美國家庭壽險 (AFL) 2011 Q2 法說會逐字稿

Welcome to the Aflac second 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 now like to turn the call over to your host, Miss Robin Wilkey, Senior Vice President of Aflac Investor Relations.

Thank you and good morning, everyone and welcome to our second quarter 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; Jerry Jeffery, Senior VP and Chief Investment Officer; and from Japan, we have Tohru Tonoike, President and COO of Aflac Japan. Before we start this morning, let me remind you that some statements in the teleconference are forward-looking within the meaning of Federal Securities Laws. Although we believe the statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective 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 could 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 US. Afterwards, I will follow up with a few financial highlights for the quarter and the first half of year and then we will be glad to take your questions. Dan?

Thank you, Robin. Good morning and thank you for joining us. I'm pleased with Aflac's overall financial and operational performance in the second quarter. I believe we've established a solid foundation toward achieving our annual operating earnings growth and capital strength objectives. With half the year behind us, we believe we have substantially completed our proactive investment de-risking program from a realized investment loss perspective. I will give you more details later but first I will begin with a review of our operations in Japan and the United States.

Aflac Japan generated strong financial results for both the second quarter and the first 6 months of the year. Revenue growth rose 3.7% for both the quarter and the first 6 months. In addition, our pre-tax margin continued to expand resulting in solid earnings growth for the quarter and for the 6 months. We are particularly pleased with the continued sales momentum in the quarter. New annualized premium sales in the yen exceeded our expectations and rose 6.6% to JPY36.1 billion for the quarter, which was a record for the second quarter production. For the first half of the year, total new sales rose 9.4%. These results are even more remarkable when you consider that Aflac Japan overcame challenges resulting from the most destructive and devastating natural disaster in Japan's history.

With the expanding bank channel in mind, Aflac Japan has developed innovative products that align well with the product needs of banks. Bank sales continue as strong growth trend with sales of JPY7.6 billion, which represents an increase of 95.6% over the second quarter of 2010. Sales through banks accounted for more than 21% of the total sales for the second quarter.

I will mention how we believed more banks, megabanks in particular, would step up their efforts in selling Aflac products and that is exactly what we've been seeing. At the end of June, Aflac Japan was represented by 367 banks or more than 90% of the total number of banks in Japan. While many banks have agreed to sell our products, turning that agreement from ink on paper into sales does not happen overnight, especially with more than 20,000 branches representing 367 banks. It will take some time to facilitate training at all these locations, but we are continuing to see sales steadily improving at many of these bank branches as training continues and the banks expand their offering of Aflac's products. In many of these banks, sales representatives have gained experience at selling our products and their confidence level and sales ability has also grown.

WAYS, which is especially popular with banks was again a key driver to the growth in the second quarter. You will recall that WAYS in our unique hybrid whole-life product that can be converted to a fixed annuity, medical coverage or nursing care benefits when the policyholder reaches a predetermined age. WAYS has been a phenomenal sales growth story and in the second quarter, generated an increase of 190.7% compared with the second quarter of 2010. Consumers find WAYS attractive because of its guaranteed principal and the future flexibility of its benefit options. Banks like to sell this product because of the high premium and attractive commissions. And Aflac's profit margin on WAYS is more than double the profit margin for child endowment. On top of that, the profit margin is significantly enhanced even further when the policyholders elect to pay all their premiums up front through the discounted advanced premium option. Importantly, 90% of the companies -- customers at the banks choose this type of payment. As our banking channel becomes a greater contributor to our top-line growth, we expect sales of the innovative and flexible products to grow significantly in 2011.

With respect to child endowment product, as we expected, sales declined, posting a decrease of 1.4% for the quarter. Furthermore, we have already seeing sales of child endowment decline so far in July and we expect sales of child endowment to continue to decline significantly for the remainder of the year. First and foremost as we told you, we are shifting our focus from selling child endowment towards selling WAYS and our new cancer product DAYS. Second, having sold the child endowment product for 2 years now, we are already cycled through major first pass at selling our child endowment product to the eligible target of families and young people. This means the remaining growth will primarily come from newborns, bearing in mind that Japan's birth rate is low. And finally, the government's child subsidy that initially helped fuel demand for this product is being reevaluated for possible reduction or elimination. As such, we expect child endowment sales to diminish.

The foundation of the product portfolio has been and continues to be our cancer and medical products. Importantly, we maintained our position as the number one seller of cancer and medical products in Japan, which confirms the continued popularity and demand for our innovative policies. Following the March 2011 introduction of DAYS, cancer insurance sales increased 12.4% for the quarter. The enhancements to this new base policy speaks to the changing landscape in cancer treatments as well as our commitment to remaining the number one provider of cancer insurance in Japan. Sales of cancer insurance accounted for 24.4% of the total sales.

