美國家庭壽險 (AFL) 2011 Q3 法說會逐字稿

Welcome to the Aflac third-quarter earnings conference call.

Your lines have been placed on listen-only until the question-and-answer session. Please be advised today's conference is being recorded.

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

Good morning and welcome to our third-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; Ken Janke, Executive Vice President and Deputy CFO; Jerry Jeffery, Senior Vice President of Fixed Income; and Tohru Tonoike, who is President and COO of Aflac Japan who is joining us from Tokyo.

Before we start this morning, let me remind you that some statements in this teleconference are forward-looking within the meaning of federal Securities laws. Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they're perspective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our quarterly release for some of the various risk factors that could materially impact our results.

Now, I'll 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. I'll then follow-up with a few financial highlights for the quarter and the first nine months, and then we'll be taking your questions. Dan?

Thank you Robin. Good morning and thank you for joining us today.

I am pleased with Aflac's overall financial and operational performance in the third quarter. I believe we have established a solid foundation toward achieving our annual operating earnings growth and capital strength objectives.

I'll begin this morning with a review of our operations in Japan. Aflac Japan generated strong financial results for both the third quarter and the first nine months of the year. Revenue growth in yen rose 4.8% for the quarter and 4.1% for the first nine months.

Although investment yields declined on new money, we saw solid earnings growth for the quarter and for the first nine months. We are particularly pleased with the tremendous sales momentum in the quarter. New annualized premium sales rose 22.2% to JPY42.3 billion for the quarter, which significantly exceeded our expectations.

Even more impressive, production in the third quarter set all-time quarterly records. For the first nine months of the year, total new annualized premium sales rose 13.9%. Third-quarter bank channel sales by far exceeded our expectations, generating JPY14.5 billion in production. That represents an increase in 146.6% over the third quarter of 2010 and a 90.7% increase over the second quarter of 2011. Bank sales in the third quarter accounted for 34.4% of total sales.

We are proud of Aflac Japan's outstanding sales results. This is particularly true following the challenges from the devastating earthquake and tsunami. Keep in mind that, for several months after the disaster, Aflac Japan shifted sales and marketing resources that included relocating both people and budget from the non-bank channel to the disaster-stricken areas. Some of the negative impact from this natural disaster that held back our traditional sales force was masked by the strong bank sales in the second and third quarter.

Let me remind you how the bank sales progressed. As I mentioned, we believe that more banks would step up their effort in selling Aflac products once other banks experienced success, and that's exactly what happened. While Shenzhen and regional banks were early adapters in terms of selling our products, we've seen new annualized premium dramatically increase in the mega-banks start selling the products. These strong bank sales reflect Aflac Japan's impressive ability to develop relevant products such as WAYS, our unique hybrid whole-life product that appeals to banks and Japanese consumers alike. WAYS has been a primary driver of Aflac Japan's remarkable sales increase.

As you're aware, the average premium for our WAYS policies sold through the banks, the primary distributing outlook for the product is about ten times the average premium for the cancer and medical product. That makes WAYS a very strong contributor to affect Japan's topline growth that has contributed to the continued rapid growth of bank sales in 2011.

WAYS generated a third-quarter sales increase of 362.8% for the same period in 2010 and a 99.3% over the second quarter of 2011. Sales of WAYS accounted for 31.7% of Aflac Japan's total sales in the third quarter.

Without the discounted advanced premium option where policyholders pay all their premiums upfront, the profit margin for WAYS is about 14%, which is more than double the profit margin for child endowment. With the discounted advanced premium option, WAYS profit margin is enhanced to around 18%. It's important to note that 90% of the customers at the bank elect to pay premiums upfront through this payment option.

Sales of cancer insurance were solid, particularly WAYS, the new base cancer product introduced in March, WAYS Plus, which upgrades older cancer policies. In the third quarter, new annualized premium for the cancer insurance rose 8.5%.

What's even more telling, however, is the number of cancer policies sold on a standalone basis increased an impressive 32.7%. Clearly, the success of DAYS has been somewhat overshadowed by the lower average premium, which is about 15% less than the older base policy. The premium difference is largely due to the fact that the new policy does not have cash surrender value options.

As our traditional sales force focus on selling the new cancer products, medical sales declined. Despite this decline, the medical category still accounts for 20% of our total sales.

Importantly, we maintained our position as the number one seller of cancer and medical products in Japan. That affirms Aflac's reputation as a strong product innovator and trusted brand.

The solid platform we've established with these two pillar product has allowed us to leverage our competitive advantages, such as branding and administrative efficiencies.

As anticipated, third-quarter sales of child endowment product continued to decline for the second consecutive quarter, posting a decrease of 8% in the quarter. For the remainder of the year, we expect child endowment sales to continue declining as the distribution channels focus on selling WAYS and our new cancer product, DAYS.

