美國家庭壽險 (AFL) 2016 Q4 法說會逐字稿

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

Before we start this morning, let me remind you that some of the statements in the 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 are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to look at our annual report on Form 10-K for some of the various risk factors that can materially impact our results. [Erin's] release is available on the investor page of Aflac.com, and also includes reconciliations of certain non-GAAP measures.

So now I'll turn the program over to Dan, who will begin this morning with some comments about the quarter and the year. Kriss and Paul will follow with an update on the operations in the US and Japan, respectively. And Fred, who will discuss our financial performance for the quarter and the year, before we start taking your questions. We will begin with Dan.

Thank you Robin. Good morning, and thank you for joining us. Let me start off by saying 2016 was another great year for Aflac. What's been an advantage for more than six decades and what sets us apart from every one of the competitors is our distinct product focus on voluntary and supplemental insurance in both the US and in Japan. That focus has been a major factor in our success, and I believe it will continue to drive our leading position in the future.

I'm especially pleased that our operating earnings per share growth before currency exceeded our expectations for the year, rising 4.7%. I think this is especially work noting, given the historically low interest rates and the disciplined investment in our US and Japan platforms, with the goal of driving future growth and operating effectiveness.

Because we are reporting year-end results, you'll hear from Teresa and Paul today about the two operating segments, Aflac US and Aflac Japan. But let me first say that I'm pleased with the overall results of 2016, and I'm proud of the hard work and accomplishments of our management team, the employees, our sales distribution in Japan and the United States. I believe both business segments are well-positioned to achieve the performance goals communicated on the December outlook call.

Turning to the capital management and deployment, Fred will provide more detail shortly, but I will share a few highlights. First, as we've said, we view growing the cash dividend and repurchasing our shares as the most attractive means for deploying capital, particularly in the absence of any compelling alternative. Our plan for 2017 is to repurchase in the range of $1.3 billion to $1.5 billion of our shares. As I said last quarter, 2016 was the 34th consecutive year in which we've increased the cash dividend. Our objective remains to grow the dividend at a rate generally in line with the increase in operating earnings per share on a diluted basis, before the impact of foreign currency.

You've heard me say that my job is a balance of the interests of all stakeholders. I think we did a good job in 2016, just as we have in the past. And I believe we are going to do that in 2017 by delivering on our promise to the policyholders and enhancing our shareholder value. Now I'll turn the program over to Teresa, who will give you an update on Aflac US. Teresa?

Thank you, Dan. 2016 was the most profitable year in Aflac US history in terms of pretax earnings. This was particularly notable as we invested over $20 million in our group technology platform. We've begun to see our platform investments pay off in the form of improved persistency and customer satisfaction. 95% of our policyholders who use One Day Pay say that they are likely to refer other people to Aflac, which will continue to differentiate and reinforce our strong brand and policyholders' trust. We've also increased our career agents adoption of our Everwell enrollment platforms, which in turn has increased account penetration in our accounts with less than 100 employees.

Despite our progress and profitability, I am disappointed in the US sales results for 2016. While we wrote almost $1.5 billion in new premiums, we did not achieve our 2016 sales growth target of 3% to 5%. The career agent channel underperformed for the majority of 2016.

Sales to groups with less than 100 employees, which is the focus of our career agents, were relatively flat for the year. However, over the past 18 months, I've witnessed the positive correlation between sales and compensation. So those sales leaders who have done really well have been rewarded, and those who have not done well have caused significant turnover. This result in a short-term disruption. However, these changes are better for Aflac in the long run.

Moving into 2017, we will continue to focus our career sales agents on groups with fewer than 100 employees. I believe this market is Aflac's to grow, because our career sales agents are best-positioned within the industry to reach and therefore succeed with these smaller employers. We will also continue on improving the productivity of new recruits, as we did in 2016. Recruiting fell more than we would have liked, but I continue to believe that this approach will not only continue to improve the productivity of our recruits, but also their retention. Ultimately, our efforts will lead to longer, more productive Aflac careers.

Looking to broker business, while we did have an increase in the broker business, the broker pipeline did not materialize as we expected. Sales in the middle market of groups of 100 to 999 employees, were negative. Whereas broker sales to groups with 1,000 or more employees experienced double-digit percent growth in 2016. In the end, the final few weeks of December were just not strong enough for us to achieve our sales goal.

Based on the success that we've had in the large-account market, we plan to expand our broker team by 25%, by adding more than 30 positions in 2017, to include additional roles designed to focus on that mid-market space. This was an area that we struggled in, in 2016, especially as we made a conscious decision to be a bit more selective in the sale of our group product in smaller-account segments. With the additional roles designed to focus on this mid-market space, along with process efficiency gains, we believe we can profitably grow this segment.

While disappointed in 2016 sales growth, we remain committed to the fundamental strategies designed to balance growth and preserve our margins. It's important to realize, the fourth-quarter 2016 was the second largest sales quarter, behind fourth-quarter 2015, in absolute dollar terms, in Aflac US history.

