美國家庭壽險 (AFL) 2008 Q4 法說會逐字稿

Good evening, everybody. If I could get your attention, please. My phone says it's 6:40 so I think we're ready to go. I do appreciate you joining us tonight. I was pleased to see the sell-side, at least in part, was able to join us after covering another company tonight that released, so we're glad that you were all able to make it and fight through the weather.

I'd like to begin this evening with an introduction of those who have joined me today from Aflac beginning with Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, President of Aflac and Chief Operating Officer of Aflac US, Jerry Jeffery, Senior Vice President and Chief Investment Officer. We're also joined by Mary Chapman, who is Vice President and our senior credit analyst, she leads our global credit effort, and Robin Wilkie, who's Vice President, investor relations. I'm Ken Janke, and again, thanks for joining us.

I would like to point out that tonight's meeting is webcast, although we had a call this morning, so if you would please do a quick check of phones, pagers, all that stuff, put them on vibrate, we would appreciate it.

And I'd also like to remind you that some of the things you'll hear tonight are forward looking within the meaning of federal securities law. Although we believe these statements are reasonable we can give you no assurance that they will prove to be accurate because they're prospective in nature. As you know, the actual results in the future could differ materially from those that we discuss today and I'd encourage you to look at last night's press release where you'll see a list of the various risk factors that could affect our future results.

So with that let me turn it over to Dan. He'll talk about the balance sheet and our operations a little bit, I'll follow up with just a couple numbers then we'd be happy to take your questions.

All right. Thank you, Ken. Good evening, everyone, and thank you for joining us. I hope you had a chance to listen to the conference call this morning. In light of the recent developments and the increased investor interest and concerns, we felt it would be helpful to conduct a separate call this morning to address some of your questions. I know that you're accustomed to hearing about the sales and the earnings growth and I'd like to talk about it a bit, but first I want to talk about what's on most peoples' mind and that is our balance sheet and our capital position, so let me begin with a couple of comments about our investment portfolio.

You may have heard me say it this morning, but I'm going to say it again and that is I want to reiterate that what I said previously and overall I am very pleased with the quality of our assets and it's with good reason. Despite the global credit downgrades over the last few months, the credit profile of our holdings is still very high. More than 98% of our fixed maturities and perpetual debentures were investment grade at year end.

I know you realize that you can't run a company in hindsight, but if you could, other than avoiding a few specific securities, I would not alter our overall investment approach. The reason is straightforward. We purchased securities that best match the characteristics of our policy liabilities. That is specifically true with our Japanese operation.

For more than 15 years, our greatest challenge has been investing huge cash flows in appropriate securities. We need to buy long-duration, yen-denominated investment grade securities to fund our long-duration, yen-denominated policy liabilities. With that as a brief background, I'd like to talk about a few specific points of the balance sheet.

First, I stand by the decision we made in 1993 when we first purchased perpetual debentures, or so-called hybrid securities. Obviously this asset class has been the center of controversy on our name over the past ten days or so. To clarify I'm referring specifically to upper Tier 2 and Tier 1 perpetual securities in our portfolio, which represents about 13% of our total portfolio's amortized cost.

I want to emphasize to you that the overall credit profile on these securities is very strong. The average rating is an A. Other than the Icelandic Banks that we told you about in the third quarter and then wrote off in the fourth quarter, every one of the perpetual debentures we own is current on interest. Furthermore, our investment department has spent many hours over the last week working with the internal credit team and third parties to assess the hybrid holdings.

As I mentioned this morning, we have stress tested our capital using very pessimistic scenarios about potential bank nationalizations and the possible impact with the hybrid holdings. Even using what we believe is a worse case scenario, we estimate that we would incur a pretax charge of only $100 million to $400 million if the governments did not back hybrids, that we own, either direct or indirect with voting rights. Even under that scenario, we believe that we are in a strong position and would not need to raise any capital.

Second, a lot of you made -- excuse me -- a lot has been made of the large unrealized losses in our debt portfolio. The biggest factor in the increased unrealized losses is the increase in the wider credit spreads on our long-duration investment portfolio. In addition, the stronger yen has magnified the unrealized losses of the investment portfolio. For instance, the yen has strengthened 13.8% from the end of September to the end of December. This increased in unrealized losses in the available-for-sale category by $357 million.

I'd also like to point out that 32% of the gross unrealized losses on our consolidated debt portfolio at the end of the fourth quarter were attributable to the held-to-maturity securities. It makes no sense to me that some people insist on including unrealized losses in the held-to-maturity category in our total gross losses.

Certain securities as held-to-maturity are for good reason. We have very strong operating cash flows. We also have the ability and intent to hold these securities to maturity. That means we will not realize those losses unless our analysis indicates that we are unlikely to receive our contractual interest and principal payments.