Also keep in my that we're selling the child endowment product for more than two years, so we've already cycled through the first major path of selling this product to the most eligible targeted marketed families with young children.

As we look to the remainder of the year, if sales in the fourth quarter are flat to the fourth quarter of 2010, our expectation would be that sales would increase 10.1% for the year. I am confident we will achieve that or better.

Now let me turn to the US operation. We are very pleased with Aflac's US performance from both a financial and a sales perspective. Revenues rose 4% for the quarter and 3.7% for the first nine months. Persistency continued to be strong. While earnings growth was down slightly for the quarter, earnings for the nine months grew 2.7%, which was in line with our expectations. Aflac US generated a 5% increase in new annualized premium sales for the quarter and a 5.7% increase for the first nine months. These results have benefited significantly from the addition of group products to Aflac US product portfolio. In fact, group product sales have exceeded our expectations for both the third quarter and the year.

Our sales and marketing areas, which are more closely aligned than ever, have synchronized their efforts by creating strategies that continue to benefit our sales results. You will recall that, in January, we rolled out Smart Launch, which is a coordinated sales and marketing effort. In these campaigns, we analyze our existing accounts to determine which accounts are most likely to need a particular product. We then align our field force resources to strategically and effectively target these accounts with that product or products.

Following the success of the first quarter launch of our dental product, we rolled out the Smart Launch to promote critical care and recovery product mid second quarter. As a result, sales of the critical care and recovery were up 11.9% in the third quarter. We will maintain this successful initiative to promote more products.

On the distribution side of the strategy, field force recurring continued to benefit from a targeted national advertising campaign, generating a 10.4% increase in recruits for the third quarter. This marked the third consecutive quarter of double-digit recruiting gains, generating an 11.4% increase for the first nine months.

Also, our distribution strategy has grown through the addition of group product platforms, which has also helped us make inroads into growing our market initiative with brokers. It's too early to say we've turned the corner. However, I believe that, given the challenging economic environment, our success in expanding our distribution network, and achieving a sales increase of more than 5% for the first nine months is outstanding for the US.

Now let me update you on Aflac Incorporated results. Overall, we're pleased with Aflac's consolidated performance. Operating earnings per diluted share rose 14.5% to $1.66 for the quarter, an increase of 15.4% to $4.86 for the first nine months. Excluding the benefit of the stronger yen, operating earnings per diluted share rose 8.3% for the quarter and 8.1% for the first nine months, keeping us in line with the 2011 earnings per share objective of an 8% increased before the impact of the yen. Our better-than-expected results in the quarter benefited from the continued expense management, especially in Japan.

Turning to our investment activities, I want to update you on what we've accomplished in the third quarter. As you will recall, we stated in the second quarter that we believed our proactive investment de-risking program is largely behind us from a realized loss perspective. That assumed that we live in a static world. However, we obviously operate in a dynamic economic environment, which means we need to be especially vigilant in monitoring our portfolio. This is exactly what we've done and will continue to do.

Let me remind you how successful we've been in substantially de-risking our investment portfolio from January of 2008 and the end of the third quarter. Over this period, we have dramatically cut our holdings in foreign and financial investments in the PIG countries from 5.9% to 2.4% of the total portfolio. We've also lowered our investments and perpetual securities from 14.7% to 7.4%, which was about half.

I'd like to point out that none of the perpetual securities we currently own are in the PIG countries. Additionally, our investment and financial exposures have been meaningfully reduced room 42% to the total of 28% in the portfolio.

I also want to update you on some of the steps that we've taken to mitigate interest rate risk impacting our solvency margin. First of all, we sold a portion of our JGB holdings classified as available-for-sale. We then purchased the same amount of securities and placed these purchased securities as held to maturity. Furthermore, all new money purchased of the JGBs this quarter had placed in held to maturity category.

Recognizing that our economic environment is continually evolving, we are paying particular attention to the investment governance through enhanced risk management and investing policies. We will continue to closely assess the securities we hold, and if we determine they are no longer appropriate for the investment portfolio, we'll take action and move them off the balance sheet.

With both operating segments doing well, I have devoted most of my time this year to the investment area. Our objective is for Aflac to be a world-class investment organization that pays particular attention to the needs of the insurance operations through the effective ALM and capital adequacy management, as well as the expectation of shareholders through investment income growth. It goes without saying that this objective is in the best interest of the policyholders.

The changes prompted by the financial crisis has highlighted the need for the enhanced global analysis and state-of-the-art investment systems. In response to this, our priority is to add to the talent of the investment management team and improve the overall investment function.