As we continue to evolve from one channel focused on the small-case market to a multi-channel operation with the emphasis on growing the broker channel, I'm reminded that it does take time. The broker channel has a three-year compounded annual growth rate of 12%. However, it only represents 30% of our business. And sometimes, our size masks the progress that we've made in the channel. Our goal is to grow it fast, while maintaining the stability of our career force.

In closing, I want to reiterate that we continue to target the long-term compound annual growth rate of 3% to 5% that we provided in our December outlook call. Now let me turn the program over to Paul.

Thank you, Teresa. Next I will provide highlights from Aflac Japan's operations, which had a profitable year in terms of pretax earnings. We did, however, face headwinds due to the persistent low interest rate environment, and absorbed the fourth-quarter reserve adjustment, which impacted overall profitability. Fred will discuss the financials in detail later. But I would note that we anticipate that low interest rates will remain one of the biggest issues facing the Japanese life insurance industry in 2017.

I'm very happy with Aflac Japan's strong annual third-sector sales increase of 4.1%, which is at the high end of the 2016 expectation of flat to up 5%. These results were impressive, considering we upwardly revised our sales targets twice in 2016. Aflac Japan produced solid results across all channels, and further affirmed its leading position in the third-sector market. On the product side, we are excited to report that cancer insurance sales were up 8.5% for the year.

Second-half sales results also benefited from the July introduction of a new third-sector product called income support insurance. As you will recall, this product provides fixed benefit amounts should a policyholder be unable to work due to significant illness or injury. It was developed to supplement the disability coverage provided through Japan's social security system. Our income support insurance targets consumers in their 20s through 40s, which is a segment of the population where we've been underrepresented. Income support insurance was received favorably, and has the potential to gradually develop into a new product pillar over the long term.

Turning to the interest rate-sensitive first-sector products, you will recall that we proactively pulled products from select channels and aggressively repriced our WAYS and child endowment products, factoring in the reality of a prolonged low interest rate environment. Aflac Japan made notable progress in 2016 to limit the sale of first-sector savings products. As planned, our actions prompted a 57% decrease in sales of first-sector products in the second half of the year.

Regarding our distribution channels, our traditional agencies have been and remain vital to our success, and this was certainly true throughout 2016. Our alliance partners also made significant contributions to our sales results. I am particularly pleased that in October, Japan Post began selling our new cancer insurance product designed exclusively for cancer survivors.

Our traditional agencies started selling the product in March 2016. We anticipate the sales of cancer insurance for cancer survivors will provide marginal benefit to our overall sales. But more importantly, it will bolster our brand, trustworthiness and reputation that we've worked hard over the years to establish.

Being there for Japan's consumers when they need us most is our top priority. Our strategic alliance partners have been successful at selling Aflac products in 2016. Given current results that prompt an intense focus on moving their own products to meet Japan's fiscal year-end goals, sales of Aflac's third-sector products in the first quarter will be impacted.

As we look ahead, Aflac Japan's focus will remain on selling our third-sector products, which are less interest rate-sensitive, and on strengthening our leading presence in places where people make their insurance-buying decisions. We will continue to fund our existing product portfolio and introduce new innovative third-sector products to maintain our market leadership. Near term, this includes the February 20 launch of our revised EVER and gift products. As we communicated on our December outlook call, we view Aflac Japan's long-term compound annual growth rate in third sector as being in the range of 4% to 6%. Now let me turn it over to Fred.

Thanks, Paul. First, let me say that I'm pleased with the overall financial results of the Company, for both the quarter and the year. Our earnings results for the full year exceeded our expectations going into 2016. Operating EPS on a currency-neutral basis was up 4.7% for the year, and within the increased guidance range communicated on our third-quarter call. Our earnings results are particularly noteworthy, considering proactive investments in our business model, the Bank of Japan's actions early in the year, and a fourth-quarter reserve strengthening.

Turning to the fourth-quarter results, there's a few items worth calling out that negatively impacted the reported earnings. First, as mentioned during both our third-quarter call and our outlook call, we completed our year-end actuarial review of interest-sensitive blocks of business in Japan. There are two smaller blocks of legacy third-sector business that have been subject to strengthening in the past years, due to continual interest-rate declines. The specific strengthening in the quarter was on a closed block of business we refer to as Super Care, and resulted in a charge of JPY6 billion, or roughly $0.08 per share. It's important to note that this is a GAAP-only impact and does not affect FSA reserves, cash flow or core capital ratios.

Additional items that negatively impacted the quarter include corporate expenses, which were elevated as a result of stock compensation expense, and accelerated amortization, due to retirement eligibility. In addition, elevated interest expense related to our debt issuance in September, which prefunded maturities in February. Together, these items amounted to roughly $0.03 a share in the quarter. If you exclude only the reserve strengthening in Japan, our fourth-quarter operating earnings per share were within the expected range provided in the third quarter.

