Robin Wilkey - Senior Vice President, Aflac Investor and Rating Agency Relations Dan Amos - Chairman and Chief Executive Officer Kriss Cloninger - President and Chief Financial Officer Paul Amos - President, Aflac Ken Janke - Executive Vice President and Deputy Chief Financial Officer, Aflac Incorporated and President, Aflac U.S.

Eric Kirsch - Executive Vice President and Global Chief Investment Officer Tohru Tonoike - President and Chief Operating Officer, Aflac Japan.

Randy Binner - FBR Capital Markets John Nadel - Sterne Agee Yaron Kinar - Deutsche Bank Steven Schwartz - Raymond James & Associates Jimmy Bullar - JPMorgan Jay Gelb - Barclays Christopher Giovanni - Goldman Sachs Joanne Smith - Scotia Capital.

Welcome to the Aflac’s Second Quarter Earnings Conference Call. Your lines have been placed on listen-only mode 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..

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, Executive Vice President and Deputy CFO, Aflac Incorporated and President of Aflac U.S.; Eric Kirsch, Executive Vice President and Global Chief Investment Officer.

Also joining us from Tokyo is Tohru Tonoike who is 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 are prospective in nature. Actual results could differ materially from those that we discussed 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 will turn the program over to Dan, who will begin this morning with some comments about the quarter.

Dan?.

Good morning and thank you for joining us. I am very pleased that we met and in many cases exceeded our financial targets for the second quarter. Let me begin today with an update on Aflac Japan, our largest earnings contributor. For the quarter, pre-tax operating earnings in yen were up 2% on a reported basis and 0.8% on a currency neutral basis.

Our focus remains on growing the sales of the third sector products, which were up 4.5% for the quarter and in line with our annual sales target. For the six months, third sector sales were up 3.2%. Sales of the first sector products declined 20.3% for the second quarter, which was down somewhat more than we had anticipated.

Third sector sales grew sequentially over the first quarter, primarily reflecting an increase in cancer insurance sales from Japan Post. The number of postal outlets selling our cancer insurance rose from 1,500 to 2,980 in March 2014 and has remained at that level as of June 30, 2014.

We were very pleased that at the end of June, Kampo was known as Japan Post Insurance Company received FSA approval to sell Aflac’s cancer insurance. Kampo began selling our cancer product last week through their 79 outlets that employ approximately 1,200 sales agents.

Another important aspect of our agreement is the sales education and training support that Kampo provides to post offices selling our products. This support, which includes sales practices in compliance helps expand our reach to agents selling our products.

Looking ahead, we believe this alliance will further strengthen when we rollout the exclusive cancer product for Japan Post. Pending FSA approval, we anticipate introducing this new product later in the year.

We remain encouraged with our growing partnership with Japan Post Holding and we believe this alliance will gradually but steadily benefit our cancer insurance sales.

With respect to third sector sales, we have seen the contribution from traditional agencies slowing down and we have developed partnerships with new channels that help offset that decline. These channels include Japan Post and we are making gradual, but steady progress with advancing our sales through the postal outlets.

However, the second half of the year will present us with difficult comparisons due to the medical product we introduced in August of last year. Taking these factors into account, we anticipate third sector sales for the full year will trend toward the low end of our expectations of 2% to 7% increase. Now let me turn to the U.S. operations.

In the second quarter Aflac U.S. pretax earnings were up 5.7%. As anticipated our second quarter sales results continued to be challenged declining 8.2%. For the first half of the year, new sales were down 6.4%. You recall at our May Analyst Meeting I told you that I was laser focused on a number of initiatives we are implementing to improve sales.

We have spent a lot to time evaluating the market and our business model. We determined our sales model is not at as effective as it was in the past, it needs to be enhanced. As such, we are implementing tactical initiatives centered around better performance, management and competitive compensation and is more closely tied to our cooperate goals.

These measures are designed to more effectively link sales management success to Aflac success. First, we are enhancing compensation through an incentive bonus for our districts sales coordinators, the first level of sales management who are primarily responsible for their own personal production and training new sales associates.

On July 1 districts sales coordinators began receiving a bonus based on new sales written at small businesses or under hundred. If it proves to be to effective which we expected to be we will use it again next year. We believe it’s vital to ensure all levels of our sales hierarchy had the potential to earn the best compensation in the industry.

Second, we made the decision to eliminate the commission based position of the state sales coordinator. To better manage our state operations, we have introduced the new position of Market Director. Market Directors will be salaried with the opportunity to earn sales related bonuses.

We believe this will enhance our performance management and better align their pay with the new business results. This change will be effective on October the first of this year. Further, we think this approach will allow us to more effectively and consistently manage the execution of the U.S. sales strategy over all state operations.

