Robin Wilkey - SVP, Aflac Investor and Rating Agency Relations Dan Amos - Chairman and CEO, Aflac and Aflac Incorporated Fred Crawford - EVP and CFO, Aflac Incorporated Teresa White - President, Aflac US Eric Kirsch - EVP and Global Chief Investment Officer, Aflac.

Jimmy Bhullar - JP Morgan John Nadel - Credit Suisse Michael Kovac - Goldman Sachs Seth Weiss - Bank of America Humphrey Lee - Dowling and Partners Ryan Krueger - KBW Yaron Kinar - Deutsche Bank Tom Gallagher - Evercore ISI.

Welcome to the Aflac Third Quarter 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 third quarter call.

Joining me this morning from US is Dan Amos, our Chairman and CEO; Kriss Cloninger, President of Aflac Incorporated; Paul Amos, President of Aflac; Fred Crawford, Executive Vice President and CFO of Aflac Incorporated; Teresa White, President of Aflac US and Eric Kirsch, Executive Vice President and Global Chief Investment Officer.

Joining us from Tokyo is Hiroshi Yamauchi, President and COO of Aflac Japan; and Koji Ariyoshi, Executive Vice President and Director of Sales and Marketing. Before we start this morning, let me remind you that some statements in our teleconference are forward-looking within the meaning of the federal securities laws.

Although we believe these statements are reasonable, we can give no assurance they will prove to be accurate because they are prospective in nature. Actual results could differ materially from those we discuss today. We encourage you to take a look at our quarterly release for some of the various risk factors that can materially impact our results.

Now, I’m going to turn the program over to Dan who’ll begin this morning with some comments about the quarter as well as our operations in Japan and the US, Fred will follow with some brief comments about our financial performance for the quarter and outlook for the year.

Dan?.

Good morning and thank you for joining us today. Let me begin by saying that I’m pleased with the company’s overall financial results for both the third quarter and the first nine months of the year.

As you no doubt saw from yesterday’s press release these strong results gave us confidence to an upwardly revised our operating EPS outlook for this year to the range of $6.40 to $6.60. Fred will provide more color on earnings and our outlook during his comments. I will lead off by providing an update of Aflac Japan our largest earnings contributor.

From a distribution perspective our traditional licensees which include individual licensees, independent corporate agencies, affiliated corporate agencies have historically been and remained to-date viable contributors to our success. Additionally our alliance partners continue to advance our strong results.

I’m particularly pleased that just this month Japan posed through its 20,000 plus postal outlets begin selling our new cancer insurance product designed exclusively for cancer survivors.

Our traditional agencies first began selling this product in March, 2016 while we anticipate the sale of our cancer insurance for cancer survivors we’ll be slightly additive to our overall sales results more importantly it underscores our reputation and commitment to being there for Japanese consumers, when they need us most.

These various distributions outlets further our goal of having a presence in all the places people want to make their insurance decisions. From a product perspective, I’m pleased with the progress we’ve made in limiting the sale of first sector savings products which are interest-sensitive.

First sector product sales decreased 54% in the quarter putting us squarely on target to reduce first sector sales by at least 50% in the second half of the year compared to the second half of 2015.

We have been aggressively and pulling product from select channels conservatively re-pricing our WAYS and endowment products for the reality of a prolonged low interest rate environment. We are extremely encouraged with this significant progress we’ve made in limiting the sale of the first sector products. Turning to the third sector sales results.

You’ll recall that we upwardly revised our annual sales target to these products last month, at the Tokyo Analyst briefing making this the second positive revision to our sales target this year. At the meeting, we announced new third sector sales outlet to flat to up 5%.

We’re pleased that Aflac Japan generated a third sector sales increase of 2.5% for the quarter and 5% year-to-date. These strong sales results in the face of difficult comparisons reflect stronger than expected productivity across the majority of the distribution channels.

This is even more notable when you consider the sales through the bank channels have been moderated significantly by restrictions on the sale of first sector products. I’ll remind you that fourth quarter still presents difficult third sector comparisons particularly following two years of extremely strong cancer and medical sales.

Our third quarter sales results also benefited from the July introduction of the new third sector product called income support insurance which has accounted for 7.8 million yen or 3.3% of the third sector sales. This product provides fixed benefit amounts in the event that a policyholder is unable to work due to significant illness or injury.

Additionally, this product was developed to supplement the disability coverage within Japan social security system. Our income support insurance product targets young to middle age consumer ranging in the age from 20 through their 40s, a segment of the population in which we believe were underpenetrated and represented.

By focusing our efforts on this demographic, we believe that we’re building relationships to lay the groundwork for the sale of cancer and medical insurance later in life. While it’s still early we’re happy with the reception of the income support insurance, as received.

We believe this product has the potential to gradually develop into a new Aflac pillar products over the long-term. Turning to Aflac US, we are pleased with our earnings are exceeding our expectations to the first nine months. Profitability in the quarter was driven by improving benefit ratios that we continue to see over the last several years.

We have simultaneously pushed resources back into the business and particularly we’re investing in an end-to-end system for the group platform that will provide the capabilities of all of our group constituents including brokers who typically sell group products.

