Robin Wilkey - SVP, Investor and Rating Agency Relations Dan Amos - Chairman and CEO Kriss Cloninger - President, CFO Ken Janke - EVP, Deputy CFO Teresa White - President, Aflac U.S. Eric Kirsch - EVP, Global Chief Investment Officer Paul Amos - President, Aflac Hiroshi Yamauchi - President and COO, Aflac, Japan.

Randy Binner - FBR Capital Markets Nigel Daily - Morgan Stanly Jimmy Bullar - JPMorgan Seth Weiss - Bank of America Merrill Lynch Eric Bass - Citigroup Steven Schwartz - Raymond James & Associates Tom Gallagher - Credit Suisse Eric Berg - RBC Capital Markets Humphrey Lee - Dowling & Partners Suneet Kamath - UBS.

Welcome to the Aflac 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. Ma'am, you may begin..

Thank you and good morning and welcome to our first quarter conference call. Joining me this morning in the U.S. is Dan Amos, Chairman and CEO; Kriss Cloninger, President and CFO; Ken Janke, Executive Vice President and Deputy CFO; Teresa White, President of Aflac US; and Eric Kirsch, Executive Vice President and Global Chief Investment Officer.

Also joining us today from Tokyo are Paul Amos, President of Aflac and Hiroshi Yamauchi, 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 we discussed today. We encourage you to look at our quarterly release for some of the various risk factors that can materially impact our results.

Now, I’ll turn the program over to Dan, who will begin this morning with some comments on the quarter as well as our operations in Japan and in the United States.

Dan?.

Thank you, Robin. Good morning and thank you for joining us today. Let me begin with an update of Aflac Japan, our largest earnings contributor. Sales of Aflac Japan's third sector products were up 21.3% in the quarter.

This result established a strong start toward our expectation to third sector sales with average and increase of 15% for the first nine months of the year.

Sales of cancer insurance continued to be extremely strong following the introduction of the end of the third quarter the new cancer days products, which includes an exclusive policy sold for Japan Post.

Following an outstanding fourth quarter 2014, reception of this product, cancer insurance sales in the first quarter generated a 118% increase through all distribution channels and outlooks. Our distribution side, our strategic alliance with Japan Post continues to be enormously beneficial.

This alliance leverages Japan's Post position as the largest distribution network in Japan with Aflac Japan status is a leading industry and pioneer of cancer insurance. Our tremendous progress continues add more than 10,000 postal outlooks offering our cancer insurance to their customers.

I believe this alliance will continue to benefit both companies as the opportunities and purchase cancer insurance is extended to more and more Japanese consumers. At the same time, our traditional agencies had been and remain key to our success.

Our goal is to have a presence for our consumers want to make their insurance decisions and our various distribution outlooks broadened for that reach. Now let me turn to the U.S. operation. As I mentioned here in the fourth quarter conference call we expected the first quarter sales would be challenging.

As we communicated the expense ratio increased during the quarter primarily reflecting the expenses related to the changes we made to our sales organization over the last several months. We believe these changes which were implemented to enhance our sales growth are better positioning Aflac U.S. for the future.

At the same time, we just started something no one in the industry is ever attempted, no less done and that is the one day pay. The industry first initiated means that we process, approve and pay in just one day.

We are delivering on our promise to our policyholders in a more meaningful way of getting cash in their hands faster than ever, faster than anyone in fact. We estimate that 70% of our policyholders can use one day pay for their clients. In 2015 we expect to process nearly 2 million claims within the parameters of this initiative.

One day pay is generated a lot of excitement with their distribution channels or accounts in our policyholders. Along with the strong brand and relevant products, I believe one day pay will continue to help Aflac standout. As I mentioned last quarter, I'm not willing to say that Aflac U.S.

sales have turned the corner until we see the results for the first half of the year. At the same time, I remain encouraged by the progress that we've seen and continue to see. I still believe that Aflac U.S. sales will increase 3% to 7% for the year.

We'll continue to advance our efforts toward expanding our distribution to access employers of all size. Doing so will allow us more opportunities to leverage our brand and have attractive products in the portfolio in an ever-changing health care environment.

Having covered operations let me turn to the topic that I know are top of mind with our shareholders and that is capital deployment. Our commitment to maintaining strong capital ratios on behalf of our policyholders puts us in an excellent position to repatriate about ¥200 billion to the United States for the calendar year 2015.