Our Japan segment margins were solid when adjusting for the reserve strengthening. Benefit ratios, expense ratio and pretax margins were all in line with recent results and our outlook call guidance. I would note that going forward, our ratios and margins in Japan will reflect hedge costs on an amortized basis, related to Japan's dollar investment portfolio.

US benefit ratios continued to trend favorably for the quarter and the year, and our expense ratio was in line with our guidance, and reflecting progress on certain strategic initiatives and increased promotional spend. Overall, our US pretax profit margins exceeded our annual guidance range for the year, coming in at 19.6%.

Turning to investments, results for both the quarter and the year were aligned with our expectations, as we continued to navigate the low-yield environment in Japan and further diversify our portfolio. As we discussed during our outlook call, we successfully executed on a comprehensive plan to address strategic and investment challenges. First, as Paul mentioned, curtailing interest-sensitive premium flows by reducing the sale of first-sector savings products. Second, timely execution of a successful switch trade designed to shift our US dollar investment strategy more toward floating rate assets, in order to more effectively hedge and optimize investment income.

And finally, we lengthened the duration of our hedge program through purchasing longer dated-forwards. This provides proof to be of good timing, as we locked in 90% of hedge costs for 2017 and just over 30% of 2018 costs prior to an increase in costs coming off the presidential election. These moves result in lower investment income in Japan in the near-term while we work to reinvest into higher-yielding in floating-rate assets, but are designed to reduce volatility in quarterly earnings, cash flow and capital ratios.

With respect to Japan's dollar program and hedge costs, our reported fourth-quarter costs were $62 million pretax on an amortized basis. As discussed on the outlook call, we adopted an amortized approach in the fourth quarter to reflect a full-year 2016 and to adjust past periods. As mentioned earlier, we're moving these costs into our operating earnings definition for 2017. We are maintaining our guidance for 2017 pretax hedge costs in the range of $250 million to $270 million, assuming no change in our strategy.

In terms of our capital position, despite market volatility in the quarter, we ended the year with strong capital ratios, with SMR and RBC estimated in the mid-900% range and mid-800% range, respectively. We ended the year with $1.5 billion of excess liquidity at the holding Company, which includes $500 million of contingency capital. Overall credit conditions in asset quality remain strong, with only a modest level of impairments in the quarter.

I'm pleased to say we continue to return a significant amount of capital to shareholders. Including dividends and share repurchase, we returned approximately $2.1 billion to our shareholders in 2016. As we mentioned on our outlook call, we expect to deploy capital in the range of $2 billion to $2.2 billion to shareholders in 2017. This includes $1.3 billion to $1.5 billion of share repurchase, with approximately $800 million to $1 billion of repurchase in the first half of the year. As is always the case, the system's share repurchase remains the optimal use of excess capital in driving long-term shareholder value.

Finally, I want to reiterate our 2017 earnings guidance of $6.40 to $6.65 per share on a currency-neutral basis. I would note that our final currency-neutral exchange rate came in at roughly JPY109 to the dollar, or JPY1 lower than the JPY110 we used on the outlook call. Similar to last year, we did not adjust the rounded range for the few pennies of additional annual earnings. To be clear, our planned earnings are essentially unchanged, and it's safe to assume we added a few pennies to our actual forecast accordingly.

In addition, our sensitivities to a given change in yen were updated, as we refined our modeling of the foreign exchange impact on locked-in hedge costs in preparation of installing into our reported operating earnings. Looking ahead, we remain well-positioned in terms of core margins and capital strength, consistent with our December outlook call comments. I'll now hand the call back to Robin.

Thank you, Fred. Now we are ready to take your questions. But please let me remind you that to be fair to everybody in the queue, limit yourself to one initial question and only one follow-up that relates to your initial question. We will now begin taking the first question.

(Operator Instructions)

Nigel Dally with Morgan Stanley.

Great. Thanks and good morning. This question is on guidance. For when the yen is at JPY1.15, the midpoint of the EPS guidance seems to have declined $0.09 from what you provided back in December. I was hoping you could discuss what drove that change?

Yes, a couple things, Nigel. Your comment is really relative to sensitivity. What's changed is, in the course of working towards installing hedge costs into our operating earnings in 2017, we refined our model to reflect having locked in those hedge costs, effectively prior to entering 2017. What happens is, that has the effect of essentially locking in a dollar-based expense at the time of that transaction.

So the way our actual results end up playing out, because we've locked in those hedge costs, is effectively reducing the dollar-coupon income, if you will, in Japan. This has the effect of increasing the relative yen earnings to dollar earnings, and therefore increasing the sensitivity. This is a very nuanced issue, but it has less to do with the nature of hedge costs and amortization, and more really to do with the fact that we have locked in those costs with a fixed exchange rate that therefore does not float throughout the year. So it has the effect of increasing our relative yen revenue and earnings, if you will, relative to our total.