While we are expanding our presence in the voluntary work side insurance market, we are also being very disciplined in the pricing of the business, especially as it relates to the profitability within the smaller case group space that includes employers 100 to 250 workers.

Although sales in the quarter were lower than expected, I will remind that I said many times that fourth quarter sales and particularly sales in the last three weeks of the year largely determine our annual sales results. Our efforts are focused on increasing the productivity of our career agents and brokers.

I believe the measures that we rolled out over a six month period beginning in the fourth quarter of 2014 are the wide approach and as you’ll recall one major element of the changes we made including the compensation to better align incentives for the career agents with company sales results.

We’re continuing to fine tune our compensation package for our top sales management to closely align pay with performance. With this superior incentive program we’re seeing our top sales management begin paid extremely well and some of the poor performing sales managers have decided that they’d rather concentrate on sales instead of management.

While we have like to have seen, the measures, the more immediate impact on our sales results, we know that it can take some time. However, I want to point out that we are exceeding our profit target while implementing these changes.

Most importantly, we continue to believe the changes that we’ve made through our sales infrastructure and compensation are in the best interest of the company to produce long-term results. We also remained encouraged with the broker business. Over the last few years our sales threw the broker channel have grown.

Our fourth quarter sales results have become more and more impactful as you saw in 2014 and 2015. This means it becomes more and more challenging to project full year sales even though sales results for the first seven nine months we know, although I’m encouraged by the pipeline of business schedules for the fourth quarter.

We’re still enhancing our forecasting of how much of the pipeline materializes into actual sales results. Therefore we believe Aflac US will require particularly strong fourth quarter in order to meet the lower end of the 3% to 5% target increase for 2016.

I will remind you that our brand is a key differentiator for Aflac both in Japan and in the United States. As a product innovator and trusted brand in both countries we experienced a tremendous amount of success leveraging the strength of our brand to drive sales in both countries nine out of 10 consumers recognize the Aflac brand.

But our brand is more than the Aflac duck for the advertising initiatives. It’s also about how we take excellent care of the policyholders. In Japan, as our powerful brand has propelled Aflac to ensure one out of four households.

In the United States, we processed, approved and paid nearly $1.3 million one day pay clients in the first nine months of 2016. And most importantly 96% of the policyholders that use one day pay said they’re likely to refer other people to Aflac. We believe this will result in more new sales going forward.

Our products are well suited in both Japan and the United States market. And we are well positioned in the two largest insurance markets in the world.

Turning to capital deployment, let me just say that we continue to view growing the cash dividend and repurchasing our shares is the most attractive means for deploying capital particularly in the absence of any compelling alternatives.

We are on target to repurchase about $1.4 billion of our shares with the majority already repurchased during the first nine months of the year. The Board of Directors action to increase the dividend by 4.9% demonstrates our commitment to rewarding our shareholders. This marks the 34th consecutive year of increasing our cash dividend.

We are proud of the achievement and our objective is to grow the cash dividend right in line with the increase in the operating earnings per diluted share before the impact to foreign currency translation. We continue to manage the business for the long-term benefit of the shareholders, the policyholders and all stakeholders.

We believe, we will continue to achieve more by building on these strategies and the foundations that have propelled our success. By doing this, I believe we will continue to enhance shareholder value while delivering on our promise to the policyholders. And now let me turn the program over to Fred, who’ll cover the financial results and outlook.

Fred?.

Thank you, Dan. Our third quarter performance continues the strong financial results reported in the first half of 2016 and execution on key initiatives design to drive long-term growth and effective allocation of our capital. Our results were driven by strong overall margins in both Japan and the US.

Operating EPS increased 16.7% or $0.26 per share with a little over half the growth driven by the strengthening of the yen and the remaining from share repurchase and pure earnings growth. Excluding the impact of the yen operating earnings increased 7% as compared to the previous year’s quarter. Our Japan segment margins were solid.

We concluded as part of our annual actuarial review process that it was appropriate to reduce the IBNR reserves for our cancer insurance block of business by approximately 4.6 billion yen or $0.07 a share. This amount is very similar to the adjustment we made in the third quarter last year and reflects continued strong cancer claims experience.

Expense ratios were generally in line with our guidance. In the US benefit ratios continue their favourable trends for the year. Our expense ratios was favourable to our expectations for the quarter.

Consistent with previous year, we fully expect our expenses to tick up in the fourth quarter as we make progress on certain strategic initiatives and increase our promotional and IT spend. Overall our US pre-tax profit margins are set to perform at or above the high end of our 2016 guidance range of 17% to 19% for the year.

For both Japan and the US, we will spend some time on our December Outlook Call discussing revenue trends. Benefit ratio drivers and specific to expense ratios where we intend to invest in the platform throughout 2017.

Turning to investments, results were both by the quarter end and year and were aligned, year-to-date were aligned with our expectations as we continue to navigate the low yield environment and further diversify our portfolio.

As we discuss during our Analyst briefing in Japan, we continue to execute on a comprehensive plan that includes for channelling interest-sensitive premium flows through actions to reduce the sale of first sector savings products developing alternative high quality yen investments including a measured re-entry back into yen private placements.

