美國家庭壽險 (AFL) 2009 Q1 法說會逐字稿

Good morning, and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may wish to disconnect at this time.

I will now turn the meeting over to Mr. Ken Janke, Senior Vice President of Investor Relations. Mr. Janke, you may begin.

Thank you, Susan. Good morning, everybody. Thanks for joining us today for our first quarter conference call. With me this morning is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Paul Amos, President of AFLAC and Chief Operating Officer of our US operation, joins us from a national sales convention, Jerry Jeffery, Senior Vice President, Chief Investment Officer, and Toru Tonoike, who is President and COO of AFLAC Japan, joins us from Tokyo.

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

Now, I'll turn the program over to Dan. He'll comment on the quarter and also the balance sheet and the outlook for the United States and Japanese operations. I'll follow up with a few financial highlights, and then we'd be happy to take your questions. Dan?

Thank you, Ken. Good morning, and thank you for joining us. I hope you had a chance to review our first quarter press release. I will comment on our operations in Japan and the United States, but first, I'd like to discuss our balance sheet and capital position at the end of the quarter.

As we mentioned in our press release yesterday, we elected to early adopt the new mark to market accounting. Although we did not get any relief on the pricing side, we believe the changes regarding impairment charges support the long view of price recovery that we've held for many years. We believe analyzing AFLAC's investment portfolio and potential, other than temporary impairments for the long-term perspective, makes sense. This long-term view reflects the way we approach and manage the investment supporting our policy liabilities. Our policyholder liabilities have long durations, particularly in Japan.

As such, we purchased long duration assets to support those liabilities. Due to our asset liability matching approach and very strong, predictable operating cash flows, we have the ability and intent to hold the securities until they recover in value, which may be at their maturity.

As a result, our approach has always been to take impairment charges for debt security only when our credit analysis indicates we're unlikely to receive contractual interest and principal payments. We believe the revised accounting guidance supports that view. We did incur some credit losses in the first quarter, however, at $152 million, they were manageable, given the strong capital generation of our business.

I do want to point out that $42 million of the charges on perpetual securities resulted from the application of equity impairment approach, because they were downgraded to below investment grade. The impairment of perpetuals did not affect our statutory financial statements, as we continue to believe we will receive interest and principal payments that are contractually due. If the pricing of the perpetuals remain unchanged as of March 31 levels, and there are no additional downgrades to below investment grade, we would expect to book $295 million of impairments during the remainder of the year under the equity impairment method.

I want to emphasize two points. First, these charges would not impact GAAP shareholder equity. And second, and most important, we would not record impairment charges for statutory accounting purposes. Overall, I remain pleased with the quality of our balance sheet. As you're well aware, the pricing for fixed maturities have deteriorated significantly since year-end. That resulted in sharp increase in unrealized losses in our portfolio, and the decline in the shareholder equity. However, because we hold our investments until maturity, the unreal losses will not be realized if our credit analysis is correct, which we conclude the investment is good money. Again, we believe this view is fully supported by the recent changes in the mark to market accounting.

Despite the ongoing decline in the global credit quality, the credit profile of our investments remain high. I'm sure you're not surprised that we experienced credit downgrades in our holdings in the first quarter. However, at the end of March, 95% of our fixed maturities in perpetual securities were investment grade, compared to 98.2% at year end. At the end of March, 86% of the perpetual securities were investment grade. In addition to monitoring the overall credit quality of the perpetual securities in our portfolio, we're continually assessing deferral and risk extension.

Other than the securities of Icelandic Banks that we wrote off in the fourth quarter, every one of the perpetual securities we own is current on interest. We do own $102 million of fixed maturity, upper Tier-2 securities, of an Austrian bank that deferred its coupon in the first quarter. That bank, Communal Credit, was contractually required to defer payment due to profitability tests. The coupons on the securities are cumulative, and additionally, they provide interest on top of the coupons. Based on our extensive work on this credit, we continue to believe we will receive all interest payments and principals. As a result, we did not impair these bonds.

I would also like to point out that we have not experienced any extension of principal at this point. You'll recall that in the fourth quarter of 2008, we had three separate hybrid securities redeemed. On April 22 of this year, KBC Bank redeemed its upper Tier-2 securities we owned. For the balance of the year, we have four perpetual securities totaling $235 million that are expected to be redeemed. As you're aware, the senior notes we issued in 1999 matured earlier this month. It had always been our preference to refinance the notes in the debt market, preferably the Samurai Market in Japan. However, due to the financial crisis, debt markets have been effectively closed to financial names, especially those without government guarantees. In addition, we're sensitive to the current interest rate costs, and we're not willing to issue debt with excessive coupons.

