美國家庭壽險 (AFL) 2010 Q1 法說會逐字稿

Welcome to the Aflac first quarter earnings conference call. Your lines have been placed on listen-only until the question and answer session. Please be advised, today's conference is being recorded. I would now like to turn the call over to Mr. Ken Janke, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, Caroline. Good morning, everybody, and welcome to our first quarter call. Joining me in Columbus today is Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Paul Amos, President of Aflac and COO of our US operations, Jerry Jeffery, Senior Vice President and Chief Investment Officer, and Tohru Tonoike, President and COO of Aflac Japan joins us from Tokyo. Before we begin this morning, let me remind you that some of the statements in this teleconference 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. The actual results in the future could differ materially from those we discuss today. As such we'd encourage to you look at our recent quarterly press release for some of the various risk factors that could affect our future results. I'll turn the program over to Dan who will talk about our quarter and operations in Japan and the United States. I'll follow up with just a few financial highlights for the quarter, and then we'll take your questions. Dan?

Thank you, Ken. Good morning, and thank you for joining us. Overall, we're very pleased with our results for the first quarter and believe we're on track for achieving our primary financial objectives for both capital levels and earnings growth this year.

Let me begin this morning's call with a review of our insurance operations beginning with Aflac Japan. Aflac Japan produced strong financial results in the first quarter. Revenue growth was in line with our expectation. In addition, our pre-tax margin continued to expand as expected, resulting in strong earnings growth for the quarter. We were especially pleased with the continued sales momentum in the quarter. In fact, Aflac Japan generated the largest first quarter production in its 36-year history. Total new sales for the quarter rose 10% to JPY30.3 billion.

Our first quarter sales continued to benefit from strong consumer response to the recent product introductions, effective promotions, and channel expansion. First quarter medical sales were again strong, increasing 21.4% over the first quarter of 2009. Medical sales reflected the successful revision of our popular medical product ever. As you know, we promoted this revised product with the Maneki Neko Duck campaign, which became an overnight sensation in Japan last year. Our commercial featuring the Maneki Neko Duck was the number one rated television ad among 2300 ads running on the major TV stations in Japan when we first released it last year. In addition, the jingle from the commercial was the most popular cell phone download in Japan for six days in a row after it was released. Today, we have distributed approximately 1.6 million Maneki Neko Ducks through Japan.

We continue to produce strong sales in our ordinary life category. Ordinary life sales were up 64.4% in the first quarter, with the new child endowment product accounting for approximately 44% of the total ordinary life sales. We sold more than 29,900 child endowment policies in the first quarter, at an average premium of JPY155,600 per policy. Although the child endowment product has a lower margin than the health products, the premium is almost three times higher than the cancer and the medical products. As such, it's a solid contributor to both the top and bottom lines. In addition, we've been able to leverage our child endowment sales through cross selling. In fact, for every 10 child endowment plans sold, our agents sold two additional policies to the same customers.

We also experienced strong gains in the bank channel sales in the first quarter. March was the single largest month of production from this channel, and bank channel sales were a record JPY3.1 billion in the quarter. That represents 6.5% increase over the fourth quarter of 2009, and a 206.6% increase over a year ago. At the end of March, a total of 352 banks represented Aflac Japan. We have a strong position within the bank channel and have significantly more banks selling for third sector products than any other insurer operating in Japan.

We believe our objective of a 0% to 5% growth in 2010 is reasonable, and our first quarter sales results are a good start toward achieving that objective. However, we do not expect second quarter sales to be as strong as the first quarter, largely due to tougher comparisons. I'll remind you, for instance, that we introduced our popular child endowment product last March. As such, growth rates in the ordinary life product category for the remainder of the year will be much lower than we produced in the last several quarters. In addition, as we discussed in the fourth quarter conference call, we expect much lower sales contributions from our largest telemarketing-based agency. We also expect sales from Dai-ichi Life to be down for the full year.

To put this in perspective, excluding the impact from these two channels, first quarter sales rose 21.7%. Yet, despite these head winds, we are encouraged by our 10% sales increase in the quarter, and our prospects in the Japan for this year and beyond. We continue to believe that Aflac Japan is positioned as the strongest competitor in the third sector in Japan.

Let me turn to our US operations. From a financial perspective, Aflac US performance was in line with our expectations in the first quarter. As expected, our persistency rate was lower than a year ago. The drop in the first quarter was attributable to the significant lapses at the Wal-Mart account. Excluding the impact from that large account, persistency improved to 72.3% for the first quarter, compared to 66.9% a year ago. However, as we expected when we announced the loss of the account last March, the earnings impact from the loss of the account was actually very positive in the first quarter due to the sizable release of reserves we held for the block of business.