Finally executing on our US Dollar investment strategy where we can hedge market value affectively and optimize investment income consistent with risk ALM and capital objectives.

With respect to our US Dollar program in hedge cost, our reported third quarter cost were elevated recognizing the currently isolate and report the full cost of forwards in the period we purchase.

Consistent with the strategy we have outlined to at our Analyst briefing in Japan we have successfully executed uncovering approximately $3.3 billion of additional US Dollar assets under the hedge program and have proactively extended the duration of our forwards to better manage 2017 cost and associated volatility.

Both of these actions will serve to exaggerate our reported cost in the period under our current reporting. Amortizing the cost over the life of the forwards, the non-GAAP reporting convention we plan to adopt in 2017. Our hedge cost for the entire book of hedges were $54 million pre-tax or $0.09 a share this quarter.

Assuming no material change in hedging strategy and our current reporting method, our pre-tax hedge cost guidance remains in the $280 million to $300 million range for 2016.

Moving to an amortized basis for reporting tactically extending duration continuing to refine the asset allocation and hedging strategy will serve to reduce the quarterly volatility as we incorporate hedge cost into our definition of operating earnings for 2017. We’ll cover this approach and forecast in more detail at our Outlook Call in December.

Turning to capital, we commented last quarter that hedging additional US Dollar asset classes would further strengthen our SMR. We ended the quarter with an estimated SMR above 900% up significantly from last quarter.

RBC is also preliminary at this point, but we expected to remain strong in the mid 800% range despite the strengthening of the yen in packing our ratio negatively throughout the year. This is the result of the Japan branch embedded in our US statutory results.

Overall credit conditions are stable impairments in the quarter were modest and primarily related to our Japan equity portfolios where depressed market values have triggered impairments in accordance with our internal accounting policies.

We continue to return capital to the shareholders between dividends and repurchase, we’ve returned approximately $1.7 billion to our shareholders year-to-date. We continue to spend down excess capital held at the holding company and expect achieve our target of $1.4 billion in repurchase for the full year.

As Dan highlighted our board elected to increase the shareholder dividend $0.43 per share for quarter, a 4.9% increase in marking our 34th consecutive year of dividend increases.

Bolstered by US segment earnings outperformance and solid results in Japan, we’re comfortable increasing our 2016 earnings guidance to $6.40 a share to $6.60 per share on a currency neutral basis. We have provided in our press release an EPS range for the fourth quarter assuming yen/dollar exchange rate of 100 to 110.

As mentioned last quarter, we are conducting our normal actuarial review of interest sensitive blocks of business in Japan. There are two smaller legacy blocks of interest sensitive third sector business that may require strengthening as these blocks have been susceptible to strengthening in the past.

In addition from a corporate perspective post-retirement benefit liabilities are sensitive to long-term rate assumptions and when that finalized we anticipate an adjustment in fourth quarter and suspect this will be a common theme among many large corporate entities.

Overall we remained well positioned in terms of core margins and capital strength and look forward to our December outlook call where we will expand on our strategic plans and 2017 outlook. I’ll now hand the call back to Robin to begin our Q&A session.

Robin?.

Thank you, Fred. Now we’re ready to start taking your questions. But first let me remind you that to be fair to everybody please limit yourselves to one initial questions and only one follow-up that relates to your initial question. We’re now ready to begin with the first question..

[Operator Instructions] we have our first question from Jimmy Bhullar with JP Morgan. Your line is now open..

My question was just on your higher EPS guidance. If you could discuss whether it was more the benefits ratio coming in better that gave you the confidence to raise the range or was it just lower discretionary spending.

And to what extent are these things that will affect next year? Like if it is spending, could that spending go over next year or likewise, if it's the benefits ratio, should that continue to be favorable through next year as well?.

Sure, Jimmy thank you for the question. This is Fred. Really the revision to our guidance is, as I mentioned in my comments largely bolstered by outperformance relative to our expectations on the earnings front in the US.

However I would add that year-to-date both the US and Japan have been traveling at generally favourable ends of our ranges for both benefit ratios and expense ratios and so I made a point to say also or point out that Japan solid results are contributing as well, but the true outperformance relative to our expectations was more pronounced in the US earning side.

In terms of as we look forward, we will spend a big deal of time not surprisingly during our December Outlook Call talking about the trends as we look at next year so I’ll spend more time there. I would say in general you would expect us in the fourth quarter for example to see some expenses pick up.

This is not uncommon if you follow the company over the last few years you’ll see that tick up has to do with the timing of promotional spend and the natural progression of initiatives as we go throughout the year. As we go into the next year, we will continue to be investing particularly in our US platform and we’ll speak more about that.

I don’t know that I would suggest it to be material but you would see a slightly elevated expense ratio as we invest in that platform and then in terms of benefit ratios. We’ve been tracking in particularly in the US at a favourable level. We expect to some degree to see a continuation of that near term eventually normalizing back towards our range.

But we have seen some persistency if you will relative to the benefit ratio being favourably throughout the year and based on what we’re seeing right now, that should continue for a bit, but we’ll talk more about it during the outlook call..

