美國家庭壽險 (AFL) 2015 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 to turn the call over to miss Robin Wilkey, Senior Vice President of Aflac Investor and Rating Agency Relations. Ma'am, you may begin.

Good morning, and welcome to our third-quarter call. Joining me this morning in the US is Dan Amos, our Chairman and CEO; Kriss Cloninger, President of Aflac, Incorporated; Fred Crawford, Executive Vice President and CFO of Aflac, Incorporated; Teresa White, President of Aflac US; and Eric Kirsch, Executive Vice President and Global Chief Investment Officer. Also from Tokyo joining us is Paul Amos, President of Aflac; Hiroshi Yamauchi, President and COO of Aflac Japan.

Before we start, let me remind you that some of the statements in this teleconference are forward-looking within the meaning of federal securities laws. Although we believe these statements are reasonable, we can give no assurance 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 can materially impact our results.

Now I will turn the program over to Dan, who will begin this morning with some comments about the quarter, as well as our operations in both the US and Japan. Following Dan's comments, Fred will follow up with some brief comments about our financial performance for the quarter. Dan?

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

Let me begin with an update of Aflac Japan, our largest earnings contributor. I am extremely pleased that sales of the third-sector products were up an astonishing 34.5% for the third quarter, and 27.1% year to date. Aflac Japan generated strong sales results from all of our sales channels, which confirms that we've focused on the right facets of our business.

We also continue to work closely with Japan Post to enhance our partnership, as demonstrated by the recently announced initiative to foster enhanced communications with the growing elderly population in Japan. Our goal is to have a presence where consumers want to make their insurance purchase decisions, and our quarterly and year-to-date results reflect our success in broadening our reach and our sales opportunities.

I want to remind you that Aflac Japan's 2014 fourth-quarter sales of third-sector products were up 28.5%, thus making this year's fourth quarter a tough comparison. However, given the very strong sales results in the first nine months, and our expectations for the remainder of the year, we are upwardly revising our sales growth target for the third-sector products from the range of 7% to 10% to 10% to 13% for the full year.

Now let me turn to the US operations. From a financial perspective Aflac US also performed very well in the quarter. Additionally, we have continued to receive phenomenal feedback from our distribution channels, our policyholders, and accounts on One Day Pay, our industry-leading claims initiative. One Day Pay allows us to process, approve, and pay eligible claims in just one day.

In particular, we're hearing from policyholders and consumers that our commitment to paying claims fast through One Day Pay underscores Aflac's integrity and commitment delivering on our promise, thus enhancing our brand reputation, and ultimately opening even more doors for Aflac. We continue to estimate that 70% of our policyholders can use One Day Pay for their claims. In 2015, we expect the number of claims processed within the One Day Pay will reach over 2 million people. Along with the strong brand and relevant products, I believe One Day Pay will continue to drive home the value of Aflac's products. Most importantly, it will help our sales long term.

Although our US segments generated a slight increase in sales, I believe 2015 has been a year of building our business through our career and broker channels. Taking into account our results for the first nine months and our expectations for sales for the quarter, we anticipate Aflac US will generate sales growth at the lower end of the 3% to 7% range for the year. While it's been a year of building, I'm not satisfied with these results. In fact, I won't be satisfied until we see our sales growth more in the range of the mid-single-digits, which I believe is reasonable and achievable.

It is very difficult for us to make sales projections for the quarter or even for the year, because around half of our sales will come in the last five weeks of the year. But I can tell you that the changes we have made to our Management infrastructure over the last year are laying the ground work for better long-term sales prospects, and we continue to invest in our platform to position us for growth. As we look to 2016, I think the ground work we laid in 2015 has put us in a better position for 2016.

Shortly, Fred will comment on the financial and capital deployment, but let me just say that I am pleased with the actions by the Board of Directors to increase the quarterly cash dividend by 5.1%. This marks the 33rd consecutive year of increasing cash dividend. Our objective is to grow the dividend at a rate generally in line with the increase in the operating earnings per diluted share before the impact of foreign currency translation.

Let me leave you with this thought. You've already heard me say that my job is to balance the interest of all stakeholders. I think we did a good job of that this year, just as we have in the past. I believe that we're going to do it again next year by delivering on our promise to our policyholders, and returning significant capital to our owners.

Now I will turn it over to Fred. Fred?

Thank you, Dan. You have all had a chance to review our earnings release. I will focus my brief comments on a few earnings items worthy of note in the quarter, adding color on key earnings drivers, capital conditions, and deployment as we enter the fourth quarter.

Our third-quarter results came in at the high end of our earnings guidance. Along with solid overall results there are two earnings items that contributed to our better-than-expected performance. The first item was in Japan, where we continue to see overall favorable claims trends.