What I would tell you is this. Both the hedge costs in our operating earnings, as well as the strategy of locking in longer-dated hedges, are both new strategies. And as we go through the year, we are going to watch very carefully these sensitivities. And obviously as we see them move around, we will adjust, if necessary. But this is our best estimate at the moment.

Okay, I've got it. And then the follow-up just gets on your recruited agents. Touched on briefly in the earlier remarks, but it seems to have dropped to the lowest level we've seen in many years. So just hoping to get some additional color as to what's going on there, and whether that was a contributing factor to the sales calendar?

Nigel, specifically on recruited agents, if you recall in my comments last year, we talked about making sure that we drove agent productivity. So we are looking at this from a long-term perspective. What we saw as our focus was on productivity, is an increase in the productivity of the agent. We saw an increase in new associate AP, we saw an increase in new accounts. And so those were all positives that we saw as it relates to recruited agent.

What our data supports is that, we know that we have a strong correlation between a lifetime tenure with Aflac if the agents get started off, and they start off well. And so that was really the focus there. We did have broker recruiting as well. We actually increased our penetration in our current brokers as well, and so we focused on that.

Now that's not to say though that -- in 2017, we have a focus on recruiting. But what we wanted to do is, we wanted to fix that front-end funnel so that we could make sure that the people who are recruited in had a likelihood of staying with us. And we are seeing the retention of an agent coming in, going to year-two, increase. So that's really what we were solving for.

Very helpful, thanks.

Jimmy Bhullar with JPMorgan.

Hi, good morning. First, Fred, I just had a question on, if you could give us some color on your forward-rate assumptions that you are using in the Super Care block, in terms of reserves? And under what situation would you put the charge that you saw this quarter a bit? And just give us some idea on what you are assuming, and how often you re-assess reserves?

Sure. This is an annual process that, as you may recall, has gone on for years. And of course, I don't have the history, but many around the table here do, and so do many of you as analysts. But for over the past 10 years or so, we've periodically added to reserves -- both on this block, but also on a dementia block. And typically for similar reasons, the persistently lower interest rate environment in Japan.

So to that degree, it's not unusual. These tend to be blocks we focus in on in low-rate environments, not surprisingly. What we did more specifically is, we took the long-term new money rate assumption down around 22 basis points. We took it down from roughly 1.75% to 1.5%, and realized that the new money rate assumptions include both yen investments as well as the dollar program, and also incorporate hedge costs which back off those dollar coupons.

So it's really looking at the investment strategy. What's very unique about Aflac, and somewhat a testimonial to the conservative nature of the Company is that, we also tend to have a practice of leaving those low rates long forever. In other words, we don't assume a recovering rate out into the future, which would make a difference in the level of charge. And we do that simply to be conservative, but also to some degree, to put this type of risk behind us as we look at the assumptions. So that amounted to the charge.

And so in other words, your portfolio yield eventually grades down to the 1.5%. In terms of future rate risk, of course, that's going to be dependent upon what we see going on in Japan. We will do the same thing we do every year, which is, test the reserves according to the rate environment. We've seen some very recent recovery.

But as is often the case, we tend not to be shifting around our assumptions based on short-term moves in rates down or up. But we felt the Bank of Japan action earlier in the year was fairly significant, and it somewhat recast a new rate environment for us. So we felt it really prudent to recast our long-term rate assumptions. That's not always going to be the case.

The only other thing I would tell you is, I realize that on this particular block, it's 4% of our reserves. Together with dementia, that's less than 10% of our reserves. And there is really no rate risk with the majority of business that we have in Japan. There's very little, if any, rate risk in the US. And that really what we are talking about here is a gap-testing process.

While we do test statutory in FSA, the reserves are quite adequate there, the margins are strong and we don't see risk in our core capital ratios. If that helps you out, hopefully it gives you the information you need.

Sure. And then maybe just for Teresa, there's a lot of talk obviously of changes in the healthcare landscape in the US. What's the risk that the whole uncertainty about what the changes are going to be pressures your sales share as small businesses sort of defer the decision to add additional benefits? Are you seeing some of that in the market? And is that factored into your assumptions for sales growth this year?

Well, I'll tell you, there is a lot of talk about it, but I don't have enough evidence to say whether it will impact sales are not. I have some meetings in the next couple of weeks with various broker partners, and I'm also talking to various folks in our field for us to really just understand what they are hearing and what they are seeing. But at this point, I think it's still early yet, and I don't know that I can assign that as a cause or put any factor on that as it relates to US sales.

Okay, thank you.

Humphrey Lee with Dowling & Partners.

Good morning, and thank you for taking my questions. Just to follow up on the US sales, can you talk a little bit in terms of why you are seeing the weakness in the mid-case market?

Certainly. We saw the less-than-100s relatively flat. Mid-case market, as you are aware, is really serviced by both our veteran agents -- and we have a number of veteran agents who have existing accounts in that mid-case market. But also it's serviced by our broker partners. We've seen a lot more brokers move into that space.