And then if I could ask one more, just on your hedge cost, it was pretty high this quarter.

To what extent did the increase related - you're just increasing duration and if you could just give us some color on how far you are going out on new purchases and what the basis point cost is for the hedges, that you are putting on?.

Yes, there is really two principle drivers of the hedge cost being up, given how we report it and that was really the tactical moves made in the quarter and it was a combination of extending duration as you mentioned.

I would say over the past year for example, we’ve pushed that duration of our hedge portfolio out from roughly four or five months to upwards now 10 months and that means by definition we’re buying out into the 1 year 18 month timeframe in some cases on the forward curve.

This is in part not only to manage forward volatility which we think is important for consistency and stability of our reported earnings and cost, but it’s also because we’ve actually seen a flattening of the forward curve, where it’s more economic for us to go a little longer and lack some of that in, so we’ve been quite tactical on that front.

The other piece that contributing over the course is just simply covering more assets and in particularly covering assets that we’ve been building in the US Dollar portfolio things like bank loans, commercial real estate and equities.

We’re covering those assets are important not only from the pure hedging perspective but also you get the favourable capital treatment or really protect the favourable capital treatment that you need for SMR.

So those have been the two areas of contribution I would say about 35% or so, the cost related to duration extension in the quarter and about 40% of the cost increase or the cost you’re seeing related to covering additional assets just to give you some round numbers.

Again we’ll be moving to an amortized basis, which is a more logical way of looking at the cost going forward. I’ve tried to give you some color for what the quarter looks like if you were to amortize cost today.

We really believe in the tactical moves we’re making and during the outlook call, we’ll give you a full rendering of how the year would look and how comparable years would look, as we incorporate it into our forecast for 2017..

Thank you..

Thank you. Our next question is from John Nadel with Credit Suisse. Your line is now open, sir..

Two questions. One, Fred, just real quick, what is the size of the notional amount of the hedged asset program as of the end of the third quarter? I know it was $14.3 billion or $14.4 billion last quarter. It sounds like it's probably in the $17.5 billion, but if you have the number that would be great..

And Eric you can jump in, but I think we’re traveling close to the $16 billion and this would be particular to the forwards that we’re covering. So John, realize that we use two instruments to hedge the vast majority of what we use our forwards and that’s where the cost comes in.

we also do some collaring on a small portion of the assets, which tends to a much, much lower cost type approach to hedging. The vast majority of our hedging has done using forwards and that notional is traveling around $16 billion up from around $12.7 billion in the second quarter to give you an idea.

And I think I’m going to anticipate where you may be going with this question from an understanding forward cost and that is, if you were to take our $16 billion in notional and just hold that constant, we’re seeing cost traveling between you know 170 to 180 basis points actually more recently it’s gotten a bit favourable coming off BOJ and Fed announcements, that’s why we move to accelerate locking in some other cost.

But we think it’s more wise to be thinking in that 180 basis point range and that gives you a sense of where we’re traveling from an amortization perspective..

Okay, that's helpful.

And would you anticipate that a Fed hike, I guess in December, would - all else equal, would increase that cost?.

You it’s always hard to say and the reason for it John as well on in theory, a Fed moving rates up and the BOJ staying put or continuing to move rates down, widens out your hedge cost realized at that things are priced into the market and so to what degree a Fed rate hike is already priced into the market, is a bit speculation.

I don’t know if you have any..

I’ll just add to Fred’s comment. Today if you looked at one year hedge cost are about 168, but we’re anticipating upward pressure for exactly the reason you said, if you looked at the forward curve one year from now, one year hedge cost about 200 basis points. So to Fred’s point, the market is anticipating the Fed hike..

Yes, understood..

One year [ph] from now, we would expect hedge cost probably to be higher 20, 25, 30 bps anticipating some Fed activity, but even by the Federal Reserve’s own public announcements, even if they raise rates they’ve been very clear slow and gradual nothing sharp because US economy won’t support that..

And then that last follow-up on this one is just, if you look out a year from now approximately how much growth would you expect to see in the actual US Dollar investment program that would require the hedge..

Yes, I think we will provide some back up to that John on the outlook call. I don’t want to steal some of the announcements from that. So I would suggest you will go into more detail. I will point this out however, it’s not simply a matter of growth in the US Dollar program, which I would anticipate to be gradual.

It’s also the mix of where we’re investing and what you’ve seen onto do through bank loans for example middle market lending and then more recently exploring transitional real estate lending which is just a form of bridge loans, commercial real estate.

These are all characterizes being floating rate US Dollar investments not that’s particularly advantageous for us because one you’ll tend to hedge that using short dated forwards where it’s relatively less expensive forwards, but also from a duration matching perspective you end up, then is a same pressure that supply to hedge cost tend to result in increased LIBOR rates and returns are yields on the floating rate securities, but one of the things that we’re working on is not just the notion of asset allocation and where the US Dollar programs goes, but also refining our asset allocation in that portfolio to be more effective as I mentioned in my comments more efficient and effective in hedging and in the process further managing volatility..

That makes sense. Thank you..

