Aflac, Inc. Q4 2008 Earnings Presentation Call Transcript

| About: Aflac Incorporated (AFL)

Aflac, Inc. (NYSE:AFL)

Q4 2008 Earnings Presentation Call

February 3, 2009, 6:40 PM ET


Ken Janke - Sr. VP, Investor Relations

Dan Amos - Chairman and CEO

Kriss Cloninger - President and CFO

Paul Amos - President and COO

Jerry Jeffery - SVP and CIO

Mary Chapman - VP and Senior Credit Analyst


Larry Bernstein

Suneet Kamath - Sanford Bernstein

Eric Berg - Barclays Capital

Daniel Moore - Aqua Marine Capital

Darin Arita - Deutsche Bank

John Hall - Wachovia Wells Fargo

Ken Janke

My phone says its 6:40 so I think we are ready to go. I do appreciate you joining us and that I was pleased to see the sale side at least important they would have joined us. After covering another company tonight they were late. So we are glad that you all were able to make it in fact due to weather.

I would like to begin this evening with an introduction of those who have joined me today from Aflac beginning with Dan Amos, Chairman and CEO, Kriss Cloninger, President and CFO, Paul Amos president of Aflac and Chief Operating Officer of Aflac, US. Jerry Jeffery, Senior Vice President and Chief Investment Officer also joined by Mary Chapman who is Vice President and our Senior Credit Analyst, she leads our global credit effort and Robin Walkie, who is Vice President of Investor relations.

I am Ken Janke and again thanks for joining us.

I would like to point out that tonight's meeting his webcast although we had a call this morning. So if you would please do a quick check of phones, pagers all that stuff put them on vibrate. We would appreciate it and I would also like to remind you that some of the things you will hear tonight are forward-looking within the meaning of Federal Securities Law although we believe these statements are reasonable. We can give you no assurance that they will prove to be accurate because of perspective in nature.

As you know the actual results in future could differ materially from those that we discussed today. And I would encourage you to look at last night's press release where you will see a list of the various risk factors that could affect our future results.

And so with that long-term me turn it over to Dan, who will talk about the balance sheet and our operations a little bit and I will follow-up, just couple of numbers and than we would be happy to take your questions.

Dan Amos

Thank you, Ken. Good evening everyone and thank you for joining us. I hope you had a chance to listen to the conference call this morning in light of the recent developments and the increased investor interest and concerns. We felt it would be helpful to conduct a separate call this morning to address some of your questions.

I know that you are accustomed to hearing about the sales and the earnings growth and I would like to talk about it a bit. But first I want to talk about what's on most peoples mind and that is our balance sheet and our capital position. So let me begin with a couple of comments about our investment portfolio, you may have heard me say it this morning but I am going to say it again. As I want to reiterate that what I have said previously and overall I am very pleased with the quality of our assets and it's with good reasons.

Despite the global credit downgrades over the last few months, the credit profile of our holdings is still very high. More than 98% of our fixed maturities and perpetual debentures were investment grade at year end. I know you realize that you can't run a company in hindsight but if you could other than avoiding a few specific securities, I would not alter our overall investment approach. The reason is straight forward. We purchase securities that best match the characteristics of policy liabilities. That is specifically true with our Japanese operations.

For more than 15 years, our greatest challenge has been investing huge cash flows in appropriate securities. We need to buy long duration, Yen denominated investment grade securities to fund our long duration Yen denominated policy liabilities.

With that as a brief background, I would like to talk about a few specific points of the balance sheet.

First, I will stand by the decision we made in 1993, when we first purchased perpetual debentures or so-called hybrid securities. Obviously this asset class has been the center of controversy on our name over the past 10 days or so. To clarify, I am referring to specifically to upper Tier II and Tier I perpetual securities in our portfolio which represents about 13% of our total portfolio amortized cost.

I won't emphasize to you that the overall credit profile on these securities is very strong. The average rating is in A.

Other than the Icelandic banks that we have told you about in the third quarter and then wrote off in the fourth quarter. Everyone perpetual debentures we own is current on interest.

Furthermore our investment department has spent many hours over the last week working with the internal credit team and third party to assess the hybrid holdings.

As I mentioned this morning we have stress tested our capital using very pessimistic scenarios about potential bank nationalization. And the possible impact with the hybrid holders.

Even using what we believe is a worse case scenario we estimate that we would incur a pre tax charge of only a $100 million to $400 million if the governments did not back hybrids that we own either direct or indirect with voting rights.

Even under that scenario, we believe that we are in a strong position and would not need to raise any capital. Second a lot of you may, a lot has been made of the large unrealized losses in our debt portfolio.

The biggest factor in the increased unrealized losses is the increase in the wider credit spreads on our long duration investment portfolio.

In addition the stronger Yen has magnified the unrealized losses of the investment portfolio. For instance the Yen has strengthened 13.8% from the end of September to end of December.