As a result, we elected to repay our maturing obligation using internally generated funds. We accomplished this through a loan from our principal life insurance subsidiary, American Family Life Insurance Company, to the parent AFLAC Incorporated. It's important to note that the loan is an admitted asset on the insurance subsidiary's books under statutory accounting principals. As a result, it does not negatively impact our RBC ratio. The loan has an annual interest of 7.13%, and the term of three years with the provision for early repayment. Although the loan has a three-year term, we view it as short-term financing until the credit markets improve. At that time, our preference remains exploring the debt markets for longer term financing.

I'd like to point out that the senior notes that matured were originally issued with a notion of about $450 million at 6.5% annual interest rate. We entered into a cross currency interest rate swap to convert dollar obligations into yen denominated notes at JPY 55.6 billion at a 1.67% annual rate. By doing so, we estimated that we saved more than $200 million in interest payments over the life of the senior note, which is almost twice the cost of the foreign exchange portion of the swap contracts. The total cost of the swaps was $106 million. Our debt issued to mature occurs in July 2010. Although that's more than a year away, we're already exploring options to satisfy the $40 billion in obligation. I continue to believe our regulatory capital position remains very strong.

Our risk-based capital was 477% at the end of the year, and I consider that number to be very impressive in light of the negative effect of the 25% strengthening of the yen dollar in 2008, as well as the elevated credit losses for last year. Although we have not yet completed our statutory accounting for the first quarter, we believe the capital position remains very strong. We estimate that the RBC ratio was 479% at the end of March. I would like to assure you that our primary focus remains on AFLAC's capital position. In fact, every officer's incentive compensation for 2009 has a component linked to maintaining the target of an RBC ratio of 375. We recognize that shareholders are laser focused on capital adequacy, and I believe it's important for our officer group to be aligned with those interests.

At the same time, I want to make sure that we continue to concentrate on the business of running AFLAC's core operations. Therefore, we are still using other important incentive compensation measures, such as traditional premium, sales, expense growth. Additionally, we used the RBC ratio as the only measure for our performance-based restrictive stock that were granted to the Section 16 insiders this year. To earn these equity awards when they vest in three years, we will have to maintain our targeted RBC levels. Maintaining our shareholder dividend is also directly related to the statutory capital position and our ability to upstream funds to the parent company.

Based on the current results and expectations for capital generated in 2009, we do not expect any change to this year's dividend. Our statutory capital generation in the first quarter was strong. We estimate first quarter statutory operating income exceeded $500 million. We believe it's important to many of our owners that we continue to pay the dividend. However, if deterioration in the investment portfolio produces stress on our statutory capital position, we will certainly look to a modified dividend as a means of conserving capital.

Now, let me turn to a brief review of the operations, beginning with AFLAC Japan. AFLAC Japan performed very well, both from an operation and a financial perspective in the first quarter 2009. Although sales were basically flat in the quarter, we were encouraged by our results in the first quarter. In the first quarter of 2008, we produced strong sequential sales growth from the new bank channels. In the fourth quarter, sales of all insurance and investment products at banks fell sharply with the emergence of the financial crisis. And bank's third sector products, including AFLAC's, were not immune. However, in the first quarter of 2009, sales through the bank channels recovered somewhat, rising 5.2% on a sequential basis. Compared with the start of the bank's channel sales in the first quarter of last year, sales were up 265%.

At the end of March, we had selling agreements with 250 banks, which is significantly greater than the next closest company selling through banks. We continue to believe that the bank channel is a great opportunity for distribution of our products, and we expect further improvement in this channel as the year progresses.

We were also pleased with the sale of cancer insurance, which was up 7.4% for the quarter. Cancer insurance sales benefited from the new sales channel or the bank channel, and cancer forte upgrade products we began offering last year. While medical sales were down 5.4% for the quarter, ordinary products were .1%. We introduced two new life products in the first quarter. We think consumers will find these new first sector policies appealing. We also believe they will better position us to offer our primary third sector products in the future.

In addition to launching new products, we expanded our reach through the recruitment of new agencies. In the first quarter, recruitment was up 35% over last year. We believe this increase improved recruiting techniques as well as the weak labor market in Japan. More importantly, we believe we can provide appropriate training that will turn recruits into producers. We continue to view Japan as a very good market for the types of products we offer. Although Japan's weak economy will certainly pose challenges, we still think the sales range of flat to 5% increase for the year is reasonable.

Not surprising, AFLAC US also faced challenges selling insurance in a weak economic environment. During the first quarter, total new annualized sales were down 0.6%. As we pointed out in the press release, we had six additional production days in the first quarter, due to the movement in the production calendar. With the benefit of the extra days, sales would have been down approximately 6.5%. Despite the weak sales environment, we still produced premium income of $1.1 billion in the first quarter, an increase of 5%.