Our next question is from Michael Kovac with Goldman Sachs. Your line is now open..

Wanted to focus a little bit on the US sales slowdown this quarter kind of relative to your longer term expectations and wondering if we could dig in a little bit more to what was really driving at this quarter. It seems like slow down across some of the accident in core cancer products but any additional color you can provide will helpful..

This is Teresa, so thank you for the question Michael. The weak sales this quarter really I think attribute to the changes that we’ve made that are settling in.

The markets that are succeeding have three fundamentals; one is, tightened broker collaboration, the second is as Dan talked about productivity per producer increased and improved productivity per producer and then the third thing is an increase in conversion rates that were approved to producers.

What we’re really focused on is making sure that we managed the full performance of all of the markets from that perspective. We are seeing some positives, we’re seeing positive growth in new account. We’re seeing positive growth in producer productivity.

But we don’t have all markets flicking on all cylinders and so that’s really the focus from a US perspective..

And I’m like one other contract, the new contract that we put in 18 months ago or so what you saw is, if you remember we had an enormous four quarter that year and a lot of people stayed around continued to produce, but now that half the organization is doing great and making more, the other half is making less money.

These ones that are making less money who are making money under the old contract, so they’re having to perform to get paid which is the way we want it, but a lot of them re-evaluating how hard do I want to work for that money? And if they want to work hard, they can make a lot more and some of them are saying, I’ve done well I’m going to take my money and I’m going to move more towards just sales and not have to worry with sales management and how much more complicated it’s gotten.

I mean, Everwell one day pay, all these other aspects have changed them from just being a sales manager to the managing or from changing from just managing sales to being a real sales manager which includes looking at profitability making sure we’re just blending our approaching to offering group products at certain prizes and so we’re going through a little change with that, we hope wouldn’t happen but I’m certainly not surprised and so that’s the other aspect..

Great and then I guess now that it’s been sort of 18 months as you mentioned since the initial rollout, do you feel like most of that is sort of through the system or should you expect to kind of continued drag from sort of the transition through the next couple of quarters..

I think that it’s hard to call, I can’t tell you how much the market’s changed.

I’ve been around here long time and it’s always been more of the same for the first 25 years I was doing it, now it’s not, it’s - our great sales organization which I’m so happy with and but in addition to that it’s the brokers, it’s the change what we never had the skew of business to the fourth quarter but because of the way they enrol the accounts.

The way it’s working now wears me out it’s like a football game where you got to pull it out in the fourth quarter, but that number’s becoming larger and larger and we’re trying to shift it more to the third quarter and it didn’t work, they still want to turn it in, in the fourth quarter and we had more control over the associates because they listen more but when you deal with this broad based broker, you just take it when - but we got this big pipeline.

So I think things are moving in the right direction, but I still believe next year the fourth quarter is still going to be big because of the way it happens..

Yes and I’ll say from a pipeline perspective when you look reenrolment, you look at new business in the pipeline, the pipeline looks good. So we feel good about the pipeline but to Dan’s point you got to pull it out in the fourth quarter which is very, very different from what we’ve been accustomed to in the past..

Great. That's helpful. And one last follow-up on that.

As we think about the promotional expenses, I know Fred and others mentioned that those tend to be higher in the fourth quarter, should we expect them to be above prior year's levels as a result of sort of trying to pick up some of the potential sales growth in the US?.

Not particularly, actually our overall budget year-over-year is relatively stable from an overall promotional and marketing spend, there may be modest differences quarter-over-quarter from a timing perspective and particular timing of ad spend and so forth, but the notion of that being bunched around enrolment season and in the fourth quarter is not unusual and there’s not really a large step up Delta, if you will to the promotional spend..

I will make one final comment and that is I don’t like the sales quite where they are, I like them better but I like what’s happening in our operations. I like the idea that we’re doing the one day pay, I like what’s happening with Everwell. I like how the brokers are coming on.

I like what I’m seeing in writing large accounts, but we’re being disciplined and not just writing every account, some they couldn’t be profitable were passing by. I like what Teresa is doing and merging the brokers and the associates together. But with that are growing pains, but all in all I’m pleased to what’s taking place in that regard.

I just want stronger sales..

Thanks..

Our next question is from Seth Weiss with Bank of America. Your line is now open sir..

Fred, I wanted to follow-up on your comments that in the US you expect the beneficial underwriting trends to persist in the near term but normalize back in the long-term, could you just comment on what gives you the visibility in both the near term and long-term?.

What we’re seeing right now is first of all realized of course, benefit ratios will fluctuate each quarter and so there will be quarters where we’re in our range and quarters where we move it in the range are little favorable, but what we’re seeing year-to-date even somewhat last year and the latter stages of last year, is a consistently favorable benefit ratio and what we see going on there we believe relates to somewhat to mix of business and two particular types of business that are driving this, we believe our one group business where group business naturally is priced to and expected to travel at a lower benefit ratio than you would find say on individual products in the way it’s priced and that’s just the function of how it’s priced and that’s just the function of how it’s priced and structured as a product.

And as business grows and becomes more of our in force and plays more of an influence on our benefit ratio is just a little bit of that.