This reinforces our plan to repurchase 1.3 billion of our common stock in 2015 and puts us in a good position for the next year as well. I want to reiterate that our objective for 2015 remains to increase operating earnings per diluted share 2% to 7% before the effect of currency.

Challenging financial markets and a very low interest rate make it difficult to invest cash flows at attractive yields. Therefore we will continue to be very disciplined in selling per sector products in Japan which will reduce investable cash flows.

As always, we are working very hard to achieve our earnings per share objectives while also delivering on our promise to our policyholders. I am pleased with Aflac's position in Japan and the United States, the two largest insurance markets in the world.

Aflac has earned a distinction of being the best branded company for voluntary and supplemental products in each country. We continue to believe Japan and the United States each are characteristic that make them extremely well suited for the products that we offer. Importantly both markets offer opportunities for growth.

We are fortunate that in the process of growing our business we have the privilege of providing financial protection to more than 50 million people worldwide. Now I will turn the program back over to Robin.

Robin?.

Thank you, Dan. And now in the interest of time, we are going to start taking calls.

Could I have the first question please?.

[Operator Instructions] Our first question is coming from the line of Randy Binner from FBR Capital Markets..

Good morning, thank you. I would like to try and get some more color on reinsurance deal. Those announced in the quarter is part of your capital management plan. I guess first, just to understand how this may have differed from the previous two deals in regard to subject matter risk that's covered, if it's with a different reinsurance partner.

And you noted that there is a recapture almost immediately.

So, can we take that last piece to mean that this is less expensive than the previous two deals?.

This is Kriss Cloninger, I will handle that. The substance of the reinsurance agreement was materially the same as the two previous transactions we did they involve blocks of our enforced medical insurance that had demonstrated financial characteristics in the like. It was done with a different reinsurer.

The previous agreements had been done with the Swiss re, this was done with Munich. We had been talking with several reinsurance partners and we wanted to expand our track record of business relationships and so we did that.

The retrocession was similar in substance to the previous retrocession we did and the second tranche was Swiss re but it was a higher amount. It was 90% of the block in the set of 50% that we did in the second deal. Accordingly, there will be a lower net cost to Aflac on a consolidated basis than there was in the previous transaction..

Just two follow-ups, one, we can think of it economically the ¥430 billion has been kind of freed up, I just want to clarify that.

And also if you can give us color of how many more of these transactions we can expect? Our view is been that there is a lot of capacity for a series of transaction that free up more of the capital reserve differential between Japan and the U.S but would like to understand how many more of these are house systematic these maybe?.

Well let me first say that, we do have additional capacity.

We are always primarily interested in making sure there are policyholders in Japan are protected it at a very higher level freeing up some of the FSA basis reserve allows us to increase our solvency margin in Japan as a first step that gives us more security that we will able to perform with response to our policyholder obligations.

We do have significant capacity remaining. I believe and we haven't gotten a specific plan. We don't have a specific plan for additional transactions but I think that we will talk about that in some more depth in our upcoming financial analyst briefing in May when we talk about sources and uses of capital.

I think you can anticipate that there will be more transactions each. We have been taking this as one step at a time, the very first transaction we did we did to increase the SMR to reduce the exposure we had to volatility and interest rates and currency in the like.

The second one we did to achieve the same objective to reduce cost and then the first retrocession deal. And this third one has essentially the same objectives in the initial transaction that are to further reduce cost through the reinsurance of the retrocession. So, I think we will give you more color at FAB in May..

All right, great. Thanks..

Thank you. Our next question coming from Nigel Daily of Morgan Stanly..

Great, thanks, and good morning. Sticking with capital, given the sizeable repatriation seems like you could easily do more buybacks in the current guidance.

First question, what's holding you back from increasing your buyback guidance?.

Doing the additional reinsurance deal does increase our financial flexibility going forward and as I said, we will talk more about our capital uses plan at FAB meeting. I think it is just fair to say Nigel and response to that we do have more flexibility but at this point we are early in the year.

We had a target for repurchase in 2015 of a 1.3 billion. We are going to stick with that things are still bit early and so we will give you more color on that in May..

And then just a follow-up on the reinsurance transaction. You mentioned it to be low in net cost given the higher retrocession.

Can you quantify what that net cost will be?.