I don't think when the earthquake and the tsunami struck, followed by the nuclear issue, that anyone would have believed Aflac Japan sales would be up 6.6% for the second quarter and 9.4% the first 6 months. This is a remarkable achievement, and I am extremely proud of Aflac Japan. As I told you, following 2 years of strong sales results, the same comparisons get tougher as the year goes on, especially in the fourth quarter of 2011. However, with better-than-expected sales results in the first and second quarter, we are upwardly revising Aflac's sales target to achieve flat to up 5% sales increase.

Now let me turn to our US operations. We are very pleased with Aflac US performance from both the sales and a financial perspective. Aflac US generated a 5.9% increase in new annualized premium for the second quarter and a 6.1% sales increase the first 6 months. These results have benefited greatly from the addition of group products to the Aflac US product portfolio. We are especially encouraged to see that the production from veteran agents continued to increase. Additionally, we continue to see crossover where Aflac's career agents embrace group products. To me, it boils down to giving our customers the choice between group and individual products. When it comes to selling group versus individual products, I told our entire US sales force many times that I am product neutral. I don't care whether they sell group or individual products, but I do want both products to be offered at the work site to employers with more than 100 workers. That is because we don't offer the group product upfront. You can bet someone else will. I truly believe that if the employer wants group products and hears Aflac offers them, they will choose Aflac over the competition and that is proving to be true.

And as you will recall from both group and individual policies, we started driving sales earlier this year through specific product pushes called smart launches. Through these coordinated sales and marketing efforts, we look at the existing accounts, particularly those accounts most likely to need a particular product. We then align our field force resources strategically and efficiently target these accounts. Our first smart launch was held in the first quarter and focused on promoting dental products. Building on the success of that effort, dental sales increased 44.1% over the second quarter of 2010. Our second smart launch promotes the Critical Care Recovery Product, which was previously called a Specified Health Event product. Because this smart launch begins in the middle of second quarter, it's too early to quantify its full impact but we're excited about how our sales is embracing both the product itself and the smart launch.

On the distribution side, our strategy, we said many times before today's recruits are tomorrow's sales. Field force recruiting continues to benefit from a net -- from a targeted national advertising campaign, generating a 10.2% increase recruits for the second quarter and 11.9% for the first half of the year. We believed improved Aflac US sales not only reflect our intense focus on supporting our field with enhanced products, including group products but also reflects better resources and training that helps our sales force better approach selling in the current environment. We will continue to help our entire distribution network, new and veteran agents, as well as brokers with ways they can improve their performance because they're a central part of our strategy and our success. We continue to believe the US is a vast and accessible market for our products and we're building our business with that potential in mind. We also believe the expectations at Aflac US sales growths for 2011 will be flat to up 5% is reasonable. Our sales and recruiting trends are working in our favor and I feel even better today than I did at the analyst meeting in A -- in May, and am optimistic that these trends will continue. It's clear that the addition of the group product platform and our growing broker initiative only served to enhance our ability to leverage Aflac's brand to reach more customers, large and small across the United States.

Now let me update on you Aflac Incorporated results. Overall, we're pleased with Aflac's financial performance. Operating earnings per diluted share rose 15.6% to $1.56 for the quarter or 15.6% or $3.19 for the first 6 months. Excluding the benefit of the stronger yen, operating earnings per diluted share rose 7.4% for the quarter and 8% for the first 6 months. Consistent with the Company's previous stated proactive investment de-risking objectives, net earnings in the second quarter included pre-tax realized investment losses of $668 million or $453 million after tax, which is $0.96 per diluted share. During the second quarter of 2011, we saw investments securities with an amortized cost of $1.5 billion resulting in a realized pre-tax loss of $182 million. The most notable sales in the quarter included several transactions that lowered our exposure to peripheral Eurozone holdings. In addition, the Company impaired certain securities resulting in a pre-tax loss of $528 million. The impairments included exposures to 2 Portuguese banks. As a results of our proactive investment de-risking program, Aflac has significantly reduced peripheral Eurozone, perpetual and financial exposures, on an amortized cost basis.