Third, we do not face any liquidity issues. As we discussed, some of the products in Japan offer a small cash surrender value, particularly with our older block of cancer insurance; however, we do not have a similar benefit feature in our US healthcare product. That means that our reserves exist for the benefits of the policyholders, but as a rule our customers do not have a claim on those assets. As such, we do not anticipate liquidity invested assets to meet cash needs for paying clients.

In 2008, we invested more than JPY590 billion after paying cash claims and operating expenses. That equated to investing JPY2.4 billion, or $23 million each working day. For 2009 we estimate our cash flow to investments will be another JPY505 billion, or $5.6 billion. As you may know, we have JPY55 billion of debt coming due in April of this year. Our preference would be to refinance the entire amount in the Samurai market if the market conditions are reasonable; however if conditions do not improve we have other options. We could refinance the debt through bank borrowing, refinance it in a dollar market, or pay the entire amount off.

My final comment on the balance sheet is directed at what I consider to be a very strong capital position. You may recall our risk-based capital ratio was 574% at the end of 2007. From the end of 2007 to the end of 2008, the yen has strengthened by 25% to the dollar.

That change in the yen had a significant impact on our RBC ratio. In fact, as we demonstrated at the analyst meeting, for several years one of the reasons that we maintained a very high RBC ratio is to provide a cushion against the risk of the yen strengthening. As you may know, the stronger yen increases our required capital; however, it does not increase our total adjusted capital nearly as much because that capital is substantially hedged by Aflac Japan's dollar denominated investment portfolio. Despite the yen's impact and the realized investment losses we took in 2008, we estimate that our RBC ratio still will exceed 450% at the end of December.

Let me recap for you from a preliminary statutory perspective. We dividend $477 million to the parent company in 2008 for the repurchase of our shares. We used another $585 million to fund the shareholder dividend and other corporate cash needs.

We also absorbed realized after-tax investment losses of $682 million. Still we increased the total adjusted capital for the year. I am confident that our current excess capital position and the capital that we generated this year will see us through these challenging times.

Now let me turn to a brief review of our operation of Aflac Japan. Aflac Japan performed well, both operationally and financially, through 2008. Coming into the fourth quarter we had told you that we thought it would be challenging to achieve our full-year sales target based on our nine months results and we were right.

For the year sales were up slightly but we did not meet our original target of a 3% to 7% increase. The shortfall in sales was primarily attributable to the disruption in the bank channel associated with the developing financial crisis. During the first nine months of the year, in -- quarterly increases in bank sales were strong; however, we thought that they would be even greater. We believe the slower-than-expected sales through the new bank channels resulted from the banks' conservatism, particularly at the mega banks and the large regional banks.

Then, the financial crisis struck. Sales of all insurance and investment products at banks fell sharply in the fourth quarter. Accordingly, sales of our products through banks in the fourth quarter were down 26% compared to the third quarter of 2008.

As we discussed in our third quarter conference call many of the banks found themselves spending a significant amount of time with their customers on non-Aflac products, such as investment trusts and annuities, in light of the Stock Market sell off. That reduced the time the banks could spend on introducing Aflac products to their customers.

Overall, we are very pleased with the number of banks offering our products. At the end of December we were selling agreements with 242 banks, which is significantly greater than the next closest company selling through banks. We also began selling our Cancer Forte product through Japan Post Network Co. at the start of October. Our initial sales efforts are being carried out through 300 of Japan's more than 20,000 postal outlets.

As a result, the fourth quarter is somewhat of a test of the new channel. Obviously, though, we began that test during a very challenging period. Still, our sales results were generally in line with our expectations. Although it will likely take time for the new channels to ramp up, we look for better sales results through Japan Post in 2009.

We also continue to focus on developing our traditional channels in 2008 including our sales force of individual agencies. Recruiting of new agencies was up 23.4% last year. In addition, we believe that the right training programs to increase the likelihood of these new agencies will help our producer growth.

We continue to believe Japan is a very good market for the types of products that we offer. The only issue that gives us pause is the weak global economic environment. As such, we've set our sales objective to be flat to up 5% for 2009.

For Aflac US selling insurance in a deteriorating economic environment also has challenges. With the emergence of the financial crisis in the fourth quarter, the challenge became even greater, and as a result our total new annualized premium sales was down 5.6% in the fourth quarter. For the full year we were basically flat.

In more than 35 years that I've been in Aflac this is the first time that I can say that the change in the economy has impacted our sales. Our persistency rate has held up fairly well, although it did decline 0.7% for the year. We also attributed the decline in the persistency to the current economic conditions. Although we believe our coverage is affordable for the average American family, we realize that in very difficult times families have to make hard choices.

As we discussed through the year, we were encouraged with the basic sales-related activities of our US operations despite that it was below our annual sales target. For instance, we continued to expand our distribution system. In the fourth quarter recruiting was up 7.4%. For the full year we recruited more than 25,700 new associates, an increase of 6.2%. As has been the case in the past, we believe that recruiting has benefited from the rising unemployment due to the weak economy.