This is especially critical given our strong brand, the rapidly changing marketplace and the expanding distribution that includes broker and career agents. From a sales perspective, changes of this magnitude will be disrupted in the short run and it takes some time to gain traction. These changes are not without cost.

We currently estimate that the quarterly costs related to these U.S. sales initiatives will be around $0.02 per diluted share beginning in the fourth quarter 2014.

We will finalize 2015 expense estimates for these initiatives in our budgeting process and they will be reflected in the 2015 guidance that we will provide in October with the third quarter earnings release. Given these changes in the sales results in the first half of the year, we now expect 2014 sales to be down 4% to 8%.

Now, I will provide you an update on the consolidated financial performance. Operating earnings per diluted share excluding currency were strong, rising 4.3% for the quarter and 5.4% for the six months. I will remind you that the second half of the year we expect to see increased expenses on various initiatives in both the U.S. and Japan.

As such we currently expect that the 2014 operating earnings per diluted share on a currency neutral basis will be up 3% to 4% for the full year. On an operating basis our second quarter annualized ROE was 21.3%. Based on our year-to-date financial results, we expect to meet our annual ROE target of 20% to 25% excluding the impact of currency.

We remain committed to generating strong capital ratios both on the RBC and the SMR on behalf of our policyholders and bondholders. Although, we have not yet finalized our statutory financial statements, we estimate that our second quarter 2014 RBC ratio will exceed 800%.

Additionally we expect that Aflac Japan’s estimated second quarter SMR will be about 800%. You will recall that at our Analyst Meeting in May we raised our profit repatriation estimate from ¥100 billion to ¥127 billion. By tomorrow, we will have repatriated ¥131.4 billion.

As such, we have the utmost confidence in this year’s plan to repurchase $1 billion of our common stock. For the first half of this year, the company purchased more than 515 million of its shares. For six decades, Aflac has been delivering on the promise to be there for the policyholders when they need us most by paying claims fairly and properly.

While I am pleased with our financial results, I won’t rest until sales are better reflected in Aflac’s full potential. So, now, I will turn the program over to Robin.

Robin?.

Thank you, Dan. I would like to go over some second quarter numbers this morning starting with Aflac Japan. Beginning with the currency impact for the quarter, the yen weakened against the dollar 3.3%. In reference to top line in yen terms, revenues as reported were up 0.7% for the quarter. Premium income declined 0.4% in the quarter.

Reinsurance lowered premium income by 2%. Excluding the impact of currency, revenues were up 0.4%. Excluding the weaker yen in the quarter on Aflac Japan’s dollar denominated investment income, net investment income rose 5.8%.

In terms of quarterly operating ratios, the benefit ratio to total revenues declined over last year going from 61.5% to 60.6% in the second quarter. Excluding the impact of the weaker yen, the benefit ratio for the quarter would have been 60.8%. Reinsurance had a 50 bps positive impact on the benefit ratio in the quarter.

Additionally, the benefit ratio improved in the quarter due to favorable claims experience in our cancer block as well as typical seasonality, which usually increases as the year progresses. The expense ratio increased in the quarter to 17.7%, up from 17.0% in the second quarter of 2013.

The pre-tax profit margin increased during the quarter going from 21.5% to 21.7%. Excluding the impact of the yen, the pre-tax profit margin for the quarter would have been 21.5%. With the expansion in the margin, pre-tax earnings increased 2% in yen terms. And excluding the yen in the quarter, pre-tax earnings would have been 0.8%.

Now, let me turn to Aflac U.S. Total revenues rose 1.3% in the quarter and persistency was 76.4%, slightly up compared to 76.3% a year ago. And looking at the operating ratios, the benefit ratio for the quarter was 41.1% compared to 49.1% a year ago. The operating expense ratio increased slightly going from 31.4% to 31.6%.

Pre-tax operating earnings increased 5.7% in the quarter. Now, turning to investment activity for the quarter, let me start with Japan, approximately 26% of the new cash flow was invested in JGB at a weighted average of 1.32%. During the quarter, 74% or $1.5 billion of the new cash flow was invested in U.S.

securities for a weighted average yield of 3.02%. As a result, total new money yield in Japan for the quarter was 2.58%, up 59 basis points from March 31 and down 44 basis points from a year ago. The portfolio yield was 2.85% at the end of June, down 1 basis point from March and 16 basis points lower than a year ago.

Turning to few other items in the quarter, non-insurance expense was $51 million compared to $48 million a year ago. Parent company and other expenses were $19 million compared to $18 million a year ago. On an operating basis, the corporate tax rate was 34.5% compared to 34.4% last year.

As reported, operating earnings per diluted share were $1.66 compared to $1.62 a year ago. The weaker yen decreased operating earnings by $0.03 per diluted share for the quarter. Excluding the yen’s impact, operating earnings per diluted share would have increased 4.3%.