As the world stands today, we believe we have substantially completed our proactive investment, de-risking program from a realized investment loss perspective and we are comfortable with the current holdings in our below investment grade securities. Our unrealized loss position in below investment grades was $470 million at the end of the second quarter, out of $93 billion in investment portfolio. The last time our unrealized loss position in this category was that low was 2008, pre-financial crisis. Let me tell you that if we thought there was a question with the remaining below investment grade holdings, this would have been the quarter to have taken the action by either selling or impairing them. The strength of our capital position has allowed us to pursue our proactive investment de-risking program to further strengthen our balance sheet and enhance shareholder value for the long-term. As we have communicated over the past several years, maintaining a strong risk based capital or RBC ratio remains a top priority for us. Although we have not yet completed our statutory financial statements for the second quarter, we estimate our RBC ratio will be within the range of 480% to 520% at the end of June. Additionally, we estimate that the solvency margin ratio will be between 520% to 535% based on the revised calculation methods of the quarter ending June 30, 2011.

In Japan, even with significant proactive investment de-risking program in the second quarter, our preliminary solvency margin ratio calculation shows a slight improvement over the solvency margin of 512% for the quarter ending March 31, 2011. We are comfortable with this level and absent a significant change in the market, such as a sudden spike in interest rates, we anticipate it will improve. We also believe these ratios, our overall financial condition proved solid support to our single A credit rating.

As you will recall, 2010 marked the 28th consecutive year of a dividend increase. Our objective remains to increase the cash [generated] generally in line with the earnings growth before the impact of the yen. The Board will again evaluate the dividend increase later this year, but I am confident we will extend our consecutive annual dividend increases to 29 years.

Additionally, you will recall that we resumed our share repurchase program in the fourth quarter of 2010. We've purchased 1 million shares in the second quarter, bringing the total number of shares purchased for the 6 months to 4.1 million shares. We anticipate ending up at the low end of the 6 million to 12 million shares repurchased target in 2011. Despite the challenges of the low interest rate environment, especially in Japan, we now have 2 good quarters under our belt. Additionally, we believe we've substantially completed our proactive investment de-risking program from a realized investment loss perspective. From an operational standpoint, I think we have done a very good job in managing our expenses but keep in mind as the year progresses, we anticipate increasing our spending, particularly on marketing and IT initiatives.

Taking all those factors into consideration, I want to reaffirm our 2011 objective of growing operating earnings per diluted shares at 8% excluding the impact of the yen. Looking ahead with this clarity and the year half completed, we expect 2012 earnings per diluted share to increase 2% to 5% on a currency-neutral prices. This upward revision to our 2012 earning objective assumes no additional significant investment losses and no meaningful decline in interest rates. Furthermore, once the effects of the proactive investment de-risking program and low investment rates have fully integrated to the financial results, we would expect the range of earnings growth in the future years to improve.

I am pleased with Aflac's overall results for the quarter and for the 6 months, and I can tell you the global financial challenges we've all seen, especially in the changes in the investment environment, have only served to reenergize my enthusiasm as the CEO of this Company, and I wouldn't trade places with any other CEO in the world. And now let me turn the program back to Robin. Robin?

Thanks, Dan. Let me go through some second quarter numbers, starting with Japan. Beginning with the top-line in yen terms, revenues were up 3.7% for the quarter, investment income was down 5% for the quarter. Excluding the impact of stronger yen on Aflac Japan's dollar denominated investment income, net investment income declined 0.9% in the quarter. The annualized persistency rate excluding annuities was strong for the first half of 2011 at 94.3%, compared with 94.0% in 2010. In terms of quarterly operating ratios, the benefit ratio to total premiums declined slightly over last year. It was 69.9% in the quarter compared with 70.0% a year ago. The expense ratio for the quarter was 19.2%, down from 19.9% a year ago and the pre-tax margin remained stable at 21.1% in the quarter. Pre-tax earnings increased 3.4% for the quarter in yen term. For the quarter, we invested our cash flow in yen securities at a rate of 2.16% including dollars. The blended rate was 2.67%. As part of our strategy to address the low interest environment in Japan, we made dollar denominated purchases totaling $1 billion in the quarter. The total amount purchased through the end of June 2011 was $2.5 billion. The yield on these investments through June 30 was 4.72%. The portfolio yield was 3.51% at the end of June, down 5 basis points from the end of March and 20 basis points lower than a year ago.

Next, I will turn to Aflac US. Total revenues rose 4.0% for the quarter. The annualized persistency rate for the first half of the year improved significantly and it increased to 75.2%, up from 71.1% a year ago. Persistency in the US was higher as a result of a return to a more normalized rate in 2011, after the decline of persistency in 2010 from the loss of a large account.