While we review our IBNR every quarter, we take a more comprehensive annual look at trends and claim studies in the third and fourth quarter. Reflecting on our favorable claims experience this year and as a result of this review, we concluded it was appropriate to reduce the IBNR reserves for our cancer insurance block of business by approximately JPY4.2 billion, or roughly $35 million before taxes. We have not completed our year-end actuarial reviews, but at this point we do not see or anticipate any material fourth-quarter adjustments.

The second driver was in our US business, where we have been steadily improving our customer billing and collection procedures. These improvements have resulted in better collection experience, and allowed us to refine our uncollected premium allowance estimate. The catch-up portion of this adjustment helped improve our rate of earned premium growth in the quarter, and contributed approximately $8 million to pretax earnings.

While these items contributed approximately $0.06 to $0.07 per share to the quarter's results, overall our Japan and US operations enjoyed solid margins, with adjusted benefit ratios favorable to our expectations, and as compared with last year's quarter. As we expected, expense ratios were modestly elevated, as we continue to invest in our platforms to generate growth, namely IT and new product introduction in Japan, and our distribution model in the US.

Turning to investments, while we have been successful in defending net investment income, the overall low-rate environment remains a clear head wind and shows no signs of abating. We have natural maturities and higher coupon investments that are running off, with proceeds reinvested at lower yields. We continue our efforts to build a position in diversified asset classes, helping to support higher returns compared to low yields in Japan and the US.

We took a larger than normal impairment in the quarter involving our investment in Navient Corp. Navient is a publicly traded student loan administrator, formerly part of Sallie Mae. While we don't believe there are any near-term risk of default, the majority of these holdings are long-dated and yen denominated, with poor liquidity.

As a result, these holdings trade at a deep discount. At roughly $0.50 on the dollar, we felt it prudent to take impairment. Note that the majority of these securities are held in our Japan portfolio, and are rated below investment grade. As a result, any decline in value has been reflected for Japan SMR purposes for several quarters. The impairment has no material impact on our overall capital position and deployment plans.

Turning to capital, we expect SMR and RBC ratios to remain strong. Between dividends and repurchase, we returned just over $400 million to our shareholders in the quarter, and expect to fulfill our guidance of $1.3 billion in repurchases for the year. Our dividend increase is in line with our expectation for full year 2015 operating earnings per share growth, excluding the impact of currency. I would note that despite continuing weakness in the yen, our excess capital position and stable view of capital generation supports the increase.

Before I turn the call back over to Robin for Q&A, I would like to comment on our earnings guidance. Our fourth-quarter guidance simply solves for our full-year 2015 EPS guidance range of $5.96 a share to $6.16 a share, given our year-to-date results.

As we look to the fourth quarter and proceed through our financial planning process we see the following dynamics influencing our performance. Recognizing the effect of our past reinsurance transactions in Japan, we see earned premium in Japan and the US increasing in the low-single-digit range with stable persistency. We see core Japan and US benefit ratios holding strong, around current levels after normalizing for the Japan IBNR reduction in the quarter.

The maturity of high-yielding investments reinvested at lower new money rates will continue to pressure net investment income, although modestly offset by a strategic asset allocation, and recognizing a bias towards higher quality. The growth we are experiencing in Japan required disciplined investment in customer care, product, and distribution expansion. We see the same dynamic evolving in the US, in order to drive more robust growth rates.

Our strong capital position and deployment efforts will continue to provide support for EPS growth. Our capital generation is strong, and we continue to explore the potential to release additional excess capital. Absent attractive alternatives, we expect to drive long-term value in repurchasing our stock.

These dynamics are generally consistent with our performance in 2015. We look forward to providing more details on our December 3 outlook call.

Thank you, and I will now turn the call back to Robin to begin Q&A.

Thank you, Fred. Now we are ready to take your questions. First, let me remind you that to be fair to everybody, please limit yourself to one initial question and only one follow-up that relates to that initial question. All right, we're now ready to take the first question, please.

Thank you. (Operator Instructions)

Our first question comes from Jimmy Bhullar from JPMorgan. Your line is now open.

Hi, good morning. First I just had a question on your relationship with the Japan Post, and how do you think it will be affected by the IPO? Do you expect them to be a little bit more proactive in selling Aflac's policies, and what's the risk that down the road as the Post looks to maximize its profits, that they could try to get more commissions out of the companies that they sell products for, or maybe do away with exclusive distribution relationships? Just if you could address how the relationship with the Post would change post the IPO?

Paul?

This is Paul. First of all, we see our overall relationship with Japan Post continuing to be very strong. I'll ask Yamauchi-san to weigh in on the recent announcement of the two different points that are very different between the United States and Japan, that partnership.