Lastly, let me comment on and reiterate some of the statements Dan has already made. We have tightened our range for our 2014 objective and now expect a range of 3% to 4% increase in operating earnings per diluted share.

For the third quarter, if the yen averages between 100 to 105 we would expect operating earnings to be in the range of $1.38 to $1.47 per diluted share. Using the same currency assumptions for the remainder of the year, we would expect to report operating EPS of $6.16 to $6.30 per diluted share for 2014. Now, we are ready to take your questions.

But first, let me remind you that to be fair to everyone, limit yourself to one initial question and only one follow-up that relates to the initial question. We will now start with the first question.

Carol?.

Randy Binner, FBR Capital Markets, your line is open..

Hi, great. Thank you. Good morning. I wanted to ask a question kind of higher level about U.S. sales. I appreciate all the commentary on the various initiatives regarding mostly incentives for managers, but other structural changes.

But I guess my question as you know, you’re not the only one we’ve seen maybe bumpy sales kind of in your segment of the supplemental health market in U.S. And so is there something going on from a macro perspective from your perspective meaning the economy, how things are changing in certain regions you have or is it Obama care.

What is it from a macro perspective that’s maybe causing some of this headwind?.

Well, we spent a lot of time trying to analyze this. And I believe that – it’s our – we’ve been doing business basically the same way for 50 years. Our structure is paid absolutely same way and what we’ve always said the founders going back to my dad and others was it the agent does well everybody else up the structure does well.

And it’s gotten out of proportion to some degree. And we needed our districts to make more money and we needed to make sure that everyone was aligned to where the company did well the others. And I think that’s our problem and I think we’ve addressed that. I’m not so much worried at this particular time.

I will say that there is still is on certainty with people trying to figure out and there is no one just tearing the numbers up and terms of sales growth in our particular sector, no matter of what. But I think we can do much better and I think focusing them on that will allow that. I’ll just give you an idea.

At our state level, one of the problems we have is when a person comes in and was taking over state, they because it was an independent contractor status. They would take home such high expenses that it was hard for some people they ever take that position.

Now, we’re going to pay everything and our state sales coordinators will be the highest paid or we’re going to call the market directors now will be the highest paid in the industry. And we don’t have to worry anymore about anyone being able to take on the expenses we’re going to cover that. And over a three-year period, it should break even for us.

But that will make a big difference. It means not only can we hire internally, which is the way we want to do it. But we can hire externally.

If there is someone else, we want to talk to we can talk to them whereas before we couldn’t talk to them because there was no way they could take on those expenses that we’re in the hundreds of thousands of dollars.

So, I think its position us correctly in the new environment we’re in and I’m very pleased with the attitude of our state people and their willingness to adapt, they get it, they understand that the company has to do well and they have to do well.

And I just believe long-term, this is going to be very effective for us and I still believe that market is huge and has great potential. But until everything goes into effect, there is still is uncertainly in the marketplace as people look for it to happen..

I guess a follow-up there, so your answer is you think it’s tactics and that’s very clear. But then does that mean that do you know whatever this Obamacare distraction has been.

Do you feel like are you through the worse of that, kind of people getting more organized and how they approach that and maybe getting closer to make buying decisions?.

Well, everyday it’s in the press about is this going to pass or is that going to pass or can they ask that all long that once you got putting in, it was never going away that they – you can argue anyway you want, but the idea that it will ever go away, I just don’t think will happen, because you’ve got to get the Republican President or you have got a get – if you got a Democratic President, you have got to get 60 people on the Senate side.

And I just – that is not something they can – is likely to happen. So, we will just have to wait and see, but there is still uncertainty and as long as that’s going on, we will have to wait, but I think it is beginning to – I think the worst is probably over, but there is still a lot of people that are waiting and seeing.

Saying that is I am not going to use any of that as an excuse to why we shouldn’t be up and I expect us to be up..

Alright, very good. Thank you..

John Nadel, Sterne Agee, your line is open..

Hi, good morning everybody. Maybe a couple of quick questions.

One on Japan and I guess I will phrase it this way, Dan perhaps I am reading too much into the commentary in the press release and you talked about gradual this morning, but not long ago, you talked about the post-relationship and Kampo as a game changer and now it seems you are really tempering expectations there? Now, we are looking at the full year third sector sales being maybe at the lower end of your outlook, but you already knew the back half of the year was going to be a tough comparison.

So, I guess if you could help us understand what’s changed there? That would be helpful..

This is Paul. I will start and then I will let Tohru chime in. Ultimately, we had hoped that the first half of the year will be slightly better than where it is today. And I will let Tohru talk about some of the reasons for that.

When we gave you an update at FAB, we have data as late as the month of April that gave us better indications of some things that would have happened in the second quarter that we thought would produce overall better results. We do see Post is improving.

Post in the first quarter did not meet expectations, but in the second quarter we saw that moving in the right direction and we believe that will continue.