As has been the case for the last several quarters, we continue to face sales challenges in the US market. Total new annualized premium sales in the quarter were $316 million, or 10% lower than a year ago. Although we weren't pleased with the sales decline, we were not surprised. I hope you remember my comments from the fourth quarter call when I said that we expected to see a sizable decline in the first quarter sales due in part to five fewer production days in the first quarter of 2010, compared to last year. The impact on sales from fewer days was approximately $16 million. However, that was largely offset by $13 million of sales from the new Aflac group business.

Beyond the tough comparisons, difficult economic conditions continue to pose obstacles to sales growth. Throughout this period of economic weakness, our veteran agents, in particular, faced very challenging re-enrollment conditions, because many businesses have reduced staffing. It's common for our sales associates to see fewer employees during re-enrollment, and the employees they do see are likely to be more cautious about spending. The impact from the sales through veteran agents is meaningful, because approximately 70% of our total US sales come from agents who have been with us more than one year. Remember, too, that approximately 90% of the businesses we sell through have fewer than 100 workers. Clearly, small businesses have been especially vulnerable in the current economy.

Historically, we've been able to offset some of the impact of the weak economy through better recruiting. You may recall that recruiting was up an incredible 25% to 8,100 new agents in the first quarter of last year, which was our largest number of recruits in a single quarter. Our record recruiting a year ago coincides with a major internet recruiting campaign and some massive layoffs at large employers, which gave us a unique opportunity to recruit. Against that tough comparison, recruiting in the first quarter was relatively weak, with 5,900 new recruits. However, on a sequential basis, first quarter recruiting was up 6.9% than the fourth quarter.

In addition to tough comparisons, we experienced some contraction in the number of sales coordinators, which has reduced our recruiting capacity. A portion of the coordinator reduction was strategic consolidation and some was through attrition. We are currently evaluating our coordinator level to determine where we might need to rebuild. We've also changed the bonus structure for our state and regional coordinators from one that was based entirely on sales to a structure including people development. The comparison to last year's second quarter will be very difficult on a year-to-year basis. We expect to see recruiting decline for the second quarter. However we expect to see better recruiting in the second quarter compared to the first quarter.

In addition to expanding the size and capabilities of the traditional sales force, we are excited about the opportunities to enhance our distribution system with the addition of insurance brokers. Our efforts to build new and better relationships in the regional and large account broker market began in 2007. In 2009 we officially launched an initiative called Aflac for Brokers. We've staffed our broker department with employees who have significant experience in broker sales. Although our entry into the distribution outlet is fairly recent, we're very pleased with our results so far. As I mentioned on our last conference call, an independent survey in January of this year found that Aflac is the number one preferred carrier of voluntary insurance among brokers. More importantly, our effort is translating into sales.

In the first quarter, broker sales rose 30.6% over last year. That reflected the inclusion of the new Aflac group business in the first quarter of this year, most of which is broker distributed. However, on a pro forma basis in which Aflac group sales were included in the first quarter results, for both this year and last year, broker sales were still up 5.9%. You will recall that we acquired Continental American Insurance Company, now branded as Aflac Group Insurance, in part to better meet the product needs of our broker distribution. At the same time, however, group products should enhance the sales opportunity for our traditional sales force of individual associates. In fact, our sales force is very enthusiastic about the new group products. We also believe this will better position us to tap into the large payroll account market, as larger businesses typically prefer group products. Admittedly, we are not only new to the group business, we are actually playing catch up, as some of our competitors have been offering group products through group for many years. In addition, it may take some time for the group sales to have a meaningful impact to the overall US sales growth. However, we bought a scalable platform and we expect to see strong sales growth in the group side of our business in the future.

In the short term, our outlook for new sales in the United States remains cautious, due primarily to the weak economy and high levels of unemployment. Earlier this year, we established a 2010 target of a 0% to 5% sales growth for the US segment. We have since modified our objective to enable our US officers to earn a small bonus if the sales are flat to down 5% in the first half, but that portion can only be paid if sales are flat to up 5% in the second half. We found this two-part bonus structure to be effective in motivating our management team when we used it in Japan three years ago, and we hope it will have the same impact in Aflac US this year. Although I don't like the idea of paying a bonus for negative sales performance, I believe it's important to set reasonable targets. Given the circumstances, the compensation committee, the board of directors also felt the two-part bonus was appropriate for this year. I believe our objective for the second half of the year is achievable, if we see improvement in employment levels of our core market, which compromises businesses with fewer than 50 workers.

In the long run, our outlook for Aflac US has not changed. We continue to view the US market as underpenetrated. Furthermore, following the enactment of the health care reform, we believe employers and consumers will increasingly understand the need for products we offer just as they have in Japan.

Overall, we're pleased with Aflac's consolidated financial performance in the first quarter of this year. Operating earnings per diluted share rose 15.6% to $1.41. Excluding the impact of the stronger yen, operating earnings per share rose 11.5% for the quarter. Gross realized investment losses in the quarter were lower than in the fourth quarter and a year ago. However, because we generated $146 million of realized gains in the first quarter of last year to take advantage of tax loss carry forwards, net realized investment losses were higher than a year ago.