In terms of cents per share it has to -.

Nigel, this is Ken. With tranches 1 and 2, we were looking at an annual run rate about $0.07 per share that would be reduced by about 10 years so from the retrocession of half of tranche 2.

Given the size of the retrocession with tranche 3 with the most recent transaction, we don’t look at it as materially impacting the net cost of the program in the short run.

So, when you think about an EPS drag for instance, for calendar '15, it's still going to be maybe in that $0.05 to $0.06 per share for the first three tranches, for the full year of this year, so total marginal net comps for the transaction..

Got it. Thanks..

Thank you. Next question comes from Jimmy Bullar of JPMorgan..

Hi, first had question on your EPS guidance, so I’m little surprised that you left the guidance unchanged at 2% to 7%, since you are going to have the $0.07 reduction in your interest expense.

I’m wondering if that this year and then obviously next year that should be around 10%, so I’m wondering if that is part of your guidance and if it isn’t, is there anything else that you see as a potential headwind that would offset the benefit of that and then secondly on Japan sales, even if sales sustain at sort of the recent level that they’ve been, it seems like your guidance at least through the first three quarters of the year for the 15% increase, is somewhat conservative.

So just wondering why sales wouldn’t sustain, they’re right now, like I’d assume that you would probably get more production from the Japan post as you keep adding additional granted..

Jimmy, let me start with the EPS guidance and to address that and then will address the Japan sales guidance. We gave you a pretty wide range; I consider 2% to 7% increase in EPS on a currency neutral basis to be a fairly wide range.

We do wide ranges because we know that some things are going to go well, some things aren’t going to go quite as well and we’re always working at activities that will move us up in the range.

So clearly taking advantage of the opportunity to redeem those high interest expense senior notes $850 million of senior notes that had a 8.5% coupon, will benefit us going forward.

That wasn’t directly reflected in the original EPS guidance but again it’s too early in the year to say that we’re going to narrow the range at this point that we initially established.

Clearly that particular transaction will increase our certainty that will be able to perform within that range and certainly it adds to our ability to perform more strongly than we originally anticipated but that’s as far as I am willing to go at the moment. Now let’s turn to Ken..

Let Yamauchi or Paul take that..

On the Japan sales guidance, okay..

This is Paul I’ll start and if Yamauchi wants to add additional comment, I will let him do so, First of all, you’re correct that we’ve had strong sales in the fourth quarter of last year and the first quarter of this year and we feel that the markets desire for our new cancer plant has been extremely strong.

And as we noted in the previous call, we are expecting the first three quarters of this year to be strong with a 15% growth over those three quarters.

At this point we’re not changing that number if we see sales continue to go extremely strong to the end of the second quarter we will at the time talk about any kind of revision but given the size of the fourth quarter of 2014 and hurtle that is to overcome, I’m hesitant yet to talk about any changes in annual sales guidance but I have to say overall, I’m very pleased with the sales, not only through Japan post but across the board.

All of our channels have been extremely receptive, I do however believe there are many things we are doing to continue to increase our long-term sales, anytime we announced new product announcements things of that nature.

There can be an adverse impact to short term sales in a 13 week period and so as we move further into the year, there are things that may not necessarily cause us to perform at the same optimum level we’re performing at today. But we’ll still achieve excellent results and so we’re very excited about where it’s going to go forward from here.

Anything you want to add? That is good, I think we are good..

Okay..

Thank you. Next question comes from Seth Weiss, Bank of America Merrill Lynch..

Hi, good morning. Thank you.

If I could ask another question on the capital and proceeds results released from the reinsurance transaction, so the reinsurance deals releases JPY130 billion so, call it JPY80 billion to JPY90 billion after tax, you increase your repatriation plan by JPY30 billion to JPY50 billion, so can you help us think about the plan for that remaining JPY40 billion that gets released from the reinsurance deal that will suppose we stay in the Japan entity?.

And I don’t know, Ken you want to add any color on that, we did this additional reinsurance transaction, we increase the anticipated repatriation some that’s it’s not really one for one deal but, it’s directionally proactive in equivalent.

We reevaluated the whole scenario as far as repatriation in the like in the JPY200 billion is our best estimate and what’s provided for in our FSA financials as of March 31, 2015.

So that is the color I’m able to provide, in a portion of it said its provisioned for potentially future type profit transfers and the portion would support the current SMR that we have in Japan, so we’ve got a lot of flexibility..

