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Executives

Robin Wilkey - Senior Vice President, Aflac Investor and Rating Agency Relations

Dan Amos - Chairman and CEO

Kriss Cloninger - President and CFO

Paul Amos - President, Aflac

Ken Janke - President, Aflac U.S, EVP and Deputy CFO, Aflac Incorporated

Eric Kirsch - Executive Vice President and Global CIO

Tohru Tonoike - President and COO, Aflac Japan

Charles Lake - Chairman, Aflac Japan

Analysts

Yaron Kinar - Deutsche Bank

Christopher Giovanni - Goldman Sachs

John Nadel - Sterne Agee

Mark Finkelstein - Evercore partners

Jeff Schuman - KBW

Steven Schwartz - Raymond James

Suneet Kamath - UBS

AFLAC Incorporated (AFL) Q2 2013 Results Earnings Call July 31, 2013 9:00 AM ET

Operator

Welcome to the Aflac’s Second Quarter Earnings Conference Call. Your lines have been placed on a listen-only until the question-and-answer session. Please be advised that today’s conference call is being recorded.

I would now like to turn the call over to, Ms. Robin Wilkey, Senior Vice President of Aflac Investor and Rating Agency Relations. Ma’am, you may begin.

Robin Wilkey

Thank you. Good morning and welcome to our second quarter call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Paul Amos, President of Aflac; Ken Janke, President of Aflac U.S, Executive Vice President and Deputy CFO of Aflac Incorporated; Eric Kirsch, Executive Vice President and Global Chief Investment Officer. Also joining us today from Japan are Tohru Tonoike, President and Chief Operating Officer of Aflac Japan; and Charles Lake, Chairman of Aflac Japan.

Now before we start, let me remind you that some statements in this teleconference are forward-looking within the meaning of federal securities laws. Although, we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature.

Actual results could differ materially from those we discuss today. We encourage you to look at our quarterly release for some of the various risk factors that could materially impact our results.

Now, I’ll turn the program over to Dan, who’ll begin this morning with some comments about the quarter and our operations in Japan and the United States. I’ll then follow up with a few financial highlights for the quarter and then we will take your questions. Dan?

Dan Amos

Thank you, Robin. Good morning and thank you for joining us today. I'm very pleased that we met and in many cases exceeded our financial target for the second quarter. Let me began with an update on Aflac Japan, our largest earnings contributor. Pre-tax earnings in yen were up 20.1% for the quarter, primarily reflecting lower benefited expense ratios. Additionally, revenues continue to be strong growing by 10%.

Given these results, we expect expense ratio to increase in the second half of the year when we step up our spending. With the new medical product launch in August we’ll be increasing advertising and promotional expenditures. Additionally, we anticipate increasing spending on projects that improve our business over the long run.

Consistent with our expectation, Japan’s new annualized premium sales in the second quarter were down 43.1% to 30.3 billion yen with waste production down sharply in the quarter. We anticipated this decline for a couple of reasons.

First, you recall, that at the beginning of the quarter, premium rates for the first sector products, including waste increased to reflect lower assumed interest rates. Second, improved investment returns prompted many of the customers at banks to [turn from wave] type insurance products to investment trust. As we’ve said, we expect the sales of the first sector products primarily wave, will continue to be down substantially for the reminder of the year. However I want to remind you that for this year our sales target is based on Aflac Japan’s third sector products which include cancer and medical insurance.

Third sector sales were down 4.9 for the quarter, which was in line with our expectations and an improvement over the first quarter. Remaining, the leading provider of third sector products is important to us and is the foundation of our product portfolio. We believe consumers will respond favorably to the new medical product we’ll be introducing in mid-August. We expect this product will appeal especially to consumers in their twenties to forties, an area which we’re currently underpenetrated.

I believe our 2013 objective of flat to up 5% increase in third sector sales is reasonable and achievable. As we look ahead with regard to cancer insurance sales, I am pleased with new alliance agreement Aflac Japan signed Japan Post group last week. The new agreement will further expand our partnership with Japan Post, which was initially established in 2008, enabling each economy to maximize synergies in the insurance business.

Japan Post has a nationwide distribution network that has earned trust of Japanese consumers and Aflac Japan is the industry leader in cancer insurance. Through this alliance Japan and Post intends to expand the number of post offices that offer Aflac’s cancer products, gradually increasing from a 1000 post office outlets to 20,000. Also subject to regulatory approval Aflac Post insurance also known as Kampo will enter into an agency contract with Aflac Japan to begin distributing Aflac Japan’s cancer insurance products at all the Kampo’s seventy nine directly managed sale offices.

A firm consultation with Japan Post group, Aflac Japan will also consider developing an exclusive cancer product for both Japan Post and Kampo. This new alliance agreement enhances our distribution and allows us to reach new consumers with the cancer insurance products. I believe Japan Post can and will become a meaningful contributor to our sales over the next several years.

Let me remind you that cancer is the leading cause of death in Japan with an ageing population the average instant rate of cancer will only increase in the future and cancer is the most expensive illness to treat. We believe our products can be a part of the solution for people battling cancer and the related out of pocket expenses and this at last will help us reach more people.