The average number of weekly producers increased 0.6% in the fourth quarter and 2.6% for the year. New payroll accounts slowed in the fourth quarter compared to the prior three quarters where they were very strong; however that's not unusual, as the fourth quarter [typically] marked heavy reenrollment of our existing accounts rather than opening new accounts.

In addition to the distribution, we believe our commercials and our branding message position us in a better segment of the market. Four of our new commercials in 2008 were short spots that emphasized our business-to-business initiative and we believe that's one of the major reasons our new accounts rose so much. These spots directly address businesses and benefit decision makers for the first time, while appealing to individuals and entertaining them, as well.

This year, we will air more business-to-business spots, including one in the education area and another one in the construction area. Let me show you two of the new commercials. The first one is called "Construction" and the second one "Education." We didn't spend a whole lot developing the tag lines for these commercials, but I think you'll find them very entertaining. They only -- we'll show them twice.

(VIDEO PRESENTATION) "When this construction company added Aflac to their benefits package at no direct cost to them it broke new ground in attracting and retaining employees. Find out more at Aflacforbusiness.com."

(VIDEO PRESENTATION) "When this school district added Aflac to complement their employee benefits package guess who became the new teacher's pet. Aflac, Aflac, Aflac, Aflac, Aflac. (LAUGHTER) Find out more at Aflacforbusiness.com. And the duck says, Aflac." (LAUGHTER)

Well, we remain absolutely convinced that the United States is a vast and attractive market for our products, and even though there is a very strong need for our US product line it is clear that the demand for the products has been dampened due to the weak economy. As such, our outlook for sales and persistency levels in 2009 remain tempered by the economic conditions. Like Japan, our US sales target calls for flat sales to up 5% increase this year.

From an earnings perspective, we continue to believe that a 13% to 15% increase in operating earnings on a per diluted share basis in 2009 is reasonable and supportive target; however, I want to emphasize that my top priority is maintaining a strong capital position.

I know many of you have wondered about the current view of our share repurchase plan. Fortunately, we have some flexibility because the shares we purchased last year will benefit the purchases resulted early this year. As such, we do not anticipate buying shares during the first half of the year. Beyond the first six months we will evaluate the market and our capital position.

Obviously, if conditions do not improve, or if they deteriorate further, it is unlikely we will buy shares back this year. However, we see no change in our outlook for this year's dividend. As you'll recall, we increased the quarterly cash dividend 16.7% effective for the first quarter of this year.

Again, maintaining our strong capital position is our highest priority. In that regard, I want to assure you that we will not do anything that would jeopardize the Company for the sake of earnings performance. Although we are in challenging times, I have great confidence in Aflac's operation and business model and especially its balance sheet. Ken?

All right, thank you, Dan. I'm just going to run through a couple items in the balance sheet and the income statement. I think you know I've got notes out there for you if you care to follow along, and you'll have a hard copy of these numbers. Beginning with the balance sheet, this shows you where we stood at year end on an amortized cost basis for the consolidated investment portfolio. Note that 72% roughly of these securities -- of the debt securities are senior in nature.

Just a brief comment on the CDOs. You'll see that they were at $909 million at cost, that's after the impairment charge that we took in the fourth quarter. I'd also like to point out that four of these CDOs remaining on our books were arranged by Lehman, and as a result of the developments at Lehman last year they're in the process of being unwound and as a result, we would expect to either receive collateral back or have received the net proceeds from the sale of collateral and that will reduce the position in the CDO holdings by about $250 million or so and we will not be reinvesting in CDO securities with those proceeds.

In looking a little bit more at the perpetual debentures, we did include this information in our press release last night to give you a break out. As I hope you recall, 72% of what we own on a book value basis are in the upper Tier 2 area, which again are senior to Tier 1, preferreds and common equity, but you'll see that only 26% of the unrealized losses are related to the upper Tier 2 securities.

As Dan mentioned in his comments, the stronger yen obviously magnifies the entire balance sheet. That means our book values, fair values, unrealized gains and losses also get magnified as the yen strengthens to the dollar. And with respect to the perpetual debenture holdings, it increased our unrealized loss by about $100 million in the fourth quarter.

Just a couple more comments on the perpetual debentures themselves and we had received quite a few requests for a little bit more detailed granularity on these holdings to tell you what we have. As we've said and we believe that the credit profile of those holdings is very high, they are all current on interest. More than 92% were rated single A or better. There'd been some questions about extension risk in light of Deutsche Bank's failure to redeem a lower Tier 2 security last December.

You'll note that we did have three securities that were redeemed in the fourth quarter of last year, which was obviously a very challenging time economically and likely those redemptions came even though they were uneconomic to the issuer. 62% of the maturities that we have are -- mature beyond 2019. That's their expected maturity or economic maturity date, so again this is a very long-dated portfolio, and only a little over $300 million are expected to be redeemed in 2009. Again, we don't see a lot of extension risk in this portfolio.