As we assumed in our financial projections for this year, the persistency rate for the US business declined. Our first quarter persistency rate was about 98% of our planned assumption. Virtually all products lines and various policy durations showed higher lapses. That tells us higher lapse rates are directly linked to the recessionary environment. We believe our coverage is affordable for the average American family. Yet we realize in these times and hardships, families have difficult choices to make. I'd like to point out that the last session did not hurt AFLAC US's earnings. However, the last rates this year do put pressure on US premium and earnings growth in 2010.

Like last year, we remain encouraged with the basic sales-related activities of the US operations. The current labor market has provided good opportunity for expanding our commission sales force, based on salary jobs being harder to come by. In the first quarter, recruitment of new agents was up 25% to 8,100 new sales associates. The average number of weekly producing associates increased by 2.4% in the quarter, and the average number of new weekly producers rose 12.1%.

New payroll account growth was also up solid 9.9% over the first quarter of 2008, and payroll accounts opened by new agents was up 18.1%. We remain convinced that we have strong business volume in the United States and we believe there are tremendous opportunities for our product line. We expect the US sales and persistency will continue to be influenced by the weak economic conditions. Although a challenge, we currently believe it is possible to produce flat sales to a 5% increase this year.

From an earnings perspective, our objective remains 13% to 15% increase in operating earnings per diluted share in 2009, excluding the impact of the yen. But I want to remind you that my number one priority is capital position. Our capital position remains strong, yet with credit markets remaining distressed, I think it's unlikely that we will purchase shares in 2009, even though we find the valuations very attractive. With no share repurchase, we would expect earnings growth to be at the low end of the 13% to 15% range, which is consistent with the comments on the fourth quarter conference call.

Overall, I believe we remain well positioned in the two best insurance markets in the world from a competitive standpoint. Our operations are performing well, and our balance sheet is strong. Although we remain in very challenging times, I have great confidence in the future of AFLAC. Ken?

Before we get to your questions, let me briefly go through some of the first quarter numbers, starting with AFLAC Japan. Total revenues rose 3.3% in the quarter in yen terms. Investment income was up .5%, which was held back due to the impact of the stronger yen in AFLAC Japan's dollar denominated portfolio. Excluding the effect of the stronger yen, investment income was up 4.6%. The annualized persistency rate, excluding annuities, in the first quarter was 93.9%, compared with 94.4% in the first quarter 2008.

As we previously discussed, we believe the persistency was impacted by a higher proportion of the population and our customer base reaching retirement age. In addition, however, it's clear that the weak Japanese economy has also influenced policy retention. In terms of quarterly operating ratios, the benefit ratio continued to improve as we expected. It was 61.5% in the quarter, compared with 62.4% a year ago. Excluding the impact from the stronger yen and investment income, the benefit ratio would have been 61.3%.

The expense ratio for the quarter was 19.5% compared with 19.6% in 2008. Expenses overall were in line with our plan ,and DAQ amortization was higher, due in part to lower persistency. Reflecting the lower benefit and expense rations, the margin improved from 18% to 19% in the quarter, and with the expansion of the margin, pretax earnings were up 9.3% in yen. Again, excluding the impact of the weak or -- excuse me, stronger yen on the dollar denominated portfolio, pretax earnings were up 11.2% in the quarter.

For the first quarter, we invested our cash flows in yen securities at 4.13%, and including dollars, the blended rate was 4.57%. The portfolio yield at the end of March was 3.87%, which was down 3 basis points from December, and 12 basis points lower than a year ago.

Turning to AFLAC US, revenues rose 4.7% for the quarter. The annualized persistency rate for the three months was 66.9% compared with 71.9%. As Dan mentioned, the economy has undoubtedly influenced our lapse rates. I'd like to remind you, that was an annualized rate, and our first quarter is generally the lowest quarter in terms of persistency. On a rolling twelve month average basis, the rate was 71.9% versus 73.6% for the prior period.

For AFLAC US operating ratios, the benefit ratio was 49.5%, down from 52.4% in the first quarter of 2008. The decline in the benefit ratio reflected the release of reserves related to the higher lapsation. Higher lapse rates also increased DAQ amortization which rose 32.8% in the quarter. And that was largely responsible for the increase in the operating expense ratio rising from 31.4% to 33.9%.

The margin expanded and was 16.6% in the quarter, compared with 16.2% a year ago. As a result, pretax earnings rose 7.2%. Although we did not have a lot of cash flow going to new AFLAC US investments, the new money yield for the quarter was 8.67%, up from 7.03% a year ago. And the yield on the portfolio at the end of March was 7.18%, up 8 basis points from the fourth quarter, and 17 basis points higher than a year ago.