A couple of things that we are doing in 2017. I explained that in 2016, our focus was on new, and building that front-end of the funnel. And I think we took the eye off of that mid-case market, specifically from a veteran perspective. And so we are driving some incentives to the mid-case market from a veteran perspective, to allow them to be able to go back into their existing accounts and drive sales there.

But the other piece of this is that, as brokers have moved into that mid-case market, what we found is, we were really under-penetrated, from a broker sales professional perspective. So we called the people who are salespeople for Aflac, broker sales professionals, and we need to make sure that we actually can execute in that market. So we are going to increase the number of people -- 25% increase in the number of people at broker sales professionals, to basically target the mid-case market. So I think it's really more about under-penetration in that area.

I'd also like to respond on that one moment. One of the things that we made a decision on, and Teresa played a big role in this, is, the 100 to 250. We made a conscious decision not to write that on the group platform.

Now one reason we did, is, so much of our systems over there is manual. And that's why we've spent $25 million to invest in the future. We found out the 100 to 250, we were making basically zero profits, or losing a little bit. And it was also taking time away from our accounts of 1,000 or more, from a service perspective. So she made the call to concentrate on the 1,000, and that's why you seen a 12% compound growth in the 1,000 or more.

So will we eventually go back to the 100 and 250? Yes, when these new systems are put in, starting January 1 of next year. But we have moved away from that, unless we have such a big block of business from a certain broker, and then we are taking that on as an entire block to keep them happy. But service is the issue there, as well as profitability.

Got it, thank you for the color. And then shifting it to Japan a little bit, the cancer sales continued to be pretty strong for 2016, and I know part of it is because of the new cancer survivorship of products being well-received. But how much would you consider is just because of the reception being better than expected? Or would it be partly because of Japan Post continue to be delivering better-than-expected production relative to your baseline assumption?

Thank you for the question. This is Paul. I will tell you that it's a combination of all factors. First of all, cancer sales are not up just because of Japan Post or just because of the new product. No doubt the new product was additive, and Japan Post has continued to produce in a manner that is in line with what we would expect and want.

We can't go into the specifics about any of their numbers. But what I can tell you is that the Japanese consumer continues to see cancer as a productive line of business that is positive for them, and we continue to see across-the-board demand for the product. So we remain optimistic obviously, as the numbers on this particular product and this particular launch of our cancer product, over time, will dissipate.

But as you know, we always are looking to reinvent our products and launch new versions of those. And so just as we've announced, on February 20, we will launch a new medical as well as a new first-sector protection product in our gift plan. We will look in the future to eventually launch a new cancer plan. And we have every belief that the long-term viability of cancer as a line of business remains extremely positive.

Thank you.

John Nadel with Credit Suisse.

Hi, good morning, everybody. A question on the US market. So clearly a shift towards the larger-case market. I'm just curious whether we should expect that the margin on sales generated to 1,000 lives or bigger group should be similar, or probably I'm guessing lower than the margins you would generate at the lower end of the market, just given the (technical difficulty) in competition at the upper end?

This is Teresa. One of the things that we are looking at is, we've said that the group would have -- it's probably very similar but slightly less than our margins on the individual side. And today, as Dan talked about, what we are really trying to work on is -- the thing that's depressing the margin right now is more about administration. And so as we work on administration, I think we can move the margins back to where we priced them.

That's right. And I would just add to that, that there is a competitive landscape, no question, in the larger-case market in general. And we will have to be mindful of that, but realize that the types of returns we are generating are quite comfortably well-above our cost of capital, and additive.

But Teresa is exactly right. What you will find at a lot of companies is pricing for your aspirational expense base, as opposed to pricing for your actual expenses. And Aflac practice is to price according to what we are seeing in the way administrative expenses. So many of the investments that Dan mentioned and Teresa just noted are designed around solving for a more efficient platform that creates the dynamic of improved returns going forward.

And just as a quick follow-up on that, how big is the differential right now in sort of priced foreign margin?

Todd, I don't know whether you've got a view on that in terms of the differential in margin. I'm going to say at least a few hundred basis points.

Yes, that's about right.

I don't want to guess, but Todd is nodding. So something in the neighborhood of 200 to 300 basis points would not be unusual.

Okay, that's helpful. And then a question for Dan. You --

Hey, John, you realize, by the way, that is starting from a very high return base on our core business. So it's not like we are talking 10% to 7%. We are talking about mid-teens, and seeing 300 basis points in differential and pricing.

Yes, I understand. And Dan, just I had a question for you on the outlook for common dividend growth. You've talked for a long time now about targeting increases in the dividend over time, in line with operating income growth ex-currency. But I think by your own guidance for 2017, and certainly by our estimates, your operating income will be flat to down, EPS maybe modestly up, given the buyback. Should we expect that maybe 2017 is a year where the dividend is flat?