We've also had a lot of questions about where actually are these exposures, what is the country of domicile for the issuer? As you see, 65% are domiciled in continental Europe, 20% are in the UK, 11% or so are in Japan and the balance is Australia. And again, these by and large were purchased in the '90's through 2005 to support our yen-denominated policy liabilities so 96% of those perpetuals are denominated in yen.

Dan touched on this a little bit in looking at the total Company realized -- or excuse me, unrealized losses on the balance sheet and this is included in our statistical supplement, but I did want to draw, again, your attention to, as Dan had mentioned, the growth in unrealized losses that are included in held-to-maturity and again, we believe there are very supportable reasons as to why those securities are held there and we would not expect to realize losses in the held-to-maturity portfolio, or gains for that matter, unless there are underlying credit events that would cause us to pull those securities out of held-to-maturity and put them in available-for-sale.

Let me say just a couple things on the statutory items. I have to say this is the first time that we've ever come to this meeting for our year-end wrap up and had anything related really to statutory results. It'll be a couple weeks, probably three or so, before we finish all our final stat accounting work and then we will let you know what the final RBC ratio was, but this gives you some idea of what we've seen over the past couple years and just how unusual 2008 was from a net income perspective.

You'll see we -- our current expectations are for preliminary net income of $940 million on a stat basis, and remember that our statutory accounting pulls in Aflac Japan because Aflac Japan is a branch of our US operation and that's why there's a yen influence. But we do expect to increase net income by about $1 billion in 2009 versus '08 with a corresponding increase in total adjusted capital.

What that would mean and this -- and the 2008 numbers are pretty consistent with what we had put out in a press release a week ago Friday meaning that our expected excess capital is about $600 million, assuming a 400 RBC, up to $1.1 billion -- and that's actually a little bit higher than what we had in the press release -- but we would expect that at present to continue to expand to $1.2 billion to up to $1.8 billion using a 350 RBC for 2009.

Now let me just walk really quickly down the segment contributions in our income statement. Obviously, Japan continues to be the driver of our income statement. Earnings were up very sharply in dollar terms due to the strengthening of the yen. You'll see in our yen P&L pre-tax operating earnings were up 8.4%, but remember that we have a dollar investment portfolio in Japan and that suppresses net investment income growth in yen terms when the dollar is weaker to the yen.

If you unwind that currency effect, really on a constant -- a truly constant currency basis, earnings were up 13.8% for the full year. US was up 7.6%, as you'll see. Interest expense was up, but that was largely attributable to the strengthening of the yen. Parent company expenses were also up, and that primarily reflected lower investment income at the parent company level compared with what we had in 2007.

The strong increases in pre-tax operating earnings reflected again a very strong yen to the dollar. The operating tax rate was fairly constant in looking at '08 versus '07 at 34.7%, and operating earnings were $1.9 billion, which you can see was up 18.5%. Excluding the effect of currency operating earnings were up 11.6% for the full year.

Clearly, by our standards and by our historical financial results, 2008 was a very unusual year in terms of realized investment losses. And just to give you a brief recap, there were about five items that accounted for 94% of the $655 million of losses we incurred.

Perpetual debentures that we wrote down in the third quarter was $191 million; Lehman was $140 million, and these are all after tax; the CDOs were $125 million; $117 million from the Icelandic Banks that we had disclosed in the third quarter; and $42 million from the impairment of Ford Motor Company in the third quarter. The remaining 6% were just various securities transactions that had occurred throughout the year.

And looking at operating earnings per share, clearly we had a significant impact on a per diluted share basis from the strengthening of the yen that added $0.23 for the full year, which is the largest, that I can recall, impact on operating earnings. As you know, we continue to talk exclusively on setting targets on a constant currency basis. That's also how our incentive compensation works at Aflac so that we don't take credit for, or we're not penalized by changes in currency, and on that basis we expect to -- our earnings growth to continue and have not changed our 2009 operating earnings outlook, as Dan mentioned and we mentioned last night in the press release. It's still 13% to 15%, assuming the yen averages the same rate in '09 that it did in 2008.

For those of you that have read our analyst book or have attended analyst meetings for the last few years you're accustomed to Kriss running through a recap, kind of a consolidated review, and looking at our modeling assumptions and we either affirm. And before we either affirm, or reaffirm an earnings target, or set a new target, we stress test our financial modeling with various scenarios and I'd like to share these with you.

You've heard about a couple of them. Sales growth, for instance in Japan we're assuming flat to a 5% increase. The new money yields we're assuming 2.75% to3%. That has not changed from our assumptions at last year's analyst meeting and obviously in 2008 we did a bit better than that. We expect the benefit ratio to continue to improve in Japan, down 1% to 1.5%. It was down 1.3% as reported in the 2008 financials.

If you unwind the currency effect it actually did a bit better than that; it was down about 1.9%.

Because of the -- kind of what we've refer to as a retirement bubble, you may recall from our conversations earlier in the year that if you look at the distribution of Japan's population by age you see a group of people that are ready to retire in the '08 and '09 period and our policyholder base mimics that population distribution, so it would not be surprising to see persistency decline a little bit again in 2009 because retirement is a typical point of lapsation.

