美國家庭壽險 (AFL) 2010 Q4 法說會逐字稿

Thank you for standing by. And welcome to Aflac's fourth-quarter earnings conference call. Your lines have been placed in listen-only until the question-and-answer session. Please be advised today's conference is being recorded.

I would like to turn the call over to Ms. Robin Wilkey, Senior Vice President of Aflac Investor Relations.

Good morning and welcome to our fourth-quarter conference call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, President of Aflac and COO of US operations; Ken Janke, Executive Vice President and Deputy CFO; Jerry Jeffery, Senior Vice President and Chief Investment Officer; and Tohru Tonoike, President and Chief Operating Officer of Aflac Japan is joining us from Tokyo.

Before we start I would like to mention the Safe Harbor language to you. Let me point out that some statements in this teleconference are forward-looking within the meaning of the federal securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are perspective in nature.

Actual results could differ materially from those we discuss today. We encourage you to look at our quarterly report for some of the various risk factors that can materially impact our results.

Now I will turn the program over to Dan, who will begin this morning with some comments about the quarter and our operations in Japan and the United States. I will follow up with a few financial highlights for the fourth quarter and the year, and then we will take your questions.

Thank you, Robin. And good morning and thank you for joining us. Let me begin a review of 2010 with Aflac Japan. Aflac Japan generated strong results throughout 2010. We were again pleased with the financial performance of our largest earnings contributor.

Sales results were especially impressive considering the tough comparisons, particularly in the fourth quarter. Total and new annualized premium sales in yen exceeded our expectations and were up a solid 6.5% for the fourth quarter. For the full year sales rose 11%. For the second consecutive year we exceeded our annual sales goal of a 0% to 5% increase.

Additionally, persistency improved for our large block of in-force business in Japan, rising from 94 to 94.2. An improvement in Aflac Japan's persistency rate contributes to the continued growth in premium income. Although Aflac Japan's benefit ratio rose in the fourth quarter, it improved for the full year. The fourth quarter benefit ratio reflects reserve adjustments made to a closed block of dementia care of business that we stopped selling almost 20 years ago.

As we look to 2011, we expect further improvement in the benefit ratio, resulting in continued expansion of the profit margin.

In the first quarter of 2010 Japan's premium income grew 3.3% and improved to 4.4% for the fourth quarter, which contributed to a 3.8% increase for the full year. As expected, our premium -- our pretax profit continues to expand, resulting in strong earnings growth for the year.

The bank channel had a great year in 2010. Our innovative products aligned well with the product needs of the banks. Bank sales in the fourth quarter posted another record with sales of JPY7 billion, which represents an increase of 140.4% over the fourth quarter of 2009.

Last quarter I mentioned how we believed more banks, and megabanks in particular, would step up their efforts in selling Aflac's products, and that is exactly what happened.

At the end of December Aflac Japan was represented by 364 banks, or more than 90% of the total number of banks in Japan. Of all the banks we now have enrolling our products there is still many branches in their system that are not actively selling it, which means there is still enormous sales potential.

In addition to having a great year from a distribution standpoint, we saw success on the product side of our business. Aflac Japan has honed its ability to customize our product portfolio to appeal to new market segments by enhancing the benefits of our existing product line. A good example is our expanding suite of medical products that we successfully created over the last decade. In fact, the medical product category was the number one contributor to total sales for both the fourth quarter and full year.

You'll recall that in August of 2009 we launched New EVER, an updated version of our popular medical product. Promotion for the New EVER featured the Maneki Neko or cat duck advertising campaign that literally became an overnight sensation in Japan, and prompted an incredible surge in the fourth quarter of 2009 medical sales. Although we saw a slight decline in medical sales compared to last year, this category generated a significant amount of new annualized premium.

Importantly, we maintained our position as the number one seller of medical products in Japan, which confirms the continued popularity and demand for our innovative policies.

Not only was 2010 a year in which we maintained our number one position in medical sales, it also was another year where our cancer products dominated the market. Cancer insurance sales made a solid contribution to the total sales, accounting for 22% of the total sales for the year.

We are introducing a new cancer policy called [DAYS] that replaces the base policy Cancer Forte. This enhancement of one of our pillar products speaks to the changing landscape in cancer treatment, as well as our commitment to being the number one provider of cancer insurance in Japan.

It is important to remember that the foundation of our product portfolio has been and continues to be cancer and medical products. This solid platform allows us to leverage our competitive advantages, such as branding, administrative efficiencies, and to grow our product offering and meet the evolving needs of consumers.

As the bank channel has become a larger contributor to sales, Aflac Japan has also been enhancing its product portfolio to better meet the needs of banks, including WAYS and child endowment products, which were key drivers to growth for the fourth quarter and the year.

WAYS is a unique hybrid whole life product that can be converted to a fixed annuity, a medical coverage, or a nursing care benefit when the policyholder reaches a predetermined age. WAYS was first introduced in 2006 and was revised for the bank channel in 2009. Sales of WAYS really took off in the fourth quarter, accounting for 13.6% of the total production.

