Aflac Inc (AFL) — Q1 2015 Earnings Call Transcript

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.

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 an average increase of 15% for the first nine months of the year. Sales of cancer insurance continued to be extremely strong following the introduction at the end of the third quarter of the new cancer days products, which include 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 across all distribution channels. Our strategic alliance with Japan Post continues to be enormously beneficial. This alliance leverages Japan Post's position as the largest distribution network in Japan with Aflac Japan's status as a leading industry pioneer of cancer insurance. Our tremendous progress continues to add more than 10,000 postal outlets offering our cancer insurance to their customers. I believe this alliance will continue to benefit both companies as the opportunity to purchase cancer insurance is extended to more and more Japanese consumers. Our traditional agencies remain key to our success. Our goal is to be present where our consumers want to make their insurance decisions, and our various distribution outlets broaden that reach. Now let me turn to the U.S. operation. As I mentioned during 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 that no one in the industry has ever attempted, and that is the one day pay. This industry-first initiative 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 by 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 claims. In 2015, we expect to process nearly 2 million claims within the parameters of this initiative. One day pay has generated a lot of excitement with our distribution channels and our policyholders. Along with a strong brand and relevant products, I believe one day pay will continue to help Aflac stand out. 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 we have seen and continue to see. I still believe that Aflac U.S. sales will increase by 3% to 7% for the year. We'll continue to advance our efforts toward expanding our distribution to access employers of all sizes. 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 is top of mind for 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 by 2% to 7% before the effect of currency. Challenging financial markets and very low interest rates make it difficult to invest cash flows at attractive yields. Therefore, we will continue to be very disciplined in selling first 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 have characteristics 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.

Thank you, Dan. And now, in the interest of time, we are going to start taking calls. Could I have the first question please?

Good morning, thank you. I would like to try and get some more color on the reinsurance deal. Those announced in the quarter as 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 the 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 completed, and they involved blocks of our enforced medical insurance that had demonstrated similar financial characteristics. It was done with a different reinsurer. The previous agreements had been done with 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, so we did that. The retrocession was similar in substance to the previous retrocession we performed, and the second tranche was with Swiss Re but it was a higher amount. It was 90% of the block in the third deal as opposed to 50% 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, can we think of it economically that ¥430 billion has been kind of freed up? I just want to clarify that. And also if you can give us color on how many more of these transactions we can expect? Our view has been that there is a lot of capacity for a series of transactions 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 our policyholders in Japan are protected at a very high level. Freeing up some of the FSA basis reserves allows us to increase our solvency margin in Japan as a first step, which gives us more security that we will be able to perform in response to our policyholder obligations. We do have significant capacity remaining. We haven’t gotten a specific plan for additional transactions, but I think we will talk about that in some more depth in our upcoming financial analyst briefing in May when we discuss sources and uses of capital. I think you can anticipate that there will be more transactions. Each, we have taken this one step at a time. The very first transaction we did was to increase the SMR to reduce the exposure we had to volatility and interest rates and currency. The second one we did to achieve the same objective and to reduce cost, and then the first retrocession deal. This third one has essentially the same objectives as the initial transaction in that we want to further reduce our costs through the reinsurance of the retrocession. So, I think we will give you more color at FAB in May.

All right, great. Thanks.

Great, thanks, and good morning. Sticking with capital, given the sizeable repatriation, it 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 the FAB meeting. I think it is just fair to say, Nigel, in 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 $1.3 billion. We're going to stick with that. Things are still a bit early, 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 from the retrocession of half of tranche 2. Given the size of the retrocession with tranche 3 from 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 the calendar year '15, it's still going to be in that $0.05 to $0.06 per share for the first three tranches for the full year, so total marginal net costs for the transaction.

Got it. Thanks.

Hi, first question on your EPS guidance, so I’m a little surprised that you left the guidance unchanged at 2% to 7%, since you are going to have a $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, I’d assume that you would probably get more production from the Japan post as you keep adding additional agent access.

Jimmy, let me start with the EPS guidance to address that and then I'll 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 and 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. Taking advantage of the opportunity to redeem those high interest expense senior notes, $850 million of senior notes that had an 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 we 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 market's desire for our new cancer plan has been extremely strong. 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 that time, talk about any kind of revision, but given the size of the fourth quarter of 2014 and the hurdle that it is to overcome, I’m hesitant 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 announce new product announcements things of that nature, there can be an adverse impact to short-term sales in a 13-week period. 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.

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, do you want to add any color on that? We did this additional reinsurance transaction; we increased the anticipated repatriation, and while it’s not really a one-for-one deal, it’s directionally proactive and equivalent. We reevaluated the whole scenario regarding repatriation, and 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. A portion of it is 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. 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 is a transfer from Aflac Japan to Aflac U.S. within the insurance entity. The 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 may have been unclear. I mean on the earnings standpoint, thinking about the retrocession specifically, which I believe goes to the CAIC entity...

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 include it 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 on a year-over-year basis, apples-to-apples, so thinking about how much earnings maybe lost there in transferring into other, just so we can get a 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 that 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 trends on this, and it should help you model on a go-forward basis. We did extend the information that we’re giving you on that, and if you have to look at that, we would 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 at it, the second change we’ve made in the statistical supplement, as you 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 and annualizing that number. So we found in talking with some analysts that was a better understood metric, and it caused us to be able to eliminate some of those anomalies especially as you annualized the first quarter, which really didn’t give you much of an idea of the trend in persistency. I apologize, I want to make the statement on page, yes, it was 22 where you can find that breakout 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 talk to my internal team here, the net effect on Japan P&L was approximately $5 million for the quarter, and I’d try to add about $5 million for the three transactions combined. And as I said, that will show up in the Japan segment as a 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 $1 million for that third transaction, third tranche.