Looking at our operating ratios for the quarter, the benefit ratio to total premiums was 57.0% compared with 57.1% a year ago. The operating expense ratio declined from 31.3% to 31% reflecting a delay in spending on several projects that will be started later in the year. The profit margin for the quarter was 18.4% compared with 17.7% a year ago. In terms of US investments, the new money yield for the quarter was 5.72%, versus 6.11% a year ago. The yield on the portfolio at the end of June was 6.7%, down 8 basis points from the first quarter and 28 basis points from a year ago.

Turning to some other items in the quarter in June, we issued JPY50 billion in the samurai bond market totaling JPY50 billion or approximately $625 million. Non-insurance interest expense in the second quarter was $41 million compared with $31 million a year ago, primarily reflecting our debt issuance in the second half of 2010 of $750 million. Parent company and other expenses declined slightly from $16 million to $15 million in the second quarter of 2010. Total Company operating margins rose reflecting the improved profitability of Aflac Japan and Aflac US both for the second quarter.

Pre-tax margins rose slightly from 19.3% to 19.5% and after-tax margin increased slightly from 2.6% to 12.7%. On an operating basis, the tax rate was 34.6% compared with 34.7% a year ago. Net earnings per diluted share for the quarter were $0.60 compared to $1.23 in 2010 and realized investment losses were $0.96 a share this year compared with $0.12 in 2010.

During the quarter, we realized investment losses of $453 million net of tax, $118 million were attributable to the sale of our holdings primarily in the various peripheral Eurozone, perpetual and financial securities. $343 million resulted from our impairments primarily in the peripheral zone, perpetual and securities of the financial sector. We also had a $27 million net after tax investment gain associated with foreign change impact and primarily passing through to the activities.

And as reported, operating earnings per diluted share rose 15.6% to $1.56. The stronger yen increased operating earnings by $0.11 per diluted share for the quarter. Excluding the yen's impact, operating earning per share increased 7.4% for the quarter.

Lastly, let me look -- let me comment on the earnings outlook for 2011. As we mentioned in our analyst meeting in May, given the continued low interest rate environment, especially in Japan, along with our concentrated efforts to de-risk the portfolio, we expect to increase operating earnings per diluted share, excluding the impact of the yen by 8%. Assuming an 8% increase in operating earnings per share, we would expect to earn $5.97 on a constant currency basis. If the yen averages is $0.80 to $0.85 for the third quarter, we would expect operating earnings to be at $1.54 to $1.60 per diluted share. If we achieve our objective of 8% growth and the yen averages $0.80 to $0.85 for the full-year, we would expect operating EPS to be somewhere in the area of $6.09 to $6.34 per diluted share.

Now we will turn our attention to your questions. To be fair to everybody, please limit yourself to one question. And if you would first state your name and your company, we will begin taking questions.

Thank you. Our first question comes from Jeff Schuman of Keefe, Bruyette, Woods.

Thank you, good morning. I wanted to talk a little bit about the issue of sort of cash positioning. You bumped up the 2012 guidance range a bit and it sounds like that has a lot to do with greater clarity about capital positions, the fact that you've done the heavy lifting on the portfolio. So that kind of clarifies the capital position but there's also been this issue in terms of how you'd be positioned with cash. I'm wondering if you can talk about sort of stat earnings for this year, how you're set up in terms of regular dividend capacity for next year, and maybe what the holding company cash position is post the recent yen debt rate. Thanks.

All right, this is Kriss, and I will -- I'll get into that for you, Jeff. The cash position right now at the holding company is good after the recent debt offering. We've got roughly $1.1 billion, $1.2 billion. We have to make the payment on the maturing samurai notes of about $400 million in September. So let's -- let us anticipate that and say we've got about $700 million or so at the -- at the life company, at the holding company. Having gone through the substantial bulk of the de-risking process from a realized loss perspective, we're now looking at our tax projections for the remainder of 2011 and doing cash flow planning for 2011, and '12. Let me just say that from a -- from a cash perspective, tax is a significant item that we have to look out for and watch because the realized losses are deductible for tax purposes in Japan and we get a tax benefit from them but in the US, in the consolidated return, we don't get to take a tax benefit for realized losses unless we have offsetting realized gains.

So what happens from a cash perspective is that you reduce your income in the FSA statements and in Japan, you get a tax benefit for it. It reduces the normal repatriation that occurs between Japan and the US. But in the US, we've got to pay the same amount of tax we would've paid if we didn't have the realized losses. So with a lower foreign tax credit, it means more cash is going out of the US and so we have got a cash management exercise in front of us and we're running through the numbers as we speak. I will say that we're doing some -- developing some mitigation strategies that we can use to generate capital gains that we can use to offset some of these realized losses that are otherwise not deductible for tax purposes. As you know in the statutory accounting, a lot of the taxes are handled pretty much on a cash basis.