But the real story can be seen in the phenomenal growth rates, which was 149.9% compared to the fourth quarter of 2009. Consumers find this product attractive because its diverse options offer future flexibility. Banks like to sell this product because it has high premiums.

And Aflac's product margin is significantly enhanced when policyholders elect to pay premiums up front, using what we refer to as a discounted advanced premium. Importantly, 90% of the customers at the banks choose this payment option.

As our banking channel becomes a greater contributor to our topline growth, we expect sales of this innovative and flexible product to grow significantly in 2011.

The other strong driver of sales growth was the child endowment product, which was up 67.4% for the quarter and 132% for the year. This product, which was redesigned in 2009, is primarily used to help fund the higher cost associated with a child entering high school and college in Japan. Child endowment policies have been very popular in Japan for many years.

Aflac's strong brand, this product's unmatched returns, our expanding presence in banks, and the government's child subsidiary payments that started in June have helped make our endowment policy the product of choice.

It is important to note that the average annual premium of the child endowment policy is about 3 times the size of the health policy, meaning that the premium is a very solid contributor to the topline growth. Child endowment also offers a discounted advance premium. And this product's profit margin more than doubles when the policyholders elect to pay the premiums up front using the discounted advance premium.

About half of the consumers who purchase our child endowment policies through banks elect this discounted advance premium method of payment.

From top to bottom Aflac's Japan performed extremely well in 2010, despite tough sales comparisons. But before the fourth quarter even began, my mind had already shifted to 2011 and the challenge we would face following two years of strong sales results. Although I believe our sales momentum will continue into the first quarter of 2011, the comparisons get tougher as the year goes on, especially in the fourth quarter.

Taking all of this into account, as we noted in last night's press release, we expect sales to be in the range of down 2% to up 3%. Although I thought in November that sales increase for 2011 would be closer to flat to up 5%; however, after a stronger than expected fourth quarter, 2010 sales ended up 11% versus our projection in November, which was up 9%.

With such exceptional performance I did not want to penalize Aflac Japan's sales department for pushing so hard at the end of 2010. So that is how we came up with the sales expectations for Aflac Japan.

Now let me turn to the US operations. From a financial perspective Aflac US continued to perform at expectations. However, ongoing low confidence levels from consumers and small businesses, coupled with fewer employees at the worksite, continued to pose challenges for our US sales growth. As such, we were not surprised that these factors reflected in a sales decline of 2.3% for the fourth quarter and 4.9% for the year.

You may recall that we acquired CAIC, now rebranded as Aflac Group in October of 2009. New annualized premium sales for Aflac US included sales from Aflac Group of $42 million in the fourth quarter. This result represented a 58.7% increase for the quarter and represented half of Aflac Group Insurance production for the year. I was very excited to see that our traditional sales force rallied to sell group products to our accounts, in addition to individual policies that they already sold.

While I would say our decision to acquire CAIC was a huge success, let me put it in perspective. An $83 million sales contribution from the Aflac Group represents only 6% of the total US production in 2010.

About 90% of our businesses continues to revolve around small business owners and accounts with fewer than 100 employees. These accounts don't usually have group insurance, and our traditional individual agents continue to be the driving force behind our relationships with them.

Our field force continues to be the key to our success. And no one else has been able to establish this kind of field force network that we have at Aflac. Unfortunately, both these smaller accounts and our sales agents that sell to them are the slice of America that has been hit the hardest by the economic turmoil over the last two years.

As you know, consumer confidence in small-business segment continues to hover at low levels. We have also been facing recruiting conditions that have not yet returned to business as usual. Although recruitment of sales associates in the fourth quarter was down 8.5%, it showed significant improvement over the 25.4% decline in recruiting for the first nine months of the year. That means we have averaged 5,500 new recruits per quarter, which is still a lot of people, but we can do better.

Despite a significantly more positive outlook on the job market, some lingering uncertainty still makes it tough to find people with salary jobs or extended unemployment benefits who are unwilling to take their chances in commission sales. We have adopted a more people-centric recruiting criteria, and are continuing national recruiting contests and programs to expand our sales force, and we anticipate this will expand the number of new recruits.

Beyond expanding the size and capabilities of our traditional sales force, we remain excited about developing relationships with insurance brokers. Our broker distribution initiative is still in its early stage, but our efforts are translating in sales.

The group product platform, which is preferred by brokers, is an important part of our efforts to broaden our product portfolio. As I mentioned, we saw crossover where Aflac career agents embraced our new group products. And frankly we also saw brokers selling individual policies.

I tell our entire US distribution system that I don't care whether they sell group or individual products, but I do want them to let the existing accounts with more than 100 employees know that Aflac now offers group products in addition to individual policies. That is because if we don't at least let the accounts now that we offer group option, you can bet that someone else will.

If the accounts want group products and they know that Aflac offers them, I believe they will choose Aflac over the competition.

