Aflac's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Aflac Incorporated (AFL)

Aflac Incorporated (NYSE:AFL)

Q1 2014 Results Earnings Conference Call

April 30, 2014 09:00 AM ET

Executives

Robin Wilkey - SVP of Aflac Investor and Rating Agency Relations

Dan Amos - Chairman and CEO

Kriss Cloninger - President and CFO

Ken Janke - EVP and Deputy CFO and President of Aflac US

Eric Kirsch - EVP and Global Chief Investment Officer

Paul Amos - President of Aflac

Tohru Tonoike - President and COO of Aflac Japan

Analysts

Jimmy Bhullar - JPMorgan Chase

John Nadel - Sterne Agee

Tom Gallagher - Credit Suisse

Yaron Kinar - Deutsche Bank

Eric Bass - Citigroup

Steven Schwartz - Raymond James

Mark Finkelstein - Evercore

Suneet Kamath - UBS

Operator

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

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

Robin Wilkey

Good morning and welcome to our first quarter call. Joining me this morning is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Ken Janke, Executive Vice President and Deputy CFO, Aflac Incorporated and President of Aflac US; Eric Kirsch, Executive Vice President and Global Chief Investment Officer. Also joining us from Tokyo are Paul Amos, President of Aflac; and Tohru Tonoike, President and COO of Aflac Japan.

Before we start this morning, let me remind you that some of the statements in this teleconference are forward-looking within the meaning of federal securities laws. Although, we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they’re 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 will begin this morning with some comments about the quarter, as well as our operations in both the U.S. and Japan. And then I’ll follow-up with a few financial highlights for the quarter and then we’ll take your questions. Dan?

Dan Amos

Thank you, Robin. Good morning and thank you for joining us. I am pleased that we met and in many cases exceeded our financial targets for the first quarter. Let me begin today with an update of Aflac Japan, our largest earnings contributor. Pre-tax earnings in yen were up 4.6% on a reported basis and 1.5% on a currency neutral basis.

Sales of our third sector products in the first quarter were up 1.8%. This result is just slightly below our annual sales target and somewhat disappointing. Our focus this year remains on growing the sales of the third sector products.

Last quarter, we communicated our expectations that sales of first sector products would be down significantly, 60% in fact in the first quarter of 2014. This was based on difficult impact in the first quarter of 2014. This was based on difficult comparisons to prior year for sector sales, which climbed considerably ahead of the premium rate increase in April of 2013.

This quarter Aflac Japan’s first quarter product sales of first sector products were down 67.6%, which significantly contributed to our overall and new annualized premium sales decline of 48.7%. However, we continue to expect that for the second through the fourth quarters of this year, the sales of the first sector products will be down slightly compared to last year and we still believe that will be the case.

Looking at the long-term sales growth opportunities, we remain encouraged as we continue to expand and develop distribution channels. This includes an agreement between Aflac Japan and Japan Post Holdings, which I believe will gradually but steadily benefit our cancer insurance sales in the coming years. As we ramp up the sales representatives at the 3,000 post offices that sale our products, I believe our 2014 expectations for Aflac Japan third sector sales to increase in the range of 2% to 7% is still reasonable.

Now let me turn to the U.S. operations. In the first quarter, Aflac U.S. pre-tax profit margin was 20.8% and pre-tax operating earnings were up 7.9% for the quarter. Aflac U.S. sales declined 4.4%, which was discouraging considering our results last year, uncertainty around healthcare reform implementation has prompted many business and consumer to postpone the decision related to healthcare coverage specially with the groups 50 or less.

However, amid this doubt and uncertainty, we believe the need for our products is just as compelling if not more than ever before. That’s the message, we will continue to convey to businesses and to their employees. Additionally, I believe we have also executed -- we have not executed as well as we should have. This year we’re taking several steps we think will help sales overtime, this includes a focus on recruiting and training in addition to performance management and improvement of our sales coordinators.

At the end of the [launch], we completed the initial test works of Aflac’s exchange called Everwell. We are analyzing the first phase of the pilot program and are making adjustments to the platform based on those insights and field sales input.

Taking into account the strategic initiatives along with the challenging economic environment I continue to believe that Aflac U.S. sales will increase in the range of flat to up by a percent for the full year for 2014.

Turning to investments; I am pleased with the progress in the multi-year strategy to build out our investment division. Additionally we are on track to complete this build-out by the end of this year as we continue to make strides with the infrastructure, the people, the processes and the technology we are putting into place.

Now I’m going to provide you an update on the consolidated financial performance which was strong for the quarter. Excluding the impact of foreign currency, operating earnings per diluted share rose 5.9% for the quarter. This result puts us slightly ahead of our annual target of 2% to 5% increase in operating earnings per diluted share before the impact of foreign currency. However as the year progresses, we expect to see increased spending and higher benefit ratios than we experienced in the first quarter. As a result, we continued to believe we’ll generate operating earnings per diluted share in the range of 2% to 5% on a currency neutral basis.

On an operating basis, our first quarter annualized ROE was 22.7%. Keep in mind, Aflac’s ROE is sensitive to currency fluctuations because we are largely hedged our equity into dollars, but not all of our earnings. That means when the yen weakens, our ROE declines. Had the yen remained unchanged since the end of December, operating ROE would have been 26% in the first quarter. Based on our year-to-date returns, we expect to meet our ROE target range of 20% to 25% excluding the impact of foreign currency for the full year.