There are nominal deferred tax credits and the like that you can take advantage of but we pretty much reached the limit on our admissible deferred tax credits on the statutory and so we're looking more at statutory taxes being occurred on a cash basis. That didn't totally answer your questions in terms of numbers, but I don't have the numbers at the moment because we are finalizing the statutory results and running through the tax planning process. Though we are pleased that we think we've got the bulk of the losses behind us. I think it will fare well for us not having to offset the strong operating earnings by realized losses for RBC purposes, for solvency margin purposes and the like, and ultimately, our cash position will improve even more.

Our next question comes from Ed Spehar with Bank of America.

Thank you. I would like to follow up on this line of questioning. I guess, one of the disappointments at the -- at the FAB meeting I think was the view that we got from Management that de-risking and share repurchase were mutually exclusive exercises, at least to some extent. And I guess, if we look at where we are today, you're saying that de-risking is substantially done and also if we update the uncommitted cash flow analysis that you gave us at the FAB meeting, the number you came up with then was, I think, $565 million for this year but that assumed no refinancing of debt. So now we have got $625 million that is coming in that was not assumed in the calculation so the uncommitted cash at the holding company this -- now is around $1.2 billion or twice what you guys had said at FAB. So I understand the tax management and everything else, but I also know there is extraordinary dividend capacity if you needed to do that. I am sure you could probably do that -- a $1.2 billion of uncommitted cash at the holding company at current share price, which happy to say is 5% higher than it was yesterday is 26 million shares. So, I was wondering if you maybe Kriss go in a little bit more detail on this because I think this was obviously a point that a lot of people were focused on? Thanks.

Ed, let me say that if we left the impression that share repurchase and financial de-risking were mutually exclusive, then we miscommunicated. They're very closely linked because they directly affect our ability to generate earnings on a statutory bases and our dividend capacity is -- normal dividend capacity is controlled by statutory earnings, less realized losses and --

I'm sorry, Kriss -- can I stop? Sorry, Kriss -- can I -- I meant, when I said mutually exclusive, I meant that you could not do both at the same time. That if you were de-risking you weren't going to be buying back a lot of stock.

Oh. Well, you are correct, and that is the point I was trying to make so they're -- to me, they're directly linked. And when we were at the FAB meeting, we, quite frankly, weren't totally sure what the level of financial loss associated with de-risking would be but we aggressively pursued it not only after FAB but before FAB, we did a lot of de-risking in the first quarter and we followed it up with more in the second quarter so now we have got more visibility and so the outlook for share repurchase is significantly improved and I'll be able to give you a better update, Ed, on anticipated share repurchase activity after we complete this cash management exercise we're going through, trying to project our tax position and our cash position and our statutory earnings for the remainder of 2011, taking into account the realized losses that we incurred this quarter.

I can say from an earnings perspective, we don't need to do a lot of share repurchase in the remainder of 2011 to make our earnings target and we're somewhat, we're always conservatively biased when we're looking at meeting our earnings estimates and certainly significant levels of share repurchase bolster earnings capability. Part of the reason we raised the guidance for 2012 from 0% to 5% to 2% to 5% was we kind of eliminated some of the murkiness associated with the cloud around how much realized loss we would end up taking as part of de-risking and how much share repurchase we were going to be able to do. I put out there an assumption that we might do no share repurchase in 2012 but I think that is off the table now. We'll definitely be able to do some share repurchase if our operating assumptions are met. But whether we're in a position to apply a $1 billion or $2 billion to share repurchase, we just hadn't determined yet but those are still pretty high numbers because we do still have a fairly uncertain outlook, I think, as far as other economic developments. We have got to get the stupid debt deal done in the US for one thing and who knows how that's going to affect world markets but we've assumed that as of this day and with no materially adverse economic developments, we're going to be in good shape.

Our next question comes from Andrew Kligerman with UBS.

Hello. Can I get a better color on the trends in recruiting -- recruited agents, you had a nice move in the first quarter -- recruits up 13.5%, 10%-plus in the second quarter and the license agents, year over year are flat right now, license sales associates, so I am wondering, if you maintain this double-digit recruiting pace, where do you think the delta will be in licensed sales associates over the next 12 months? And if you maintain this recruiting pace, where do you think sales can go next year? Single digits? Double digits?