As we noted in last night's press release, we booked $27 million of GAAP-only impairments on two perpetual securities using the equity impairment method. These impairments resulted from rating deterioration of these securities. As we have repeatedly discussed, we are required by GAAP accounting to apply an aging schedule of unrealized losses to the perpetual securities that are classified as below investment grade. Our business continued to generate significant capital in the first quarter. Although we've not yet completed our statutory financial statement, we estimate that our risk-based capital ratio was in excess of 525% at the end of March. Maintaining a strong RBC ratio remains a priority for us. Like last year, it's an important component of our management incentive plan for all Aflac officers. Our official objective for this year is to maintain the ratio range of 375 to 475. However, we plan to work toward finishing 2010 with a higher RBC ratio than year-end in 2009 ratio of 479%.

I realize that many of you have asked when we feel comfortable deploying capital again. As I noted last quarter, we would like to extend our record of 27 consecutive annual increases in the cash dividend to 28 and beyond. If the credit markets remain relatively stable, I think it's reasonable to expect the board to approve a dividend increase some time during the second half of the year. Over the long run, our capital generation has allowed us to maintain a policy of steadily increasing the cash dividend. Additionally, we continue to believe it's appropriate to enhance shareholder value through prudent share repurchases. However, before we commit to resuming share repurchase, we will closely monitor global financial markets to make sure the worst is behind us. We will also regularly assess our capital levels and measure our RBC ratio. I think it's likely that the soonest we would consider repurchasing our shares is toward the end of this year or 2011.

Our objective is to increase the cash dividend and resume share repurchase, but our greatest priority continues is to maintain a strong capital position. Yet at the same time, we are still focused on the income statement. In that regard, we reaffirm the earnings outlook we previously communicated in 2010. Our goal this year is to increase operating earnings per diluted share by 9% to 12% before the impact of the yen. At our upcoming analyst meeting, we will discuss the outlook for 2011 earnings growth.

I remain pleased with Aflac's positions in the two biggest insurance markets in the world. We continue to believe Japan and the United States each have characteristics that make them perfectly suited to our products. Aflac has earned the distinction of being the best branded company for volunteer supplemental products in the each country. Importantly, both markets offer opportunities for growth. In pursuing our objectives for this year and beyond, it's clear that we will continue to face some challenges. However, our business is strong from an operational perspective, and we have confidence in our business model and in our people. We also have the strength in our balance sheet that will allow us to continue to fulfill the promises that we've made to the customers and the expectations of our shareholders. Ken?

Thank you, Dan. Let me just take you briefly through some of the first quarter numbers, starting with Aflac Japan. Beginning in the top line in yen terms, revenues were up 3.6% for the quarter, and investment income rose 2.5%. Excluding the effect of the stronger yen on Aflac Japan's dollar-denominated investment income, net investment income rose 3.5% for the quarter. The annualized persistency rate, excluding the annuity business, was strong and little changed in the first quarter. The rate was 93.8%, compared with 93.9% a year ago.

In terms of operating ratios, the benefit ratio continued to improve over last year, and was 59.5% in the first quarter, versus 61.5% a year ago. The expense ratio also improved slightly at 19.1%, down from 19.5% in the first quarter of '09. As a result of the lower benefit and expense ratios, pre-tax margin rose from 19% to 21.4% in the quarter, and with the expansion of the margin, pre-tax operating earnings increased 16.8% for the quarter in yen terms. For the quarter, we invested our cash flow in yen securities at 2.46%. Including dollars, the blended rate was 2.67%. Although new money yields were lower due to spread compression in the purchase of higher rated securities, they were above budget for the quarter. The portfolio yield was 3.75% at the end of March, down 2 basis points from the end of December, and 12 basis points lower than a year ago.

Turning to Aflac US, total revenues rose 3.7% in the first quarter. The benefit ratio was 45.5%, compared with 49.5% a year ago. The decline in the benefit ratio reflected the higher lapsation from the Wal-Mart policies in the quarter and higher lapses also increased DECK amortization which was up 9% versus a year ago. The operating expense ratio rose from 33.9% to 35.4%, reflecting both the higher DECK amortization, as well as higher advertising expenses which were planned for the first quarter. The profit margin for the quarter was 19.1%, compared with 16.6% a year ago, and as we indicated in last night's press release, the margin would have been approximately 16% without the impact of the benefit reserve release related to the Wal-Mart terminations. In terms of US investments, the new money yield for the quarter was 5.98% versus 8.67% a year ago. Like Japan, our new money yields in the US segment were ahead of budget for the quarter. The yield on the portfolio at the end of March was 7.06%, down 11 basis points from the fourth quarter, and 12 basis points lower than a year ago.

