美國家庭壽險 (AFL) 2008 Q3 法說會逐字稿

Good morning and thank you for standing by. At this time, all participants are on listen-only. After the presentation, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) I would like to inform all participants that your call is being recorded. If you have any objections, you may disconnect at this time.

I would also like to turn the call over to your conference host this morning, Mr. Ken Janke, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you very much. Good morning everybody, and thanks for joining us for our third quarter conference call. With 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 Jefferies, Senior Vice President and Chief Investment Officer, and Tohru Tonoike, President and COO of Aflac Japan joins us from Tokyo. Before we begin this morning, let me remind you of the Safe Harbor. I would like to point out that some of the statements in this conference call are forward-looking within the meaning of federal securities laws and although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature. The actual results in the future could differ materially from those we discuss today and I would encourage you to look at our quarterly release or latest filing to see some of the risk factors that could influence our results materially in the future. Now I'd like to ask Dan to give us some comments and go over the quarter and then we will run through some numbers and be happy to take your questions. Dan?

Good morning, and thank you for joining us today to discuss the third quarter results and outlook.

It is during uncertain times like these that one of our primary attributes, consistency, is so vitally important. Aflac has a long history of consistent operating performance and this year has been no exception. Our operating results for the third quarter and for the first nine months of 2008 were strong and we met or exceeded our expectations. As we noted in yesterday's press release, we expect operating earnings per share for 2008 of a 15% increase before the impact of the yen. I also believe we are well positioned to achieve our objective for the operating earnings per share for 2009.

I want to spend some time talking about the balance sheet and the capital position, but first let me briefly review our operations beginning with Aflac Japan. At our Tokyo analyst meeting in September, we said we were disappointed with sales in July and August. Aflac Japan's management also discussed plans we believed could result in a strong September which would leave us in a position to achieve our sales target for the year. Overall, those plans were pretty successful. We had a significant increase in September which resulted in modest sales increase for the quarter. However, despite that increase, it will still be difficult to achieve the full year sales target on a year-to-date basis results.

I know that many of you have wondered how the situation at AIG has impacted our business in Japan. Initially, there was some confusion following the extraordinary events at AIG. Following the news at AIG, we received more than 1,200 calls in a day from consumers wondering if we were, in fact, the same company. Both companies begin with the word American and that shouldn't come as a shock. We quickly created ads that were specifically designed to differentiate Aflac and to promote our financial strength. Just two weeks ago, I spent three days in Tokyo speaking with the media and emphasizing that we are not related to AIG and we did not share their issues. As a result of those interviews, the calls we received from consumers and customers dropped dramatically to less than 50 a day.

Overall, sales through the distribution channel has been solid. In the third quarter, we sold 1.3 billion yen in new business through the bank channel which was a 92.8% increase over the second quarter. Although that is an impressive increase, like the second quarter, we thought that we would do a little bit better. The global financial crisis has affected some of our new banking partners. Banks are understandably more attuned to the financial turmoil of these agencies, and we have been spending a lot of time communicating our financial strength to our new bank distributors. Although the Shinkin Bank's sales of Aflac's products were strong in September, regional banks were somewhat weak because they spent a lot of time with their customers on non-Aflac products such as investment trust in light of the stock market sell off. That is still the case in October. We remain pleased with the number of banks that are offering our products, and at the end of the September, we had selling agreements with 196 banks, which is significantly more than our competitors.

As you know, we just began selling Cancer Forte products through Japan Post Network on October 1 of this year. We are obviously in the early stages of this selling agreement. With our product being offered to 300 of Japan's over 20,000 post offices, I would consider our initial sales to be somewhat of a test. However, our sales through these new channels has been very good so far, and I'm pleased with the strong start. We are the best branded company for Cancer insurance in Japan and there is no doubt Japan Post has a long history of successfully selling to consumers. As a result, we believe this channel will be a solid contributor to our future sales.

Now let me turn to our business in the United States. Selling insurance in the current US economy has proven to be a challenge this year. Total new annualized premium sales were up one-tenth of a percent to $369 million in the third quarter and up 1.8% for the nine months. As we discussed in previous quarters, I think it is likely that some of our policy holders, potential customers and sales associates are feeling the impact of the weak economic environment. While we have faced difficult economies before, this part of the economic cycle has been particularly challenging to the consumers. Obviously, the recent stock market turmoil has only added to consumers' unease. In addition, Hurricane Ike severely disrupted sales in Texas, which is our largest sales state -- or, selling, in the country.

Despite the sales results of the third quarter, we continue to be pleased with the basic sales related activities of our US operations. In the third quarter, we recruited more than 6,400 new sales associates, an increase of 4.9%. The average number of weekly producing associates increased 3.7% in the third quarter. Other indicators have also remained positive. The number of new payroll deduction accounts rose by 6.4% in the third quarter. Our new agents in particular continue to be a key driver in opening new accounts and selling new business.

We believe these solid results and the fundamental activities of our business position us for better results next year. We have certainly faced a much more challenging economy this year than I think anyone expected. However, that has not changed consumers' underlying need for US product line. Our coverage provides valuable protection at affordable prices. We are absolutely convinced the US remains a sizable and attractive market.

Considering Wall Street's current focus on the insurance industry, I would like to spend some time on the balance sheet. I remain pleased with our balance sheet, which I consider to be strong, especially from a capital adequacy standpoint. Because of the nature of our products, our Japanese operation, our liability and assets are unique compared with other North American insurers you might follow or own. The most important distinction of our policy liabilities is that our products help protect wealth. They don't help build wealth. Some of our products in Japan do offer a small cash surrender value, particularly with our older block of cancer insurance. However, we do not have a similar benefit feature in the US products. At the same time, our products are very affordable premiums and as a result, our business is not subject to so-called run on the bank. In fact, the persistency of our business in both the US and in Japan remains stable.