But as Dan stated earlier, the headwinds that we face due to the launch of the medical plan in August of last year will make the second half of the year substantially more difficult to overcome than the first half of the year.

Tohru, do you want to chime in on the specifics around the corporate affiliate agencies?.

Yes. For the second quarter, our largest disappointment was the sales by our large corporate affiliate agencies. And particularly, the sales posted employees to our customer companies. So, in April, typically the date had that solicitation to the new employees of our customer companies, which were very good.

So, that was – the result of that kind of affair was in line with our expectations more or less, but in May and in June, when our corporate affiliate agencies tried to solicit existing employees, the sales are less than we had – they had expected. That’s where the largest disappointment came.

In addition to that, we had some disappointment with the sales with independent and individual agents. And that impact is largely offset by the growth of our sales to the large non-exclusive agents – agencies. So, that’s the reason why that we have lowered our expectation for the year is somewhat changed.

And that is quite right that the Japan Post services can be a game changer, but Japan Post in the huge organization so it takes time to realize that entire potential on the channel. So, the sales of the Japan Post, is improving month-to-month or quarter-to-quarter, but still it has not quite reached that full potential of the channel.

So, I think that’s our situation of the Japan sales..

John, I want make one more comment about the game changer. It is a game changer. It is a game changer and it was the only outlet that was left they could possibly be major and go against us in cancer insurance. When we mailed that outlet down, that new distribution channel and took it over and now control it. That was a major game changer for us.

From a compensation or really production basis, it is going to be a game changer. I believe that, I still believe that and I think the numbers will reflect that as we move forward. These numbers could be larger. Our job is not to predict what we hope it will, but to be conservative.

So, I could have given – we could have given higher number, but I don’t like to ever disappoint. I’ve said this before and I’ll say it again, we’re very not very good at projecting sales. Everybody else predicts revenues, but we would like to predict sales, is 13 weeks and it’s the best we know. But there is enormous variance and how they do that.

And so I’ll continue to monitor that, but I feel Japan posed as exactly where we wanted to be right now. We were – I didn’t like first quarter as much, but I do like second quarter and I do like what July is looking like and going forward. So, I’m very pleased with that.

So, let me be clear on the phone if nothing else Japan post is a winner and I’m thrilled with it. In Campo and the rollout of the product is the unknown what will happen there. But they are committed and we are committed and I feel good now the individual are agencies and the corporate agencies are challenged.

We’ve seen consumers move away from writing business at the worksite or buying at the worksite, that’s why we’ve done the shops, that’s why we’re doing other things, that’s why we’re adding these new channels because we do see consumers move in that direction.

That’s our challenge and what we have to find ways, it’s not so many of the new employees, it’s the all employees who have had the mail outs for many times and that thing going on for many years now. And we will continue to monitor that and word toward that..

Okay. And then I appreciate all those comments and in my follow-up question, it’s sort of unrelated, I’m just curious after you take this ¥131 billion back to the U.S. or the remainder of it I suppose.

How do we think about the impact on a pro forma basis for your SMR ratio in Japan? How much is that come down and then related to that is just the question back half of the year expenses being higher. Is that simply a matter of timing you were slower to spend in the first half or is there something truly incremental about those expense levels..

John, this is Ken. Let me start off and Kriss may want to add something to this. First on the SMR, the proper repatriation estimate for the number of 131.4 is fully reflected in the SMR estimates of around 800 that we announced..

Excellent, got it..

Already reflected in there.

As far as the expenses go for Aflac Japan, we’d have expected to see their earnings more front loaded this year in terms of our total forecasting and modeling and part of that is just related to the expected infrastructure expenses that we talked about last year with our third quarter release in our guidance is the head wins for instances.

And then clearly, the restructuring of the state position from a mission-based position to a salaried position, which starts in October, is something new, but also would result in higher expenses in the fourth quarter..

Okay so, it’s – but aside from that $0.02 in 4Q, the rest of it’s really just the timing..

Yes, and I’d also point out too that we have benefited in the first half of the year from lower benefit ratios than we had in prior periods. If you look back, you’ll see that generally the second half benefit ratios for both Japan and U.S. are higher than they are in the first half of the year. So, we’d expect them to increase..

Okay, thank you very much..

Yaron Kinar, Deutsche Bank. Your line is open..

Good morning. Ken, going back to your last comments on the expense ramp up in Japan, if I remember correctly the CVEP program was supposed to be about $0.12 of a headwind this year, I think by looking at the G&A in Japan today we see about $0.01 maybe.

So, just want to get a better understanding of the ramp up process, are you still expecting those $0.12 to fully materialize this year? And how much of a success that would end up being forfeited this year’s ability to maybe come out with products at a faster pace? I guess I have two questions in here.