Turning to some other items for the quarter, noninsurance interest expense in the first quarter was $31 million, compared with $7 million a year ago. The higher interest expense primarily reflected our debt issuance in 2009. Parent company and other expenses were unusually low in the first quarter of last year, and rose from $9 million to $14 million in the first quarter of 2010. Total company operating margins rose reflecting the improved profitability of Aflac Japan and Aflac US As a result, the pre-tax margin rose from 18.1% to 20%, and the after-tax margin increased from 11.8% to 13% in the first quarter of this year.

On an operating basis, the tax rate was unchanged at 34.7%. Net earnings per diluted share for the quarter were $1.35 compared with $1.22 a year ago. Realized investment losses were $0.06 per share compared with $0.01 per share in the first quarter of 2009. During the quarter, we realized investment loss of $77 million or $0.16 per diluted share. As we noted, $49 million of which came from the sale of the remaining of our holdings of Takefuji Corporation, and $27 million, as Dan mentioned, came from the equity impairment method charges on two perpetuals.

We also realized investment gains of $47 million, or $0.10 per diluted share in the quarter. $36 million resulted from the sale of securities. The remaining $11 million gain was due to the valuation of foreign currency, interest rate and credit default swaps as required by ASCA10, formally known as SFAS #167. As we discussed on our fourth quarter call, ASCA10 eliminated the concept of qualified special purpose entities, and required us to consolidate certain variable interest entities on the balance sheet. Upon adoption we made a one-time cumulative adjustment, which reduced shareholders' equity by $165 million. As reported, operating earnings per diluted share rose 15.6% to $1.41, and the stronger yen increased earnings by $0.05 per diluted share in the quarter.

Finally, let me comment on the outlook for 2010. As you heard Dan say, we affirmed the objective for 2010 of a 9% to 12% increase in operating earnings per diluted share before the impact of currency. That would equate to $5.29 to $5.43 for the full year. Assuming an exchange rate of JPY90 to JPY95 to the dollar, we would be at $5.24 to $5.56. If the Yen averages JPY90 to JPY95 for the second quarter, we would expect operating earnings to be in the range of $1.33 to $1.38. We'd now be happy to take your questions, and to allow time for everyone to ask questions, please try and limit your questions to one. If you have more, we'll try and get back with you. Caroline, we'd be happy to go to the Q&A now.

Thank you. We will begin the question-and-answer session. (Operator instructions) Our first question or comment comes from Jimmy Bhullar, from JPMorgan. Your line is open.

Good morning. I had a question on your excess capital position and ability to buy back stocks. Just on an estimate the magnitude to buy back, I think, Dan, you mentioned, that you looked at that, or you looked at potential buybacks later in 2010. Could you maybe discuss what you expect your RBC to be longer term and help us quantify what the size of buy backs would be on an on-going basis? Like how much cushion you have, versus your goal in the 525% RBC right now, than free cash flow I think is over $1 billion each year, so, just so we can get a better idea on what the magnitude of buy backs could be, on an on-going basis.

Jimmy, Kriss Cloninger. I'll handle that. We have given some guidance in our previous FAB meeting that our EPS guidance modeling, is based on share repurchase of somewhere between 0 to 12 million shares, both for 2010 and 2011. We pretty much stick to that. We had been running share repurchase at a rate of about 12 million shares a year, until 2008. Then we accelerated the share repurchase when we thought we had a significant amount of excess capital. You can argue whether or not that turned out to be the case. Today, we ended last year at 479. We are in excess of 525, at the end of the first quarter I'll say, with the situation in Greece and the like, and their downgrades that happened yesterday, that will have some negative affect on RBC. It just points out the need to continue to do what we said we were going to do during 2010, which was to watch the environment to see how things stabilized, and then to make our decision toward the end of 2010. At which point, we'll start to deploy excess capital.

I personally told Ken Janke, I don't want to use the words excess capital in any of the press releases for the foreseeable future. If you want to quantify, I think it's pretty easy to tell the difference between the stated RBC ratios of, say, 479 and whatever our current position is. I will say that our required capital base is about $1.2 billion, which would represent about 100 points of RBC. So, if you want to determine the difference between where we are in RBC and where you think we ought to be based on your personal opinion, you're welcome to quantify it yourself, but I am still avoiding using the words excess capital today.

Yes. And maybe you could call that a capital cushion. But the reason I was asking is, if you have $1 billion dollars above your target and you're generating a billion-plus of free cash flow each year, will you let -- if you're thinking longer term next year or the year beyond, would you let the capital just sit there, or would you, over time if the markets are stable and the situation increased and everywhere else stabilizes, would you ramp up buybacks at least to use up your free cash flow each year.

We've said that's under active consideration.

And to follow-up, do you know what the impact on the RBC is from the Greece downgrades?

Well, we've down some -- I will call them quick and dirty estimates that said that if all our investments in Greece got downgraded to an NASC3 category, which is basically BB, it will impact us by roughly 14 RBC points.

That includes the sovereign and the bank exposure.

And just a numbers question, on your interest expense, it was $31 million this quarter, $25 million -- around $25 million the last couple of quarters. Is the first quarter a good run rate to use going forward?