We remained committed to generating strong capital ratios, both RBC and SMR on behalf of our policyholders and our bondholders. Although we have not yet finalized our statutory financial statements, we estimate that first quarter 2014 RBC ratio will exceed 775%. Additionally we expect that Aflac Japan’s estimated first quarter SMR will be above 750%.

You will recall we anticipated repatriating approximately a ¥100 billion in 2014. Given our strong capital ratios and risk mitigation strategies, we now anticipate repatriating ¥127 billion yen this year. This increase in repatriation bolsters our liquidity and flexibility and gives us the utmost confidence in this year’s plan to repurchase $800 million to $1 billion for our common stock. It also allows us to focus more on positioning the SMR repatriation and repurchase for 2015.

For nearly six decades, Aflac has been delivering on our promise we made to be there for our policyholders when they need us most by paying clients fairly and promptly. We continue to believe we’re well positioned in the two best insurance markets in the world. Our success in these markets has presented us with the privilege and the responsibility of providing financial protection to more than 50 million people who count on us to be there when they need us most and we have delivered on that promise.

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

Robin Wilkey

Thank you, Dan. I’d like to go over some first quarter numbers this morning, especially those related to the yen impact which was notable. I will start first with Aflac Japan beginning with the currency impact for the quarter. During the quarter the yen weakened against the dollar 9.8%. In reference to the top-line in the yen terms, revenues as reported were up 2.2%, while excluding the impact of currency; revenues were up 1.5% for the quarter.

Investment income, as reported, increased 9.4%. Excluding the weaker yen in the quarter on Aflac Japan’s dollar denominated investment income, net income rose 4.5%.

In terms of quarterly operating ratios, the benefit ratio to total revenues declined over last year going from 61.4% to 59.9% in the first quarter. Reinsurance impacted the benefit ratio by a negative 0.5% in the quarter. The improvement in the benefit ratio reflects typical seasonality, as it easily increases as the year progresses. Excluding the impact of the weaker yen, the benefit ratio for the quarter would have been 60.3%.

The expense ratio increased in the quarter to 18.1%, up from 17.1% in the first quarter of 2013. Reflecting the improvement in the benefit ratio, the pre-tax margin increased going from 21.5% to 22.0%. Excluding the impact of currency, the pre-tax profit margin for the quarter would have been 21.5%. With the expansion of the margin, pre-tax earnings increased 4.6% in yen terms.

Excluding the impact of the yen, pre-tax earnings in the quarter increased 1.5%

Now let me turn to some numbers for Aflac U.S. Total revenues rose 1.2% for the quarter and persistency was 73.8% compared to 74.7% a year ago. And looking at the other operating ratios, the benefit ratio for the quarter was 47.1% compared to 48.0% last year.

The operating expense ratio improved slightly going from 32.5% to 32.1%. The profit margin was 20.8% compared to 19.5% a year ago. Primarily reflecting the improvement in the benefit and expense ratio, pre-tax operating earnings increased from 3.6% last year to 7.9% this year in the quarter.

Now turning to some investment activity for the quarter, let me first start with Aflac Japan. Approximately 74% of new cash flow was invested in JGBs for a weighted-average yield of 1.51%. During the quarter, 26% or $1.1 billion of new cash flow was invested in U.S. securities for a weighted-average yield of 3.37%. As a result, the total new money yield in Japan for the quarter was 1.99%, up 47 bps from December 31 and down 104 bps from a year ago. The portfolio yield was 2.86% at the end of March, up 6 basis points from the end of December and 15 bps lower than a year ago. In terms of U.S. investments, the new money yield for the quarter was 4.33%, up 1 basis point from December 31.

Turning to few other items in the quarter, non-insurance interest expense was $50 million compared with $48 million a year ago; parent company and other expenses $16 million compared to $17 million in the first quarter of last year. On an operating basis, the tax rate was 33.8% compared with 34.4% a year ago.

As reported, operating earnings per diluted share were $1.69, in line with a year ago. The significantly weaker yen decreased our operating earnings per diluted share by $0.10 in the quarter. Excluding the yen impact, operating earnings per diluted share would have increased 5.9%.

Lastly, let me remind you as Dan said, we’re reaffirming our objective for 2014 of a 2% to 5% increase in operating earnings per diluted share excluding the impact of the yen. In this year, we estimate that 1 yen move on the average annual exchange rate will equal approximately $0.031 to $0.037 per diluted share. So, if the yen averages a 100 to a 105 for the full year, we would expect operating EPS of $6.06 to $6.40 per diluted share this year. For the second quarter using the same currency assumptions, we would expect operating earnings to be somewhere in the range of $1.54 to $1.68 per share.

I’d also like to take this opportunity to remind everyone that our Annual Financial Analyst Briefing Meeting will be held in New York on May the 22nd, and we hope to see you all there.

Now we are ready to take your questions, but first let me remind you that to be fair to everybody, limit yourself to one initial question and only one follow-up that relates to that initial question.

Now we’re ready to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Jimmy Bhullar, JPMorgan Chase. Your line is open.