Turning to the asset side, let me first remind you why we invest the way that we do. Ultimately, the characteristics of the products we sell that drive our investment approach. Our products in Japan result in long-duration yen-denominated liabilities. As such, we purchased long-duration yen-denominated assets to support those liabilities. It is primarily the long duration nature of the investments that has led to the large unrealized losses in the portfolio as credit spreads have widened globally. In addition to duration and currency matching, the investment policies of the board of directors do not permit the purchase of speculative investments such as junk bonds. As a result, 98.4% of our debt securities were invested in investment grade products as of September.

Our investment approach has been time tested and has been effective. In fact, it has not changed in 19 years that I have been the CEO, and I'm absolutely convinced it is still the most prudent way for us to do.

As many of you know, Japan does not have a developed corporate bond market, so we have to purchase securities issued by many non-Japanese entities. We have a diversity of insurers and a portfolio from insurers in 42 countries around the world. Financial institutions have been a natural insurer for the types of assets that we own, and as a result, we so have large investments in the financial sector. We take some comfort in the fact that financials are highly regulated. In addition, we have always tried to invest in the market leaders and large financial institutions that underpin the economies in which they operate. I believe our investment premise has been vindicated considering the extraordinary efforts that many governments have taken in the current financial crisis to ensure that these large institutions do not fail.

Another characteristic that makes Aflac somewhat unique is the size and predictability of our cash flows to the investments in Japan. Through the nine months of this year, we invested more than 354 billion yen after we paid claims and operating expenses. That equates us to investing about 1.9 billion yen or $18 million each working day. These substantial cash flows means that we do not participate -- do not anticipate liquidating invested assets to meet cash needs for paying claims. As a result of our cash flow characteristics, the incredibly high persistency rate of our business in Japan, we remain a significant percentage of the securities that are classified as held to maturity.

Of the slightly less than $5 billion in gross unrealized losses on the consolidated debt portfolio at the end of the third quarter, $1.9 billion or about 38% were attributed to held to maturity. Because we have both the liability and the intent to hold these securities to maturity, we will not realize those losses unless there is a significant credit event with the insurer.

While we have a very good record from an investment perspective, we know that we are not perfect. As you know, we sold our holdings in Lehman Brothers at a large loss and we disposed of some small investment in Washington Mutual at a loss. We also impaired our investment in Ford Motor Company in the third quarter even though Ford is still current in its interest payments. As we pointed out in the press release, we own securities in Iceland's three banks. All of those banks are in receivership, and we believe that it is unlikely that we will see both interest and principal. We plan to impair these securities in the fourth quarter at an estimated loss of approximately $110 million after tax. Any time you extend credit, you take a risk. We understand that, and through credit analysis is the cornerstone of the investment approach. Obviously, if we thought Lehman had been a risk to failure, we would have never bought that debt. We believe the decision to buy securities and we accept the responsibility. Certainly, in this extreme environment, it is not surprising that some of the companies are failing.

Kriss will comment in more detail on these decisions to reclassify the perpetual debentures we own as available for sale. However, I want to emphasize that we have been consistent with our investment accounting during the 15 years we have owned these securities. But considering the current capital market conditions, we believe our approach to reclassify them is a conservative one. I remain convinced that our investment approach is the most appropriate for Aflac given the types of products we sell, and I believe our overall approach to the balance sheet remains conservative.

Undoubtedly, conservatism in this volatile market is crucial. You will recall our risk based capital ratio was 574% at the end of last year. As I mentioned in the press release, we do not normally compute interim ratios. However, in light of the investors' concerns about the industry's capital adequacy, we felt it was important to calculate the RBC ratios as of September 30. Since the end of the year, the yen has strengthened significantly to the dollar. As we have discussed at the analyst meeting, stronger yen lowers our RBC ratio. Despite the yen's impact and the realized investment loss that we took in the third quarter, our RBC ratio was still approximately 495% at the end of September. We also expect our solvency margin in Japan to remain strong. As a result, we believe our capital level is more than adequate to support our ratings. We do not anticipate the need for raising capital.

We remain focused on the best way to manage our capital in ways that allows us to navigate the current financial crisis, maintain our capital ratios and ratings and deploy excess capital to benefit our shareholders. Unlike other companies, we have not suspended our share repurchase program. We bought 23.2 million shares in 2008, all of which was funded with internal capital. We believe those purchases helped position us to achieve our earnings per share target for both this year and next. Although we do not anticipate buying additional capital this year, we expect to purchase approximately 12 million shares in 2009 or about 35 million shares over the two-year period, which is consistent with our prior guidance.

In addition to repurchasing our shares, we are also pursuing our same dividend policy. As you read in last night's release, our board of directors raised the quarterly cash dividend by 16.7% effective with the first quarter of this year. That will mark the 27th consecutive year in which we've increased the dividend. Our intent remains to increase the annual dividend at a faster rate than our operating earnings per share growth before the impact of the yen. Reflecting the underlying strength and profitability of the insurance operation, we have upwardly revised our outlook for this year from a 14% to 15% increase in operating earnings per diluted share before the [foreign currency] to 15%. We continue to believe that the 2009 objective of a 13% to 15% increase in operating earnings per diluted share excluding currency is reasonable and achievable. I'm confident in Aflac's operations and its business model and I can tell you, I wouldn't trade places with any other CEO. Now, I would like to turn the program over to Kriss.

Good morning, everyone. I want to briefly comment on the $191 million non-cash impairment charge related to the perpetual debentures we own. In light of the recent unprecedented volatility in the debt and equity markets, we have reevaluated two accounting issues related to our holdings of these so-called hybrid securities, which both have debt and equity characteristics.