Although weaker sales have slowed the topline growth somewhat over the last few years, we saw steady improvement in persistency in 2010 compared to 2009. I believe we've also done a very good job in managing our US operations, including budget and people resources. Managing financial components within our control has improved our 2010 expense ratio from 33.7 to 32.5.

We are taking measures to better reach potential customers with some innovative product benefits and solutions. We also continue to believe that the US provides a vast and accessible market for our products, and we are building our business with that potential in mind.

For 2011 we expect Aflac US sales to be flat to up 5%. Some of you may feel that our 2011 sales expectation is too ambitious considering the environment. To that I would say that I will remain cautious until we see some stability in the economy. But we have been adjusting our business to this environment and we still believe strongly in the products that we sell.

Now let me update you on Aflac Incorporated results. Excluding the benefits from the stronger yen, operating earnings per diluted share rose 10.1% for the full year, meaning we achieved our goal of a 9% to 12% increase for 2010. Our balance sheet and capital position remained strong. And we believe that our investment approach of effectively matching assets to policy liabilities is the most prudent approach for our policyholders and shareholders.

Clearly a lot of attention has shifted recently to the impact of lower interest rates on earnings. As you heard me say repeatedly, since the early '90s our greatest challenge is investing huge cash flows in Japan's low interest rate environment. To address this we started increasing the amount Aflac Japan invests in dollar-denominated securities last year.

This strategy we discussed at the Tokyo analyst meeting this past September, produces two benefits. First, we are funding incremental dollar purchases with the sale of Japanese government bonds. These JGBs are scheduled to mature before the end of 2011, and this strategy allows us to capture the gains for tax purposes before they mature.

Second, we are able to invest the proceeds in higher-yielding dollar-denominated corporate bonds at a meaningful spread. The current strength of the yen and the wider spread on the dollar bond helps mitigate the currency risk associated with this strategy.

While our preference is to invest in yen-denominated securities, we believe this is a short-term strategy to help enhance our yield during the low interest rate periods.

As we communicated over the past several years maintaining a strong risk-based or RBC ratio remains a priority for us. And you will recall that it is also a component of the management incentive plan for all Aflac officers. Our goal was to end 2010 with a higher RBC than our year-end 2009 of 479%. Although we have not yet finalized our statutory financial statements, we estimate that 2010 RBC ratio exceeded 580%. I believe our ability to maintain a strong RBC exemplifies our effective capital management strategy.

Our decision as to whether to increase the dividend or repurchase our shares is a function of our capital position. As you'll recall, Aflac's Board of Directors approved a 7.1% increase in the quarterly cash dividend effective in the fourth quarter of 2010 payment. That marked the 28th consecutive year of a dividend increase.

Additionally, we resumed the share repurchase program in the fourth quarter and purchased 2 million shares. We still anticipate repurchasing 6 million to 12 million shares in 2011. At the same time I remain convinced it makes sense to maintain a healthy degree of conservatism, given the economic uncertainties around the globe.

We continue to focus on maintaining strong fundamentals in our core business and building on our record of consistent earnings growth. As I commented in the third quarter release, we will likely be at the low end of the 8% to 12% range for our operating earnings per share in 2011. Although low interest rates have increased somewhat in the United States recently, they have not increased as much in Japan and the yields remain very low.

If we assume 8% earnings per share growth, we would earn $5.97 per diluted share, excluding the impact of the yen. If the yen averages JPY0.80 to JPY0.85 to the dollar for the full year we would expect recorded earnings to be in the range of $6.09 to $6.34 per diluted share.

Looking ahead to 2011 and beyond, we continue to believe that Japan and the United States each have characteristics to make them ideally suited for the insurance products we offer. And no other company is more focused on supplemental insurance products that respond to that need than Aflac.

We are focused on providing value to the shareholders. And we are fortunate that in the process of doing so we have the privilege of providing financial protection to more than 50 million people worldwide.

Now I'll turn the program back over to Robin.

Thanks, Dan. Let me go through some numbers for the fourth quarter and year-end starting with Aflac Japan. Beginning with the topline in yen terms revenues were up 3.5% for the quarter. Investment income was flat. And excluding the effect of the stronger yen on Aflac Japan's dollar-denominated investment income, net investment income rose 2.8% in the quarter.

The annualized persistency rate, excluding annuities, was 94.2%, up from the nine months and up from 94.0% in 2009. In terms of quarterly operating ratios, the benefit ratio rose in the fourth quarter to 61.0 due to reserve adjustments made to a closed block of dementia business. Excluding the impact of the stronger yen, the benefit ratio improved for the year by 90 basis points.

The expense ratio for the quarter was 20.4%, down from 21.6% a year ago. The decrease reflected tight general expense controls and lower advertising expense in the quarter.

The pretax margin decreased slightly from 18.7% to 18.6% in the quarter. With the retraction of the margin, pretax earnings increased 2.9% for the quarter in yen terms. Excluding the impact of a stronger yen on Aflac Japan's dollar-denominated investment income, pretax earnings were up 5.4% in the quarter.

For the quarter we invested our cash flow in yen securities at 2.36%, and including the dollars the blended rate was 2.61%.