Jimmy Bhullar - JPMorgan Chase

Hi, good morning. I had a question on Japan third sector sales, so obviously they slowed a lot from the roughly 16% growth you had in the fourth quarter and the big part of that is the slowdown in the medical products. So maybe if you could discuss what’s going on there? And then related to that, how do you feel about the Post relationship and how that’s taken off and that just what your expectations are for how fast you can ramp up cancer sales by the Post?

Dan Amos

Tohru?

Tohru Tonoike

Yes, let me begin with our sales of the medical products. We started, we offered the new medical product in the August last year and have been selling pretty well for basically the full year. And it continues to sell well, even in the early part of this year.

It is true that it does not sell as much as it used to be, but it’s just still maintaining the momentum. And the first quarter is always a little bit slow quarter, because every year our agents tend to slowdown a little bit after that busy fourth quarter. And so, but we are feeling pretty confident with the expectation of our medical sales going forward.

And also that you asked about our expectation about the JP, Japan Post cancer product build up. And I can tell you that since October last year, when we expanded our operation with Japan Post, Japan Post and Aflac have been trying to build up the new level of the cancer business and we did it together and we have talked to each other and made an agreement how to do it and both Japan Post and Aflac are doing exactly what we have agreed.

So the basis is building up as we have planned. But because of the magnitude of the organization of the Japan Post, the rollout has been slower than we had expected but we are working on that. And now that April is the first month of their financial year, so they have entered into new stage in which the new things are started. For example, sale of the cancer product, Aflac cancer product now clearly defined as an important part of the Japan Post as business plan, so they have more clear vision of the importance of that cancer product among the Japan Post.

And also we expect that in addition to the Japan Post and the [compositions] company, will start working for us, as soon as their application for the new arrangement with Aflac is approved. So we are -- many good things, we’re expecting many good things in the near future. But I can’t tell you how soon we can do it, but we’re feeling pretty comfortable about the way it’s going.

Jimmy Bhullar - JPMorgan Chase

Thank you.

Operator

John Nadel, Sterne Agee. Your line is open.

John Nadel - Sterne Agee

Hey good morning everybody. Really a question for Kriss. Kriss you’ve been, if I’ve been following this correctly, I think you’ve been trying to shift our focus on repatriation from Japan from what used to be more of an earnings driven level of repatriations to one that’s more of a function of the capital ratios or SMR. So I guess the question is this, with the increase in your expected repatriation how should we think about what you guys are targeting for an SMR ratio if you allow for some stress and maybe more specifically the incremental ¥27 billion how do we think about that in terms of the impact on the SMR in points?

Kriss Cloninger

Okay. So you’re correct. I am trying to refocus the orientation of repatriation from FSA earnings toward the absolute level of the SMR. It’s not to say that we ignore FSA earnings at all, John, but….

John Nadel - Sterne Agee

Yes, understood.

Kriss Cloninger

In making the decision to target a higher repatriation then originally projected, specifically a ¥127 billion instead of about a ¥100 billion house in Japan week before last and looking at projected SMRs as of the end of the first quarter and alike and concluded that if we kept about the same SMR that we had at December 31st, which was around 777 specifically not in the 750 to 775 range we could bring back about 25% more than we expected or the ¥127 billion number and still achieve that level of SMR.

Now you made the observation that what’s our kind of risk adjusted SMR target I forget what the exact words you used were but it’s not the 775 is our target SMR and that’s got a cushion in it to allow for the fact that unrealized gains are substantial at the moment, what would the impact on the SMR be if interest rates went up some, what happens if we have some currency changes, what happens if credit spreads increase. And so we can absorb fairly a significant change in those factors and still stay above the what I’ve called the core target which is going to be closer to 600%.

John Nadel - Sterne Agee

Perfect.

Kriss Cloninger

It might be even a bit below that. Now we’re going to build out some of that John at the FAB meeting with the presentations Todd Daniels our Chief Risk Officer is going to make and Ken and I’ll offer additional comments. But you’re right on, we’re trying to produce an appropriate level of repatriation, primarily in relation to where our capital ratios are.

John Nadel - Sterne Agee

Very helpful. Thank you Kriss. And then just one quick follow-up on the level of investment spending in the quarter and for the year. If memory serves you had expected about $0.12 or $0.13 of incremental investment spending in 2014 over ‘13 can you give us some sense for how much of that was in the 1Q numbers, it doesn’t seem like much?

Kriss Cloninger

Well let me start and Eric may want to follow-up the $0.12 you mentioned was what I categorized as our headwind to increase in operating earnings per share on account of several investment related matters. One was lower yields than we started with at the beginning of last year because at the beginning of last year we put a lot of money into U.S. corporates in the first half of the year so we had a very good start on yield. This year we pulled back the second half of the year to invest more in JGBs, we restarted the U.S. corporates in the first quarter and I want Eric to comment on that.

But a combination of lower investment yields in the first part of the calendar year 2014 compared to 2013, of somewhat lower level of new cash flow because of the decline in the first sector sales also impacted that $0.12 estimate and a very little of it related to investment operating expenses.

John Nadel - Sterne Agee

I appreciate that. I was actually referring more to this modernization type project you’ve got underway particularly in Japan I’m sorry.