Now, let me turn to the U.S. operation. Pre-tax earnings were up 9.9% reflecting an improved benefit ratio. Keep in mind we will increase spending in the second half of the year especially with the initiatives related to the preparation of the implementation of the affordable care act. Premium income rose 3.5% with policy persistence to remaining strong. Aflac US new sales increased 1.4% for the quarter and for the first half of the year they were down 1.9. As you’ve heard say many times before we don’t want anything to give between us and the customers. Our job is to be multi passage in our distribution to make sure we have a presence where consumers want to purchase our products. There are different distribution possibilities we continue to work on including creating profit exchange that will help employers, our field force and the brokerage community. While we’re busy laying the ground work for the future, we’re still working hard to achieve our annual sales target. Having covered operations, now let me turn to investments.

I’m very pleased that for the first six months our net investment income is ahead of plan. Our new money yield for the first half of the year in Japan was 3.02%, which is significantly higher than our new money yield of 2% in the first half of 2012. Currently we’re pursuing several strategies to accommodate the impact of the changing rate environment on the SMR, which we mentioned in our press release last night.

Additionally, we are re-weighting the current asset allocation for new money investments in Japan. You’ll recall at the analyst meeting, we discussed that our plan was to designate two-thirds of our new money to U.S. corporate bonds and one-third to JGBs.

Our investment team is revisiting our asset allocation for new money investments and expressed to allocate the majority of the third quarter cash flows to JGBs and underweight in the allocation of the U.S. corporate bond hedge.

Just as the markets are fluid, we remain agile to respond properly, appropriately to the changing investment landscape. We will continue to consider diversification and liquidity as we approach various investment options. We also expect to come in close to our budget for the new money yield for the year.

Turning to Aflac Incorporated, our consolidated financial performance was very strong for the quarter, excluding the impact of foreign currency, operating earnings per diluted share rose 14.3% for the quarter and 9.9% for the first six months of the year. While this puts us significantly ahead of the annual operating earnings per share objective, the comparison for the operating earnings per share in the third quarter will be difficult to the tax benefit of $0.10 per diluted share recognized last year in the third quarter.

I also want to remind you of what I said earlier, we will increase spending in the second half of the year in both, Japan and the United States. As such, our target remains to increase operating earnings per share in the range of 4% to 7%, excluding the impact of the yen. Within that range though, we anticipate operating earnings to increase approximately 5% for the full year before the impact of foreign currency.

As we’ve communicated, given our capital structure our ability to repurchase shares is largely tied to profit repatriation. Just last week, we repatriated 76.8 billion yen. You’ll recall that we entered into a hedging transaction with the vast majority of our anticipated repatriation at weighted-average exchange rate of 96.04 yens to the dollar.

In dollar terms, this profit repatriation was $795 million. As we've said for many years, when it comes to deploying excess capital, we still believe that growing the cash dividend and repurchasing our shares are the most attractive means and those avenues, we will continue to pursue.

Our objective remains to grow the dividend at the rate that is in line with our operating earnings per share growth before the impact of the yen. Aflac repurchased approximately $129 million or 2.3 million shares of its common stock in the second quarter. For the first half of the year, the company purchased $279 million or 5.3 million of its shares.

We have a lot of flexibility at the parent company in terms of liquidity and it’s still our intention to repurchase $600 million of our shares for the full year. Additionally, our current plan remains to increase our share repurchase next year by repurchasing $600 million to $900 million of our shares.

Generally, generating an industry leading return on equity, excluding the yen impact is also important. On an operating basis, our second quarter annualized ROE was 22.1%. Keep in mind, Aflac’s ROE is sensitive to current fluctuations because we are largely hedged our equity in dollars but not all of our earning.

That means that when the yen weakens, our ROE declines. As the yen remained unchanged since the end of March, operating ROE would have been 26.4% in the second quarter. Based on our year-to-date returns, I expect to meet or exceed our ROE target of 20% to 25% excluding the impact of foreign currency for the full year.

Overall I'm pleased with Aflac's position in Japan and the United States, the two largest insurance markets in the world. First and foremost, we are focused on protecting our policyholders and providing value to our investors. We are fortunate that we have the privilege of providing financial protection for more than 50 million people worldwide in the process.

Now, I’ll turn it back -- the program back over to Robin. Robin?

Robin Wilkey

Thank you, Dan. Let me get through some brief numbers for the quarter starting Aflac Japan. Beginning with the currency impact, during the quarter, the yen weakened against the dollar 18.8%. For the first six months of the year the yen weakened against the dollar 16.4%. In terms of topline growth in yen terms, revenues as reported were up 10% for the quarter. Excluding the impact of currency, revenues were up in the quarter 8.6%. The annualized persistency rate excluding annuities in the quarter showed strong improvement at 95.1% compared to 94.7% last year.

Net investment income as reported increased 16.6% for the quarter. If you exclude the benefit of the weaker yen in the quarter on Aflac Japan’s dollar-denominated investment income, our net investment income rose 6.8%. In terms of the quarterly operating ratios, the benefit ratio as total revenues declined over last year, going from 62.0% a year ago to 61.5% in the second quarter. Excluding the impacts of the weaker yen, the benefit ratio for the quarter was 62.3%.

The expense ratios for the quarter were 17% down from 18.4% a year ago. As a result of the lower expense ratio, pre-tax earnings increased 20.1% in the quarter. Excluding the impacts of the yen, pre-tax earnings in the quarter increased 13.5%.