This increase in unrealized losses in the available for sale category by $357 million, I would also like to point out that 32% of the gross unrealized losses on our consolidated debt portfolio at the end of the fourth quarter were attributable to held to maturity securities.

It makes no sense to me that some people insist on including unrealized losses in the held to maturity category in our total gross losses.

Certain securities as held to maturities are for good reasons. We have very strong operating cash flows. We also have the ability and intent to hold these securities to maturity that means we will not realize those losses unless our analysis indicates that we are unlikely to receive our contractual interest and principal payments.

Third, we do not face any liquidity issues. As we discussed some of the products in Japan offer a small cash to run the bank particularly with our older block of cancer insurance. However, we do not have a similar benefit feature in our US healthcare products. That means that our reserves exist for the benefit of the policy holders. But as a rule our customers do not have a claim on those assets. As such we do not anticipate liquidity invested assets to meet cash needs for paying clients.

In 2008, we invested more than $590 billion yen after paying cash claims and operating expenses, that equated to investing $2.4 billion yen or $23 million each working day. For 2009 we estimate our cash flow to investments will be another $505 billion yen or $5.6 billion.

As you may know we have 55 billon yen of debt coming due in April of this year. Our preference would be to refinance the entire amount into samurai market, if the market conditions are reasonable.

However if conditions do not improve we have other options. We could refinance the debt through bank borrowing, refinance it in the dollar market or pay the entire amount off.

My following comment on the balance sheet is to record what I consider it to be a very strong capital position. You may recall our risk based capital ratio was 574% at the end of 2007. From end of the 2007 to the end of 2008 the yen has strengthened by 25% to the dollar. That change in the yen had a significant impact on our RBC ratio.

In fact as we demonstrated at the analyst meeting for several years one of the reasons that we maintained a very high RBC ratio is to provide a cushion against the risk of the yen strengthening. As you may know the stronger yen increases our required capital.

However, it does not increase our total adjusted capital nearly as much because that capital is substantially hedged by Aflac Japan's dollar denominated investment portfolio.

Despite the yen's impact and the realized investment losses we took in 2008, we estimate that our RBC ratio still will exceed 450% at the end of December. Let me recap for you from a preliminary statutory perspective, we dividend $477 million to the parent company in 2008 through the repurchase of our shares.

We used another $585 million to fund the shareholder dividend and other corporate cash mix. We also absorbed realized after tax investment losses of $682 million, still we increased the total adjusted capital for the year. I am confident that our current excess capital position and the capital that we generated this year will see us through these challenging times.

Now, let me turn to a brief review of our operations of Aflac Japan. Aflac Japan performed well both operationally and financially through 2008. Coming into the fourth quarter we have told you that we thought it would be challenging to achieve our full year sales target based on our nine months results and we were right.

For the year, sales were up slightly, but we did not meet our original target of 3% to 7% increase. The shortfall in sales was primarily attributable to the disruption in the bank channel associated with the developing financial prices.

During the first nine months of the year quarterly increases in bank sales were strong. However, we thought that they would be even greater. We believe the slower than expected sales to the new bank channels resulted from the bank's conservatism particularly at the mega banks and the large regional bank.

Then the financial crisis struck. Sales of all insurance and investment products of banks fell sharply in the fourth quarter. Accordingly, sales of our product through banks in the fourth quarter were down 26% compared to the third quarter of 2008.

As we discussed in our third quarter conference call, many of the banks found themselves spending a significant amount of time with their customers on non-Aflac products such as investments trust and annuities in light of the stock market sell off. That reduced the time that banks could spend on introducing Aflac products to their customers.

Overall, we are very pleased with the number of banks offering our products. At the end of December, we were selling agreements with 242 banks, which is significantly greater than the next closest company, selling through banks.

We also began selling our Cancer Forte products through a Japan Post Network Company at the start of October. Our initial sales efforts are being carried out through 300 of Japan's more than 20,000 postal outlets. As a result, outlook for the fourth quarter is somewhat of a test of the new channel. Obviously, though, we began that test during a very challenging period.

Still, our sales results were generally in line with our expectations. Although, it will likely take time for the new channels to ramp up, we look for better sales results through Japan post in 2009.

We also continue to focus on developing our traditional channels in 2008, including our sales force of individual agencies. Recruiting of new agencies was up 23.4% last year.

In addition, we believe that the right training programs to increase the likelihood of these new agencies it will help our producer growth. We continue to believe Japan is a very good market for the types of products that we offer, the only issue that gives us pause is the weak global economic environment, as such we have said our sales objective to be flat to up 5% for 2009.

For Aflac US selling insurance in the deteriorating economic environment also has challenges. With the emergence of the financial crisis in the fourth quarter the challenge became even greater and as a result our new annualized premium sales was down 5.6% in the fourth quarter. For the full year we were basically flat.

In more than 35 years that I have been in Aflac this is the first time that I can say that the change in the economy has impacted our sales.

Our persistency rate has held up fairly well although it did decline seven-tenth of a percent for the year. We also attributed a decline in the persistency to the current economic condition although we believe our coverage is affordable for the average American family, we realized then in very difficult times families have to make hard choices.