Okay, great. Thanks. And on the earnings side I understand there is very little net impact just for the case of our models, is there should we think about a transferring of earnings from the Japan entity to the U.S. entity and if you could give us any quantification of that that would be helpful. .

Well, that’s what the repatriation is the JPY200 billion as a transfer from Aflac Japan to Aflac U.S. within the insurance entity then question remains how much of that would be dividend to the parent. But the JPY200 billion is the transfer from Japan to the U.S..

And so, I made have been unclear, I mean on the earnings standpoint thinking about the retrocession specifically which I believe goes to the CAIC entity in….

Right. Okay.

Well I earlier commented that there is very little marginal effect on EPS of this transaction because it was 90% retroceded in terms of the cost, we do report the full cost in the Aflac Japan segment and the benefit of the retrocession will come through in our financial reporting identified in the so called other segment, we didn’t included in the Aflac U.S.

segment because it wasn’t really an Aflac U.S. transaction but the net cost through corporate will be reflected in the consolidated financials. I’m not sure, I’m totally answering your question but..

Yes, it just comes to try to look at Aflac Japan in a year-over-year basis, apples-to-apples so thinking about how much earnings maybe loss there in transferring into other, just we can get better view of underlying growth in that entity if you want to strip out earnings which is essentially being transferred to other. Thanks..

This is Robin, let me just say especially for those may not have reviewed the statistical supplement and detail, we made two major changes to the statistical supplement and one of them is on page 21, we broke out the impact on both premium and on benefits for premiums, gross versus premium seeded and we went back from the first tranche.

So that you will be able to see trend on this and it should help you model on a go forward basis, so we did extend the information that we’re giving you on that and so if you have to look at that will be glad to talk you through that also following the call if you would like to.

The second thing I would mention while we’re added, the second change we’ve made in the statistical supplement and as you’re all know we make it in the first quarter of the year, so that we do not have any partial year anomalies occur, we enhanced what we think is the reporting of the persistency modeling in the U.S.

it now includes CAIC and additionally it is on a rolling 12 month basis versus taking each quarter to-date in annualizing that number.

So we found and talking some analyst that was a better understood metric and it caused us to eliminate be able to eliminate some of those anomalies especially as you annualized first quarter which really didn’t give you much of an idea of the trend in persistency.

I apologize, I want to make it statement on page, yes it was 22 where you can find that break out of that seeded and then 21 on the seeded in gross premium..

And I don’t have the net profit impact directly in front of me but as our call and I’m going to talking to my internal team here is the net effect on Japan P&L was approximately $5 million for the quarter and try to add about $5 million for the three transactions combined and as I said that will okay that will show up in the Japan segment as gross number and then the retrocession effect will show up in the other segment but the impact on consolidated P&L ought to be probably less than a $1 million for that third transaction, third tranche.

.

Okay, thank you..

Thank you. Our next question coming from Eric Bass of Citigroup..

Good morning. Thank you, just can you talk about the trends in U.S.

recruiting in the incentives you put in place try to increase the agent force, I guess the given the changes that you made on the middle of last year and the increase commission payments and the little surprise that recruiting hasn’t accelerated in recent quarters?.

This is Teresa, so I will answer that.

First let me explain the recruited agent metric, the metric includes though career agent recruits as well as broker recruits, so as I mentioned in the fourth quarter, we did expect disruption in the number as we started consolidation of that broker organization and we redirected a lot of their efforts at least in the short term to focus on existing broker relationship.

So we did really good job at recruiting brokers but what we wanted to do was enhanced relationships and obviously helped to increase penetration with regard to Aflac business.

So even with this results are not acceptable, we know that we have to have a marked improvement in the long-term but it’s important to know that the changes that we’ve made is that are really driving the operation to one side of the operation to look at career recruiting and the other side of the operation to focus on broker recruiting and developing of those relationships..

Got it. And I guess how do you think about the sales growth pattern for the U.S.

and given the I guess relatively flat producing agent levels on kind of the traditional channels do you expect to see material growth from that channel over the next quarter or most of kind of the year-over-year growth come in the fourth quarter, when you see the higher group sales?.

So as we start increasing the volume of group product, we do anticipate that more of the sales skewed toward the fourth quarter and that’s just kind of a natural progression as you increase your sales and with brokers in the group markets. So we do see a skew towards the fourth quarter with sales growth..

