential customers just sit there without people being called on. So one way or another we're going to get to them over the next year or so. But I'm -- I've tried to do it tactfully. But at some point I'm going to have to do it with pressure.

Thanks, Dan. I appreciate the candor.

Colin, hi. Jerry Jeffery. To your question about Ford Motor Company, I assume you were referring to the company, let me just refer you, first of all, to our impairment policy which is very clear. We will and have in the past written down and subsequently sold any investment where we thought there was a significant risk that we would not receive our principal interest on time and in full. As you probably know, we have four -- five material below investment grade positions and we spent an amount of time looking at each one. And we have regular reports. But beyond that, I mean, those things really consume a great deal of our time. Our view on Ford has not changed. We still -- I don't want to get into a credit discussion on Ford specifically, but our overall view remains that we expect to receive our payment in full and on time. Does that answer your question?

Yes.

Our next question comes from [Sidney Thomas] from Sanford Bernstein.

Yes. Thanks. Just another question on the cancer sales. You mentioned you're seeing the impact some more of these upgrade sales as opposed to new policy sales and that's impacting your results. Can you talk specifically about what you're doing to try to reverse that, get more new policies sold as opposed to upgrades? And then just related to that, there was a pretty big drop off it seems in terms of contribution from Dai-ichi. Can you talk about what's going on in that channel?

I'm mention Dai-ichi. Dai-ichi came in exactly where they told us they would. So we knew that they were going to concentrate on another product. So they're not out of line with what we anticipated. As far as the cancer, I'm going to let Tohru and them talk about it. But I want to mention, had the cancer products, instead of selling the rider, had they sold those 94,000 the full cancer product, our sales would have been up 2.7%. So it just gives you an idea what impact it had. Tohru.

Yes. We're now trying to refocus our agents to serve the product rather than the upgrade product. We're doing -- trying to do so by basically two measures. One is that we are going to increase our [effectiveness] hot calls which is our calls to the policy holders to sell the TKs and try to reduce the investment of involvement of our agents of the human resources in selling upgrade products. And at the same time, we plan to make more associates to serve the cancer product by providing that a rebate for about JPY2,000 per policy. So we are going to run the campaign for that purpose. And we are trying -- we are trying to encourage the associates to increase the number of the prospective customers and also increase the level of the -- their approach to those prospective customers. And in addition, we are trying to help the corporate agencies by providing opportunities of alliance with individual agents, so that they can have a better capability to reach their prospective customers.

Just on those appliances, I mean, I think you talked about that in the past. And I'm not sure they've been success. Is there something that you're changing that would make that more successful going forward?

I think that it hasn't changed yet. But we're trying to find out the individual agents, which would be more useful to the corporate. And so we're trying to find a better fit than before.

Okay. Thank you.

Our next question comes from Steven Schwartz from Raymond James and Associates.

Hey, good morning. If I may, just as a follow-up to that last question, I didn't understand. There's going to be a rebate on a product or something like that?

Tohru.

Yes. We are going to provide a JPY2,000 rebate for every cancer policy that our associates would sell.

Okay, so that's going to go to the associate or that's going to go to the contract holder?

Associate. To the associate, our agent.

So in effect, you're going to be increasing, at least temporarily, commissions on --

That's correct.

Okay.

Yes, but be clear of one thing. We set aside x amount of money every quarter, every year for contests, etc. All of this will still fall within the guidelines of us making our earnings per share and our overall earnings in Japan. So it won't have any impact on that.

Okay. Very good. I understand that. Just to stick with this topic then. I don't get it. Again, maybe you can explain the salesmans' mind to us. I understand it's an easy sale doing this upgrade product. Certainly you're going back to people who have a product that was last upgraded in 2001. And by the way, I wonder if the corporate agencies were very, very important in this upgrade thing since they seemed to be the lion's share of sales back then. So I'm wondering about that. Also the commission is going to be significantly lower. So these guys sell more, but they're going to make less, I would assume, even if they sell more. It just -- it doesn't make sense to me. I'm trying to figure out the mindset of these guys. Even if they sell more, they're going to make less, so why do it?