Kriss Cloninger

All right. The so called CVP project, yes I had estimated about $0.12 a share for that one also. So that’s where I got confused, but…

John Nadel - Sterne Agee

Yes sorry. And my only point is it, it doesn’t look like expenses really picked up very much at all in 1Q and just wondering if there was any portion of that $0.12 already incurred in 1Q?

Kriss Cloninger

Yes, there was. What we budgeted in estimating the $0.12 for CVP was in fact incurred in the first quarter of 2014. So, our spending is inline with the budgets that underlie the financial estimates.

John Nadel - Sterne Agee

Okay. But is that more back half of the year loaded like is it $0.03 a quarter, it doesn’t seem like it’s $0.03 a quarter?

Kriss Cloninger

I think it ramped up some, I don't specifically remember what it was by quarter. But I believe spending was scheduled to ramp up some throughout the year of 2014, but it was going to level out in 2015. So, it was like zero in the first quarter and $0.04 in the second third and fourth.

John Nadel - Sterne Agee

Okay.

Kriss Cloninger

We have some in the first.

John Nadel - Sterne Agee

Okay. That’s helpful. Thank you, Kriss.

Kriss Cloninger

Okay.

Operator

Tom Gallagher, Credit Suisse. Your line is now open.

Tom Gallagher - Credit Suisse

Thanks. Hey Kriss one quick follow-up for you and then I had one on U.S. margins. So, the increase repatriation amount, can you just talk about planned uses of that? Is there the opportunity potentially upsizing the buyback for this year or should we think about that more for paying an upcoming debt maturity?

Kriss Cloninger

No, we’ve already provided for the upcoming debt maturity. We took care of that with the bond issue last year. This additional repatriation increases our financial flexibility, I thank it gives us more confidence; we’re likely to hit the high-end of the target on the share repurchase this year. But quite frankly, we just decided it last week and I really hadn’t had a chance to simulate it with treasury team here.

But it increases our confidence; we can hit the upper-end of the share repurchase target. We already did for $15 million worth of $800 million to $1 billion target for the year. And we could have done more in the first quarter, but we want to keep some dry powder in case of market developments later in the year. So, I don’t know, Ken do you have any…

Ken Janke

The only thing I’d add to that it’s more likely that the additional repatriation will be warehoused in Columbus in the U.S. segment, but we have more than adequate dividend capacity if we elected later to send it to the parent company.

Dan Amos

And the only other comment that I want to make is that we’re well aware of how much shareholders feel about additional capital and that they’d like to see it in the share repurchase. So, balancing that with what we’ve always said about the dividend will be continued the way we operate going forward.

Tom Gallagher - Credit Suisse

Okay, got it. And then my question on the U.S. is margins are strong there, looks like it was coming from the reduction in the size of future policy benefit reserves meaning there were some kind of reserve drawdown. Was that related to lapses or can you provide some color on what happened there?

Ken Janke

Yes, this is Ken. It was related to the change in persistency that’s what largely drove it and you saw that also reflected in higher debt amortization. We also had lower operating expenses particularly general operating expenses and you know we’ve commentated last year in the third quarter that we’re undertaking some initiatives here to enhance our operations particularly in an enrollment initiative right now. And we haven't seen a lot of expenses associated with that yet. So, you will see that increase as the year progresses.

And the other thing that I’d note in there is, you may remember last year we made some changes to our retiring medical and to moving from a defined benefit to a defined contribution plan for new hires. And as a result a lot of that savings flows through the U.S. segment and it’s actually those savings that we had anticipated using this funding, the initiatives that we are working on the U.S. So again our expectation would be that we would see higher benefits in the next several quarters which is typically our seasonal pattern and we would also see greater spending on some of the strategic initiatives that we have outlined. The two highest priorities within those initiatives, I would say other than the enrollment that I mentioned are the Everwell exchange platform and then building out the sales distribution at Aflac group, so that we can better penetrate the large case market.

Tom Gallagher - Credit Suisse

Thanks, Ken. And just one last follow up is the expectation that the higher [lapse], is that some you view that is a one off or are you seeing any evidence that that’s going to remain alleviated for a while?

Ken Janke

So we always see at a bit, its always a bit lower in the first quarter but it’s something that we are carefully monitoring. We continue to see some mixed economic data, and we don’t know to what degree that maybe driving, but it’s something that we are watching very closely.

Tom Gallagher - Credit Suisse

Okay, thanks.

Operator

(Inaudible), I am sorry Bank of America Merrill Lynch. Thank you. You may begin.

Unidentified Analyst

Hey, good morning. I have a question on, excuse me the U.S. sales data and the change in recruiting agents and producing agents. So I believe this is the first quarter and about a year and half you’ve got an increasing recruiting agents but the producing agent count continues to decrease rather sharply. Could you just comment a little bit on the dynamics of the producing and recruiting agents, thank you?

Kriss Cloninger

Let me start, and I am sure Dan is going to want to add something to this as well. We have really been focusing the carrier side of our sales force meaning our sales management throughout the country to focus on the recruiting activity and the 3% increase that we saw in the first quarter I think is just the reflection of really our redoubled effort on recruiting. What we need to do is the process is to bring new recruits in and then have them convert to producing agents then you get that through training and mentoring through the coordinator system. And that’s the number that we are really focusing on turn. And we haven’t seen it yet but we have seen other activities, for instance improvements in the number of new payroll accounts that we think will lead to better our producers as we go forward.