As part of our strategy that Dan talked about to address the low interest rate environment in Japan, we made dollar-denominated purchases totaling $703 million through the end of 2010. We will continue these purchases into 2011 until we reach $1 billion. The yield on these securities was 4.19%. The portfolio yield was 3.56% at the end of December, down 8 basis points from the end of September and 21 basis points lower than a year ago.

Now let me turn to Aflac US. Total revenues rose 2.5% in the fourth quarter and continued to benefit from the addition of Aflac Group sales. The annualized persistency rate for the year was 73.6% compared with 72.2% a year ago. Persistency showed steady improvement throughout 2010.

The benefit ratio for the quarter was 50.1% compared with 53.8% a year ago. The decrease in the benefit ratio was due to adjustments made in 2009 that were not repeated in 2010.

The operating expense ratio was 32.5% compared with 33.7% in the fourth quarter of 2009. Reflecting improvement in the benefit and expense ratios, the profit margin for the quarter was 17.4% compared with 12.5% a year ago. And pretax operating earnings were up 42.3% for the quarter.

In terms of US investments the new money yield for the quarter was 5.45% versus 6.25% a year ago. The yield on the portfolio at the end of December was 6.92%, down 4 basis points from the third quarter and 25 basis points from a year ago.

Turning to some other items in the quarter, excluding FAS 115, the ratio of debts to total cap was 21.7% at the end of the year compared with 22.3% a year ago.

Noninsurance interest expense in the fourth quarter was $41 million compared with $25 million a year ago. The higher interest expense reflected debt issuance earlier in the year and the impact of the stronger yen on our yen-denominated debt.

Parent company and other expenses were $20 million in the fourth quarter compared with $32 million a year ago. The lower parent company expenses in the quarter primarily were the results of in 2009 we did not convert yen repatriation due to pending repayment of debt. In addition, we had higher legal and consulting fees in 2009.

The operating margins improved for the quarter. Pretax margin rose from 16.1% to 17.2%. The after-tax margin increased slightly from 11.0% to 11.2%. On an operating basis the tax rate increased from 31.5% to 34.7% in the fourth quarter of 2010.

Net earnings per diluted share for the quarter were $0.92 compared to $0.53 in 2009. The primary difference between net and operating EPS was again realized investment losses which were $0.41 per share in the fourth quarter of 2010 compared to $0.65 per share in 2009.

As reported, operating earnings per diluted share for the quarter rose 12.7% to $1.33. The stronger yen increased operating earnings by $0.06 per diluted share for the quarter and $0.19 for the year. Excluding the yen's impact, operating earnings per diluted share increased 7.6% for the quarter and 10.1% for the year.

Lastly, let me comment on the outlook for operating earnings per share for 2011. As you heard Dan say, we affirmed our objective for 2011 of an 8% to 12% increase in operating earnings per diluted share, excluding the impact of the yen. With yen yields remaining very low we are assuming an 8% increase in operating earnings per share growth. We would expect to earn $5.97 on a constant currency basis.

This year we estimate that a JPY1 change on the average exchange rate for the year would equal approximately $0.045 per diluted share. If we achieve our objective of 8% growth and the yen averages JPY0.80 to JPY0.85 for the full year, we would expect operating earnings per share to be in the area of $6.09 to $6.34 per diluted share.

Now we will start taking people's questions. We want to make sure that everybody has an opportunity to ask a question, so I would like to ask you to limit your questions to just one to be fair to everyone else. Now we will be glad to start taking questions.

We will now begin our formal question-and-answer session. (Operator Instructions). Jimmy Bhullar, JPMorgan.

I had a question on your Japan sales, and then a clarification on just your earnings. I think the dementia charge, the reserve increase and the back amount was $0.15, correct, on EPS?

That's correct.

As we think about run rate earnings, we shouldn't be assuming that -- we shouldn't be adding that entire amount back, because I think you actually spent -- it seems like you spent a little bit less on advertising than you would have otherwise. So the $1.33 seems close to a real run rate as opposed to a significantly higher number even with the charge.

Kriss Cloninger here. Let me just comment on that. The $0.15 is correct for dementia by itself, the dementia reserve strengthening we have and the deferred costs we rode off. But what you have to consider is that we normally have a couple of different types of adjustments in neither third quarter or fourth quarter, or any quarter for that matter.

In the fourth quarter of this year we had some claim reserves released because we trued up some of the runoff factors in the experience analysis too, and we had some JPY5.2 billion of claim reserves released compared to what we had posted at the end of the third quarter that offset some of that dementia increase.

Let me just make a couple of more comments on that. That is not an unusual thing for us. As a matter of fact, in accordance with our SOX requirements on internal standards for financial controls, we actually have recorded that we will do a review of the adequacy of dementia reserves with respect to interest rates during the fourth quarter. And we will do certain other updates on claim runoff factors for claim reserves and the like during either third or the fourth quarter. And we have all that coordinated with the audit work that goes on.