Okay, thank you..

Thank you. Our next question coming from Steven Schwartz, Raymond James & Associates..

Hi, the couple questions Teresa just to follow-up on that and anything you can say with regards to progress with the alphabet brokerages would be appreciated?.

Certainly we are seeing progress with many of the large brokerage houses and matter fact, they’re moving in our top, they’re in our top five now and before as far as production, sales production and before we couldn’t say that.

We were seeing marginal improvements but now they’ve moved in our top five as far as sales growth, so we are seeing tremendous improvement there, obviously we continue to work with each of those brokers houses and we’ve now created an organization, I think that will help us to further enhance relationships in those brokerage houses as well as other relationships with regard to regional and large scale brokers..

And let me say one thing. Because the number is so big, our general, our associates are agents that work for us on writing accounts of hundred or less. We must maintain continued stability there.

We do have growth there and so this has been an evolution as we are going through this process of trying to add on brokers while protecting and building our existing field force and that’s been a real challenge for us.

But it’s under Teresa’s leadership it is doing very well and I’m very encouraged about that and I think long-term these decisions that we’ve made have been the right ones. I will make one comment about recruiting and that is that we’ve made so many changes from a production perspective that there is a lot going on and so all of it is tying together.

I like the one day pay. I like that we have set it up in a way that these people are important market directors will do very well as the company does very well and they won’t if we don’t. So, I think it’s all working nicely together and as I said in my comments, I’m not willing to declare victory but it’s certainly going the direction.

I would like it to go faster as Teresa would but it’s still moving in the right directions of what we ultimately want to accomplish.

I did find it interesting with all the changes, we make that we did not lose any market directors and so there is probably a few that will change out that if they don’t as well, they won’t make as much and they may retire or whatever.

So there is still some changes probably to take place but all in all, I think we’re going down the path that it’s going to prove that it’s working the right way. It’s just a question of how fast it’s working..

Yeah. And as a follow up part of what I think I heard you say at least at the beginning when you started talking. You didn’t say in so many words but that try and keep the career agents in a sense where they belong at smaller accounts under 100 people is continuing and is working..

Yeah. We’re paying more to write there. So it’s been an enhancement of moving them in that direction but paying because that’s where they are most effective. And it is also the least area of competition..

Okay. And then just an accounting question. I don’t know Kriss if you know this answer or not but given the retrocession back to the U.S.

is there any increase in the deferred profit liability?.

You’re talking GAAP, not statutory..

Yes I am talking about GAAP..

Okay..

Or is it any 10% I guess there is a difference..

Well, the retrocession would be proportion of the direct transaction. And we do use on a well on a GAAP basis, it’s we use deferred profit liability to minimize any profit recognition effect. So -.

So it would be right in Japan? I guess.

Yes in Japan..

But not in other, okay. All right. Thank you..

Thank you. Our next question coming from Tom Gallagher of Credit Suisse..

Good morning. Wanted to ask Eric a question in terms of the new money yield in Japan. It was only 1.1% this quarter. I think the plan for the year is two. Can you comment on why it looks like you pretty much just invested in [indiscernible] quarter.

Is that just a timing issue? And then second question related to that for Kriss and I appreciate that first sector sales fell lot, but there is still north of 20% of your Japan sales for the quarter at terms of ways in endowment.

Are you actually making a profit for those products earning 1.1%?.

Thanks Tom.

This is Eric and I will go first and thanks for asking that question because I know it sticks out a little bit but the short answer and the simple answer is our cash flows for the first quarter were insignificant and that was primarily in all plans for because as you know we have increased the frequency of repatriation, we had tax payments, so the amount of money we had to invest was inconsequential and not reflective at all of our strategic asset allocation.

We do expect in the second quarter our cash flows to be relatively low as well but in the second half of the year they will pick up and our new money yields at that point will reflect the types of investments new starts making whether those be in dollars or other products but for the first quarter it was just simply and inconsequential amount of new money..

And Eric when you say inconsequential would that be less than 10% of the money you expect to invest in the year is it a way you could quantify?.

Yes actually it was about 4.5%, 5% of the total new money for the whole year. So it really is back ended in the second half of the year..

Got it..