Dan Amos

Yes. I have been now watching the U.S. and getting very actively involved for the last nine months or so. And we have created some short term disruption for what I believe will be long term growth. The segmentation of the why we do business to where our field force is concentrating on a 100 or less our core broker which is more brokers to deal with what I call community brokers and then national brokers. And our ability to pay higher commissions to the management team for 100 or less, I think it is going to be very positive now. The way we do it is not on first year commission and some renewal commission. So they actually won’t see the benefits until January of next year, I mean you just call out me telling I am going to give you $100 versus hand it to you. And so it has a little slower impact even though we are (inaudible) statements of whether it will be and things of that nature.

It takes a little while, but I do believe that there is great opportunity there for us. And I think the second quarter will still be down slightly, I want to be clear on that. But I think the second half, I am expecting it to be up. All that being said, we have got to execute well, we have got some problems on our own that we are working on, but I am encouraged because I believe with change comes disruptions but it also offers opportunity. And I believe there is lot of opportunities for us and we are working hard on doing that. And I believe ultimately we will prevail and see stronger growth, especially in the larger than 50 accounts because I think our individuals will continue to grow that business for us, but it would be actually easier to grow accounts 50 or more if we didn't have the field force, but I’ve got to deal with the field force who are so important to us and they are key to our growth. But I have to work that through and it’s just taking sometime. But I have been in talk to the vast majority of our field force, I’d say 80% to 90% of the field force I have been in front of, talked to and I’m encouraged by what I’m seeing, but it’s slower than I wanted to be. I’m frustrated that it’s taking longer than it is. But I do believe the fundamentals are there. And I could talk on and we’ll cover it in more detail at the FAB Meeting, but just because of a lot of financial questions you want, I’ll limit to that, but if you want to ask more, I’ll be glad to answer.

Unidentified Analyst

Okay, thanks Dan. And I appreciate that commentary. If I could just ask one follow-up, maybe just on Japan and Japan Post. And I believe this quarter in terms of talking about the Japan Post ramp up, this is the first time that just in your prepared script you’ve linked the 2% to 7% increase in sales with the ramp up of sales representatives in the 3,000 Japan Post offices. I’m just trying to reconcile those comments with Tohru’s comments that the roll out was slightly slower than expected. So, maybe if you could comment on that and if there is actually specific number of Japan Post cancer sales that’s built into that 2% to 7% guidance number? Thanks.

Dan Amos

Absolutely, there is a number built in to the 2% to 7% with Japan Post, but they have specifically asked us not to discuss that and we have to hear to their request. But most definitely and I believe they will achieve what they’ve told us. I generally found that to be true with all Japanese corporations. I saw it with [Daechi Life], I saw it with the bank channels I’ve seen with all the groups that we’ve dealt with that they come very close to meeting or exceeding the objectives that they set forth.

Saying that, remember all the new objectives were reset effective April the 1st with it being New Year for them. And so, I do expect them to make those numbers, because they are committed to it. They see it as a positive for them not just for us as they make decisions on what they are going to do in terms of going public or whatever. It’s a big benefit to both us and to them. So, go ahead.

Robin Wilkey

And I would also remind you that the number of post offices almost doubled in March. So that’s just occurred where we went from 1,500 post offices to 2,980.

Unidentified Analyst

Okay. Thanks a lot.

Operator

Our next question comes from Yaron Kinar, Deutsche Bank. Your line is now open.

Yaron Kinar - Deutsche Bank

Good morning everybody. Going back to that last discussion about the cancer product sales in the Japan Post, I guess I’m still having a little difficulty reconciling a few of the previous statements where on the one hand we have the 2% to 7% growth guidance sale impact. On the other hand I think what was there in the past was that the Ever product and the impact from the August launch would bring by the second half of this year. And I believe Dan you also said that the cancer sale roll out would be gradual. I just, I have a very difficult time getting to the midpoint of it 2% to 7% growth range without much more substantial growth in cancer products. And I would be thankful for any additional color you could provide there?

Dan Amos

Well, what I would say is the actual number of counts or post office does not totally give you a number, because one office in (inaudible) is bigger than a 100 offices in other location. So, total number of offices won’t directly tell you, but symbolically it begins to set the pattern for what we're talking about that we have doubled and that we’re on the road to do this.

So, the other thing that Tohru mentioned is, it is not just the post office, but also the sales organization of the post office eventually selling with us. And when it will come online and how they will do it. They’ve got which is compo; they have any normal sales force that is very, very strong in dealing with the consumers and exactly how that will come on. And all I can really tell you is that what I’ve said in the fourth quarter is, is that we absolutely expect to achieve that number. And I wish I could give you more color on it, but that’s part of doing business in Japan. As you may know or not know, one time people of other companies discuss something that was told not to do and it created enormous problems between the two companies.

So, we don’t want any problems because we are working so well with them and appreciate. But we let me be clear, we don’t get to go at our pace, we have to go with their pace, but their pace and our pace are the numbers reflected in the sales target that I gave you.