Overall, I do believe that our partnership through the IPO is something that has been very consistent, that they are very proud of the work that has happened in the partnership between Aflac and Japan Post, and that we have no reason to believe that there will be any pressuring on margins or change in commissions. I think at this point we are focused highly on continuing to grow the distribution through the now fully expanded 20,000 post offices. We continue to focus on executing through the new cancer plan that both was specifically developed for Japan Post, as well as the regular product that they're also selling.

Thank you, Paul. Let me add a few comments in Japanese. (interpreted) In terms of the business alliance of the JP that he just referred to, there's really something very specific to Japan. As you know, Japan is an aging society, and the families are becoming more nuclearized. What the FSA or the society overall is really demanding for an insurance company is that we need to check up on whether the policyholders, these older policyholders, are still alive or not.

Since as you know Japan Post has its mail delivery network across Japan, what we like to do is to use their network to check up on our policyholders. If we try to do everything on our own within Aflac, it is going to require a lot of work. However, with the cooperation with JP, we will be able to achieve the same purpose in a relatively easier manner.

One other point -- this is probably more specific to Japan, as well, is that any notice that needs to be sent from an insurance company to a policyholder has to be done by mail. However, when the policyholder changes their addresses, we will not know the new address until our policyholders tell us so.

Overall, it will lead to increasing the services to our customers, because the JP -- the post offices will know that our customer's address has changed, because they are delivering the postal mail to them, and that will make it easier for us to know where the policyholders are. We do believe this is a great alliance, because we are using the strength, and what the JP does best in their way and we are making leverage out of what JP is doing, and that will also benefit us and our policyholders as well. That's it for me.

Let me just say, Jimmy, you can tell Yamauchi is very encouraged about this new announcement with the elderly. But the answer to your question is just simply it's going as well or better than we expected, and we see nothing but good things ahead in the future.

Yes, they have been through their IPO process. I think they've been talking up the potential opportunity to sell more products for companies such as yours. I was just concerned about the long-term risk if they try to, given their distribution breadth, maybe go after the underwriters and ask them for more commissions, or try to open up the distribution to additional underwriters. But I guess we'll see how that evolves over time.

At this particular point, we are very happy with the arrangements, and they are too.

Maybe if I could ask just one more. On US sales, given your results I was a little surprised that you didn't actually end up lowering your guidance. To what extent do you see that goal as achievable for this year, verses it being somewhat of a stretch?

This is Teresa. From a US perspective, we have a lot of moving parts going on, as Dan said in his talk. We are rebuilding that distribution and restructuring. We feel good about some things that we're seeing. We've had -- we've looked at all of the markets. We're assessing market book of business, how they're managing those markets, training programs, recruiting practices, and we're driving consistency and collaboration across the broker and career channels. We feel good about what we are doing. It's taken a little bit longer for us to get there, longer obviously than we would like. But we are seeing more markets that are achieving the 5% increase in year-over-year sales.

There has been a tremendous amount of change in the way our business is coming in. I think Dan spoke a little bit about that. We know that we're going to get a tremendous amount of business in the fourth quarter, and I think we have been saying that from the beginning. We're reviewing a lot of our modeling to project that. We feel pretty good about the low end of the range, and we see a lot of activities within the markets that look positive to us at this point.

Jimmy, we've got to have an 8% increase in the fourth quarter. The real change here is the way this broker business comes in, it all now comes in the fourth quarter. It makes me nervous and Teresa and everybody else nervous, will it come through? We've got a pipeline that we know what's out there. We know there's more business out in the pipeline this year than in previous years.

This really started a year ago, as you saw when we were up 14% in the fourth quarter of last year. We're not sure how good that pipeline is, but our gut tells us that it should be and that we're expecting a good fourth quarter. But we'll have to monitor it and see. As I said in the call, the last five weeks of the fourth quarter will bring in as much business or close to as much, probably 45%, 55%, as it did in the first eight weeks. We won't know until the end of the quarter, but we do like what we are seeing in the pipeline from a broker perspective and what will take place.

Then also our 100 or less that we're writing in our Columbus in career is really working well, and Teresa's doing a good job in that area, and I'm very pleased with that.

Okay, thank you.

Thank you, speakers. Our next question is from Jay Gelb from Barclays. Your line is now open.

Thanks very much. With regard to the Japan margin, I believe it was mentioned that we should expect the margin to stay mostly unchanged, excluding the benefit that we saw in 3Q from the reserve release. Can you walk us through that a bit more?

Thanks, Jay. This is Fred. Where my comments were coming from first, the adjustment in the quarter. Let's make sure we understand that. This was an adjustment to IBNR reserves related to our cancer business in Japan. More specifically, it was related to a subset of our IBNR that relates to what we characterize as tail-related claims. These would be longer-duration claims or estimate of claims emerging, typically longer than three years out.