For the United States our target again, or our expectation is somewhat in the flat to 5% area. New money, 5.5% to 6%. I should point out - and we had a lot of questions related to the new money yields for Aflac US -- there's not a lot of cash flow going into US investments at this point, so when you look at some of the new money yield assumptions they were very high in the fourth quarter. That's nothing to be overly excited about because there's not a lot of cash flow behind those numbers. They're simply opportunistic purchases by our US portfolio manager.

And the reason there's not a lot of cash flow is we had had some products that we had written about 20 years ago that had a return of premium feature, so that if the policyholder did not incur a claim over 20 years we would return the premium to that customer. We're now at the point where those policies are, in effect, starting to mature and you're seeing some of those pay outs and that's one of the reasons that their cash flow is not very strong to investments. That, of course, has been factored into our assumptions and our modeling.

We expect modest improvement in the benefit ratio for Aflac US in 2009, and again, persistency to be down slightly, as we experienced in 2008.

Dan has already referenced one of the assumptions on our -- from a corporate standpoint, and again, the current plan is that we don't anticipate buying any shares in the first half of the year. At the mid year we'll evaluate where we are and it's possible that we could buy shares in the second half of the year. I think it's fair to say the way that you can look at this is that if we don't buy any stock at all for the full year, we're closer to the 13% end of the range.

If we buy shares in the second half that puts us up closer to the 15% area rate of growth in terms of operating earnings per share for 2009. We don't anticipate any changes to the dividend, meaning that which we've already declared at $0.28 a quarter, nor do we anticipate any changes to the capital structure or the tax rate.

What that means in looking at how this year may play out given different yen scenarios, we are a little bit more sensitive to the currency this year than we were last year, simply because we anticipated getting more of our income from yen sources in 2009 compared with dollars than we did in 2008. And if you look at the math behind this you'll see that every one yen move on the annual exchange rate will equate at various scenarios to roughly $0.025, $0.026 or $0.028 per share. That's -- that kind of is what these numbers kick out. But again, our target for this year at 13% to 15% based on last year's exchange rate would be $4.51 to $4.59 and we just hope that you would consider these sensitivities of exchange rates when you're either modeling or forecasting our earnings for 2009.

Really, that wraps it up for me and what I'd like to do, please, is ask Dan, Kriss, Paul, Jerry and Mary to join me and we would be happy to take your questions. Again, I'd like to remind you this is being webcast. For the courtesy of those listening to the webcast we'd ask that you wait for the microphone to ask your questions so that everyone can hear what you have to say and we'll be happy to take your questions.

Okay, first question?

Sure. [Larry Bernstein]. During the call this morning you focused on hybrids as an investment. I wanted to discuss one of your non-bank assets. During your call you discussed your investment in a Japanese corporate [Takafuji] and 28% of your investment was repurchased during the fourth quarter, which leaves investment of a little over $400 million.

Takafuji is a subprime unsecured lender in Japan and their bonds have recently collapsed in the last few weeks. Five year Takafuji CDS traded today at 60 points up front plus LIBOR plus 500, and therefore their senior bonds are now trading at less than $0.40 on the dollar. Do you think it's appropriate to impair this asset given the Market's mean forecast that the company will default on its bonds in the next 18 months?

I'm going to pull Jerry and Mary together to let them talk about this and let me make one brief comment. I think it's certainly appropriate to talk about Takafuji because we raised it on the call this morning, but beyond that we got a lot of securities in our portfolio and we really don't want to go through a security-by-security conversation on the credit worthiness of every issuer we have, but I think it's a fair question given that -- what we mentioned this morning, so with that as a background let me pass this to Jerry and then Mary, feel free to comment.

Let me start and I'll pass the baton, but I think first of all, we are well aware of what the pricing action's been at Takafuji. We're clearly setting it and we apply the same impairment methodology to Takafuji we would apply to all our securities. For an update on our credit view I'm going to turn it over to Mary and let her comment to the degree that she can. Go ahead.

Thanks for the question on Takafuji. We have a very strong business relationship with Takafuji and it was at their request, as Ken mentioned and as Dan mentioned as well, that they redeem that. They redeemed it because it was a high coupon security for themselves. We have now JPY50 billion -- or actually it's a little higher than what the number you noted in terms of dollar value of our exposure to them. Of that, 40% has very protective covenants which protect Aflac in terms of their ratings aspect.

Yes, they are a subprime and they have always been a subprime provider of consumer finance in the market within Japan. They have continued to have very good access to liquidity, very good access to market aspects. We continue a very good business relationship with them, both from an investment perspective, as well as other business ties that we have to that company.

We apply, as usual with all investments, the standard impairment policy, which you can find in our financial analyst briefing book, of which one of the things which we look at is pricing, as you mentioned, and we also look at the likelihood of the payment in full and on time of all payment obligations to Aflac. At this time we do not see any reason to impair Takafuji whatsoever and I'd also note that it remains investment grade from the obligations held by Aflac.