Andrew, this is Paul. Let me begin by talking about the recruiting. I must tell you that licensed sales associates is a number that we publish but it's not a number that I manage our business from. As I've said in years past, really beginning about 2005, focused more on average weekly producers, the ability to produce the amount that is being produced, kind of the 2 factors that drive our business. I think Tom and our sales team working with our marketing team has done an awesome job of turning around our total recruiting and think it's 2 consecutive quarters of great recruiting. It really began back in the end of the third quarter of last year when they set the initiative, began communicating it. I told you at that time it would take a period of time to begin to get it turned. The combination of focus on that topic as well as our DRTV and some of the things that we have done have generated incredibly good results. I'm very happy with where recruiting is. What I do want to see longer-term is that recruiting generates both new associate premium as well as average weekly producer growth over the long-term. I'm less concerned about the number of licensed agents. It's not how many people have a license, it's how many people are actually selling our products that makes a difference for us.

So Paul, so with the weekly average producers kind of flattish in the first half of the year, are you concerned about that? I know Dan was saying today's recruits are tomorrow's sales. I really like that, so the recruits are big. Do you think that--?

It's a time lag, Andrew. It's a time lag. My expectation is, although there is no guarantee that as we move forward if things are moving in the right direction, that average weekly producers should begin to grow. And so recruits happen first, we train, we get them into production and eventually they will begin to make headway on moving toward being a part of our average weekly producer so our recruit and train model should begin to generate that.

Okay, so -- so--

Our next question --.

Oh no, no, he got cut off let me finish. And I don't know if you can bring him back but if not I'll just finish the second part of his question. He asked about the sales and I think it's a fair question. What I told you at the end of last quarter was we had 1 data point, we now have 2 data points. And I would much rather see 3 and 4 before I begin to make predictions. Am I happy with where we are? Yes, I am very happy with where we are. If you take the first quarter and you take out the additional day, it drops it from 6 back to 5, and if you take the extra day and add it in the second quarter, it takes it from right at 6 and moves it to 7 so I am very happy. I think the second quarter was better performance than the first quarter in terms of what I think and I'm hoping to continue to see things move. Again, this is only our second big year in group business.

We don't know how the fourth quarter is going to pan out. We continue to see positive signs as we move forward but he fourth quarter number from last year is a large number so I want to see where things go. I think some time in October, if not January, I'm going to feel comfortable really talking about things. But I think it's would be a mistake not to say that momentum is extremely high. I have been traveling around the country meeting with our sales associates. They seem extremely optimistic. And I think that what we have done with our product portfolio has put us in a place, that combined with our product marketing to be successful going forward, but it's too early to say that the turn is completely in when you have got the economic factors where they are. We've dealt the last few years with the economy being very difficult. I know this morning, we got a good report on jobs supposedly but in reality, we're not seeing jobs as optimistic out there in terms of small businesses. They were 180 days ago so I want to see what is going to happen. I think our team is executing well with some performance places, we can continue to do better but at the same time there are economic factors that continue to hang over us and that overhang will dictate how high we can go both the remainder of this year as well as sales in 2012.

Thanks a lot.

Darin Arita with Deutsche Bank, your line is open.

Thank you. Had a question on the Aflac Japan's benefit ratio. It looks like the piece of the child endowment sales is slowing and sounds like it will continue to trend lower in the second half of this year. Just, per the Japan benefit ratio guidance for 2012, if we think back from the financial analyst briefing in May. What level of child endowment sales did that contemplate and how does that compare with the decline in child endowment sales that we're seeing?

Darin, I think the projection, the financial -- the sales projection anticipated some decline in child endowment sales. I don't have those sales projections directly in front of me. But I believe that our actual experience is probably somewhat lower for child endowment sales than we had in the projection. Partly because Dan and I have been directing Aflac Japan to reduce promotional efforts on child endowment and to increase promotional efforts on both the new cancer product and the WAYS product. And so we're trying to reemphasize the desirability of selling the higher margin products. It's really the lower child endowment margin that's been driving the benefit ratio up some and the overall margin preventing the expansion at the same level we've seen in the past. So we think the trends are moving in the right direction relative to selling power margin products. Let me just leave it at that.

Yes, the only other comment I would make is, is on top of all of the disaster issues trying to all of a sudden get your sales force to also change one of the products they're selling makes it difficult but they have achieved it and it -- what you don't see is, you see that sales were down 1.2% in endowment for the quarter. But what you don't see is that April was up, May was down, and June was down even more and our tracking for July shows it's even down further. So they have definitely shifted. I give our Management team at Aflac Japan credit for that and as I said, there are other reasons for that. It is an older product, it has been out there 2 years. And basically, they made a pass at everybody and now it's only the newborns and in addition to that, there is a question of whether or not the government will even keep it or certainly reduce it. So, all in all, I feel real good that that's in place in the second half. We're going to move on to WAYS, which I mentioned has a more than 100% increase in the profit margin over the endowment.