As we discussed through the year, we were encouraged with the basic sales related activities of our US operations despite that it was below our annual sales target. For instance we continue to expand our distribution system. In the fourth quarter recruiting was up 7.4%.

For the full year we recruited more than 25,700 new associates, an increase of 6.2%. As been the case in the past we believe that recruiting has benefited from the rising unemployment due to the weak economy. The average number of weakly producers increased 0.6% in the fourth quarter and 2.6% for the year.

New payroll accounts slowed in the fourth quarter compared to the prior three quarters where they were very strong. However that's not an unusual as the fourth quarter typically marked heavy reenrollment of our existing accounts rather than opening new accounts.

In addition to the distributions we believe our commercials and our branding message position us in a better segment of the market. Four of our new commercials in 2008 were short spots that emphasized our business-to-business initiative and we believe that's one of the major reasons our new accounts rose so much. These spots directly address businesses and benefit decision makers for the first time while appealing to individuals and entertaining them as well.

This year we will air more business to business-to-business spots including one in the education area and another one in the construction area.

Let me show you two of the new commercials. The first one is called construction and the second one education there. We just were a lot developing the tag lines for these commercials. But I think you will find them very entertaining, we’ll show them twice.


Well, we remain absolutely convinced that United States is a vast and attractive market for our products. And even though there is very strong need for our US product line it is clear that the demand for the products has been dampened due to the weak economy. As such our outlook for sales and persistency levels in 2009 remain tempered by the economic conditions. Like Japan our US sales target calls for flat sales to up 5% increase this year.

From an earnings perspective, we continue to believe that 13% to 15% increase in operating earnings on a per diluted share basis in 2009 is reasonable and supportive target. However, I want to emphasize that my top priority is maintaining the strong capital position.

I know many of you have wondered about the current view of our share repurchase plan. Fortunately, we have some flexibility because of the shares we purchase last year will benefit the purchases resulted early this year.

As such, we do not anticipate buying shares during the first half of the year. Beyond the first six months we will evaluate that market and our capital position. Obviously if conditions do not improve, or if they deteriorate further it is unlikely we will buy shares back this year.

However, we see no change in our outlook for this year's dividend. As you will recall, we increased the quarterly cash dividend 16.7% effective for the first quarter of this year. Again, maintaining our strong capital position is our highest priority.

In that regard I want to assure you that we will not do anything that would jeopardize the company for the sake of earnings performance. Although we are in a challenging times, I have great confidence in Aflac's operation and business model and especially its balance sheet. Ken?

Ken Janke

Alright. Thank you, Dan. I am just going to run through a couple items on the balance sheet and the income statements. I think you know I have got notes out there for you if you care to follow along and you will have a hard copy of these numbers.

Beginning with the balance sheet, this shows you where we stood at year-end at an amortized cost basis for the consolidated investment portfolio. Note that 72% roughly of these securities of the debt securities are senior in nature.

Just a brief comment on the CDOs, you will see that they were at $909 million in cost that's after the impairment charge that we took in the fourth quarter. I would also like to point out that four these CDOs remaining on our books were arranged by Lehman and as a result of the developments at Lehman last year. They are in the process of being unwound.

And as a result, we would expect to either receive collateral back or have receive the net proceeds from sales collateral and that will reduce the position in the CDO holdings by about $250 million or so, and we will not be reinvesting in CDO securities with those proceeds.

And looking a little bit more at the perpetual debentures, we did include this information in our press release last night to give you a breakout and as I hope you would recall 72% of what we own on a book value basis are in the upper Tier II area, which again are senior to Tier 1 preferred in common equity where you will see that only 26% of the unrealized losses are related to the upper Tier II securities.

As Dan mentioned in his comments, the stronger yen obviously magnifies the entire balance sheet. That means our book values, fair values, unrealized gains and losses also get magnified as the yen strengthens to the dollar. And with respect to the perpetual debenture holdings, it increased our unrealized loss by about a $100 million in the fourth quarter.

Just a couple of more comments on the perpetual debentures themselves and we have received quite a few requests for a little bit more detail granularity on these holdings to tell you what we have. As we have said and we believe that the credit profile of those holdings is very high, they are all incurred on interest, more than 92% were rated A or better.

There have been some questions about extension risks in light of Deutsche banks' failure to redeem a lower Tier II security last December. You'll note that we did have three securities that were redeemed in the fourth quarter of last year, which was obviously a very challenging time economically. And likely those redemptions came even though they were uneconomic to issuer.

62% of the maturities that we have or mature beyond 2019 that's their expected maturity, or economic maturity date. So again this is a very long dated portfolio, and only little over $300 million are expected to be redeemed in 2009. Again, we don't see lot of extension risk in this portfolio.