Now let me turn to a few highlights for Aflac U.S. The benefit ratio to total revenue decreased over last year, going from 51.1% to 49.1% in the second quarter. This was primarily the results of a favorable industry-wide healthcare usage trend during the quarter. The annualized persistency rate for the first six months remained strong at 76.3%. The expense ratio for the quarter was 34. -- 31.4%, up from 30.6% a year ago. However it was slow compared with expectations for additional spending later in the year. The profit margin for the quarter increased to 19.5% compared to 18.3% a year ago.

Turning to investment activity for the quarter, starting with Aflac Japan, for the quarter approximately $3 billion of Aflac Japan’s new cash flow was invested in our hedged U.S. corporate bond program for gross yield of 3.51% at an annualized hedge cost of 22 basis points. The yield net of hedging costs were 3.29%. This brings the year to date total cash flow invested in the U.S. corporate bond program to approximately $4.9 billion with a total yield on the corporate bond portfolio of 3.59% excluding hedged costs.

Since the inception of the program, the total cash flow invested in the U.S. corporate bond program is approximately $11.8 billion, which is with a total yield of 3.44% excluding hedged costs. This is in line with our annual allocation expectation for this program. Approximately 27% of new cash flow was invested in JGB’s in the second quarter with an average yield of 1.68%. In terms of U.S. investments, the new money yield for the quarter was 3.70, an increase of one basis point from the first quarter. The yield on the portfolio at the end of June was 6.11%, down eight basis points from the first quarter and 43 basis points from a year ago.

Turning to some other items in the quarter, non-insurance expanse in the second quarter was $48 million compared to $45m a year ago. At the end of the quarter, cash and cash equivalents at the parent company level were $1.3 billion. On an operating basis, the tax rate decreased from 34.4%. Operating ROE as reported for the quarter was 22.1% and excluding the impact of the yen, operating ROE for the quarter was 26.3%.

During the quarter, we also executed on a securities lending transaction of $1.2 billion. This was a short-term transaction that will mature in the third quarter. One of the strategies that we are pursuing to accommodate the impact of the changing rate environment on our SMR is policy reserve matching of PRM.

The PRM investment strategy is gauge up accounting treatment that considers the financial characteristics of insurance company and is widely used in Japan by other companies. The PRM also promotes asset and liability management. This method provides better liquidity and is not subject to the mark-to-market accounting treatment of the available for sale.

Lastly, let me comment on our earnings outlook for the remainder of 2013. You heard us affirm our annual objectives to increase operating EPS of 47% with the expectation of a 5% excluding the impact of the yen. If the yen averages 95 to 105 for the full year, we would expect to report operating earnings of $5.83 to $6.37 per diluted share for the full year. For the third quarter, using that same currency assumption we would expect operating earnings to be in a range of $1.41 to a $1.51 per diluted share.

Now, we would be happy to take your questions. Let me remind you that to be fair to everyone, please limit yourself to one question and one follow-up only that relates to that initial question. We’re ready to begin now.

Question-and-Answer Session

Operator

(Operator Instructions) First question, Yaron Kinar from Deutsche Bank.

Yaron Kinar - Deutsche Bank

Good morning everybody. I wanted to touch a little bit more on the Japan Post deal. And first of all understand if the 0.5% guidance refer to third-party fair growth in sales. Is that -- did that at all impacted by that deal?

Dan Amos

No. That does not include anything with Japan Post.

Yaron Kinar - Deutsche Bank

Okay.

Dan Amos

But Charles Lake and Tohru on the line and the three of us were at the news conference on Friday. So let me see if they want to add any to that.

Tohru Tonoike

This is Tohru Tonoike. And that is correct. Our original expectation of 0.25% growth for the south sector does not include anything from the Japan Post. And at the same time, I have to remind you that we start our operations under the new agreement beginning October 1st this year. But we will start by adding not all of the 2,000 --20,000 offices, but just only a part of it because we want to make sure that we will -- half the Japan Post offices start selling our product.

Also both Japan portion, we are comfortable that we have provided sufficient training to the employees regarding the features of our product and the new market conduct rules. So we will begin that operation rather smaller than increase over time.

Charles Lake

Let me make a couple of comments by Japan Post. Number one is, it is the largest insurance company in the world with over a trillion dollars in assets. It also has -- is the largest company in terms of employees and remember that the 79 agencies at the insurance company of Japan Post is never sold for us. And these agencies would be equivalent to mega agencies in the United States. So as I said on CNBC this morning, this is a game changer for us in terms of what can take place in the future. Charles you were very instrumental in this, any comments from you?

Charles Lake

I think you outlined everything, but I think the important also is to talk about the fact that, this is a corporate group, Japan Post group, so just Aflac deal was not only with Japan Post, the network in Japan Post insurance, but Japan post group as a whole. Dan you signed that document with the CEO of the Japan Post group, so that makes the agreement even stronger in my view.

Does it answer your question?

Operator

Our next question comes from (inaudible) from JPMC.

Unidentified Analyst

Hi, Good morning. Just a question on U.S. sales, Dan you mentioned you are still comfortable that sales will pick up in the second half of the year. I would have assumed that with the healthcare reform coming on, the smaller employers would be more pre-occupied with that and wouldn’t really want to put or enhance their offering and put on new products on the self.