Our next question comes from Tom Gallagher from Credit Suisse.

Good morning. Just a question on the de-risking, just so I'm clearer on where things are likely to go, going forward. Dan, is the comment that your investment losses from a realized loss standpoint are pretty much done here, is that because you don't have any intention to further de-risk peripheral Europe, because you still have Italy, Spain, and, some Irish exposure? So should we take that comment to mean you don't intend to sell those down at all or is it because you do potentially expect to sell some of those positions down but you just don't think you're going to have meaningful losses?

I think we don't think we'll have meaningful losses. Is that--? The one point that I wanted to make in that speech was that this is the time that we ought to hit everything we could. We met and then we met again -- on, look, if we got it, clean the house out, get it over with and we have 4 others that we considered that were below investment grade and we came to the conclusion that they were good, there was senior debt on a couple of them. And so we made that decision that we thought they were all right. So to the best of our ability, unless there is some dramatic change, we think the majority of the losses are over. That is not to say there might not be some small amount here and there or profit here and there, but I think it is basically over and that is what we were trying to do was end it by the second quarter, and we think that we have achieved that, provided there isn't any major issue that come forward in the future.

And so, Dan, should we take that to mean there won't be any more meaningful sales or will -- is there still likely to be meaningful sales but you just don't foresee substantial losses?

I think we will evaluate each position and look at it from an optimistic perspective of what we think might be out there. Certainly, we've moved away and changed our focus to where, as you know, we have moved away from financials. You have seen that cut dramatically. You have seen us move away in terms of the PIGS and not made any investments there, so, the numbers as a percent of the portfolio continue to drop and will continue to drop going forward. If we were offered opportunities to change investments in other areas, we'll evaluate it and see what it offers. We are truly going through a restructuring now and viewing ourself from a pre-financial crisis to a post-financial crisis of our investments and everything is on the table of looking at what will be our best strategy going forward to manage this Company. And I really believe our operational issues are minor. I think we're running on, especially considered the economies, I think we're doing great operationally. So, my biggest issue out there is investments. And we have a Board that has an Investment Committee that is very laser-focused on this and you're going to see us concentrating and giving more information to keep as transparent as we can. Everything we're doing and how we're doing it going forward.

Okay. Thanks.

Let me just say that I think Dan said we're looking at things from an optimistic point of view. He really meant opportunistic.

I'm sorry, that was one thing that I kind of tripped over there. But we're look at things from an opportunistic point of view, being able to do the right thing at the right time.

Okay. Thanks.

Otherwise that was a strong statement.

Our next question comes from John Nadel with Sterne Agee.

Hello, good morning everyone. I wanted to take you back in time a bit and maybe you could give us some perspective. Kriss, you alluded earlier to the folks in Washington and some risks we've got here and you and Dan and others at Aflac were in your positions or at least in senior positions when Japan lost its Triple A rating some time ago. So I was wondering if you could, given that experience, if you could give us some of the lessons you learned from that event. How did it impact Aflac's results if at all. Any observations that might be helpful for us in thinking about what a US downgrade from Triple A to Double A might mean?

Well, I don't believe it had any significant effect on us directly, John. I know that we were rated Double A at the time and the rating agencies told us that we could not be rated higher than the government of the country where we had our principal operations. And so that was one indirect effect. It really had no significant effect on JGB yields that I was aware of, and it was--

Actually, the yields went up somewhat but so did the Nikkei quite a lot.

The Nikkei went up a lot, Japan goes downward. Okay. So I just alluded to the budget dilemma in Washington because my big concern is not so much the effect on US treasuries but what overflowing effect it might have to Europe and even Japan. Particularly if it impacted interest rates in Europe or economic conditions in Europe, which I doubt that it would, but, anyway, we don't have any specific major concerns about the budget dilemma in Washington. I'll just use that, as an example of economic uncertainty that seems to crop up every day.

Okay. I appreciate the color. And just one real quick one for Jerry, if I could. Just thinking about the exposure that remains to Spain both sovereign and financials, as well as Italy, can you just give us your current perspective? Since the end of June, clearly CDS spreads have widened. Those remain at least relative to your equity base, still pretty meaningful exposures, so any update there.

Look, I think they are meaningful exposures, but I think a lot of context needs to be applied when you look at these exposures. Take Spain, for example. Of our government exposures, 70% of exposures have below investment grade put language and that is a provision that is unique to the exposures we've negotiated. In our non-government, non-financial exposures in Spain about 50% of our electric utilities, which is really the major component of our exposure to non-government Spain exposure, have leveraged and/or interest coverage covenants of our in -- non-utility industrial exposure, about 50% of them, have below investment grade puts on them so there is a lot of context that is not immediately evident when you look at our exposure to Spain.