This quarter we did strengthen the dementia reserves, and let me just tell you why. Last year we also strengthen dementia reserves in the fourth quarter, but because they pretty much netted against other adjustments we made the claim reserves and the like, we didn't discuss it because it didn't create any significant difference in the benefit ratio.

So last year we strengthened interest rates underlying the reserving of the closed block of dementia down to a 2.7% ultimate new money interest rate. We actually used 2.5%, graded up to 2.7%, because we thought interest rates were very low and likely to increase.

This year we decided to eliminate the assumed increase in interest rates, so we just kept the new money rate used to reserve that block at a flat 2.5%. And that is the only thing that caused the increase in the reserve on that block of business.

I just wanted to make sure that you were not implying that other than that earnings would have been higher. That is the reason I asked that.

Other than that, earnings would have been higher but by not much. We take a look at the range of possibilities for reserving conclusions. And my operative philosophy, and I think I probably said it to the investment community before, is always to make sure that the numbers key moving in the right direction. I want to make sure that our numbers are moving in accordance with the underlying fundamental trends of the business, and that is why we made this adjustment.

Then my other question on Japan sales, I understand the reasons for your guidance, but wanted to see -- obviously comps are tougher. Other than that, is there something else that makes you cautious that might actually result in you hitting the low end of your range versus maybe the middle of it or the higher-end? And I'm not sure if you can comment on January or how the trends have been so far this year.

We can't mention January but, Tohru, would you like to make a comment?

Yes. We have some negative factors about our expectation of the 2011 sales. For example, sales of the Dai-ichi Life was lower than the last year in 2010, but we expect that it will continue to be lower in this year.

Also, we had a big decline in the sales by one of our big telemarketing agents. Again, we expect that sales -- that part of the sales continue to go down this year. So we have a couple of negative factors.

All in all, as we have reviewed 2011 most of our channels we expect to be up except for those two that are down. And the two that are down we thought that it will be more sizable increase in the bank channel, not to the level we saw in 2010, but it should have an increase, and that is how we ended up balancing it out and coming in with that number.

Okay. Thanks.

John Nadel, Sterne Agee.

If we could talk for a second about the earnings guidance for a moment, you have obviously told us to focus on the lower end of the 8% to 12% growth. There is nothing new here. But your Japan sales in the fourth quarter were ahead of your expectations by a pretty fair amount. You had a pretty significant one-time reserve item in the fourth quarter, not withstanding, I understand, Kriss, what you just talked about with maybe the offset from some claims reserves.

You've got this program where you are investing some Japanese cash flows into dollar-denominated securities. That is layering in at least a little bit of additional yield. So I guess what I'm getting at is your focus on the low end of the growth range feels more conservative now than maybe it did over the past few quarters. Is there something I'm missing that would be an offset to those positive items at the margin?

Let me start with a comment there. One of the things that is creating us being biased towards the low end of the range is that in 2010 we had an extraordinary benefit to earnings of our US operation caused by the termination of a large case. That created a net impact to profitability of roughly $40 million that we've got to find some way to cover in next year's earning comparison.

So that $40 million is a pretty good amount. Other than that, we are concerned about the layering in of more low interest rates. While we have moderated sales expectations in Japan due to modest or difficult comparisons, Japan sales and then Japan profitability probably ought to be in line in terms of growth with 2010.

We still need US sales and US revenue growth to recover to give us growth over and above covering this extraordinary benefit we got in 2010. So offsetting that is our ability to resume the share repurchase program, and having achieved good capital adequacy positions during 2010 will allow us to deploy some of that cumulated capital during 2011.

Okay, I appreciate that commentary, Kriss. And that gives me -- that segues me to my second question for you guys, and that is really more around the capital, the investment portfolio exposures. And maybe I will put it this way, from where you stand right now looking out at your portfolio, looking out at the risks, what would it take -- is today's environment the kind of environment that would lead you to be thinking more about the upper end of your buybacks or do we need to see a continued improvement from here?

Let me start with the answer to that. 2010, as I said, was a year of strong capital accumulation for us. Though we haven't finalized our statutory results yet, we are confident that our statutory earnings came in at somewhat over $2 billion after tax.

The realized losses on a statutory basis are pretty much pretax numbers, and that is going to come in at somewhere around $850 million to $900 million. So overall net earnings on a statutory basis are going to come in around $1.2 billion. Now that added to our capital position during 2010.

Also, what you make in terms of statutory earnings, less your realized losses, gives you the amount of money you can dividend out as a life company without special approval. And let's just say that is going to be $1.2 billion. It was $1.4 billion last year. We didn't take out the $1.4 billion. But we could take out -- and I'm speaking hypothetically at the moment because (multiple speakers) finalize the numbers.

But we could take out $1.2 billion to apply to capital management purposes. That assumes that we could absorb say another $1 billion of realized losses in 2011 if we continue making statutory earnings in excess of $2 billion and replenish the capital we took out as the dividend. So that still leaves us in a very strong RBC position.