At the financial analyst briefing in May, we told you, as far as our investment function goes, everything was on the table. We felt the first thing we needed to do was to hire a global chief investment officer. Ultimately, out of 100 candidates we screened, we selected Eric Kirsch. Through his three decades of industry experience that includes Bankers Trust, Deutsche Asset Management and Goldman Sachs. Eric has proven to be a very strong team builder and leader. I think having the expertise and presence on the ground in New York is an integral part of Aflac's future investment success. Eric understands the investment risk and the challenges we face and we think he is an excellent addition to the Aflac team. He officially joins Aflac on November 1, and we expect that, by the time we release fourth-quarter earnings, he will have evaluated the investment function and be able to expand on Aflac's future global strategy.

Now let me make a few comments about our capital position. As we've 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 third quarter, we estimate the RBC will be within the range of 500% to 540% at the end of September. Additionally, we estimate that the solvency margin ratio will be within the range of 555% to 575% based on the revised calculation methods for the quarter ending September 30, 2011. These strong capital ratios demonstrate our commitment to maintaining financial strength on behalf of the policyholders and the bondholders.

Our strong capital position has enabled us to increase our cash dividend to shareholders for the 29th consecutive year. I am very pleased with this action by the Board of Directors which increases the cash dividend by 10%. Our objective is to grow the dividend at a rate that is in-line or somewhat better than the earnings per share growth. I believe dividends are an important component for the value we provide to investors.

Another way to reward shareholders is through share repurchase program. In the third quarter of 2011, we purchased 1 million shares, bringing the number of shares purchased for the first nine months to 5.1 million. We anticipate purchasing 6 million shares in 2011. In 2012, we anticipate our share repurchase activity will increase.

With three quarters of the year complete, we continue to believe we are well positioned for another year of solid financial performance. Our earnings outlook for the year remains unchanged. Our objective is an 8% increase in earnings per share, excluding the impact of the yen. As such, we expect fourth-quarter earnings per share, excluding the impact of the yen, to increase 7.6%. Our fourth-quarter earnings will be impacted by higher expenses, particularly in marketing and IT initiatives following three quarters where we've held back on the spending, particularly in Japan.

Looking ahead, I want to reiterate our expectation that 2012 operating earnings per diluted share will increase 2% to 5% on a currency neutral basis. We anticipate this 2012 earnings per share objective will establish a new baseline for earnings growth. This 2% to 5% range reflects the integration of investment losses and the low interest rate associated with the proactive investment de-risking program on a GAAP basis.

Remember, we told you we believed our proactive investment de-risking program was substantially completed in the second quarter, and we continue to believe that today. I am already looking for 2013 and beyond, when we expect the rate of earnings growth to improve over 2012. Hopefully, all the major de-risking is over.

I'm very pleased with Aflac's financial and operating results for the quarter and the first nine months. I can tell you the global financial challenges that we've seen, especially with the changes in the investment environment, have only served to re-energize my enthusiasm as CEO of the Company, and I still wouldn't trade places with anybody as CEO in the world.

Robin?

Thanks Dan. Let me briefly go through some third-quarter numbers, starting with Aflac Japan.

Beginning with the topline in yen terms, revenues were up 4.8% for the quarter, investment income was up 0.9%. The persistency rate improved in the quarter with an annualized rate, excluding annuities for the first nine months of 2011, at 94.4% compared with 94.1% a year ago.

In terms of quarterly operating ratios, the benefit ratio to total premiums rose slightly over the year. It was 70.0% in the quarter compared to 70.4% a year ago. The expense ratio for the quarter was 18.7%, down from 19.2% in the third quarter of 2010, reflecting a delay in spending on several projects that will be started later in the year, including IT and marketing initiatives that Dan alluded to.

Reflecting the lower benefit and expense ratios, the pretax profit margin rose slightly from 21.2% to 21.7% in the quarter. With expansion of the margin, pretax earnings increased 7.5% in yen terms.

For the quarter, we invested our cash flow in yen securities at 2.12%. Including dollars, the blended rate was 2.26%. The portfolio yield was 3.42% at the end of September, down 9 basis points from the end of June and down 22 basis points from a year ago.

Now let me turn to Aflac US. Total revenues rose 4.0% for the quarter and the persistency rate improved significantly and was about 76.0% in the quarter. The annualized rate for the nine months was 75.9%, up from 72.6% a year ago. The increase in persistency in large part reflects a return to a more normalized number following the loss of the large account at the end of 2009, resulting in the lower-than-usual persistency numbers throughout 2010.

In looking at operating ratios for the quarter, the benefit ratio to total premiums increased over last year. It was 59.1% in the quarter compared to 58.1% a year ago. The higher benefit ratio is largely the result of increased claims in the quarter, reflecting a return to a more normal utilization rate after claims in Q1 and Q2 were unusually low.