And Tom on your question about profitability of first sector business [indiscernible] ways we are still writing. Those are profitable at the anticipated annual investment yield of about 2% recall that reserving was reduced to 1% FSA in first assumption and we reprice the products with networks assumptions of around 1.25%.

So we still we would have a positive spread in our anticipated yield for the year if we looked at first quarter only of 1.1% now it is pretty marginal.

There are sources of province other than interest spread but for the quarter itself the closer to break even and profitable in that first sector business but keep in mind we’re writing the first sector business primarily is in accommodation to keep distribution alive and maintain relationships primarily with the banks.

So to some extent first sector business today is in the accommodation and we do have caps on total production to try to mitigate the lower anticipated profit opportunities at these low interest rates..

Yes, Paul Amos, do you want to make any comments about that?.

I would be glad to our exclusive agencies have continued to be obviously dedicated to Aflac and all of its products. As a result we continue to allow those exclusive agencies to offer not only our third sector products but in order to be competitive in the marketplace, they do still offer certain levels of our first sector products.

In terms of the other channels as Kriss mentioned we are holding back and putting in caps for certain areas in certain channels in terms of the total sales.

I think this meets our objectives, we obviously talk about caps on an annual basis and so we continue to look at them and how that will be affected throughout the remainder of the year as the sales reach those caps..

Got it. And then that's all helpful guys, just one final question if I could the -.

I would have Hiroshi Yamauchi very quickly here..

[Foreign Language].

So basically what Paul has said is absolutely correct and for agencies to be selling the first sector product -.

We can’t hear you?.

It is not clear..

It is not clear, do it the way you are just talking..

As Paul had mentioned the third sector product revenue by our agency and in order for them to do so the first sector product entity is - we are capping the first sector and for our customers that is needed in order for to retain the customers that is selling to be purchasing the third sector product..

But all of that are in our numbers that we with our earnings per share guidance that we have given, all of that is taken into account and there is nothing there that we are shocked about going forward..

That is clear, thanks guys..

Thank you. Our next question coming from Eric Berg of RBC Capital Markets..

Thanks very much.

My first question is for Dan or for Kriss, well I certainly understand value appreciate what you are doing on the capital accounts side of things with the reinsurance and repatriation and so forth and related share repurchase, I can have noticed in your business in Japan on a constant currency basis is reporting lower earnings, your profits are down this year on a constant currency basis and then right it is not the Yen, my question is when you expect to start seeing the earnings, not the earnings per share but the earnings of your business in Japan growing and relatively, what would you view at this point in history of the company as the sustainable growth rate if you consider the long term sustainable growth rate of your Japan business?.

This is Kriss. I will take the first shot at that and if Dan wants to supplement, he can. First regarding first quarter Japan operating results we were down little bit on the currency neutral basis.

We had better well lower benefit ratios last year in the first quarter than we had this year but that was primarily due to the order of magnitude of claim reserve adjustments.

Last year we had a some release of claim reserves to get us down to the high end of the range that our auditors like to see in last year we had a larger release than we have this year.

We did have some release this year but again we maintain conservative claim reserves I believe and we try to be within the range that auditors independently recalculate in.

So we just have it is really more difficult comparison so to speak earnings first quarter of 2015 versus 2014, overall I would say that we have the headwinds primarily of low interest rates somewhat at lower cash flows in the like impacting our operating earnings in Japan in keep in mind our margins in Japan are the highest in the industry and we really don’t anticipate that they will increase significantly.

We have got bit of a mix shift going own sale between first and third sector and even though first sector sales are down relative to where they had been as previously pointed out, there is still significant and we are still having a larger proportion of our overall premium income associated with first sector products as the business continues to earn out on the premium thing basis.

Long term growth rates Eric the way outlook added is it at least related to third sector business, the medical and cancer, I will relate our fundamental business to the level of healthcare expenditures in the country and in Japan we anticipate the level of healthcare expenditures will continue to increase independent statistics have numbers in the 5% range in our fundamental business in the third sector is to help our policyholders meet their share of the healthcare cost that they have to bear in Japan.

Right now under the National Healthcare Program the co-payments are 30% we think those will either remain stable or increase going forward and that might increase our opportunity to further our medical sales. Regarding first sector sales it is going to depend on the trend in interest rates.

Right now the profit margin is lower than what we want to have in our portfolio, so we are de-emphasizing the production of first sector business..