We have also had a lot of questions about where actually are these exposures, what is the country of domicile for the issuer, as we see 65% are domiciled in continental Europe, 20% are in the UK, 11% or so in Japan and the balance is Australia. And again these by enlarge were purchased in the 90s through 2005 to support our yen denominated policy liabilities. So 96% of those perpetuals are denominated in yen.

Dan touched on this a little bit and looking at the total company unrealized losses on the balance sheet. And this is included on a statistical supplement, but I did want to draw again your attention to as Dan had mentioned the growth unrealized losses that are included in help the maturity.

And again, we believe there are very supportable reasons as to why those securities are held there and we would not expect to realize losses in the held maturity portfolio or gains for that matter unless there are underlying credit events that would cause us to pull those securities out of held maturity and put them unavailable for sale.

Let me say just a couple of things on the statutory items. I have to say this is first time that we have ever come to this meeting for our year-end wrap up and had anything related to statutory results.

It will be in couple of weeks, probably three years or so, before we finish all of our final stat accounting work and then we will let you know what the final RBC ratio was. But this gives you some idea of what we have seen over the past couple years, and just how unusual 2008 was from a net income perspective.

You will see our current expectations are for preliminary net income of $940 million on a stat basis. And remember that our statutory accounting pulls in Aflac Japan, because Aflac Japan is a branch of our US operation. And that's why there is a yen influence, but we do expect to increase net income by about $1 billion in 2009 versus '08 with a corresponding increase in total adjusted capital.

What that would mean and the 2008 numbers are pretty consistent with what we had put out in the press release a week ago Friday, I meaning that our expected excess capital is about $600 million assuming 400 RBC up to $1.1 billion, and that's actually a little bit higher than what we had in the press release. But we would expect that at present to continue to expand to $1.2 billion to up to $1.8 billion using the 350 RBC for 2009.

Let me just walk really quickly down the segment contribution on our income statement. Obviously, Japan continuous to be the driver of our income statement, earnings were up very sharply in dollar terms due to the strengthening of the yen.

You will see in our yen P&L pre-tax operating earnings were up 8.4%, but remember that we have a dollar investment portfolio in Japan. And that's suppresses net investment income growth in yen terms when the dollar is weaker to the yen. If you unwind that currency effect really on a truly constant currency basis, earnings were up 33.8% for the full year.

US was up 7.6% as you will see, interest expense was up, but that was largely attributable to the strengthening of the yen. A parent company expenses were also up and that primarily reflected lower investment income at the parent company level, compared with what we had in 2007.

These strong increases in pretax operating earnings reflected, again, a very strong yen to the dollar. The operating tax rate was fairly constant and looking at '08 versus '07 at 34.7%. And operating earnings were $1.9 billion, which you can see was up 18.5% excluding the effect of currency operating earnings were up 11.6% for the full year.

Clearly, by our standards and by our historical financial results 2008 was a very unusual year in terms of realized investment losses. And just to give you a brief recap, there were about five items that accounted for 94% of the $655 million of losses we incurred, perpetual debentures that we wrote down in the third quarter was a $191 million, Lehman was a $140 million and these are all after tax.

The CDOs were $125 million, or $117 million from the Icelandic Banks that we had disclosed in the third quarter, and $42 million from the impairment of Ford Motor Company in the third quarter. Remaining 6% were just various securities transactions that had occurred throughout the year.

And looking at operating earnings per share, clearly, we had a significant impact on a per diluted share basis, from the strengthening of the yen, it added $0.23 for the full year, which was the largest of that I can recall, impact on operating earnings.

As you know, we continue to talk exclusively on setting targets on a constant currency basis, that's also how our incentive compensation works at Aflacs so that we don't take credit for, we are not penalized by changes in currency. And on that basis, we expect our earnings growth to continue and have not changed our 2009 operating earnings outlook as Dan mentioned. And we mentioned last night in the press release, it's still 13% to 15% assuming the yen averages the same rate in '09 that it did in 2008.

For those of you that have read our analyst books, or attended analyst meetings for the last few years, you are accustomed to Chris running through a recap, kind of a consolidated review. And looking at our modeling assumptions and before we either firm or reaffirm earnings target or set a new target, we stress that's our financial modeling with various scenarios and I would like to share these with you.

You have heard about a couple of them, sales growth for instance in Japan. We are assuming flat to a 5% increase. The new money yields, we are assuming two and three quarters to 3%. That has not changed from our assumptions at last year's Analyst Meeting. And obviously in 2008, we did a bit better than that.

We expect the benefit ratio to continue to improve in Japan, down 1% to 1.5%. It was down 1.3% as reported in the 2008 financials. If you unwind the currency effect, it actually did a little bit better than that. It was down about 1.9%.

Because of the kind of what we refer to as a retirement bubble, you may recall from our conversations early in the year that if you look at the distribution of Japan's population by age, you see a group of people that are kind of ready to retire in the '08 and '09 period, and our policyholder base kind of mimics that population distribution. So it would not be surprising to see persistency decline a little bit again in 2009, because retirement is a typical point of lapseation.