It's a relatively small portion of the total IBNR that we hold for cancer, but it's one that periodically, as in at least once a year, we do a more thorough examination of and test based on the trends we have been seeing in recent years. As you can see, our trends have been very good on the overall claims front. When we put these reserves, these particular tail reserves under review, we comfortably determined that there was margin in those reserves and we should take them down. That's the JPY4.2-billion reduction that I referenced. Then I'm asking you to pull out, if you will, to think about the benefit ratios going forward.

My comments on the stability of benefit ratios is to first recognize that we have multiple businesses, as you know, in Japan that have different benefit ratios and different benefit ratio and claims trends. But overall, when we pile them all together and look at the overall Japan benefit ratio dynamic, we expect stability, but stability in third sector, particularly as you pull out that IBNR on the cancer side.

I appreciate that. The fourth-quarter guidance seemed to show roughly the same trends, though, as in 3Q from an earnings power basis, even including those -- that $0.06 to $0.07 you called out. Do you expect any one-timers in 4Q, or is the run rate of earnings power just getting better as we continue through the year?

Yes, I think first of all we have a relatively wide EPS margin for the fourth quarter, and that's really the result of two things. One, somewhat solving for the full-year guidance range, which creates a larger fourth-quarter range. The second is of course we have a range naturally based on our assumption for what the yen may do. We think in terms of the range being dictated by yen between $1.20 and $1.25, so that creates a wider range.

Part of the reason we wanted to walk you through a couple of the normalizing items in the quarter was so that you could really roll forward our results in a fairly consistent way. At the moment our expectation is for stability in the key earnings drivers as we roll forward, and we would leave it at that. Don't expect -- at this point in time, I don't know enough to know what I would characterize as one-timers. The only comment I made is that we do more thorough actuarial reviews in the third and fourth quarter. As we sit here today, we don't see any material adjustments coming from those reviews, but it's still early in the process.

Okay. The fourth-quarter guidance range, obviously it's reflective of that range in the end, like you've talked about before; but it's essentially solving for the full-year guidance which hasn't changed.

That's right.

I got the sense it had pointed higher, but I guess I was wrong on that. All right, thank you.

Jay, you need to look at last fourth quarter, too, and that will give you some sense of really where it's going.

Well, just to make a comment, year to date we have grown our -- holding constant the yen. We've grown our operating earnings per share by about 2.9%. We've got guidance out there, full-year guidance of 4% to 7%. Realize the fourth quarter last year, though, was a somewhat reduced earnings per share by virtue of accelerated expenses or accelerated spend, so it had a disproportionate weighing down on that EPS.

Again, my view as we sit here today, my comments were a rolling forward and really consistency and stability in the earnings drivers as we sit here today, and roll forward into the fourth quarter. I don't see any -- at the moment, don't see any sharp moves. But again, it's very early in the quarter and I am really talking specifically to the actuarial work, not so much other items that may appear naturally in a quarter.

Thank you.

Thank you speakers. Our next question is from Nigel Dally from Morgan Stanley. Your line is now open.

Great, thanks, good morning. With Japan sales, the strength in third sector were certainly encouraging, but the growth in first sector was perhaps a little surprising? Back at Investor Day you talked about those being down 25% to 40%, and how you had very limited appetite for those products, given the very low rate environment. But it still seems slightly -- writing a fair amount of it, sales this quarter up 6%. Just hoping you can discuss what's going on there?

Go ahead, Paul.

Go ahead, Fred.

I will just make a couple comments, and then Paul can provide more of the strategic color on it. First, we monitor the sale of these first-sector products very carefully, because the returns on those products can be very sensitive to the interest rate environment, as you point out, but also your investment strategy backing these products.

Even though the interest rate environment is very low, it's always possible that our investment strategies -- and you've seen recently that particularly in the third quarter we have been able to defend our new money rates and put money to work at relatively attractive levels, albeit head winds are definitely in the market place. They're very sensitive to that type of investment strategy.

More importantly, we have really made moves to really focus the type of product that we're selling to de-emphasize lump-sum premium, or so-called dump-in premium type product; and also product that is sold particularly in the bank channel, where it is more of a spreadsheet environment and a competitive landscape.

Those things, coupled with the interest rate and investment market, can make for volatile returns or challenging returns, so we want to de-emphasize that. Where we're emphasizing is the longer-pay products, which gives more possibility of putting money to work at attractive levels. It also tends to attract more of a protection-orientation verses investment orientation. Most importantly, it's being driven through the traditional channels, which support cross-sale activity. Again, recognizing once you are into cross-sale activity, you're trying to look at the overall blended return on a household, which includes the returns on these products, plus third-sector products.

We're monitoring it very carefully. You're absolutely right. There was a rise in our sales, but it's largely coming through the traditional channel, largely coming through longer pay premium products, and involving cross-sale. Paul, you can maybe expand or add?

You nailed it.

Okay, great.

That's one reason our cancer sales are up so much in the traditional channel, too. It's not limited to just the post. We have also seen a big movement in our traditional channel in terms of sales. They tied together.