So I just was wondering what gives you the comfort that sales in the U.S. won’t actually deteriorate in the second half, which has given all this uncertainty that health care reform is going to create.

Dan Amos

Well, as I said, I still -- because right now we’re within 1% I think down, I think it’s a reasonable assessment that we can achieve it. I do not have the comfort level with the U.S. as I do with Japan in terms of achieving the objectives. I am very comfortable even though Japan looks like it’s coming further from behind because of this new product, that they are getting this month, I feel very good and Paul could relate more to that, because he has been more involved.

But with the U.S. Jimmy, I am concerned that because of the delays and the other things, it can have an impact. But we’ve got some things that we are working on like for example we have a toll free number that will go online affected the middle of August to where our agents can call in and ask questions. I think some of our agents are a little bit reluctant to go out and talk about healthcare reform with the fear that they won’t know all the answers, but will have this safety net of this watch of this toll free number I can call that will allow them to feel more comfortable calling on the employers, new and old, old for re-enrollment, new for -- to do that, that may help us in the second half.

So I am counting on that has been something that will help us. But your concern is something we too worry a little bit about.

Unidentified Analyst

And then just -- you had mentioned that you’ve already obviously you have started to edge capital repay creation and you (inaudible) amount for 2013, but what are your thoughts on capital [repay] creation for 2014 and whether you want to hedge that for currency most?

Ken Janke

Jimmy, this is Ken, let me comment on that. As I’d mentioned at the Analyst meeting in May, we had begun to hedge a portion of our expected 2014 [repay] creation. You may recall that I talked about the possibility of about 96 to 97 billion Yen in repay creation next year. As of today, and we’ll probably hold with this for the time being, we’ve hedged 47 billion Yen and as far as what we ultimately pull out, the same commentary that we would have said a year ago applies to now. Maybe, we have to see how the macro market, macro environment changes between now and next June. And what the impact might on realized or unrealized gains in making the financial determination about how much we fall out, but that’s where we stand today.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Christopher Giovanni from Goldman Sachs.

Christopher Giovanni - Goldman Sachs

Thanks so much. Good morning. I guess, I’m trying to better understand the investment strategy in kind of the capital interplay here. I mean, obviously the bond program was successful you have up to 150, 200 basis point pick up relative to JGB’s which I think you felt good about given the access liquidity that gave in the diversification. But now, with the move up in rates, shifting back to that JGB strategy, so just some additional commentary there?

And then thoughts on kind of the BMR type strategy versus available for sale at health to maturity. I think others have looked at this, but what are some restrictions that, I think potentially things need to be sold and then re-bought, which you might not want to do kind of given the move up in rates. So, just any thoughts there on the interplay? Thanks.

Eric Kirsch

Sure. Hey, Chris. This is Eric. I’ll grab that one and then kind of Kriss might jump in on the SMR side. But to take a step back on the investment strategy, just to remind everybody. We did a very thorough strategic asset allocation project back in 2012, which took into account liabilities, assets, our surplus, and basically created our guide post in terms of an optimal portfolio. But economically over the long-term would help us grow the surplus with minimal volatility.

But in FAS, as you know, there is a guide post that the long-term range plan, important in our investment decision is what we call tactical asset allocation. So just because we have the guide post, we have to sit down as investors in that group and think about the macro environment of the world, credit fundamentals and whether or not any particular day, month, quarter keep into that exact guide post make sense or making some adjustments.

And I think we’ve already said, part of the build out of our investment function is to be more flexible, so that we’re not buying whole but rather buying manage and be able to adapt the different market environments.

I think it’s no surprise to anybody on the phone that we have just gone through in the second quarter, one of the highest rates of volatility relative to rates that we have seen since 2008. So if you go back to the financial crisis and you look at treasury volatility options, you’ll see the greatest amount of volatility when the Fed came in and plunged trillions of dollars into the system and at that time you saw rates decline was their intent. We’re seeing the unwinding of that as we saw the Federal Reserve coming to the market in May or so and announced the potential for cap bringing the QE3 programs and that cause from peak to trough the 10-year treasury to go from $170 to $270.

So in our view from a tactical standpoint we’re in a volatile interest rate environment and I should say, Japan as well, because of their Central Bank policies we saw deals on April 5th plum it and then come back up, and they think if Japan is successful there’ll be some pressure on their rates too.

So with that in mind and with the growth of the corporate program which is grown on the trajectory we expected in fact it’s a little ahead of our projection, with the fact that from the standpoint, as Dan mentioned, our investments in sales, net investment income, we’re actually running ahead of budget. We made the tactical decision to sit on the sidelines for now, re-weight that allocation more heavier towards JGBs for the third quarter and let’s see what happens with the Federal Reserve in September.

As you know, today, economic numbers on GDP were strong and treasury is backing up. Tomorrow, we may get some weak economic numbers. So our standpoint is rather stand on the sideline to the volatility because we’re performing in all -- on all of our metrics and even if we stayed at this new allocation, we still expect the range of the percentage allocations of the corporate program by the end of the year to be very close to our expect ranges because we are a little ahead in terms of the funding of that. So that’s all the background on the decision around the asset allocation.