For the United States, our target again or our expectation is somewhat in the flat 5% area, new money 5.5% to 6%. I should point and we had a lot of questions related to the new money yields for Aflac U.S. There is not a lot of cash flow going into US investment at this point. So when you look at some of the new money yield assumptions, they were very high in our fourth quarter.

That’s nothing to be overly excited about, because there is not a lot of cash flow behind those number, they are simply opportunistic purchases by our US portfolio manager. And the reason there is not a lot of cash flows; as we had had some products that we had written about 20 years ago that had a return of premium feature, so that if the policyholder did not incur a claim over 20 years, we will return the premium to that customer.

We are now at the point where those policies are in effect, starting to mature and you are seeing some of those payouts, and that's one of the reasons that their cash flow is not very strong to investments. That of course has been factored into our assumptions and our modeling.

We expect modest improvement in the benefit ratio for Aflac U.S. in 2009 and again persistency to be down slightly as we experienced in 2008. Dan has already referenced to one of the assumptions from our corporate standpoint. Again, the current plan is that we don't anticipate buying any shares in the first half of the year, at the midyear will evaluate where we are and it's possible that we could buy shares in the second half of the year.

I think it's fair to say, the way that you can look at this is that if we don't buy any stock at all for the full year, we are closer to 13% end of the range. If we buy shares in the second half, that puts us up closer to the 15% area rate of growth in terms of operating earnings per share for 2009, or we don't anticipate any changes to the dividend, meaning that which we have already declared a $0.28 a quarter nor do we anticipate any changes to the capital structure or the tax rate.

What that means in looking that how this year may play out given different yen scenarios. We are little bit more sensitive for the currency this year then we were last year, simply because we anticipated getting more of our income from the yen sources in 2009, compare with dollars than we did in 2008.

And if you kind of look at the math behind this, you will see that kind of every 1 yen move on the annual exchange rate will equate various scenarios to roughly $2.5, $2.6 or $2.8 per share.

Now that's kind of what these number kick out. But again, our target for this year 13% to 15% based on last years exchange rate would be $4.51 to $4.59. And we just hope that you would kind of consider the sensitivities of exchange rates when you are either modeling or forecasting our earnings for 2009.

Really that wraps it up for me, and what I would like to do please as asked, Dan and Kriss, Paul, Jerry and Marry to join me and we would be happy to take your questions. Again, I would like to remind you this being webcast for the courtesy of those listening to the webcast, we would ask that you wait for the microphone to ask your question so that everyone can hear what you have to say. And we would be happy to take your questions.

Okay, first question.

Question-and-Answer Session

Larry Bernstein

Sure, Larry Bernstein. During the call this morning you focused on hybrids as an investment. I wanted to discuss one of your non-bank assets. During the call you discussed your investment in a Japanese corporate Takafusi, and 28% of your investment was repurchased during the fourth quarter, which leaves investment of a little over $400 million.

Takafusi is a subprime unsecured lender in Japan. And their bonds have recently collapsed in the last few weeks. Five year Takafuji CDS traded today at 60 points upfront, plus LIBOR, plus 500. And therefore their senior bonds are now trading at less than $0.40 on the $1. Do you think it's appropriate to impair this asset given the markets mean forecast that the company will default on its bond for the next 18 months?

Dan Amos

I am going to pull Jerry and Mary together to let them talk about this. And let me make one brief comment. I think it's certainly appropriate to talk about Takafuji, because we raised it on the call this morning. But beyond that, we got a lot of securities in our portfolio. And we really don't want to go through it security-by-security conversation on the credit worthiness of every issuer we have. But I think it's a fair question given that what we mentioned this morning. So kind of with that as a background, let me pass this to Jerry and then Mary.

Jerry Jeffery

Let me start now, I'll pass the baton. But I think first of all, we are well aware of what the pricing action has been at Takafuji. We are clearly setting it and we apply the same impairment methodology at Takafuji we apply to all our securities. For an update on our credit view, I am going to turn it over to Mary and let her comment to the degree that she can. Go ahead.

Mary Chapman

Thanks for the question on Takafuji. We have a very strong business relationship with Takafuji, and it was at their request as Ken mentioned and as Dan mentioned as well that they redeem that, they redeemed it because of the high coupon security for themselves.

We have now 50 billion yen, or actually it's a little higher than what the number you noted in terms of the dollar value of our exposure to them. Of that 40% has very protective covenants, which protect Aflec in terms of their ratings aspects.

Yes, they are a subprime and they have always been a subprime provider of consumer finance in the market within Japan. They have continued to have very good access to liquidity, very good access to market aspects. We continued a very good business relationship with them, both from an investment perspective as well as other business ties that we have with that company.

We apply as usual with all investments the standard impairment policy, which you can find in our financial outlook briefing book of, which one of the things which we look at is pricing as you mentioned. And we also look at the likelihood of the payment in-fall and on time of all payment obligations to Aflac. At this time, we do not see any reason to impair our Takafusi whatsoever and it also note that that it remains investment grade from the obligation held by Aflac.