Yaron Kinar - Deutsche Bank

Okay. And then one follow-up on U.S. sales and persistency, usually when I look at persistency coming down it’s some indicative of more of your shopping around in the turnover and you got sales hoping to be a bit lower, because you’re not benefiting from lower persistency on the other hand. Could you maybe add some color there on what’s hindering sales at this point?

Dan Amos

Say that one more time?

Yaron Kinar - Deutsche Bank

Sure. In the U.S., I’m looking at persistency rates come down a bit even one year just for seasonality. Usually when you see some lower persistency, it often comes hand in hand with a bit more sales just because you see more turnover in accounts and more shopping around and we haven’t really seen that in the sales number this quarter. So, I was curious maybe you could give us a little more color on what’s been holding back sales?

Dan Amos

Well, part of it is recruiting from the year before. There is no doubt in my mind that the recruiting has hurt us to a great degree, because there is enormous correlation between the number of new accounts, I mean the number of new recruits and the number of new accounts they open. And so, Tom, our Director of Sales has really been concentrating on ramping up the number of people that we hire.

Also one of the things is simply putting in these new programs in the separation; we’ve had meetings that have disrupted us to a degree in terms of just short-term sales. But putting excuses aside, I just don’t think we’ve done a good enough job and we got to do better. I’m not going to go blame a bunch of stuff except us. And we’re going to pick it up and we’ve got little problems here and there on everything, but I believe the economy is no worse than it was if not a little bit better. I believe the accounts over 50, they’ve adjusted pretty much and there is no major change there.

It seems to be a little bit of a problem with the accounts of 50 and less because they are uncertain to some degree and of course that’s where we write the majority of the business. But overall, I think we should be doing better and I’m going to be expecting more in the second half.

Yaron Kinar - Deutsche Bank

Okay. So, there is 0% to 5% growth target or guidance you’re selling to?

Dan Amos

I’m still believing that. And as I said, I’ll live for the fourth quarter; I mean second quarter to be down slightly. So, I don’t want to mislead you. But I will be hard lived with it and end up saying, I warn you now, you don’t have to tell them, they know it.

Yaron Kinar - Deutsche Bank

Thank you.

Operator

Our next question comes from Eric Bass, Citigroup. Your line is open.

Eric Bass - Citigroup

Hi, thank you. Just had a couple of follow-ups on sales in Japan, I guess first could you talk a little bit about the product cycle in Japan and if that’s shortening at all? And I guess I was surprised a little bit by the sharp sequential drop off in medical sales, I would have thought this product in many ways is opening a new market for you, you still might have had a little bit of a longer sales cycle? And then secondly just on Japan Post, do you get any sense that agents maybe waiting to push the cancer product until the post exclusive product is rolled out later in the year?

Dan Amos

I can answer these, but I’m going to let Japan answer, whoever wants to.

Tohru Tonoike

Yes. So first about the medical products of U.S. instead the product cycle is shortening in Japan. And yes that doesn’t, but might be true to some extent, but we don’t see the big difference in the paired which the new product continues to be successful though. I think we are still within a period in which the sale is still good. Like I said, we see some decline from the fourth quarter last year to the first quarter of this year, but still close to 20% of the growth is a good number and we will be maintaining that growth rate as long as possible. The competition is very hard. That is true. But I think we are very competitive in that and we will be able to maintain our share in that. And those are the -- Japan Post, if it’s true that Japan Post wants to see the special product for them, but that doesn’t hold them back from selling the existing products now. They now as I told you before that from the April 1st, the sale of the cancer product is included in their annual business plan. So they have a good reason to say make efforts to the sales of cancer plant today. So if we can offer them the new product specific to them that will be nice. But even now they’re working very hard to expand their cancer business within their network.

Paul Amos

Yes. And one thing, this is Paul, one thing I’d like to chime in and say, we’re spending a good bit of time and resources on helping Japan Post get up to speed. As you remember back when we did the bank channel years ago, they took extended effort and that was for a smaller roll out in terms of total number of branches in the initial roll out. Here we’re rolling out a massive number of larger offices in a short period of time. In fact, as of April 1st, we’ve shifted 52 people over to work full-time on helping the post offices get up to speed. Now we know that’s going to be a gradual ramp up. We’re continuing to stay in front of each of the post offices and their sales staff to make sure it’s most effective process.

In terms of product development, the reality is that we continue to keep our product development cycle moving as fast as possible. As you think about we’ve launched our medical plan last year, we planned to launch another third sector plan this year if at all possible and we continue to negotiate with the government and other people to make sure that happens potentially in the latter half of this year.

Eric Bass - Citigroup

Great. Thank you for the color there. And if I could just ask one quick one on the investment portfolio, just what are you targeting now as a percentage of Japan cash flows to invest in U.S. dollar securities for 2014? And then should we still assume that that’s primarily corporates at this point, or are you expecting to broaden asset classes over the course of the year?

Dan Amos

Before Eric says that, this is Dan, I want to make one other comment. With products changing so fast which they are faster that’s the reason we need these additional funds for the computer update because things are changing new builds and whistles on products, new ways of doing things. So I just want to reiterate as you talk about these changing products and moving faster that’s one reason the expenses have gone up in our IT systems to be able to do that. So, now Eric sorry.