Yes. We fully absorbed the increased interest expense for the first time in the first quarter of 2010. So, that's a good run rate from now on. We will get a slight decrease in that run rate when we pay off our yen-denominated senior notes of JPY40 billion in early July, but the interest rate on that was pretty low, so it's not going to be a material decline. Interest expense will between $110 million and $120 million for the year.

Okay, thanks.

Thank you, our next question or comment comes from Steven Schwartz, from Raymond James & Associates. Your line is open.

Hi, good morning, everybody. I was hoping to hear from Mr. Tonoike about what was going on in Japan, and I am particularly interested in Kampo. My understanding is the DPJ recently okayed Kampo to increase the life benefits that it pays outside of its policies and increased the amount of composites it can take. And, recently, I believe, there was a proposal floated to allow Japan Post insurance to enter new markets without official approval, rather just notifying various ministers. So I was wondering what was -- what exactly was going on there with Kampo.

This is Dan. I'm going to -- I asked Charles Lake to be on the call just in case we got a question. Charles is the chairman, of course, of Aflac Japan. So, Charles, would you mind addressing that?

Yes. Let me first say that, in terms of development relating to Japan Post in Kampo, we expect a cabinet decision regarding a bill on Japan post reform either on April 30 or May 7, which will be followed by an introduction of that bill to the Japanese Diet or the Parliament for debate after the golden week holidays in Japan which is, as you know, the early part of May. The cabinet decision will likely be based on the outline that was announced by the two ministers in the charge of postal reform, which, as you probably know, was widely reported. It provoked opposition inside the Cabinet, as well as domestic and international communities. The debate that will take place in the Diet will be taking place in the context of very complex political dynamics in Japan. A three party coalition headed by Democratic Party of Japan, DPJ, as you mentioned, which is about to face an upper house election in July. For this reason, again, many of the things that you mentioned with respect to those ideas, many policy experts on the ground in Tokyo say that it's really not clear whether this bill will actually pass the Diet by the June 16 close of the current legislative session.

We are in close communication with many of the key players in the Diet and government, and many will verify or confirm that assessment. So, even if the bill does pass the Diet by June, the legislation will be lacking in detail, requiring a lot of regulatory work, with implementation date being possibly as late as October 2011. So, accordingly, really it would be premature to discuss a lot of things that's floating out there, or rumored to be in the Cabinet decision. Tohru and I have talked about this. In our view this debate will not have an immediate material impact on our operations in Japan. And Aflac Japan is continuing to work with postal network to develop that channel. So, I don't know if that helps elaborate on many of the issues that are out there, (inaudible).

Yes.

Go ahead.

I just want to say, Charles, that I appreciate that you are on the call.

Thank you.

Let me say one other thing about postal. The new product that we've been selling, the life insurance product, the child endowment, is in direct competition with the postal. And, as you've seen the numbers, we have done exceptionally well. So I'm encouraged how we are able to compete in a head-to-head with the post, even though I think Charles explained it better and in much more detail that we are a long ways from seeing anything take place.

Dan, just to follow-up on that, just to make sure we're apples to apples here, your child endowment policy -- well, is post allowed to have the same amount of benefits that is you provide?

Tohru, why don't you answer that?

Yes. The benefits now, their product is not exactly the same as ours. Basically they provide the same kind of benefits but we think ours is a better product overall, but it is, I will say, similar in nature.

Okay. Thank you.

Thank you. Our next question or comment comes from Nigel Dally, from Morgan Stanley. Your line is open.

Great. Thank you. Good morning. My question is regarding the US. You mentioned some changes in compensation to include a [complaint of the bill force development]. Can you reflect some additional details regarding these changes, linked to recruiting or, excuse me, agent counts, and how much of the compensation is going to be linked to this measure relative to the sales? Thanks.

I'll be more than happy to talk about that, Nigel. We have traditionally had bonuses at the highest levels of management focused solely on production. While that does well within a single calendar year, it is essential for us to look at the long term viability and growth of our organizations, and we felt it was good to include not only producer growth, but account growth on a net basis, so it is a form of retention in there, along with the production components. We feel like this is a more balanced score card for our people to determine what they need to be doing in the future.

I will tell you that as a part of that, it is recruiting is not included in that. What is included is average weekly new producer growth. The reason we did that is, recruiting is merely an activity of getting people. We need to make sure those people are being more productive. That's the reason, when you saw, and as Dan mentioned, on our internet recruiting numbers, we had a high volume of recruits, 8,100 in the first quarter of last year. Unfortunately the productivity from those recruits was not as high as we would like. And as such, we've refocused the attention of our regional sales coordinators and state sales coordinators to be balanced among the different channels of sourcing for recruiting, not just internet but also to include field nomination, the way we used to do business. We feel like that will have a driving component behind why our average weekly new producer growth will eventually come up as recruiting comes up. So, that's why Dan spoke of second half improvement, sequentially, in recruiting between the first quarter and the second quarter, and then improved recruiting in the second half of the year.