The first issue is whether they should be classified as debt or equity on the balance sheet. The second issue is the appropriate approach for determining other than temporary impairment. Regarding the classification of hybrids, with the concurrence of our auditors, we have carried them as debt instruments for 15 years and we believe with good reason. As you may know, hybrids are priced and rated like debt securities. Although they do not have a stated maturity date, the hybrids we own have unique features that create what is essentially an economic maturity or redemption date. All of these features make it very punitive for the issuer not to redeem the securities at their economic maturity dates regardless of the economic environment. In fact, we had one hybrid that was redeemed on October 8 this year during what was arguably one of the most distressed periods for the global credit market.

Our first purchase of these hybrids was in 1993. Just as we do every time we invest in a new asset class, we carefully assessed the statutory and GAAP accounting implications before we made our initial investment. From a statutory accounting standpoint, the regulators treated hybrids as debt instruments, and they have since affirmed that position, very recently. At that time, our auditors also concluded debt treatment was appropriate given the substantial debt-like characteristics of the hybrid securities. In fact, had our auditors not agreed that they were debt instruments for accounting purposes, we probably never would have never bought them. However, the recent turmoil in the debt and equity markets has resulted in an unprecedented widening of credit spreads for all bank debt and equity issues, including hybrids, as well as an increase in unrealized losses, particularly for longer duration securities. As a result, we concluded it is now both reasonably conservative and prudent to classify all of our hybrids as available for sale and to carry them at market value on our balance sheet.

The second issue relates to the application of the appropriate impairment policy. At the end of September, all but two of our hybrids were rated investment grade, and they were all current on interest payments through the third quarter. We believe they will be redeemed at the economic maturity date and that the principal will be returned. In addition, we have both the intent and ability to hold these securities until maturity or at least until a recovery in value. As a result, no impairment was required using a debt approach. However, after discussions with our auditors and considering market conditions, we concluded that it is prudent to evaluate these hybrids for other than temporary impairment using an equity impairment model.

After applying that model, we concluded that a cumulative impairment charge of $191 million was warranted. We used a valuation date of June 30, 2008 for determining that charge because of recent comments from the SEC on that very topic. In fact, just last week, the office of the chief accountant of the SEC sent a letter to the Financial Accounting Standards Board regarding impairment treatment for hybrid securities. In that letter, the SEC acknowledged that hybrids posed a challenge because of the debt and equity characteristics. The SEC also stated the hybrids could be treated as debt for impairment purposes for all filings after the date of its letter until the FASB could further address the issue. We interpret that letter as meaning that the SEC believes an equity approach to evaluating impairment should have been used through June 30, 2008, so that influenced our decision to reflect the equity impairment model in our financial statements for this period.

While this is an issue requiring substantial judgment, I hope you will agree that we have been very transparent in our disclosures about our accounting treatment for these hybrid securities. We will continue to not only monitor, but also contribute to the discussion related to these instruments, and when there is further clarification of the required impairment approach, we will keep you apprised through our normal disclosure process. Ken?

Thank you, Kriss.

Before we get to your questions, let me just finish by briefly running through some of the numbers for the quarter beginning with Aflac Japan. Starting at the top line, in yen terms, revenues were up 3.3% for the quarter. Investment income rose 0.9% reflecting the impact of the stronger yen on Aflac Japan's dollar denominated investment income. Excluding the effect of the stronger yen, investment income was up 4.4% in the quarter. As you heard from Dan, our persistency has been very stable. The annualized persistency rate, excluding annuities, in Japan was 94.6% compared with 94.8% for the first nine months of 2007.

In terms of the quarterly operating ratios, the benefit ratio continued to improve over last year. It was 62.2% in the quarter compared with 63.7% a year ago. The expense ratio for the quarter was 19.5% compared with 19.1% in 2007's third quarter. The increase primarily reflected higher budgeted expenses for the bank channel and IT. Reflecting the lower benefit ratio, our pretax profit margin rose from 17.2% to 18.3% in the quarter. With the expansion of the margin, pretax earnings increased 10.1% for the quarter in yen terms. Again, excluding the impact of the stronger yen on dollar denominated investment income, pretax earnings were up 13.7% in the quarter. For the quarter, we invested our cash flow in yen denominated securities at 3.05 and including dollars, the blended rate was 3.44. The portfolio yield was 3.96 at the end of September, down two basis points from the end of June and 10 basis points lower than a year ago.

As you heard from Dan, the overall credit quality remains very high. We have only 1.6% of our debt instruments rated below investment grade; that dropped from the end of June. That reflected an upgrade of our holdings of Ahold that were moved to investment grade during the quarter and also the impairment of Ford Motor Company. IKB Deutsche Industry Bank and Glitnir Bank were also downgraded in the quarter and are now carried at below investment grade.

Let me turn to Aflac US, which had a 7.8% increase in revenues for the quarter. The annualized persistency rate for the nine months was 73.5% versus 73.8% a year ago. It's improved in each of the last two quarters. In looking at the operating ratios, the benefit ratio was 52.7%, down from 53.1% a year ago. The expense ratio was 30.4% compared with 30.6% last year. And the profit margin was 16.9% up from 16.3%. As a result, pretax operating earnings rose 11.9% for the quarter. In terms of US investments, the new money yield for the quarter was 748 versus 701 a year ago, and the yield on the portfolio at the end of September was 7.05%, up 1 basis point from the second quarter and 4 basis points higher than a year ago.

Looking at some other items for the quarter, the non-insurance interest expense was unchanged at $6 million. Parent company and other unallocated expenses were $9 million, up from $6 million a year ago. And the margins improved on a consolidated basis on a pretax margin basis rose from 16.5% to 17.5%. The after tax margin increased from 10.8% to 11.5%. The operating tax rate was 34.5, little changed from a year ago. And as you saw, operating earnings per diluted share rose 20.0% to $1.02 in the quarter, which was a bit ahead of consensus. The stronger yen increased operating earnings by $0.04 per share for the quarter and $0.17 for the first nine months of the year. Excluding the yen's impact, operating earnings per share increased 15.3% for the quarter and 14.5% for the first nine months.