Great, thank you.

Thank you, speakers. Our next question is from Erik Bass from Citigroup. Your line is now open.

Thank you. Can you comment on how sales at the new medical product in Japan have compared to your expectations? I think typically we have seen with the new product introductions there tends to be a little bit bigger jump in sales. If you could just comment on how this feature has been received, and how you would expect sales to ramp from here?

The sales do -- this is Paul -- the sales do meet our expectations. What we didn't expect in all likelihood was the continued success of our cancer plan, but our Hiroshi-san, who is the Head of Sales and Marketing in Japan, directed our sales force to continue to push hard on the overall cancer sales, while also focusing to some extent on the medical sales. Within a range of expectations, we're happy with how it turned out. We do believe the medical product will continue to grow in its sales, but right now we're very happy with how long the cancer product has continued to sell at such strong increases.

Thanks. Then following up on your comments earlier about moving the sales guidance for Japan third-sector sales, was that driven more by the strength that you have seen in year-to-date sales, or are you now expecting fourth-quarter sales to be stronger or hold up better than you had initially expected?

Well, I think we put out a 15% expectation for the first three quarters of the year, and we came in considerably higher than that, almost double that. It is in part driven by the success in the first half of the year, and the 34.5% sales that we had in the third quarter. That said, we are also seeing somewhat better trends in the fourth quarter. We are mindful of where those are going so far, but we are happy. I think that the 10% to 13% is reflective of improvement on both.

I can't remember -- I have been around here a long time. I can't remember 12 months of a 28% increase in sales in Japan in a long, long time. That's what we've got from October 1 through September 30 here. We are just so proud of the job they're doing at Aflac Japan with that.

Great, thank you.

Thank you, speakers. Our next question is from Ryan Krueger from KBW. Your line is now open.

Hi, thanks. Good morning. I know you can't give any specific numbers on this, but in regards to Japan Post, have you seen much of a sales contribution from the second 10,000 post offices at this point that were rolled out in July, or is that really all future benefit to come going forward?

This is Paul. I very much appreciate what you are trying to get at, but just based on our partnership deal, we do not continue to give out those numbers. We did communicate to you at the fab. Dan specifically talked about the fact that the first 10,000 post offices represented a much larger proportion of the potential sales than did the second 10,000 post offices. But what I can just tell you is right now we are very much in line with what we want to see in the Japan Post partnership, and we're very happy with how things are progressing.

Understood. Then on the US, can you give some more color on the US claim trends? I think generally they've been running somewhat favorably, but Fred you commented that you believe that margins can be sustained there. Can you just comment a little bit on the underlying drivers there?

Essentially, there's really nothing notable to speak to in the US claims patterns. I say that not to avoid the answer to the question, but we're just seeing decent stability there in claims. Overall, while there are pockets of up and down and pockets of persistency up and down, persistency has also been on overall hanging in there pretty well. As has been the case at Aflac for many years, it's been a relatively stable platform from that perspective -- benefit ratio and earnings drivers. It's been gradually favorable in recent years, but we see it as being a relatively stable outlook, and nothing really notable in the patterns.

Okay, great. Thanks a lot.

One thing I would comment on, Ryan, just in this quarter to be mindful of from a math perspective is I mentioned the premium collection reduction in the allowance for uncollectible premium. Obviously realize that pumps up the numerator, if you will. That helps benefit -- optically, it benefits both your benefit ratio and your expense ratio, because your premium is pumped up a little bit when you make that adjustment. Be mindful of that this quarter. There's actually a really slight amount of normalization that you would want to do on benefit ratios, but it's actually not related to claims. It's related to premium being up a little bit.

Got it. Okay, thanks Fred.

Thank you, speakers. Next question is from Humphrey Lee from Dowling and Partners. Your line is now open.

Good morning. I just want to follow up on the Japan sales outlook. The third-sector sales in your outlook is 10% to 13% sales growth. That, based on my math, that will imply the fourth-quarter third-segment sales would be somewhere between JPY19 billion to JPY21 billion. I know that's -- you talked about the tough year-over-year comparison, but at the same time based on Paul's comment earlier, medical sales continue to expect to grow further in the fourth quarter.

To me, that suggests the cancer sales would be more like a JPY10-billion to JPY12-billion range in the fourth quarter. That would be a decline from the third-quarter level. Maybe a little comment on why, if my interpretation is correct? Maybe you can elaborate a little bit more detail for the 10% to 13% expectation on a more-product level?

As Dan said, the large fourth quarter we had last year was representative of the very strong launch to our new cancer plan. The previous three quarters this year have been going up against no cancer plan the previous year. We'll be going up against for the first time that strong cancer sales in the fourth quarter of last year. I think it's reflective of what we expect to be a progressive increase of the medical plan, while at the same time having to go up against the very strong numbers from the launch of the cancer plan in 2014.