Now, let me turn to some of your questions on PRM, AFS, HTM and SMR. So historically here at Aflac, as you know, we’ve used HTM health to maturity both for big portion of our JGBs and historically, our private placements, a large percentage went in HTM. On the outlook that as you know, we have low liquidity needs. We don’t have a lot of liquidity needs and we really can’t afford to hold assets for a long time.

Nevertheless, we did learn as we went through the financial crisis, particularly with non-JGBs, HTM is very difficult because if you do need to make credit adjustments, the accountants really put colors on you in terms of your ability to get it out of HTM and make an adjustment.

So the corporate program really was designed to be an AFS so we can buy and manage it, not have that on us going forward. Where SMR is today in the large rate rise that we saw, U.S. rates and rates rising in Japan in terms of the impact to SMR, we fully anticipated with that kind of rate rise, we would say our SMR dropped to where it is today, but as Dan mentioned and Kriss as well it’s within the range we expected 5% to 600%.

Nevertheless, our sensitive now to, kind of, rates continue to go up as higher from our standpoint and the sensitivity to our available for sale portfolio feeds into the SMR calculations going forward. So in that respect, we are pursuing a couple of hedging strategies if I could call it that, so that if ratio continue to raise whether in Japan or the US we have some built in protections to the portfolio, which will directly impact and benefit the SMR, so specifically Robin has talked about PRM, Policy Reserved Matching.

Now, PRM for most of our Japan peers is the more commonly used method as opposed to HTM. PRM is favorable in that. Unlike HTM, we do get the favorable atomic treatment that we have in asset, JGB’s, in PRM we don’t have to mark them to market for purposes of SMR. However, we’re allowed to trade those JGB’s for asset liability management purposes. That’s a valuable tool task. Our liability can change as rates go up and down, so that gives us more flexibility than HTM. So to mitigate interest rate risk to the end market, it is our plan to move a number of JGB’s from the existing AFS into PRM and that will help mitigate interest risk. That will happen over the next few months as we certainly want to be cognizant in our transaction costs.

With respect to US rates, we are exploring interest rate hedging strategies, we can’t really put US corporate assets and PRM that’s not an appropriate place where PRM was built and the rules are around JGB’s. So we’re looking at more interest rate in hedging strategies and it’s all of you collected tab, I talked about currency hedging strategies, which we’re now moving into our pilot program and colors and different operations that stay in concept as what we’re applying to interest rates. So we’re working carefully with our management and team in Japan, our management here in the U.S. to collaborate the sensitive of SMR if you will the changes in these different risk factors yen rates and US rates primarily to come up with the right percentages of these hedging techniques. Once (inaudible) PRM hedging strategies for US will be more economic if you will that give us the flexibility of rates raised, will have protection against declining values in the AFS security. So let me stop there and see if anybody wants to add anything or any other questions on that.

Ken Janke

This is, Ken. I think that’s a pretty thorough answer. The one thing I’d point out is not only are the dollar -- corporate dollar asset’s not an appropriate investment for PRM. It’s been our policy to historically to not put them in HTM as well. Our dollar assets are typically kept in AFS and that’s one of the reasons that the unusual spike in rates had the impact it did on SMR because we had more exposure to AFS.

Christopher Giovanni - Goldman Sachs

Understood, very helpful and then just one follow up question here on the August product. I guess can you comment a little bit about maybe pricing changes there? Some of the presses report that I guess 30% declines in rates for maybe a younger consumer, which I think is maybe a bit more than we would have thought but consistent Dan comment said, the FAB meeting that maybe the [younger age probably] used to pay a little less and the older group needs to pay a little more. So just some pricing comments around the different age cohort would be helpful thanks?

Ken Janke

Tohru?

Tohru Tonoike

Yes, I think our -- that’s his [question], new product is focused on the relatively young aged customers. So we have chosen the characteristics which we think that would be -- would appeal to that age group. So there are some adjustments in the pricing that they are based on the (inaudible) stuff. Overall profitability are pretty much the same as before, so we do not expect any say sub essential trends in the -- on the overall profitability.

Kriss Cloninger

Now, this was Kriss, a second Tohru’s comments on that. I think what we’ve found is that relative to competition, we think we’ve perhaps overcharged the lower premium rate classifications and undercharged the higher premium rate classifications for expenses. You can spread expenses any number of ways but we found that we tend to be more competitive at the higher premium rates and less competitive at lower premium rates. We try to move toward a better balance between the higher and lower premium rate relative to our competition.

So the lower rates went down some and higher rates went up some in the aggregate based on the distribution, we expect to sell, we all have about same profitability on the new product as you know.

Christopher Giovanni - Goldman Sachs

Thanks so much.

Operator

Thank you. Next question, John Nadel from Sterne Agee.

John Nadel - Sterne Agee

Thank you. Good morning. Just in, real quick numbers question, so the 76.8 billion yen repatriation this month that were just shy of the $800 million, that seems like -- if I recall that’s a bit above where you were expecting that repatriation to come in. Can you just help us understand what drove the upside and then can you just level set where is parent company cash including the repatriation, is that $2.1 billion?