Lastly, let me comment on the outlook for earnings per share for the remainder of the year. As Dan mentioned, our objective for 2008 is now a 15% increase before the impact of currency translation. That would mean a target of $3.76 in operating earnings per diluted share, assuming the exact same exchange rate as 2007. However, the yen is clearly stronger than it was a year ago, and if the yen averages 100 to 105 for the remainder of the year, we would expect to report operating earnings per diluted share of $3.97 to $3.99. Under that scenario of a stronger yen, the fourth quarter operating earnings per share would likely fall in the range of $0.95 to $0.97. The current First Call estimate for the fourth quarter was $0.98. Again, as you heard, our objective remains for 2009 of a 13% to 15% increase before the effect of currency translation.

Now Trey, I'd be happy to turn it back to you so we can take some questions. We will stay a bit longer than the top of the hour if that is warranted based on the number of questions that are in the queue, but in the meantime, please try and limit your question to one so everyone has a chance to ask us a question. Trey?

(OPERATOR INSTRUCTIONS) Our first question does come from Nigel Dally. You may ask your question.

Great, thank you and good morning, everyone. With the AIG situation, even if you succeed in differentiating your company from theirs, does it make consumers think twice about buying from a foreign-owned insurer? In which case, potentially, it could depress for several additional quarters your sales outlook. Alternatively, does it provide some opportunities to pick up some market share in Japan, and if so, how quickly do you feel you could capitalize on that opportunity? Thanks.

I will answer that because I just got back from there. I think that while I was over there, being able to differentiate us made a big difference. We've got some research that came in even this morning that I just saw that said that we were perceived as being much stronger, and I don't see it as a problem regarding foreign insurers. Remember, our operations over there, everything is run in Japanese, we have only got two Americans that work over there, and so they perceive us as being Japanese to a great degree even though we do have the American in the name to some point. So I see opportunity for us.

It is really not AIG, it is ALICO versus Aflac is the problem. It's not AIG, because ALICO is American Life Insurance Company versus American Family. But now that we have differentiated ourselves -- and there were over 11 different newspaper articles throughout the country while I was over there that said we were looking at it. And by the way, with this uncertainty that is going on in the marketplace, I think that's off the table right now. So I want to say that, although we were always just looking, just as we have with any other company. But I think it gives us opportunities to broaden our base, to hire additional aassociates, and so over the long run, it is going to help us. Over the short run, I think it caused us some problems. But I think we are through that and we will move on now.

That's very helpful. Thanks.

Colin Devine of Citi, you may ask your question.

Okay, thank you very much. I have got two questions. One, I want to focus on the investment portfolio. But just also a clarification, Dan, that you acknowledged that you were looking at ALICO for potential M&A, but you are not now. So, just to clarify that. But then I'd like to turn to the investment portfolio.

While it's easy, and I appreciate you do not have surrenderable liabilities, but the fact is, as you pointed out, you do have almost $5 billion of unrealized losses that represents about 70% of the company's equity, which is well above average. Where I want to go with this is to look at both Aflac's impairment policy and its risk concentration issues. Now, I appreciate you wrote down the Ford Motor, okay? But that's trading at about 51% based on where you had it. There was nothing done to Ford Credit at 55% of book value, IKB at 44% of book value or the Gitzir Bank at 54%, although you acknowledged that you are going to impair that in the fourth quarter. What is Aflac's impairment policy?

And then, with respect to concentration, which was the issue in the past with Parmalat, 5% of the company's equity was exposed to Ford. And as a single B-minus credit, that seems rather high to us. But also, if I'm looking at your top 5 BBB holdings, they represent -- what -- over 42% of the company's equity. If we take the top nine on page 13, you are up to almost 70. What are your concentration limits? Because I acknowledge that you don't have much in below investment grade, but where Aflac is making some big bets -- or taking some bets, they tend to make pretty big ones.

Colin, it's Jerry. First of all, I think our impairment policy says that anything that is rated below investment grade is immediately subject to intense scrutiny, and I think we've been through what that scrutiny entails, but --

Well actually, then why would you write down Ford and not Ford Credit? Why, at 44% of book value, is IKB not written down?

Because -- well, two reasons. One is that Ford Credit and Ford are two entirely different credits. And we can debate why they are entirely different credits in a separate conversation. But Ford Credit is -- first of all, it has got receivables that are covering the maturity date that we are exposed to, which is 2013. It is a 4.5 year obligation that we have. Ford Motor Company, I take your point, is a very different situation and we have reacted accordingly.

Again, IKB, I don't want to get into specific credit discussion with you, but I will talk to you about our impairment policy, which is if we think that it is probable that -- and I'm either quoting or closely paraphrasing here -- if we think it is probable that we are not going to receive either principal or interest on any investment, we will impair it. By the way, typically, we do more than impair; we simply sell it, and that was the case with Lehman Brothers. We sold those immediately. I'm not even sure they went through impairment. The Iceland banks, you have heard about. We're -- those will be written down to zero. There probably will be some recovery there, but we are not counting on it. IKB, I think is, again, a situation which is very fluid right now, and as soon as there is any clarity at all, we will make a determination and we are making a determination right now talking about it. So we are actually, I think, pretty proactive.

In terms of your other question, speaking to concentrations, yes, we do have specific concentration limits. They are lower than they were a couple of years back and we are very disciplined about any new investments we make in terms of minding that concentration limit.

Well, then what percentage do you feel is prudent of equity to expose a single B-minus or perhaps BBB? What are your limits?