The operating expense ratio increased slightly, going from 30.5% a year ago to 31.1%. IT and other expenses increased slightly during the quarter, in line with our expectations.

The profit margin for the quarter was 16.4%, compared to 17.7% a year ago. As a result, pretax operating earnings declined 3.8% for the quarter.

In terms of US investments, the new money yield for the quarter was 5.77% versus 5.69% a year ago. The yield on the portfolio at the end of September was 6.72%, down 4 basis points from the second quarter and down 24 basis points from a year ago.

Turning to some other items in the quarter, as you will have read in the press release, we will adopt the new DAC guidelines on January 1, 2012. Based on December 31, 2010, the retrospective adoption of this accounting standard will result in an estimated after-tax cumulative charge to the Company's retained earnings of approximately $500 million to $700 million, or 4.5% to 6.3% of shareholders equity, as of December 31, 2010. We also estimate the adoption of the standard will result in an immaterial increase in income in '11, '12 and all the preceding years impacted by the retrospective adoption. These numbers largely reflect the nature of our business with our sales associates being 100% commission-based and approximately 70% of our DAC expenses that we capitalize are commissions. The remaining 30% is associated with administrative costs. Of these administrative unit costs, 75% of these will continue to be capitalized under the new DAC guidelines.

Noninsurance interest expense in the third quarter was $44 million compared to $37 million a year ago. This higher interest expense primarily reflects the impact from our debt issuance of $750 million senior notes in 3Q 2010 and the Samurai notes that we issued in July of this year.

Parent company and other expenses increased from $11 million to $15 million in the third quarter. Total company operating margins showed a slight increase, reflecting improved profitability of Aflac Japan. Pretax margin went from 19.4% to 19.6%. After-tax margin improved slightly from 12.7% to 12.8%.

On an operating basis, the tax rate was 34.5%, compared with 34.6% a year ago.

Net earnings per diluted share for the quarter were $1.59 compared to $1.46 in 2010.

Realized net investment after-tax losses were $0.07 per share this quarter compared to a $0.01 share gain in 2010. During the quarter, we realized investment gains of approximately $200 million net of tax from the sale of several securities, including the remaining holdings of our Portuguese financial institutions, a portion of our U.S. Treasury holdings that we sold, and a part of our swap program with JGBs in which we sold a portion of JGBs that were classified as available-for-sale, repurchased these and put them in held to maturity.

We also had $108 million net investment realize losses attributable to impairments of certain debt and perpetual securities. As reported, operating earnings per diluted share rose 14.5% to $1.66. The stronger yen increased operating earnings by $0.09 per diluted share for the quarter. Excluding the yen impact, operating earnings per share increased 8.3% for the quarter.

Lastly, let me comment on the earnings outlook for 2011. As you've heard Dan say, we reaffirmed our objective for 2011 of an 8% increase in operating earnings per diluted share, excluding the impact of the yen. With that in mind, if operating earnings per share increase 8% for the year and the yen average is 75 to 80 for the remainder of the year, the fourth quarter, we would expect operating EPS to be, for the fourth quarter, $1.45 to $1.52. Now, that compares to First Call estimates of $1.55.

Remember what Dan said. In both the US and Japan, we expect IT expenditures related and also marketing and advertising expenditures to increase substantially in the fourth quarter. Using the same foreign currency assumptions, also we would expect for the year operating earnings will be $6.30 to $6.37 per diluted share.

Now we're going to turn to your questions. To be fair to everybody, please remember to limit yourself to one question and only one follow-up that relates to your initial question. Now we'll be able -- we would be happy to take your one question.

(Operator Instructions). Jay Gelb, Barclays Capital.

Thank you. I wanted to touch base on the Japan sales growth outlook. First, I just wanted to clarify. When you're talking about 10% new sales growth, that's for all of Japan for 2011? Is that correct?

That is correct.

Then you mentioned potentially flat sales growth overall in Japan for the fourth quarter of 2011, but given the momentum in WAYS were doubled on a linked-quarter basis in the third quarter, it would have to drop by a significant amount in 4Q. Is that what you expect?

I think what you want to know is if fourth quarter equaled third quarter, which was the biggest quarter in the Company's history, sales would be up 14% for the fourth quarter, which would give us a 14% increase for the year. I'm not willing to commit to that. What I do believe is we will exceed last year's production which at the beginning of the year I didn't think we would be able to do. Now, how much better we'll do then that I'm not sure, but that gives you a range to know.

That's helpful. Thank you.

Randy Binner, FBR Capital Markets.