Looking at some other items. Noninsurance interest expense was unchanged at $7 million in the quarter. Parent company and other expenses were $8 million, down from $10 million a year ago. Total operating profit margins rose, reflecting the improved profitability of AFLAC Japan and US. The pretax margin rose from 17% to 18.1%, and on an after-tax basis, the margin was 11.8%, up from 11.1%. The tax rate was unchanged at 34.7%.

We did generate $0.32 per share in operating -- in realized gains in the quarter, which as we said, we triggered to offset tax losses we had previously booked. We also had $0.33 per share of realized losses, which, combined with those gains, resulted in the net realized loss of $0.01 in the quarter.

We also purchased some of our yen denominated corporate debt in the quarter. We bought back JPY 5.4 billion of bonds at a purchase price of JPY 3.86 billion or 71% of par. The extinguishment of this debt resulted in a $10 million gain in the quarter $0.02 per diluted share. As we reported, operating earnings on a per diluted share basis rose 24.5% to $1.22. The stronger yen in the quarter increased operating earnings by $0.09 per share. Excluding the yen's impact, operating earnings per share increased 15.3% for the first quarter.

I'd like to comment on the outlook for operating earnings. As Dan mentioned, our objective is 13% to 15%, excluding the impact of the yen on a per diluted share basis. However, as you heard, it's more likely to be toward the lower end of the range this year, as we do not anticipate purchasing any shares in 2009. A 13% increase would translate into $4.51 in operating earnings per share for 2009, assuming the same exchange rate. And although the yen has weakened to the dollar since last year, the average so far this year which is about JPY 95, is still stronger than it was a year ago. If we assume the yen average is JPY 100 to JPY 105 for the full year, we would expect to report operating earnings of $4.47 to $4.59 per diluted share for 2009. And under that same currency scenario, we would expect second quarter operating earnings per share to be $1.11 to $1.14. The current first call estimate for the second quarter is $1.15.

I hope you all will attend or listen to our 2009 analyst meeting, which will be coming up in just a couple of weeks. At that time, we will discuss our outlook for 2010 earnings targets. We'd like to take your questions now. We have about 35 minutes to do so. I'd hope you'd just ask one question so we can make sure we get to everybody. Susan, with that, I'll turn it back to you for the Q&A.

(Operator Instructions). Please unmute your phone and record your name clearly when prompted. Our first question comes from Jimmy Bhullar, JPMorgan. Please ask your question.

I had a question on your persistency in both Japan and US businesses. Obviously, it declined a decent amount in the US. Seems like it was lower in Japan, also. What do you attribute this to? You mentioned the weak economy in the US, but what do you attribute the Japanese decline to? And if in fact you do expect a further decline, how does that impact your view of your growth rate longer term?

This is Kriss Cloninger. In Japan, I think Ken mentioned that we're experiencing slightly higher lapses due to some demographics that are going on in Japan. We have a high concentration of old business that is going through the typical retirement ages in Japan between attained ages 55 and 60. We had an extraordinarily high amount of business. Started impacting us last year. The lapse rate went up about .5% last year, and it continued to go up a little bit this year.

We expect it to stay at that elevated level throughout 2009, and then to gradually decline in 2010 and later. That doesn't have a really material impact on our Japanese growth rate longer term. So I don't -- there is some impact of the economy on Japanese persistency, but I don't think it's significant.

I think the impact of the economy is much more significant in the US where we saw a more uniformly distributed increase in lapses across the entire spectrum of our business, be it by issue age or product category and the like. We just had increases in lapses of all policy issue ages and durations and categories of business. So that was more pervasive and related to the general economy.

Do you think this is representative quarter in terms of the rest of the year, or do you expect to see a further increase in lapses as the year goes on in the US?

You tell me what the economy's going to do, and I'll tell you what I expect. I think the first quarter was very bad from my perspective. I will tell you that AFLAC's lapses tend to be higher in the first quarter than any other quarter for the year. The way we annualize a quarterly number tends to magnify extremes.

When we look at persistency measures in the second, third, and fourth quarter, it's going to be cumulative based on when's happened so far, but the first quarter gets to annualized based on the first quarter number. So, it's really hard to tell whether the economic conditions are going to moderate or improve at all in the US for the next couple of quarters. So, it's not beyond belief that we would continue at this level for another couple of quarters in 2009.

And again, I want to remind you that when we discussed our outlook for 2009 and our modeling assumptions, we had assumed declines in persistency for both US and Japanese segments.

Thank you.

Our next question comes from Steven Schwartz, Raymond James and Associates. You may ask your question.

Good morning, everybody. Dan, I think it was a $295 million number that you put out there for perpetual GAAP impairments if things stay the same. Was that pre or post tax or are they the same? Is there a tax offset there?