The other dynamic though is really more guaranteed issue business, where the actual building reserves tends to be slower and more moderate in their early years and so as you start to sell more of that guaranteed issue business as proportion of other business, you’ll see just the slower ramp up in reserves and a generally more favorable near term benefit ratio.

So that’s what I mean when I say we would expect to see as those types of business age, that they will age back into our expected long-term range of benefit ratio, but for a period here.

It looks as if we’re traveling at a again a persistently low benefit ratio relative to our expectations and again it’s all on the margin, where we’re traveling I think maybe 50 or so basis points, better than our guidance in general, but we’ll provide more of an update on this and some trends as we get to the outlook call..

Great, thank you and once quick follow-up just on the hedge cost. You commented or reiterated at $280 to $300 million range for the full year. I believe you’re already at the low end of that range, so could we assume that you’ve effectively done most of your purchases for the year on the US Dollar denominated program..

That’s right unless we take a different tactical approach, for example decide into aggressively lock in more long-term hedges than we would expect to stick with that guidance and what that really means is, you can see we’ve covered effectively all of our needs, we’re right now about 98% covered if you will on our hedge activity in 2016 and furthermore, we’ve gone into 2017 and we covered a lock in if you will about 40% of our cost in 2017 and that’s what we want to try to do, we’re going to try rolling if you will as we go forward, so that we can create a level of consistency in our hedge cost..

Great, thank you..

Our next question is from Humphrey Lee with Dowling and Partners. Your line is now open..

Just another follow-up on these hedging costs, given a lot of the Japanese insurance companies you’re talking about expanding the foreign investment program backed by a hedging program behind it.

So from a hedging instrument perspective given the higher demand, do you see any potential impact on the hedging cost from the capacity perspective, from your counterparties?.

From my conversations with the team, I’ll ask Eric to weigh in though. The forward market particularly the forward market involving two of the largest and more stable currencies on planet Dollar and yen is such a deep and strong market that you tend not to see the ebb and flow of purchasing and selling having a tremendous impact on it.

There will be times where supply and demand do play-in, in fact into the forward cost that’s natural and by the way by locking in a little bit longer we have the ability to sort of step out on the margin where necessary and step back in tactically and that’s part of what we try to do on the margin.

So there’s no doubt, there’s some possible influence but I’m not sure given the depth of this market that it would be significant, but Eric maybe you have some comments..

Fred’s absolutely right, there’s not an issue, the availability of forwards. There’s plenty of capacity in the market from counterparties, however it does drive into the price of the forwards.

We tend to mostly talk about the difference between central bank policy between the Fed and Japan that is the largest driver and [indiscernible] is the largest driver, but there is also something called the basis is basically a reflection of supply and demand for dollars.

But to your point, a lot of Japanese insurance and other investors outside of Japan are buying along the dollar assets and therefore in the currency market and that will drive up the price in the forwards, but it will not reduce the supply. There is more than ample supply for the most liquid market in the world..

So to that point, even if longer term, the interest rate environment to become more normalized. But if there is [indiscernible], there is the demand from the Japanese insurance companies that could create an upward pressure on the basis..

That’s right investors from around the world, not just Japanese insurance companies..

Okay. And then just to follow up on the US dollar investment.

So to the point that they are definitely a greater demand from foreign buyers of US assets, so for your tactical shift in terms of your asset allocation to bank loans and middle market lending, have those asset classes been tapped and by the other foreign buyers as well, and if so, can you talk about the competitive landscape in terms of sourcing of these assets?.

Happy to. It’s a very, very large market and is attractive to insurance companies like ourselves.

However there is a trend of a shift capital available, to the loan, middle market, loan market, even transitional real estate and what I mean by that is, there’s thousands of lenders across the United States lending to thousands of small middle market company and in the real estate market.

Historically banks have been the capital providers to those loans markets for the lenders if you will as well as re-syndicating some of those loans because of Dodd-Frank the banks have removed themselves from that market, it’s no longer capital friendly for them.

For an insurance company like us, we like to focus on credit risk and underwriting where we can negotiate, very tight covenants [ph], of high predictability of securement [ph] of loans if you will and our money so it’s an attractive asset class, so yes it’s true. There is a trend of insurance companies and other investors substituting for the banks.

So in a way, the zero sum game I couldn’t give you exact specifics but insurance companies are coming in, where banks are leaving and providing that capital to the market.

Now naturally, to supply and demand, so there may be more demand than there’s been in the past and that might tighten spread to that but you’re getting paid for taking the credit risk and those types of particular loans, companies but you’re also getting senior secured status, very tight negotiations to your favor to protect yourself in case there is any credit challenges with the company..

Okay, thank you for the color..

Our next question is from Ryan Krueger with KBW. Your line is now open, sir..

Fred, first, I wanted to follow up on your comments about the fourth-quarter actuarial and post-retirement benefit review.

Are those - are anticipated impacts from those included in your fourth-quarter EPS guidance or would that be viewed as separate impacts?.

Yes, it’s. Here’s how to think about it. In terms of our fourth quarter estimates, the post-retirement benefit adjustment we have allocated or set aside in our forecast, in our estimate an amount of money.