In fact we what we try to make sure of it is they sell a first sector they have to sell the third sector as well and pretty much what I would say Kriss covered especially when it comes to third sector because that is really the way I view our business.

The first sector is nothing but an introduction of selling ultimately third sector products and I would like to see a growth rate of 5% in new sales, it gets tougher as the number gets bigger but that is a goal that certainly worthy of us continuing to strive for and no one has got the distribution system we have and so we are always looking for new products and ways to do that.

And if we are right now working on another new product which we can’t talk about but we are doing, we will constantly be revamping and then the wildcard as Kriss said is whether or not the co-pay as deductibles go up.

I don’t have any reason to think they are tomorrow other than if you look at the issues they are having regarding their budgets, they are continuing to have problems and they have got to find a way to bring down their deficits and with an aging population could there is a much higher likelihood that it is going to continue to go up not down, so I would think there will be more pressure on reviewing and seeing if they want to increase the co-pays and deductibles and if they do that that is a game changer for us..

One thing Eric you know little advertisement for the FAB meeting I do talk about anticipated margins between first and third sector during FAB speech as you can refer back to our FAB booklet for what our forecast for 2014 to 2016 as far as benefit ratio as expense ratios and profit margins separately for our first and third sector business.

And I will update those in May, so I can just tell you right now there is no major change in our margins that we anticipate so that is a bit of a preview but it says lot of our future growth will be related to revenue growth not margin expansion..

One quick follow up then I will end it there. I have a question too about the reinsurance.

I tend to think of the so to speak the cost of reinsurance in a co-insurance you like this one as the amount of premium I mean amount of assets that you have to see invested assets that you have to see to the reinsure in order to be relieved of a certain amount of risk? So I guess my question in order to are you really reducing the cost of the reinsurance or more accurately are you just ensuring significantly less than would be the case if you weren’t retroceding the business?.

Well that is a way to look at it, the retrocession reduces the direct session obviously and so instead of reinsuring 100% of block of business you’ve reinsured 10% of it and accordingly you have 10% of the cost, it is a risk sharing transaction between Aflac Japan and to reinsure and then it is a risk sharing transaction between the reinsurer back to the U.S.

subsidiary CISC, that is a legal entity that picks up the retrocession.

So clearly their cost transfers but enough to the overall company you are correct, so let me just tell you that we don’t we haven’t had to do asset transfers in this co insurance, the prospective cash flow on the block of business is such that no asset transfer was done in any of the tranches and we just ceded the liability for future claims and exchange for our share of the gross premium.

And there is a net cost associated with it. Just to review the very first tranche that we did for capital raising purposes in Japan basically we did it, because that was the lowest cost of capital with any alternative we had. And we reduced the cost or reduced the size of the future tranches, the retrocession.

So we are achieving some reserve relief on an FSA basis enhancing our solvency margin, continuing to protect policyholders and the like, but continuing to free up some of or what I sometimes refer to payroll capital so that's an overview..

Thank you..

Thank you. Our next question coming from Humphrey Lee of Dowling & Partners..

Good morning, thank you for taking my questions. Just a quick follow on the reinsurance.

Kriss mentioned that there will be a additional capacity for the reinsurance, but coming on the appetite like in other words all factors we’ll appreciate if you give you more this year as opposed to doing last this year?.

I think I mentioned on the last conference call, I don’t want to do reinsurance just for the sake of doing reinsurance. I want there to be an appropriate use of capital in order to incur the cost regardless of how small the cost maybe.

There's still a capital cost associated with doing the deal and unless we’ve got an appropriate use for the reinsurance, we’re not going to have the appetite. I've covered the uses of capital from the reinsurance we've done so far. We’ve certainly got additional capacity in terms of the blocks of third sector business in Japan.

We've certainly got or continue to have an excess of FSA reserves over U.S. statutory reserves on same block and I'm confident that the U.S. statutory reserves were adequate so we believe we've got some opportunity to relieve ourselves as some of the excess reserves.

We’re holding on a FSA basis, but there is no point in doing or reassuring reinsurance arrangement unless you have an appropriate use of capital. And again I'll give you some more color on that in May, I don't want to it on this call.

But we do have significantly more financial flexibility today after having done the reinsurance and particularly at a lower net cost than we had 18 months ago.