That's after tax, Steve.

Okay. So the pretax would be 295 divided by .65?

Right.

Is there still on a statutory basis, there's still tax credits to be had to offset any losses there?

Tax credits?

I'm not saying it right, but some companies have run out of the potential for tax options.

No, we haven't. The gains that we've recognized, that we have realized gains on for GAAP, GAAP purposes, we generated those gains to make sure that we covered unrealized tax credits that would expire within five years. We want to be sure we take advantage of those. We like to match up realized gains with realized losses for tax purposes.

Let me point out, though, Steven, that for statutory purposes, that $146 million of realized gains, that's an after-tax number for GAAP that needs to be grossed up to the pretax number for stat. Those aren't allowed to be recognized in stat income or stat equity. You have to put those gains into the so-called interest maintenance reserve, IMR for statutory. So that doesn't increase statutory equity in total amortized income.

But they would be utilized for tax purposes to offset realized losses, particularly things like the Icelandic banks, when we generate the real tax losses.

Okay.

And Lehman Brothers and some of the others.

Okay. Great. That was my question.

Okay.

Next question comes from Suneet Kamath, Sanford Bernstein. You may ask your question.

Thanks. Just to follow-up on the $295 million equity impairment charge. What is the base of the perpetuals that that applies to. And sort of related to that, what has been the trend since the end of the first quarter in terms of downgrades of perpetuals? I think you said 14% as of March was below investment grade. So maybe that's $1.2 billion? How significantly has that changed since March? Thanks.

It's Jerry Jeffery speaking. Your first question was the $294 million, what base -- those reflect the below investment grade ratings that have been applied to the Lloyds Banking Group which includes HBOS and Bank of Scotland. It also includes Royal Bank of Scotland. And the assumption is that assuming the price and rating remains the same going forward for the balance of the year, that we would impair these under the equity impairment model during the third and fourth quarters of 2009.

I think your other question pertains to ratings action since March 31. None of our securities have migrated to below investment grade since March 31. I should say in the perpetual securities sector.

Our next question comes from Colin Devine, Citigroup.

Okay, I have two. FIrst, with respect to the record lapse rates in both Japan and particularly in the US, you mentioned that impacted earnings favorably. I was wondering if you could quantify that.

Then if we could turn to the investment portfolio, Jerry, I guess I'm puzzled given Dan's commitment to maintaining the RBC when we're looking at things like Lloyds which are going to impair. When do you bring into question AFLAC's intent to hold to maturity. And then specifically, why haven't you impaired it now? I'm looking at how much these unrealized options are up and also, I guess on the Ford credit position, the debt's being sold back at $0.38 on the dollar. How can you not impair that right now?

Let me talk first, Colin, Kriss here about quantifying the effect of persistency. Really, in the US it was pretty much an offset. We measure offsets by comparing, say, amortization versus plan, and then total benefits versus plan. And benefits were higher than plan by about -- or they were less than plan by about $24 million. And amortization was higher than plan by about $22 million.

Do you mean DAQ amortization versus the increase in future policy benefits? It would be very helpful to be very specific here.

That's correct, Colin. I thought I said that, but anyway, the amortization was $22 million higher than plan in the US. And the total incurred benefits to be actually explicit was $24 million less than plan. So we don't know that all of that was attributable to persistency, but the greatest part of it was, in terms of the plan variance.

So we said maybe there was a modest -- there was a net $2 million benefit to US earnings there, which we consider immaterial. So we essentially said, it was either a modest benefit or a neutral on US earnings. And then in Japan, I think it was pretty neutral, too. I don't have the plan variance numbers in my mind, but benefits were right on plan in Japan.

Amortization was slightly higher in Japan at 4.1% of premium, but that was compared to 4.0% in the fourth quarter. So I didn't consider that a material change between the fourth quarter and the first quarter.

These lapses are why we're seeing the slowest growth in premiums in force in ten years?

That's correct. That combined with basically flat sales.

Okay.

I mean, sales increase premiums and forced lapses decrease premium force. So you're right, relatively flat sales and relatively higher lapses tend to lower the increases in premium in force.

Okay.

Colin, it's Jerry. Let me answer your question. First, let's start with your second part of your question, which refers to Ford credit. I think what you said was that you referred to Ford at $0.38 cents on the dollar. I think you're referring to Ford Company. We, in fact, did further impair Ford Company to reflect that pricing in the first quarter.

Turning to Ford Credit, as I'm sure you're aware of the new accounting guidance, and we are early adopters, as I'm sure you know, speaks to the fact that we are not held to any right line standard about time to recovery. We still firmly believe that Ford Credit will pay us in full and on time, and that it will recover.