It is preliminary and we don’t have the final because it ends up being the result of a final posting if you will of the pension interest expense or basis points from a composite and so what the pensioner world waits for is the production of that composite, but we fully anticipate it to be down.

It’s hard to envision there being a recovery in it and as a result, we have a greater level of confidence there will be something and so we have set aside some money for that.

In the case of our review of these legacy blocks of business I mentioned, that is not in the number because we really are too early in the process to know what might be the practical ranges or if it will be a resource for anything at all on those products and so we do not have anything in the numbers for that..

Okay, thanks and then another follow-up on the US sales.

Is the comment that it will be more challenging to meet the 3% to 5% full year target, should we view that as more reflective of somewhat lower sales in the first few quarters of the year relative to what you would have expected or does it have more to do with your actual outlook for the fourth quarter and broker production?.

I think the broker production as far as the pipeline looks pretty good, so within the range. I had hoped that we would be a lot further along after the third quarter and so I would view it more so as my disappointment in where we are as of the end of the third quarter.

However, I will say this as Dan said, there’s a plenty of opportunity for us to really bring in new business. We also are looking at the profile of the business that we’re trying to bring and we are turning down some of the cases and so, when we talk about it, going to be a little bit more difficult.

It’s really going to require a great fourth quarter for us now. We said that the last couple of years and our sales teams delivered. So that’s really just kind of how I’m looking at it at this point.

Do you have anything else, Dan?.

Okay, thanks a lot. Appreciated..

Our next question is from Yaron Kinar with Deutsche Bank. Your line is now open sir..

I also have a question on us sales so and talking about your forecast and the environment you’re seeing right now, you talked a lot about the distribution force and the dynamics that you’re seeing there.

Can you also talk a little bit about what you’re seeing in terms of the competitive landscape from manufacturing perspective?.

Well from a competitive and did I hear manufacturing perspective?.

Competitive..

Okay, so from a competitive perspective. We are seeing a lot more competitors in the voluntary space. Some of the employer paid benefits are now becoming voluntary benefits. So again, additional voluntary benefits in this space. At this point, we’re also seeing competitive bids specifically on the broker business.

Some of the bids as I said earlier, we really are passing on because of the profile of the business and we want a really stable product profile and some were choosing to partner to get like the long-term care type products.

So we’re trying to go to best-and-breed to get those, so really from a competitive set we’re seeing a lot more competitors in the market. But we still feel good about what we’re doing in the market as well..

I want to say one other thing about this. This is not unusual ended. I can go back 20 years ago and remember when our competitors got in the market and they were going to cobalt and chemotherapy benefits. We kept telling ourselves, we couldn’t meet that they ended up having 50% rate increases two or three times in a row to offset that.

The good news is we’ve got all these statistics of what we’ve been doing in the cancer insurance business and in this area. For so many years, we kind of know how to price it and some that want to make lowballs it generally bites them later on.

And yes, it gives us a little problem short-term to sales go back 20 years ago, we were losing sales to some of the competitors couple of those companies aren’t in business anymore and few that were had to change the way they approach things. So this is not that unusual that we’re having people lowball on products.

We’ve seen in Japan, but the fact is we know what we’re doing and we’re pricing it right and we’re giving the customer a good value and in return we’re making a good profit..

I appreciate the color. And then another question. Regarding the revised guidance, if I back - out of the numbers correctly, I think I got to roughly flat constant currency earnings in the fourth quarter and the midpoint of that guidance range.

And if I heard Fred's comments earlier, I think those numbers don't include the potential adjustments to reserves or on the pension front at this point - retirement [ph] front, sorry, at this point.

So what other drivers are there right now that are serving as a head wind relative to last year or is it just that last year was a very strong quarter?.

No, I would say in general it’s really a couple of things. One is what I mentioned we believe there will be a bit of an acceleration and expenses in the fourth quarter that’s what we’re forecasting, sometimes that plays, sometimes the timing of that doesn’t play out but at the moment that’s our forecast and then again recalled it.

I did in fact include some level of expense related to what we believe is inevitable post-retirement benefit adjustment related to interest rates. Now again that’s not finalized and you need to understand the final before you can book anything, but we know enough to know that there’s a probably a range amount in there.

So that’s a little bit of what’s traveling through the number and you know obviously we’ll continue to do our best to meet or exceed the forecast as best we can..

But I thought that fourth quarter usually see an acceleration of expenses.

So wouldn't that have held through last year as well?.

Yes, it’s all relative it’s a matter of how big the acceleration was last year and how big this year. So I would say those are really the issues..

Got it. Thank you very much..

Our next question is from Tom Gallagher with Evercore ISI. Your line is now open sir..

Thanks. Another question on the hedging program.

So Fred, if you factor in the cost of hedges currently and then you consider the impact on your first sector business like WAYS, are those products still going to be profitable when you factor in the cost of rolling these hedges here? And is that the way you're thinking about it at a discreet product level in terms of profits or are you thinking about the hedge in a different way? Is that sort of a corporate expense? It's discreet and not being factored in at the product level?.