So just hypothetically, again, say we took out the $1.2 billion dividend, and I will go over all this, as I usually do, at the payout meeting in terms of sources and uses of capital. But let's say we took out that $1.2 billion of dividend, we have over $600 million of cash at the holding company today. Let's just say we wanted to maintain $200 million to $300 million of that, that leaves us with say $1.5 billion we might want to deploy.

I am giving you just a lot of numbers that are in my head. I haven't vetted them with everybody that matters around here, but this is some stuff I have been playing with. Say we've got $1.5 billion available, we've got a shareholder dividend commitment of around $500 million, a little more, maybe $525 million.

Say that leaves us $1 billion to do share repurchase or other activities. Well, we have said 6 million to 12 million shares, while obviously at the high end of the range at 12 million, say buying back shares at $58, $67 dollars a share, we would spend somewhere between $700 million and $800 million there, and maybe that leaves us a little bit more cushion.

So I think the fact that we could, I think, maintain RBC levels that we ended 2010 at, still absorb some significant realized losses during 2011 -- which we hope not to do, but I will let Jerry address that -- still maintain strong fundamental earnings growth and statutory earnings, which I expect we will do, puts us in a very good position for deploying capital during 2011. And I think that is sort of what is on my mind.

Some people have asked me in the past, are you going to be so conservative that you will just sit there and grow RBC levels? I replied that, no, we are not going to sit there and create a position where we've got significant sterile capital that is not being deployed. I just want to reiterate that. That is my conclusion.

My only caveat is that I do have to worry little bit about the impact of further strengthening of the yen on the solvency margin in Japan, particularly if we increase the portion of our Japanese capital that we invest in dollars, because we lose some solvency margin benefits from doing that.

But the yen is already pretty darn strong at JPY82 to the dollar. And the Japanese industry is starting to complain about their ability to maintain exports and the like. So not to say that is a controlling factor for currency, and we are really predict currency, we just try to manage in whatever currency environment we're in. But that is a kind of a brain dump.

Kriss, I appreciate it. And to the extent that my vote counts, I vote in favor. Thanks.

Jeff Schuman, KBW.

I was wondering if you could circle back a little bit more on the Japanese sales? The challenges for 2011 I think are pretty clear, including obviously the difficult comps. But I guess the reason why you have difficult comps is because you have had such strong momentum recently, including with the WAYS product, which just launched.

So I guess I want to be clear, or maybe one thing would be helpful for us to better understand exactly how much upside we have left in fully penetrating the bank opportunity. Are we kind of -- it still feels like we are pretty early in ramping into the bank opportunity, but is that too optimistic? Are we sort of second inning or are we seventh inning, or where are we in terms of realizing the bank potential?

Tohru, you want to take a shot at that, and then we will follow up here?

Yes, please. Regarding the penetration to the bank channel, we have [grown] pretty much, but the number -- the percentage of the bank branches that produce at least one policy per month, that is a benchmark we measure the bank penetration. And that ratio has been growing pretty nicely. That has come to the -- at the end of the fourth quarter that has come to about 50%, little of the -- I'm sorry -- 27% for all banks and 51% for the megabanks. That is for as of the end of the 2010.

If we look at the fourth quarter, the penetration is even higher. That has come to 6% for the megabanks. But still we have a lot of -- we think we have a lot of potential there. So the number can obviously grow even further.

Even if we reach at the number really close to 100%, that really means that one branch sells only one person for the month. And we have no reason to believe that they can't sell two policies per month or even three policies. So I don't know which inning we are in, but I am sure that we have plenty of potential on that.

I think the question you're looking for is -- or the answer is, is we are calling for about a 20% increase in the new sales in the bank channel in 2011.

Okay, and then on another question. What is the long-term outlook for Dai-ichi? Is it going to be in permanent decline or is there another scenario out there?

Regarding the Dai-ichi Life, there have been pretty new after becoming a public scope ownership company. So they is still working on the ways they manage the Company as a public company. They want to forecast on that, and they have say less time to spend -- to sell our policy. So last year, and probably this year too, their sale of the [counter] would continue to decline. But once they are comfortably managing the company as it is, there is no reason why that we should expect that sales continue to go down in the future. So we hope that can come back, we don't know yet.

Okay, thank you very much.

Thomas Gallagher, Credit Suisse.

I had a few investment questions for you. Kriss, you had referenced $1 billion of credit losses for 2011. And I know you were just talking hypothetically. But if I think about where your heads are at in terms of your portfolio, potential derisking, I guess I would like to hear maybe from Jerry, what are you thinking about the Greek banks' exposure? That would appear to be your next big slug that you need to make a decision on at some point, or not.

And then the other credits I would like you to comment on would be Investcorp, the Tunisia exposure, and Israel Electric, which I believe was downgraded in 4Q to below investment grade by S&P, and that is nearly $1 billion position. Thanks.

Before he starts, I just want to reiterate, you gave me the benefit of reminding him that it was a hypothetical comment I made. I just was saying on a statutory basis it was $800 million to $900 million capital loss in 2010, and we could absorb that in 2011 without disturbing RBC. I'm not saying we're going to, I hope we don't. But I will let Jerry take it from there.