So therefore, under the accounting guidance that we are mandated not to impair it. That's been our position and continues to be our position.

Now, I didn't really quite understand your question about the hybrids, if you want to rephrase that maybe.

I guess, given the steep increase in unrealized losses for the quarter, how are we not seeing more impairments, specifically on the Lloyds piece? It's very unclear to me why you haven't impaired it this quarter.

Well, that's a good question. We did impair Lloyds this quarter, in fact, under the equity impairment model. The equity impairment model speaks to an amount of price decline and the time that the security has been below carrying value. Some of our Lloyds exposure was mandated to be impaired under the equity impairment model in the first quarter, and we did so. Some of the other Lloyds and RBS exposures that -- by the way, RBS, we also impaired some of our holdings there in the first quarter.

Can you be specific with the amounts?

Sure. The total amounts were in the press release, were they not, Ken?

$42 million.

$42 million, that was all Lloyds and RBS. The amounts that were quoted earlier in this call of $294 million net of tax, also speak to those same credits.

All our other -- in fact, all of our perpetual securities continue to pay us in full. In fact, KBC Bank, and this should be public knowledge I think, redeemed their upper tier two securities that we hold on April 22. That was a JPY 5 billion exposure. So again, when we think that we're not going to get paid in full and on time, we will aggressively impair and/or sell any of those holdings.

Okay. The $295 million number you provided is just on the perpetual preferreds? That doesn't include the other fixed maturity holdings in terms of projected losses for the year?

That's correct.

Thank you.

Those are -- Colin, those are the below investment grade rated perpetuals that we account for impairments on those according to the equity method. The new accounting pronouncements basically verify that other than temporary impairments can be assessed with respect to credit expectations over the period in which you believe you'll hold the security, and it's not price driven.

In the past, the impairments were more price driven in terms of will the security recover in price within some period of time, and auditors like a one-year period of time. So we were really under the gun. And particularly given the long-term of our securities that we hold to match the long duration nature of our liabilities. So we've always had long duration securities to match our liabilities. and we've always had an affinity or tendency toward looking to the long-term rather than the short term. We're not subjected to liquidity problems that some others that have to have a shorter term view might be.

The one thing I'd add is that we have held below investment grade securities to credit cycles before when we felt we would get paid. For instance, KLM, and in other cases where we became uncomfortable with the credit, Levi-Strauss, we sold them.

Did you say $295 million projected losses is just on the below investment grade perpetual preferreds.

Correct.

So that doesn't include Lloyds. Because you've got that rated as an A?

Colin, once again, let me emphasize that does include Lloyds, that does HBOS, that does include Royal Bank of Scotland and that does include Bank of Scotland.

That's just not what Kriss said so all right.

Not what I said?

$295 million and below investment grade, and you've got Lloyds rated investment grade, unless I can't read page 13 here which says it's rated a single A. I'm just trying to clarify what the likely realized loss number is for the year that you're projecting.

Just to be clear, we rate Lloyds internally as below investment grade, and therefore, they are part of our projected impairments for the year.

Then maybe what you could put in this so it would be helpful is your ratings, what you think you have is below investment grade.

I think, Colin, we also own some senior debt of Lloyds which is rated A.

Colin, I point to you page 15 of the supplement which shows Lloyds as the first below investment grade holding .

I'm just trying to reconcile between page 13 and 15, Ken.

Susan, do we have another question?

Our next question comes from Andrew Kligerman, UBS. Your line is open. Please ask your question.

Yes. Good morning. Quickly, just on the sales. If you hadn't upgraded to the new cancer insurance product, how much would sales be down in lieu of that .6%?

I don't know how to answer that.

I couldn't tell you that, Andrew.

I just can tell you, andrew, that we expect the sales number for the year. I think the bank channel is what's driving it moreso than the upgrade of that, and we hope to have another new policy approved and ready to go the end of the second quarter. But I can't go into details of that because we haven't gotten the FSA approval.

Andrew, let me comment real briefly on the upgrade policy. This is a regular activity for us to upgrade our customers when we come out with something new. We did it before with a product called rider pack. They're about 13.6 million cancer policyholders in Japan that are eligible for an upgrade to the levels of cancer forte. And we only have a little less than 400,000 of the upgrade policies in force. So this is a campaign that will likely continue for sometime and continue to influence the cancer sales category.

Got it. And just in my view, though it might make sales look significant -- new sales look significantly better than they actually would be, just given that these are people that are existing and it's renewal business. But I understand your point.

Now, the other thing is just following on from what Colin had been talking about, I'm quite perplexed myself. Let me just give a little backdrop and see if you can help me. It's my understanding that a number of hybrids were downgraded in 1Q 2009, particularly by the Standard and Poor's. However, in your supplement, only 3 perpetual issuers, Lloyds, RBS and HBOS show up in the below investment grade holdings list on page 15.