Dan Amos

John, this is Dan. First off, at the analyst meeting, we said then that we estimated repatriation would be 70 billion to 75 billion yen and…

John Nadel - Sterne Agee

Okay.

Dan Amos

…and that compensated 80% of estimated FSA earnings. So FSA earnings came on little bit better. I can’t point to any specific reason why but we retained the 80% remittance. That’s what drove it up to 76.8 billion.

John Nadel - Sterne Agee

Okay. In the cash of the holding company then, I just add the $800 million to the 1.3 at the end of the quarter and we’re there?

Dan Amos

Well. It’s not all at the parent at this point. So right now if you look at on an operating basis, we had $576 million at the parent company at the end of June. Now, that excludes the net proceeds from the debt issuance we had because that’s basically pledged for debt servicing in future periods.

The repatriation that we brought back $795 million right now is warehouse at Aflac and then on the quarterly basis as we dividend up for the parent company’s needs, it will be moved up to the parent company to support things like share repurchases and dividends. So it’s not all there right now.

John Nadel - Sterne Agee

Got it. That’s helpful. Then I guess, the second is if I just take a setback and think about this quarter and your delivering operationally I think on every single metric or exceeding on every single metric, maybe there is a little bit touch weakness on sales but seems like you’ve got confidence in the back half.

So your stock is down and I think that’s all about the system. I mean, can you just help us understand, I know you just went through the strategy, there is PRM maybe a few other things, you’re considering on the U.S. sided that hedge against rate. How much urgency is there inside the company to get this done and help your investors be very confident that SMR is going to be stable at or near the upper end of your targeted range from here? 10-year treasury yields are up, eight basis points today just top of the GDP et cetera. So that’s moving quickly, I just wonder how quickly Aflac is moving?

Kriss Cloninger

This is Kriss. I’ll take a stand at that. It’s a little ironic to me, John, as I was reflecting on last quarter’s conference call, where you’ll all given me greek, the SMR was too high and we needed capital. How Japan this quarter as Eric summarized we have the significant spike in interest rates, so that drove the value of AFS assets down from the level it was at March 31. But I do want to point out that the fair value of the yen are nominated AFS assets are still right at par. We had a significant unrealized gain at the end of the first quarter, that basically went away in the second quarter and I try to tell the investment community on the first quarter call that we don’t tend to count on unrealized gains as a major source of capital. We know there are variably fluctuate. They go up and down, they went down this quarter. So instead of being way over the 500 to 600 target, which we were at the end of the first quarter, we’re down at the high-end of the 500 to 600 target. All that being said, we do feel some sense of urgency to protect our SMR levels from further deterioration associated with marking AFS assets to market. I will say, getting on a soap box a little bit, this is more of an accounting issued to me than a capital adequacy issue. If you look at our RBC ratio, little over 700% at June 30th.

Now I know you all are going to give me great through how can you lift RBC grow over 700% and it was SMR they on it. If RBC is up and the answer is it's all related to accounting for those AFS classified assets and marketing one group to market for FSA purposes and carrying the same group that amortized costs for U.S. statutory purposes. So, all that being said, we got to pay attention as tomorrow we’re doing it in addition to the accounting issues, not to let accounting grab economics, but I’ve got to be mindful that accounting is important. We are -- we’ve got multiple levers that were analyzing in terms of the cost benefit relationship of exercising some of our option to insulate SMR to any further significant declines beyond our target range. And what we are trying to do is get comfortable that we’re pursuing the most efficient approach from a cost to capital point of view. Some of the strategy has don’t cost anything that’s the PRM that Eric summarized the other strategies have some modest cost, but relatively, relatively immaterial and then some other strategies we would probably only look at if we felt pressed, so I say. So we’ve got a number of levers, we’re trying to evaluate… John and I know, you know that this what we’re paid to do. So we’re after it.

John Nadel - Sterne Agee

And just, real quick, so if we fast forward to this time three months from now and we’re on the conference call, is it fair for us to assume that one or more of those levers would have involved?

Dan Amos

Yes.

Operator

Thank you. Next question, Mark Finkelstein from Evercore.

Mark Finkelstein - Evercore partners

I guess maybe if we think about it this way, a 100 basis point movement rates is roughly 200 or some other points give or take? Based on these strategies that you are undertaking, how would you -- what is your target for that same sensitivity?

Dan Amos

I think one of the things we are doing is working on what the people are calling risk appetite statements and I think within the framework of risk appetite statements, we will provide guidelines to our operating people regarding our target values -- minimum target values for items like SMR. And 500 to 600 range we’ve quoted it have been kind of an informal statement of risk appetite. So we’re just kind of I mean we’ve communicated a lot of financial targets in the past and that’s pretty much where we operate them. So, we’re going to try to stay in those zones. We obviously want to avoid concern on the part of the regulators. So that’s an overriding objective too. Ken, you got anything?

Ken Janke

I don’t know that I can answer that.

Dan Amos

Okay, Mark I don’t know that was responsive intake.

Mark Finkelstein - Evercore partners

Well I guess maybe just, if you don’t want to give a number, can we say that, that sensitivity will likely be substantially reduced when we look at kind of March 31st ?

Dan Amos

That will be our objective, yeah that will be our objective. We use to reduce the sensitivity. But the overriding objective is to keep the SMR within the 500 to 600 target at various interest rate scenarios both yen and dollars, that’s what we are looking at. What keeps it in that range?