No, I think you should look for an increase in the dividend. Where or how -- I'm not exactly sure where it will end up. But as you know, we tend to be a little on the conservative side, and we always are very attuned to individual shareholders. And that is -- of course, we have much more institutions today. But they are still a part of our Company, and so we are always trying to find ways to make sure the dividend is growing.

And if I could follow up one more quick one. If you didn't hedge 90% of the cost -- if you didn't lock in 90% of the cost for the hedge program for 2017, how much higher today versus pre-election would those hedge costs be running?

I'll talk to Eric on that, John. He can comment on what we're seeing.

Yes, from election to now, I'd say it's about, a one-year basis, 20, 25 basis points. Keep in mind, the long end of the curve went up a lot since the election. The short end really has not moved all that much, because it's still based on short-term rate differentials. And on that basis, with the Fed's actions that they did in December, were very much expected by the market. But the increase was more or less in line with our expectations, in either event.

Got it. Thank you so much

And one other thing I just want to mention. One thing also that drives our interest in that dividend is, we are an elite group of people, with going 34 years of continuing increases in the dividend. So I wouldn't want to stop it for that either.

Understood.

Erik Bass with Autonomous Research.

Hi, thank you. First, just for Teresa. You've given some of these numbers, but was hoping you could just provide a couple more. In the US, can you just give the sales growth detail for group, I guess both the 1,000 lives as well as the mid-market, as well as what the growth was for the individual or small-case? And then also, roughly how much does each channel contribute to your overall sales volumes?

The mid-market was actually our negative. We were in the negative there, and negative single-digits. Flat in the less than 100. And we had double-digit increases in the greater-than-1,000. And I can give specifics offline.

Now the other thing is, the large majority of our business sits in the less-than-100 category. So that's where we have the majority of our business, and then we go up to the mid-case, and then the larger-case. Our challenge right now is from a broker perspective, whereas Aflac is very heavy 70% career, 30% broker production. Most of our competitors are just the opposite. And so our base is a lot bigger as far as the core, which then drives us to have to overcome that big base.

The other thing is just, when you look at the 100 to 999, if you just pull that out and you look at 250 to 999, that was relatively flat as well. So there is a specific area within that 100 to 250 that we saw the level of decrease. And that's where we are really focusing. And we believe some of that was primarily the instance that Dan talked about, which was the 100 to 250 space, where we decided to be very selective in what we sold, from a group perspective, in those smaller-case markets.

It was self-inflicted, to a great degree.

Yes

Got it. And then just one follow-up, for Paul. You mentioned the new EVER product you're coming out with. I don't have any details you can give at this point, but would you characterize it as a major revision, or just minor tweaks to the product?

Yes, this is more of a major overhaul. We traditionally, over about a three-year period, will do both minor revisions or additions of small writers, as we did about 18 months ago. This particular revision is one that is more significant in nature.

That said, as we've talked about, both at mini FAB and otherwise, the competitiveness of the medical market continues to be strong. So we feel that while this product will be additive to sales, I'm tempering excitement somewhat in the overall product launch. But I feel like that for most of our channels, it will be strong.

Keep in mind, however, as we think about our strategic alliance partners, be it Dai-ichi, be it Japan Post, [Dyrther-wife] and others, they don't sell our medical product. And since a large percentage of our sales continues to be focused on cancer, then that's something you have to keep in mind as you look at a product launch of EVER.

Got it, thank you.

Ryan Krueger with KBW.

Thanks, good morning. I had one for Fred. Do you have an update on how much of the $2.5 billion floating-rate US dollar portfolio that you've added so far?

Yes, I think you are referring to the switch trade that we did last year, where we sold out of US dollar bonds, went into JGBs, and then now feathering our way back into a floating rate portfolio. I'm assuming that's what your question is.

Yes, how much you've done so far?

Yes, very little. It will build throughout the year, and I will give you some additional detail. Our estimate of the drag to net investment income in 2017 related to the switch trade is running right around $0.08 to $0.10 for the full year. And the difference in that range will have to do with the pace of putting that money to work. We are actively engaged in both qualifying and starting the process of preparing to fund as good loans come our direction -- and really emphasis on that last piece.

And that is, the pace of it is not -- we are not in a rush, if you will, to put money to work in ignoring, if you will, the credit fundamentals. These tend to be, by definition, BB-ish-type investment credit ratings. And so you want to be particularly careful that you put it to work in a measured way. So we been somewhat conservative and practical in that build of the portfolio, and expect it to go on throughout the year. Eric, if you've got something to add, please do.

I would just add a couple of comments. In our planning -- because we are forming more partnerships with lenders, if you will, both for middle-market loans and transitional real estate. And I should mention that transitional real estate, by and large, is investment-grade, versus the middle-market loans that are BB.