Okay. But still, if we're to assume the medical sales were to stay flat, that will imply cancer sales would decline sequentially. Any reason why that would be the case, or that could be potentially up side to your sales guidance?

Go ahead, Dan.

I was just going to say we're just looking at overall that we've just finished 12 months with a 28% increase. I think to try to break it down into 13 weeks is just getting too much into the minutia of how we see it. Overall, let me just say that we are extremely pleased with what's going on. We will be excited if we finish in the 10% to 13% range, which we totally expect to do. How it breaks out by product -- remember the profitability are close to the same, so we don't care how the agents write it.

We don't look to say, oh please don't sell cancer, please sell medical, or please sell cancer. Don't sell medical, one or the other. It doesn't matter to us. We don't break it out that way in terms of looking at it. Now, we do look at life insurance, where we have been on it, watching it, staying very close. But on cancer and medical, we really don't care how it comes in.

My question is more with the Japan Post continuing to be performing -- that's a little bit surprising to see. Cancer sales may potentially trend down. I guess we'll just have to wait for the fourth quarter to see what the resales are. Shifting gear to maybe on ways. I understand you talked about using it to entice the traditional channel to do more cross-sale, and you can closely monitor from an interest rate perspective. Is there a rule of thumb in terms of thinking where the ten-year JGB would move to prompt you to dial back, or have stronger appetites for the ways sales?

Humphrey, it's not that simple. Certainly as you watch JGBs grind down, that doesn't make the job any easier in terms of generating yield. Realize we've got a portfolio approach to backing these products, which includes among other things the dollar program, Eric's strategic asset allocation. We take somewhat of a blended strategic asset allocation portfolio yield approach, if you will, to the expected investment horizon.

For example, recently we have seen treasuries and JGBs go down, but spreads widen out to where new money can be put to work actually at even net more attractive levels, as long as you are being careful in where you go with the money. It's not quite as simple as pegging to a JGB

Certainly as you see JGB going down, you've got to keep in mind two things. One, obviously more of a challenge to reinvest that money. The other is you are having to gradually move towards lower assumptions for ongoing interest rates as it relates to pricing of the product. You end up having a gradually less competitive product in the market place. This is really an industry thing, not an Aflac issue. Do you reach a point where it is just not as much a value proposition for the client as you had hoped, and does the overall market start to get soft? I think those are some of the dynamics, but it's not a one-for-one tie at the JGB. It's not quite that simple, although directionally certainly doesn't help.

One other thing I would say on third sector and some of the commentary around Japan Post. Be mindful of the difference between growth rates and just having a much larger engine now as we start January 1 verses January 1 of last year. The fact of the matter is we're just selling a more volume of product. Even though the comparables may be challenging, we have a net larger distribution engine that's driving simply more sales overall. That growth rate really benefits you as you move forward and look particularly at premium growth rates and your in-force growth rates and the overall economic value that you have driven.

There will continue to be growth in my view in terms of value, even though you may occasionally look at comparables, comparable sales periods that don't look as attractive -- particularly when you know the dynamic with this is that it jumped out at a very strong level, which is not unusual when build up all the advertising and marketing investment to really launch it. That was the story in the fourth quarter of last year.

Okay. Thank you for the color. Thanks.

Thank you, speakers. Our next question is from Steven Schwartz from Raymond James & Associates. Your line is now open.

Hi. Good morning, everybody. A question for Teresa. This may be a little nebulous, but you and Dan were talking about pipeline. Could you give us a sense of how you measure that, if there is some particular metric you're using?

Certainly. We basically look at the pipeline from the perspective of groups that have agreed to offer Aflac policies. That pipeline is weighed based on where they are. This is mostly the large group. It's mostly the large-group segment. It's weighed based on where we are in the process. There is a piece of the process that looks at commitment to offer the product. Then as you go further down the pipeline, we basically have had they submitted all of the enrollment materials, have we set them up for enrollment? There are varying places in the pipeline up to the enrollment.

What we do is we look at the percent increase year over year to assess whether we have the constructive increase in that pipeline. Today what we see is a double-digit increase in the pipeline from last year to this year, apples to apples compare. Group insurance, it's usually group insurance and not individual insurance when we are talking about that.

Okay, sure. What would -- Teresa, what would stop, I guess, the process from commitment to offer to actually getting it done?

A couple of things. It may be that they decide to move the date of enrollment, and so it may migrate it down the pipeline -- not down the pipeline, but they'll change the date of the enrollment, so it will move it from one quarter to the next. A couple of other things that may change it are that they decide that they're not going to adjust their benefit packages for that year, and they hold with the current benefit offering that they have, or they decide not to offer any voluntary benefits at all. But we don't think that they will, but we never know.