No, it’s not discreet, in the sense when we look at our - are putting new money to work if you will premium and what new money assumptions that’s called the new money curve, we need to achieve to achieve certain profitability levels.

We not only factor in what I would call the gross yields we would expect on investing our money, but when it comes to the US Dollar program. We also are projecting a hedge cost environment into the net yields that we expect to support the product.

So when we are pricing a product like WAYS, we’re looking not only at the interest rate environment and mix of investment and associated credit spread if you will. But we also in our case have to be factoring in hedge cost.

So it’s a very real part of how we think about the product and so as a result, all of the re-pricing that we’re doing is really having to take into account the low interest rate environment, our asset allocation, hedge cost and then most notably and Japan is also a recognition that the standard rate if you will or the discount rate assumption used for reserving practices is going to come down materially in Japan at the end of March, 2018.

All of those things have been factored in to pricing out our savings or interest sensitive related for sector products namely WAYS, child endowment and making sure that we can adhere to use of profitability..

Okay, so we shouldn't be thinking about worrying about DAC or reserve adequacy for your first sector business in a broader sense when you consider what's going on with these hedge costs?.

Right, we do that actuarial work. I’ve pointed to a couple of legacy blocks of business as it relate to being particularly close to the edge and we have to watch and carefully watch that and these tend to be blocks of business that you’re familiar with Dementia, Super Care. These are products that we’ve been watching for a number of years.

But we do the testing work on all of our products both third sector and first sector in the fourth quarter, not surprisingly we will see the reserve margin squeeze on first sector savings products as it relates to the current environment including hedge cost.

But we have solid margins in those areas and so at the moment, we don’t see that as a risk, it’s more these acute what we are calling legacy smaller blocks, but are actually third sector business to be technically correct..

Okay, and then just a follow-up for Eric. Can you comment on what’s the breakeven of where hedge costs would have to go to the point where you would say this has been a negative decision from an economic standpoint in terms of building up this US Dollar portfolio? Clearly running at 180 basis points, I know it’s high.

Is that still - is that a net positive? Like when you factor that in and look at the yield and the risk related to building up this program?.

Yes, absolutely. The approximate number is 2%. Meaning our earnings are about 3.6%, if you looked at spot hedge cost 160, 180. We got about 2% margin built in but we just like to follow-up a little bit on Fred’s comments before to put this thing in context because your focus appropriately so is on the large increase this quarter.

When we went into this program, we presumed the long-term average of hedge cost is somewhere between two and three quarters and three. So we were very clear when we got into the program hedge cost were historically low and that was about 60 bps back in 2012, they kept traveling down to 20.

So what we’re seeing now is more of a normalization, we could never know exactly when or where are the exact macro dynamics that would make hedge fast a lot, but we always knew they would go up.

So even though they’re at 168 or 180 basis points today that’s about 50%, 60% of the way towards the long-term average, but then if you think about that long-term average. It would take quite a huge amount of growth in the United States for the Federal Reserve to raise interest rate so substantially, to get to those numbers.

It could happen some day but we got about 2% margin to be precise on your question before we’ll be saying, this is a breakeven trait..

Got it.

So really this would have to cost you 350 to 400 basis points before it became breakeven?.

That’s right and finally I’ll just again reiterate what Fred said earlier that assumes we’re passive. And we do nothing, but again we continue to look at asset allocation and changing the mix of the assets to better match off against those hedge costs like the floating rate assets. We also look at the current composition of the portfolio.

We may decide to lighten up on certain asset classes and then of course, there’s - how do we look at the hedge strategy itself, which we continue to look at and as Fred has mentioned continue to lengthen duration.

So if we just were passive that’s the answer, but we would expect to continue to manage that with a fine tooth comb to preserve as much as that margin whether it’s through higher income or better hedge cost management. So that will be dynamic overtime certainly..

And Eric, when you compare the cost, is that to JGB yields? Is that the benchmark?.

That’s correct, that’s the ultimate benchmark so that’s another point, Tom. Three or four years ago, 20 and 30 year, JGB’s were 2% when I got here, they traveled 10 days a point a few months ago, now they’re at about 40 or 50. So it’s all in relativity and once again the dollar program has limits and we’re actually pretty close to those limits.

We have some capacity and as Fred said, we’ll talk more in the December outlook call, about future purchases but in context of a large global portfolio, we like the diversification because if all we were buying were yen assets and we’ve got quite a large amount every year maturing private placements, old assets and 2% to 3%.

Our net investment income would go down pretty rapidly as well. So it’s a diversifier and it’s a balancing act. But that’s why we have limits on each part of our program..

Okay, thanks..

Thank you very much. We are at the top of the hour right now.

So before we end today, I want to take the opportunity to remind everybody as Fred said, mentioned earlier that we’re going to have our 2017 Outlook Call that will be held later this year on December 2, so we want to make sure you mark your calendars for that event on December 2 and for further details on the call.

Please feel free to call our investors, Rating Agency Relations Department and we look forward to speaking to all of you. And thank you for joining us today..

And that concludes today’s conference. Thank you for your participation. You may now disconnect..