So, I think we’re in a much stronger and more flexible financial position having done each of these three transactions and proven we could do it we continue to have reinsurance capacity both from the two companies we’ve done business with so far and we’ve got other parties that continue to knock on our door and ask for opportunity.

So we’re happy with where we are..

Thank you for the color. And another question on U.S. side of the business. So the expenses were little bit elevated, I think that's impart because of the condensation structures changes and also some other ongoing issue just going on in the US.

How should I think about the kind of excess ratio, the expenses for the quarter that would be considered more for recurring expenses due to the compensation structure change, as oppose to these initiatives going on?.

This is Ken. Let me comment on that, I talked a little bit about that in the fourth quarter when we released our guidance and talked about what went into it.

In the first quarter of this year, the added expense from the changes we made to our field for structure was approximately $19.5 million net of capitalization and we expect it to run kind of in the $20 million to $22 million or so, we expected to run around $20 million to $22 million as a run rate for the fourth quarter of this year.

So we're little bit lower than in the first quarter than what we would anticipate it but it was again about $19.5 million of additional fixed expense coming from those changes..

Okay, got it. Thank you..

We're coming up to the top of the hour now so we have time for one more question please..

Yes ma’am. Our last question coming from the line of Suneet Kamath of UBS..

Thanks, good morning. So question on these reinsurance deals. Can you just remind us, does the FSA or U.S.

regulators need to approve these transactions?.

We've reviewed the reinsurance transaction with both the FSA and the U.S. regulators. We’ve reviewed both the direct reinsurance agreement and the retrocession agreement with the FSA. Certainly we covered the first tranche with them. With the FSA we approached them, two we approached the FSA with an opportunity to discuss the retrocession arrangement.

And they appropriately observed that Aflac Japan was not a party to the retrocession agreement and wondered why we had brought it to their attention. So we apologized and thanked them for their interest.

We just wanted to make them aware of the transaction, but yes we’ve covered both aspects of the agreement with the FSA and of course we have covered with the state in Nebraska both on all three tranches and South Carolina with respect to the retrocession.

So we’re in good shape on the regulatory relationships and approvals with respect to these transactions..

Yes, we just want to make sure that we’re not only taking care of the shareholders, but also making sure that we have strong capital position on behalf of the policyholders for Japan. So that’s important to us too. And everyone seems happy at this point..

Okay. And my second question is on Japan sales and you’ve talked about on this call and earlier calls sort of the benefit of staying in the first sector area in terms of your ability to sell third sector products.

But have you quantified that, in other words if you decided to significantly scale down even incremental to what you’re doing now for sector sales, how big of an impact do you think that would have on your ability to sell third sector products?.

Well, I'll just answer that for the time running out. I think we're safe for this year. We feel very comfortable with the quotas we set and what will take place. As the year goes on and according to what interest rates do, we’ll have to review it, but we're not going to be selling product at losses.

So, we'll take it on and figure accordingly, but that's a problem for the industry not just for us. If it's affecting us, it's affecting everyone else in the industry. So, what we've seen in the past is, as interest rates stay down with these lower assumptions, which is ultimately mean rate increase on the premiums.

So I would expect if rates continue to stay down, then we probably have right increases on policies going forward and that would help solve part of our problem..

Let me add one thing and it's not on chattering but I think what will happen is that if the low interest rate environment continues you’ll see a migration way from the asset accumulation element of life insurance contracts or first sector contracts more to the protection element. There is a need for protection in the first sector products.

And I think that that will become a larger part of the first sector products that we sell, the pure insurance elements that are still required by policyholders and we may move more to protection product in first sector, but I think we’ll still do first sector.

And keep in mind that we sold the first sector products for a long time and we really started to see in spikes in first sector sales probably around 2010 when interest rates started moving the way they did and of course we had to respond to the truly low interest rate environment in 2013.

But if you kind of lopped off the spike in our sales, you’ll see that we're about where we were pretty interest rate volatility. So that's about it..

All right. Thank you..

Thank you very much and I will reiterate what Chris said several times that we will be having our Financial Analyst Briefing meeting in May. It will be on May 21, in New York. We hope to see you all there. And please give us a call if we can help you with any of those details and we do have an online registration site.

And we appreciate you listening this morning and be sure to give us a call if we can follow-up with anything. Thank you very much. Bye, bye..

Thank you. And that conclude today's conference. Thank you all for joining. You may now disconnect..