Eric Kirsch

Thank you Dan. No problem. Relative to 2014, looking at the entire year and primarily focused on the Japan portfolio, we would expect as a percent of all Japan cash flows, the U.S. dollar allocation to be in the 35% to 40% range. It could go higher depending on market conditions and our tactical decisions but we would expect that and the remainder to be in JGBs. Relative to new asset classes, we are ramping up those efforts. That’s always been part of our plan. I would acknowledge because of the volatility last year particularly with interest rates, we focused most of our resources and attention there. So the concept of the outsourcing in new asset classes did get slowdown but we’re ramping up those efforts again this year. Having said, it takes much of research of different asset classes, the ones that did our risk appetite. it takes working with our partners and accounting and finance to get prepared for that.

So in terms of actual implementation in new assets, something could happen but it would be more likely to be towards the end of the year but I would certainly expect in ‘15 you’ll hear more about that with respect to new asset classes.

And finally on the U.S. dollar allocation, and I think last quarter we talked about this and certainly at FAB I’ll talk about this, no it’s not going to be all in corporate securities. We’ve broadened out our investment capability and we’re thinking more tactically around markets. So when we think of the U.S. allocation, corporates fundamentally are very sound as you all I think would appreciate and agree from a credit standpoint. However, from a spread standpoint, technically speaking they’re at all-time lows and continue to get tighter because demand in the market for yieldy assets is very, very high but because of that, we're actually using a mix of U.S. treasury securities and corporates in our U.S. dollar allocation with the thought being we’d rather leave some dry powder for a later day. Now we’re going to meet our NII budgets, which we have an eye on as well. But within that, we’re going to use our discretion in terms of where markets are, spreads are, yield levels are to make tactical decisions within the asset class of U.S. dollars or frankly between U.S. dollars and JGBs as well. So that will develop through the year. But I think I’d give you a good roadmap of our expectations absent any big volatility in the market that could change that.

Eric Bass - Citigroup

Great. Thank you.

Eric Kirsch

Welcome.

Operator

Our next question comes from Steven Schwartz, Raymond James. Your line is open.

Steven Schwartz - Raymond James

Hey, good morning everybody. Looking at U.S. sales some follow-ups. Dan, can you pin point maybe what territories or what areas of the country that you found to be most disappointing when looking at the sales in the quarter?

Dan Amos

I was -- I'm sitting here trying in my mind break it down. I think four are up and four down. I know the Southeast is down and I know that the North is up, the way we do it. I can’t remember any of the specifics. But I do know those two particular ones. I know the Pacific, the number of recruits is way up and we're expecting that to continue. We’ve had a couple of management changes, so that impacts us too, but I'm trying to think of anything else. But it's more this -- I look at more of the states than I do the territory itself and what's going on from that perspective. And the place we've got to see growth is got to be California, New York, Florida, Texas. The same states you think of in terms of winning of Presidential election is the big states with the population. It's not going to be the Georgia. I mean house penetration and population as South Dakota, they are not going to carry us over. They're great state and they’re good example whereby to look to and that area of the country is doing very well. So I can mention them when I think about it. But it's got to be these metropolitan areas that have got to pull us for future growth. So, I’ll give you more detail about at the Analyst Meeting. I’ll break that out, getting broken out for you where you know more but I don’t know more than that.

Steven Schwartz - Raymond James

That's okay. Just I know you don't want to lay blame anywhere but you’ve got to wonder about, I got wonder about whether. Also on the number of agents, so one thing I noticed, maybe you could talk about this and I realize license sales agents isn’t a key parameter, but they did fall dramatically despite the increase new including. And I'm wondering if there was a change there, if there was a calling or anything like that going on.

Ken Janke

Steven, this is Ken. We did have a calling, we periodically do parts our agent records for non-producers, we also had some that failed to take required training and those are naturally purged as well. So it would kind of a -- it was a clean up if you will of the ranks. And we don't do it annually, but we do periodically and because that it does get noticeable.

Steven Schwartz - Raymond James

Okay. I'll stick to my two. Thank you.

Operator

Our next question comes from Mark Finkelstein, Evercore. Your line is open.

Mark Finkelstein - Evercore

Hi, good morning. Kriss, if you said it, I missed it, I apologize, but what is the ratio of repatriation to expected year-end FSA earnings with the 127 billion of repatriation?

Kriss Cloninger

We had a gain on the reinsurance transaction during the FSA fiscal year ending March 31, 2014, that will be included in FSA earnings. The repatriation of a 127 billion lets’ say it's probably going to end up being around 80% again including the reinsurance gain, but it will be close to a 100% excluding the reinsurance gain. Again, I want to reiterate that are more focused on SMR than FSA earnings, but those are the order of magnitudes of the repatriation relative to earnings.

Mark Finkelstein - Evercore

I guess the question then becomes and maybe this is early and you’ll talk about it more in a few weeks, but I mean are we heading upon a new normal or a higher kind of standardized level for repatriation that we should be thinking about?