But in our planning, relative to the guidance that Fred has previously given to you, is an assumption that these start to fund by the end of the second quarter. To the extent we are able to get them online sooner, that will be a net positive to our earnings for the year. But we were conservative, because as Fred said, we want to be conservative on the underwriting. We like underwriting, we like credit risk, we think we do well. But because it's a larger core allocation, we also have to be just as careful around onboarding and starting the process -- more volume of those.

So it's conservatively estimated, but it will be a net positive to our net investment income after hedge costs. So while we took a short-term decline in net investment income, long term, this is a very good relative value proposition for our program.

Thanks. And then one more for Teresa. You have a long-term US sales target of 3% to 5% growth. Given some of the initiatives you are working on for 2017, do you think that's achievable this year?

I feel like we are still going to be within the range of the CAGR that we provided. So absolutely.

Thank you.

Now I'm going to tell you, we are going to have a tough first quarter. I do want to say that. But I feel pretty good about what we've already talked about. The guidance.

Randy Binner with FBR Capital Partners.

Good morning, thanks. I wanted to ask a question about the benefit ratio and loss margins in Japan. Those [FN]-per ratio is higher in our model than it's been in several quarters, just on a core basis. And my understanding was that utilization trends have just been very favorable in Japan, and I kind of expected that benefit ratio to stay where it had been, maybe even work lower.

So the question I have is, was there anything unusual in the benefit and loss activity in the fourth quarter, outside of the Super Care charge? And can I get an update on how loss trends in utilization is going in Japan? Hospital utilization, is mostly what I'm referring to.

Yes, I'll answer a couple of the questions, and then certainly welcome Todd Daniels to comment on utilization trends, if he has more color to add. But just a couple things. And you hit on it, Randy. So first, recognize that the reported benefit ratio to premium, the 74%, that if you adjust for the reserve strengthening, that comes down to around 72.5%, 72.4%, and is actually consistent sequentially with what we reported in the third quarter.

Now it is a tick up from the fourth quarter last year. But that's not unusual that you will have those types of fluctuations as you are doing IBNR adjustments and the like, every quarter, frankly. So that's what I mean by saying, that core benefit ratio, when adjusted for the reserve strengthening, is in line with our expectations in Japan.

In terms of utilization and overall trends that are driving the benefit ratio and hospitalization trends, they have indeed been favorable, albeit that over time, they naturally start the process of plateauing a bit. Meaning that you eventually start to see it stabilize, but at these favorable rates. So we do see pockets of improvement, but maybe not as material as there have been some historically. But Todd, do you have anything you want to comment on?

Yes, I'll just mentioned too that for the year-to-date benefit ratio, when adjusting for the Super Care adjustment, was 72.2% as a ratio to premium. And that's still trending lower versus what we saw in 2014, 2015. And regarding the utilization, we are continuing to see hospitalizations trend in a positive manner. So we are reflecting that periodically as we do our reserve testing.

Just as long as I have you on utilization, on the US side, the margins were pretty good. Any update on utilization trends there? Because that's also been a tailwind, I think, the last couple of years.

Yes, and I think there it's a slightly different story. There are those fundamental trends that have been positive, but there's also a mix of business dynamics playing into it. Todd, again I'll ask if you have any --

That's right. There is a mix of business playing into it. As Fred mentioned, I think, in the prior quarter, we have tended to sell more products with these guarantee-issue features. And as we went into some of these products, we were relatively conservative with pricing these during these guarantee-issue periods, and we've had some favorable experience with that. So as our mix of business has shifted to more products with those features, we have seen the benefit ratio come down.

I will say, as we look at things on an overall lifetime basis, we do see these ratios moderating a bit. I wouldn't expect an increase in 2017, however. I think we are still going to see a continuation of the benefit ratio we saw in 2016.

I think one thing I would add -- and again, I realize that any particular quarter does not tell the full story. But just don't lose sight of the fact that there is some level of correlation between record US profits and profit margin, and our sales progression.

And that is one thing that we have not let our guard down on, is really a couple things. One is, pricing with a level of conservatism. Focus on high-quality business. And we are not going to chase competitive dynamics in pockets where we think it's not the right kind of business for us. Again, it's a long-term plan of that type of discipline that yields the kind of earnings results in the US. But there is a correlation.

All right, thank you.

Suneet Kamath with Citi.

Thanks and good morning. Just wanted to ask a couple more on the US. Teresa, in your prepared comments, you talked about some turnover disruption, I think, associated with some of the senior leadership. How long do you think that's going to take to fix?

Well, I believe we put in the performance management plan end of 2014, I think, is when we started it. So we had our full year in 2015. 2016, we basically are correlating sales growth with our compensation, and those that are in those roles. We also had some retirements as well, so I need to say that.

But our goal is to make sure that when people move into those roles, they need understand the dynamics of the market, they understand how the market -- what they need to do within the market. And so obviously when something is just put in, you're going to have a cycle of more moves than you have ongoing.