Just on the credit side, I was wondering if the recent European deal could affect how statutory impairments are taken. What I mean is there may be haircuts locked in over there I. Don't think those haircuts relate to bonds you own directly, but there is a difference generally associated with hybrids between GAAP and statutory impairments. I just wanted to get some color on if the situation over there now may change the way the GAAP versus STAT works in the credit portfolio.

This is Ken. Let me start answer on this and we'll see where it goes.

Just as a reminder, the different impairment treatments for perpetual securities is on a GAAP basis only, and it's purely price based, so it will largely depend on how the perpetual Tier 1 and upper Tier 2 assets are valued in the market on a go-forward basis.

There were a couple of the securities, one in particular, that we would have impaired under the equity model this quarter but we did have credit concerns, which is why we took credit impairments for on a GAAP FSA and a STAT basis. So I think it's a little bit too early to see how this all plays out.

We're all certainly encouraged that there was a deal struck and that they're continuing to work the problem. Fortunately for us, we don't have any direct [REEC] exposure any longer. But again we'll just have to monitor it. I don't think it will have any direct impact though on how we take the impairments unless the credit needs change.

That's great. And a quick follow-up is, is there an update that you have on the overall difference in the hybrids between GAAP and STAT impairment?

I don't have that number in my head. I'd have to -- we'll have to get that and I'll ask Robin to pass it on.

Thank you.

Ed Spehar, Bank of America Merrill Lynch.

Good morning. Kriss, I was hoping you could provide some more detail on the outlook for free cash flow for the Company not just this year and next, but sort of on a more normalized basis. I think there is some controversy about the relevance of US statutory earnings for dividend capacity for the Company. So I was wondering if you could give us some sense of how to think about this and just free cash flow, meaning what you could use to buy back stock and pay dividends over time. Thank you.

Let me just start out with that, and I'll try not to make the answer too long. But let me kind of say that our current outlook is that we will spend -- and I think that you're getting primarily to share repurchase. As you know, we declared an increase in dividend of about 10% this quarter. Now, that's going to take our dividend expenses paid out of the parent to around $600 million a year.

Recall we haven't changed the dividend at all since the financial crisis started. We've increased the dividend every year and share repurchase has been the variable in our utilization of free cash flow.

Historically, pre-financial crisis, our share repurchase commitment approximated the amount we were able to get out of Japan via profit repatriation. I think that the amount of profit repatriation will continue to be a primary driver of the funds available for share repurchase.

Now, to some extent, statutory capacity and profit repatriation are highly correlated. Japan does form a substantial percentage of our statutory earnings, but there are some things that we're not able to allocate to Japan, like corporate interest expense and shareholder dividends that are funded in large part out of statutory cash flow, not counting profit repatriation.

So let me just say that, in our minds, we correlate proper repatriation and funds available for share repurchase quite significantly. I was pointing out to Robin just this morning that, 2007, we repurchased about $575 million of stock, and we basically doubled down in 2008 and bought almost $1.5 billion when you guys convinced me we had excess capital late 2007, early 2008. Then the financial crisis hit and everything changed. When we started taking realized losses on investment securities, that impacted FSA basis earnings and STAT earnings and all earnings, and we had to cut back on profit repatriation. Therefore, we had to cut back on share repurchase. We didn't do any share repurchase in 2009, and not again until the beginning of the fourth quarter of 2010.

We have resumed share repurchase in 2011, as you well know. This year we intend -- we expect to buy about 6 million shares and spend about $300 million. Next year, based on our current best estimates, we anticipate repatriating somewhere around JPY45 billion, which at today's exchange rate should approximate about $600 million. We would expect to commit that amount to share repurchase.

I'll say I want to get away from quoting a number of shares. I'd rather go toward dollar amounts because, at current exchange rates, so to speak, because the share price has been volatile, and I'll let you guys make an estimate of what you think the price we buy at is going to be, price per share, so I'll let you determine the number of shares, but guidance as far as share repurchase at, say, the mid 70s and the yen-dollar exchange rate is going to be around $600 million, or better stated, on a yen basis, about JPY45 billion.

In 2013, we think we can double approximately our profit repatriation to about the JPY90 million to JPY95 billion level. So what that means is that we'll be able to double share repurchase between 2011 and 2012 and double it again in 2013.

Right now, that's the best guidance I can give you. I thought about trying to get into the details behind all this, but Ed, I would need a half-hour session with flip charts and all that, and they won't give it to me right now.

I think all of us and investors would give it to you if you want to allocate that time. But --

Well, we may (multiple speakers)

This is the most important issue I think. I'm not the only one who thinks it.

Just a quick follow-up, is that level of -- if you think about that level of repatriation in 2013, is that a normal level? When we think about cash flow, how do we think about a normal free cash flow level relative to what we see, which is the US statutory earnings number?