One, being the expense load and ramp up of the CVEP and two being kind of that impact on the ability to come out with products at a faster clip, which I think was also built into the sales expectation number for this year originally and that, that has since come down slightly?.

Well, I will let Paul address the second part. It’s clearly a shorter speed to – or shorter time to market or faster speed is something that we want to accomplish in Japan.

That speaks to the kind of the nature of the long-term corporate value enhancement project, but we don’t – there is really no expected change in the emergence of those expenses related to our spending in Japan..

In terms of the ability to launch products quicker, that is one of the primary goals of CVEP. Currently, we are working on multiple different initiatives. One of those is the new business process. The new business process is the single largest element that we must work on in order to bring products to market faster.

And so I feel like we prioritize correctly what we are doing there. It is going to take a period of time in order for that to come together, but I feel confident that we are trying to move things in the right direction.

That said, as we continued to expand our channels and we continue to work with groups like Tohru mentioned with the non-exclusive agencies, it’s essential that we would be able to simultaneously fix whatever we need to in order to compete in the marketplace today while also focusing on what the long-term solutions will be for what Japan is as a market in the long-term, including the cost efficiency to make sure we are maximizing our profit levels on our products..

So, I think a little while back, can you talk about maybe coming out with another medical product in Japan this year, is that still a possibility?.

We have talked about an additional third sector product this year. That being the revision of our cancer plan. And we are currently working through the final details around that with the Japanese government and internally..

Thank you..

Steven Schwartz, Raymond James & Associates, your line is open..

Good morning, everybody. Just some follow-ups.

Dan, the corporate affiliate agencies, that’s been a problem forever and ever and ever, maybe there is nothing to be done there, but what can you do with the individual agencies?.

Well, I think that we continue to look at different aspects of the way they are operating and try to run more ads for them that we have done. We have done better training, but there is some we eat away a little bit by adding distribution channels to the situation like with the banks. It does impact individual sales to some degree when we do that.

So, it’s been the new channels to me that would offset it more than anything else, but Tohru would you like to comment or make any – have any comment I should say?.

Sure. Dan, you are right. So, the individual agents will continue to be the important part of our distribution channel. There is no question about that. However, there are some other channels, which are growing faster than the individual agents. The biggest one of such growing channel is the large non-exclusive agencies.

So, like Dan said, we are focusing more on our business results, large non-exclusive agencies other types of distributors such as the Japan Post. So, on a comparative basis, individual agents – we are now shifting away from the individual agents, but they will continue to be producing as much as they are doing now, I think..

I think what I would say about it is it’s a stable block and we will continue to grow it, but we are going to where the consumers are going. And the consumers are moving more towards other places and we are trying to make sure that we are there for them to fill those needs and that’s very important and what we will continue to do.

But we do care about our individual agents. We do constantly focus on that. We have contest, we want to grow it. But that is not where we see the real growth channel going forward..

Okay. And then a little move to the U.S.

as follow-up I get that the market directed to move from state sales coordinator to market director I get that, I am not getting the compensation to the DSCs I mean I get trying to incentivize them to go the right accounts and what have you, but are you implying that these people don’t make enough money (indiscernible) out their selling?.

Well, what I believe is that we have more district sales coordinators than a lot of our competitors. And we need to focus on making sure that they are making the money we want them to make. And I would like to see them – I would like to have strong districts that are making good living and we promoted a lot of people.

If they got renewals they make very high numbers. But when they are coming on they need more front money and so we are trying to concentrate on that and making sure that they are able to grow their business. What we have done over a period of time is we made some adjustments – an example would be, we might cut in a new level of management.

And that means that we have cut the commissions back a little bit to take that into account. Now at that time the districts were for it, we were for it, but you take a little bit away and take a little bit away here, it begins to hurt their income. So by adding this back we are now getting them up to the level that they were in 2008.

And I think ultimately will benefit us. We have always said that the district levels are the key to our organization that and the associates. And so trying to make sure they are high paid is very important to us and we want to make sure that happens – continues to happen going forward.

And we think this cements that and allows us to really grow the business because they are the ones training the new people. And we have got to hire more new people and that requires a lot of time and effort on their part. And they are going to be working harder and so we want to pay him more for working hard..

So pay these guys more or their sales like the same level of sales they can live and then got out and use the extra time to train?.

Well, they don’t – let’s be clear almost every time they are selling, they are not selling by themselves. They are taking somebody with them. So they are splitting the commissions on what they are doing when they are out training a new person. So we are trying to make sure that they are better positioned.

And frankly this I think will put us in a position where we will be able to hire more people at the district level and really grow the business long-term. But shifting some money to them is the exactly what we need to do..

Okay.

And then one more if I may very quickly, California I don’t know if you ever all looked at this but California, AB 1962 with regards to MLRs for dental, have you guys looked at that?.

I don’t know anything about that now, but I will find out and get back with you..

Alright. Thank you..