Next?

Thanks Ken. Suneet Kamath from Sanford Bernstein. Just maybe one for Kriss and then -- and one for Paul. For Kriss, on this morning's call you mentioned you'd been speaking to the rating agencies, maybe after the surprise move by S&P, and I think in the past you've talked about how they're -- maybe to put words in your mouth, "aware of the yen sensitivity of the RBC."

Obviously that's had a huge impact on the RBC decline that you reported as of year end. Can you just talk with respect to the conversations that you've had, have there been any discussions around their growing concern as the yen has strengthened? And then I'll follow up with Paul, if I could.

I think because we ourselves have illustrated starting three, four, five years ago at our financial analyst meeting, which the rating agencies typically attend, the sensitivity to yen strengthening on our RBC ratio has been no surprise to them. Our last graph in that book showed that our RBC ratio would be about 600% at 120 and if you go down to 80 it's about 400, and that's exactly what has transpired and that was exactly the subject of a recent research report that started some of the discussion of the sensitivity to yen strengthening on our RBC and the related issue of the hybrids, so it hadn't been -- there's been no surprise, absolutely in my mind with the rating agencies.

Other than downgrading us and not telling us.

He said it.

(LAUGHTER) And then I guess if I could follow up with Paul. Just on the 0% to 5% growth, this morning you talked about the brokerage opportunity and then you have the business-to-business opportunity that had heavy advertising. I just want to reconcile those two seemingly pretty significant opportunities with this 0% to 5% growth relative to your longstanding view that this US market is vast and untapped?

Yes, the fact of the matter is that the business-to-business continues to be something where there's continuity from 2008 to 2009. During 2008 we really developed a brokerage strategy. 2009 we expect to see strong implementation with success in 2009, hopefully great success, leading into 2010.

The truth of the matter is that we think that 0% to 5% is a good target. We think we can hit within that range as a result of the downswing in the economy but the alternate layering on of certain strategies like these, so again I think 0% to 5% is where we want to be. Don't get me wrong, I like a double digit growth on an annual basis, but the fact of the matter is the current economic environment has not provided us with that opportunity, and so I believe that this is (inaudible) to what would be the best for the Company.

Pardon me. Thanks, Ken. Eric Berg from Barclays Capital. My understanding of the accounting for the hybrid securities is that by carrying them at year end at $8 billion versus a cost basis of $9 billion you're basically -- not basically, you're saying that you could sell them today -- this is not some theoretical value that you could -- this an exit value. You could sell them today for $0.90 on the dollar. If you believe that, given the downside risk, the possibility that maybe there will be some rationalization, if you think they're worth $0.90, why didn't you sell them?

Thanks, Eric, for the question. I think in this market the idea that you could sell $8 billion of any security class in one fell swoop is not realistic. In addition, it would -- it would wreak havoc on us from an accounting standpoint. Remember, these securities are securities that are tied to long-dated liabilities in our portfolio that would create a horrendous mismatch because we would then be in the position where we'd have to reinvest $8 billion in long-dated yen securities.

Now, that would be on top of the annual cash flow of $4 billion that we currently put out. Investing $12 billion in long-dated yen securities of any stripe would be a formidable challenge. And that's beside the point. We still think -- we evaluate them as being money good, they're still current, and our expectations are that they will continue to be so.

Daniel Moore from Aquamarine Capital. Can you give us any update on the sales of the banking channel in Japan as we're a month or so into the most recent quarter after, obviously, a very difficult and challenging Q4? Thanks.

Well, I called on of the top 20 banks. When I was over there in January I called on 13 of them and I called on -- you have what we call the Shinkin banks, which is more of the regional banks, but that's -- not actually. In addition to Shinkin you have regionals and then you have the mega banks.

The one thing that has -- as I mentioned in my speech is the mega banks and the regional banks have really not taken off. The Shinkin banks have taken off and done pretty well for us and I think they'll continue to do well.

The regional banks and the mega banks are the ones that were tied up with selling these annuities and other products and they're much more of a bureaucratic structure. They're also -- by being bureaucratic like that they're very slow on coming on, but once they come on they generally have done well for us, as was in the case when they sold our products to their employees, so now that they're trying to sell to their customers. They had a set back because of the fourth quarter, but I do expect them to come around.

I think that you're going to see it pick up again in the four -- in the second quarter some and will start, but I'm not sure at this particular point. I was over there the first week of January, so if I'd been over toward the end I could tell more so, but my gut is we are expecting the banks to have a good year for us. That is a known in our calculations, so we do expect that.

I can't give you a breakdown at this particular point, but I met at length with our person in charge of the banking channel. He had good predictions, as we've shared with you last year almost by quarter how it was going to grow. Until the financial crisis it slowed down, but he expects it to pick back up and for us to have a good year there.