Yes, I would say it's relatively normal. I think it's somewhat conservative perhaps. Keep in mind that our past allocation or distribution of free cash flow has been roughly somewhere between one-third dividend, two-thirds share repurchase, or maybe a 70/30 split. So, I think you can think of normal share repurchase as being approximately twice our dividends, assuming that we have no substantial increase or no substantial investment, additional investment losses.

Thank you.

Steven Schwartz, Raymond James.

Good morning everybody. Just a quick follow-up on that. Kriss, that was $1.2 billion and 2013, so maybe $600 million in 2012?

Yes, that's right. I said really JPY45 billion --

Yes, that was a translation.

-- and roughly JPY95 billion in '13 is our current target.

Then I'm going to cheat here. I'm going to ask another little follow-up from the first question. Maybe Tohru could address this. But the sales in Japan, the mega-banks, I guess I'm wondering how much of this is really -- like when the insurance companies first came into the market, low-hanging fruit for the mega-banks, and then how do you kind of think about that relative to an expansion, if you will, to even more branches because you've still not in any way shape or form saturated the number of branches to the best of my understanding.

Yes, let me answer to your question this way. Out of the (inaudible) this year, about 80% of the total branches of mega-banks have sold at least one policy per month. That sounds -- may sound a large number, but if you think about that, one policy during the month is not a big number. Mega-banks' employees are getting very used to selling insurance products, so I think there is a lot of potential in the future.

Thank you. Then if I may just for Jerry, can you talk to Dexia, not necessarily what you did there but kind of the process. I'm having -- I'm interested because I'm having a hard time figuring out what exactly was guaranteed and whether or not this may be a template going forward for other banks that may need help.

In Dexia, you've picked a particularly complex example. But our exposure to Dexia has been included in the Dexia Bank Belgium part of the agreement.

As you may know, there are three separate entities that are emerging from the Dexia organization. Dexia Bank Belgium is actually now a bank which is owned by Belgium. It is a deposit-taking institutions. It is not the so-called bad bank which migrated into the French -- a couple of the French agencies picked that up. So it's still very early days, but the characteristics of it is it is a Belgian-owned banking institution and a deposit-taking institution, which we view as a positive step.

I get that. I guess my question is, is there some type of visibility with regards to how the types of debt that you have there are being treated? For example, I've had people tell me that everything is guaranteed. You would expect -- well, you can't do it under GAAP but you would expect a write-up as opposed to a write-down. So obviously that didn't happen. So I'm trying to figure out how exactly your debt will be treated by Belgium, or the European common market, whoever it is.

There's no visibility that the debt will be guaranteed by the government, if that's what you're after. It's owned by the government but not guaranteed.

All right, thank you.

Even the accounts are really -- they don't let us write things up that have been impaired either, so we don't get that benefit.

No, no I understand that, Kriss.

One last thing, on the sales for the bank, especially the mega-banks, we've got one mega-bank that's coming on strong in the fourth and first quarter. Then we will have pretty well covered the mega-banks to a great degree. As Tohru said, they can continue to grow. But your question was did they -- is it a surge? The answer is yes, the surge is going on right now to some degree.

Andrew Kligerman, UBS.

Good morning. In the press release, there is a quote that goes "The outstanding sales results" -- and we're talking about Japan -- "The outstanding sales results in 2011 will create difficult comps in 2012." I'm wondering if I should read into that maybe sales might even be down in 2012. Is that the right read?

No, it's just too early for us to tell at this point because I don't know what the bank channel is going to pull in, in the fourth quarter. What I'm saying is that the third quarter came in so much better than we ever dreamed with a 22% increase that we're trying right now to gauge that, and it'll take us. But I'm putting on notice that the comps are so difficult that it creates some issues for us that we're worried about. So we'll have to monitor it and see. But I do expect it continue to be strong in the fourth quarter and certainly the first quarter because, remember, they set their objectives on a 12-month basis that starts April 1, so they won't tell us what their projections are, but I can say that what their projections were, they far exceeded what they thought. So we'll have to look to the bank channel as a separate channel going forward.

I think, as I mentioned, the non-bank channels, a lot of the expenses that occurred -- because remember, 5% of our production came from the affected area. We put a lot of additional funds and resources there to help the people, so we had to tighten the budget other places. We continued to let the money flow at the bank channel. So I expect next year not to have that resource issue in terms of money, so the non-bank channel -- so we're going to break the two out for you to let you look at it. Hopefully, we'll have a lot better insight on the fourth-quarter conference call to be able to tell you what 2012 looks like. Tohru, do you have any other comments?

No, I don't think so.