We have cut a pretty wide swath here. Let me just say one thing at the outset. The number one concern that I have and have had is -- in terms of risks to the portfolio is concentration risk. That continues to be -- our highest priority is to look for intelligent ways to reduce our concentration risk and diversify our risks. So you brought up a number of topics that speak to that, the first being the Greek banks.

I think that obviously that is a very fluid situation. I am sure there will be liability management exercises among the Greek banks in 2011 or maybe beyond that. And we will keep an eye on that, and if it is advantageous to us, we may act on it. But we are constantly evaluating that prospect.

I'm going to turn into Israel Elect first. Israel Elect, as you know, is in effect a government agency, if you will. They are more than 99% owned by the government. I think given the structure in Israel it is highly unlikely that they would have any other owner other than the government in the foreseeable future because of the way their rate structure operates.

I think nothing has changed materially in their business model, and in fact, they are -- unlike what you have seen happen in Europe, their ability to raise capital in public markets has been unaffected. This past month they did a domestic debt deal, the largest in their history.

So their liquidity remains pretty secure. The problem there has been that the Knesset has put a lid on what their return on capital can be. And given their capital expansion needs that is something of a sore spot to them.

But their operating model hasn't changed. What has changed is that S&P took a look at what has been the status quo for years and decided to fire a shot across the bow it seems to me and downgrade them. It was a warning shot, I guess, to Israel that they need to ensure that Israel Elect can achieve greater profitability.

So we will see what goes there, but they still are a monopoly. They are an essential service in Israel. Their profits, while low, are adequate, so we are not concerned about their ability to service debt.

But turning to Tunisia, I think what we can say about there is I think it is an interesting situation, because one of the key reasons that Ali left Tunisia was he was not able to demonize the opposition because it was not Moslem fundamentalist opposition, it was really much more of a secular opposition.

So therefore, I think you have a well-educated, very secular population that I would say that the outcome politically is highly uncertain there. But I would also say that the market has not responded with any material devaluation of their bond.

If you look back to December valuations on Tunisian public debt, and then you look at the valuations today, many of their issues trade well above particularly, and none of them have been devalued by more than 5% in the marketplace. So I think globally there is not the level of concern about Tunisia that there is in Egypt, which is much more -- the opposition there is probably a little more troubling.

Investcorp, I think is, again, an interesting situation. I think we remain pretty comfortable with Investcorp. It is a large exposure, but they have really shifted their emphasis much more towards a fee-based business model as opposed to direct investment in hedge funds, etc.

So their profitability is much more stable. They were able to raise a significant amount of capital over the last 18 months. So I would view that as a fairly stable situation.

That is helpful, Jerry. Just one follow-up. So given what you have said about Israel Electric and Tunisia, that they're actually trading well, should we view those as opportunities to shrink the size of those positions because like, at least from what I have heard from a number of investors, they are just uncomfortable based on the sheer size as opposed to the credits.

Well, let me answer the question this way. As I said at the outset, my number one concern is concentration of risk. So if there are ways to reduce concentration risk that are beneficial to us, we will do it.

Great, that's helpful. Thanks.

Randy Binner, FBR Capital Markets.

I think this is another question for Jerry. But I was just trying to understand what changed in your approach to the impairments this quarter, so the two Irish items and Aiful, and how that differs relative to other below investment grade holdings you have which had similar unrealized loss positions?

I am just trying to understand why changed for those and what triggered you to take an impairment on those, and how that differed from some of the other distressed items in the below investment grade holdings?

Let's start with Aiful. Aiful is part of the Japanese consumer finance industry. As you probably know we had an exposure to Takafuji, and we sold our final exposure in the first quarter of 2010.

Aiful was quite a different situation because -- and is quite a different situation. They have a significant amount of liquidity, and they have sources of funding that will last them for at least the next three or four years. But they are operating in an industry that has -- where the rules have changed materially in the last couple of years, and have changed negatively for them.

But given the support of their banks, and given their liquidity, we continue to support them. But when they came out with earnings results -- I think they came out in October -- we became somewhat uncomfortable with the disclosures we were receiving, and so that really precipitated the impairment there. We viewed their future as, I guess, more opaque than it had been. So that speaks to the Aiful situation.

With Allied Irish Banks, really I guess there were two things there that triggered our decision to sell -- impair and then sell. First is they started receiving -- and the two are related, by the way. The first is that they started receiving significant amounts of support from the Irish government. And as a result, the politicians have taken over rule of law when it comes to the rights of the bondholders.

We knew -- we did own subordinated debt, which prior to the Irish banking crisis, had debt was considered exempt from loss sharing. But in Ireland there are no rules about subordinated debt anymore that we can take comfort in. And we were concerned that the Irish government was going to exact serious loss sharing penalties from subordinated debt holders of Allied Irish. So when Allied Irish announced a tender offer, we pursued that with them.