Ken Janke


Suneet Kamath - Sanford Bernstein

Thanks again. Suneet Kamath from Sanford Bernstein. It's maybe one for Kriss and then one for Paul. For Kris, on this morning's call you had mentioned that you have been speaking to the rating agencies maybe after the surprise move by S&P.

And I think in the past, you have talked about how they are put words in your mouth, "aware" of the yen sensitivity of the RBC. Obviously that has had a huge impact on the RBC decline that you reported as of year end.

Can you just talk with respect to the conversations that you had? Have there been any discussions around their growing concern as the yen has strengthened and then I'll follow-up with Paul if I could?

Kriss Cloninger

I think because we ourselves have illustrated starting three, four, five years ago at our financial analysts meeting, which the rating agencies typically attend. The sensitivity to yen strengthening our RBC ratios has been no surprise too. Our last graph in that book showed that our RBC ratio will be about 600% and 120 and if you go down to 80 it is about 400 and that’s exactly what has transpired and that was exactly the subject of a recent research for that started some of the discussion of the sensitivity to yen strengthening in our RBC and the related issue we will have.

So, there has been no surprise absolutely in my mind with the rating agencies.

Dan Amos

Other than down.

Suneet Kamath - Sanford Bernstein

And then I guess to make a follow-up with Paul. Just on a 0% to 5% growth, I mean this morning this you talked about the brokerage opportunities and then you have the business-to-business opportunities, the heavy advertising. I just want to reconcile those two seemingly pretty significant opportunities with this 0% to 5% growth relative to your long standing use at this US market is vast and untapped.

Paul Amos

The fact of the matter is that the business-to-business continues to be somewhat as continuity to 2008 and 2009. During 2008 we really developed a brokerage strategy. 2009 we expect to see strong implementation with success in 2009, hopefully great success leading into 2010.

The truth of the matter is that we think zero to five is a good target. We think we can hit within that range as a result of the downswing in the economy, but the alternate layering on of certain strategies like these. So, again I think zero to five is where we want to be. Don’t get me wrong I like a double-digit growth on an annual basis but the fact of the matter is, current economic environment has not provided us with that opportunity and so I believe this is really been what would be the best in the company.

Eric Berg - Barclays Capital

Thanks. Eric Berg from Barclays Capital. My understanding of the accounting for the hybrid securities is that by counting them at year-end at $8 billion versus a cost basis of $9 billion. You are saying that you could sell them today, this is not some theoretical value this is an exit value, you could sell them today for $0.90 on the dollar. If you believe that given the downside risk the possibility that maybe there will be some nationalization, if you think they are worth $0.90 why didn’t you sell them.

Dan Amos

Thanks Eric for the question. I think in this market the idea that you could sale $8 billion of any security class in one fell swoop is not realistic. In addition, it would reek havic on us from an accounting standpoint. Remember these securities are securities that are tied to long dated liabilities in our portfolio. That would create horrendous mismatch because we would then be in a position where we have to reinvest $8 billion in long dated yen securities. Now that would be on top of the annual cash flow of $4 billion that we currently put out. Investing $12 billion in long dated yen securities of any stride would be a formidable challenge.

Kriss Cloninger

And besides that point, we still think we evaluate them as being money good there are still current and our expectations because that they will continue to be so.

Daniel Moore - Aqua Marine Capital

Daniel Moore from Aqua Marine Capital. Could you give us any kind of update on the sales in the banking channel in Japan, as we are book a month of sale and two, most recent quarter after obviously a very difficult challenging Q4?

Dan Amos

Well, I called on of the top 20 banks, when I was over there in January, I called on 13 of them, and I called on do you have what we called the Shinkin banks, which is more of the regional banks, buts that’s not actually what it will be. In addition to Shinkin, you have regionals and then you have the mega banks. But one thing that has, as I mentioned in my speech is, the mega banks and the regional banks have really not taken off. The Shinkin banks have taken off and done pretty well for us. And I think they will continue to do well. The regional banks and the mega banks are the ones that we are tied up with selling these annuities and other products. They are much more of a bureaucratic structure. By being bureaucratic like that, they are very slow on coming on. But once they come on, they generally have done well for us, as was in the case when they sold our products to their employees.

So now, that they are trying to sell with their customers, they had a setback because of the fourth quarter. But I do expect them to come around. I think that you are going to see it pick up again in the second quarter and we will start, but I am not sure at this particular point. I was over there at the first week of January. So, if I had been over there toward the end, I could tell more so. But my gut we are expecting the banks to have a good year for us. That is unknown in our calculations. So, we do expect that. I can't give you a breakdown at this particular point. But, I made a link with our person-in-charge of the banking channel. He had good predictions as we shared with you last year almost back quarter how it was going to grow until the financial crisis it slowdown but he expects with pick backup and for us have a good year.