Our limits on new investments are typically -- are 5% of [TAC]. Now, in the case of Ford Credit and Ford Motor Company, those were put on at an earlier date before these limits were imposed. And if we think we are taking unacceptable risk, we will sell them. I would also say in the past couple of years, as you know, our emphasis has been a strong bias towards much higher rated investments.

I acknowledge that page 13 is a big improvement. Perhaps you could add that column then to it as a percentage of TAC, since that's how you are managing, versus as a percentage of total debt securities.

Look, I will be happy to talk with risk management and see if I can give you more clarity.

Mark Hughes of SunTrust. You may ask your question.

Thank you. What were the most successful actions in Japan in September that drove the improved sales? And then, to what extent has that continued into October?

Well, certainly the bank channel came through with a strong increase, 92% for the quarter, and it was a strong September. We were going against easy comparables. Remember, we had a rate increase that went into effect September 1. So we had a surge in business last year in July and August. So it actually was tough comparisons for July and August and easy comparisons in September. Then overall, all of our agencies just did a little bit better in the month of September. Finally, we had a direct mail campaign. Tohru is on the line and he may have something to add to that. Tohru, do you have anything?

I think, Dan, you are right. The factors that you just named are the main factors which helped us to have a better September. I think that's about it.

Do you have anything on October?

We do not have any specific incentives forecasting October. But instead, we are having a very stable, good and stable operation in the regular of our channels. And our initiatives are more forecasted on the later part of the quarter, mostly in December.

Tom Gallagher of Credit Suisse. You may ask your question.

Good morning. Just a quick one on capital and then another one on the investment side. Kriss, can you talk -- just remind us what your target RBC is? I think you have had to hold some extra margin above the normal 350 RBC for AAs because of the swing factor of the yen. And then also, just remind us what the yen sensitivity is, because I believe the yen has strengthened another 11% or 12% since the close of the quarter. That was my first question. Then I just had a follow up too.

I appreciate your acknowledging the fact that I have repeatedly said that we had to carry -- I was more comfortable carrying a higher level of capital than average because of the potential for a strong yen, and we are seeing that today. Let's see. As I recall, the strengthening of the yen by about 10 basis points would cost us potentially approximately 100 basis points in RBC. I would have to go back and refresh my memory to make sure that is accurate. I discussed that at the last analysts' meeting. But I would say, based on our modeling, our sensitivity becomes less over time in terms of sensitivity to a strengthened yen. And you mentioned the 350 RBC level, I would have to say yes, that is probably what we would like to maintain, and I don't see us getting anywhere near that in the near future.

Tom, this is Ken. Remember too that the RBC is used -- we have got to live with the period ending rate in computing the RBC for the entire year, and the rating agencies understand the nature of our business and the sensitivity of the RBC to the yen.

Okay. And just to follow up on that, to Kriss, so a 10 point move in the yen, which we have had since quarter end, would shift the RBC by 100 points.

That's what I recall, Tom, but I would want to go back and verify that from the computations we have done.

Okay, great. The only other question I had was, Jerry, can you comment on the top 30 holdings that you have laid out? Can you talk about whether any of those are on a watch list of any sort? And maybe just comment a little bit about where the bonds are trading of some of the high profile ones that, I think had received government assistance, like Dexia, Fortis, HFOS. Thanks.

Yes, Tom, the top 30 holdings, I guess there is obviously a heavy preponderance of bank debt. I think of those names, Fortis is one of the larger exposures. There has been significant government assistance by three different governments, and all that assistance has come in the form of capital infusions that are subordinate to our exposures. Again, our discipline remains unchanged on all of these. We are looking at all of them constantly. We have been proactive in the past, and we will be in the future. It is impossible for me to predict where these things are headed. Obviously, the market values are far lower than what we think is reasonable, but we also would say that the -- well, I would say to you that while the market values are far lower than where they have been, we still have had no indication that we are not getting paid our interest and principle. And these are securities that are dedicated to liabilities we have and we have got no reason to change our posture on that.

We are not adding to any of the top 30, by the way, or anything that approaches 5% of total adjusted capital, and that has been a policy we have been following. We are committed to diversification. In fact, right now in terms of our new investments, we are spending a lot of -- the bulk of our cash flow is being devoted to essential service type companies. By that, I would mean primarily electric utilities, water companies. And with almost any company we speak with now, we are able to negotiate extremely strong covenants. So we feel like we're continuing to build a very solid and durable portfolio.

Okay. Thanks.

Ed Spehar of Merrill Lynch, you may ask your question.

Hi, thank you. I was wondering, Kriss, maybe you could give us the key differences we should be thinking about when you talk about the equity impairment model versus debt. And related to that, is there -- what do you think the risk is that the statutory accounting will follow this change on a GAAP basis? Thank you.

Well, the equity impairment model focuses on the discount to par that these securities are trading at in the marketplace. In other words, how much under water are they and the period of time they have been under water. We have used basically a three step model that says, okay, have they been more than 10% under water for 12 consecutive months? Then another step would be 20% for more than nine months, and the third step is more than 35% for more than 6 months. And once they hit any of those conditions, they are deemed to be subject to impairment. So that's sort of the equity model.

The debt model basically depends on an assessment as to whether or not you are more likely than not to suffer a loss of interest income or principle. So impairment is typically not done on a debt security unless you have those conditions, unless you expect not to receive principal or interest. If you intend to hold them -- if you have the ability and intent to hold them to maturity, and we normally do have the ability and intent to hold all of our debt securities to maturity, and we have long duration securities because we have long duration liabilities, and I pointed out to our board yesterday that basically, we run a larger risk for investing in short duration securities because of reinvestment risk than we do suffering through these periods of market value fluctuation of the long duration characteristics, where we remain matched between asset and liability durations. So that's that. As far as this --

Kriss, can I ask you just on that, though -- so does this mean that this is a bright line test then for these securities? When you say --

You could call it that. You could call it that, and that equity impairment model has been brought into question.