And Paul, what's the difference between the compensation regarding the new measures averaged weekly producing account business and traditional production levels?

You mean the split between the two? Is that what you asked, Nigel?

Yes, exactly. Yes.

It's about 50% production, 20% account growth and 30% people growth. I'll give you all the details if you want them, when we get the FAB. I'll put that into a little more depth.

Perfect. Thanks a lot.

Thank you. Our next question or comment comes from Ed Spehar, from Bank of America. Your line is open.

Thank you, good morning. Kriss, one question. If you look, in the last couple of years, the required capital has grown at a rapid pace because of credit migration, but if you go back in prior years, so I'm talking about denominator or the RBC ratio -- if you go back in prior years, it wasn't growing all that rapidly. Could you give us some sense, given the mix of business you have, and your expectations for growth, how we should think about the change in required capital over time?

Yes. I think generally, Ed, that the key factors are the growth of the premium income and the growth of the assets themselves. It's focused on insurance risk, and it's focused on asset risk. And, what's really grown over the last year or two has been the asset risk component of the thing. The insurance risk is represented by growth in premium income and the like has grown at say the 5%-type number on average that's represented in our core growth in top line revenues and the like. So, that's pretty much it. The two risks of insurance and asset are the two dominant factors and the big increase in 2008 and 2009 related to the assets, not the insurance. And I think, absent any more credit migrations or credit downgrades, that we'll see a resumption of the more normal growth in RBC required capital associated with just the growth, the normal growth in the business.

Okay, perfect. And, just one more follow-up. Could you just give me, again what you said the RBC impact you estimated from Greece and what -- when you say the total amount downgraded, could give us what that invested asset number is. Because it's not just the sovereign, right? You said it was the banks, as well?

Right, and we've got around $350 million or so sovereign debt in Greece, and around $1 billion in three banks. Maybe a little less than that. Jerry, do you have --

It's about $950 million in three Greek banks.

All right. A little less. So out of the $1.3 billion total, we're saying that if all those securities were downgraded to NAIC3, it would impact our RBC negatively by about 14 points.

Okay. Are they all mixed now, the NAIC1 and 2? Or are they all 1?

That's correct. Yes, they are 1 and 2 right now.

Okay, thank you.

Thank you. Our next question or comment comes from Eric Berg from Barclays Capital. Your line is open.

Thanks very much. My one question relates to the US business. What specifically has to happen in the economy for employers to be more inclined to do business with you folks than they are at present. In other words, more specifically my question is, let's say the consensus view is right. That unemployment remains high for the foreseeable future, call it the next couple of years, unemployment, I don't know, 8%, 9%, 10%. Could your business prosper in the United States even with that high level of unemployment? Thanks.

Let me begin, Eric, but saying it really isn't the employer that's the issue, it is the employee and the individuals who are making choices. In fact, while our account number that we released was down, if you were to actually take out the five extra days of processing, we were up 3.7% in new accounts. Employers, more than ever, are listening to the fact they want to put in our products, they see the value in what we are doing. We continue to believe that's viable. As we've talked about for a couple of years, now, the other concept is that it's building shelf space. It is the employees individually who are not purchasing at the same level. And to let you know, that's true of both our existing accounts and our new accounts. It's pretty consistent, which we believe points directly to the fact that it is the economy.

So to your question of what needs to happen for employers to begin hiring new people, I can't speak directly to what they're going to be doing in their individual businesses, but my hope is that this will not be a jobless recovery. Certainly the better employment is, the stronger chance we have of continuing to sell our products, and I think stability in the economy will give people more security about spending their dollars on insurance. Does that answer your question?

Yes. I think it does. I mean, I certainly got the message. The message is coming through loudly and clearly. That it is fundamentally about what the employee thinks rather than his employer. But again, let's say that unemployment rate remains high. Could you still imagine an environment in which employees are willing, more than at present, to say yes. The employee, I guess -- I'm rephrasing my question to focus now on the employees.

Yes, I can imagine that. Is that something that will happen in the short term? I cannot predict. But we certainly are putting strategies in place that we believe will help better affect sales.

One thing I can tell you on a positive note, is that while the productivity of the veteran agents, which has been one of the key reasons that we've talked about things being difficult, has remained down. The number of veteran agents who are producing has been steadily on the decline over the last few months -- steadily on the increase, excuse me, over the last couple of months. So we feel like that is a slight uptick in trend that is positive. But, again, it's productivity.

And to your point, do I see employees eventually wanting to buy more of our insurance? I absolutely do. As Dan mentioned earlier, national health care is going to place an emphasis on people understanding the better value of our products, and I believe, long term, just like it did in Japan, that will be a positive for us.

Thank you, sir.

Thank you. Our next question or comment comes from Randy Binner, from FBR Capital Markets. Your line is open.