Thank you. Darin Arita from Deutsche Bank. Just building off of that question -- that previous question but turning towards the Japan Post, Dan, can you talk a little bit more about your comments? This morning, you said the Japan Post started off a little better than you expected. I know it's early days, it's only 300 offices, but can you give a little more color there? And then secondly -- I'll let you start there.

Well, I'm not as sure about the Japan Post as I am the banking channel. I guess it's because I'm much more familiar with the banking channel because of all of the years we've worked with the banks. I've been doing it for over 20 years so I know most of the CEOs of the major banks in Japan and so have had good relationships with them over the years. The Japan Post is still a wildcard. I'm not sure at the exact rate that they're going to bring it out and take it.

I do know this that our biggest awards for the United States is in April and this big trip we have. Japan Post has said they will come to the United States and visit our operation. Of course you know the date during April when our biggest award is and I said whenever you'll come, I will be there and we will entertain you and show it. They have never ever gone, as far as I have found out, ever to another country to visit their operation, to see what's going on, so I'm very encouraged about that and it makes me think that they will roll it out even more so.

But at this particular point I don't have a long-term relationship where I'm willing to go at this particular point and make some comment other than it will be an increase. It will help us in many ways. They are a selling machine. They have the ability to bring in big numbers. Whether they will at this particular point, how the economy will affect them I am not sure, but it definitely calculates in another plus for us as we start 2009.

Can you just also talk about the Japan Post Insurance Company and where they stand in their foray in entering the third sector?

Well, we're not -- (multiple speakers) what were you going to say? Okay, I'll let --

I would say I assume you're speaking specifically to Compo? Some of you may have seen there was news recently, and it actually has appeared in the Japanese press going back to late last year about their desire to move new -- more product through the Network Company and they do -- as part of the privatization process, for those of you that don't know, Japan Post is being broken into four different entities, one of which is Compo, the insurance manufacturer. They have distribution access through the Network Company, as we do, for a period of time as the privatization process occurs.

There has been some talk -- they have a relationship with Nippon Life that they would like to offer a cancer insurance product, which is I assume what you're referring to. To our knowledge it seems like a trial balloon at this point. We're not aware of any product being filed by Compo.

In addition to going through the normal channels of product approval that we have to go through, any products that Compo develops also must be approved a privatization commission, and one of the hallmarks of kind of the cornerstones of this privatization process is that the playing field be leveled for all participants within the life and health insurance area for distribution reasons with Japan Post. So they have an additional hurdle to clear when it comes to product approval that other companies do not have.

We have known all along -- when we were selected by Japan Post Network Company to be the exclusive provider of cancer insurance, it was exclusive to the extent that Japan Post picked one company and that was us. I think we've always known that as the general trend throughout the Japanese insurance market has been a steady increase in competition that some day we would be fighting, if you will, for shelf space at the Japan Post Network Company, which was why it was good for us to get a head start as a private company selling through the Network. But that's kind of where we are at this point. Does that help?

All right, I have a question about the hybrids. A substantial portion of your bank hybrid securities are dual currency dollar yen bonds with dollar coupons and yen principal. Given that Aflac is the sole investor in many of these bonds, how do you mark these untraded bonds, and have you asked a dealer for a bid on any dual currency bond to check the quality of these dealer model base marks?

We validate all of the reverse dual currency bonds, whether they be hybrids or others, by soliciting -- at every marking period we ask for bids from three dealers and -- match those bids against the model marks that we have. And in fact, callable RDC bonds, our markings are done entirely on the basis of dealer marks, not on model marks.

So look, I'd be -- I don't think it's realistic to say that in this market, dealer marks are precise, but I guarantee you they're not too high and that's pretty much how we handle that aspect of our portfolio. We have -- to your other question, have we tried to sell them? No.

Or ask for a bid.

Well, no, because the reason for asking for a bid -- first of all, I don't think it's fair to the dealer to ask for a bid and say thank you, I'm just doing this for accounting purposes. I think -- we have no intent to sell them.

My suspicion is that certainly when we've had other bonds that have been extremely stressed, i.e., Parmalat, which was extremely distressed four years ago that when we asked for a bid on $250 million value we got one and we got one quickly, so my understanding is that -- my supposition is that we could get that again. It might not be as easy in this market, but I think we could get one.

I have one more follow-up question. I am a novice in insurance accounting, but as I went into your 10-K to look up the value of your very long-dated yen-denominated liabilities, the implied interest rates for your 1990 decade liabilities was at a yield over 5%. GAAP does not allow Aflac to mark its insurance liabilities to market. How should investors think of the value of these very long-dated liabilities with rates in yen now 1% to 2%?

Well, we evaluate the adequacy of our liabilities in the aggregate. Insurance companies are required to determine that there's no future losses based on its net liability position. That is the value, if it's gross liabilities know that it's a deferred acquisition cost, combined with current prospective cash flows -- future cash flows, which are future premiums and investment income net of expected benefits and expenses, okay, so we monitor that. That's called a gross premium valuation and we monitor our net position every year. We have a very strong net position.