Jimmy Bullar with JPMorgan, your line is open..

Hi, good morning. First on the changes that you are making in the U.S. you mentioned in the release it’s about $0.02 expense per quarter in the fourth quarter, should that actually stay about the same next year or would it like go up or go down.

And then how long would it take for you do get a return on this, I am assuming it’s like 1% to 2% headwind on earnings growth next year, but you could let me know if that’s right or not.

And then on the share buybacks you – obviously, your capital position is fairly strong, so I am just wondering and you stayed with the $1 billion guidance but just wondering why you did less in the second quarter than that would have – than we would have expected given your $1 billion guidance?.

This is Ken. Regarding the expenses related to the change to the salary position we will know a lot more in the next couple of months as we budget because of that amount about half is related to the state operating expenses that Aflac will now be responsible for.

In addition, it also includes the overhead that it will take to manage in effect 66 tele workers around the country plus their, whatever administrative staff, they have a secretary or admin that we also pull in on. So, we will have to tighten down those expenses, but that’s the best estimate right now. That – so we are layering on fixed cost.

There is an expected offset with the reduction in variable costs, because we will now – you should see total commission expense as a percentage of revenues declined going forward, because we are not going to be paying out renewals for that level of the hierarchy any longer.

So, the more that we sell, the shorter the payback period in terms of that reduction in variable expense offsetting the fixed expense that we will be putting on the income statement..

But did those end to sort of the – the net of the higher fixed minus the variables, it’s more like an ongoing expense at least initially as opposed to one-time type expense?.

Right. It is more – you will see in year two meaning the second 12 months, you see a larger offset, because you always would see sales coordinator position will still be – they are in effect – they are still earning commissions on business that they had written all the way up to September or will write all the way up to September 30 of this year.

So, the drag is really greater in the first year than it would be in the second..

Got it. Yes..

On your follow-up question on share repurchase, when we buy, we want to make sure that we are buying in a manner that we are acting as a responsible investor. We try and buy below the VEP, which we did in the second quarter and we have generally been able to do.

We want to stay on track for the full year amount of $1 billion and trying to be as opportunistic as we can. So, really it was just some judgment on our part based on market conditions, volumes the way the stock was trading so on and so forth, but we still again expect to be at the $1 billion mark for the full year.

We will have to see how that plays out between third and fourth quarter..

Okay, thank you..

Jay Gelb, Barclays, your line is open..

Thank you. I want to circle back on something that was mentioned earlier in the prepared remarks with regard to Japan Post I believe it discussed rolling out the new Japan Post specific policy. My sense was that was going to be done earlier.

So, can you give us some perspective on what’s the delay there?.

We will let Tohru answer.

Tohru?.

The cancer product now designed specifically for the Japan Post, our plan was, I don’t know if we had sold the market that we were going to introduce that product earlier. So, we are working on that. We are working exactly as we have been planning.

So, I don’t seem to understand exactly what your question is?.

Sure. Well, my question is my understanding is it’s a pretty simplified product.

So, I am not sure what the delay is in terms of launching it specifically within the Japan Post system?.

Well, this is Kriss. I will just kick in. It – we have to get it approved by the FSA. We had a party day that pretty much the anniversary of the new agreement, which would be around October 1. We didn’t anticipate implementing it prior to that time.

So, if you could have the impression we were doing it earlier, it was somewhat inaccurate, but we are more or less on track with our original plan to get the JP specific product in their hands, hopefully around the beginning of the fourth quarter..

Okay.

And then my follow-up question is also on Japan for the third sector growth outlook for 2015/2016 at fab, you discussed the range of 2% to 8% given that’s been narrowed for 2014, I would like to kind of see if you can update your confidence level in achieving that target for 2015/2016?.

I think it’s too early. What we don’t know is the uncertainty of Japan Post and specifically how Kampo will do with the new product. At the end of the third quarter, we can probably shed a lot better light on that..

And I don’t believe those were actually our sales projections, I believe those were data that was placed into Kriss’ financial projections they shared with you. And clearly articulated the time that they really are meant to be projections, but meant to be ranges of assumptions that we would articulate.

When we get to the end of this year, we will do as we typically do and give out our sales guidance for the coming year and I feel like that time we’ll be better able to give you forward looking guidance..

Alright, look forward to that. Thank you..

Credit Suisse, your line is open..

Good morning. I just wanted to ask you a question about the change in the seasonality, the earnings pattern here. If I go back three or four years ago, you saw what was an emerging pattern of 4Q earnings to be lower based on what you guys had flagged as timing of higher expenditures in 4Q.

And now you’ve definitely seen that spill into 3Q and it started happening last year and it seems to be more pronounced now. So, you’re getting a very big delta between what you’re earning in the first half of the year versus second half of the year. And you flag some of the higher back half earnings and I got that, when you gave our guidance.