Well, one reason you're doing it is, is to help the policy holder themselves. The policy holders have less coverage. And at time of claims you want to make sure they have the best possible coverage out there. So part of it is a responsibility on the agent's part to simply make sure our customers have the right coverage. So it's true that the commission is the driver. And I'm sure what a lot of them are doing, are doing it for that reason. Again, one of the flaws in our corporate agency structure is that most of the corporate agencies are salaried people. The corporate agencies keep all the money. And so they make a little bonus. But as a general rule, it's not the same as you see our individual sales force or our other small agency sales force where commissions really are the driver.

So then does it, in fact, follow that a lot of what you saw in terms of the selling of this upgrade came from the corporate agencies?

Tohru, can you just ask Matsumoto-san what he thinks of that question.

Yes. Just one moment. Yes, I think Matsumoto-san believes -- Matsumoto-san -- in talking with many associates, Matsumoto-san feels that many associates have started to realize that they have been shifting their attention too much to the upgrade policy. And they realize that annual premium and also therefore their commissions are decreasing. Therefore, many of them have started to increase preparation for the cancer products by themselves. We expect that in August they're trying to make efforts to almost three times more than they did last year of the same month.

Okay. That's good information. But it didn't quite get to the question.

The question, Tohru, is the corporate agency's responsible for a lot of the sales of the upgraded policy.

Yes. That's about -- let's see, yes, more than half -- more than half of the upgraded policies.

Okay. All right. That's good information. Thank you.

Our next question comes from Mark Hughes from Suntrust.

Thank you very much. The banks with whom you've partnered, what percentage of them are actually making material contributions to sales at this point?

Tohru.

Yes. Shinkai-san reported to me that currently about 13 institutions which represents 20 persons with the total number selling, about 80% from the total sales.

Right. And then the strategy for getting the other, I guess, the balance of those banks to ramp up their sales?

Yes. That actually the things we are trying to do going forward. And we have been increased the trainings given to those banks. And by providing them the example of the banks we have been successful. There are a few banks which have been very successful in the second quarter. So we took their model and teach those models to the other banks so that they can learn and start selling quickly.

Thank you.

Our next question comes from Eric Berg from Lehman Brothers.

Thanks very much. I was hoping we could revisit, Dan or Paul, your comments about sort of what's happening to the average American family and how this slowdown of the economy affects the attractiveness of your products. I mean, I would think that it would be exactly the opposite of what you're saying in the sense that I would think that a family has -- a middle income family, you're not selling to the poor and you're not selling to the wealthy in this country, you're selling to middle income families. I would think the way it works most families budget for necessities. And for many families, I suppose not all, for many families, gas is a necessity, you have to drive to work in many cases and you have to cool your house and heat your home. I would think they have a budget for necessities including food that when these necessity costs go up, discretionary expenditures, such as yours, get crowded out.

And if I understood your points earlier, your prepared remarks, this situation increases the attractiveness of your products. Help me sort of think this through because I'm not getting your point earlier about the economy and the attractiveness of your product. Thank you.

Be glad to, Eric. The fact of the matter is that the more disposable income someone's forced to spend on necessities such as gas, food, anything of the sort, the less money they're putting away in terms of savings. The fact of the matter is the majority of Americans today are self-insuring themselves against the financial and the nonmedical related costs of an accident or illness. That's exactly for a nominal amount of what we're insuring them again. I think people more than ever realize they could be in bankruptcy as a result of a health care issue if they don't have our types of products. I think that's it's shown directly of the fact of people purchasing our products they're purchasing more than they ever have. And we're seeing increases in terms of the average premium per customer. Additionally, businesses, which is a key means through which we offer our products are offering our products at a record pace. Our new account growth is up tremendously. We're having new agents come on being more successful than they've ever been. So I think from all facets you're seeing the American consumer and American business environment is accepting our products and sees the need for them. I only think that's going to continue to grow.