Specifically, with respect to the policies that were issued in the -- really inception of the branch, which was 1974 through early 1990, those policies tended to be priced at about 5% interest, so we have -- we had a clear reinvestment risk once interest rates fell in Japan, and we employed a strategy of adding onto the policies riders that had a much higher profit margin than our typical policies.

Since you're not that familiar with Aflac, you may not be familiar with what we called Rider Max, which was a rider to our original cancer policies that expanded the coverage from cancer only to all cause medical. Those Rider Max policies were very, very profitable and what happened was we expanded our total profit margins in the aggregate so that we were able to cover the negative spread on interest with higher margins on morbidity and that put our overall block into a very sound position. So that's where we've been since early 2000.

We -- that's one of the reasons we expanded our margin was writing more profitable business than the old business we had, and that's been a historical factor of Aflac. That's one reason our benefit ratios continue to improve and any negative margin we've had has pretty much been eliminated by the fact that the new business we've written since 2000 has been priced at about 2.35% and we've consistently gotten new money rates in excess of 3%, so we managed our way through that problem.

Thank you.

Thanks very much. John Hall, Wachovia/Wells Fargo. I have a quick question on the statutory net income projection that you laid out there of $1.9 billion. Are there any investment losses or gains factored into that number, or is that just operating?

No, that's really a projection of the normalized operating income from statutory and doesn't include any anticipated future realized gains or losses.

Anyone else? Well, listen -- oh, okay, one more here.

Thank you. I just have one last question about the competitive environment in Japan this year. Obviously, in the last few weeks you've come under pressure, but if your Japanese competitors were public I imagine the pressure would be even greater. Maybe you can talk about how you see the competitive environment in Japan given all of the challenges?

Well, as far as we're concerned we -- let's break it down according to the product line, specifically the cancer business, we have dominated. It hasn't mattered who we were in competition when deregulation took place in 2001 and the largest life insurance company and the largest non-life all of a sudden jumped into the market, a lot of people thought that maybe we would lose market share. It never happened. They had a short spike in business and then we've dominated the business ever since because we've been able to offer the best product at the best price.

In the medical side, one of the US competitors who was doing business in the medical side had that -- had the medical business and then when we came into the medical business -- and I forgot what year it was, but -- 2002 we became the number one seller of medical insurance, and we have continued to be number one.

What drives Aflac is our operating expense ratio. We have been able to be the low-cost producer, and by being the low-cost producer we have offered a better product at a better price with a higher commission and that is what drives everything. And it's also low premium.

We're less competitive the larger the premium is, so our ability to offer low-price products, the -- for example, the major life insurers they can't compete with us because our operating -- on an FSA basis, on a per policy basis, what it cost for us to put a policy on the books it cost our competitors 50% more. Now granted they generally sell higher-premium policies but if you think of lower-premium policies then we dominate that and they can't get into our market and so that has been the advantage that we've had and we've been able to do that.

We constantly monitor -- as the profit margins have expanded we've been very careful to monitor, and why we've been able to do it has been this expense ratio has been very helpful to us. The loss ratio, of course, has come down, but in addition to that the expense ratio has been so low that it's allowed that profit margin to stay up there and been very profitable for us.

And we expect to [dominate], but we never take it for granted, and you add that to our sales force and our distribution channel, that's been our strength. I don't know if that's -- because I don't want to get into any one specific company, but there's no one out there in the fields of what we're doing.

The final thing I'll mention is life insurance. Life insurance has become a larger part of our business with our individual agents. Again, lower premium life insurance, not trying to sell the big volume life insurance but that has been very helpful and a tack-on product when they are out selling the medical insurance or the cancer insurance that's built for us, too. So all in all, from a competitive, we never take anybody for granted but I feel very strong about our position and that we'll continue to dominate the Japanese market.

One more here.

(inaudible question - microphone inaccessible)

It's the -- well, it's everything from we are not located in downtown Tokyo or the Ginza or the expensive areas, we're out in Chao Fu, our total cost of doing business. It's the way the structure was originally set up. We've always been set up on a volume basis; low premium, high volume. Most insurance companies are set up on lower volume and high premium, life insurance for example, or whatever, and even with our competitors that are in the medical business they are generally a lower volume but a much higher premium insurance policy they're trying to sell you.

And so it's been that and it's been our IT initiatives and our ability -- for example, in the United States we process -- what's the number, almost 80, 90% of our business through -- 95% of our business is issued where it never touches human hands. It's all electronic. We've gotten where we almost become a paperless company. We're taking that in Japan, that drives our cost down.

And then the final thing is our sales organization is all commission. In Japan, the life insurance industry is salaried plus bonus, so when they go in their cost of doing business is much higher, so those things together have really been the reason.

Okay, well again, let me thank you for joining us. We'll be here a little bit longer if you have anymore questions and if not please feel free to call or e-mail either Robin Wilkie or myself any time. We'd be happy to answer your questions, and thanks again.