So I'm looking at the $8.4 billion in perpetuals. My first question is, how much of this exposure is split rated, and of these split rated securities, what portion is classified as investment grade. And then lastly, if there is a fair amount of that, when do you decide it's investment grade or below investment grade?

What's going into this decision making? Because I see a number of names that you hold that S&P has downgraded to BB range, and those still appear to be investment grade with AFLAC.

The answer to that question is that there are approximately book value about -- just looking at the numbers here. I have to get back to you on the precise number. But the precise number will fall between $1.5 billion and $2 billion in book value that are split rated. When we look at split rated securities, we do a case by case credit analysis, and it is the determination of our credit group as to whether or not to impair these securities. In fact, when we look at -- and we use a debt impairment analysis for all these.

In other words, our debt impairment policy is will we continue to receive our interest and principal in full and on time? And in every case, we have determined that we will.

And by the way, that includes Lloyds and Royal Bank of Scotland who continue to pay and continue to honor all coupons. So were these securities that are split rated to have a majority of ratings below investment grade. So if there are three ratings, if two of them go below investment grade, then we really are mandated, whether or not we believe them to be money good, we will then mandatorily impair them..

If just S&P did it, that may not be enough.

Not necessarily a precondition to our impairing. It may be, depending on what our credit view is.

Again, remember, when he's talking about impairments, he's talking about under the equity impairment method, which is simply an analysis of an aging of unrealized losses and has no bearing whatsoever on the issuer's ability to satisfy the obligations.

Ken, did the adoption this quarter of SFAS 115-2 and 157-4, did that have any, benefit to not having to take impairments and if -- I know you mentioned immaterial in the release, but how much benefit might that have provided?

We're convinced that the changes to 115 support the view that we've held for many years, and that is when you have the ability and intent to hold the securities to maturity, meaning they have the probability of a recovery in value and that the cash flow testing and credit analysis suggests that the issuer will meet its contractual obligations for interest and principal on a timely basis, then regardless of what happens to the price in the short term, OTTI isn't warranted.

So your view really didn't change with that?

Our view did not change. The accounting view supports our view and our long held view.

Got it. Just lastly, my estimate on the perpetual portfolio is that you kind of on an unrealized basis marked it to $0.65, $0.70 on the dollar on average. Does that sound right to you?

I'd have to look at it on upper tier 2 versus tier 1. I think combined the perpetuals were $0.74 on the dollar at the end of March.

The one thing, a lot of these securities are trading way below $0.50. Just on where they're trading, the average is so much lower. Is there a fair amount of discretion being used?

I don't think it's discretion but I'm not sure you're pricing the very securities that we own. We get a lot of comments that the securities perpetual securities have much lower marks than we're carrying. I would suggest they're probably not looking at comparable securities to what we own, which are long dated privately issued yen denominated securities that have been swapped by the issuer back into their local currency.

All right.

There's an embedded value in the currency swap that really doesn't show up on the publicly traded perpetual securities that people tend to look at.

All right. Thank you very much.

Darin Arita, Deutsche Bank, your line is open. Please ask your question.

Thank you. With respect to the perpetual securities, since the start of the year, can you talk about what changes you've made to monitor these exposures and proactive measures you've taken or are thinking about taking to mitigate potential losses?

Hi, Darin. I'm not sure we've made any specific changes to how we're monitoring them. I would say you have to understand our investment style, which is we do tend to have the issuance offered to us and in so doing in structuring these deals, we developed a close relationship with a lot of these issuers. Therefore, our credit analysts here and in Japan are in constant contact with the treasurers of a lot of these financial institutions, really probably all of them on at least once a week, talking to these guys. Depending on the institution, it may be more frequent than that.

We visit them and recently visited -- our credit analyst here recently did a visit of several banks in Europe, attended conferences in Europe. But those are ongoing activities that we have always done, and nothing has changed there.

To your question about mitigating potential losses, it is still our contention that these securities offer value. We have obviously been shown a number of tender opportunities from banks. And at this point, although we'll evaluate them on a case by case basis, we've turned them all down because the banks are taking are - a, liquid enough to be able to tender for these bonds; and b, we view it as a tremendous arbitrage opportunity for them that is improving their balance sheet. So we want to be investors in a bank whose balance sheet is getting improved.

All right. Thank you.

Randy Binner, FBR Capital Markets, please ask your question.

With the RBC neutral loan that came up to the parent, the $450 million, was that something that needed to be requested from the regulator?