Does that mean -- can you give us a sense for -- I would guess that there are a number -- given the declines we have seen in some of these hybrid type securities, that there are a number of these that are falling into that at least down 20 and probably down more than 35% bucket. If there were no change in market conditions, can you give us some sense of six months from now, what we would be talking about in terms of this bright line?

Not much more, if there were no change in market conditions, because we marked them all down as of June 30. Then the SEC directed the FASB to reinvestigate this whole notion of the impairment model for these hybrid type securities, you know. And I commented on why we made the change effective with prices as of June 30 anyway, that's what the SEC seemed to say should have been done. Prior to this time, we had maintained that they were -- debt securities ought to be evaluated on a debt impairment model. But in the event that the SEC forced us to change, we felt it was prudent to go ahead and take the charge through June 30 and to await further guidance from the FASB regarding the appropriate impairment model. The whole notion is what is a fair value for these securities in a relatively illiquid market when values are somewhat artificially depressed, you might say.

And Ed -- this is Ken. Remember one thing that Kriss had commented on too. The $191 million after tax charge related to hybrids in the third quarter really resulted from kind of a retrospective treatment of these hybrids using the equity impairment model going back several years.

-- (multiple speakers) at least 2004 and was cumulative through that whole period of time. I think Jerry has a comment.

Yes. Your question really is -- I think you are trying to look prospectively at what you can expect in terms of potential impairments. And I will tell you this about how we are measuring these things. We are pricing these things really at just egregiously low levels because there are no observable markets out there for a lot of securities of all stripes. So we have elected to price them very conservatively, the marks are extremely low. So I don't see the marks really changing absent a complete and utter meltdown. And I would tell you this about the hybrids, just to give you an overall characteristic of what the portfolio looks like. Our overall portfolio is 82% A or better, which is about as high a standard as there is in our industry. Our overall portfolio of hybrids is rated at this level, 97% A or better. So this is an extremely high quality slice of our portfolio which we'd marked at very low levels already.

I'm sorry to belabor this. I guess what I'm still a little confused on, though, is if nothing changes where these securities are marked on an unrealized basis, won't we have some portion that is going to drop into this greater than 35% for more than 6 months bucket, that has not been recognized as impairment, but will be?

Some will migrate to those buckets, yes. So if you are asking could there be additional charges, yes, but we wouldn't expect them to be anywhere near what we had in the third quarter. Again, because the third quarter was a cumulative [catcher].

We have done that model and the number is nowhere near what it would be -- what it was at the end of the third quarter.

It is approximately $80 million pretax in the fourth quarter if nothing changes. But again, the SEC has basically deferred the use of the equity impairment model until the FASB could reconsider the propriety of that as it relates to hybrid securities.

But Ed, just remember -- this is Dan. That is an accounting issue, not an economic issue, because we don't plan on selling it. If you go back while I have been CEO, I have seen $5 billion -- almost $6 billion in profits in our bond portfolio which we couldn't sell either, because we had marked these assets against liabilities and as long as they were paying, we couldn't afford to make changes anyway, because we would be buying back at lower interest yields. We are in for this for the long run. We plan on keeping these, and at the end of the time, we expect them to mature with a full rate.

And I guess that was my second question, then. Because I completely understand that, and I guess that's why the question about statutory, do we think there is going to be any change on a statutory basis, maybe is more relevant.

Well, it was just within the last two years we had gone through extensive discussions with the Standard Valuation Office of the National Association of Insurance Commissioners and received agreement that these hybrid securities would be treated like debt securities for statutory accounting purposes. It is not to say that decision is not subject to review or change, but we haven't had any indication at this point that they are so inclined.

Thank you.

Darin Arita of Deutsche Bank. You may ask your question.

Thank you. The interim RBC ratio was very helpful there. Can you give us a sense, though, how much higher the RBC ratio would have been without any share repurchases this year?

Well, the required capital is about $800 million per hundred basis points of RBC. It probably would have been maybe close to 100 points higher without, say, the extra shares we bought anyway. We did pull out all of our money from statutory capital in 2007 to finance the share repurchase that we did this year. So it was already out of the life company into the holding company. So that money came out in 2007 and was reflected in the end of the year RBC ratio. Basically, it wouldn't have had any effect on the 2008 number.

Okay. That's helpful. Can you give us a sense of what percent of the statutory operating earnings do you need to reinvest for growth each year?

Well, our statutory earnings are increasing at approximately the same rate as our GAAP earnings, roughly 15% before the effect of currency. If you say capital needs to be increased at the same rate of growth as revenues or assets or earnings, we probably have a required increase in capital, order of magnitude 10% to 15% per year. But we have always had a self financing company. We have never had to raise capital for the operating capital. And we have more than adequate statutory earnings to finance any required increase in capital.

All right, thank you.

John Hall of Wachovia. You may ask your question.

Thank you. Kriss, in your comments to Ed's question, you mentioned an $80 million pretax number. Did that reflect where that charge would have been had you used third quarter ending values on the securities?

Yes, that's correct.

Okay, great. Thanks.

And assuming that the prices stay constant through the end of the fourth quarter. Because some of these things that weren't fully aged according to the aging parameters would now fall into those buckets of over 12 months, over 9 months, over 6 months, et cetera, that I mentioned earlier.

Great, that's helpful. And for Jerry, I notice that the held-to-maturity bucket of investments seems to be increasing. Is there a decision to classify more securities in this environment into that bucket now?