It's a similar situation in Italy. I would point out in Italy our financial exposure in Italy is extremely low. It's $183 million and that is senior indebtedness and I don't think anybody is looking at burden-sharing for senior debt particularly, in view of the recent releases as a result of the Basel III financements of last week. We do have a direct exposure to the government of Italy, which we are comfortable with. In our utilities and industrials, our utilities exposure in Italy, over 70% of those exposures have below investment grade put language and our industrial exposure, about 15% have similar covenant protection to what I just described in Spain. So, in the aggregate, it's not enough to just look at what the numbers are but what the protections are that we had. And the individual credits that are non-government in both countries. We are very comfortable with.

That is exactly the color I was looking for. Thank you very much, Jerry.

Okay.

Our next question comes from Jay Gelb of Barclays Capital.

Thank you and good morning. I wanted to touch base on a few things. First on the outlook for new sales in Japan. Essentially implies that you're looking for a 4% to 5% year over year decline in the back half of 2011 to get to your guidance and looking at past trends, it doesn't appear that link new sales in Japan always decline in the back half. So I'm just trying to understand why you feel you might be down year over year in the back half?

Tohru, do you want to answer or you want me to?

Yes, the week of when we had that -- we made a projection that earlier, for the remainder of the year. We assumed that -- we took the factors into the consideration and particularly the ones we are concerned. And -- now we didn't change those numbers significantly. But the more we see that actual serious conditions, we are simply getting more confident with the projection so that's why we increased that projection to some extent.

I think the other comment is, it's the fourth quarter we're worried about. The third quarter, I think, we'll have a nice increase but I think the fourth quarter, our numbers were so big, I think it was the biggest quarter in the Company's history.

That's 2, 4 quarters in a row so have 2 years--

And that is our real issue. If we know that, we wouldn't -- it's not the trending down as much as it is the comparison to the previous years. But -- so we'll have to watch it and see. But there is no trend that we think is changing in terms of the projection of our sales going forward. It's simply the comparisons of the year before that is our worry.

And comparisons to the year before that. The fourth quarter in 2010 and 2009 were record-breaking quarters.

I see. Okay, and then more broadly, is it fair to say that pretax operating earnings growth for the US could be faster going forward than Japan and local currency?

Right now, our projections for '11 and '12 have them growing at approximately the same rate. It is possible that US could start growing faster than Japan because more of the US premium income is first-year premium opposed to -- it's about 33% first year in the US compared to about 9% first year in Japan, so the US is more reactive to changes in new sales and earnings directly follow earned premium so it's possible that US gets good new sales that will convert to premiums over the course of the year and the growth rates could be faster in the US than Japan.

Great, thank you.

Our next question comes from Steven Schwartz of Raymond James & Associates.

Hey, good morning everybody. Question for Paul. Paul, the group has gone great through the agents, I was hoping that maybe you could talk to or maybe give some indication of what kind of traction you're getting in brokerages?

Steve, I'll be glad to talk about it. You're right, the field force we did comment in Dan's comment was doing extremely well in selling the group products and I think that has been the greater surprise to us. I think all along, we assumed that group products would sell well through the broker market. As I've said, since we lost our broker initiative really going full time in 2009, and all the implementations we have made, things continue to go in the right direction. We're moving, we're growing we seeing positive growth in that. I feel confident that we continue to build these relationships.

Relationships on the local level have long since been something Aflac has done. We wrote almost $200 million for several years leading up to the launching of our broker initiative. The relationships at the regional level are coming on faster. It is just a level of our ability to get in and out of the brokerage offices and then relationships on a national level have done well in terms of our procurement on the corporate level and now we're beginning to move them down toward the producer level. So, do I feel good about what is going on? I think we're executing a plan, I think we're moving in the right direction, I think we can always continue to find ways to operationally improve. But I am still confident that the group business will continue to be something that opens up the broker market for us and that our agents that are selling that business is really just a icing on the cake in terms of our ability to grow but it just -- we really point that out to you all to show you more that the group business is not a single channel move, it's something that applies for both the broker channel as well as the field force channel and has really reinvigorated a lot of things in our business.

Okay, thanks Paul, I appreciate it.

Okay, I think we've reached the top of the hour. So I would like to thank everybody for your questions and participating this morning. If you would like to follow-up with any questions later on, we'll be in the office today and give us a call. Thanks so much.

This concludes today's conference call. Thank you for participating.