Actually it was a $500 million loan to assist us in retiring the $450 million of senior notes. So that's provided for under the Nebraska Statute as a permitted practice, and then it was subsequently received approval by the Nebraska Commissioner so that it could be treated as an admitted asset. But it was in the normal course of business and the $500 million amount of the loan was significantly less than the amount permitted under the Statute, which would have been in excess of $1 billion.

Okay. Do you have any color on how the rating agencies may view that?

Well, we were affirmed -- our rating was affirmed and taken off negative credit watch by Standard and Poor's subsequent to the time we did that, and we fully discussed the process we would use to extinguish the senior debt with S&P during our review. So I can only infer that they didn't have any problem with it.

I guess just more technically when we're trying to forecast RBC, that's what I'm thinking about, if the rating agency shares the same view as the regulator.

I think you can assume that they would.

Okay. And just one last thing. In Dan's comments, was that RBC targets? Was that $375 million?

That's not our target per se. That's kind of a --

Yeah. It's kind of the where we start evaluating everything we're doing in a much more serious manner.

Right. I think it's fair to say that our target is higher than that more in terms of, that's kind of the threshold which we start to be concerned about the impact on the ratings and things like that. It's just kind of our comfort zone, though it's way in excess of where the regulators would get concerned.

Okay. But in the context of the compensation package, if it was $374 million at the end of 2009, would that have impacted the discretionary compensation.

The compensation would be less than the target at $374 million, yes.

Right.

Perfect. Thank you very much.

Ed Spehar, Merrill Lynch, you may ask your question. Check your mute button, please. Ed Spehar, your line is open. I'll go to the next question. Jeff Schuman, KBW, your line is open. Please ask your question.

A couple of quick ones. First of all in the US, how many sales days are there in the second quarter, and how should that shade our expectations for sales production?

Secondly, what are new investment cash flows going into in the US and Japan? And lastly for Dan, given that without share repurchase, you're headed more towards 13% EPS growth rather than your personal goal of 15%? Is there any contemplation of any other possible levers or adjustments that could be used to get you back towards your personal 15% target?

I'll answer the first one. This is Dan. I'm certainly disappointed to even think because I thought it was in the bag, because I thought we would be doing the share repurchase. I never say never because we've got things could change tomorrow. Capital could continue to improve. And we'll just have to watch it accordingly.

But I think it behooves us to pay much more attention to the capital position than the EPS. And so at this particular point, I'm giving up something personally I wanted to achieve to ultimately protect our shareholders, and to make the analysts feel more comfortable. And that's really all it's about.

It's really not about the 20 years. It's really about making our share value go back up. That's what I'm trying to do.

Paul, you want to take the one about the production days?

Absolutely. The second quarter is a different comp for a couple of reasons. One, we do lose a day, one of the days that we mentioned before was the movement of the Good Friday holiday back and forth, depending on when the calendar is.

Obviously, the second quarter of last year where our largest comparables many other quarter as well as the majority of things that we just rolled out with our new wing span initiative around products, marketing and sales techniques, have all been rolled out within the last week. The product rollouts continue to happen through the remainder of this quarter and really take full effect in the third quarter.

So I expect the second half of the year hopefully to show stronger promise than the first half, and second quarter continuing to be a difficult comparison. Were those all your questions?

That was a question for you but I can't remember what it was.

The question for Jerry, was where investment cash flows are being directed now in the US and Japan?

We expect cash know for investments and Japan in the yen to be approximately JPY 450 billion this year. That is very similar to the amount that we had targeted for investments last year.

In the US, the cash flow is de minimus for a couple of reasons. There is some policies that were written in the 1990s that require payout in last year and this year, I think are the big payout years. That has redirected that cash flow. So it's difficult to project the US cash flow, but it will be a very minimal number.

I meant, what are you buying?

Oh, different question. We are -- in Japan our purchases have really centered around purchases of a, we found very attractive opportunities in sovereign and state guaranteed debt, not US state guaranteed. These are our foreign states. And we have also found some great opportunities in essential services, really globally.

And by essential services, I'm referring to water and power provider transmission companies, companies that we view as essential to the infrastructure of countries. We haven't made any bank investments in the first quarter of 2009, have no immediate plans to increase our exposure, which is already at a lofty level.

In the US, since cash flow is quite minimal, the investments there have basically been as the result of bond swaps. And again, the strategy's the same.

Great. Thank you very much.

Susan, my watch is telling me we're at the top of the hour, and that's the terminating point for the call. I hope we're able to answer everyone's questions. If there were some that were still in the queue, I apologize we didn't get to you. I hope that you'll take the time today to call either Robin Wilkie or myself and we'll be happy to discuss the quarter with you and any questions you might have. Again, thanks for joining us.

This concludes today's conference. Thank you for joining. You may disconnect at this time.