Let me answer that this way, we have -- in our Japan portfolio, you are not permitted to reclassify from available for sale to held to maturity on existing holdings under Japan GAAP. So no, there has been no strategic decision to take existing holdings and reclassify them. I would say that our policy on what we classify as available for sale versus held to maturity is unchanged, and a lot of the securities that we bought this year qualify as held to maturity securities under our internal rules. So that's the only reason it has happened. We actually -- if we end up purchasing more JGBs towards the end of the year, which we occasionally do, then that will add to the available for sale component.

Great. I was just wondering if you could comment more broadly on the sales mix in Japan across the banks and that channel's progress a little bit.

Tohru, do you want me -- do you want to talk about that a minute?

I understand the question was the sales mix in Japan?

Sales mix at the banks.

Shinkin banks versus the major banks.

I see.

And regional banks, how does it breakdown?

Yes. Let me see . As of -- for the month of September, roughly a little bit over half came from Shinkin Bank and about one-third was from the regional banks ,and the mega banks is less than 10% and that share has been pretty stable during the third quarter. We saw increasing shares by Shinkin Banks. Does that

Yes. Thank you, Tohru.

You are welcome.

Jeff Shuman of KBW. You may ask your question.

Thanks, good morning. A couple things for Kriss. Kriss, is there any cash or excess capital at the holding company at this point?

Yes, I'm looking at Ralph Rogers. He monitors that cash position. We have got about $250 million of excess cash at the holding company level.

So that is additional resource beyond whatever is embedded at the operating level?

That's correct, yes.

I want to clarify something. I'm think -- maybe the answer to one of Darin's questions, a little bit confusing. You talked about how retained earnings needed to grow along with the top line, and it kind of sounded like almost a break even picture. But that is really not the right picture, right? Isn't the easiest way to think of it is that your return on statutory equity is 40% and your premiums probably grow high single digits and there is still a big spread, at least on an operating basis it's going to generate continued excess cash flow, is that right?

Yes, that's correct.

Okay, just wanted to clean that up. And then --

About 18 million a day.

Yes. We are investing about $18 million to $20 million a day on average.

At the yen it is 20 now.

Through net cash flow.

Yes, I didn't mean invest in cash flow. I mean in terms of excess capital. As long as your statutory return on capital is much higher than your growth rate, then you still are going to generate substantial excess capital.

Yes, you are right.

Okay. And then lastly, one clarification. Early on, Dan indicated that the preliminary share repurchase plan for ' 09 is 12 million shares, but then, of course, later we got into this discussion about the dramatic move on the yen and possibly having 100 basis points impact on the RBC ratio. I would guess it was some level of RBC there would be a modification to the share repurchasing thinking? Is that correct?

We don't see it right now. We think we are stronger and we can handle it, and that's our position at this particular point.

Okay, great. Thank --

It really depends on the stock price, Jeff. It is a lot cheaper today than it was three months ago.

Sure. Okay, thanks a lot, guys.

[Michael Gorzynski] of Third Point. You may ask your question.

Yes, my first question is about the held to maturity portfolio. As of June 30, you had losses of around $1.8 billion. What were the losses at the end of the quarter?

The held to maturity portfolio?

Hold on just a second. They were $1.9 billion, I believe. $1.9million were in held to maturity at September 30.

Given the risk and recent performance of your investment portfolio, why are you raising your dividend when your peers are out raising capital?

Because we don't need to raise capital, and we believe that this sends a message of the strength of the company and what is going on and that we believe with 98.5% of our investments in investment grade bonds, that we are in a good position and with the enormous cash flow that we have, we can handle it.

As you reflect back on our investment portfolio and our position for the last -- since I have been here, 19 years, it really hasn't changed. We believe, in retrospect, although we wish we had not bought Lehman Brothers bonds or whatever, it is a very conservative investment portfolio and the way to structure it. We don't have the real estate, we don't have any exposure there. We had this accounting change. But other than that, we have had no stocks. We had no mortgage issues that have been out there. So we have positioned ourselves -- now, in this environment where there has been unsettling news worldwide, we are affected by that, but long-term, we think our position as a company is very, very strong. We believe that once we get through these uncertain times, we will come out on the other end being one of the strongest companies that is out there today, and we want to send that message to our shareholders that we feel that and that's why we increased the dividend.

I guess where I would question it is you have got $8 billion of these perpetual bank instruments, and a number of these instruments are now trading at less than $0.50 on the dollar. If those bank issues come under -- even if these valuations turn out to be true or those valuations deteriorate, it's going to put significant pressure on your capital. That's why I'm asking the question.

They are mark-to-market right now in the September 30 financial statements.

But not in the maturity portfolio, right?

All the hybrids are now in our available for sale portfolio.

So they have been moved.

That has been reflected in our September 30 financials.

Okay, thank you.

Welcome.

Eric Berg of Barclays Capital. You may ask your question.

Yes. My first question relates to -- and I don't think you have gone over this. Maybe you have. The valuation of the securities of the perpetuals, you mentioned repeatedly that they have been marked as of June 30. If they had been marked as of September 30, what would be the reduction in the fair value have been?

We covered that. It was $80 million.

So that -- I thought the $80 million was what the impairment would be if you went into a different bucket. No?

Hold on. Ralph is checking it.

Thank you. While you are doing that, let me ask Paul a question about recruiting. What should we infer from the significant improvement in the number of daily producers? While one might be temped to say that this is a favorable reflection on your recruiting and training, that the number of weekly average produces, is it also possible that this is just simply the result of a sharply deteriorating economy in the US and that it is easier to get people to work for you when the job outlook is deteriorating? How should we think of that improvement.