Good morning. Thank you. Just can you talk about the trends in U.S. recruiting in the incentives you put in place to try to increase the agent force? Given the changes that you made in the middle of last year and the increased commission payments, I’m a little surprised 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 both career agent recruits as well as broker recruits. 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 relationships. So we did a really good job at recruiting brokers, but what we wanted to do was enhance relationships and obviously help to increase penetration with regard to Aflac's business. While these results are not acceptable, we know that we have to have marked improvement in the long term, but it’s important to know that the changes that we’ve made 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 those relationships.

Got it. And I guess, how do you think about the sales growth pattern for the U.S.? Given the 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 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 products, we do anticipate that more of the sales will be 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 toward the fourth quarter with sales growth.

Hi, a couple of questions, Teresa. Just to follow up on that, anything you can say with regard to progress with the alphabet brokerages would be appreciated?

Certainly we are seeing progress with many of the large brokerage houses, and as a matter of fact, they’ve moved into our top five now as far as production, sales production, which we couldn’t say before. We were seeing marginal improvements, but now they’ve moved into our top five as far as sales growth, so we are seeing tremendous improvement there. Obviously we continue to work with each of those broker 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, our agents that work for us on writing accounts of a hundred or less. We must maintain continued stability there. We do have growth there, and thus has been an evolution as we go through this process of trying to add brokers while protecting and building our existing field force, and that’s been a real challenge for us. But under Teresa’s leadership, it is doing very well, and I’m very encouraged about that. I think long-term these decisions 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 – our important market directors will do very well as the company does very well, and they won’t if we don’t. 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 in the direction I would like it to go. 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 that with all the changes we made 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 are still some changes probably to take place, but all in all, I think we’re going down a path that’s proving 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 trying to keep the career agents skilled at fairly 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.

Thanks very much. My first question is for Dan or for Kriss, well I certainly 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 have noticed in your business in Japan, on a constant currency basis, you are reporting lower earnings; your profits are down this year on a constant currency basis, and right now 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 the first quarter Japan operating results, we were down a little bit on a currency neutral basis. We had 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 larger 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. So we just have a more difficult comparison between earnings in the first quarter of 2015 versus 2014. Overall, I would say that we have the headwinds primarily of low interest rates impacting our operating earnings in Japan. 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 a bit of a mix shift going on 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 activity, 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 basis. Long term growth rates, Eric, the way I look at it is that it is at least related to third sector business, the medical and cancer areas. I will relate our fundamental business to the level of healthcare expenditures in the country of Japan, and we anticipate the level of healthcare expenditures will continue to increase. Independent statistics have numbers in the 5% range. Our fundamental business in the third sector is to help our policyholders meet their share of healthcare costs that they have to bear in Japan. Right now, under the National Healthcare Program, the co-payments are 30% and 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, what we try to make sure of is that if they sell first sector, they have to sell 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 to 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's a goal that is certainly worthy of us continuing to strive for. No one has got the distribution system we have, and so we are always looking for new products and ways to do that. 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. The wildcard, as Kriss said, is whether or not the co-pays and 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. They have got to find a way to bring down their deficits. With an aging population, 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, I just want to advertise for the FAB meeting. I do talk about anticipated margins between first and third sector during my FAB speech, so you can refer back to our FAB booklet for what our forecast for 2014 to 2016 is regarding benefit ratio, expense ratios, and profit margins separately for our first and third sector business. 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 a 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, so to speak, the cost of reinsurance in a co-insurance like this one as the amount of premium, I mean amount of assets that you have to see invested assets that you have to give to the reinsurer in order to be relieved of a certain amount of risk? So I guess my question is, 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 one way to look at it. The retrocession reduces the direct session, obviously, so instead of reinsuring 100% of a block of business, you’ve reinsure 10% of it, and accordingly you have 10% of the cost; it is a risk-sharing transaction between Aflac Japan and the reinsurer 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, there are cost transfers, but enough to the overall company you are correct. Let me just tell you that 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 in 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. 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 what I sometimes refer to as payroll capital, so that's an overview.

Thank you.

Good morning, thank you for taking my questions. Just a quick follow-up on the reinsurance. Kriss mentioned that there will be additional capacity for the reinsurance, but coming on the appetite, like in other words all factors, will you 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 may be. 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 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 the 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 of some of the excess reserves we’re holding on a FSA basis. But there’s no point in doing or re-insuring 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 elaborate on this call. But we do have significantly more financial flexibility today after having done the reinsurance, 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 from both the two companies we’ve conducted business with so far, and we’ve got other parties that continue to knock on our door looking for opportunities. So we’re happy with where we are.

Thank you for the color. And another question on the U.S. side of the business. So the expenses were a little bit elevated. I think that’s in part because of the consolidation structures changes and also some other ongoing issues just going on in the U.S. How should I think about the expense ratio and the expenses for the quarter that would be considered more recurring expenses due to the compensation structure change as opposed 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 structure was approximately $19.5 million net of capitalization, and we expect it to run kind of in the range of $20 million to $22 million or so. We expect it to run around $20 million to $22 million as a run rate for the fourth quarter of this year. So we’re a little bit lower than in the first quarter than what we would anticipate, 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.

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 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 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 a strong capital position on behalf of the policyholders for Japan. So that’s important to us too. Everyone seems happy at this point.

Okay. And my second question is on Japan sales. 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 a loss. So, we'll take it on and figure it 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. What we've seen in the past is that as interest rates stay down with these lower assumptions, it typically means rate increases on the premiums. So I would expect if rates continue to stay down, we probably have rate 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 away 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. 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. We may move more to protection products in the first sector, but I think we’ll still do first sector. And keep in mind that we sold first sector products for a long time, and we really started to see 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 well with interest rate volatility. So that's about it.

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. 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.