Irish Life and Permanent kind of similar background. Quite a different situation however, they have not taken on any government support, and at this point it is unclear whether or they will. But we decided to be proactive in that situation because they too are governed by Irish law, which is just -- there is no clarity as to how that is going to resolve itself. Did that help?

Yes, it's great. I think -- I mean, what I am taking away from this, and I am sure everyone else is too, is that your -- it is a very kind of individual -- it is a credit specific decision all the time based on a variety of circumstances. So there is no rule that we can apply to the other unrealized loss positions on the below investment grade. I'm just trying to think ahead to what might come down the pike.

You have hit the nail on the head. That is always how we approach these situations, and I'm glad you appreciate it. And we will continue approaching them that way.

Fair enough, thank you.

Ed Spehar, Banc of America - Merrill Lynch.

Kriss, I wanted to go back to clarify some of your statutory comments. I guess, first on statutory operating earnings, I think your stat operating earnings for the first nine months were about $1.8 billion. And you had been running -- so you're running about $600 million a quarter. So is it something happened in the fourth quarter or are you just rounding down in terms of what you are saying stat operating earnings were for the full year?

I may be rounding down a bit. But we did, I am sure, carry over the -- say the dementia reserve adjustment to statutory and things of that nature. So like I said, I don't have the final numbers, but you can assume I have rounded some of those down.

Remember too that the [ILP] impairment, we had impaired it before using the equity impairment method because it is perpetual. It had not been impaired on stats. So when we impaired it in the fourth quarter of '10 for credit purposes a much greater amount hit stat.

Right, but that would be net, but I am talking about operating. So that wouldn't have been through operating, correct?

No, I am sorry. Yes, it is net only.

Okay and then -- and, Kriss, your comment about pretax and after-tax losses being the same on stat, is that what we should expect going forward, or should we expect that you would be able to have tax offsets if you did have some high levels of losses?

Well, on a stat basis we don't get the same deferred tax treatment that we get under GAAP. We don't get the full benefit of a deferred tax offset on realized losses. On stat it is more key to tie it into the cash tax return. There are some deferred tax provisions, but they're normally lower then you get on GAAP. And I am not an expert on deferred tax statutory accounting, so I will probably need to get back to you on that some, but I know we don't get the full benefit under stat that we get under GAAP.

But you would assume that on a normal basis you would get some offset, correct?

Yes, there is some, but it is not the full tax rate, assuming that you can fully utilize realized losses in future tax returns.

Okay, and then just last final -- the question on margins. If you look at your sales expectations in Japan for 2011, and you think about what the mix is of sales in 2011, what would be -- if we are trying to think about the margin dynamics here with the mix shift, if your margin in 2010, your pretax margin on revenue was -- I think it was 20.6% -- if you just looked at the collection of business you're going to write or you think you will write in 2011, what kind of range of margin would you think if you tried to put it on a comparable basis thinking about pretax margin on revenue?

It depends. I know you know that production in the bank channel, particularly, of the child endowment and WAYS, is going to drive the overall margin down a little bit, because those products, those two products, produce more investment spread income common than they do -- now let me use a property and casualty context, underwriting income, the difference between premiums, benefits and expenses.

Particularly child endowment, that is close to a zero underwriting product, where premium about equals benefits and expenses at the assumed pricing interest rate. And then what you do is make a spread on the reserves based on the difference between the earned interest rate on invested assets and the required interest rate on reserves. And that is going to emerge more over time on that child endowment.

And also I have talked about advanced premium deposit funds being a spread type generator too. So those spreads don't emerge in proportion to premium, they emerge over time in proportion to invested assets and earned rates versus credited rates.

WAYS is similar, though not quite as extreme as child endowment. So I am telling you that if the margin -- the underwriting margin goes down, it is going to be replaced to some extent by increased investment spreads that you won't directly see the way we look at the numbers now.

I am promising you all, we talked about this some at the mini fab in September. We didn't talk about it on the program, but I talked to a number of you. I mentioned it again, I think, in the third quarter report. And at the fab meeting I am going to try to -- the fab meeting in May, I will try to lay out a lot more about the impact of child endowment and WAYS on the margin computations.

But I want to assure you that those products are expected to produce profits not quite at the level of our medical products, and I have told you that. But they're going to add to the overall profitability of the Corporation by growing revenue faster than we otherwise would have grown it. And by producing margins they are going to add to total profits.

Any way, Kriss, can you just tell us if you think about just on a statutory or cash basis what type of internal rate of you return he think you get on selling those products?

Yes, it is in the teens. I don't think it is in the 20s.

High or low?

Huh?

High teens, low teens, mid teens?

No, I would say mid to more like -- let me just say 15% to 17%, I think, is what I have been seeing out of some of our prop and testing work.

Okay, that is very helpful. Thank you.

Katherine, it is just past 10 o'clock, so I think it is time for us to close the session please.

Would you like to take one more question?

I am sorry, we are past 10 o'clock already.

Thank you.

Thank you.

Thank you for participating in today's conference. This will conclude today's session. All parties may disconnect at this time.