Dan Amos

Well I hope so, its my intend to continue to decrease the difference between the FSA reported earnings and say U.S. statutory earnings, or U.S. statutory earnings are increasing at a more rapid pace than FSA earnings. I talk someone on the road about the difference between FSA and staff to reserves and how the more conservative assumptions and the like underlying the FSA reserves and factor we have to post full strength net level reserves on an FSA basis, drags down our FSA earnings in the year, we write a lot of new business and statutory gives us a little bit of breakthrough than actual technique call pulmonary term.

We’ve just seeing significant increases in FSA reserves, our stab reserves and I think the stab reserves, we are satisfy with those adequate from an economic point of view, and probably more than adequate from an economic point of view. So I am working toward reducing the difference between stab and FSA reserves which improves, will improve our ability to repatriate.

Mark Finkelstein - Evercore

Okay. And then just finally any additional updates or progress on I guess release reducing of statutory stream potentially through internal or external reinsurance agreement?

Dan Amos

Well, we will probably have reinsurance as a significant tool to help us reduce the change in the difference between FSA and stab. I am going to give you some additional information on FAB about that what progressions are, but roughly the projected increase would be about 60 billion yen next year and the difference, I think I can use some techniques to manage that difference down and to allow more of that to follow FSA earnings.

But again I am focused on the SMR more than earnings, but I am trying to manage our ability to repatriate up by creating a stronger and a more stable solvency margin, one that’s less subject to volatility and I think the reinsurance agreement we did this year, the other actions we took to minimize volatility and SMR give you an indicator as to why we were comfortable increasing repatriation this year and that is one of our management objectives.

Mark Finkelstein - Evercore

Okay, thank you.

Robin Wilkey

I think we are coming to the top of the hour. So we have time for one more question.

Operator

Our next question comes from Suneet Kamath, UBS. Your line is now open.

Suneet Kamath - UBS

Thanks, good morning. I just wanted to go back to one of the responses to previous question, Dan I think in describing the U.S. sales force and all the dynamics. You may have comment I will try to pair phrase it, something like it would be easier to grow in the 15 over market without the field force. And I didn’t quite understand what you meant by that, can you describe that in a little bit more detail?

Dan Amos

Sure I would be glad to, what I am saying is that our field force is key to our business and as we deal with larger accounts broker don’t like to necessarily deal with our field force, but our field force is what build our company we have to keep them. So there is conflict between brokers and field force, so m to constantly keep the field force writing the accounts of 100 or less especially new people that are getting into business.

And I can give you this is example, it’s kind corny but it’s a true story, I mean true example, if I have said to you, I am going to take you fishing and I am going to take you and you can fish in this lake and you will catch all the fish you want. But none of them will be bigger than a pound, but you’ll leave with all you want or I’ll take you over here and you can fish in this lake and you can catch a few, but there is a 10 pounder in there, almost everybody wants to go to the lake and try to catch the 10 pounder. That’s true with the sales force you hire a new person, they all want to go land the big account, but the fact is they will make a live in and they will be able to eat and do what they need to do on writing the one pounders or the small accounts. And trying to create that wage creates conflict and trying to keep them to do that.

Because most of the time, our associates are going to do great with a 50 or less or 100 or less. But they are going to land the big ones, but brokers tend to land the bigger ones. So, is a disruption, before we just say go out and call on anything you want do whatever you want to do. And now we try to move them to the younger through call me smaller accounts through compensation. So, that’s what I’m talking about.

Suneet Kamath - UBS

Got it, okay. And then my follow up, is just if I think back to the history of Aflac U.S. when you had these sort of issues in terms of managing the field force. My recollection is it always seems to take a little bit longer to correct than maybe some of us think. Do you think that is potentially the case this time? Or do you think that, you could really get on top of this and really get to that 0% to 5% for this year?

Dan Amos

Well, I wouldn’t say it, if I didn't think it. I think it’s going to be top. But I’ve always found a way to win and my age makes no difference, I’d say I’m working harder and actually I’m enjoying it. There is lot of the strategies we’re putting in place are doing were carry over for things that have been going on in the past. It’s just the changing environment, it’s not that our strategies were wrong, it’s just things are changing.

So, I still believe that I tell you I mean that’s why I said the second quarter is going to be down slightly. So, I’ll give you more inside into that at the FAB Meeting. But again, I believe with change comes opportunity. And I wouldn’t swap our U.S. market in our potential for anybody else out there. I mean I don’t want to be in the life insurance, I don’t want to be in a property casually. I still think our markets got the biggest potential. And I think we’re in the right place.

And final thing I would say is we’re ending this call is we are a written trashy business either. The one thing that’s the undercurrent of everything we’re doing right now is look at the margins, look at the business we’re riding, we’re making sure that what we put on the books is good business and you don’t have to come back three years from now and say yes, you wrote all those sales increases. But they didn't end up being profitable and we’re not doing that.

So, we’re being cautious and making sure as we take on new markets and new things, that we ultimately protect the shareholders and make sure we give a good value to the policyholders.

Suneet Kamath - UBS

Understood. Thanks Dan.

Dan Amos

Alright.

Robin Wilkey

Thank you everybody for joining us. If you have further questions (inaudible) and we have to see you all at our Analyst Meeting on May 22nd. Thanks so much. Bye, bye.

Operator

This concludes today's conference call. Thank you for participating. You may disconnect at this time.

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