So we hope to stabilize within 2017, to see what we have. We've been seeing a lot more competitors wanting to come to our join the markets as well. We are hoping to see that, that stabilizes in 2017. But again, it's really all about whether the performance is where it needs to be.

Let me make a comment about that. In the last 18 months, we've had a turnover at the MKD level, which would be equivalent what we call in charge of the state, of 50% of the people. As Teresa said, it was either due to retirements, or it was due to lack of income that they were used to because their sales were not where they should be, and therefore, they made a lot less money.

Because of all these openings, we've had opportunities not only to fill them with our people, but we've had a lot of the competitors come our way and interested in those slots. And Teresa has filled those slots with some key people that are growing our business, or that we expect to grow our business in 2017. But any time you've got a lot of changes like this, it does take a little time. And as Teresa said, it makes it a little bit harder the first quarter because of all these changes. And so hopefully, we will see it --

-- stabilize through the year.

Okay?

Yes, that's fine. I had one follow-up actually, Dan, either for you or for Teresa. A couple of years ago, we spent a lot of time talking about channel conflict between the brokers and the traditional agents. And some of the comments you made earlier, particularly in that mid-case market, it sounds like both of those distribution channels are participating in that mid-case market. I guess the question is, are those channel conflict issues behind us now, or is there still some of that stuff going on in the US?

Well, I don't know that channel conflict will ever be totally behind us from that perspective, but it's not at a fever pitch. I think that our directors of sales, both on the career side -- Andy Glaub, who is looking at it from a US perspective, but focused on the career side, and then Drew Niziak, who is on the broker side. There's a tremendous amount of collaboration that's happening. And quite frankly, in various markets, we see that our broker teams are working collectively with our career teams to enhance what we deliver to brokers, as in rollers and et cetera.

So we've seen it work, we see it working. But are there still pockets where we have channel conflict? Absolutely, there are pockets. And really, I think that's where it really becomes a matter of understanding where the market is taking us, and making sure that we deliver tools and services for each of the market sets, so both of those markets, especially from a career perspective, can grow. And so that's what we will continue to do.

All right, thank you.

Tom Gallagher with Evercore ISI.

Thanks. Teresa, just a follow-up on what's going on, on the distribution side. Just to be clear, is the high turnover in some of the underperforming regions for the agency channel that you are referring to, is that because they are getting picked off and recruited away by competitors? Or are those people that you are firing, that you are pushing out?

The majority of the people that have moved out of those market positions have moved into sales positions. So many of them have decided to move back down into a coordinator-type position within Aflac. I've not heard of many of them going to competitors, if that was your question.

Yes, it is, thank you. So from the standpoint of this turnover and the impact on sales, was a lot of this happening later in the year, and that's why 1Q is going to be affected? Can you talk us through the --

Right. So if you think about it from a sales perspective, we are looking at sales targets by quarter, and most of the volume is hitting in the fourth quarter. So many of the changes happened within the third and fourth quarter, where we started seeing that people were not going to meet objectives. Some of them decided that they would retire, that type of thing. So yes, that's why we are anticipating a little bit more disruption in the fourth quarter, as well is in the first quarter.

Got you. And then, Paul, a question for you. You are referencing the strategic alliance partners in Japan pivoting to their own products into the fiscal year-end, as being one of the reasons why 1Q is going to be softer. Can you just comment on your level of confidence that this isn't the beginning of a weaker trend with the alliance partners? That this 1Q dip is not the sign of some kind of signal for where those sales are likely to go in the subsequent quarters as well?

I obviously can't get into specifics, but I can tell you, I'm extremely confident. The reality is that, for their fiscal fourth quarter, and of course kicking off their year -- the beginning of the first quarter for them is the second quarter for us -- sales could be slightly light. But we know the second half of the year will be strong.

We talk to our partners and make commitments internally on an annual basis. As I said, they outperformed the first three quarters of their year ending in the end of last year. And I can't go into specifics and I don't want to put us in any kind of a precarious situation. All I can say is that I think this is temporary in nature, and is partly reflective on the success that we've had with our alliance partners, but should in no way temper future expectations.

And I will make a comment that, I've seen this with Dai-ichi Life. Once they make their numbers, they tend to focus on other things, and then set the new numbers for the next year. So the way these numbers will fall out after the first quarter will be a new year, so they will be setting the new numbers and making those. And that's just their way of doing business from a Japanese perspective.

Okay, thanks.

All right, thank you very much. We've answered all the calls that came in, so please let me just follow up with a couple comments. I want to share with you today, our calendar for 2017 is available on the investor relations page of Aflac.com.

I would also point out that our financial analyst meeting that has historically been held in May has been moved to a September timeframe, and this year it will be held on September 28. That is September 28 in New York. Please feel free to call our investor and rating agency relations department with any questions. And we look forward to speaking with you soon. Thank you, and have a good day.

And that concludes today's conference. Thank you for your participation. You may now disconnect.