And so then with the WAYS product now becoming what appears to be the leader in terms of Aflac sales, ten times the premium of the other products you mentioned, that 14% to 18% margins there, it's lower than your other products. When I look at the total benefits divided by total revenues in Japan, you were at 59.6 a year ago; you're at 59.6 again. Should I assume that we're kind of done with the improvements in this benefit ratio that we're going to see something a little flatter, or maybe even going up?

I think, in line with our guidance that we provided at FAB meeting, we said the 2012 benefit ratio might go up between flat and 50 basis points. We have had more production of WAYS than we built into our projection, but probably less child endowment. Child endowment was the biggest drag on that benefit ratio improvement. WAYS, though, does have a benefit ratio that is higher than health, but its profit margin is a lot closer to health than child endowment was.

So what I think is you're going to see some modest deterioration in the margin, I wouldn't expect more than 1%, but somewhat faster increases in revenue than you would otherwise have seen if we were producing only health business. It is adding to the total profit of the Company, and I think our profit guidance is remaining unchanged, and we do expect 2013 to be on the up-trend.

This is Ken. Just other side to that, remember that, with the higher premium life contracts like child endowment and WAYS, the expenses are lower as a percentage revenue. So somewhat offsetting the higher benefit ratio will be a lower expense ratio, which is why you won't see too much change in the margin.

Just to prove that we're moving away from the child endowment, one of the mega-banks that has just decided to go full-blown for us, we've encouraged them to just introduce WAYS and not fool with child endowment, and they agreed to do so. So there is an example of where we're shifting to the product that could be 18% because, remember, I said 90% of the policies that are sold with WAYS in the banks are sold with the advanced premium. So that's going to be much better for us that they won't be fooling with that. So, we're gradually moving away from that. But we haven't stopped it, the endowment, because we still ride with WAYS and endowment for every policy we sell or I should say for every five policy we sell, we add a cancer or a medical with it.

Thank you much.

Colin Devine, Citi.

Good morning. I'm wondering if we could talk a little bit about the other sales channels in Japan, both the affiliates corporate and then the individual independent. In your traditional sort of corporate agencies, I guess they've now declined for the 14th consecutive quarter. Perhaps you can talk a little bit about what's going on there, and is that just a channel that's perhaps run its course.

Then the other one on the individual independents, it seems pretty much every quarter now sales are growing at a much slower pace than associates. I'm not sure what's happening there unless what you're reporting is licensed associates may also include the bank reps. Maybe we can just get some clarification.

Tohru, do you want to start on that?

Yes, let me comment on that. The traditional agents, both corporate and affiliated corporate and individuals, are not doing very well this year. They are affected to some extent by the earthquake and the tsunami which happened in March this year. As Dan mentioned, 5% of our business came from that affected area. That's (technical difficulty) -- yes, and the major part of that 5% was used to be sold by this traditional agent. So that's one reason.

Also, after the earthquake, for some period of time, their business was disrupted through the limitation on the usage of the supply of electricity and the disrupted traffic lines etc., and so this year -- and also many of the corporate affiliated agents lost the opportunities to do the group marketing typically done in early April. So many factors have affected them negatively this year. So, if you take out those negative (technical difficulty), I think their performance this year is not -- is better than it seems to be. So, we are trying to re-energize the corporate affiliates [other than the] individuals, so hopefully they can start growing again in the next year and going forward.

I was looking up the number of individual corporate agencies hit an all-time high in the third quarter to 18,091, so that's from 17,759 in the second quarter.

I thought the corporate affiliates were at 1862. Isn't that what's been the --?

It's individual and independent corporate. Corporate affiliated are 1862, which is down slightly. But --

No, they're the ones that have shrunk for 14 quarters. I was just trying to understand what was going on there.

I think that, to some degree, the other distribution channels have had some impact on them, that creating this brand -- this is not new now, but the individual agents certainly affected it to some degree, and then the bank channels affected it to some degree as well. So I think all of that together has had some impact, but I said our greatest asset is probably a liability in terms of percentage growth with the corporate agencies because it was so big in the early years that it doesn't play as big a role today.

This is Ken. A couple of the other factors that have influenced it -- remember that the affiliated corporate agencies largely sell to very large payroll accounts. Those -- employment at those accounts really has not increased materially during the time that Japan's economy has struggled, but our penetration rates have steadily risen. so it's not the market that it used to be in terms of large employers. We've also had privacy legislation there like we have here that has made it a little more challenging to conduct the kind of campaigns we did in the '80s and early '90s. That's why we had shifted a lot of our distribution to those that have more face-to-face contact with the ultimate customer, including the individual agents and now the bank channel.

Then just on the question about the number of licensed sales associates, does that include the bank reps, because I'm trying to reconcile the (technical difficulty) there?

No, it does not include the bank reps.

Why do you think that sales associates have been growing so much faster? This has been just a trend for many years than sales.