It's a sad time, Eric -- Eric, this is Ken. Dan did mention and Paul had mentioned on our first quarter call, when we open up a new account, people who are buying are buying a little bit more than they did last year. But we're seeing fewer people enroll. -- your point, that there is some buyer resistance at some point from people who feel they just can't afford it at this time.

However, that smaller penetration in accounts represents an opportunity for us to go back when there's complete stabilization and really, what we're buying is shelf space for the future with a greater opportunity.

Thank you.

Our next question comes from Darin Arita from Deutsche Bank.

Thank you. Just a question, going back to the affiliated corporate agencies. I guess I'm a little surprised that I guess we're attributing some of this decline here to the new distribution channels when the share of the affiliated corporate agency as a percent of the total sales is pretty much unchanged at 35% from the first quarter and it's pretty much in line with the full year '07 and up from full year '06. Isn't the decline a function of the 39% share they had in the second quarter of last year, that spike up there?

Absolutely. If you're looking at the year-over-year growth, it's more attributable that, as Dan pointed out, the sharp rise they had last year, the second quarter was one of the best quarters they had had. So you're absolutely right. But not much has changed on their overall contribution which also means it hasn't improved.

Can we really conclude that the new distribution channels are cannibalizing your sales here?

Well, let's just go back a minute and talk about overall sales in Japan. I want to make sure we keep everything in perspective. First of all, I would have hoped that sales would have been flat to up a couple percent. Now, we were down roughly 5%. So we're talking about 5% -- we're off about 5% to 7%. I knew we were going against a tough comparison. And I know that going into the second quarter, I'm going -- excuse me, the third quarter, I'm going to be going against the easy comparison because cancer sales drop off dramatically. I mean, they just fall off the table. So I know that I've got those going forward.

So I just hope that as you analyze, and I certainly appreciate your ability to analyze that you realize the third quarter is when we should see a lot of improvement. We just happen to have the prior rate increase in sales in the second quarter and then we'll have the other to follow. I think our distribution channel model has evolved over the last seven or eight, almost 10 years with corporate agencies becoming less and less -- yes, it used to be 80%, 90% of our sales, like you said, it is now in the 30%s. And last year it spiked up. It only spiked up last year because of the rate increase that was going to go into effect. I think all along that the sales of the corporate agencies will stay at about the percentage that it's been. And it will move lower as the other new channels come on board and we'll add more as postal takes hold in the fourth quarter and as the banks grow just like it did with Dai-ichi life.

So I think those things will continue to change going forward. The I do expect us to meet our objective for the entire year, which is in the 3% to 7% range. I do think it's tougher. Frankly, I thought 5% was probably easy to do. Now I think it's tough. And I think the 3% is more in line. But I do believe we will achieve that. So I don't know if I answered your question specifically, but if I didn't, tell me it again and I'll try to say it.

No. That was very helpful. Thank you, Dan.

This is Kriss Cloninger. And I'd like to offer one comment on this. In the past the term cannibalization has been used when the sale of a new product replaces an existing product. In other words, it causes a lapse of the existing product to be replaced by a new product. There's no net effect on the company. In our case here we are shifting from one distribution outlet to another. There's still a net increase in our overall in force. I want to make that point for that to be clear. I think cannibalization has a negative connotation that I'm not sure is fully deserved in this case.

Kristine?

Our next question comes from Tom Gallagher from Credit Suisse.

Hi, this is Mike [Abramsky] filling in for Tom. Can you guys refresh us why most of your bonds are classified as [health] and maturity? I think most of your competitors told them they're available for sale.