Hi, thanks. Actually, I was going to ask a couple of Washington policy type questions, and it picks up right there on what Paul was saying. On the health care reform, I am hearing you say it's a general awareness folks would have as kind of their personal responsibilities, but are you also potentially thinking about making a product that could be designed to sold in or around the exchanges that will be formed?

As the current law exists today, our policies will not be sold through the exchanges. At this point, we have no reason to believe that is going to change. If you look at the regulation itself, currently there is no regulation for life, disability and accident, some of our largest product lines. It is the remaining products that ultimately are going to be overseen. At this point we believe that the product development that we are doing through our distribution of both field force and the brokers represents the best opportunity for us to get to the employer. And I do not believe right now that the exchanges will be in any way used for supplemental or voluntary work site benefits.

Okay. But, is there a way that you could sell around the exchanges, more directly if there are shortfalls that people get from products there?

Whether it's an exchange, whether it's an HMO, whether it's a national health care as in Japan, or whether it's Blue Cross/Blue Shield, there are still gaps that occur. And our job as sales people is to make sure that we expose those gaps, tell them where they are, and how they need to be filled. So, the answer to your question from that standpoint is yes, we will continue to find products and services that help fill gaps that are created in the health care environment. Does that answer your question?

Yes. That's perfect. Thank you. And, then, just on the other piece of legislation, the financial reform, through the derivative piece of this potential legislation, and I guess I would mention tarp tax, too, any potential exposure or change that you see for Aflac operations through that bill?

We are following it, but we don't see any major implications for us. you know, the so called tarp tax, it's my understanding that they are excluding financial institution liabilities that are subject to another support fund, whether it's policy holder protection fund in Japan, or the state regulatory remedies in the US when insurance companies fail. So, we don't think there is a big influence on us there.

And on the derivative side, just intuitively, if you had to purchase your derivatives instead of doing it over the counter, which I imagine you do now but did it more through a more transparent exchange, could that potentially save you money? Would I be thinking about it the right way if I said that?

I think it is important to understand we have some derivatives on our books now as a result of accounting changes. We are not active participants in derivative markets. So, I don't really see any significant impact on any derivative reforms that takes place.

Great. Thank you for the answers.

Thank you. Our next question or comment comes from Suneet Kamath from Sanford Bernstein. Your line is open.

Great, thanks. I want to go back, for Jerry, on the sovereign exposure. I think the Greek sovereign exposure that you mentioned earlier on the call is a little different from the numbers that I jotted down last night. So, if you don't mind, could you just walk through the sovereign exposure, Greece, Spain, Italy, and maybe comments around what exactly your exposure is. Is it to the government or other entities? And then, related to that, I think you mentioned total Greek exposure banks plus sovereign is something like $1.3 billion, which -- relative to your equity base is pretty sizable. I know we've talked on these calls about concentration restrictions and some changes that you've made to your investment philosophy there, but do you have restrictions or are you thinking about restrictions related to total country exposure, obviously excluding Japan, given that governments and financial institutions in these countries have obviously become a lot more linked relative to the past? Thanks.

Let me start with your first one, which is what our sovereign exposures look like. Our direct sovereign exposure to Greece is -- the book value is about $285 million. And we have -- on a book value basis, just slightly over -- very slightly over $1 billion to Greek banks. None of the Greek bank exposure is professional exposure, by the way. As far as -- was Portugal one you asked about? We have no direct sovereign exposure to Portugal. We have some exposure to their banking system. The total exposure to their banking system in Portugal is approximately $750 million, book value. We do have some industrial exposure there, as well.

And Spain and Italy were the other two I mentioned.

Spain, we have no sovereign, no direct sovereign exposure. Italy we do have exposure to the Republic of Italy. That book value is $269 million. In terms of your other question, which are we contemplating imposing sovereign limits. Is that your question?

Yes.

I think it's a great question and I think it's one that we're looking at very carefully right now, because the notion of a sovereign default by an EU country or any highly rated country was unthinkable a couple of months ago. And so -- and I still don't think it's predictable as to what's going to happen with Greece, but there's enormous pressure being applied by the EU and the IMF as we speak. And it will be very instructive as to how we proceed, what takes place there. I think we'll learn a lot today, actually, as to the course that that takes, and we will respond to that.

Okay. Thanks.

Thank you. Our next question or comment comes from Darin Arita, from Deutsche Bank. Your line is open.

Thank you. As I take a look at this year's EPS growth guidance of 9% to 12%, can you talk about what the critical drivers are, as we look to the balance of this year, to get to the upper end of that growth range?

Yes. This is Kriss. Well, the key drivers that are going to occur throughout the year are just the basics of revenue growth and margin changes. In Japan we continue to think the revenue growth will be in line with the first quarter growth of roughly 3.5%. We think we'll have margin expansion of roughly 1.5% to 2% of revenue. We'll update you on that probably at the FAB meeting, but I think it'll be in line with what we saw in the first quarter.