Why do I think what now?

The number of sales associates generally grows significantly faster than sales through the --

Because I think the economy. People don't have jobs as easily and they're willing to look at going to work on a commission basis whereas they wouldn't have considered it when you had higher employment.

Remember too, Colin, when we recruit an agency, that agency will have multiple licensed sales associates working there, so it gets magnified. If you hire one agency, you may get six or seven salespeople out of it.

Thank you.

Mark Finkelstein, Evercore Partners.

Good morning. Maybe just to right-size this issue that I think Andrew was asking about, if the margin on WAYS is 18% with advanced premiums, what is the comparable revenue margin on new sales for cancer and medical products?

It's close to -- it's mid to low 20s%.

Okay, mid to low 20s%. Okay. Then I don't recall you addressing this. If you did, I apologize for missing it. But in the second quarter, you talked about the cash at the holding company and the tax issue related to kind of the lack of foreign tax credits from the Japan business. There was a call on the holding company cash. I think, net of the debt, it was around call it $700 million. Can you give an update on where are we at with the holding company cash position, and how do we frame out this issue around taxes and foreign tax credits?

Well, I did talk to the tax guys and what we determined was that if we had not had the de-risking that we had in the fourth quarter of 2010 and the first quarter of 2011, our profit repatriation would have been some higher by roughly $875 million, and our federal tax payments out of Aflac US would have been lower by about $450 million. So we're talking about a net impact on available cash to the life company, at the US level, of roughly $1.325 billion.

Now, as you said, the holding company had, as I recall, roughly $700 million of cash. The share repurchase we've done and the dividend we paid in the third quarter came primarily out of holding company cash. We had a little bit of leftover yen proceeds out of our most recent Samurai offering that we did convert to available cash for the holding company in dollars, but order of magnitude, that's kind of what it's been.

How much cash do you have at the holding company right now?

Between $400 million and $500 million.

Should we look at that $400 million to $500 million as largely kind of an amount to deal with this tax issue or do you see that as above and beyond that amount?

No, that's over and beyond that. We deal with the tax issues at the life company level because that's where the taxes are assessed.

Thank you.

Joanne Smith, Scotia Capital.

Yes, I just want to shift the focus a little bit back onto the US. Just I'd like to get a sense of what the competitive dynamics are in the market right now, and also if you could address where the biggest source of the growth from the independent agencies or agents in terms of the group products. What is the actual average size organization that you're paying or that you're bringing on in that operation?

Yes, I can first address the competitive landscape. We have seen a tremendous number of new entrants attempt to come into the market, primarily entrants that are attempting to leverage themselves out of major medical or at least open up new facets of their business as a result of continued pressure on margins with medical loss ratios continuing to go up as well as the broker market continuing to push certain companies to offer those products so that they can raise their total revenue they're taking in.

That said, we don't think it's had an adverse effect on our sales in any way. In fact, we believe that our recent competitive focus, especially on our traditional competitors, has worked very well for us. We believe that, if anything, the additional companies coming into our industry will help raise the overall penetration into the market rather than creating market share wars.

So I feel good about our competitive positioning at this time. I think that has been buoyed to a great extent by our ability to compete in both ends of the market.

The acquisition of CAIC, as Dan said in his speech, has exceeded our expectations both for the quarter and for the year, and so Aflac group is doing very well. We have a minimum group size there of 100. We make rare exceptions to that. So the average case size that we're writing in Columbia is North of 100. We don't actually give out specific numbers, but I'll tell you that we focus on selling accounts that are really 500 and over in that particular market.

Again, was there any aspect of your question that I missed?

No. I'm just trying to get a sense because I know that there's a lot of companies that sell employee benefits, 401(k), etc. I know you've been trying to move into the voluntary market. I'm wondering what you're seeing from those competitors. I understand about the major medical players. but I'm looking more towards the insurance, similar to more your company, where they haven't necessarily had a big presence in the voluntary market before.

We're not seeing -- you know, I'm really not seeing anything. It doesn't mean they're not winning cases and that they're not creating relationships, but in terms of our 70,000-plus agents who are out there -- and I've just come back from our national convention being with all of our top people across the country, and I did not hear one thing about new competitors or entrants that were outside of the major medical field.

Great, thank you.

We are at the top of the hour, but we're going to extend for one more question please.

John Nadel, Sterne Agee.

Good morning. I have a relatively simple question, I think. Setting aside sales comps, would you prefer to have a dollar of sales today or tomorrow?

I'd always rather take a dollar today.

Yes, I would too.

That's it. Thank you.

We like ending on simple questions!

If you all want to follow-up with any questions, please call us in the office and we'll be here. Thank you very much.

This does conclude today's conference call. You may disconnect your phones at this time.