Then one more. I think you answered it in the first question, but assuming you get that 8% number for the fourth quarter, my assumption here is this is going to be driven by plus-100 cases?

Yes, that's our assumption as well. Although we will have some -- the natural sales that we have with our career agents, we do believe that we will skew towards the greater than 100 cases in the fourth quarter.

It will probably be even greater than 1,000 cases, really.

Yes.

That's always in the fourth quarter. It's not during the year. But the fundamental growth of the less than 100, Teresa and her team are doing a great job in stabilizing that and continuing to have that grow, especially through Everwell and the 50 or less. We're encouraged about that. But it's this fourth quarter that's an anomaly, because of the way the group presentations come in, and we specifically work to where each case might have a different product. It's tailored to them, and that's what causes the issues.

All right. Thank you, guys.

Thank you, speakers. Our next question is from John Nadel from Piper Jaffrey. Your line is now open.

Thank you. Good morning, everybody. Maybe Fred, I just wanted to follow up on the comment, and make sure I understand exactly what you're trying to tell us about the relative stability of the margin in both the US and Japan. I haven't done the math perfectly for the adjustments, the one-timers this quarter. But it seems to me on adjusting for that, the Japan margin's 21% or slightly above 21% year to date, and the US margin is 18% or slightly above 18% year to date. In both cases, that's the upper end of the outlook for 2015 through 2017. In short, are you telling us that we should expect both operations to maintain margins at or even maybe slightly above the upper end of the guidance range?

Yes. First, let me just say that my comments were not meant to preempt the December outlook call. When we get to December 3, we'll give you a little more context and color around these earnings drivers and margins. But if you were to adjust both the benefit ratios -- so adjust the Japan benefit ratio for the IBNR adjustment, and adjust the US benefit ratio really just modestly for the premium kick-up related to the premium collection allowance, we're seeing relative stability in those margins, certainly as we enter into the fourth quarter. As we get into 2016, we don't see things at the moment that would disrupt that.

Realize that the mix of business can play a little bit with your benefit ratios, and so we'd want to understand the mix of business in Japan, particularly third sector verses first sector, and we want to understand some of the mix of business dynamics in the US a little bit better. But we're not seeing things that suggest to us significant movement in those benefit ratios going forward. We'll provide a little more color on this in the outlook call.

I would also note that expense ratios obviously in the recent year have been slightly more elevated as we reinvest back in our platforms. I mentioned that in my comment. We also see stability there, too, meaning we see a need to continue to reinvest in our platform to support the kind of growth you are seeing in Japan, and to position ourselves for better growth in the US. That stability comment I made goes both ways.

Yes, you took my follow up question, which was I think that's what you were hinting at. Specifically around expenses and investments into the business, I can't remember exactly when it was, but a year or two ago, Aflac announced a pretty significant couple of year investment program in Japan that was I think at the time expected to run its course and then tail off. It sounds to me that the message here is that elevated level of investment will maintain itself.

Yes. I would say in general this is the type of topic that we would also give a little bit more color on, on the outlook call. Right now, our investment has been oriented around -- in the US has been oriented around what you know, and that is the investment we have made to reconfigure the sales platform and drive better growth. We're going to have to look at the same sorts of things in the US that we have been successful in achieving in Japan, and that is keeping pace with the modernization and digitizing of our platform in the US.

Those involve incremental investment. We have been making some of those investments along the way, so it doesn't necessarily suggest big deltas and things like expense ratios and so forth because we have been investing. But the pace of that investment's going to have to react to the market opportunity. That's how we will approach it. When we see there's opportunity to go after that requires a level of investment, and argues for our capital, then we'll want to do that for our shareholders. That's the type of color, and we will give you more context for that when we get to the outlook call.

Let me just say something about our sales, and what we've done there. I don't like sales at the level where they are, but I will say this. Our organization is such that people are making less money if we don't achieve our objectives. That's what it's all about, which means we make a little bit more, but that isn't the idea. We want the sales to be up and pay more. But we have corrected that, and it is having an impact that I think ultimately will drive sales higher. But we're making sure that everyone shares in the pain. If we don't achieve our objectives, they're going to feel it too. If we do well, they can too.

My real quick follow-up is just on the EPS guidance for the year. Should we be holding you against that constant-currency growth rate, excluding the benefit of $0.06 or $0.07 this quarter? That was unusual, or should that be part of the growth?

Yes, I think the range we have out there attempts to accommodate some of these unusual items. But when we talk about carving positives out of our numbers, we typically mean that to carve it out for the purposes of guidance and going forward.

Got it. Okay, thank you.

Thank you, speakers. Next question is from Suneet Kamath from UBS. Your line is now open.