Darin Arita - Deutsche Bank

Thank you. Darin Arita from Deutsche Bank. Just building off of that question then previous question concerning towards the Japan post. Dan can you talk a little bit more about your comments this morning you said the Japan post has started off a little better than you expected, I know its early days, its only 300 offices, but can you give a little more color there and then secondly, I will let you start, Dan.

Dan Amos

Well, I am not sure about the Japan Post as I am the banking channel, I guesses because I am much more familiar with the banking channel because of all the years we work with the banks, have been doing it for over 20 year. So I know most of the CEOs of the major banks in Japan and so had good relationships with them over the year.

The Japan Post a still wildcard, I am not sure at the exact rate that they are going to bring it out and take it, I do know this that our biggest awards for the United States is in April and this big trip we have Japan Post has said they will come to the United States and visit our operation of course, to-date, during April when our biggest award is in and I have said whenever you will come I will be there and we will entertain you and, so never ever gone as far as it found out ever to another country to visit their operation to see what’s going on.

So, I am very encouraged about that and it makes me think that they will roll it out even more so. But at this particular point I don’t have a long-term relationship where I am willing to go at this particular point and make some comment other than, it will be an increase, it will help us in many ways. They are a selling machine. They have the ability to bring in big numbers, whether they will at this particular point, how the economy will affect them I am not sure, but it defiantly calculate another plus for us as we start to 2009.

Darin Arita - Deutsche Bank

Can you just also talk about the Japan Post insurance company and where they stand in their full array and entering the third sector?

Dan Amos


Paul Amos

I assume you are speaking specifically to Compo. Some of you may have seen there was news recently and it actually has appeared in the Japanese press going back to late last year about their desire to move more products through the network company and they do it as part of the privatization process but those of you that don’t know Japan Post has been broken into four different entities one of which is Compo, the insurance manufacturer. They have distribution access through the network company as we do. For a period of time since the privatization process occurs. There has been some talk; they have a relationship with Nippon light that they would like to offer a cancer insurance product which I assume what you are referring to. To our knowledge, it seems like a trial balloon at this point. We are not aware of any products been filed by Compo. In addition to going through the normal channels of product approval that we have to go through, any products that Compo develops also must be approved by a privatization commission.

And one of the hallmarks of kind of the corner stones of this privatization process is that the plain field be leveled for all participants within the life and health insurance area for distribution reasons with Japan Post. So, they have an additional hurdle to clear when it comes to product approval that other companies do not have.

We have known all along; when we were selected by Japan Post Network Company to be the exclusive provider of cancer insurance it was exclusive to the extent that Japan Post pick one company and that was us. I think we have always known that as the general trend throughout the Japanese insurance market has been a steady increase in competition that someday we would be fighting if you will for shelf space at Japan Post Network Company which was why it was good for us to get a head start as a private company selling through the network, but that’s kind of where we are at this point. Is that helpful?

Darin Arita - Deutsche Bank

Alright, I had a question about hybrids. A substantial portion of your bank hybrid securities are dual currency dollar-yen bonds with dollar coupons and yen principle. Given that Aflac is the sole investor in many of these bonds, how do you mark these un-traded bonds? And have you ask the dealer for bid on any dual currency bond to check the quality of these dealer model base marks?

Dan Amos

We validate all of the reverse steel currency bonds whether they be hybrids or others. Soliciting at every marking period we ask for bids from three dealers and match those bids against the model marks that we have. And in fact, callable RDC bonds marking are done entirely on the basis of dealer marks not on model marks. So look I don't think its realistic to say that in this market dealer marks are precise but I guarantee they are not too high. And that's pretty much how we handle that aspect of our portfolio. To your other question, have we tried to sell them?

Darin Arita - Deutsche Bank

Or asked for a bid.

Dan Amos

Well, no because the reason for asking for a bid, first of all I don’t think its fair to the dealer to ask for a bid and say thank you but I am just doing this for accounting purposes. I think we have no intent to sell them. My suspicion is that certainly we have had other bonds that have been extremely stressed, i.e., Parmelot which was extremely distressed four years ago that when we ask for a bid on $215 million we got one and we got one quickly. So my understanding is that, my supposition is that we could get that again. It might not be as easy in this market. But I think we could get one.

Darin Arita - Deutsche Bank

I had one more follow-up question. I am a novice in insurance accounting, but I wonder your 10-K to look up the value of your very long dated yen denominated liabilities. The implied interest rates for your 1990 decade liabilities was at a yield over 5%. GAAP does not allow Aflac to market insurance liabilities to market. How should investors think of the value of this very long dated liabilities with rates and yen now 1% to 2%?

Dan Amos

Well we evaluate the adequacy of our liabilities in the aggregate. Insurance companies are required to determine that there is no future losses based on its net liability position, that is the value of its gross liability net of its deferred acquisition cost combined with the current prospective cash flows, future cash flows which are future premiums and investment income, net of expected benefits and expenses.