But the order of magnitude here is a lot bigger than I’d have guessed, looking at a 15% earnings drop sequentially that you’ve guided too.

Can you peel back the onion a little bit and talk about how much of that is expenses, how much of that is benefit ratio change that we’ve seen on some of these newer products and anything else you could elaborate on..

Tom, it’s Kriss, now I try to address that, yes, we’ve – we have had lower earnings in the second half of the year than the first half and then part of its due to the reason you’ve identified sometimes or cautious on our expense initiatives and first half of the year and as we’ve moved through the year and gained more certainty that we’re going to be able to achieve our annual EPS guidance then we kind of loosen the strings a bit and particularly in the marketing promotion area may have a larger expenses that’s been true gosh for years now.

Not just last three or four years may be more recently in Japan.

The other thing that has gone on traditionally, Tom is that we – now that we’ve had all of the stock stuff in place for years and years we’ve had to define the process of evaluating our claim reserve estimates in the like with the auditors and we’ve got a particular process employees where we evaluate certain reserves in the third quarter and certain other reserves in the fourth quarter.

And so the historic patterns reflected some reserve strengthening for example in closed blocks like dementia due to lower interest rates than anticipated in the reserving in the like. And we’ve had some reserve strengthening over time for that that tends to occur to some extend the third quarter, some extend the fourth quarter.

So, that’s been more financial reporting seasonality than an actual benefit reserve seasonality. This past year, we did a reinsurance agreement in the fourth quarter that actually improved benefit ratios in the fourth quarter relative to the third.

We’ll have the reporting of that reinsurance fully integrated into our benefit ratios by the end of the third quarter and we’ll give some improvement in the third quarter benefit ratio in 2014 compared to the third quarter of 2013, Robin identified that was about 0.5 point improvement in the benefit ratio in the second quarter of this year and will be again in the third quarter and the fourth quarter that will be in the system we’ll have direct comparability so that improvement will go away.

When we do have some seasonality claim patterns that we reflect in the financial statement more today than we used too, we used to be able to move them out a little bit.

And these days, the accounts are more sensitive to smoothen anything else, so we have to go more with the actual seasonality of things and claims tend to be lower in the first part of the year as people they tend to back load business for the doctor in the actual claim processing partly due to deductibles and the like, but partly just due to the holidays and other seasonal patterns.

So that’s a long answer to a pretty short question, but I will focus more on the accuracy of the annual estimates. And we did because we exceeded our six month EPS increased – exceeded our annual high end of the range of 5.4% was greater than our annual range of 2% to 5%.

And because of some of the anticipated expenses we have talked about earlier, we decided to tighten the range within the 2% to 5% going to 3% to 4%. So that’s some of the rationale behind it..

Got it. That’s helpful Kriss.

And so if I am interpreting your answer correctly this is a pattern that we will continue to see each year directionally much greater order of magnitude in terms of first half earnings and second half earnings, in part normal higher expenditures but also the benefit ratio that change being more directly reflective of claim payment patterns, is that a fair way to put it?.

Yes. That’s a fair way to put it. I do want to just say that I specifically mentioned dementia reserves and we have had a couple of increases over the last couple of years. But right now we don’t anticipate doing that in the third and fourth quarter. We will have to look at the interest assumptions behind the reserves.

But with the stabilization of investment yields in the total portfolio and the like we don’t think we have got that kind of interest rate exposure we had in the past that led us from reserve increases, so that’s a favorable thing..

Okay. Thanks..

Christopher Giovanni of Goldman Sachs, your line is open..

Thanks so much. Good morning.

I guess first one just on in terms of medical sales clearly alluded to the tough comp in the back half of this year, but I want to think about the sustainability of the quarterly sales we have seen so far year-to-date?.

Sustainability in quarterly sales..

Medical..

We have seen beginning last year very strong sales in our medical product. We anticipated that the medical sales would sustain slightly better growth in the first half of this year than we originally saw. That said, we still believe that the product continues to go in a strong manner.

We are focused on the standard medical plan, not our gentle ever plan at this time. But we believe those products will continue to sell well in the coming quarters. That said, it is the reality that competition continues to put out more and more new products all the time.

And one other things that we have to continue to do one of the key reasons I mentioned earlier our desire to be able to launch products in a quicker manner is the sustainability of the length of time that a product last in terms of the boost of new sales. So we are constantly monitoring that.

We do believe we still have continued tailwinds with our medical plan for some period of time, but we continue to notice that, but amount of time that a new product is lasting is slightly less than it used to be..

Okay.

And then for Dan sort of a silly question but given your recognition that you won’t be growing kind of at the pace you have in the past, the increased focus you have on capital generation returning capital to shareholders, I guess why continue to have such an emphasis or heavy emphasis and probably you stated goals around sales targets?.