Mark Finkelstein - Evercore partners

Okay. And I think, I heard Kriss say that, the cost on the JGB side is nil and the cost to, I guess, execute the strategy on the corporate bond side is immaterial, I think, I heard you say that? I guess, the obvious question is, why haven’t we’ve been doing this all along then?

Kriss Cloninger

Well, we haven’t seen the volatility of interest rates. For example, I think, the thing we are looking at on the corporate bond strategy is probably interest rate hedging strategies that has cost associated with it depending on the level of risk and sensitivity, we want to retain or going through kind of cost effectiveness modeling exercise on that strategy.

The PRM does have some cost to it, because we won’t have to do some JGB transactions, you can’t just reclassify accounting wise, you’ve got to classify when you acquire them, so we would have to sell some JGB’s and buy similar replacements and alike, get them reclassified. But the cost didn’t material, considering overall affect, I think it somewhat 1 to 2 basis points on the trade. Eric, do you have any other comments?

Eric Kirsch

Yeah. I’d like to add, Mark, just a couple of comments to put in context and we’ve been very, very open since I’ve been here around our transformation. So taking the step back, as you know, historically, before I got here, the investment strategy, we are just very focused on either JGB’s or private placement and HTM.

The tools and the sophistication and the intellectual capital to do interest rate hedging strategies, which obviously encompassed doing derivative type strategies, modeling your portfolio, understanding these sensitivities are quite complex as you can all appreciate.

Two years ago when I got here, we were just not equipped to do that, whether it would the systems, the technology, having the appropriate operation set up to do all that, the legal agreements with broker dealers of this, et cetera. But part of our transformation program, a big part is design, so we can do all the investment techniques in the market that are necessary to run a large balance sheet.

The good news that I can tell you is, we do have that intellectual capital now. We have the systems capabilities to do the modeling and we are doing that with the highest priority which is what Kriss commented on before.

But these are new for Aflac, so it has to go through the appropriate governance procedures. We have to ensure the appropriate operational capabilities to set up to hit that aspiration. And in all those things a good news is, we are well along in our transformation, where we can impact, we are working on these things. But we’ve got a little more to go before we can prepare to execute.

But as Kriss said, by the time we have this call in the third quarter we’ll be able to tell you about the progress with PRM because that’s live and that’s moving along as we speak. And the analysis and ability to do the interest rate hedging on the U.S. portion is well along, and analysis and in the few weeks we’ll be able to move our ability to execute and do transactions to do that. So I think we’ll have good news for you by the end of the quarter, but that gives you the answer to why hasn’t it done before hopefully.

Mark Finkelstein - Evercore partners

Okay. One very, very quick follow up, I know that on waste sales, you kind of gave a couple different reason, one of which was shift to kind of [trough]? I’m just actually curious, if you’ve seen any changes in surrender activity on the product you saw in ’11 and ’12, was just that kind of change in Japanese market?

Dan Amos

No. We haven’t, I think, it’s too early to see that, our products have significant surrender charges in them prior to the time they become paid out that really won’t occur until 2016, 2017?

Mark Finkelstein - Evercore partners

Okay. Thank you.

Operator

Thank you. Our next question comes from Jeff Schuman from KBW.

Jeff Schuman - KBW

Thanks. Good morning. I was wondering if you could give us a little bit more big picture perspective on Japan Post. I think it’s pretty widely understood that Japan Post wanted to manufacture their own cancer product. I’m wondering if we should think of your arrangement is, maybe a temporary one until the IPO at which point they might reconsider competing against you with their own products or how should we think about it, the relationship in a longer term?

Dan Amos

I’m going to let Charles Lake to answer that.

Charles Lake

This deal is structured as a long term relationship deal and it is deep down in that regard. It is an exclusive agreement that makes it very clear that Japan Post group including Japan Post Insurance will be offering Aflac to cancer products. And again I maybe repeating what Tohru and Dan talked about, but Japan Post group has Japan Post Insurance as well as Japan Posting Network Company. That network company has 20,000 post offices that has 100,000 licensed agents.

As Tohru, talked about, we will be training them and so on, but there are already insurance agents that are trained. So they are going to be selling eventually when we reached 20,000 that is 100,000 agents gradually down the row Aflac Insurance and Aflac branded insurance that will gently develop within. The third component of this deal that was announced again makes that very clear that is, it is a long term relationship that we have structured here. This is a special product that we will work with them. Here are their views and then develop, but it is an Aflac branded product.

So in many ways as Dan talked about this deal, it is a game changer. It is indeed a president setting. Other insurance companies have had some access to the channel. But we are making in many ways setting a president here in a way that makes this a very, very big deal in Japan. The media coverage in Japan, all the front page articles that appeared when these deal was announced with any indication, all prime time news covering this deal with any indication, but that kind of a deal is not going to be a two year or three year deal that only was structured for the IPO so.

Hopefully, I’ve given you enough or some of the flavors of the nature of a deal in a way and why we believe it’s a long term.

Jeff Schuman - KBW

Thanks, Charles. That’s all very helpful. Just to be crystal clear, so when you say exclusive, that clearly means they won't sell products and other third parties. But are they precluded from manufacturing their own product?