I think it is a direct correlation to the fact that our success in recruiting has led to new agents going out and working extremely hard in the marketplace. I think the fact that our average weekly producer number is up and our recruiting is up and yet our premium is not up at that same level says that the average consumer is not purchasing at the level that they once were. They are being slightly more conservative within the policies that they are buying. But overall, the number of new accounts that our new agents as well as our veteran agents are opening, Eric, is tremendous. I'm very happy with those numbers. So what I can tell you is, and I've used this analogy before, we are buying shelf space for the future. I think our new agents are doing exactly what they want. I think when this economy turns and people begin to purchase more insurance than they are purchasing today, we are going to see those new agents, as well as our veteran agents be very successful with a lot of access to future businesses. So I'm very excited about some of the underlying things that I'm seeing.

Thank you. I will wait for the answer from Ralph.

It is about $80 million, Eric.

Thanks very much.

John Nadel of Sterne Agee. You may ask your question.

Hi, good morning. I have a question on the US. Understanding that the visibility has got to be very difficult given the economic outlook. But I was wondering if you can give us a sense of any expectations you have with respect to US sales and more importantly maybe than that,is for US persistency. Could you maybe talk about what you have seen happen over the course of past US recessions with respect to the persistency levels in the US? And if persistency were to fall, how much flexibility do you have for instance on the G&A line or in other places to keep margins intact if sales in the top line slow?

US persistencies remain consistent. I will let Kriss talk about the G&A effect.

Inconsistent but Paul, consistent sort of across a 15 year period, or does it tend to fluctuate or move down during economic weakness, or is that a time when the product is that much more important to the consumer and maybe persistence even tends to improve?

We have never seen a material change in persistency in response to economic conditions, either favorable or unfavorable.

So more of a sales issue then?

Yes, I think that's right. People in distressed times tend to want to hold onto what insurance they have. It is kind of the last thing to go in many cases. We haven't observed that in the whole period of time I have been around Aflac, which has been a long time.

Okay. So it's really then just a matter of, can sales hold up enough to keep the top line growing at a reasonable pace to grow the earnings, right?

Yes, I think that's correct, and we do have some flexibility in managing our expenses. We certainly have variable expenses. For the most part all of our agent compensation is directly variable with premiums, the G&A has a number of elements of discretionary spending in them that could be adjusted. But we are trying real hard not to cut into muscle as we do this. We are taking a hard look at budgets for 2009 and trying to make sure our expenses are growing less than the rate of growth of our anticipated premium income and of course, if we really had a strong fall off in sales in response to severe economic conditions, we would have to make some adjustments, but we are not at that point yet.

I want to further comment on the outlook for sales. While I can't give you specific numbers, what I can tell you is I returned last week from our national convention for sales with over 1,500 of our top sales people from around the country. Among them, the momentum remained extremely strong.They are positive. They do recognize the difficulty of the economy, but they also recognize the extreme need for our products both by businesses as well as by individuals. The other thing I can tell you is that we do know that gas prices both affect our agents and affect of consumers, and the fact that gas is continuing to drop and if it holds, I think it will have the affect on an average person and their ability to purchase certain things. I think the fear around the price of gas has been something that's effected and I've continued to hear through our enrollments and questions we've had. At $64 a barrel or whatever it was this morning, that is a positive sign for me of some of the people that are purchasing our products and one of the things that we will see in the future.

That's good color. Thanks, Paul. And then one more quick one. More strategic, maybe for you, Dan. Despite the fact that the stock is down, everything is down and your relative multiple is still significantly strong. Is this -- I know it is not -- I know it is not in Aflac's character, but is this not maybe an opportunity for you to take advantage of that and grow the company via acquisition?

I think right now we are going to hold capital and just continue to watch and at a later date, we may look at something. We always try to look, but every time we do, our main responsibility, as you know, is to protect the shareholders' interest and we weigh it against buying the stock back, increasing the cash dividend and we will look at it and see. We have looked at a lot of companies over the years. But acquisitions is not our specialty. We are probably not going to be as good at it as somebody else, but at the same time, if there is a steal out there in terms of an acquisition, we want to look at it. That's why we were going to look at ALICO, is see what the price was. If it was a very high price, then we weren't interested. If it was a very reasonable price, because of our understanding of Japan, we were willing to look at it. But I think right now we just want to get through these uncertain times with the global economy. I think we are again,well positioned and our operations are doing extremely well. We basically -- who do you know that can say that can almost guarantee a 15% in operating earnings per share for this year and that next year is 13% to 15%? When you have got that going for you, I'm reluctant to look at any acquisition when you have a bird in the hand at this particular point and we feel like we have that.

I understand your point. I wouldn't sell yourself short. Very few are good at acquisitions.

Thank you.

Our last question today comes from Suneet Kamath of Sanford Bernstein. You may ask your question.

Great, thanks. Not to beat a dead horse, but I did want to come back to the hybrid securities issues. In your comments, you have said a couple times you have really marked this down. If I literally just take the 191 of losses and gross that up for taxes and then compare it to the close to $8 billion on the balance sheet, it only looks like a write down of about 3.7%. So am I thinking about it wrong? I want to understand when you say you have really marked it down, how you arrived at that conclusion. If then maybe related of it, if the FASB reverses course now in terms of how it treats these instruments, would you be looking at a write up of the $191 million that you took in the third quarter at some point in the future?

I feel certain that would not be permitted. It's not in the nature of accountants to allow you to write things up once they're written down, so we would have to wait until we collected the cash. I'm going to let Jerry address the marks. I will say just off the top of my head that tier 1 securities have been marked down a lot more than the upper tier 2.

Suneet, this is Ken. I think the point of the comment was that now that the entire hybrid portfolio is contained in the available for sale classification, their fair values are already reflected on the balance sheet.

And equity.

I think the number that he is bringing up is the impairment that we have taken. Now, that doesn't reflect the mark down of the entire portfolio. That only speaks to the securities we have impaired. The mark down on the portfolio is considerably larger than that. So the 97% is actually not an accurate number.

Okay, thanks.

Are there any more questions?

We show no further questions.

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