Okay, so we monitor that. That’s called the gross premium evaluation. We monitor our net position every year. We have a very strong net position. Specifically with respect to the policies that were issued in the really inception of the branch which was 1974 through early 1990, those policies tended to be priced at about 5% interest. So we had a clear reinvestment risk once interest rates fell in Japan and we employed the strategy of adding own through the policies rather that had a much higher profit margin than our typical policies.

Since you are not that familiar with Aflac you may not be familiar with what we call Rider MAX which was a rider to our original cancer policies and expanded the coverage from cancer only to alcohols medical. These Rider Max policies were very-very profitable and what happened was we expanded our total profit margins in the aggregate, so that we were able to cover the negative spread on interest with higher margins and morbidity. And that put our overall block into a very sound position. So, that’s where we have been since in our early 2000, that’s one of the reasons we expanded our margins, it’s riding more profitable business than the old business we had, and that’s been a historical factor of Aflac. That’s one reason our benefit ratios continue to improve and any negative margin we have had, has pretty much been eliminated by the fact that the new business we were in since 2000 has been priced at about 2.35% and we consistently got in new money rates in excess of 3. So we managed our way through that.

Darin Arita - Deutsche Bank

Thank you.

John Hall - Wachovia Wells Fargo

Thanks very much. John Hall, Wachovia Wells Fargo. I have a quick question on the statutory net income projections that you laid out there, $1.9 billion. Are there any investment losses or gains factored into that number is that just operating?

Dan Amos

No, that’s really a projection of the normalized operating income from statutory and does include any anticipated future realized gains or losses. Anyone else? One more here.

Eric Berg - Barclays Capital

Thank you. I just have one last question about the comparative environment in Japan this year. Obviously, I mean in the last few weeks you have come under pressure but if your Japanese competitors were public I imagined the pressure would be even greater. Maybe you can kind of talk about how you see the competitive environment in Japan given kind of all that challenges.

Dan Amos

Well as far as we are concerned, let's break it down according to the product lines specifically the cancer business. We have dominated, it doesn't matter who we were in competition when deregulation took place in 2001 and the largest life insurance company the largest non-life all of a sudden jumped into the market. A lot of people thought that maybe we would loose market share, it never happened. They had a short spike in business and then we dominated the business ever since because we have been able to offer the best product at the best price.

In the medical side, one of the US competitors who was doing business in the medical side had medical business and then when we came in to the medical business and not forget what a year it was, but 2002 we become a number one seller of medical insurance. And we have continued to be number one. What drives Aflac? Is our operating expense ratio. We have been able to be the low cost producer and by being the low cost producer we have offered a better product at a better price with a higher commission and that is what drives everything.

And it's also low premium. We are less competitive the larger the premium, so our ability to offer low price products for example the major life insurers they can't compete with us because our operating. On an FSA basis on a per policy basis what it cost for us to put a policy on the books, it cost our competitors 50% more. And they generally sell our higher premium policies, but if you think of the lower premium policies than we dominate that and can't get into our market and so that has been the advantage that we have had and we have been able to do that.

We constantly monitor, as the profit margins have expanded, we have been very careful to monitor and why we have been able to do it has been this expense ratio has been very helpful to us. The loss ratio of course has come down but in addition the expense ratio has been so low that it has allowed that profit margin to stay up there.

And we expect the downs, but we never take it for granted. And we add that to our sales force and our distribution channel. That's been our strength. I don't know of that. Because I don't want get into any one specific company. But there is no one out there in the fields of what we are doing.

So, the final thing I would mention is life insurance. Life insurance has become a larger part of our business, with our individual agency. Again, lower premium life insurance. Not trying to sell the big volume life insurance, but that has been very helpful and take on product when they are outselling the medical insurance or the cancer insurance, that’s built for us.

So all in all, from a competitive we never take anybody for granted, but I feel strong about our position and that we would continue to dominate the Japanese markets.

Ken Janke

There is one more here.

Eric Berg - Barclays Capital

Does not look for that lower insurance ration right now.

Dan Amos

Well, its everything from we're not located in Downtown Tokyo, where it begins or the expensive areas we're out in. Our total cost of doing business. It’s the way the structure was originally set up. We've always been setup on a volume basis. Low premium, high volume. Most insurance companies were set up on lower volume and high premiums, life insurance for example or whatever.

And even with our competitors that are in the medical business, they are generally a lower volume but are much higher premium insurance policy, they're trying to sell you. And so it has been that and it has been our IT initiatives and our ability for example, in the United States, we process a number of almost 80% to 90% of our business through, 95% of our business is issued where it never touches human hand, its all electronic. We have got almost become a paper less company, we are taking that in Japan that drives are cost down. And then the final thing is, is our sales organization is all commissioned and Japan the life insurance industry is salary plus bonus. So when they go in there are cost of doing business as much higher. So those things together who have been the reason.

Ken Janke

Okay. Well again let me thank you for joining us, we will be hear little bit longer, if you have any more questions if not please feel free to call or email either Robin Walkie or myself anytime we would be happy to answer your questions. And thanks again.


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