Charles Lake

It is an exclusive deal that Japan Post Insurance will not be developing its own cancer product.

Operator

Thank you. Next question is Steven Schwartz from Raymond James and Associates.

Steven Schwartz - Raymond James

Probably a follow-up on that one, I guess two things. The original deal was structured in 2007. Obviously, this deal has more of the post hours. But I think the assumptions had been that you’re going to expand from the original amount. I guess my first question is, this didn’t really sell well the first time around. I guess -- what's different this time?

Dan Amos

I want to answer this.

Charles Lake

Okay, Dan.

Dan Amos

And then, you can Charles. If you remember when we announced, I specifically said, don’t get your hopes up too high on Japan Post. I specifically said that the banks would be much bigger than would be the post office. Everyone got real excited and our stock hit all highs at that time. I was always felt that we needed to temper it because we did not have the network or the group as we call it.

We only had one part of it and the insurance company and these agencies were not a part of it. So we never knew exactly what would happen, would the post develop their own product, would they not. This is now totally different. Now I’m willing to say this is a big deal. So I’m very excited about that.

Steven Schwartz - Raymond James

Okay. Unless something else is going to trend in, back in 2007, if I remember correctly Dan, and I do remember, you’re talking about the banks versus the post office and banks being much bigger. But I do think that you were thinking at the time that the post office might be as big as Daiichi back in the day which was about 10 billion yen. Is that reasonable to think about?

Dan Amos

We’re not going to make any comments on numbers at this point. We’re in too early stage, but as I’ve told, as said on CNBC, this is a game changer and I’m willing to make that comment, but I can’t quote numbers at this point. We’ve agreed to wait and see with Japan Post and so it would be improper at this time.

Steven Schwartz - Raymond James

Okay. I appreciate that. Thanks guys.

Robin Wilkey

We’ve got two minutes left. So we’ll take the last call, please.

Operator

Thank you. Our last question today comes from Suneet Kamath from UBS.

Suneet Kamath - UBS

Quick follow-up on Japan Post and then another one on the SMR, on the Post, it seems like another difference this time around is the 79 direct sales outlets that come with the deal. So what is your expectation that you’d start to sell-through those outlets?

Dan Amos

Charles?

Charles Lake

Yeah. Should I answer that?

Kriss Cloninger

Yes.

Dan Amos

Yeah.

Charles Lake

Yes. That's a arrangement, that would be an agency cont arrangement between two insurance companies and that just as it was the case with Dai-ichi it requires an approval from FSA. So we will be working on that. So pending approval for FSA, as soon as we receive that approval, we will begin that process.

And again, I think, Dan, hit all the key points and maybe I’m repeating, what he said, but this deal was the entire group with the holding company that ultimately makes it an integrated deal, makes it special. So, it's not just the Japan Post agency, Japan Post Insurance agency, but the Japan Post network both combined in a coherent strategy to implement as a group in exclusive deals to sell Aflac Cancer product. That's what makes it a game changer

Dan Amos

Charles, you might mention about new management.

Charles Lake

Yes. That’s a very important point. Mr. Nishimuro, the new CEO of Japan Post Holdings, one of the most highly respected international business persons in Japan, former CEO of Toshiba and former CEO of Tokyo Stock Exchange and he has taken on this leadership role and he has expressed his vision for the IPO and working together with different companies and were one of the first companies to have structured the deal and made the announcement. He also made a very kind statement in the press release that we issued. So this is a private sector seal with demonstrated record of success in a global economy and Dan and Nishimuro had a wonderful meeting and we are looking forward to that strategic cooperation in that regard as well with this new management team.

I also want to mention Mr. Ishii who is the President of Japan Post Insurance, Mr. Takashi from Japan Post Network Company, all are combined working together as a team with us. Tohru and I had a number of meetings with them and we are very much looking at this as a long term and working in a way that will make this a big success. So all of this is very positive in our view.

Suneet Kamath - UBS

Okay. And I guess, maybe I’ll just follow-up on Japan Post. So when we went down this road with the banks, it turned out that the banks wanted a really different product than what you guys were selling through the other channels, both in terms of how the product was structured, I believe, also in terms of how they were paid commission wise.

So, I guess that initially you are going to sell, I believe what you are going to sell through Japan Post is the same cancer product that you are selling today, but I guess as we think about Japan Post wanting to create their own product, also going public and wanting to be profitable, could we see something similar as we saw with the banks in terms of, maybe a modified product that may not be similar to the cancer insurance products that you guys have sold through other channels?

Dan Amos

No. It will be similar, but it will -- it will have Japan Post stamp on it, that is what they want. But it will be same profit margins and much similar -- it will still be a cancer policy. It's not like we are all of sudden going to in wait or somewhere else. This is going to be very similar, how you would view it from an analyst perspective.

Suneet Kamath - UBS

Got it. So, same margins, same benefit ratio, all that stuff.

Dan Amos

Exactly.

Suneet Kamath - UBS

Perfect. Okay. Thank you.

Robin Wilkey

Hi. Thank you very much. I appreciate all of you joining us today. If you like to follow up with any question, I will be available. So thank you very much. Bye-bye.

Operator

Thank you. This concludes the conference call. Thank you for joining and all parties may disconnect at this time.

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