Great, thanks. Good morning. I just wanted to come back to -- I think Fred, your comment about the cross-sell initiative between ways and I think cancer in Japan. I was sort of interested in how you characterized it. I believe you used the term household. Where I'm going with this is I would have thought that given the sizeable premium differential between ways and third-sector products, that to neutralize for the impact of the margin differential, you would need to sell more than just one for one. You would probably need to sell three, four third-sector products to neutralize the lower margin from the first sector. The question, I guess, is am I thinking about that correctly?

I think -- and I will ask Paul to expand on this. But I think you're thinking about it correctly in the sense of when I say driving households, I mean it from a couple perspectives -- one, the actual consolidated return on what we have provided to that household, to your point. But the other is what value you see in that household and that agent relationship going forward as you continue to develop new product to sell to your existing block of business and clients, and new clients.

The other thing to consider is that you have agents making a living off of the building out of these households, and the sale or potential sale of new product. It supports the growth of your agency force and stability, and even retention and development of your agency force. These are things that are difficult to put economics behind, but we all know they drive embedded value.

That's where I come from when I use the term household, is the support for the agency, the agency build-out, the ability to cross-sell, and what might be the future -- present value future sales dynamics related to having developed more households?

One of the things we tend to lead with in Japan is we are in one in four households. When you start the conversation with that, that suggests there to be a lot of opportunity you can develop by simply being in that position. It really benefits us.

The other thing I would say is when we first started selling ways, we just picked up as much business as we could, and a lot of people bought it just on the yield and that was it. We've now moved away from that totally in telling our field force. They want an overall arching program that they can offer to a consumer that will cover their life insurance needs, their health insurance needs, and any aspect that they might have. That's what we're trying to do, is to cover them in their entirety. But we are definitely continuing to de-emphasize these type products. We will continue to going forward until we see changes in the interest rate environment going forward.

Got it. Then my second question is -- and I don't want to front-run your December event -- but as we think about 2016 Japan sales, do you guys have plans for any new product launches next year that can help stimulate sales in what I guess is going to be a pretty difficult comp for most of the quarters in 2015?

I think we'll have to wait until our December call to give you an update on that type stuff. We want something to be able to talk about in December, so don't take it all away from us.

Okay, that's fine. Thanks.

Thank you.

I think we have time for one remaining call.

All right. Thank you, speakers. Our last question is from Mr. Tom Gallagher from Credit Suisse. Your line is now open sir.

Good morning. The question I had is when I look at -- and Paul, you had mentioned that cancer sales through the non-Japan post, your traditional distribution system, have continued to remain robust. It sounds like better than you had expected. In medical, the ramp-up of the new medical product has been more slow. Do you expect that trend to continue, or do you think we're going to see a bigger shift into medical? Fred, can you remind us how the margins stack up in terms of the cancer product verses medical?

I'll start. This is Paul. To your question, we have continued to see the overall cancer sales be stronger than we originally anticipated. That is even pushing through into this quarter. Therefore, we have not put as strong an emphasis on selling the medical plan at this time and selling its new writers. Do I expect the medical plan to be strong and to grow over time? I expect it to grow over time, but to have a slower launch than we might have expected when we do a product, and the previous product has already run its course.

We really want to see this cancer product sell for as long and as well as we can sell it, especially through our traditional channels who are very invigorated by this cancer plan, and the ability to speak to not only our existing customers but to new customers that they have never had access to before.

Paul, sorry, just one quick follow up. Is that because the medical space is increasingly more crowded, or is that because you think more of your -- is it more of just the focus on one product at a time through much of your distribution?

I do not think it is because of the competitiveness of medical. Otherwise, we would be pushing that much harder right now. It has much more to do with the excitement around the cancer plan, and the continued success that our sales force is having. As you have seen, there's such a strong cross-sell between the cancer plan and the 15 pay ways and longer. That's eating up a lot of the premium that we're selling to those individual customers, but we will be going back to them with the medical plan in the future.

Then Fred, on the margins?

Tom, let me handle that. This is Kriss. The margins on the cancer and medical are approximately the same. Let me also add a comment on Suneet's question about neutralizing the margin on the cross-sell between ways and cancer or medical. It's not meant to be a complete neutralization because of the premium difference that Suneet mentioned; but it does move us in the direction of additional value to shareholders, in terms of adding additional business with significant value by having these cross-sales. I think that would about wrap it up on that question.

Okay, thanks.

Okay. Thank you, Kriss. Before we go, I want to share with all of you what's been mentioned before that on December 3 at 9:00 a.m., we will have our scheduled earnings outlook call for 2016 to discuss our expectations for 2016. I hope you will all join us. We will be sending out a reminder, as we always do. But again, that's December 3 at 9:00 a.m. Eastern Standard Time. Please feel free to call us in Investor Relations if you have any questions. Thank you very much for joining us this morning. Bye-bye.

Thank you, speakers. That concludes today's conference. Thank you all for joining. You may now disconnect.

Editor: Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this event.