Hi. Yes, this is Jerry Jeffery speaking. There are a couple of reasons for that. One is because we have a very, very high persistency rate, particularly in Japan, our cash flow is, A, very predictable, and, B, very robust. So we can focus more on asset liability matching in the decisions we make on investing. Therefore, we tend to invest -- as the duration of our portfolio is significantly longer than our peers in Japan because we focus a lot more on asset liability matching. As a result, it is our intention to hold these to maturity. And our past history has demonstrated that we, in fact, do that. It is unheard for us to -- well, it is extremely rare for us to move a security from held to maturity to available for sale. We typically only do it if it gets downgraded to below investment grade. So in the lion's share of those cases we sell them.

So is there any approval required for that or it's just based on your decision?

There's no approval required. There has to be some consistency though applied, otherwise it's deemed to be a change to your portfolio. If you're putting stuff held in maturity and moving it out for consistent reason.

Okay.

-- there and you demonstrate over a period of time that maturity securities are just that, then the regulatory bodies typically are okay with it.

Okay. Thank you very much.

Again, Kriss Cloninger. Wanted to offer a comment. When we price products, we implicitely guarantee an investment return to the policy holders. As long as we can make investments that are going to meet those guarantees, then we're satisfied we covered our obligation. So we don't need to move securities around during the life of the contract to do that. And that's one of the things that's given our operating practices over time. And when we had substantial unrealized gains in our portfolio, we still held those securities to maturity. We did not think we would take advantage of the unrealized gains by liquidating the securities and reinvesting in lower yield rates. Similarly today we don't feel compelled to liquidate the securities and take advantage of the higher yields that we could generate in the event that we took the realized loss and then took power investment income going forward. So that's just from my perspective one of our motivations.

Our next question comes from Mark Finkelstein.

Hi. Just two very quick questions on the US. By your metrics, how did penetration with an account compare to Q1 levels? Did they deteriorate further? I know that was one of the issues that was brought up on the first quarter call.

We don't actually give that specific number out. What I can tell you is that because we're opening up such a long valuable of new accounts, it's very difficult to tell how the penetration's going to be. While we may go out and have an initial enrollment, the full enrollment may take place over a longer period of time, say three to six months, depending on going back, following up, getting all the people, if you have got multiple shifts on a particular job, you'll be looking at. So it's a little bit of a trailing statistic. And it's one I don't want to mislead you on. What I can tell you is is that overall we feel the new accounts that we're bringing on are extremely solid. That we are seeing -- we're not selling to as many people as we once were. But we're selling more to the people we're selling to. The people who understand the need continue to purchase our products and we continue to see that consumer demand go in the right direction.

So I don't know if that fully answers your question. But what I can tell you is as I said earlier, the shelf space we're purchasing for the future is something we're going to have to bring on these accounts without fully penetrating them to the extent we'd like to.

Okay. And then just knowing that you disclosed last quarter as well that sales in the US were kind of up about 6.5%, I think you gave through the first three weeks of April is the metric. Is there anything you can say about sales trends throughout the month, knowing we ended at 4.9% for the average, 6.5% is an average we likely started it at. Was it lumpy, or was it kind of a trend down. Is there anything you can say --

It was pretty consistent. May was by far our biggest month in 2007. So we went up against, I think it was an 18% comparison to May of 2007. So May was a little bit slower, but it was still great growth. Overall throughout the quarter I feel like we're still consistent. I feel like we're still producing the same numbers, I feel like 4.9% was representative of the quarter we had.

Remember too, Mark, and this is also true in Japan, especially true in Japan, it's why we don't talk about monthly data much or intraquarterly sales updates. Our sales tend to be very, very skewed towards the last couple weeks of the quarter. And sometimes we can be at the month of June and feel that sales are going one way and at the end of June find out they're going another way. So that's why we don't comment on these intraquarterly trends.

Sometimes the last month of a quarter can almost equal the first two months because of the way our push and our enrollments work.

Okay. Great. Thank you.

Kristine, I have the top of the hour at 10:00 AM, which means we'd -- we'll conclude the call today. If there are other questions, I'd encourage you all to please call Robin or myself at the toll-free number. We'd be happy to talk to you today or whenever you choose to call. And we thank you for joining us this morning.

This concludes today's conference call. You may disconnect at this time.