As we are a sales company and I expect sales to grow. And there I believe it sets a trend for us to what ultimately earnings are going to be and persistency is in that number and other elements. But I want to – I believe that ultimately when the agent does well everybody else will do well. And that’s what we have got to see happen here.

And I am committed to fixing this in the U.S. and believe we will be able to do it. I put my reputation on the line of trying to fix this and that’s what I get paid big bucks to do is to fix things. And I understand that’s the way it works.

And I am willing to go out on a limb and telling I expect third quarter sales to be down but I want to see an upward movement in fourth quarter and I know that’s quick knowing how hard it is to make changes sometimes. But that’s where I am focused and that’s what I will continue to do..

This is Kriss, I pushed down a bit, so look we got to have the revenues to build the house – the house of earnings. And we have done well at building earnings over the period and sales are an important part of the earnings for Aflac U.S. The premium income for Aflac U.S. is probably at least 25% first year and about 75% renewal.

In Japan its not is big, it’s little less than 10% first year premium 90% to 92% renewal. But I need that growth in first year premium to help grow the revenues overall if we are going to get earnings growth.

So that’s why it’s important to keep getting new sales and to keep pushing on new sales estimates and the like to achieve our overall financial objectives which include growth in earnings per share..

Thank you..

Carol, we are coming up to the top of the hour, so will have one last question please..

Joanne Smith, Scotia Capital. Your line is open..

And I have always thought that those were the guys who had the biggest existing books of business?.

We only call we didn’t get any of your question. You just came on in the middle and start back and so we can hear which question is….

Okay.

So can you hear me better now?.

Now, we can..

Okay. So if my recollection is correct, my understanding of the state sales coordinators has been they are the ones that have the largest historical in-force book and that they are earning most of their money on the commissions that their getting from that. And those aren’t going away.

However, if those state sales coordinators do not chose to pick on the new position of Market Director, what is the outlook for those books of business and is there the potential for them to move those to some other carrier is in fact they move to a different – a different company as a rep?.

First of all, it’s not their book of business is based on the people that work for our company. I was a state sales coordinator for 10 years, so I will understand totally and now you can’t move it that easily. So that’s one half. The other thing is we have not had a single state sales coordinator not go for this new program.

It’s going to be the highest paid in the industry. They like it. There is a wonderful retirement – for your salary we put out the equal amount for retirement. So they like it very much. But they will become more of a manager than just a sales manager. They will look at profit, they will look at all aspects.

So I am very pleased with we had them sign confidentiality agreements and we introduced this a week go and to adjust them in six locations, we had them at the exact same time took away all cell phones we are very pleased because – we are pleased of where we offered them. This is a great deal for them.

It is a great deal for the company because we now can be a united front. We don’t have 50 independent people running state organizations or in this case 65 go in different directions. We will unite with the strongest brand that’s out there in the insurance industry and be able to push forward with what I believe will ultimately drive our sales.

Now again I warned you the third quarter, but the fourth quarter in going forward I have been in sales, it’s in my blood and I just think we can do this. So we will wait and see but that’s where outlook added now..

Okay, okay, Dan.

Just as a follow up very quick, so the first quarter you are looking for an uptick, is this something that you think is I mean as – this is not like a major change that would be disruptive for an extended period of time, is that what you are suggesting that people are on board that now they are going to be directed towards what the overall objective of the company is which is to bring in the sales of the core small business employer for some of these agents that are not going after the large cases, etcetera.

So, you think that this is something that can get implemented and it could be back to business as usual by fourth quarter and we should start to see some improvement then?.

Well, one reason I am optimistic about an uptick in the fourth quarter was it was such you are right in fourth quarter last year. So, I didn’t like our sales last year, so that’s the reason that I am encouraged about that. I don’t want to be too optimistic in terms of it not being somewhat disruptive.

Remember, all these people are used to being independent contractors. So, it’s a change of the way they have operated.

But we think that we can mold the way we are going to do it in a way that they are going to like it and it will be less disruptive for them, but any time you change jobs and this is a change in job, there is some disruption, but I think the districts making higher money in between is going to help offset the disruption, because here these districts are as we are announcing this making more money.

So they need to be out there selling, because we have only guaranteed it through the end of the year, although I hope will possibly continue it if it works. So, while we have got this disruption at the state level, we have got this enormous positive thing happened at the district level, which I think will help drive sales.

So, that’s why I am encouraged. But look I am an internal optimist when it comes to sales. I don’t want to overstep it, but as I said, I will be very disappointed, if I don’t see an uptick in the fourth quarter. And then going forward, I expect to see improvements..

Okay, thanks very much, Dan..

Carol, I think we are out of time. If anybody wants to follow-up with more questions, I and my colleagues will be available in Investor Relations and thank you for joining us today. Goodbye..

This does conclude our conference for today. All participants may disconnect at this time. Thank you..