US revenue growth -- certainly the US is more impacted by the level of new sales and the revenue growth, because roughly 30% of revenues come from first year premium in the US , whereas in Japan it is less than 10% of first year premium. So, the US results are much more sensitive to the level of new sales. We have predicted level margin for our US business absent the impact of the Wal-Mart thing, which was totally a first quarter event. So we estimate that the US margins will probably be relatively constant for the remainder of the year.

I mentioned interest expense earlier. We fully absorbed the new level of interest expense in the first quarter compared to the quarters during 2009, so the effect of increased interest expense will diminish as we go through the year. We took on our first level of new debt, $850 million of new debt, middle of May last year. We followed that with a little bit of additional yen-denominated debt in June, and of course, another measure of senior debt in December of $400 million or so. So that effect's going to diminish throughout the year.

We had a negative impact on EPS growth in the first quarter related to an increase in diluted shares, just associated with the increase in the share price and the diluted effect of outstanding stock options. Up until 2009 when the stock price was really depressed, we had had roughly 6 million shares of dilution each year from say 2005 through 2008. First quarter of 2009, that dropped down from six million shares to about one million shares, and the first quarter of this year is back up to about 4.5 million shares. So, we hope to see more dilution from stock option as the stock price goes up, but that is a bit of a drag on EPS. We doubt that we'll resume share repurchase in 2010, though it is under consideration. And I previously talked about where we -- what we're looking for, for share repurchase in 2011. So that's the big picture, Darin.

So, are share repurchases not necessary for 2010 to get to the 12%?

Well, not for the 9%.

Yes, I know about the 12. 'am not sure about whether -- we have to have some better increases in the core earnings to get to 12, I think. I'm not sure we're going to do share repurchase in time to have a material impact on 2010 EPS.

Okay, that's helpful. Thank you.

Our next question or comment is from Andrew Kligerman from UBS. Your line is open.

Hi, good morning. Just some questions on the US. Firstly, you indicated that in order to pay bonuses out to the coordinators, or I guess management in the US, sales would have to be up 0% to 5% in the first half of the year, is that correct?

Second half.

Yes, It would be -- down 5% to up to flat. And then the second half would be flat to up 5%.

Oh, I see.

But you can't get the first half if you don't get the second half. It's exactly the way we did it in Japan three years ago. So, we're basically trying -- if we ended up being flat for the first half, we would be thrilled, but what we want to see is a turn around. That's what we're shooting for.

And I guess for these folks to even make anything, then they'd have to be flat in the second quarter in order to be down 5%, since you were down 10% in the first quarter. Do you have any optimism they could actually be flat 2Q over 2Q in the US?

Let me say, just a clarification, 2Q only impacts the bonus for the first half.

Right.

That's only 25% of the total. So, they could still get the 75% for the second half of the year, if they got an increase, even if they missed the first half objective. Maybe that was clear before, but I'm not sure.

No. Now, it's a lot clearer now. So, with regard to that question, do you have some optimism that they will -- they could potentially be flat in the second quarter and then get up 0% to 5% year-over-year in the second half? What are you thinking as we move into the next three quarters?

Andrew, I honestly believe that the things that are within our control, we have the right initiatives in place to create short term and especially long term results. Unfortunately, there still remains a large economic component to the factors that is are contributing to our sales. Until I have a better grasp on improving economic conditions, I cannot really state what I think and how close we'll be to that, but in general I would say that our field force remains extremely optimistic. The broker production, in general, remains back end loaded with the largest emphasis being in the latter half of year because of open enrollments that occur. So, am I optimistic? I think I am happy with the progress we are making internally.

Got it. Maybe Paul, just to follow-up. I mean, this is first time in a while I've heard about any contraction with the sales coordinators. And, you mentioned some is attrition, some you wanted to move out of that role earlier in this call. Is there a problem right now with the sales coordinators? I mean, do you have any concerns at this stage in the game?

You know I honestly believe that there is always a rise and fall as you grow. The long term is -- the question is where is the trajectory in the long term? I believe that we have contracted backwards to consolidate certain over expanded areas where people and coordinators specifically were not making enough money to really be sustainable. As a result, it did decrease our recruiting and training capacity, but, I believe, long term we'll create stronger organizations that can then grow and provide people opportunities to take on management rolls. So, do I have the expectation in the long term of that number of coordinators growing numbers? I do. Do I think it will be massive growth? No, I think it will be a linear growth that will happen over time as a result of people being successful and being given the opportunity to grow their operation as has been historical with Aflac.

Okay, thank you.

Caroline, I'm showing that we have reached the top of the hour, 10;00. If there are still people in the queue, please free to call Robin Wilkey or myself. We'd be happy to continue dialog and to take your questions. Thank you again for joining us and we hope to see you at our analyst meeting in just a couple of weeks.

Thank you, that concludes today's conference call. Thank you for your participation. You may disconnect at this time.